What is the difference between Internal Auditor vs External Auditor?

What is the Difference between Internal Auditor vs External Auditor?

Auditing is a means of evaluating the effectiveness of a company's internal controls. Maintaining an effective system of internal controls is vital for achieving a company's business objectives, obtaining reliable financial reporting on its operations, preventing fraud and misappropriation of its assets, and minimizing its cost of capital. Both internal and independent auditors contribute to a company's audit system in different but important ways.

Having an effective audit system is important for a company because it enables it to pursue and attain its various corporate objectives. Auditors assess the risk of material misstatement in a company's financial reports. Without a system of internal controls or an audit system, a company would not be able to create reliable financial reports for internal or external purposes. Thus, it would not be able to determine how to allocate its resources and would be unable to know which of its segments or product lines are profitable and which are not.

Internal Audit vs External Auditor

There are basically two types of auditors: external auditors and internal auditors.

Internal Auditor

Internal Auditors are actual employees of an organization and External Auditors on the other hand refers to public accountants who take on different clients and perform the audit together with an engagement team. These are the usual public accounting firms such as the Big Four firms that audit large public companies in addition to large private companies. External auditors are employees of the accounting firm they are associated with and only interact with their clients through the audit process. Internal Auditors role is to perform general auditing procedures all year to ensure that all accounting and record-keeping are being done properly so that the external audit becomes more feasible. Internal auditors usually exist only in large companies. Internal audit serves an important role for companies in fraud prevention. Recurring analysis of a company's operations and maintaining rigorous systems of internal controls can prevent and detect various forms of fraud and other accounting irregularities. An important part of prevention can be deterrence, and if a company is known to have an active and diligent audit system in place, by reputation alone it may prevent an employee or vendor from attempting a scheme to defraud the company.

External Auditor

Internal Auditors are company employees which is hired by the company, meanwhile the External Auditors work for an outside audit firm and appointed by a shareholder vote. Internal Auditors help to design the company’s organising systems and help develop specific risk management policies. They also ensure that all policies implemented for risk management are operating effectively. The work of the internal auditor tends to be continuous and based on the internal control systems of a business of any size. Meanwhile, External auditors are independent of the organisation they are auditing. They report to the company’s shareholders. They provide their experienced opinion on the truthfulness of the company’s financial statements and perform work on a test basis to monitor systems in place.

An external audit focuses on finance and the key risks associated with the business’ financial business. They are usually performed on at least an annual basis to provide the annual statutory audit of the financial accounts. This audit is designed to show whether the accounts are a true and fair reflection of where the company sits financially. External auditors will evaluate all the internal controls put in place to manage financial risk to assess whether they’re working effectively. Working in the auditing sector is always challenging and whether you work as an external or internal auditor you will face plenty of career challenges. Many people opt to work in internal roles to have the camaraderie and rapport of working with a single company whilst others enjoy the variety of work they come across in an external role where every day is different.

Resource

Goh, M. H. (2016). A Manager's Guide to Auditing and Reviewing Your Business Continuity Management Program. Business Continuity Management Series (2nd ed.). Singapore: GMH Pte Ltd.

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