Internal Audit: Definition, vs External Audit, Importance, Purposes

Most people associate the word auditing with external audits. This process involves examining an entity’s financial statements. Based on that assessment, auditors reach a professional conclusion about the subject matter. These auditors are not the employees of the entity under consideration. However, audits may also occur internally, known as internal audits.

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What is an Internal Audit?

Internal audit refers to audits conducted internally. This process involves an entity’s employees checking its systems to add value to them and improve the process. However, internal audits must be independent and objective. Although employees conduct these audits, being autonomous is highly crucial. If internal auditors are not independent of the management, the internal audit process will not be effective.

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Internal audits involve examining operations and processes. The primary objective of this process is to improve internal control systems. On top of that, it also focuses on enhancing operational efficiency and maintaining the integrity of financial systems. Internal auditors also perform compliance-related checks. In some jurisdictions, internal audits are mandatory.

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Why is Internal Audit important?

Internal audits are crucial within many organizations. The primary reason it is important involves its focus on operations. As stated above, internal audits seek to enhance the processes and procedures within a company. It also identifies weaknesses within those areas and focuses on reducing wastage and inefficiencies. Consequently, it helps companies evolve and achieve more efficiency and effectiveness.

Large and diversified companies have more complex operations. Therefore, the need for internal audit functions within those companies is higher. The primary reason behind it involves the risks that these companies face. Internal audits can be highly crucial in risk management. In the absence of this function, companies can suffer significant losses.

Internal audits can also help organizations with compliance issues. This function focuses on identifying non-compliances within an organization and acting on those areas. Similarly, an internal audit helps establish internal controls within companies. Overall, internal audit functions can be highly crucial within any organization. It is one of the primary reasons why companies focus on establishing an independent internal audit function.

What is the difference between Internal and External Audits?

Although they may sound similar, internal and external audits have significant differences. Some of the primary areas where they differ include the following.

Objective

The primary objective of an internal audit is to focus on operations and improving processes within a company. On the other hand, external audits primarily involve auditors expressing an opinion based on the audit conclusion.

Users

The primary users of the reports generated from internal audits are a company’s management. On the other hand, external audits include the shareholders and other stakeholders.

Scope

The scope of internal audits may differ from one company to another. This scope depends on the needs of a company and its management from the internal audit function. On the other hand, the scope of external audits comes from auditing standards and rules and regulations.

Auditors

The auditors within an internal audit are a company’s employees. These employees work within the internal audit function within the company. Usually, they also fall under the audit committee. On the other hand, auditors performing external audits come from outside the company. Regardless of the type, both auditors must be independent and objective.

Conclusion

Internal audit refers to a process performed within a company that focuses on operational efficiency. It also involves other areas such as internal controls, compliance-related issues, financial systems, etc. In some jurisdictions, maintaining an internal audit function is mandatory. This process differs from external audits in various ways, as stated above.