For business owners, understanding the difference between internal auditors and external auditors is essential for maintaining good financial health. Internal and external audits are two of the most crucial aspects of corporate governance, as they assure that an organization's financial statements are accurate and comply with applicable regulations. The differences between these two forms of audit go beyond just their scope. A thorough understanding of each type of audit will help you ensure that your company complies with all relevant laws and regulations and protect your business from potential liabilities. Read on to learn more about the differences between internal audits and external audits.

What is an internal audit?

An internal audit is an evaluation of an organization's internal controls and procedures. It is conducted by the organization's audited employees and is typically overseen by the organization's Audit Committee. The purpose of an internal auditing firm is to provide assurance that the organization is operating efficiently and effectively and in compliance with applicable laws and regulations.

Internal audits may cover areas such as financial and operational controls, information systems, employee compliance with policies and procedures, risk management processes, and other internal processes.

What is an external audit?

An external audit is an objective review and assessment of an organization's financial statements and performance by an independent auditor. The purpose of an external auditing firm is to assure that an organization is adhering to generally accepted accounting principles (GAAP) and managing its finances responsibly.

Certified public accounting firms conduct external audits (CPAs), and usually take place once a year. However, some organizations may undergo multiple audits in a year if regulators or shareholders require them. External audits are typically more comprehensive than internal audits, as they not only assess financial statements but also look at other areas, such as management processes, control systems, and compliance with laws and regulations.

Differences between an internal audit and an external audit

When comparing internal audits to external audits, there are several notable distinctions in the role and scope of work. Unfortunately, they are frequently disregarded or misinterpreted by those who ultimately have a say. Here are a few of them;

Employment Relationship

In most cases, a company's staff member will conduct the audit internally. Since they don't want to be influenced by personal feelings, they only rate work in which they have had no hand. Nonetheless, there are a few businesses that hire outside auditing services to do their internal auditing for them.

In contrast, an external audit is conducted by a third-party firm or auditor. External auditors from a hired third-party firm with no vested interest in the organization are often brought in to ensure an unbiased and fair assessment.

Audit Purpose

The purpose of an internal audit is to help a company better its management and operations. Many different types of fraud, hazards in governance and management, excessive spending, and so on can be uncovered in a timely manner, which would help immensely. Its purpose is to evaluate the importance of various hazards to the company and how well they are being controlled.

An external audit is necessary to provide assurance to the company's stakeholders and conduct a thorough examination of the company's financial health. By reviewing the balance sheet, income statement, and cash-flow statement, as well as offering an opinion on the company's financial health, auditors guarantee accuracy and reliability. Therefore, the objective of external auditing is to check and double-check the company's financial statements without bias.

Reporting to Different Audiences

It is the responsibility of the internal audit department to provide governance assurance directly to the senior management, the board of directors, audit committees, and/or other groups within the boundaries of the organization's governance.

The reports of an independent third party, such as an external auditor, are presented to audiences other than the organization's internal governance structure, such as company members, shareholders, investors, customers, and regulatory bodies.

Audit Focus

Organizational health is evaluated, and actions are inspected to see if they further the company's goals. Several potential threats to these goals are also highlighted, along with recommendations for mitigating them.

Conversely, external auditors check that a company's financial records accurately reflect the company's financial performance. In addition, they assess the company's financial health and offer expert commentary.

Frequency of Audits

The conduct of an internal audit is voluntary. Even though it's not required to have these audits done, you should. In reality, they take place all year round to guarantee regular and periodic checks of the ongoing operations of the firm.

There is a legal requirement for annual external audits. These audits are performed at the end of each year or quarter to review the company's financial accounts.

Conclusion

To summarize, internal and external audits each have their own unique purposes and benefits. The organization itself conducts internal audits to ensure its compliance with laws, regulations, and procedures, while external audits are conducted by independent third parties who provide an objective view of a business's financial condition. Both types of audits can play an essential role in assessing the performance of any business or organization. Now that you understand the difference between internal audits and external audits, you can wisely choose the best internal or external auditors in Dubai, London, or anywhere in the world.