Businesses use two types of audits to gauge financial results: internal and external. Here’s a closer look at how they measure up.
What is an Internal Audit?
Internal audits focus on a company’s internal controls, accounting processes and ability to mitigate risk. They are performed by an auditor employed by the company that is being audited. Internal auditors evaluate whether the company’s activities comply with its strategy, and they may consult on a variety of financial issues as they arise within the company.
What is an External Audit?
In contrast, external audits focus solely on the financial statements and are done by auditors from an independent accounting firm. Specifically, external auditors evaluate whether the statements comply with applicable accounting standards and practices. Another aspect of an external audit is determining whether or not the statement presents a true and accurate presentation of the company’s financial performance. Accounting rules prohibit external audit firms from providing their audit clients with ancillary services that extend beyond the scope of the audit.
Difference Between Internal and External Auditors
Internal auditors don’t need to be certified public accountants (CPAs), although many have earned this qualification. Often, internal auditors earn a certified internal auditor (CIA) qualification, which requires them to follow standards issued by the Institute of Internal Auditors (IIA).
Conversely, the partner directing an external audit must be a CPA. Most midlevel and senior auditors earn their CPA license at some point in their career. External auditors must follow U.S. Generally Accepted Auditing Standards (GAAS), which are issued by the American Institute of Certified Public Accountants (AICPA).
Audit Reporting Format
Internal auditors issue reports throughout the year. The format may vary depending on the preferences of management or the internal audit team.
External auditors issue financial statements quarterly for most public companies and at least annually for private ones. In general, external audit reports must conform to U.S. Generally Accepted Accounting Principles (GAAP) or another basis of accounting (such as tax or cash basis reporting). If needed, external auditing procedures may be performed more frequently. For example, a lender may require a private company that fails to meet its loan covenants at year end to undergo a midyear audit by an external audit firm.
Sometimes the work of internal and external auditors overlaps. Though internal auditors have a broader focus, both teams have the same goal: to help the company report financial data that people can count on. So, it makes sense for internal and external auditors to meet frequently to understand the other team’s focus and avoid duplication of effort. Contact us to map out an external or internal auditing strategy that fits the needs of your company.