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Definition of External Audit: Key Differences Between Internal Audit and External Audit

Internal audit is conducted internally to review operations and provide suggestions for improvement, while external audit is obligatory and conducted by an independent third party to give an opinion on the financial statements. The key differences are that internal audit is discretionary while external audit is compulsory, internal audit reports to management while external audit reports to stakeholders, and internal audit scope is set by management while external audit scope is determined by law. Together, internal and external audits complement each other by checking activities and validating accounts, respectively.

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110 views2 pages

Definition of External Audit: Key Differences Between Internal Audit and External Audit

Internal audit is conducted internally to review operations and provide suggestions for improvement, while external audit is obligatory and conducted by an independent third party to give an opinion on the financial statements. The key differences are that internal audit is discretionary while external audit is compulsory, internal audit reports to management while external audit reports to stakeholders, and internal audit scope is set by management while external audit scope is determined by law. Together, internal and external audits complement each other by checking activities and validating accounts, respectively.

Uploaded by

Amrutha Gowda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Audit alludes to a process of independent checking of financial records of

an organization, so as to give an opinion on the financial statement. It can


be grouped into two categories, namely, Internal Audit and External
Audit. Internal Audit is not compulsory by nature but can be conducted
to review the operational activities of the organization. In this type of
auditing, the work area is determined by the entity’s management.

On the contrary, External Audit which is obligatory for every separate


legal entity, where a third party is brought to the organization to perform
the process of Audit and give its opinion on the Financial Statements of the
company. Here the working scope is determined by the respective statute.

The auditing process of the two types of the audit is almost same and that is
why people get confused between these two. However, there is a fine line of
difference between internal audit and external audit.

Definition of External Audit

The periodic, systematic and independent examination of the financial


statements of the company conducted by a third party for specific purposes,
as required by statute is known as External Audit.

Definition of Internal Audit

By Internal Audit, we mean that an unbiased and systematic appraisal


function, performed within the business organisation, with the purpose
of reviewing the day to day activities of the business and providing
necessary suggestions for the improvement.

Key Differences Between Internal Audit and External Audit

The following are the major differences between internal audit and external
audit:

1. Internal Audit is a constant audit activity performed by the internal


audit department of the organisation. External Audit is an
examination and evaluation by an independent body, of the annual
accounts of an entity to give an opinion thereon.
2. Internal Audit is discretionary, but the External audit is compulsory.
3. Internal Audit Report is submitted to the management. However, the
External Audit Report is handed over to the stakeholders like
shareholders, debenture holders, creditors, suppliers, government,
etc.
4. Internal Audit is a continuous process while the External Audit is
conducted on a yearly basis.
5. The purpose of Internal Audit is reviewing the routine activities of the
business and give suggestions for improvement. Conversely, External
Audit aims at analysing and verifying the accuracy and reliability of
the financial statement.
6. Internal Audit provides an opinion on the effectiveness of operational
activities of the organisation. On the other hand, External Audit gives
an opinion of the true and fair view of the financial statement.
7. The scope of internal audit is decided by Those Charged With
Governance (TCWG). As opposed to external audit, whose scope is
determined by law.
8. Internal Auditors are the employees of the organisation as they are
appointed by the management itself, whereas External Auditors are
not the employees, they are appointed by the members of the
company.
Conclusion

Internal Audit and External Audit are not opposed to each other. Instead,
they complement each other. External Auditor may use the work of the
internal auditor if he thinks fit, but it does not reduce the responsibility of
the external auditor. Internal Audit acts as a check on the activities of the
business and assists by advising on various matters to gain operational
efficiency.

On the other hand, external audit is entirely independent in which a


third party is brought to the organisation to carry out the procedure. It
checks the accuracy and validity of the annual accounts of the organisation.

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