Internal audit refers to the department located within a business that monitors the efficacy of its processes and controls. The internal audit function is especially necessary in larger organizations with high levels of process complexity, where it is easier for process failures and control breaches to occur.
An external audit is an examination that is conducted by an independent accountant. This type of audit is most commonly intended to result in a certification of the financial statements of an entity. This certification is required by certain investors and lenders, and for all publicly-held businesses.
There are multiple differences between the internal audit and external audit functions, which are as follows:
Internal auditors are company employees, while external auditors work for an outside audit firm.
Internal auditors are hired by the company, while external auditors are appointed by a shareholder vote.
Internal auditors do not have to be CPAs, while a CPA must direct the activities of the external auditors.
Internal auditors are responsible to management, while external auditors are responsible to the shareholders.
Internal auditors can issue their findings in any type of report format, while external auditors must use specific formats for their audit opinions and management letters.
Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders.
Internal auditors can be used to provide advice and other consulting assistance to employees, while external auditors are constrained from supporting an audit client too closely.
Internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company.
Internal audits are conducted throughout the year, while external auditors conduct a single annual audit. If a client is publicly-held, external auditors will also provide review services three times per year.
In short, the two functions share one word in their names, but are otherwise quite different. Larger organizations typically have both functions, thereby ensuring that their records, processes, and financial statements are closely examined at regular intervals.