Whilst the functions of both internal and external audits complement each other and can often work together, there is a difference between their objectives and areas of focus that do not conflict but rather both contribute to compliance and effective governance.
What is an Internal Audit?
Designed to identify and assess key risks to the business, internal audits help organisations to be proactive rather than reactive, improving the effectiveness of risk management and control processes.
An internal audit will often concentrate on the future with a focus on things such as as ‘are the right systems in place’ and ‘what is the strategy to identify and manage risks’ or ‘how are they working to achieve their objectives’.
- Internal Auditors
The role of an internal auditor tends to be more advisory, with a holistic approach to areas such as information, procedures, businesses control systems and governance risk. They work by identifying risk areas, weaknesses or deficiencies in certain areas and by supporting the organisation through recommendations that can help to improve them.
The scope of an internal auditors is usually defined by management can include both financial and non-financial elements as well as things such as company reputation. It is up to the management to consider the current objectives and risks of the business in order to determine which areas they would like to be given attention by the auditor.
What is an External Audit?
The intention of an external audit is to look into the business and independently verify that the organisation is giving a true and accurate account of their standards, operations and legal compliance.
An external audit will typically look at historical information as required by the standards such as operational, productivity and incident reports to ascertain the accuracy, success, effectiveness and compliance of the organisation with standards, laws and regulations.
These independent reviews help to highlight areas of importance, provide greater transparency with shareholders and increase credibility with customers, users, clients and employees and are also required to maintain ISO compliance.
- External Auditors
External audits are usually appointed by the shareholders and carried out by an independent third party tasked with delivering a true and impartial account of their findings.
An external auditor will focus on the organisations compliance, accounts, fulfilment of legal requirements and accuracy and completeness of internal reporting to determine whether they represent a truthful account of the company’s performance.
What are the Key Differences Between Internal and External Audits?
Often the work of internal and external auditors will overlap and although internal auditors tend to have a broader, more holistic approach, both types of audits have the same goal – to help the company make improvements, ensure accurate reporting and deliver precise, impartial and reliable information.
- Internal audits are ongoing and completed regularly to help improve efficiency and work towards the continual improvement of the business and management systems
- External audits are performed annually to assess, inspect, review and report their findings.
- Internal audits are not compulsory but rather introduced by management to help pinpoint areas for improvement. They are however required by all ISO standards and for some public sector organisations, having internal audit functions can be required by statute.
- External audits are obligatory, compulsory or legally required for every organisation of a certain size, and are also required to maintain ISO compliance.
- For internal audits, the scope is decided by the organisation
- The scope of an external audit is decided by the law or the required standards.
- Internal audits are most often first party audits that are conducted by internal staff or outsourced to a second party if they do not have the internal resources or they are not independent from the process
- External audits are always carried out by an impartial third party that is independent to the organisation.
- The objective of an internal audit is to give insights and educate employees and management on how they can improve, develop and progress the business, making it more efficient and therefore more successful.
- The purpose of an external audit is to examine, inspect and review the relevant accounts, reports and information to verify that the compliance standards or legal requirements are met.
- Internal audits are reported internally and submitted to internal management and the board, usually via an audit committee, they are not usually published externally.
- External audits are reported to shareholders, government, creditors, and suppliers and are published publicly if required.
The Benefits of Internal and External Audits
Whether an organisation is making a conscious decision to carry out internal audits or whether they are undergoing a mandatory external audit, both provide several benefit to businesses.
Internal Audit Benefits
- Internal audit reports are utilised by management to resolve, fix and put right any weaknesses, risks or issues that are reported. This allows them to work on constantly improving the business, its processes, procedures, internal controls and business practice.
- Often referred to as an ‘early warning system’ – internal auditing is a great way to ensure you’re your business is proactive rather than reactive and able to identify and get ahead of potential issues and resolve them before they cause any problems.
- Can be used to evaluate conformity, assess effectiveness and ascertain potential areas for improvements.
- In relation to ISO, internal audits allow businesses to compare their Management System against the requirements of the expected standards to clearly identify weaknesses or areas on non-conformance which can then be corrected ahead of external audits.
- Internal audits are a valuable insight into ways that management can make simple yet effective changes and implement new processes, procedures and strategies which will help to drive the business forward.
- It can be easy to become complacent in business, internal audits help to challenge assumptions and strive for continual improvement which helps to reduce risks, increase performance, lower costs and improve working environments throughout.
- They can help to protect assets whilst lowering the possibility or opportunity for fraud to be committed.
- Regular internal auditing helps to improve efficiency in operations and increase financial reliability and integrity whilst also ensuring compliance with legal and statutory regulations.
- Internal audits are a great way to prepare your
External Audit Benefits
- External audits help to improve internal systems and controls.
- An external audit provides a comprehensive report that can help give a thorough account of the inner workings of the company and help simplify things for management. This can then be used to action remedial work and resolve any faults, weaknesses or non-compliance that are slowing or affecting processes.
- External audits help to ensure that the company is up to date with new, relevant rules, laws and regulations.
- They provide a completely impartial, neutral, independent and unbiased perspective of the organisation and its inner workings.
- Not only can external audit reports instil confidence with shareholders but they can also help to attract and bring in investors. The reports offer a comprehensive presentation of the company’s past and present work providing a reliable indicator of its profitability path that helps make the decision for potential investors a simpler and more attractive process.
- Another advantage that comes with having a successful external audit is that it helps to generate confidence, provide credibility and reassure shareholders.
Why Businesses Need Internal and External Audits
Audits aren’t just about ticking boxes, going through the motions and fulfilling legal and regulatory requirements.
Internal and external audits can both add value to business across various industries to develop, progress and achieve their goals.
For organisations that are looking to gain ISO certification, internal audits allow companies to assess their conformity to the standard and identify areas that need improvements in order to prepare for the external audits and successfully achieve certification.
Auditing can be extremely challenging and time consuming with a lot of businesses unable to spare the internal resources needed to successfully manage the ongoing auditing processes.
At JR Consultants, our team of experts are on hand to provide the advice, guidance, knowledge and resources needed to carry out internal audits and use them to successfully identify procedures, processes and areas that need addressing.
If you would like to find out more about our auditing services then please do not hesitate to contact us today and one of our advisors will be happy to help.