Internal vs. External Audit: What’s the Difference?

Audit And Fraud Investigation. Auditor Using Magnifying Glass On Document

Internal and external audits are complementary processes that vary in scope, purpose and the benefits they bring to organizations. As such, it’s essential to understand the key differences and when each should be utilized.

As experts in helping businesses navigate the complexity of the auditing process and reduce risk, we’ve outlined everything you need to know about internal and external audits.

Important things to know about Internal and External Audits:

  1. What is an Internal Audit?
  2. What is an External Audit?
  3. When should you conduct an Internal and/or External Audit?

What is an Internal Audit?

The primary role of the internal audit function is to help the decision makers of the company safeguard organizational assets while supporting operational sustainability and scalability.

The internal audit function focuses on providing assurance around business process risks and controls. In recent years, as risks have increased and become more complex, internal audit roles and responsibilities surrounding governance and risk appetite have become more important.

The scope of an internal audit can vary quite greatly depending on your business needs and objectives – however, commonly included areas are financial reporting, risk management, information technology, operations, human resources, procurement and compliance with laws and regulations.

Internal audits provide assurance that a company’s risk management, governance and internal control processes are operating effectively. Internal audits also help to maintain operational efficiency by identifying problems and correcting lapses in internal controls.

The internal audit function is beneficial to external auditors as they can gain insights into the company by leveraging the internal audit team who may have relevant experience in particular competencies specific to the company – and as a result, focus on more significant audit-related testing and issues.

Examples and types of Internal Audits:

  • Financial Audits: Determining the accuracy, reliability and fairness of financial information, documentation, reporting and statements.
  • Operational Audits: Assessing operational procedures, systems, and activities to ensure efficiency and effectiveness at every level.
  • Compliance Audits: Ensuring processes and controls follow laws, regulations, standards and best practices.
  • Information Technology Audits: Evaluating IT infrastructure, policies, procedures, controls and data management practices to identify risks and safeguard an organization from threats.
  • Fraud Investigations: Detecting, investigating, and preventing fraud within an organization, including areas such as misappropriation of assets, financial statement fraud, bribery, corruption and more.

What is an External Audit?

An external audit is completed by a third-party CPA firm with no links to the company being evaluated to confirm the accuracy of their financial statements, controls and/or compliance within the governing laws and regulations.

The final audit report is provided to an organization’s management team, Board of Directors and other stakeholders.

The key objectives of an external audit are to determine:

  • The accuracy and completeness of the company’s accounting records.
  • That accounting records have been prepared in accordance with the applicable accounting framework.
  • That financial statements accurately represent the company’s financial position.
  • Whether or not processes and controls are in compliance with governing laws and regulations (e.g. SOC report, SOX 404b).

Conducting an external audit has many benefits, because it provides an independent opinion of a company’s financial position which can support an organization’s efforts to secure external financing from lenders and investors while establishing stakeholder confidence.

Oftentimes, it’s best to conduct an internal audit prior to an external audit to help you identify any inconsistencies or areas for improvement, allowing you to make corrections before you decide to have a third party audit your records.

Examples and types of External Audits:

  • Financial Statement Audits: Assessing balance sheets, income statements, cash flow statements and documentation to verify accuracy, completeness and compliance.
  • Internal Controls (for SOX 404b Audits): Evaluating the design and effectiveness of internal controls over financial reporting, including control environment, control activities, information systems and monitoring processes.
  • Compliance Audits: Reviewing legal and regulatory documents, contracts and agreements to ensure adherence to required standards and obligations such as SOC 1 & 2 Reports.

When should you conduct an Internal and/or External Audit?

If your organization or management team is looking for answers regarding the best ways to mitigate risk, drive operational efficiency and develop stronger internal controls, you should consider conducting an internal audit to help drive informed decision making.

External audits are required for public companies, growing private companies, companies with banking requirements, SOC reports and other compliance audits – so if you fall into any of those categories, it’s likely that you’ll have to conduct an external audit at some point in time to provide investors, government agencies and/or the general public with the objective assurance that your financial statements are trustworthy and accurate.

Conducting an internal audit before an external audit can help inform the measures you need to take to rework your systems and processes as needed before this information is presented to stakeholders, helping to ensure your success down the line.

Final Thoughts on Internal vs. External Audits

While they vary quite greatly in scope and purpose, both internal and external audits bring many benefits.

If your organization is looking to mitigate risk, improve processes and controls, and integrate measures to help prevent fraud, our experienced team at Bridgepoint Consulting is here to help.

Our internal audit experts deliver risk-based and objective assurance and advice to address strategic, financial, operational, regulatory and fraud risk areas.

Need Internal Audit Support?

Our team at Bridgepoint Consulting provides internal audit support to help you protect and add value to your business. Our experienced team delivers risk-based and objective assurance and advice to revolutionize your internal audit department and address strategic, financial, operational, regulatory and fraud risk areas.

Contact us today or learn more about how we can help at the link below.