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Are Internal Audit and External Audit Functions Complementary? How are they different?

Internal audit and external audit are often heard, although you may not know that the two-need close cooperation and are complementary in function, in fact, their purpose and practice focus are different. What is the difference between the two? Just know that they are very important to the risk governance of the enterprise/group and the control of financial/non-financial systems.

Internal audit vs. External audit?

In short, an internal audit mainly develops a specific set of financial and risk management policy systems for the enterprise/organization, continuously ensures its effectiveness, provides support for external audit on this basis, and reports to the audit committee, and board of directors to make a report.

In addition, the external audit is independent of the enterprise/organization that needs to be audited and only needs to report to its shareholders. The work content mainly focuses on the authenticity of the company’s financial statements, provides experienced opinions on this, and monitors the relevant systems to ensure its compliance and sustainability.

What is the difference between an internal audit and an external audit?

Audit purpose

As the name suggests, Internal Audit conducts a comprehensive assessment within a business/organization, be it financial or regulatory, to ensure that business practices are supporting management’s strategic goals, while identifying risks that may affect those goals.

External audits are a bit different. In addition to focusing on business, accounts, and whether they are fairly and accurately reflected in financial performance, they also have auditors from government or regulatory agencies to look for any irregularities.

Audit scope

Internal audit is more preventive, providing management with insights and recommendations covering virtually all governance, risk, and control processes.

While external audits are often required annually or at least every five years, the scope is limited to the financial statements, and the scope of the audit is determined by the regulatory body conducting the audit.

Auditors

Internal auditors generally need forward-looking professionalism and the ability to actively explore risks, and they need to maintain the key principles of objectivity and independence. They must not put vested interests first but instead focus on auditing activities.

In contrast, external auditors need to review past record keeping or compliance certificates to judge the situation of the enterprise/organization and make timely inspections and assessments.

Who to report to?

Internal auditors will report directly to senior management, the board of directors, the audit committee, or other groups in the organization, make comprehensive recommendations for improvement above, communicate governance messages to subordinates, and communicate in multiple directions throughout the organization.

As for external auditors, as a completely independent third party, they may report to different audiences in different institutions, which can be internal company members, shareholders, investors, customers, regulators, and even the public who do not belong to the organization.

The role of audit reports

Whether it is an internal audit or an external audit, an audit report needs to be formulated, and the internal audit report is only used for the internal use of the organization, and mostly provides a business reference for the proprietor or management, so the external assurance role is not fulfilled.

On the contrary, the external audit report has a forensic role for the whole society, because most of this report needs to be disclosed to a specific audience, and it provides a lot of reference materials for investors, creditors, and the general public.

The above information is for reference only. If you have any questions about internal audits and external audits, we welcome your inquiry.

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