Audit alludes to a process of independent checking of financial records of an organization, so as to give an opinion on the financial statement. It can be grouped into two categories, namely, Internal Audit and External Audit. Internal Audit is not compulsory by nature but can be conducted to review the operational activities of the organization. In this type of auditing, the work area is determined by the entity’s management.
On the contrary, External Audit which is obligatory for every separate legal entity, where a third party is brought to the organization to perform the process of Audit and give its opinion on the Financial Statements of the company. Here the working scope is determined by the respective statute.
The auditing process of the two types of the audit is almost same and that is why people get confused between these two. However, there is a fine line of difference between internal audit and external audit.
Content: Internal Audit Vs External Audit
|Basis for Comparison||Internal Audit||External Audit|
|Meaning||Internal Audit refers to an ongoing audit function performed within an organization by a separate internal auditing department.||External Audit is an audit function performed by the independent body which is not a part of the organization.|
|Objective||To review the routine activities and provide suggestion for the improvement.||To analyze and verify the financial statement of the company.|
|Conducted by||Employees||Third Party|
|Auditor is appointed by||Management||Members|
|Users of Report||Management||Stakeholders|
|Opinion||Opinion is provided on the effectiveness of the operational activities of the organization.||Opinion is provided on the truthfulness and fairness of the financial statement of the company.|
|Scope||Decided by the management of the entity.||Decided by the statute.|
|Obligation||No, it is voluntary||Yes, according to Indian Companies Act, 1956.|
|Period||Continuous Process||Once in a year|
|Checks||Operational Efficiency||Accuracy and Validity of Financial Statement|
Definition of Internal Audit
By Internal Audit, we mean that an unbiased and systematic appraisal function, performed within the business organisation, with the purpose of reviewing the day to day activities of the business and providing necessary suggestions for the improvement.
Internal audit performs a wide spectrum of activities such as:
- Evaluating the accounting and internal control system.
- Examining the routine operational activities.
- Physical verification of inventory at regular intervals.
- Analysing financial and non-financial information of the organisation.
- Detection of frauds and errors.
The main aim of the internal audit is to increase the value of an organisation’s operation and to monitor the internal control, internal check and risk management system of the entity. An Internal audit is conducted by the internal auditors who are the employees of the organisation. It is a separate department, within the organisation where a continuous audit is performed throughout the year.
Definition of External Audit
The periodic, systematic and independent examination of the financial statements of the company conducted by a third party for specific purposes, as required by statute is known as External Audit. The main aim of external audit to publicly express an opinion on:
- The truthfulness and fairness of the financial statement of the company
- The accounting records are complete in all respects and prepared as per the policies outlined by GAAP (Generally Accepted Accounting Principles) or not.
- All material facts are disclosed in the annual accounts.
For carrying out an external audit, the auditor is appointed by the members of the company. He should be independent, i.e. he should not be connected to the organization in any way so that he can work in an impartial way without any influence. The auditor has the right to access books of accounts to obtain necessary information and provide his opinion to the members by way of the audit report. The report is of two types:
If the report is modified, the auditor has to give reasons for the same.
Key Differences Between Internal Audit and External Audit
The following are the major differences between internal audit and external audit:
- Internal Audit is a constant audit activity performed by the internal audit department of the organisation. External Audit is an examination and evaluation by an independent body, of the annual accounts of an entity to give an opinion thereon.
- Internal Audit is discretionary, but the External audit is compulsory.
- Internal Audit Report is submitted to the management. However, the External Audit Report is handed over to the stakeholders like shareholders, debenture holders, creditors, suppliers, government, etc.
- Internal Audit is a continuous process while the External Audit is conducted on a yearly basis.
- The purpose of Internal Audit is reviewing the routine activities of the business and give suggestions for improvement. Conversely, External Audit aims at analysing and verifying the accuracy and reliability of the financial statement.
- Internal Audit provides an opinion on the effectiveness of operational activities of the organisation. On the other hand, External Audit gives an opinion of the true and fair view of the financial statement.
- The scope of internal audit is decided by Those Charged With Governance (TCWG). As opposed to external audit, whose scope is determined by law.
- Internal Auditors are the employees of the organisation as they are appointed by the management itself, whereas External Auditors are not the employees, they are appointed by the members of the company.
Internal Audit and External Audit are not opposed to each other. Instead, they complement each other. External Auditor may use the work of the internal auditor if he thinks fit, but it does not reduce the responsibility of the external auditor. Internal Audit acts as a check on the activities of the business and assists by advising on various matters to gain operational efficiency.
On the other hand, external audit is entirely independent in which a third party is brought to the organisation to carry out the procedure. It checks the accuracy and validity of the annual accounts of the organisation.