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External vs. Internal Audit

Have you wondered what the difference is between external and internal audit?  Here is a simplified comparison:

External Audit

Internal Audit

  • Greater focus is on financial records
  • Goal is to determine if the financial accounts give a fair reflection of the company’s financial position
  • Selection is done by management or audit committee/board of directors.  Shareholder approval is required
  • Audit report is primarily used by stakeholders such as investors and creditors
  • Performed by outside audit firm
  • Point-in-time audit, usually annually
  • Opinion is based on historical data
  • Usually mandated by a statute
  • Greater focus is on business processes
  • Goal is to determine if business processes are helping the company to manage its risks and meet its objectives
  • Selection is done by management or audit committee/board of directors.  Shareholder approval is not required
  • Audit report is primarily used by management
  • Performed by company employees or outsourced
  • Usually conducted year-round or ad hoc
  • Opinion is based on current controls.  Also forward-looking improvement opportunities are usually communicated
  • Usually discretionary

While the list above displays their differences, there are also similarities. The first similarity is that both plan their audit effort around the areas that pose the highest risk to the achievement of company objectives. The second similarity is that both types of audits assess internal controls to determine if they are in place and working to ensure the reliability of financial data. Internal audits, which have a heavier focus on controls, usually add coverage of controls that help ensure effectiveness and efficiency of operations, compliance with laws and regulation, and safeguarding of assets. A third similarity is that both types of audits are performed in accordance to certain professional standards — such as the Statement on Auditing Standards for external audits and the International Standards for the Professional Practice of Internal Auditing for internal audits.

With all their similarities and differences, both types of audit services can play an important role in creating an effective governance structure and can help contribute to the company’s success. If you have questions about the internal or external audit process, please contact us at 925.271.8700 or at info@ssfllp.com.

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    Carmen Caballero

    Director of Governance & Compliance Services

    caballero@ssfllp.com
    925.271.8700