Audits are present in most businesses. While technically there are three types of audits; external audit, internal audit and tax office audit people usually struggle to understand the difference between internal and external ones.

What is an external and internal audit?

An external audit and an internal audit are two distinct types of audits that serve different purposes. An external audit is conducted by an independent external auditor who reviews the financial systems and statements of a company to determine whether they accurately reflect the company’s financial position at a given point in time.

On the other hand, an internal audit is conducted by employees within a business to assess its processes, procedures and systems for efficiency, accuracy, and compliance with legal requirements. Internal auditors may be employed directly by the organisation or work as part of an external firm contracted by it.

Both types of audits have their own unique set of benefits but also come with certain risks associated with them such as potential conflicts between external auditors and management or inadequate resources available for internal auditing activities. Understanding their differences can help companies make informed decisions on which type of audit is most appropriate for the business’s needs.

Benefits of an external audit

The external audit is a comprehensive review of the financial statements of a company that evaluates their accuracy and reports on the effectiveness of management in controlling risk, safeguarding assets, and complying with legal requirements. An external audit can bring several benefits to an organisation. External audits can help businesses identify potential weak points in their systems and processes which may have previously gone undetected or been misreported by management. 

 This external review can assist in preventing fraudulent activities or misappropriation of assets, as well as ensuring that the financial statement figures genuinely reflect the current situation. External auditors often possess specialised external knowledge which can help organisations improve their internal reporting and financial control standards. Moreover, external audits provide assurance to stakeholders such as shareholders and creditors that the company’s financial statements are reliable, accurate and up-to-date.

 External audits also provide valuable insights into potential areas for improvement within a business. External auditors are usually highly experienced professionals who understand complex accounting principles and techniques used within a company. They are able to assess the quality of accountants’ work to ensure compliance with laws and regulations as well as identify any gaps or discrepancies between expected standards and actual performance. In addition to providing feedback on existing practices, external auditors may also suggest alternative strategies that could improve operational efficiency or reduce costs over time. 

 Their advice however can not be as detailed and extensive as an internal audit, and lacks the contextual knowledge that an employee can bring to the process. An external audit provides credibility to a business’s financial reports since it is undertaken by an independent third party that has no conflict of interest with management or other stakeholders in the company.

external audit

Benefits of an internal audit

Internal audit activities are conducted by employees within the business who understand the company’s processes, procedures, and systems in great detail. As such, Internal audits can be completed more frequently than external audits allowing for a greater degree of understanding of managerial decisions and activities throughout the year. This can help prevent fraud or other misappropriations from going undetected for long periods of time as internal auditors are constantly monitoring and reviewing processes. 

 Internal audits also provide valuable insights into areas where improvements could be made with respect to organisational performance, efficiency and cost-reduction strategies. Through their detailed understanding of the company’s operations and the external environment in which it operates, internal auditors are able to assess existing practices across all departments, identify ineffective or inefficient methods of operation, as well as suggest alternative strategies that could help improve overall organisational performance. In addition to improving operational effectiveness, conducting periodic internal audits may also help an organisation maintain compliance with applicable laws and regulations by ensuring that its processes are properly documented, monitored and updated on a regular basis. 

 In addition to providing insights into areas for improvement within an organisation, internal auditing can also be used to strengthen internal control measures. Internal controls refer to policies and procedures designed to ensure that companies adhere to good and ethical business practices while minimising risk exposure. By conducting regular reviews of key control systems such as financial reporting reviews or operational procedure reviews at least annually if not more frequently, companies can detect any potential faults early on before they result in serious consequences such as fines or charges of fraud or embezzlement

 Additionally, these reviews can identify any potential weaknesses in the design or implementation of these systems which could then be addressed through further training or additional measures put in place by management. Any identified weaknesses can serve as an opportunity for management to review their current processes and develop new ones that better address developing risks or the external business environment changes in order to maximise protection against external threats while still promoting safe business operations internally.

Differences between an external audit and an internal audit

An external audit and an internal audit are two distinct processes that organisations use to evaluate the accuracy of financial statements, ensure compliance with laws and regulations and identify areas where improvements can be made. Both types of audits provide valuable insights into areas for improvement or potential risks related to operational efficiency or financial troubles but differ in their approach as well as their scope. Understanding the main differences between external and internal auditing is essential for any business looking to maximise organisational performance while minimising risk exposure. The main differences are:

  • Who conducts the audit
  • Who they are responsible for
  • What a business can learn from them
  • How often they are conducted

Who conducts the audit

An external audit and an internal audit are different. An external audit is done by someone outside the company who looks at financial records to make sure everything is right. This person must be a certified accountant (CPA). An internal audit is done by people inside the company to find ways to improve how it works, like reducing costs or being smarter with tasks. External audits help show that a business’s financial reports are accurate, while internal audits are responsible for different departments and how a business can benefit from changes.

Who they are responsible for

An external auditor is hired by the company to confirm that the financial reports they produce are true, fair and prepared according to accounting standards. They are usually paid for by the company itself but they are conducting an audit to ensure external partners are satisfied. Those can be the government or shareholders. On the other hand, as internal auditors are hired by the business in some way, their purpose is to make the company a better place.

What a business can learn from them

An external audit offers an independent opinion on all relevant financial information and other practices to confirm the accuracy of budget statements. On the other hand, an internal audit focuses solely on specific areas within a given company and measures current performance as well as identifies areas that need improvement.

External audits aim to prove whether the financial statements published or provided by the company are accurate while internal audits look for ways to improve operations, policies and processes. Internal audits are more flexible in the way they are written while external audits have a strict report format to follow. They can also more effectively identify issues that external auditors may overlook due to their lack of familiarity with the organisation’s operations.

How often they are conducted

An external audit is usually undertaken once a year and their frequency is decided by external parties. An internal audit may be conducted twice or more per year in different areas as they can provide the business with advice. The management can decide on the frequency of an internal audit.

How to decide which one is right for your business

As an external and internal audit have their own differences but also similarities, choosing one depends on the situation. However, it is advisable that businesses perform both types of audits if they are medium or higher in size. Some corporations, usually the larger ones or public ones that have shareholders, are required by law to perform external audits. In that scenario, there is not really a choice to be made. Audits can be time-consuming and sometimes costly but the advantages outweigh the disadvantages. They are an investment in the future of the company and can help solve more issues that will result in easier growth or expansion. They provide great findings which can drive company improvement and better overall reporting.

Polonious performs external audits yearly along with additional internal audits to ensure that we comply with the strictest international standards. We are ISO 27001 and ISO 9001 certified to highlight our commitment to a confidential and high-quality system, and we use our own software to manage our compliance and audit process. Our clients can fill out audit reports online which saves time and increases record-keeping accuracy. By spending less time on paperwork, our customers can focus more on improving their core business operations. If you want to learn more about Polonious, reach out and we are happy to chat!