Difference and Similarities of Internal Auditor Vs. External Auditor

Here is a clearly differences and similarities “Internal Auditor” versus “External Auditor” sorted out:

 

The Different Objectives

The External Auditor:
The external auditor seeks to test the underlying transactions that form the basis of the financial statements.

The internal Auditor:
The internal auditor, on the other hand, seeks to advise management on whether its major operations have sound systems of risk management and internal controls.

 

The Main Differences

There are, however, many key differences between internal and external audit and these are matters of basic principle that should be fully recognized:

  1. The external auditor is an external contractor and not an employee of the organization as is the internal auditor. Note:  however, that there is an increasing number of contracted-out internal audit functions where the internal audit service is provided by an external body.
  2. The external auditor seeks to provide an opinion on whether the accounts show a true and fair view, whereas internal audit forms an opinion on the adequacy and effectiveness of systems of risk management and internal control, many of which fall outside the main accounting systems.

 

The Main Similarities

The main similarities between internal and external audit are as follows:

  1. Both the external and internal auditor carry out testing routines and this may involve examining and analyzing many transactions.
  2. Both the internal auditor and the external auditor will be worried if procedures were very poor and/or there was a basic ignorance of the importance of adhering to them.
  3. Both tend to be deeply involved in information systems since this is a major element of managerial control as well as being fundamental to the financial reporting process.
  4. Both are based in a professional discipline and operate to professional standards.
  5. Both seek active co-operation between the two functions.
  6. Both are intimately tied up with the organization’s systems of internal control.
  7. Both are concerned with the occurrence and effect of errors and misstatement that affect the final accounts.
  8. Both produce formal audit reports on their activities.

 

To enrich your knowledge about the internal an external audit, read on……….

 

The 3 Key Models Of Organization Activities Involves Internal And External Audit

 

[a]. Financial systems may be considered by the external auditor as a short-cut to verifying all the figures in the accounts to complete the audit process. The internal auditor will also cover these systems as part of the audit plan.

[b]. Overall risk management arrangements are the main preoccupation of the internal auditor who is concerned with all those controls fundamental to the achievement of organizational objectives.

[c]. The final accounts are the main preoccupation of the external auditor who is concerned that the data presented in the accounts present a true and fair view of the financial affairs of the organization:

  1. It should be clear that the external audit role is really much removed from the considerations of the internal auditor both in terms of objectives and scope of work.
  2. External audit is a legal requirement for limited companies and most public bodies, while internal audit is not essential for private companies and is only legally required in parts of the public sector.
  3. Internal audit may be charged with investigating frauds and, although the external auditors will want to see them resolved, they are mainly concerned with those that materially affect the final accounts.
  4. Internal auditors cover all the organization’s operations whereas external auditors work primarily with those financial systems that have a bearing on the final accounts.
  5. Internal audit may be charged with developing value-for-money initiatives that provide savings and/or increased efficiencies within the organization. This applies to some external auditors in the public sector (e.g. Audit Commission and National Audit Office).
  6. The internal auditor reviews systems of internal control in contrast to the external auditor who considers whether the state of controls will allow a reduced amount of testing.
  7. Internal audit works for and on behalf of the organization whereas the external auditor is technically employed by and works for a third party, the shareholders.
  8. The internal audit cover is continuous throughout the year but the external audit tends to be a year-end process even though some testing may be carried out during the year.

 

Here is a list of Internal Audit Versus External Audit in detail:

Internal Auditor Vs External Auditor

For further reading about auditing, you may want to read the following entries as well:

  • Auditor’s Reports: Clean and Not So Clean Opinions
  • Are Audits Required or Just a Good Idea?
  • Accounting and Review Services by Certified Public Accountants
  • Auditors and Management Fraud
  • Why Audits?
  • Author: Lie Dharma Putra

    Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

    21 thoughts on “Difference and Similarities of Internal Auditor Vs. External Auditor”

    1. The External Auditor:
      The external auditor seeks to test the underlying transactions that form the basis of the financial statements.

      The internal Auditor:
      The internal auditor, on the other hand, seeks to advise management on whether its major operations have sound systems of risk management and internal controls.

    2. The External Auditor report to the president of the country/legislature Assembly/owers of the company Ltd/shareholder. etc

      while the internal Auditor report to the management of the company for the work performance,properly post to the book of accouts.reconcil cash and bank monthly adhearing the proceduces etc

    3. Your stuff is exceptionally good. There are short and precise. please send me notes on the types of Audit and their descriptions. Thank you.

    4. Can someone pls explain to me how to prepare the flexible budget with this requirement bellow:-
      1. Prepare a financial estimation for the proposed food stall. Your estimation shall
      include, but not limited to the following:
      a. Estimated revenues
      b. Estimated costs for:
      i. Initial setup
      ii. Variable costs
      iii. Fixed costs
      iv. Overhead
      2. Prepare a monthly flexible budget for the proposed stall based on the following
      monthly sales revenues:
      a. RM20,000
      b. RM40,000
      c. RM60,000

    5. I REALLY ENJOYED THIS ARTICLE IT IS HIGHLY EDUCATIVE AND MEANINGFUL. KEEP EDUCATING AND DEVELOPING ACCOUNTING PROFESSION

    6. I appreciate your commitment to the subject matter and I will to come up with my profession in case of any problem.

      Thanks so much

      Zerai

    7. Very useful, and very exact and descripitve! Thanks for a much needed description (a better one than Wikipedia has on auditing).

    8. according to definition, objective of internal audit it helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes external auditor to asses fairness of financial statements

    9. Can you please help me I need to explain internal auditing in my own words and then I need to explain in the definition what independent and objective means.

      The similarities between the auditors and the differences as well

    Leave a Reply

    Your email address will not be published. Required fields are marked *