What is the Difference between Internal and External Audit?

What comes to your mind when we talk about audit. Some may think of it as a painful and gruelling session to uncover mismanagement. But that can be misleading reflection of audit. Without performing the audit, there can be a lack of integrity that can prop up. Hence audit is the foundational requirement. An audit is an unbiased type of examination and evaluation of the financial statements of a company/organization. In this article, we look to understand the two types of audit- Internal and External Audit.

What is Internal Audit?

Internal audit is an unbiased and systematic examination and evaluation performed within the business organization. It involves assessment of the accounting and internal control system, detection of fraud and examining routine operational activities.

Internal audit increases the value of the organization and such an audit is conducted by the internal auditors who may be employees of the same organization.

What is an External Audit?

 The periodic, systematic and independent examination and evaluation of the company’s financial statements performed by a third party for specific purpose is called External Audit.

The auditor for external audit is appointed by the members of the company. Such an auditor should be independent, meaning he should not have any association with the company which ensures him to work in an impartial manner. External audit helps the business and the government with a check of financial^[1] aspects. It provides assurance to the investors and other stakeholders that the financial statement of the company is accurate and fair.

Internal and External Audit- Key Differences

Internal Audit and external audit differ from each other on various fronts which are often overlooked or not considered by many. Since audit is an important element, one cannot afford to misunderstand these two terms. The difference between the two have been explained in the table made below:

	Internal Audit	External Audit
Meaning	Constant audit activity that is performed by the internal audit department of an organization.	Examination and evaluation of the annual accounts by an independent body.
Appointment of the Auditor	It is often undertaken by an internal employee however various firms outsource their internal auditors from independent firms.	An independent firm or auditor performs external audit. The organization may hire auditors from a contracted third party firm.
Objective	Main objective is to enhance and improve the performance of the organization. It helps in assessing the risks faced by the organisation.	Main objective is to keep a proper check of the financial conditions of the business with assurance to the stakeholders. Hence it provides independent examination and verification of the financial statement of the company.
Scope	Company’s Management defines the scope	Scope is defined by a statute.
Obligation of Audit	Not mandatory as it is optional to conduct this type of audit. It is conducted periodically to ensure smooth functioning of the organization.	These audits are conducted at the end of the year or quarter as they are mandated by a statute.
Users of the audit report	Audit report used by the management of the company	Audit report used by shareholders, public and other stakeholders.
Skills of auditors	Internal auditors are interdisciplinary and come from different professional backgrounds.	External audits are performed by certified, accountants or government officials. They are proficient in the areas of accounting, finance, tax and compliance.
Nature	Discretionary	Compulsory
Qualification of Auditor	No specific qualification required for internal audit.	Specific or prescribed qualification is compulsory for an external auditor.
Applicability of the Audit	It covers all organizational transactions	It covers operations that have a contribution to financial results.

Takeaway

Internal and external audit may have points of differences among them but they do not work in isolation meaning both types of auditing is essential to get maximum benefit from the audit process. Audits help an organization in the long run to function efficiently.

Read our Article:An Internal Audit– Companies Act 2013 along with requirement of LODR 2015