‘What is the difference between internal and external auditing?’ This is one of the most asked questions by graduates who are considering a career in the field of audit. Although both professions involve the auditing process, there are distinct differences between the two job functions.
The most obvious difference is in the name – internal vs. external. Internal auditors are employees within the organisation they audit, while external auditors are independent professionals who audit organisations for which they don’t work.
The type of work performed by internal and external auditors differs mainly because they have different objectives.
External auditors typically assess the risks related to financial statements. They are outsourced to organisations to objectively scrutinise and interpret fiscal data to ensure that the statements are free from fraud and mistakes. External auditors ensure the fairness of financial representations. Their main goal is to ensure that internal processes conform to regulatory directives such as rules of Securities and Exchange Commission.
External auditors help regulators and investors ensure that an organisation’s financial statements are complete and accurate. The accounting reports that are audited are typically statement of profit and loss, balance sheet, statement of retained earnings, and statement of cash flow.
The results of external auditors’ assessments strongly influence the reputation of the organisation. Serious consequences can be expected if the auditor’s conclusion is different from the report released by the organisation. External audits give client ratings that can determine if they can stay in business.
External auditors are vital in the finance sector. The premise of external audit is one of unbiased objectivity, as the auditor is not employed for the company they audit. This translates to accurate reporting crucial to the companies and investors to assess the real financial standing of the company.
Although internal auditors look also look at financial statement risk, their role is different from external auditors. Internal auditors help a firm ensure that the operating controls and processes comply with the governance standards, human resources policies, and top leadership’s recommendations. These auditors aid top management in identifying, monitoring, and measuring risks inherent in corporate activities in the short and long term. Relationship building skills are integral to the internal audit profession.
Internal auditing is an assurance and consulting activity that aims to improve an organisation’s operations. It helps the company realize its goals through a disciplined and systematic approach to evaluation to improve the efficacy of control, risk management, and governance processes.
Internal auditors’ main roles and responsibilities are to:
- Evaluate control, risk management, and governance systems to ensure that they are functioning as intended.
- Report risk management issues to company leaders and make recommendations for improving the operation for effective and efficient performance.
- Evaluate associated risk exposure and information security.
- Evaluate regulatory compliance programs with the help of legal counsel.
- Evaluate the company’s readiness in case of business interruption.
- Communicate with audit committee and top management about issues, recommendations, and solutions.
- Provide support to anti-fraud programs within the organisation.
The internal audit hierarchy is based on knowledge, experience, and expertise.
Entry-level Internal Auditors
This is typically the job that new graduates will have when they start their career in auditing. Entry-level auditors are hired to review and align the processes of the organization with its objectives. They are usually tasked to collect, analyse, and examine company records to ensure compliance. Regarding educational background, organisations prefer those who have a Bachelor’s degree in finance, accounting, computer information systems, or business administration, and those with a professional certification such as the Certified Internal Auditor (CIA) certification.
Senior Internal Auditors
Senior Internal auditors are usually the ones who understand the ins and outs of their organisation and are familiar with the industry’s best practices. Thus, they are tasked to provide value-added solutions to any problem that the company encounters. They mainly work with management staff to mitigate risks, monitor internal controls, and provide feedback about audit plans. For this position, at least five years’ relevant experience is required.
Internal Audit Managers
Internal audit managers supervise entry-level and senior internal editors. Additionally, their main function is to help top management in testing, planning, and executing internal audit activities. They are also tasked to monitor and examine the company’s system of internal controls. An internal auditor can expect to progress to management level after 8 years’ experience.
Chief Audit Executives (CAE)
CAEs oversee the internal audit department. They manage and execute audit plans. They also direct and lead the whole audit term and report directly to the CEO of the organisation. For this position,10 years relevant experience is required.
Additional audit seniority levels include Audit Senior Manager, Audit Head of Department, Audit Director, and Audit Managing Director, all of which differ at individual organisations.
So while a Finance or Business educational background can lead to a career in either internal or external audit, the tasks and responsibilities differ for each profession. An analytical mind and critical thinking are interchangeably valuable, but the transient nature of external auditing means that soft skills, such as effective communication and socialism are more central to an internal auditor’s role.