Internal and external audit: what are the differences? ?
Auditing is a common practice in the corporate world. It is used to assess the performance and compliance of an organization, process or project against current standards, regulations and best practices. Two types of audit are generally used in companies: internal and external. Although these two activities share similarities, they also differ significantly in terms of roles, responsibilities, objectives and methods used. Are you interested in becoming an auditor? Discover our Master of Science in Audit et Contrôle de Gestion for training in accounting disciplines and financial control.
What is the auditor’s role?
The role of an auditor is to conduct impartial and objective assessments to help ensure that a company’s financial and accounting operations comply with current rules and regulations.
Auditors can be internal or external. The internal auditor works on behalf of the company, and as such is responsible for the ongoing monitoring of the company’s internal processes. An external auditor, on the other hand, is hired by an independent company to audit its processes and provide an objective assessment of its performance.
In both cases, the auditor uses auditing tools and techniques to assess the company’s risks and vulnerabilities, and to identify opportunities for improvement. Auditors also assess the company’s internal controls to ensure that its assets are properly protected against fraud, error and abuse.
The main objective of the audit is to provide reasonable assurance that the financial statements and information presented by the company are accurate and comply with applicable standards. The auditor therefore plays a crucial role in protecting the company’s investors and stakeholders.
What is an internal auditor?
Internal audit is the department within a company that monitors the effectiveness of its processes and controls. The internal audit function is particularly necessary in large organizations, where processes are highly complex and it is easier to identify process failures and control violations.
Unlike external auditors, internal auditors are first and foremost employees of the company. It is responsible for evaluating the company’s activities and operations to ensure that all internal standards and procedures are respected. This function is therefore essential to guarantee the integrity, transparency and compliance of the company’s activities.
Internal auditors are responsible for checking financial documents, internal policies and operating procedures to ensure that all company activities are legal and comply with current standards. They also assess the risks associated with the company’s activities and propose solutions to reduce these risks.
To be an effective internal auditor, you need to have a thorough understanding of the company’s standards and procedures. Financial analysis and risk management skills are also essential. Internal auditors must be objective, independent and have the integrity to ensure the accuracy and veracity of their conclusions.
What is an external auditor?
An external audit is a review conducted by an independent chartered professional accountant (CPA). This type of audit is most often intended to produce a certification of an entity’s financial statements. This certification is required by certain investors and lenders, as well as by all listed companies.
The external auditor is a professional who examines a company’s financial statements to ensure their accuracy and compliance with current accounting and tax standards. Unlike the internal auditor, who works within the company, the external auditor is an independent service provider hired by the company to carry out this task.
The external auditor checks the company’s books, invoices and financial documents to ensure that all transactions are correctly recorded. It also examines the company’s internal control processes to assess their effectiveness and reliability.
The primary objective of the external auditor is to provide independent and objective assurance that the company’s financial statements fairly reflect its financial position, performance and cash flows. This assurance is important for shareholders, creditors, suppliers and other company stakeholders, who need this information to make informed financial decisions.
The external auditor must be impartial, objective and possess solid expertise in accounting and finance. He must also be able to work closely with the company to understand its activities, risks and challenges.
Internal or external audit: which is better?
First of all, there are many differences between the internal and external audit functions:
- Internal auditors are company employees, while external auditors work for an external auditing firm and are appointed by a shareholder vote.
- Internal auditors are accountable to management, while external auditors are accountable to shareholders.
- Internal audit reports are used by management, while external audit reports are used by investors, creditors and lenders.
- Internal auditors examine issues relating to the company’s business practices and risks, while external auditors examine financial documents and issue an opinion on the company’s financial statements.
- Internal audits are carried out throughout the year, while external auditors perform a single annual audit. If the customer is a listed company, the external auditors will also provide review services three times a year.
Neither audit is “better” than the other. In reality, these two types of audit have different and complementary objectives in guaranteeing the compliance and transparency of a company’s activities. The internal audit will be applied to assess compliance with internal company policies and improve operational processes, while the external audit will ensure compliance with current accounting and tax standards. The choice between internal and external auditing will therefore depend on the company’s specific needs and audit objectives.
Would you like to play a cross-functional, managerial role in the company’s strategic financial decisions? Discover our Master of Science in Audit et Contrôle de Gestion and develop your analytical skills to achieve your goals.