Learn About External vs. Internal Audits (Four Key Differences)

By Indeed Editorial Team

Published March 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

An audit is an examination of a company's financial or operational proceedings. Audits may help ensure that companies are operating efficiently, accounting finances correctly and following all required regulations. In business, you may conduct both internal and external audits to maintain financial and operational health. In this article, we explain what external audits are, define internal audits and explain four key differences between external versus internal audits.

Read more: Learn About Being an Auditor

What are external audits?

An external audit is an examination of the finances or operations of a company, as performed by an external accountant. Financial audits are the most common type of audit, and the process to which the term "external audit" generally refers. Other types of external audits include compliance audits and operational audits. Compliance audits review a company's history of following rules and regulations. An operational audit reviews the day-to-day operations of a company, and the large-scale operations. The process of an external audit may involve the following steps:

  • Selecting an external auditor: The first step of an external audit is for the shareholders of a company to select an independent auditor. An audit committee may suggest a reputable audit firm to the board of directors, who may then offer the recommendation to the shareholders.

  • Confirming the external auditor: After appointment by the shareholders, the external auditor confirms that they've no other connection with the company, then accepts the audit.

  • Creating an audit engagement contract: Next, the company and auditor create a formal engagement contract that explains the objectives of the audit, the responsibilities of the auditor and the responsibilities of the company.

  • Preparing audit plans and programs: This stage of an external audit involves the auditor creating a plan that outlines the audit with deadlines. Next, they prepare the programs that they'll use to complete the audit.

  • Collecting evidence: One significant area of the audit program is the collection of evidence from the financial records of the company to support their final audit claim.

  • Drafting the audit report: The audit report includes the auditor's opinion of the financial status of the company, along with relevant data and analysis. An auditor may give the opinion "clean report," "qualified report," "adverse report" or "disclaimer of opinion."

  • Signing the audit report: Finally, the auditor signs the audit report to verify their opinion.

An external auditor is a financial or operational professional who has no other connection with the company under review. External audits can help certify that a company's financial records are sound or that the operations are legal and sustainable. Company shareholders may vote to select an external auditor for each financial year.

Related: How To Create an External Auditor Resume (With Steps and Tips)

What are internal audits?

Internal audits are reviews of company finances and protocols as performed by an internal company team member or department. These can help companies gain knowledge and data to better understand their own processes. Specifically, internal audits can help companies evaluate governance, risk management, financial processes and operational processes. They may then use this evaluation to make financial and strategic decisions about how to improve the company. Internal audits may be particularly helpful for large companies looking for ways to improve company spending and operation.

The process of an internal audit may include steps like planning, fieldwork, reporting and follow-up. The specifics of an internal audit process may vary depending on the type of audit. Common types of internal audits include:

  • Compliance audits: Compliance audits ensure that a company is following all applicable laws and regulations.

  • Environmental audits: Environmental audits assess the environmental impact that a company generates and ensure that the company is following applicable environmental laws and regulations.

  • Information technology audits: This category of audit assesses the accuracy, security and operations of a company's information technology systems.

  • Operational audits: This type of audit assesses an organization's operations, including day-to-day operations and company-wide infrastructure.

  • Performance audits: Performance audits assess how well a company meets the goals of the company board.

Read more: Internal Auditor Skills and Qualifications (Plus Salary)

External vs. internal audits

Here are four key differences between external and internal audits:

Employer

The main difference between an internal and external audit is the employer of the auditor. An internal auditor (IA) works for the company management while an external auditor (EA) works for an employer outside the company, like an external audit firm. Internal auditors report their findings to the company directly, while external auditors report to their external manager and to the company shareholders who hired them.

Related: What Is Auditing? Common Types and How To Perform a Company Audit

Purpose

The purpose of an external audit is distinct from an internal audit. In the case of external audits, company shareholders like investors, creditors or lenders may use the audit results to validate a company's financial reports. With an internal audit, company management may use the results to evaluate which company processes work well, which processes may benefit from improvement and how best to improve those processes to secure a stable and profitable future for the company. Internal audits may focus on a variety of areas, including finances, business practices and risk management.

Auditor qualifications

The required qualifications of the auditor are another element that distinguishes external audits from internal audits. A certified public accountant (CPA) must lead an external audit. This can help ensure the knowledge and accountability of the individual. For an internal audit, the company may appoint any financial or operational professional to direct the proceedings. This means that the individual or department that appoints the internal auditor is responsible for choosing an individual or team with the necessary qualifications.

Timing

Companies generally conduct external audits once every financial year. This is another element that distinguishes external audits from internal audits, as companies may choose to perform internal audits at any time throughout the year. Companies can also perform more than one type of internal audit in a single year.

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