What Is The Difference Between An Internal Audit And An External Audit?

Audit may sound like a "four-letter word," but last we checked the term definitely had five letters! Plus, an audit isn't as intimidating or frustrating as you may think, especially when you and your business team have realistic expectations about the process.

Many companies utilize both internal and external audits to help maximize the integrity of their operational systems. In this article, we'll explain what both of these audit processes are, how they're different, and how they may apply to your company.

Internal Audits and External Audits: Which is Which?

Internal audits come from a department within an organization. An internal auditing team's main task is to monitor the company's processes, controls, and overall efficiency. Internal auditors help with important jobs like detecting fraud, assessing risk and controls, ensuring legal and regulatory compliance, and tracking and protecting assets.

Large, complex, and/or publicly held businesses often rely heavily on internal audits, since these more nuanced organizations are more at risk for breaches and systemic failures.

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External audits come from independent accountants from outside an organization. An external auditor is tasked with monitoring and evaluating the accuracy of a business's accounting records, whether a business's financial statements are a fair representation of its financial positions, and whether a business's financial records are prepared in accordance with relevant frameworks. Sometimes, external audits are also triggered to search for fraud.

8 Key Differences Between an Internal Audit and an External Audit

Now that we have a clearer idea of what internal vs. external audits are, it may be helpful to more clearly define how these two important processes differ. Here are at least eight key differences between an internal audit and an external audit:

1. An internal audit is conducted by a person who is hired by an organization—he or she is actually considered a company employee. An external auditor is an independent contractor from an auditing firm who has been appointed to audit a company based on shareholder votes.
2. An internal auditor can but does not have to be a certified public accountant (CPA). An external auditor must be directed by a CPA.
3. An internal auditor is responsible to the organization, particularly the organization's upper-level management and regulatory board. External auditors are responsible to (effectively "looking out for") the organization's shareholders. This is why external audits are so important for publicly held companies, although publicly held and traded companies may also benefit from internal audits, too.
4. Information obtained in an internal audit can be disseminated by the auditor as a way to offer advice and assistance to employees. But external auditors are not supposed to support the organization or its personnel too closely, out of a concern for conflict of interest.
5. An internal audit can be formatted into a report of any type or style. An external audit requires the use of specific and formalized formats.
6. An organization's leaders and upper management use internal auditing reports. Conversely, the intended recipients of external audits are the organization's lenders, investors, stakeholders, and creditors.
7. An internal audit may be held multiple times throughout the year, typically at the organization's discretion. A formal external audit is conducted in a single annual event. Publicly held organizations will also be reviewed three times by an external auditor.
8. The main intention of an internal auditor is to identify and highlight any issues pertaining to an organization's risks and business practices. An external audit, on the other hand, has a different goal: mainly to evaluate a company's financial records and issue an audit opinion of the company to the relevant parties.

LEARN MORE: Cybersecurity protection and detection for community banks

As you can see, internal audits and external audits are quite different in terms of implementation and intended use. But depending on the size and nature of your organization, you may very well need both. 

Ready to see how the experienced business and technology specialists at Integrity Technology Solutions can help your business sail through your next internal or external audit? Contact our team at 309-664-8150 to schedule a consultation today.