What is an Internal Audit?
Internal audit refers to the department located within a business that monitors the efficacy of its processes and controls. The internal audit function is especially necessary in larger organizations with high levels of process complexity, where it is easier for process failures and control breaches to occur.
What is an External Audit?
An external audit is an examination that is conducted by an independent accountant. This type of audit is most commonly intended to result in a certification of the financial statements of an entity. This certification is required by certain investors and lenders, and for all publicly-held businesses.
Comparing Internal and External Audits
There are multiple differences between the internal audit and external audit functions, which are as follows:
Internal auditors are company employees, while external auditors work for an outside audit firm.
Internal auditors are hired by the company, while external auditors are appointed by a shareholder vote.
Internal auditors do not have to be CPAs, while a CPA must direct the activities of the external auditors.
Internal auditors are responsible to management, while external auditors are responsible to the shareholders.
Internal auditors can issue their findings in any type of report format, while external auditors must use specific formats for their audit opinions and management letters.
Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders.
Internal auditors can be used to provide advice and other consulting assistance to employees, while external auditors are constrained from supporting an audit client too closely.
Internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company.
Internal audits are conducted throughout the year, while external auditors conduct a single annual audit. If a client is publicly-held, external auditors will also provide review services three times per year.
In short, the two functions share one word in their names, but are otherwise quite different. Larger organizations typically have both functions, thereby ensuring that their records, processes, and financial statements are closely examined at regular intervals.
The term “Audit”, with the advancement of knowledge, has become a word that needs definition to understand what it means. Of the most prevalent audit types are financial audit, which is usually called External Audit, and Internal Audit. Financial audit is an important activity used by business entities to express an opinion on the validity and fair presentation of the Financial Statements. Meanwhile, Internal Audit is an important
tool used to verify integrity of internal control systems and their implementation, thus achieving internal control. There are broad differences between both types of audit. However, both are integral to each other. The following illustrates the differences and similarities between both types: Differences
1. Mandatory Application
| Internal Audit | External Audit | |
| Statuary to listed companies and companies licensed by Capital Markets Authority (CMA).However, it is voluntary for other forms of legal entities | Statuary to all business entities. |
2. Conducted By
| Internal Audit | External Audit | |
| Employees of the organization, usually an internal auditing department.However, there is an increasing number of outsourced, or co-sourced internal audit functions, where internal audit service is provided by an external entity | For the companies subject to CMA and CBK supervision Independent third-party auditors licensed by regulator, including Ministry of Commerce and Industry, Capital markets Authority, and Central Bank of Kuwait (CBK).For other business entities:Independent third party auditors licensed by the Ministry of Commerce and Industry only. |
3. Appointed by, reporting to and responsible before
| Internal Audit | External Audit | |
| Board of directors. | Shareholders. |
4. Objective
| Internal Audit | External Audit | |
Seeks to advise the board of directors on whether the entity’s major operations:
| Seeks to provide positive assurance that accounting records and financial statements are true and accurate |
5. Scope of Audit
| Internal Audit | External Audit | |
| Covering all organizational units | Limited to financial unit |
6. Binding Standards
| Internal Audit | External Audit | |
| No binding standards in Kuwait. However, best practices are applied such as:
| From the perspective of accounting
From the perspective of external audit
|
7. Binding rules and regulations
| Internal Audit | External Audit | |
For companies subject to CMA and CBK supervision
For other business entities | For companies subject to CMA and CBK supervision
For other business entities |
8. Period of audit
| Internal Audit | External Audit | |
| Annually for all companies subject to CMA and CBK to cover the financial year of the companyQuarterly is not mandatory, but normally required by companies for internal use For other business entities No internal audit services are mandated.However, voluntary internal audit services can apply. | Annually for all companies as per the regulations of the Ministry of Commerce and Industry Quarterly to meet the requirements of CMA & CBK For other business entities Annually as per the financial year set forth in the company memorandum of association to comply with the requirements of Ministry of Commerce and Industry. |
9. Approach
| Internal Audit | External Audit | |
| Risk based approach, covering business risks | Risk based approach, covering risks of material financial misstatement. |
10. The final report
| Internal Audit | External Audit | |
| Customized report format;Forms an opinion on the adequacy and effectiveness of risk management systems and internal control, many of which fall outside the main accounting systems. | Standardized report in a format required by Auditing Standards, consisting of two main parts:One part focuses on whether the financial statements give a true and fair view of the financial position of the entityThe other part covers the entity’s compliance with legal and regulatory requirements |
11. Recipients of the report
| Internal Audit | External Audit | |
|
|
12. Public disclosure
| Internal Audit | External Audit | |
| Not applicable | Mandatory for listed companies |
13. Service Nature
| Internal Audit | External Audit | |
| Consulting | Assurance |
14. Staffing
| Internal Audit | External Audit | |
| Any university degree trained in internal Auditing | University degree in accounting |
15. Career path
| Internal Audit | External Audit | |
| Professional certificate as:Certified Internal Auditor (CIA) | Professional certificate as:Certified Public Accountant (CPA) or Chartered Accountant (CA).Academically: Masters/PhD in Accounting |
Similarities
Similarities between internal and external audit are as follows:
- Testing
Both the external and internal auditors carry out testing routines and this may involve examining and analyzing many transactions. - Internal Control Systems
The internal auditor and the external auditor are concerned with authenticated procedures, organization’s systems of internal control and relevant implementation. Further, both tend to be deeply involved in information systems, since this is a major element of managerial control, as well as being fundamental to the financial reporting process. - Standards
Both adopt a professional discipline and operate to professional standards. - Cooperation
Both seek active co-operation between the two functions, as they are inter-dependable. - Reporting
Both produce formal audit reports on their activities.
- Testing