Internal Audit vs. External Audit

James Hadfield

James Hadfield – Audit Partner

What’s the difference between an internal and external audit?

Although appearing seemingly similar as the two functions share a common word, they are in reality quite different. Larger organisations tend to implement both to ensure that their records, effectiveness of the company’s internal controls, regulatory compliance and financial reporting are closely examined on a perpetual basis.

Smaller entities may decide not to use an internal audit function given that it might not be cost effective for them to do so, however in order to understand the difference between the two functions we need to ask ourselves a few fundamental questions:

Q. What is the purpose of the and internal and external audit?

Internal Audits

An internal audit is designed to assess the key risks facing the business, the effectiveness of the   business in managing those risks along with the control processes that management have implemented. Internal auditors often perform a more advisory role by issuing recommendations aimed to support management in improving their systems and controls for the instances where they identify deficiencies in certain business areas.

Their scope of work includes but are not limited to financial and non-financial elements and can even consider the company’s reputation. The scope of their work is defined by management who will pinpoint certain areas for attention in light of the business’s objectives and risks.

External Audits

The objectives of the external auditors are defined by statute.

The purpose of an external audit is to provide an objective independent examination and to verify that the financial statements provide a true and fair reflection of where the company financially and have been appropriately prepared in accordance with accounting standards.  This not only increases the value and credibility of the financials produced by management which in turns increases user confidence and reduces investor risk, but an independent review also provides greater transparency to the shareholders, highlighting areas of importance.

Q. Who are the auditors?

Internal Auditors

Internal auditors may be employees of the firm, or alternatively the firm may wish to outsource its internal audit services.

External Auditors

External auditors are appointed by the shareholders of the company and unlike internal auditors they must be able to act independently to ensure an objective approach to the audit process.

Q. Is it a requirement to have an audit?

Internal Audits

Although larger organisations see an internal audit as a fundamental way of improving the company’s systems and developing specific risk management policies, internal audits are discretionary.

External Audits

In the case of external audits and whether or not these are required, this must be assessed on a case by case basis.

Q. Who are the end-users of the audit report?

Internal Audits

Internal auditors will report internally to the audit committee or the Board once they have documented their findings and will review the recommendations.

They will provide a tailored report about how the risks and objectives are being managed and focus on any strengths and weaknesses identified. Internal audit reports are not available to the public.

External Audits

External auditors report primarily to the shareholders of the company which could range from its owners to the general public.

The main report is in a format required by the Auditing Standards and focuses on whether the financials give a true and fair view and comply with legal requirements. External auditors’ reports are placed in the public domain via the annual financial statements required to be filed in the UK with the registrar of Companies.

More Audit FAQs

More about Menzies audit and compliance services

As well as meeting your statutory reporting obligations, Menzies’ audit and compliance services are the proactive way to reduce risk and drive forward your business strategy. Our pragmatic, hands-on approach helps you improve your business performance – by challenging assumptions and resolving commercial issues that could be holding your business back.

Our audit and compliance team will help you to:

  • Add value to your business by using the audit as a basis to identify and resolve commercial issues and to improve your business processes.
  • Use the understanding and insight gained from the audit as a basis for helping you develop strategies to drive your business forward.
  • Reduce risk and improve your organisational performance by challenging existing assumptions and practices.
  • Secure peace of mind from knowing your statutory obligations are met, accounts are true and potential problems have been identified early on.

To speak to a partner or for more information about the audit and compliance services we offer please contact one of the Menzies LLP offices or complete our contact from below.