External Audit vs. Internal Audit: What’s the Difference?
Written by: Hilbert College • Jan 5, 2024
External Audit vs. Internal Audit: What’s the Difference? ¶
Auditing helps organizations ensure compliance, identify risks and maintain financial integrity. It involves examining and evaluating an organization’s financial statements, systems and processes. Businesses commonly undertake two key types of audits: external audits and internal audits. An examination of external audits vs. internal audits reveals that both determine an organization’s health. However, they differ in their scope, objectives and reporting structure.
To understand an external audit vs. internal audit, it’s important to explore the unique attributes and responsibilities of each type of auditor and how they contribute to an organization’s integrity, efficiency and performance.
What’s an External Auditor? ¶
The main function of external auditors is to conduct comprehensive audits, which include conducting systematic reviews of financial records, internal controls, and regulatory and legal compliance. They’re primarily responsible for:
- Verifying the accuracy and integrity of a company’s financial statements
- Ensuring that financial records are free from significant errors or fraud
- Providing assurance to decision-makers about the reliability of financial information
External auditors are typically certified public accountants (CPAs). The CPA designation means that they’ve passed the rigorous Uniform CPA Examination. It demonstrates proficiency in financial accounting, auditing, taxation, ethics and law. The rigorous training ensures their ability to conduct detailed and effective financial evaluations.
A third party, independent of the audited organization, performs external audits. They prevent conflicts of interest and guarantee unbiased assessments. They follow generally accepted auditing standards (GAAS) and regulatory guidelines. Their methods include transaction reviews, account reconciliations and third-party confirmations.
The end product of an external audit is a detailed report. It offers the auditor’s opinion on the fairness of the financial statements. It also highlights any significant issues or weaknesses. The report is indispensable for an organization’s management, board of directors and stakeholders. It provides insights into financial performance and suggests areas for improvement.
What’s an Internal Auditor? ¶
Internal auditors focus on enhancing internal processes, controls and compliance. Conducted by the organization’s own professionals, internal audits offer independent, objective assessments of various operational areas, including financial operations, information technology (IT) systems and human resources.
An internal auditor’s focus differs from that of external auditors. They concentrate primarily on improving operational efficiency and regulatory adherence. Internal auditors conduct comprehensive audits, with a focus on:
- Bolstering governance, managing risks and improving overall performance
- Evaluating internal controls, risk management practices and policy compliance
- Performing tests to determine the effectiveness of controls, identify risks and determine corrective actions
- Offering recommendations that assist in process improvement and risk mitigation
The evaluations of internal auditors support decision-making and risk management. Their work can also support external audits. As either full-time employees or contractors, internal auditors possess expertise in accounting principles, software and relevant laws, playing a crucial role in identifying compliance issues, risks, fraud and data inaccuracies. By scrutinizing compliance and risk, they ensure that organizational activities meet legal and regulatory requirements. Key qualities of internal auditors include critical thinking, attention to detail and the ability to operate independently.
Similarities Between External and Internal Auditors ¶
External audits and internal audits, though serving distinct purposes, share common goals and methodologies. The following are examples:
- Both strive to deliver accurate and reliable information.
- They also uphold professional standards and maintain independence.
- Their primary role involves assessing the effectiveness of internal controls and pinpointing areas for improvement.
Key activities for each role also include rigorous risk assessment, systematic audit planning and detailed reporting of findings. External auditors focus their reports on the accuracy of financial statements for stakeholders, such as shareholders and regulatory bodies. In contrast, internal auditors report to management and the board, concentrating on internal controls, process efficiency and operational effectiveness.
Professionalism and ethical conduct are paramount for both roles. This means that individuals in these roles must adhere to codes of ethics. Additionally, continuous learning enables them to stay abreast of regulatory and standard changes.
Collaboration between the two types of auditors can optimize audit processes and outcomes. The teamwork fosters a comprehensive view of organizational operations. It can also help with identifying risk better, ensuring compliance, reducing fraud and promoting ethical behavior. Such a partnership can encourage internal auditors to report fraud and unethical actions, thereby enhancing organizational performance.
Differences Between External and Internal Auditors ¶
What are the differences between external audits and internal audits? External auditors are independent professionals, serving as freelance accountants or as part of a consulting firm. They perform annual audits to examine financial records against accounting standards and laws. Their goal is to provide an impartial opinion on the accuracy of financial statements. They report to shareholders and the board via an audit committee.
In contrast, an internal auditor is the audited organization’s employee. They assess business practices, risk management and internal controls throughout the year. Their broader scope includes financial operations, compliance and process improvements. They focus on boosting operational efficiency and governance and report their findings to senior management and the board’s audit committee, with a focus on internal improvements.
Another difference is that external auditors maintain independence from the audited organization. Internal auditors, conversely, engage more collaboratively within their organizations.
Ignite Your Career in Auditing ¶
A review of external audits vs. internal audits shows that both are crucial components of a comprehensive auditing framework. People in these roles offer expert advice, guidance and support in navigating the complexities of auditing, helping organizations reach their financial and operational goals with confidence.
Individuals aspiring to be external or internal auditors can jump-start their careers or advance their knowledge with a bachelor’s degree in accounting.
Hilbert College Global offers an online Bachelor of Science (BS) in Accounting with a core curriculum that includes auditing and study opportunities that are deep dives in areas such as financial statement preparation, federal financial regulations, accounting ethics, individual and corporate tax law, critical thinking, and problem-solving.
Learn how Hilbert’s BS in Accounting can set you on the path to growing your career as an auditor.
Sources:
Association of Certified Fraud Examiners, External Auditor
Caseware, Internal vs. External Auditing
FloQast, “Internal Audit vs. External Audit: What’s the Difference?”
The Institute of Internal Auditors, International Professional Practices Framework (IPPF)
Investopedia, “Auditor: What It Is, 4 Types, and Qualifications”
Investopedia, “Generally Accepted Auditing Standards: Definition, GAAS vs. GAAP”
Investopedia, “Internal Audit: What It Is, Different Types, and the 5 Cs”
Investopedia, “Internal Auditor (IA): Definition, Process, and Example”
Kirsch CPA Group, How External Auditors Can Leverage Your Internal Audit Work
Linford & Company LLP, “Internal Audit vs External Audit: What You Need to Know”
