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INTERNAL AUDIT:-Internal audit means a continuous critical review of financial and operating matters of a business. In other words, we can say that the audit of a business conducted by the business for a continuous basis. Internal audit is done by the internal staff appointed particularly for the audit purposes. These are called internal auditors.EXTERNAL AUDITOR or STATUTORY AUDITOR:-If an independent auditor examines the books and records of the company on the behalf of the shareholders, it is called external audit. While auditor is called statutory or external auditor.Nature And Field of Work (Common):-In case of accounting matters both the auditors work is largely in the same field. They have common interest in finding the errors and detecting the frauds. Both want to know the correct and true financial statements.DIFFERENCE BETWEEN INTERNAL AUDIT or AUDITOR AND EXTERNAL AUDIT or AUDITOR 1. Appointment:-Internal auditor: Internal auditor is appointed by the management of the company.External auditor: External auditor is appointed by the shareholders of the company.2. Legal Position:-Internal auditor: Legally internal audit is not compulsory.External auditor: External audit is compulsory by law.3. Status of Auditor:-Internal auditor: Internal auditor is employee of the company.External auditor: External auditor is an independent person.4. Qualification:-Internal auditor: For internal auditor any specific qualification is not compulsory.External auditor: For external auditor specific qualification is compulsory.5. Submission of Report:-Internal auditor: Internal auditor has not to submit any report.External auditor: External auditor submits report to the shareholders.6. Fixation of Remuneration:-Internal auditor: Internal auditor remuneration is fixed by the management of the company.External auditor: External auditor remuneration is fixed by the shareholders of the company.7. Name of Remuneration:-Internal auditor: Internal auditor receives salary.External auditor: External auditor receives audit fee.8. Nature of Checking:-Internal auditor: Internal auditor checks all the transactions.External auditor: External auditor may apply test check.9. Right of Attending Meeting:-Internal auditor: Internal auditor has no right to attend the meetings of the company's shareholders.External auditor: External auditor has a right to attend the meetings.10. Kinds of Audit:-Internal auditor: Internal audit is kind of continuous audit.External auditor: External audit is conducted after the preparation of final accounts.11. Guidance:-Internal auditor: Internal auditor gives suggestions to the management for the betterment of the business.External auditor: External auditor has no need to give suggestions unless he is asked.12. Duties:-Internal auditor: Internal auditor primary duty is to find the frauds and errors.External auditor: External auditor has to report about final accounts whether these are true or false.13. Removal:-Internal auditor: Internal auditor can removed by the management.External auditor: External auditor can be removed by the shareholders.14. Case of Misconduct:-Internal auditor: Internal auditor cannot be prosecuted for professional misconduct except (C.A).External auditor: External auditor can be prosecuted.IMPORTANCE OF MUTUAL CO-OPERATION:-External auditor may get much assistance from the internal auditors about the accounting system and technical knowledge of the business.To reduce his work he may rely on the work of internal auditor. But if any error or fraud remains undetected then external auditor will he held responsible. In some cases internal auditor may also restrict his work in that section where external auditor has made detailed checking. So by mutual co-operation both the auditors may help each other and may reduce their work.Anyhow external auditor cannot shift his responsibilities on the internal auditor.
An internal auditor is one of the company's staff to audit its books and reports to the company's management. An external auditor is from another company and he is to audit the company's books and report to local authorites as well as to the company's management.
Depending on the local laws, every company must have an external auditor but havinv an internal auditor is a company's decision.
One of the main differences between internal and external audit is the overall scope of the audit. The potential scope of an internal audit covers the total conduct of business. This includes the examination and evaluation of the adequacy and effectiveness of the organization’s governance, its risk management process, systems of internal control structure, and the quality of performance in carrying out assigned responsibilities to achieve the organization’s stated goals and objectives. The scope of the external audit is usually confined to a financial and compliance audit to satisfy the statutory responsibilities of the external auditor, which requires examination of the accounts and providing an opinion as to whether the financial statements produced provide a ‘true and fair picture’. Additionally, at their discretion, the directors may commission a Value for Money audit of the administrative and management operations. Over and above issues of scope, there are three other key differences between internal and external audit. (a) Appointment: External auditors are appointed by the shareholders (although they are usually only ratifying the directors’ choice) and must be independent of the company, whereas internal auditors are usually employees of the organisation. (b) Responsibility: External auditors are responsible to the owners (i.e. shareholders, the public, or Parliament in the UK), whereas internal auditors are responsible to senior management. (c) Objectives: The objectives for external auditors are defined by statute, whereas those for internal auditors are set by management. In other words, management decide what parts of the organisation or what systems internal auditors are going to look at and what type of internal audit should be carried out.
Internal vs. External
Internal auditors work within an organisation and report to its audit committee and/or directors. They help to design the company’s organising systems and help develop specific risk management policies. They also ensure that all policies implemented for risk management are operating effectively. The work of the internal auditor tends to be continuous and based on the internal control systems of a business of any size.
External auditors are independent of the organisation they are auditing. They report to the company’s shareholders. They provide their experienced opinion on the truthfulness of the company’s financial statements and perform work on a test basis to monitor systems in place.
Internal Auditor may be company staff or independent outside professionals reporting to the company management. They will report the weknesses in the system and help for correction.
External Auditors are independent outside professionalsreporting to the shareholders normally on the true and fair view of the financial statements and the compliance with various standards etc.,
Laws enforce the appointment of external auditors.Normally, appointment of Internal auditors is not mandatory.
In some countries, Laws enforce maintenance of internal audit system proportionate to the size of the company.
Appointment external auditor is done by shareholders, appointment of internal auditor is done by the management.
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