Difference between Internal and External Audit

By Jaxson

Main Difference

Audit is an important function to evaluate the financial performance of an organization and to check whether the financial statements prepared by an entity in all material aspects are according with International Financial Reporting Standard or not. Audit is divided into internal audit and external audit. The main difference between internal audit and external audit is that internal audit is restricted to the organization’s governance, management controls over organization’s operations and risk management while the scope of external audit is wider than internal audit as it involves the auditing of both financial and non-financial areas as well.

Internal Audit

Internal audit is an audit conduct to improve an entity’s operations. Medium size and large size organizations usually have internal audit department to monitor the operations of organization regarding improvement of effectiveness, control, governance processes and risk management by providing recommendations and suggestions on the basis of assessments of data and business transactions. The main purpose of internal audit is to provide independent opinion and consultancy to the senior management and those charged with governance (governing bodies). Internal audit is mostly performed by an employee of the organization, however, some organizations also hires the services of audit firm for internal audit.

External Audit

External audit means the audit of the financial statements of the organization by an independent audit firm that is not under the control of organization which it is auditing. Those performing external audit are called external auditors. External auditor is appointed by the organization’s shareholders. External audit is performed because of statutory audit of financial accounts to express an opinion whether the financial statements in all material aspects are in accordance with an acceptable financial reporting standard or not. External auditors are appointed by the shareholders, donor for special audit or board of trustees at annual general meeting of the organization. For external audit, auditor is required to not have any prior link with the organization in any way. He must be independent in his work.

Key Differences

  • Internal audit is restricted to the organization’s governance, management controls over organization’s operations and risk management. External audit deals with the report on financial statements of the entity.
  • External audit is a statutory requirement while internal audit is conducted on personal will of the business owners to measures the efficiency of operations being conducted by the business.
  • External audit is performed by an external auditor or audit firm while internal audit is performed by the regular employees of a firm, however, an audit firm can also be appointed to conduct internal audit.
  • Internal auditor is selected by HR or interviewing body of the organization while external auditor is selected at the annual general meeting of the shareholders or by donor or Securities and Exchange Commission.
  • External audit is performed keeping in view the requirements of any acceptable financial reporting standards while there are no such rules for internal audit.
  • Internal auditor is responsible to management or audit committee while external auditor is reports to shareholders.

Video Explanation

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