Comparison of external and internal audit

Internal and external auditors often carry out their work using similar procedures.

This is something to bear in mind when answering ‘practical’ questions on auditing in an examination.

However, there are a number of fundamental differences between the two audit roles. These are summarized in the following:

External Auditors Role and work: To express an opinion on the truth and fairness of the annual financial statements. The external auditor will therefore carry out whatever work he deems necessary to reach that opinion.
Internal Auditors Role and workTo examine systems and controls and assess risks in order to make recommendations to management for improvement. The internal auditor’s work programme will therefore to a large extent be dictated by management.

Qualification to act
External Auditors Set out by statute. This ensures that the external autitor is independent of the entity and suitably qualified.
Internal Auditors : No statutory requirements – management select a suitably competent person to act as internal auditor. It is therefore possible that the internal auditor may not be as competent as the external auditor, depending on management’s recruitment criteria.

External Auditors Appointed by The shareholders. This ensures independence.
Internal Auditors Appointed by Management. In order to give as much independence as possible the internal auditor should therefore report to the highest level of management.
External Auditors Duties set out by Statute.
Internal Duties set out by Management
External Auditors Report to The shareholders.
Internal Auditors Report to Management.

External auditor has no specific responsibility for fraud and error, other than to report whether or not the financial statements give a true and fair view; the external auditor will be concerned that there has been no material undetected fraud or error during the period.