Question

Both internal audit and external audit provides assurance and consulting services to its clients. Although they have many similarities, they also have several differences. What are the similarities and differences between the two auditing professions?

Answer 1

Ans. Similarities between Internal and External Audit are: (i) Both the external and internal auditor carry out testing routines and this may involve examining and analyzing many transactions. (ii) Both the internal auditor and the external auditor will be worried if procedures were very poor and/or there was a basic ignorance of the importance of adhering to them. (iii) 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. (iv) Both are based in a professional discipline and operate to professional standards. (v) Both seek active co-operation between the two functions. (vi) Both are intimately tied up with the organization’s systems of internal control. (vii) Both are concerned with the occurrence and effect of errors and misstatement that affect the final accounts. (viii) Both produce formal audit reports on their activities.

Differences between Internal and External Audit are: (i) Internal auditors are company employees, while external auditors work for an outside audit firm. (ii) Internal auditors are hired by the company, while external auditors are appointed by a shareholder vote. (iii) Internal auditors do not have to be Chartered Accountants, while a Chartered Accountant must direct the activities of the external auditors. (iv) Internal auditors are responsible to management, while external auditors are responsible to the shareholders. (v) 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. (vi) Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders. (vii) 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. (viii) 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. (ix) 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.