5 Fundamental differences between internal and external audits

Fundamental differences between internal and external audits

At first glance, internal and external audits appear similar, they are in fact functionally different in approach and serve entirely different purposes, even though they both may be conducted within an organisation.

Internal auditors take a more detailed internal focus on their organisation’s governance, risk, and control systems, and make sure the policies and procedures as developed have been effectively implemented. In contrast, external auditors focus more on ensuring the policies and procedures satisfy compliance against external factors such as standards, regulations, customer requirements, and specifications. Let us have a closer look at how both these auditing functions differ.

1. The purpose of the internal and external audits

Internal audits

The purpose of internal audits is to truly understand the processes of the business, assess critical risks facing a business, the effectiveness of the business policies and procedures in managing those risks, and to identify areas for improvement. Internal audits extend far beyond the sphere of financial and compliance controls. Best auditors often execute a more advisory role by providing recommendations to support the management for improving their systems and controls.

The internal audit function should work for the organisation, to verify that things are working well and be improvement-oriented. Internal audits can provide crucial insights on how governance and risk management processes can be more effective in both managing risk and supporting organisational objectives.

External audits

The purpose of external audits is usually undertaken to conduct an independent examination and verify that the activities that are supposed to be in place, are in fact in place. External audits also examine if policies and procedures that have been developed by the organisation meet the intent of the standards, regulations, or customer needs. External audits provide greater transparency to the external stakeholders and highlight areas of importance.

External audits are often seen as having less bias in the audit results, and more objectively report on the positive and negative issues to draw conclusions on the level of compliance.

2. The focus of the audit

Internal audits

Internal auditors adopt a more detailed and process-focused approach to assessing organisational health by determining if business policies and procedures are supporting strategic objectives and assessing risks that could impact those objectives. The focus of internal audits lies in enhancing and protecting organisational value. Internal audits are a forward-looking and proactive approach, to determine if procedures are in place, consistent, effective, maintained, understood, and are producing the intended results.

External audits

External auditors focus on whether the policies and procedures of the organisation are adequate, and fulfill the requirements of the standard. External audits involve auditors from external and independent agencies focusing on outcomes, record-keeping or demonstration of compliance.

3. Who are the auditors?

Internal audits

Internal auditors may come from a variety of backgrounds. They can also be employees of the organisation unless the organisation decides to outsource its internal audit services. Wherever they are sourced, they need to be familiar with the processes of the businesses in order to audit with some depth, though they cannot audit their own work.

External audits

External auditors are trained and experienced compliance professionals, who are often certified by RABQSA proving they are subject matter expertise in the area they are auditing. They must be able to act independently to ensure an objective approach to the audit process.

4. Is it a requirement to conduct audits?

Internal audits

Before an organisation seeks compliance against an external standard, it is rare that they undertake internal audits, However, once an organisation commits to internal audit management they soon see internal audits as fundamental ways to improve their systems and to develop specific risk management practices.

External audits

Most external compliance standards require an external audit to verify that the standard is being met by the organisation. The motivation for external compliance may be part of a contract, contingent on government funding or a license to operate, or some firms seek to benchmark themselves and their performance through voluntary compliance with quality, environment, workplace safety or food safety management systems.

5. The end-users of the audit report

Internal audits

Good internal audits can influence change and improvement within an organisation, and are best aimed at operational senior management. Senior management and the board of directors may also use the reports as the reassurance of the things that are working well within the organisation, and to satisfy governance requirements that risks are understood and are managed.

External audits

External audit reports can be effectively used by company members, investors, customers, or regulators that are not part of the organisation’s internal governance structure. External audit reports can sometimes be placed in the public domain and focus on whether the claims made are true and fair and that regulations have been complied with by an organisation.

Conclusion:

Both internal and external audits are both important but can serve different crucial purposes. Both represent certain challenges and benefits to an organisation, but both benefit the organisation and ensure compliance and improvement, help in achieving targets and meet objectives.

Automation can assist both internal and external audits in conducting audits in a more efficient manner, allowing more time to do other things or allow more time to perform more audits or to audit at a greater depth.

Use compliance audit software that includes robust workflows for audit management, ensuring audits are effectively scheduled, allocated to the right auditor with the right credentials, and that audit tasks remain on track. The audit software also allows for detailed and summary reports to be generated right from the audit in real time, and in the format that suits the needs of the audience.

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