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Internal Audit versus External Audit: The Key Differentiators

Most organizations are familiar with external audits that are performed by licensed auditors to ensure financial statements are accurate. Internal audit refer to systematic and independent examinations of an organization’s processes, controls, and financial information. Both forms of audits are integral pieces of strong corporate oversight but have key differences that organizations need to know.

Audit Purpose

Internal audits are conducted by an organization’s internal audit team, either internally employed or contracted. Internal audit’s intended purpose is to add value and enhance the effectiveness of the organization’s governance, risk management, and internal control processes. Internal audit focuses on activities such as assessing risks, evaluating internal controls, monitoring compliance, and providing recommendations for improvement.

External audits are conducted by independent external audit firms. The main purpose is to provide an independent assessment on whether the financial statements accurately represent a company’s performance and comply with accounting standards and regulations.

Scope of Internal Audit

The scope of internal audits can cover a wide range of areas, such as financial controls, operational processes and efficiencies, compliance with laws, regulations, and internal policies, technology and information systems, human resources, and risk management practices. The scope of internal audit can be customized based on many factors, including an organization’s industry, size, complexity, and specific needs to help organizations achieve their strategic objectives, manage risks effectively, and enhance internal controls and governance practices. Internal audits can be relative to specific projects/objectives as defined by management and/or governance as well.

External audits focus primarily on an organization’s financial statements and includes the audit of financial records and transactions to express an opinion on whether the financial statements as a whole are free from material misstatement.

Independence

As internal auditors are hired by management, either internally employed or contracted, maintaining independence and objectivity are of paramount importance. Internal auditors ultimately report to the management or board of directors of the organization.

External audits are conducted by an independent third-party who is not affiliated with the company being audited. This independence is essential to provide unbiased opinions in regard to a company’s financial statements. External auditors ultimately report to the stakeholders of an organization.

Reporting

Internal audit findings and recommendations for improvement are presented to management and the Audit Committee and/or Board of Directors. Internal audits are conducted throughout the year, providing real time feedback and insights into the organization.

External audit reports are also presented to management and the Board of Directors and are often shared with creditors, regulatory bodies, and shareholders. External audits are limited to a specific time period, which is typically one year.

Can Internal Audits and External Audits be Performed by the same Audit Firm?

A common question we get at Blue & Co. is whether internal audit services can be performed for external audit clients. Internal audit services can be performed for external audit clients if certain safeguards are in place by both Blue and the client. To maintain independence and objectivity, internal auditors cannot perform management functions such as, but not limited to, entering journal entries, creating/approving source documentation, or making management decisions. Typically, different staff members serve clients on the respective internal and external audit teams. The specific responsibilities of each party will be documented in the associated Engagement Letter/Statement of Work.

If the appropriate precautions are taken, the benefit of having one firm provide both internal and external audit services follow:

  1. The audit firm’s familiarity with the organization’s processes can lead to more efficient audits.
  2. Better understanding of the organization’s risk environment and internal controls.
  3. Consistent audit approach can help in identifying and addressing issues more holistically.
  4. Enhanced communication and coordination between internal and external audit efforts.

Benefits that Can Result from Internal Audits

  1. Risk Management: Internal audits can help identify and assess risks within an organization, ensuring that potential issues are addressed before they become significant problems.
  2. Compliance: Internal audits can assess an organization’s compliance with relevant laws, regulations, and internal policies, which can help avoid legal issues and penalties.
  3. Operational Efficiency: By evaluating and improving internal controls and processes, internal audits can enhance operational efficiency and effectiveness.
  4. Fraud Prevention: Internal audits can detect and prevent fraud by identifying unusual transactions and practices.
  5. Strategic Planning: Internal audits can provide valuable insights to evaluate strategic decisions and help align operations with the organization’s goals and objectives.

Internal audits provide independent assurance that an organization’s risk management, governance, and internal control processes are operating effectively.

Contact Blue & Co. about Internal Audits

Though often confused, internal and external audits both play important, yet distinct, roles in helping to ensure the accuracy and integrity of a company’s financial results as well as the company’s processes and the related internal control structure.

At Blue & Co., we go beyond simply providing you with an internal audit report – we give you information that will enable you to effectively and efficiently manage your business. For more information about internal audits and how your organization can benefit, reach out to your local Blue & Co. advisor or contact a member of our internal audit team below.

Jeff Reed, Director

Peter Szostak, Director

Carrie Bucher, Manager

Beverly Burch, Manager

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