The Relationship Between Internal & External Audit

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The word audit means to examine something critically, or can refer to a report generated from such critical examination. Thus, auditors, both internal and external, scrutinize the activity of a firm and create reports expressing their impressions of this examination. Though there are many similarities in their work, there are also important differences between the two types of auditors.

External Audit

  • External auditors are not employees of the firm that they audit. The primary interest of the external auditor is the determination of whether the firm’s stated business activity is consistent with the results reported in the firm's financial statements. They also examine the firm’s bookkeeping methods to determine whether they are in accordance with generally accepted accounting practices.

Internal Audit

  • Internal auditors are an integral part of the firm. Though companies sometimes outsource their auditing needs, internal auditors usually work directly for the company. Internal auditors oversee every aspect of the company's operation. They constantly scrutinize organization, procedures and governance to find any way in which a change may increase the organization’s efficiency.

Similarities

  • There are several similarities between internal and external auditors. Both observe the manner in which the company conducts business. Both assess the possibility of fraud or theft, and both compare regulations and laws with the actual operation of the firm. The recommended skill sets and qualifications for both types of auditors are also similar. For each, a familiarity with the type of business audited is a strong advantage. A detailed understanding of accounting, finance or general business also assists both types of auditors.

Differences

  • The biggest difference between internal and external auditors is apparent in the name. External auditors provide an objective outsider's perspective on the articles of interest (usually financial statements). Internal auditors usually work directly for the company. External auditors may examine the firm in great detail to verify the accuracy of financial statements, but they don't concern themselves with the specifics of running the company. Internal auditors, on the other hand, try to optimize every process and task to achieve greater efficiency. Thus, the internal auditor’s job is far more comprehensive regarding the firm’s day-to-day operations.

Interaction

  • Internal and external auditors for the firm should meet periodically. There are certain tasks performed by both, and coordination between the two avoids redundancy. If the process desires redundancy, scheduling prevents conflicts over the use of various resources needed by both. Exchange between the two groups results in better work coordination and understanding of their respective responsibilities. For example, the information technology systems used, the manner in which the company uses them, and the firm’s accounting procedures are all areas in which it is beneficial for the internal audit and external audit to be “in sync.”

References

  • Photo Credit Winston Davidian/Photodisc/Getty Images
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