Conducting audits is a key job function within the accounting career field, and it is important to know the differences between the activities performed by internal and external auditors. The number one objective of most companies is to improve shareholder value. Other organizations that include nonprofit entities and public agencies have strategic objectives that include a mix of financial and non-financial goals. Auditing helps to make sure that a company’s processes and policies in place to mitigate risks to meeting financial and strategic objectives work effectively. Here are some of the key differences between external and internal audit functions.
The scope of external and internal audits is a key differentiator between the two roles. For example, external auditors verify that critical controls that monitor a company’s financial data work as intended. In this role they evaluate an organization’s financial statements as well as the ways in which the financial data are presented so that a true snap shot of an organization’s health can be taken. External auditors are not employees of the companies under audit, but they are independent, third party business professionals who are usually employed by accounting firms with recognized industry credentials for competence in external auditing. Internal auditors are usually employees of the company under audit, or they can be auditors to whom the company outsourced the work. The scope of internal auditors extends beyond evaluation of financial statements and their mode of presentation. These auditors also assess their company’s strategic initiatives, policies and process compliance. They are involved with helping to develop risk mitigation plans and following up to verify that the plans are effective.
The audit owner, or the one that orders the audit, sets the agendas for external and internal audits. External audit owners can be the company owner as sole proprietor, shareholders or government agencies. External audits conducted on non-profit organizations like charities have trustees who are audit owners. External audit reports are generally published and made available to the public. The results of internal audit activities are not usually released outside of the company audited, but reports are kept within house to aid continuous improvement efforts.
Reasons for Conducting Audits
The audit agendas for external and internal audits reflect the reasons why audit owners order audits. External audits can be ordered by government agencies for statutory reasons. Sometimes these audits are used to evaluate a company’s financial health for the purpose of establishing its credit worthiness. Shareholders or other audit owners can order an external audit to evaluate the fiscal risks associated with misrepresented financial statement data. Internal audits are ordered by audit owners for numerous reasons, but they are usually based on some identified threat or perceived risk to a company’s financial health or specific strategic activities. For instance, internal audits are ordered to ferret out suspected fraudulent activities. While external audits are generally done annually, internal audits are conducted at the direction of company managers as needed.
The depth of experiences that one can achieve within the accounting career field is clearly revealed through the job descriptions of auditors. Although the objective of both internal and external auditors is the verification of the effectiveness of a company’s risk mitigation efforts, the purpose of their audits may differ greatly.