To make sure every business is running in a proper way and the company is working fine from every aspect it is necessary to make sure everything is in order. There are many ways to do that and different check and balance systems which make sure thing stay in the upward direction. In some cases, though, it is not always enough. For example, when a company is being run by different shareholders it is not possible to satisfy each one of them. Similarly, when there are some issues going on in terms of monetary matters it is important to go to the root and find what is the reason or the problem. For this purpose, audits are carried out and has two main types. Internal Audit and External Audit. Both have different ways of being carried out and will be discussed here. Internal audit is the one which is carried out by the company for the company. Someone from the employees is appointed who has relative experience and then is appointed with the task of finding the problem’ solution. External audit is carried out by the private firm of an independent company. This is carried out if a shareholder wants and has the full backing of the directors. The main reason for internal audits is to make sure the company runs in a smooth manner while the main purpose of external audits is to look in to matters such as a specific client is not getting extra benefits. They are therefore carried out by Certified Public Accountant who has the knowhow of all the matters and is bound to report to a specific person who is not related with the company in any way. They are not a requirement when it comes to internal audits and anyone from the company can be appointed. The format of report does not matter in internal audits because they are being done in-house but there is a proper requirement of a specific report format since it is being done in a professional way. An internal audit provides suggestions on how to improve the company while external audit takes in to account all the money matters and makes sure things are being done in a satisfactory manner. There are many other differences too, which will be mentioned in short later on while a brief description of both types is given in the next few paragraphs.
Definition of Internal Audit
Internal audit is the one which is carried out by the company for the company. Someone from the employees is appointed who has relative experience and then is appointed with the task of finding the solution. It does not have to be a CPA and does not need to report to a private person. All the matters of company stay between the people and they make sure that the issues are solved in the best possible way. There is no format requirement for such types of audits since they are in-house, different ones such as a formal report, bullet points, a letter or even power point presentation can be used to convey the solution. There is no limit to how many times it can be conducted over the year. There can be many issues which need addressing therefore, several audits can be carried out at the same time.
Definition of External Audit
These types of audits are carried out by a private firm of an independent company. This is carried out if a shareholder wants and has the full backing of the directors. There is a requirement of a competent professional which is usually a Certified Public Accountant who has the knowhow of all the matters and is bound to report to a specific person who is not related with the company in any way. This results in a neutral analysis of the company. Main aim is to make sure that one client is not getting all the favors and others being ignored while all the money related matters have transparency. A proper report structure has to be followed since it is a professional work while the audit can only be carried out once a year since multiple ones will result in company not being able to perform its daily tasks in an orderly manner.
Differences in a Nutshell
- Internal audit is carried out by the people working in the firm themselves, while external audit is conducted by people who are working for a private firm.
- Internal audit is reported to the member of the committee set up by the firm while external audit is presented to a neutral who can give their option later on.
- External audits are conducted by the shareholders in a company who are suspicious of some wrongdoings while internal audits are carried out to make sure everything is working well in the company.
- Certified Public Accountants responsible for carrying out an external audit while they are not a requirement for internal audits.
- External audits have to follow a particular report format while internal audits can be in form of random reports.
- Internal audits are used to gain suggestions and improvements while external audits are there to make sure every client is getting equal opportunity.
- External audits are carried once a year at most while internal audits can be done whenever the need be.
- External audits carry a proper investigation of money coming in and out while internal audits do not have the terms of reference to do that.
In a nutshell, this article details the main difference between the two terms of Internal Audit and External Audit. There are many terms relating to these and therefore can become utmost important. It will help individuals in developing a clear understanding of the topics and get first-hand knowledge about the definition and the scope of it.