Difference between the internal and external auditor

On the basis of functional division, auditors can be classified in two broad categories, namely, external auditors and internal auditors. 

External auditors are the persons who practice the profession of accountancy having qualified in the professional examination and are external vis-a-vis the organisation of which they audit the accounts. 

The internal auditors, on the other hand, may also be professionally qualified and are internal vis-a-vis the organisation in which they are appointed to perform specific work. They are considered internal because their appointment is done by the management and the scope of work is also specified by it. They may be appointed either on a contract basis or as employees to undertake auditing of the books and records as a part of management control and appraisal system. 

The external auditors, on the other hand, are appointed by the owners of the organisation, say, shareholders of the company and thus they are treated external to the organisation in which they have been appointed. When an external auditor is appointed under a particular statute, such auditor may be known as the statutory auditor. Their scope of work is determined by the statute under which they have been appointed. 

Another significant distinction between the internal and external auditor is that the former is not considered independent vis-a-vis the management of the organisation while the latter is independent of the management of the organisation which is responsible for the preparation of the books of account. 

Finally the scope of work of an internal auditor may extend even beyond the financial accounting and may include cost investigation, inquiries relating to losses and wastages, production audit, performance audit, etc. It must be remembered that the basic foundation of any type of auditing, whether internal or external, envisages that the auditor must be independent of the activity for which he is going to conduct an audit. Even though the internal auditor is an employee yet he must be independent to the extent practicable.