What are the major differences between Internal Audit and external audit?

Several factors determine the continued success of businesses over time. To ensure the company is always on track to achieving its objectives and goals, there is a need to audit the processes and activities in the business occasionally.

On a larger scale, auditing can be described as critically analysing the effectiveness and efficiency of a company’s internal processes. In the end, opinions are raised to improve productivity while acknowledging its current financial standing. Audits are carried out on the financial aspects of the business, its operations, or both.

By ensuring businesses stay aligned to their objectives, audits also help in risk management, assets misappropriation, and detection and prevention of fraud, both internally or otherwise. Audits are a necessary aspect of business and comprise internal and external audits.

Table of Contents

What is Internal Audit?

These are audits performed by a company’s designated department or group of people within a company. They are required to provide an independent, unbiased, and objective overview of the company’s operations and processes.

Although tasked to act independently, they take a holistic overview (beyond the company’s finances) to ensure every aspect of its operations is working efficiently. Their sole purpose is to provide for the company’s survival, sustainability, and increased productivity.

For an audit to be classified as internal, it must be performed by designated company staff members. These internal audits do not necessarily have to be government certified auditors but individuals with the necessary expertise employed to function in this role.

What is External Audit?

On the other hand, an external audit is an independent analysis of a company’s financial records and statements by auditors outside the company’s payroll. For larger companies, especially those with public holding, this is a routine mandatory process by shareholders and the government. But some companies are exempted from conducting an audit annually.

An external audit primarily focuses on the company’s financial aspect and raises opinions on its standing. By evaluating, verifying, and validating a company’s financial records, external audits give a detailed financial worth of a company.

In much simpler terms, when a company claims to be worth a certain amount (in assets and profits), an external audit will help verify and validate the claim.

Primary Difference Between Internal and External Audits

Although internal and external audits can work together to help raise opinions about a company, they often have significant differences in functionality and roles. For quick and better understanding, each of these primary differences is discussed in the table below.

 

Differences

Internal Audit

External Audit

What is the objective?

To improve the company’s internal controls by taking a holistic view of all its processes. Its end result is to raise awareness and give opinions, where necessary, on ways the company can effectively increase productivity and profits.Evaluate the company’s financial records to raise thoughts on its current financial standing and risks. It also ensures complete compliance with the standard regulatory and financial laws of the state/country.

Who do they report to?

With the objective in mind, findings and opinions are reported to the company’s senior management. Depending on the size and scale of the company, senior management could either be the audit committee, board of directors, or the company’s highest management.Financial statements are audited to be made public. Whatever findings are observed, opinions are shared with the company’s shareholders, customers, investors, government regulators, and the general public.

Employment relationship

Internal auditors are the staff of the company. They are on the company’s payroll and hired to function as internal auditors.These are third-party auditors the company employs on a contractual basis to analyse their financial records and statements. They are either from a government or regulatory agency or a separate private auditing company.

Level of auditing coverage/scope

With the objective focused on improving the productivity and success of the company, internal audits take a general coverage of all aspects of the company. It takes a complete, holistic overview of the entire processes of the business. This includes its day-to-day activities, company governance, production channels, etc.It is primarily concerned with the financial aspect of the company. These include the assets, liabilities, cash flow records, debts, and taxes.

Auditor’s qualifications/skills

Internal auditors have an interdisciplinary background and do not necessarily have to be certified. However, they are often hired for the role based on their integrity, competence, financial knowledge, and dedication to the company’s growth.These are highly experienced, government-certified auditors. They either have certification as accountants or government compliance officers.

Audit frequency

Internal audits take place continuously throughout the year. However, since its primary objective is to improve the company’s performance and audit staff are on the payroll, audits are done more frequently. The chosen frequency and time of audit are voluntary and subject to the company’s needs.Verification and validation of a company’s statement are done annually. This helps investors, shareholders, and the public knows and understand the company’s financial state. To reiterate, external audits are primarily carried out once a year.

Audit Obligation

Although internal audits are aimed at the company’s self-improvement, by law, companies incorporated in Singapore have to, at the very least, have proper financial documentation. However, there are no statutory obligations for the frequency of internal audits.In Singapore, external audits are mandated for all incorporated companies.

Each year, companies must undergo external audits unless categorised as small companies or falling within the exemption parameters. External audits must conform to the outlines and framework stipulated in the Singapore Companies Act.

The Accounting and Corporate Regulatory Authority (ACRA) is constituted by law to enforce these audit laws.

Audits are a necessary part of a business lifespan. It is an independent, unbiased approach to understanding the company’s journey and making better-informed decisions for self-improvement.

There are two types of audits—internal and external. Apart from sharing a name, both have varied differences in their functions and objectives. Internal audits open up the company’s processes and financials for an in-depth, independent evaluation. Conversely, external audits focus on verifying the financial claims of the company. Both, in the end, raise opinions on their respective findings to their intended audience.

 

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