Difference between Internal Audit and External Audit

Differences between Internal Audit and External Audit FINANCE  January 22, 2017February 23, 2017adminshare this

Every organization has a compulsion to perform auditing of the accounts and financial statements of the company. the auditing is divided into Internal auditing and External auditing. There exist many differences and similarities between them. This article focuses on how they are different from each other and functions of the Internal and External auditing.

According to Institute of Chartered Accountants of India (ICAI), an audit is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.


Internal audit is defined by the as an independent appraisal function established by the management of an organization for the review of the internal control system as a service to the organization. The aim of every internal audit report is to prompt management action to implement recommendations for change leading to improvement in performance and control.

What are the steps of an Internal audit?

⦿ Planning the audit
⦿ Performing the audit
⦿ Documentation


External audit is also known as ‘Financial audit’ or ‘Statutory audit’. The function of the External audit is to provide an opinion on the financial statements of the organization. External auditors may make use of the work of internal audit in forming their opinion. It is a function of external audit to evaluate the effectiveness of internal audit work.

What are the steps of an External audit?

⦿ Review of internal controls
⦿ Transaction testing
⦿ Verification of data
⦿ Review of areas susceptible to fraud
⦿ Review of financial statements


Now let us see some of the top differences between Internal Audit and External Audit in the following table.

INTERNAL AUDITEXTERNAL AUDITInternal auditors are salaried employees of the organization.External auditors are appointed by the shareholders of the organization. Assists inInternal audit will assist management in its assessment of risk and its corporate governance responsibility of internal control.An External audit will assist the management to determine whether the financial statements are in compliance with accounting standards. Provide AssuranceInternal audit Provide assurance that the Organization is operating efficiently, review the integrity of financial statements for reasonableness and accuracy.External audit Provide assurance to the stakeholders or equivalent regarding statutory financial statements and other reports as required by law. Concerned WithInternal audit discovers evidence of fraud or some other malpractice and reports them to the appropriate level of management.An External audit is concerned with expressing an opinion on whether or not the financial statements are truly and fairly presented. Audit ReportInternal audit Report is Delivered to the Board of Directors and consists of results of the audit and auditor maintain confidentiality.An External audit report includes The auditor’s opinion on a complete set of financial statements, including a Statement of Financial Position, Statement of Activities, Statement of Cash Flows, etc and Disclosures relevant to the statements. Effectiveness of AuditThe effectiveness of internal audit depends substantially on the quality, training, and experience of its staff.The efficiency of an audit cannot be achieved if communication barriers exist between external and internal auditors’ communication. Audit WorkAudit work is done by individuals Employed by the organization and reporting to the board or audit committee.Audit work is done by a Certified Public Accountant or Chartered Accountant who is independent of the organization and reports to the shareholders or people who have an interest in the organization. Scope of WorkThe scope of work includes abiding by management policies and procedures and identifying the weakness in the internal control systems of the organization.The scope of the work is defined by the companies act and the regulatory authority of the country. RemunerationRemuneration of the Internal auditor is fixed by the board members of the organization.Remuneration of the External auditor is fixed by the Shareholders of the organization. Removal of AuditorInternal auditor can be removed by the board of directors of the organization.External auditor can be removed by the Shareholders by conducting a meeting. Policies and RulesInternal audit should determine its own policies, in consultation with management.An external audit should follow the rules and regulations given by the regulatory and statutory body of the country. Nature of WorkInternal audit is an ongoing and continuous process in the organization.External audit is generally done once in a year. Managed ByThe internal audit is managed by a head of the internal audit who is qualified and having experience of internal audit and of its management.The External audit is done the external auditors who are qualified professional auditors by the regulatory authority.

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