Audit refers to the systematic procedure of investigating the financial records of an organization to get clarity on its financial health. It is one of the major cruxes of any running organization in the world, an aspect that everyone has to follow to allow a smooth running of the business operation.
Although the word audit comes with its own set of intimidation that entails a painful, grueling, and strict interrogation to unmask misdeeds, it is a pillar that plays a vital role in making the capital market transparent and trustworthy.
Broadly speaking, there are two types of audits – external audits and internal audits. Even though their spirits are similar, there are stark contrasts between them that give them their unique identities.
What is an External Audit?
An external audit interrogates the meticulousness of the financial statements of an organization by finding out whether the accounting practices it follows comply with the agreeable and applicable rules and regulations. It also gives an unbiased perspective of the performance of the organization in question.
This type of audit acts as an assurance service to the lenders, stakeholders, and investors of an organization by ensuring them that the financial statements of the company their interest lies in are being maintained and held fairly. With the help of an external audit, you can rest assured that the financial results are being conducted keeping in mind the existing accounting and governing standards.
Since this type of audit is done primarily for stakeholders outside the concerned organization, it must be performed by agents who are independent of the said company. Various audit and assurance services in Dubai work round the clock following industry protocols to comb through minute details to find out the presence of any discrepancies in the financial records of the organization in their external auditing process.
The majority of the external auditors conduct their investigations at the conclusion of the year by running backward as they verify whether the past events of the year are reflected accurately in the financial records of the company. However, this concept is now evolving as more and more stakeholders are opting for mini-audits throughout the year that allow for a more continuous focus instead of the year-end focus.
What is an Internal Audit?
Internal audit is a process of reviewing the day-to-day activities of an organization to find areas of improvement through a systematic appraisal function. It plays a crucial role in increasing the value of operation for a business and is considered a benchmark for monitoring internal control.
With this type of audit, you are able to have stable control over the risk management system of your organization as you take full control over the analysis of confidential financial and non-financial information.
As it concerns the organization alone, this type of audit is primarily conducted by the employees of the concerned organization. In today’s volatile climate where there is an ever-increasing rise of fraudulent activities, there is a need for a continuous audit that has to be performed throughout the year by a dedicated department within the organization. The internal audit can also be outsourced to a reputed firm.
Evaluating the accounting and control system, an internal audit helps an organization physically verify inventory at regular intervals and helps in scrutinizing the operational activities regularly. As a result, it makes detecting errors and fraud all the more easy.
The management directs the scope of the work of the internal auditors. However, this doesn’t impact their objectivity as they report to the board or the audit committee. As reports are presented, brainstorming sessions are performed within the management to optimize internal controls and streamline operations.
Key Differences between External Audit and Internal Audit
While external and internal audits are both directed toward providing an independent report on the financial practices and health of an organization, they differ significantly in their scopes, aims, and personnel.
First and foremost, when it comes to scope, an external audit gives a broader perspective by taking into consideration all relevant financial data and practices that could impact the budget statements. Internal audit, on the other hand, focuses on a specific area of the organization. An internal audit will give you an idea of the effectiveness of the business activities whereas an external audit will give an accurate view of the financial statement of the organization.
Secondly, in terms of their aim, external audits are done to strengthen the trust of stakeholders, lenders, and investors as it helps in proving the authenticity of the financial statements of the organization. It helps in detecting discrepancies and gives an impartial opinion of the financial health of the said entity. Internal audit, on the other hand, is conducted for measuring the present performances and detecting errors and areas of improvement.
When it comes to audit personnel, external audit is performed by third parties who professionally provide audit services whereas internal audit is mostly performed by dedicated employees within the organization.
In addition to these major three aspects, other key differences between these two audits include whom these reports are submitted. While internal audit is handed over to the management, external audit is submitted to the stakeholders. Furthermore, external audit is mostly performed on a yearly basis while internal audit is conducted around the year. External audit is compulsory while internal audit is discretionary.
Final Thoughts
While an external audit ensures that whatever reports the organization is presenting factually match the authentic financial events, an internal audit helps improve the organization from within by cracking loopholes and pointing out areas of development. The existence of both these audits helps in making sure the company is running smoothly and efficiently.
Both external and internal audits are necessary to strengthen the trust in an organization, which, in turn, adds to the profitability as more stakeholders invest in the organization, and minimal errors contribute to better revenue within the organization.