External Audit vs Internal Audit: Key Differences

Introduction 

Auditing is an important financial process for businesses as it allows them to maintain financial integrity and conveys their financial health to external stakeholders as well. In order to ensure the same companies go through internal and external audits. 

In this blog, we are going to talk about what external and internal audits are, the purpose they serve, and the key differences between internal and external audits. 

What is an Internal Audit?

An internal audit is an unbiased internal assessment of a company’s functions and operations that provides an objective view of the company’s operations. They are conducted in a systematic manner to decipher how well a company is functioning and identify areas for improvement. 

Businesses need to implement internal controls and a number of processes and procedures to mitigate risks and optimize the functioning of the company. The purpose of an internal audit is to regularly review such controls and processes, providing strategic advice to enhance the productivity and efficiency of the company. Businesses conduct internal audits as a best practice to gain the trust of customers and stakeholders. Recently a lot of organizations are automating the audit processes for enhanced efficiency. 

Let’s take a closer look at the key purposes of an internal audit:

1. Enhancing operational efficiency: Internal audits enable us to identify opportunities for cost-cutting and improving internal processes for maximum efficiency. 
2. Fraud detection and risk prevention: A key aspect of internal audits is to check if the controls implemented by the company are able to mitigate risks and detect fraud. 
3. Financial integrity and accountability: Internal audits enhance transparency and accountability within the organization. Additionally, they ensure that the company’s financial statements are free of errors and fraud to maintain financial integrity. 
4. Ensure adherence to regulatory requirements: Internal audits make sure that businesses are taking all the necessary steps to stay compliant with regulatory laws and industry standards. 
5. Prepare for external audits:, Internal audits ensure that the company is prepared for external audits. 

Who is an Internal Auditor and What are they Looking For? 

Internal auditors are responsible for conducting regular audits within an organization. Companies either employ an internal audit team or outsource these services. Either way, internal auditors function independently and are not part of any other teams in the organization. This allows them to maintain an objective view as they assess the functions and operations of a company. 

Since internal auditors report to the management, they are not required to be Certified Public Accountants (CPAs); however, a lot of auditors do get affiliated with CPA firms. Internal auditors must comply with standard accounting regulations, and Certified Internal Auditors (CIA) need to comply with Institute of Internal Auditors (IIA) standards. 

In order to perform their jobs, internal auditors look for the following while conducting audits:

1. Effectiveness of internal controls: Evaluate the internal controls and identify opportunities for improving them. 
2. Regulatory compliance: Ensure that the company is complying with all the regulatory requirements. 
3. Enhance operational efficiency: Assess the operational efficiency of a company and suggest how it can be improved for continuous growth. 
4. Financial integrity: Ensure accuracy of financial statements by identifying the presence of any errors or discrepancies in the financial information.
5. Fraud prevention:Evaluate efficiency of risk and fraud prevention processes and identify the areas for improvement.. 

What is an External Audit?

An external audit is an independent evaluation of a company’s financial statements and is conducted by an external auditor. They are meant to review the accuracy and integrity of the reported financial information. These audits benefit external parties who have a vested interest in a company such as investors, shareholders, and the general public.

Let’s discuss the key purposes of external audits in detail:

1. Enhance transparency and accountability: External audits play a key role in the financial reporting process, ensuring increased transparency and accountability when it comes to financial information reporting. 
2. Ensure accuracy of financial statements: External audits serve the interests of stakeholders in a company and are hence supposed to report how reliable and accurate a company’s financial statements are. This helps stakeholders have a clear understanding of the company’s financial position and improves the quality of financial reporting in the business world. 
3. Fraud detection and risk assessment: External audits are especially important to detect any kind of fraudulent information in financial statements, thereby protecting stakeholders from any potential harm. 
4. Ensure adherence to regulatory requirements: External audits also make sure that public companies stay compliant with all the necessary laws, accounting standards, and regulations. 
5. Improved decision-making for stakeholders: Stakeholders rely on external audits to gain accurate information about a company’s financial position and their accounting practices. This information helps them make informed decisions regarding their involvement with the organization. 

Who is an External Auditor and What are they Looking For? 

External auditors conduct external audits at the end of the year and review the financial statements of an organization. These auditors are not a part of the organization and are independent contractors or firms affiliated with the CPA or CIA.

External auditors provide an unbiased opinion on the organization’s financial statements, with their primary responsibility being towards the stakeholders and not the organization. 

Here’s what external auditors are primarily looking for while performing the audit:

1. Accuracy of the financial statements: External auditors need to ensure that the financial statements released by the company are accurate, complete and truthful.
2. Regulatory compliance: They need to ensure that the financial statements comply with all applicable regulations and laws. 
3. Internal control effectiveness: They need to assess the efficiency and effectiveness of the internal controls of the company. 
4. Fraud detection: Identify any kind of fraud or wrongdoing when it comes to the financial statements. 
5. Risk assessment: They should assess risk prevention policies and processes at a company and how well they function. 

Internal vs. External Audit: Comparison and Differences 

While internal audits help companies continuously evaluate their processes and operations, enabling steady growth and minimizing the risk of fraud and errors, external audits perform a thorough analysis of a company’s financial statements and provide stakeholders an unbiased picture of the company’s financial position. 

Some of the key differences between internal and external audits are: 

How Can HighRadius Help Ensure Audit Accuracy

Accuracy is a vital component of any audit. Ensuring accuracy in financial reporting is essential for maintaining the integrity of your organization. Highradius can make a significant difference in enhancing the accuracy and efficiency of audits. The Highradius’ Record to Report suite streamlines the entire financial reporting process, ensuring all records are accurate and up-to-date. This minimizes the risk of human error and ensures consistency and compliance with regulatory standards.

At the heart of this solution is the Financial Close Management software, which provides a structured and efficient way to manage the financial close process, reducing days to close by 30%. The Close Checklist feature enhances productivity by ensuring that support documents, weblinks, and comments are readily available for auditors. This ensures accountability and compliance, supporting both internal and external audit requirements.

The Month-end Close Task Workflow is another key feature, ensuring transparency, compliance, and a detailed audit log during auditing processes. Furthermore, Account Reconciliation Software enhances audit readiness by providing essential evidence for closing balances on specific dates, addressing a critical need for audits.

The LiveCube Task Automation includes automated data extraction and period-over-period rollover features, reducing manual intervention and increasing efficiency by 50%. These capabilities allow analysts to focus on critical tasks such as audit preparedness, adjustments, and reporting.

The Journal Entry Management module ensures accountability and integrity in journal entry postings. By logging all tasks worked on by preparers and approvers, this feature is essential for audit purposes. 

Leveraging the AI and automation-backed Record to Report suite, your organization can achieve greater accuracy and efficiency in its financial processes, ensuring that internal audits are based on reliable data, leading to more effective and insightful audit results. Features like anomaly detection allows you to identify errors or discrepancies in the general ledger and resolve 80% anomalies.

FAQs

Q1 What is considered an external audit?

An audit performed by an independent external auditor who is not part of the organization in any way is considered to be an external audit. These audits review the financial statements of a company and offer an unbiased opinion on its financial position to all the relevant stakeholders. 

Q2 Who is paid more, an internal or external auditor?

Internal auditors are paid more than external auditors. This being said, external auditors are supposed to have better growth over time in the field. Furthermore, several factors affect the pay range of both internal and external auditors, including geographic location, role, experience level, etc. 

Q3 What are the roles of internal audit and external audit?

An internal audit is an ongoing process at an organization aiming to streamline its functions and operations. External audits, on the other hand, are conducted annually to evaluate the accuracy and truthfulness of a company’s financial statements, aiming to increase the transparency and accountability of organizations.

Q4 What is the main purpose of external auditing?

The key purpose of external auditing is to enhance transparency and accountability regarding financial reporting. These audits assess the financial statements of companies and check for any fraudulent information. The audit reports provide an objective view of the company’s financial position. 

Q5 Can an external auditor become an internal auditor?

Yes, an external auditor can become an internal auditor. This is because a lot of the duties and skills of external and internal auditors overlap. Moreover, external auditors work across different industries and companies, which can add to their knowledge and make the transition to becoming an internal auditor easier.