Differences Between Internal Auditing and External Auditing

What is Auditing?

Auditing is a systematic process which involves the examination of the financial books of accounts. The systematic process follows a certain procedure whereby it commences with a client inquiry, an audit plan, fieldwork, analysis, professional judgment, reporting, and documentation.

Auditing can be differentiated as either internal and external auditing. The basis of the differentiation jots down to the need of the firm along many other factors. Therefore internal auditing is an auditing process conducted by a company internal employees whereas External audit is an auditing process conducted by external auditors.

The difference between Internal and External Auditing

Some of the major differences between internal and external auditing include:

1. Difference by Definition

Internal auditing is performed by the companies’ employees who report the results of the audit to the auditing committee which has its functionality in the organization. The employees are required to perform both a financial and a non-financial audit guided by the annual audit plan. On the other hand, external auditing is an auditing process that is conducted by an independent audit body that operates outside the organizations. There are a wide range of external auditing companies which offer the external auditing services and it all narrows down to an organization to choose the best auditing company in relation to the services required and vice versa.

2. Difference by purpose

Internal audit investigates the main risks that occurs in a business and to what extend is the management putting plans in action to revert those risks. Basically, this help the business to meet its goals and objectives within a given period of time. Internal auditing may look into matters such as, the effects of mass production of a given product, the nature of employees (Skilled, Unskilled or Semiskilled) in Company and if the salary provided to the employees is worthy the services and input they offer. The process is modeled in a way that it will highlight the main issues and some risks facing the business.

External auditing, on the other hand, has the mandate of performing a yearly statutory audit which aims at ascertaining if indeed the records filled in the financial books of accounts are true. To achieve the later, external auditors usually examine internal controls. In other words, external auditing is far much superior to internal auditing as it not only helps the internal auditors to check the efficiency of the system put together to manage risks but also follow through the money path by getting information from producers, suppliers about the business supplies.

3. The difference in the channel of reporting information

Internal auditors forward their audits reports to the board of directors who are tasked with the responsibility of coming up with the company organizing system. Most at times, they report to the senior management which comprises the board of directors who are owners of the business. External auditors, on the other hand, report their audit information to the company shareholders, General public or at times the government. They provide their judgment without favor and malice since they work independently to the organization.

4. Differences in the appointing process

The company shareholders usually appoint the external auditors after discussions with the board of directors members. The shareholders and board of directors choose an auditor from a company that doesn’t have any links with their company. On the other hand, internal auditors are employees buy their own company and the audit conducted within their department on certain periods of time.

5. Differences in the period of performance

External audit is usually performed on a yearly basis depending on the financial year of the business. The main reasons narrow down to the provision of the annual statutory audits reports which may be required by the government or the public sector. On the other hand internal audit is performed at different times in an organization when the board of directors deems its fit to conduct the internal audit for various reasons, however, most business conduct audit during the beginning and the end of a given financial year as it provides relevant information that can be used to make effective policy changes.

6. Differences based on the scoop of the audit

Internal auditing covers a wider scoop. This is due to the fact that the auditing process in not only interested in checking the books of financial account but it also address certain vital areas that need dire attention in an organization. Areas that maybe covered during an internal audit process include. Governance within an organization, Risk management, Operational effectiveness and the process of conducting the best fraud audit among many other topics.

On the other hand, the scoop of external auditing is not as wide as internal auditing. Majorly, external auditors focus on ensuring that the books of accounts balance and the information provided regarding assets, liabilities and capital are a real reflection of what is indicated in the books of account.

7. Difference in independence

External auditors are an independent entity in their function. Their auditing process, results and information is not influenced by the board of management but they provide a detailed information based on their experience in the field. Auditing professionals’ standards requires that auditors to perform their duties with independence and external auditors most at times maintain independence in their duties.

The reverse may be true for external auditing. Their independence is usually in question as they are not a different entity from the company that employ them. The independence may be compromised due to the fact that internal auditors are subjected to internal placement and promotions by the management. The independence between External and internal audit independence can also be seen through the submission of the audit report. Some internal auditors report auditing information to please the board of management which is contrary to the external auditors.

In conclusion auditing a is vital process towards success in an organization. Whether you decide to work as an internal or external auditor, you should always ensure that you work independently for the success of your organization.

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