Internal
auditors and external auditors each play an important role in the
governance of an organization. Both groups have mutual interests
regarding the effectiveness of internal financial controls, and both
adhere to ethical codes and professional standards set by their
respective professional bodies. Additionally, both types of auditors
operate independently of the activities they audit, and they're expected
to have extensive knowledge about the business, industry, and strategic
risks faced by the organization they serve. Yet, with all of their
similarities, internal auditing and external auditing are two distinct
functions that have numerous differences.
Diverging Approaches
The IIA defines internal auditing as "an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes." Internal auditors in the public sector place an added emphasis on providing assurance on performance and compliance with policies and procedures. Concerned with all aspects of the organization - both financial and nonfinancial - the internal auditors focus on future events as a result of their continuous review and evaluation of controls and processes.In contrast, external auditing provides an independent opinion of a company's financial statements and fair presentation. This type of auditing encompasses whether the statements conform with Generally Accepted Accounting Principles, whether they fairly present the financial position of the organization, whether the results of operations for a given period of time are represented accurately, and whether the financial statements have been affected materially (i.e., whether they include a misstatement that is likely to influence the economic decisions of financial statement users). External auditing's approach is mainly historical in nature, although some forward-looking improvements may be suggested in the auditors' recommendations to management based on the analysis of controls during a financial statement audit.
Organizational Structure
Internal auditors represent an integral part of the organization - their primary clients are management and the board. Although historically internal auditors have reported to the chief financial officer or other senior management staff, the trend today is for internal auditing to report directly to the audit committee, which helps strengthen auditor independence and objectivity.Conversely, external auditors are not part of the organization, but are engaged by it. Their objectives are set primarily by statute and by their main client, the board of directors. External auditors are appointed by the board, and they submit an annual report to the company's shareholders. The appointment is meant to extend for a specified time - external auditors can be re-appointed at the company's annual general meeting. In some jurisdictions, there are limits on an external auditor's length of service, often five or seven years.
Mandatory Versus Voluntary
In
general, internal audit functions are not mandatory for organizations.
Instead, their installment is left up to individual organizations'
discretion. Recent legislation, however, has made internal auditing
mandatory in some cases.
Qualified and Knowledgeable
The
necessary qualifications for an internal auditor rest solely on the
judgment of the employer. Although internal auditors are often qualified
as accountants, some are qualified engineers, sales personnel,
production engineers, and management personnel who have moved through
the ranks of the organization with a sound knowledge of its operations
and have garnered experience that makes them aptly qualified to perform
internal auditing.
Evolution of Auditing
Business
growth, globalization, and corporate scandals have changed the thrust
of the internal audit profession in recent years. In its early years,
internal auditing focused on protection-oriented objectives and
emphasized compliance with accounting and operational procedures,
verification of calculation accuracy, fraud detection, and protection of
assets. Gradually, new dimensions were added that ranged from an
evaluation of financial and compliance risks to an assessment of
business risks and corporate governance. These changes have increased
the gap between the disciplines of internal and external auditing.
Today, internal and external auditors
can benefit from their complementary skills, areas of expertise, and
perspectives. They should meet periodically to discuss common interests,
strive to understand each other's scope of work and methods, discuss
audit coverage and scheduling to minimize redundancies, jointly assess
areas of risk, and provide access to each other's reports, programs, and
workpapers. In fulfilling its oversight responsibilities for assurance,
the board also should require internal and external auditors to
coordinate their audit work to increase the economy, efficiency, and
effectiveness of the overall audit process.
A Common Purpose
Despite
some similarities, a world of difference exists between internal
auditing and external auditing. Nonetheless, both audit types, and the
respective services they provide, are essential to maintaining an
effective governance structure. With a greater understanding of each
other's unique perspective, the two audit groups can maximize their
aggregate contribution and help ensure organizational success.
