An audit is a process in which problems are identified, analyzed, and evaluated through the professional examination of evidence. However, do you know the difference between internal and external audits?
In a business context, audits are crucial to ensure that companies are operating properly and complying with tax regulations.
There are two common types of audits, namely internal audit and external audit. While both share a similar goal of ensuring company success, significant differences exist between them.
In this article, you will find out the differences between internal and external audits and their examples below!
What is an Audit?
An audit is a systematic and independent examination of records, transactions, procedures, and systems of a company or organization.
The aim is to provide objective assurance and opinion regarding the truth and fairness of the information examined.
This process is carried out by professionals called auditors, be it internal auditors who are part of the company or organization itself or external auditors who work independently of the company or organization.
Differences between Internal and External Audit
So, what is the difference between internal and external audits? You can observe the difference from several aspects, such as the auditor's institutional origin, auditor qualifications, audit objectives, and others.
This aspect is also based on the statement of the difference between internal audit and external audit according to Sawyer (2009).
A more detailed explanation of the differences between internal and external audit is as follows:
1. Auditor Institution Origin
The first difference between internal and external audits is the origin of the auditor institution. Internal audits are conducted by auditors who are part of the company itself.
Meanwhile, external audits are carried out by independent auditors who work from outside the company.
2. Auditor Qualifications
Internal auditors have an educational background comparable to company employees, such as accounting or management.
On the other hand, external auditors generally have a more specific educational background, such as public accounting or finance.
3. Audit Objective
The next difference between internal and external audits is the purpose of the audit itself.
The purpose of internal audit is to assist company management in monitoring and improving company performance.
This is different from an external audit which aims to provide an independent opinion on the truth and fairness of the company's financial statements.
4. Audit Scope
The scope of the audit is also one aspect of the difference between internal and external audits.
Internal audits focus more on internal controls and the efficiency of company operations, while external audits focus more on testing financial statements and internal controls related to financial statements.
5. Audit Time
Internal audits are conducted regularly and continuously. However, external audits are only conducted at the end of the fiscal year or when the company needs financial statement certification.
6. Audit Standards
Internal audit standards are regulated by ministerial regulations and BPKP head decrees, while external audit standards are regulated by the Indonesian Institute of Accountants (IAI) and the Financial and Development Supervisory Agency (BPKP).
7. Auditor Responsibilities
The last difference between internal and external audit is the responsibility. The responsibility of internal auditors is to assist company management in monitoring and improving performance.
On the other hand, the external auditor's responsibility is to provide an independent opinion on the truth and fairness of the financial statements.
Examples of Internal and External Audits
After discussing about point-point with the difference between internal and external auditing, let's find out what the examples of both are.
Internal Audit Example
Here are some examples of internal audits that you may know:
1. Financial Audit
Financial audits have the objective of evaluating the accuracy and reliability of a company's financial information.
In this case, the internal auditor team examines financial statements, transactions and records to ensure compliance with accounting principles and company policies.
2. Compliance Audit
A compliance audit focuses on examining the extent to which the company complies with applicable regulations, laws, internal policies, and tax rules.
3. Operational Audit
An operational audit aims to evaluate the efficiency and effectiveness of a company's operations by reviewing business processes, operational procedures, and resource utilization.
4. Human Resources (HR) Audit
HR audits assess the company's HR management practices, including an evaluation of compliance with labor regulations, payroll policies, and performance evaluation systems.
5. Information Technology (IT) Audit
IT audits are conducted to evaluate the security and effectiveness of a company's information systems.
The audit process involves assessing security policies, access controls, and compliance with IT standards.
External Audit Example
Next, let's look at examples of external audits. In general, external audits can be categorized into several types, including the following:
1. Financial Audit
A financial audit is the most common type of audit. Its main focus is to examine and evaluate the financial statements of an organization.
The purpose of this audit is to ensure that the report is accurate, adequate, and in accordance with applicable accounting standards.
Auditors perform an analysis of accounts, examination of supporting evidence, and review of disclosures in the financial statements.
This is done to provide assurance that the financial statements fairly reflect the financial position and results of operations of the organization.
2. Operational Audit
An operational audit aims to evaluate the efficiency, effectiveness, and integrity of an organization's operational processes.
This process includes assessing the use of resources and the effectiveness of internal controls.
Later, the auditor will check the fulfillment of operational objectives and identify potential improvements.
Operational audits help identify problems in operational processes that can hinder the achievement of company goals.
3. Information System Audit
Information system audits are conducted to evaluate the security, efficiency, and effectiveness of information systems and technology used by organizations.
Auditors examine data security controls, ensure compliance with IT policies, protect against cyber threats, and evaluate the effective use of information systems in supporting company operations.
4. Company Asset Audit
A corporate asset audit focuses on assessing and verifying the existence, condition, and accuracy of the records of an organization's physical and non-physical assets, such as inventory, property, equipment, and intellectual property rights.
The aim is to ensure that these assets are properly recorded in the financial statements and are in adequate condition.
Auditors verify the existence, condition and recording of assets to ensure the integrity of the financial statements.
That's a complete explanation of the differences between internal and external audits and what are the examples.
From the description above, it can be concluded that internal audit and external audit have significant differences.
While both have a similar goal of ensuring the company's success, the scope, timing, and responsibilities of auditors are different.
Therefore, choosing the appropriate type of audit is crucial for companies to ensure their success.
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