Five Differences between External and Internal audit

To run a business successfully, a company needs to ensure its financial records are accurate and in line with the accepted accounting standards in the region as well the applicable rules, regulations, and laws. Additionally, certain non-financial components too need to be gauged to ensure they align with the company’s objectives. And this is the role of an auditor. Though several UAE companies need an audit, they are often uncertain about the type of audit required. If you too belong to this league and cannot decide between external and internal audits, we hope to provide you some direction. In order to decide, you need to know what each of these audits involves and how different one is from the other.

So, let us delve deeper and review the differences between external and internal audits based on some common criteria.

1. Goal and scope of work

Internal audit is an internal metric that helps to determine the overall efficacy of a company’s processes. Thus, an internal auditor focuses on streamlining the business processes and making them error-free and more efficient. He/she would also gauge the key threats the company has to deal with, the practicality of dealing with such threats, and the control measures taken by the administration to facilitate seamless business operations.

Typically, internal auditors perform a more consulting role by suggesting proposals to the management that could help them improve their business frameworks and controls, especially in cases where they identify shortfalls in particular business areas.

An internal auditor can also ease the work of an external auditor when the company decides to get an external audit done at a later date.

Unlike an internal audit that has a key ‘internal’ element linked to it, an external audit is about focusing on both the internal and external aspects of a company. Thus, it examines the company’s overall financial records and gives opinions regarding its financial statements. From ensuring the company’s financial records and operations are accurate and compliant with the UAE government’s laws and confirming its financial claims are true to offering help for handling existing or impending issues, an external auditor would do all this and more. Such an auditor would proceed based on his/her evaluation of the risks of the accounts being considerably misstated. Thus, if an external auditor finds other things (beyond the regular scope) that he/she believes should be brought to the client’s notice, he/she can report it separately to the stakeholders (say via a management letter to the company directors).

An external audit can be called a partial-health check of a company’s key accounting elements. Since it assesses if the company’s accounts offer a ‘true and fair picture’, it enhances the company’s financial credibility. Additionally, it ensures compliance with the government laws along with helping to prevent fraud and malpractices that could often go unnoticed and potentially avoid huge losses to the company.

2. Appointment

To conduct an internal audit, a company hires internal auditors based on the management’s decision. Often, they are on the payroll of the given company. But internal audit could also be outsourced to individuals or companies. Though it is common for internal auditors to have an accounting background, they may come from other backgrounds too.

External auditors are not in-house employees. They are independent professionals chosen from outside the company. Their appointment is finalised at the company’s annual general meeting by a vote of the shareholders. Several factors like the regulatory requirements, the nature, extent, and timing of audit, audit requirements, the competence and reputation of the auditor, etc. need to be considered before external auditors are short-listed by a company and approached. If a prospective external auditor has a financial interest in the company and thinks that this would make his/her independence to be compromised, he/she could refuse to be engaged by the company.

3. Qualification

To some extent, it is optional to hold specific certifications in case of an internal audit. However, for an external audit, the individual must have an accounting degree or a qualification such as CA or CPA in addition to exhibiting relevant experience in the auditing/financial domain. Additionally, he/she needs to hold an auditing license. This is in accordance with the law that mandates each company to hire a registered auditor with the Ministry of Economy for auditing its books of accounts.

4. Audit report

For internal audit, there is no particular format in which the audit report needs to be submitted. However, external auditors must follow the specific format as prescribed by law and consistent with the auditing standards while presenting their audit reports.

An internal audit report is used by the company’s management while an external audit report is used by the company’s external stakeholders such as creditors, investors, and lenders to have a deeper insight into the company’s performance.

Based on the internal audit report, the company’s internal management takes the necessary steps. In the case of an external audit, it is the company’s stakeholders who are the decision-makers with respect to what essential steps need to be taken.

5. Audit frequency

No restrictions exist for conducting an internal audit. Thus, companies can do it on a monthly, quarterly, or half-yearly basis. Sometimes, internal auditors may choose to review the processes in one go. Else, they may select specific aspects or components and assess them over a few months according to a predetermined schedule. In case it is the latter, internal auditing would be a perpetual process that takes place across the year.

In contrast to the flexible frequency of internal audits, external audits are typically conducted annually though some organizations may choose to conduct it every six months as well.

Wrapping up

Companies in the UAE need both internal and external audits, which makes it important not to ignore either. Qualified and experienced professionals should be engaged to conduct both these audits to ensure they are error-free, which will facilitate the company’s overall growth.

If you need the services of an auditing firm with a proven track record, look no further. Contact us today .