What is the difference between an internal and external audit?

If you’re part of the leadership team within a business or organisation, chances are you’ve encountered (or are about to encounter) internal and external audits. But what exactly do we mean by these? How is an internal audit different to an external one? Do I need to undertake both?

To answer these questions, let us first break down the key features of each of these processes and explain how they both serve to evaluate and improve your business.

What is an internal audit?

Put simply, an internal audit is a review of a company’s processes and operations conducted by employees or audit department within the company itself with the purpose of evaluating efficiency, finances, compliance and risk management.  Internal audits can be supported by specialists who are contracted to assist the process and develop a keen understanding of your business.

What are the key features of an internal audit?

Key features of an internal audit include:

• • Ongoing feedback: Internal audits can occur at regular intervals throughout the year, creating more opportunities for improvement.
  • Proactive problem solving: With regular occurrence, internal audits can be used to detect issues before they become a major event. In addition to identifying problem areas, internal audits seek to strengthen or remove these weaknesses to increase efficiency and reduce risk.
  • Comprehensive understanding: As internal audits are undertaken by existing staff or contracted specialists who work closely and regularly with your business, internal auditors have more in-depth knowledge about your operations and goals.
  • Broad scope: Internal auditors typically evaluate a whole range of business operations including tangible areas such as financial compliance and IT systems, as well as the intangible aspects of company culture and ethos.

Why are internal audits important?

While not mandatory, regular internal audits are considered best practice in business management as they not only improve operational efficiency but detect and prevent issues from occurring down the track.

What is an external audit?

External audits are performed by impartial, independent professionals who hold specific qualifications and should be registered with the Australian Securities and Investments Commission (ASIC). Primarily focused on ensuring that financial and legal records are compliant, external audits are formal events usually undertaken once a year for smaller entities such as private companies.

What are the key features of an external audit?

Key features of an external audit include:

• • Finance first: Typically, external auditors are engaged to evaluate a company’s financial statements against current legislation.
  • Bias-free: As they are undertaken by independently appointed specialists, external audits provide an impartial perspective that can identify issues that may be overlooked by internal staff.
  • Annual engagement: External audits occur once a year to coincide with your company’s financial reporting period.
  • Compliance focus: An external audit is a deep dive into the business’s financial statements, checking for accuracy and compliance with relevant regulation and laws.

Why are external audits important?

For starters, external audits are mandatory for many not-for-profit organisations, large corporations and government departments to provide transparency and assurance for investors, stakeholders and regulators. These annual reviews ensure everything is legally compliant through an unbiased, independent evaluation that builds trust and credibility for your business.

What is the difference between internal and external audits?

To review, internal and external audits differ in five main areas:

• • Independence: Internal audits are undertaken by existing staff or specialists contracted by your business who have developed detailed knowledge about your operations. External auditors, on the other hand, do not work for your company and remain independent and unbiased in their assessment.
  • Frequency: External audits are annual events that typically align with your financial reporting period, whereas internal audits are regular and ongoing throughout the year.
  • Purpose: Internal audits are conducted to ensure that business operations are in line with internal policies, procedures and ethos, and serve to inform decisions about improvement and change. External audits evaluate financial compliance with the laws and regulations related to a company’s industry or field.
  • Scope: External audits focus specifically on financial records over a set period of time, while internal audits are much boarder in their scope of evaluation, covering everything from risk identification and management, human resources and IT systems.
  • Depth: As they are used to evaluate financial, regulatory and legal compliance, external audits are far more in-dept

Do I need both an internal and external audit?

Yes, both internal and external audits are essential to the health and success of your business. Each audit examines and evaluates different aspects of your company for different purposes. If you are a publicly traded company, annual external audits are required by law but are also commonly used by private companies to ensure financial accuracy and compliance. Internal audits, while not compulsory, are considered best practice among high-performing businesses due to their focus on procedural improvement and operational efficiency.

If you have any questions about external or internal audits, or would like to discuss how we can assist, click here to get in touch with our team today!