Internal and External Audit: Definition, Differences, Objectives and MORE

8 minutos de lectura

To speak of audits is to speak of a very important procedure for the good performance of a company, as well as to demonstrate its credibility before the various entities. Now, so that you know in detail what an audit is, how they are classified, what is the difference between an audit internal and external audit, among other points, we present this article.

Knowing all this information is essential so that you can handle the business environment in the best possible way.

Keep reading and you will know many keys to develop them successfully!

What is an audit?

An audit is a tool that plays a very important role in a company as it reflects its accounting image. Therefore, auditing is defined as the process by which a company or professional (independent auditor) is hired to collect accounting information within an entity or institution.

This information is of great value to verify that the company that is being audited has fulfilled the accounting standards and that it is kept up to date in its accounting.

What is Internal Audit?

The internal audit is generally carried out by an employee of the same company or institution. In this way, what the internal auditor emits as a result of his analysis will be useful for the authorities in charge of the business.

The internal audit responds to the particular interests of each company, and although its performance is not mandatory, it is very necessary. This, because after issuing the report, the auditor will be able to provide a series of recommendations to improve internal processes.

In addition, it can also be conceived as an important element of control since it is intended to increase its value and improve all operations within an organization. In turn, all this is done through a professional, systematic and objective analysis of the various financial and administrative operations.

Its purpose is very direct: to help meet goals, improve the efficiency of management processes and control them. Therefore, an internal audit is capable of verifying compliance with plans and programs, as well as evaluating internal controls.

This type of audit covers all areas of the organization that need to establish priorities. To fulfill its objective, it responds to specific procedures such as, for example, the prior identification of areas, the application of internal audit programs to specific areas and the execution of tests on transactions and performance reports.

Finally, most of the time it is carried out by an internal audit department with a full-time staff linked to the company, who must report hierarchically to management.

What is the External Audit?

For its part, the external audit is usually carried out by an external auditor, that is, someone who does not work in the audited company. Precisely, by not working in it, a more objective view of the financial situation of the company is expected from him.

Thus, the reports of an external audit are provided with the interest (mostly) of providing this information to an entity outside the company that can strengthen the procedures. For example, these types of audits are often useful to apply for a loan and even to attract new investors, etc.

In other words, it is as an examination carried out to express a professional criterion about the operation that an organization has in the framework of its development, which is why it is prepared by independent personnel who are not involved with the entity and can be as objective as possible.

Its main objective is to issue an opinion on the reasonableness of financial information, giving confidence and asserting reliability to the users (owners, banks, investors, etc.) of said information.

They cover studies and evaluation of the controls that are present, variations in the accounting information system, and evaluation of electronic data processing. To do this, you must follow specific procedures such as planning, evaluation of controls and application of substantive and compliance tests. Everything, through work programs such as supports and sampling application.

Differences Between Internal and External Audit

There are several key differences between a Internal and External Audit, for this reason we share the most relevant:

  • The first is that internal audits are not mandatory but optional, but external audits are required in companies that are listed on the stock market and that, as they are of a certain size, must respect many guidelines.
  • Second, unlike internal audits that are done for particular analytical needs of the company, external audits, if they find some irregularities, can have immediate legal consequences. This, since the final report of an external audit generally goes to third parties, such as a supervisory entity.
  • Another difference between an Internal and External Audit is that the internal one is carried out by a member of the company itself, while for the external one it is common to hire a third party to carry out the procedure, this in order to obtain a clear and impartial view of the processes you need to analyze.

Objectives of the Internal Audit

The internal audit has the following objectives:

  • Act independently within the organs of the company, in order to meet the other objectives related to the performance of functions.
  • Develop functional activities that are within a previously established and approved annual audit program.
  • Free access to company data and information, and in general to all sources of information that may exist.
  • Take and review the rules and instructions related to the general operation of the company.
  • To reach out to the different organs of the organization in the implementation of systems and procedures, in order to direct the company’s management practices towards greater efficiency.
  • Enforce the rules and instructions established by the company, as well as the recommendations issued by the audit.
  • Request the necessary collaboration of any department of the company that is required to complete the audit and achieve the objectives of the same.
  • Support the change of address, if necessary, according to appropriate suggestions and observations.
  • Lead the organization successfully in its plans, risks and responsibilities.
  • Give faith and credibility to accounting matters. Strengthen internal and operational functioning.
  • Protect accumulated assets.
  • Detect in time the possible financial and operational problems that could be generated.

The scope of internal audit

The scope of internal audit generates several advantages or benefits, including:

  • It allows evaluating the validity, sufficiency, quality and application of the accounting, financial and operational controls that exist in the company.
  • Ensures that the policies and procedures established by the organization are properly followed.
  • Supervise that assets are properly registered and protected.
  • It guarantees that the information used is useful for direction and internal improvement.
  • Evaluate the quality and effectiveness of the responsibilities assigned to each team member.
  • Promotes and proposes operational improvements within the organization.
  • Identify savings in terms of the impact that may occur on financial results.
  • Provides recommendations and suggestions made by the organization.
  • Finally, sometimes you can find companies in which, given the size and operational complexity, the internal audit function is more complex than it should be. However, there are others where internal audit departments are well defined and carry out specific functions.

Objectives of the External Audit

The objectives pursued by an external audit are presented below:

  • Analyze whether the way in which the entity’s computer system is used is correct and sustainable.
  • Verify the existence of problems that the company could face.
  • Highlight points, both strong and weak, to promote correct decision-making.
  • Suggest constructive ideas.
  • Control actions related to the development of the company.
  • Support the company in its accounting field.
  • Demonstrate the solvency of the company in front of potential investors and even in financial entities.

Characteristics of the internal audit

For its part, if we talk about the main characteristics of internal auditing, we can mention the following:

  • He works on scheduled dates that are agreed for different times of the year.
  • They must be impartial, competent and objective processes.
  • They are not improvised, but are executed after a thorough investigation process.
  • It is based on ethical rules and standards.
  • It helps to finalize the objectives achieved and prevent future problems.

Characteristics of the external audit

Among the main characteristics of the external audit we can highlight that:

  • It is generally performed by an accounting firm, whether private or non-profit.
  • Its results determine the reliability and financial solvency of a company.
  • Provides important information for use by owners or any other entity involved in its development, such as investors, partners, etc.
  • It is developed through work programs that plan, evaluate and apply reliable tests.

Obligations of an audit

  • Review financial accounts to see if the company has used its resources efficiently and effectively.
  • It must be, as well as the auditor, a transparent and totally independent process, in order to legitimize the process and reflect reality.
  • Know the difficulties that the company is having at the moment and prevent those that it may have.
  • Verify the various reports offered by the company on its economic activity and verify that they are true and credible.

Why is it important to audit a company?

A company has to demonstrate that the use of its resources is transparent, legal and efficient. Therefore, the institutions have to deal with all legal regulations such as the payment of taxes and other procedures in a faithful and obligatory way.

Finally, an audit involves giving future creditors confidence that the company may have and keeping its name clean and up to date. To read a similar article, click here

Thanks for reading!

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