Internal Vs External Auditors

Bigger the company, the bigger the financial statements. It is a clear-cut fact that if the financial statements of the company are not duly examined the possibility of errors and fraud increases, which obviously can be fatal for any company. An official inspection of a company’s accounts, typically by an independent body, is held to ensure the accuracy of the statement’s provided by the company, in other words, it is known as an audit. And the person who conducts these audits is known as an auditor. An auditor is an official personnel who checks the financial statements of an organization and ensures whether the statements of the organization are following norms or not. He also tends to protect the organization in a way, by checking if there is any sort of error or fraud in the books of the company, otherwise, in the future, it can be a big threat. There is some key difference between internal and external auditor, and to understand them we must, first go through the meaning of internal and external auditor. 

Internal auditor 

Internal as the name suggests is a department within the organization, which gives independent and unbiased reviews regarding the system and process of the organization, this is known as internal audit. Hence an internal auditor is trained personnel who provides independent and objective evaluations and reviews of a company’s financial and operational business activities. They ensure that companies efficiently follow procedures and functions. Their main function is to verify and solve problems before they are discovered by an external auditor. They perform the following functions- 

  • Make sure that the organization and its employees are following the government’s laws and regulations.
  • Make valuable suggestions, to rectify an auditing process. 

External auditor 

An external audit is an auditing process that is conducted by an independent accountant or by an accountant who is not an employee of the organization. This accountant is known as an external auditor. An external auditor is a public accountant and is independent of all clients, hence is in a better position to give a good unbiased evaluation of the financial statements and processes of the clients. They normally submit their reports to the shareholders of the company and if any error is detected, they come up with a suitable solution. Their key responsibilities are-  

  • Going through financial records and other related documents other documents the company.
  • Analysing financial reports, frauds, or risks.

Difference between internal and external auditors. 

After understanding the key meaning of internal and external auditors, it is easy to point out the following differences between them-

  1. Appointment 

    Internal auditors are appointed as employees of the organization; undoubtedly they function as an independent department, but within the organization. Whereas external auditors are to be appointed from some other firm by the shareholders of a company, usually after discussing it with the directors. The job of external auditors is difficult than that of an internal auditor, owing to the familiarization of the environment an internal auditor has an edge over an external auditor.

  1. Responsibility 

Responsibility of an internal auditor falls easy, as they are answerable only to their senior management, but the external auditor is answerable to all the owners of the company, now they may be shareholders, directors, or government. Hence, the in case of responsibility external auditors carry a heavier load. 

  1. Objectives 

The objectives of an external auditor are usually general, and they have the freedom to go through every related statement, as they like. But in the case of an internal auditor, objectives are settled by the management, and they are only to assess those areas which are pinpointed by the senior management. They do not have much free reign. 

  1. Auditing process

Practically speaking, an internal auditor conducts the auditing process in the position of an employee of the company. Whereas an external auditor conducts the auditing process as a third party appointed by the shareholders of the company. 

  1. Opinion provided 

 An internal auditor provides his opinion on the effectiveness of the operational functions of the organization. Whereas an external auditor provides his opinion based upon the credibility and fairness of the financial statement of the company. 

  1. Period for auditing 

An internal auditor has, to audit continuously, being the employee of the company, whereas an external auditor is appointed once a year, that too because of the compulsion of Indian companies Act, 1956.

Overview 

An internal auditor is supposed to look at the key risks that can harm the business and how the business can face or avoid those risks effectively. On the other side, an external auditor focuses on risks related to business finance. They do the edit annually. Hence, there is a difference between internal and external auditors, in terms of the nature and scope of their work, but they both contribute towards the smooth functioning of their respective employer’s business.