The above is certainly the second most prevalent question being asked in the auditing society.
By means of giving the definitions and working methods of both, the difference can be explained the most effectively.
Internal audit is conducted to disclose the weakness of the management and thus help to enhance its performance.
So the appointment for an internal audit is made by management and is part of internal control. Internal audit can suggest improvement in the internal checking system. Internal audit can perform its duties under the terms of appointment and the management can limit the scope of work at any time. The internal auditor is an employee of the company and not an independent person. So internal auditing is nothing but the checking of the product that the company produced.
The main purpose of internal audit is to keep proper control over business activities. When there is proper control there is maximum efficiency. The internal auditor determines the degrees of control over work. It evaluates therefore the accounting system. It is concerned with checking proper authority for transactions like purchase, retirement and disposal of fixed assets. The vouchers can be compared with entries in order to determine that figures are factually correct.
The second purpose of internal audits is to help the management overcome the weakness of management as pointed out by internal audits which are used as tools to correct the situation. The management functions can then be reformed properly as result of the outcome of internal audits.
The third purpose of internal audit is to review the successful operating of the business. The working processes of the current year can be reviewed in detail just to note the successful areas of working. There is a then also the need to locate the weak points. The corrective measures can be taken for proper continuous working.
Planning is the first most essential feature of internal audit. The auditor can plan to check the accounting system. The plan may relate to accounting functions like purchase, sales, income, expenses and shares. The planning includes degrees of risk and extent of audit. It also states the nature of audit work.
Controlling is a second essential feature of internal audit. The auditor can examine the operations of the accounting system. He can control audit work through audit programs. The whole audit work is distributed among audit staff.
External audit is the critical review of the representation of the published financial statements. It is compulsory for all companies which are listed in the stock exchange so it is conducted to help the shareholder. The rights of owners are protected. The appointments for external audits are made by the shareholders.
The external audit cannot suggest improvement in the internal checking system. As such it doesn’t perform its duties under the terms of appointment by the company. The management can’t limit the scope of work at any time. The external auditor is not an employee of the company. He is an independent person who can perform his work to terms of appointment and other prescribed rules. The scope is very wide.
In short, external audit is checking the product of the company by its customer. Here it means the company may not find mistakes in its processes. As a third party who comes and check the system, the external auditor may see some deviation and supply suggestions for possible improvements of the system.
However, what is important after both internal and external audits, is to hold an auditors meeting to discuss the closing meeting content with all auditees involved with the audit. Firstly, point out what was done well. Secondly, address the non-conformances and ensure that the auditees understand the non-conformances and what part of the standard is not met.
Thirdly discuss and implement the audit report in a timely manner and encourage auditees to decide on the corrective actions. Allowing auditees to have input which will give them ownership in implementing changes.
Finally assist those responsible in completing the corrective actions by setting reasonable deadlines and be available and willing to help the auditees in their perceptions. The corrective action deadlines may vary depending on the severity of the non-compliance.