Internal audit and external audit are both the watchdog of entity and shareholders; however, there are some key differences between internal and external audit for some perspectives.
For example, purpose, employment, legal requirement, reporting and so on. The following are the key differences and similarity of internal audit and external audit:
The Different of External and Internal Audit
1) Purpose of Audit
The purpose of an external audit is to let auditor examine the entity’s financial statements and express their opinion on its.
The external auditor examines the reports and expresses their opinion if the entity’s financial statements are free from any kind of material (error or fraud).
The purpose of an external audit is sometimes required by law, regulation, shareholders or sometimes required by the bank.
External audit reports provide assurance on the financial statements and helping users of financial statements feel comfortable with the reports they are using.
However, the internal auditor is not express their opinion on the financial statements.
Instead, they are reviewing the internal control over financial reporting to ensure that the good internal controls are in place to ensure that the financial reports are prepared in all material respect. This is the internal audit in the financial report perspective.
In general, the purpose of internal audit is to review and assess the major internal control of the entity, not only internal control over financial reporting.
Internal audit also reviews the effectiveness, efficiency, and economy of an entity’s use of its resources.
Check out the Purpose of Audit on Financial Statements:
External auditors are the employee of audit firms like KPMG, PWC, and EY. They are not the employee of the entity they are auditing.
So basically, the employment contracts, training, compensation, and performance review are all with the firms.
Internal audit is the employee of the entity and normally they are working in the internal audit department or internal audit division.
However, sometimes internal audit activities are outsourced from external auditors or consulting firm who have professional skill and resources. So, the employment contracts, training, compensation, and performance review are all with the entity.
Check out what does audit plan mean,
External audit reports are reporting to those charged with governance (TCWG). ISA 260 is the standard that we should refer to and actually, the standard does not say specifically about the exact person that external auditor reports, but it uses the word “governance”.
Be careful, when you do the research about who the hell external auditor reporting to on the internet and you found many different results.
Well, Those Charged With Governance includes someone or a group of people at the highest level of management of an entity. Those people include executive, non-executive, committee, or board of directors.
Internal audit work in the entity has some different reporting line from the external auditor. For administrative purpose, the internal auditor might report to the CEO or other executives in the entity.
For example, administrative expenses, staff turnover, recruitment plan or similar. Reporting result of internal audit and other relevance maters are directly reporting to the audit committee, owner, or board of directors.
In other words, reporting to people or ground of people who manage the executive management in the entity.
Check out what do Audit Strategy Mean?
In the external audit report, there is an opinion of external auditor expressing on the financial statement as the result of their audit. These opinions include the unqualified, qualified, disclaimer, and adverse opinion.
For limited assurance, the external auditor also issued their opinion, but not like positive assurance.
Internal audit, by the ways, does not express an opinion on the true and fair of entity’s financial statements even those they tested those fs.
But, they online issued finding along with the rating of those finding based on the impact and likelihood of findings found.
5) Legal perspective
If the external audit issued their opinion negligently, and the negligent cost the entity, then external auditor face the legal action with the entity at the both of company level.
The entity could not sue the employee in the external auditor, but audit partner, maybe depending on the law in that jurisdiction.
However, if the internal auditor does something against the entity policies and regulation, then the employee might face some action based on entity policies.
6) Standard use
The internal auditor normally uses the audit standard issued by the local regulator or body and adoption of International Standard on Auditing (ISA) which is issued by IFAC.
Sometimes, it also follows the requirement of other related bodies like security exchange to be able to audit the entity’s financial statements listed in the stock exchange.
Internal audit is followed internal manual which adopts best practice and IIA Standard. In general, an internal audit is adopted and use the standard which is issued by IIA (International Professional Practices Framework (IPPF))
Work in an external audit firm as normal staff are not required to hold ACCA, CPA, CA, but if you hold one of them, your credit is better than others.
However, the audit firm required its partner to hold the CPA at least one. Sometimes, it depends on local regulation, one or two people holder CPA and also registers in the local authority that controls CPA firms.
Internal auditor; however, is not required CPA. But most of the people who manage the internal audit department required good experiences in internal audit or sometimes, require someone who has experiences from the external audit firm preferable big four.
CIA is also one of the most popular professional internal audit qualification. Having the CIA could help you gain more credit and get a better opportunity in internal audit.
8) Scope of works
Scope of the external audit depends on the services request by entity and availability services in the firm.
In general, if we talk about the scope of external audit on auditing financial statements, the scopes include the period of engaged financial statements, the standard use to prepare financial statements
Scope of internal audit is a bit different from the external audit. The internal audit might cover the areas and determine by the audit committee.
However, it is generally cover internal control both operation and internal control over financial reporting, investigation on fraud, compliant review again company policies or local regulation, examine on management report, and 3Es audit (economy, efficiency, and effectiveness)
External audit responsibilities are defined in ISA 200, and their main responsibilities are:
- Audit entity’s financial statements based on required standards
- Maintain ethical requirement related to the audit of financial statements; for example, keep professional judgment, professional skepticism,
- Make sure audit risk are properly assessed and audit strategy is applicable to those.
- Report to audit committee if there is any problem related to independent and conflict of interest.
Responsibilities of internal audit are defined in the audit charter and they might be a bit different from one company to others. In general, an internal audit is responsible only for auditing only one company or under the group.
They are responsible for reviewing and assessing the internal control of the entity, compliant review, and fraud investigation.
They are also responsible for reporting any significant errors, fraud, or problems found to the audit committee and board of directors.
10) Code of Ethics
External audit code of ethics is defined by IFAC and they are tailor by the firm for internal use. However, those internal codes of ethics also need to follow IFAC.
The internal audit code of ethics is generally set in the internal audit charter or policies. However, IIA also issued an internal audit code of ethics that should follow by the internal auditor.
The Similarity of External and Internal Audit
Both internal audit and external audit are working independence from the operation. Independence here means both Independence in mind and physical.
Both internal audit and external audit issues their report after they complete their tasks. Yet, their reports have different format and objective.
Both of audit cost the entity. This is the big challenging for some small entity to engage audit firms to audit its financial statements.
Standard of works
Internal audit and external audit requirements to maintain a high quality of works to ensure that the result of their audit is trust-able and reliable by related parties.