Let’s dive into internal and external auditing. If you’re running a business or are part of a business leadership team, you’ve likely encountered internal and external audits. Perhaps you have even been involved in one or both. But do you fully understand what distinguishes them and why they could both be important to your business?
What is Internal Auditing?
Think of internal auditing as your in-house investigative team. These professionals are either employees of your organisation or contracted specialists who possess a thorough understanding of your business. Their role is to scrutinise your processes, identify inefficiencies or risks, and recommend improvements. Whether it pertains to compliance, risk management, governance, or operational efficiency, your internal auditors ensure that your operations align with your business objectives.
Key features of internal audits include:
- Continuous Monitoring: Internal audits may occur several times throughout the year, offering ongoing feedback.
- Focus on Improvement: Rather than merely identifying issues, internal audits aim to help resolve them, enhancing both compliance and efficiency and reducing risk.
- In-depth Knowledge: Since they engage with your business regularly, internal auditors have a comprehensive understanding of your operations.
- Broad Scope: Internal audits can encompass various areas, from financial operations to compliance and risk management.
For instance, imagine you are managing a retail chain and want to assess the efficiency of your inventory management system. An internal audit could involve evaluating stock accuracy, identifying risks such as obsolescence or wastage, and reviewing the effectiveness of your supply chain. Auditors would then provide recommendations for improvements. Given that internal audits are often conducted regularly, you would receive continuous feedback throughout the year to ensure everything remains on track.
What is External Auditing?
External audits are akin to inviting an independent party to provide an objective evaluation of your financial statements. These auditors do not work for you; they are independent third parties, ensuring impartiality. Their primary responsibility is to determine whether your financial records are free from material misstatement and in compliance with applicable accounting standards and regulatory frameworks.
Key features of external audits include:
- Objectivity: External auditors, being independent, offer an unbiased perspective.
- Financial Focus: External audits typically centre on financial statements.
- Annual Occurrence: They are generally conducted once per year in alignment with your financial reporting cycle.
- Regulatory Compliance: External audits ensure your business complies with relevant accounting standards and regulations.
For example, if you manage a publicly traded company, you are required to prepare financial statements that investors and stakeholders can trust. An external audit provides assurance that these statements offer a true and fair view of your financial position, instilling confidence among investors, creditors, and regulators. External audits occur annually, and their results are shared with key stakeholders.
Who Conducts These Audits?
Internal auditors are typically in-house employees or contracted experts. They are analytical thinkers with a strong understanding of your operations. While maintaining objectivity, they collaborate closely with various departments within your organisation. These individuals are usually trained in accounting or finance but may also possess expertise in other areas such as information technology or regulatory compliance, depending on the audit’s focus.
In contrast, external auditors are independent professionals from audit or accounting firms. Known for their impartiality, they adhere strictly to auditing standards. External auditors often hold qualifications such as Chartered Accountant (CA) or Certified Public Accountant (CPA), and many are registered with the Australian Securities and Investments Commission (ASIC) as Registered Company Auditors (RCAs). They bring a fresh, unbiased perspective to the audit process and are experts in auditing and accounting standards, regulations, and industry practices.
What Types of Businesses Use These Services?
Most large corporations, non-profits, and government entities are legally required to undergo external audits. Government agencies are also often mandated to conduct internal audits. For example:
- Disclosing Entities, Public Companies, and Large Proprietary Companies: Due to their complex operations, internal audits are essential for continuous oversight, while external audits provide transparency and financial assurance to investors and regulators.
- Financial Institutions: Banks and financial institutions conduct frequent internal audits to manage risk and ensure compliance with stringent regulations.
- Not-For-Profit Organisations: Entities such as companies limited by guarantee and incorporated associations that meet certain revenue or asset thresholds are required to have their financial statements audited.
Why Should Small Businesses Engage External Auditors?
If you operate a small business, you may question whether hiring an external auditor is necessary or beneficial. The answer is a resounding yes. Here are a few reasons why engaging a contracted auditor could be advantageous:
- Objectivity: An external consultant auditor provides an unbiased view, often identifying issues you might overlook.
- Credibility and Performance: If you are seeking investors, partners, or financing, an external audit adds credibility to your financial statements. While internal audits can also offer valuable insights into systems and operations, helping reduce risks and increase efficiency.
- Compliance: Even when not legally required, audits (whether internal or external) ensure compliance with relevant regulations, helping you avoid penalties or other potential future issues.
For small businesses, an external audit may not be as extensive as for larger companies. You might engage a CA firm to review your financial statements, assess accounting practices, and provide a report on their findings. This process does not have to be an annual occurrence—many small businesses choose to audit every few years or in preparation for significant milestones like a sale or major investment.
Key Differences: Why Both Are Necessary
So, what’s the primary distinction between internal and external audits? In simple terms, internal audits are proactive and ongoing, designed to review and enhance various aspects of your business. External audits, by contrast, are more of an annual checkup focused on financial transparency for external stakeholders.
Both types of audits are essential. Internal audits help fine-tune operations, manage risks, and prevent potential issues, acting as an early warning system. External audits ensure that your financial statements are accurate and credible, building trust and transparency with stakeholders.
What’s New in Auditing?
Let’s briefly explore some emerging trends:
ESG Reporting
Environmental, Social, and Governance (ESG) issues are becoming increasingly significant. Both internal and external auditors are now paying closer attention to ESG metrics, ensuring data accuracy and alignment with business strategy.
Technology and AI
Auditors are leveraging AI to analyse vast amounts of data, detect risks, and provide real-time insights. Both internal and external audits are being transformed by these technological advancements.
Independence Concerns
When firms offer both auditing and consulting services, conflicts of interest may arise. Auditors must be vigilant to maintain their independence.
Collaboration
Internal and external auditors are working more closely than ever before, aligning their efforts to provide comprehensive audit coverage while preserving independence.
National Audits Group Audit and Assurance Services
At National Audits Group, we provide both independent external audits and specialised internal audit services to support businesses of all sizes. Our external audits ensure transparency, compliance, and confidence among stakeholders, while our internal audit services focus on improving operational efficiency and managing risks.
We leverage AI and data analytics to enhance audit efficiency and deliver real-time insights, helping businesses stay ahead of risks. With expertise in emerging areas like ESG reporting, we remain at the forefront of auditing practices.
Whether you need external or internal audit support, we offer the independence and expertise to safeguard your business’s success. Contact us today to learn more.
Further Reading: Read more about auditing independence here.
National Audits Group
