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The difference between internal and external audits

distinguish between internal audit and statutory audit

Direction does not want to be the red face in case of possible changeability during lawful audit and explain why that happened. To keep a control of the operations of the firm, internal audit is performed. Whether it is an internal audit been performed or not, Statutory audit is made for the effectiveness of the financial states of the firm. It is necessary to be sure that the firm follows rules and regulations in the assertion and no compromise with the financial interests of the stockholders is undergoing. Having an effective audit system is important for a company because it enables it to pursue and attain its various corporate objectives.

  • The aim of internal audit is to provide an independent and objective assurance that the company’s risk management, governance, internal check and internal control systems are functioning in a satisfactory manner.
  • This type of audit is most commonly intended to result in a certification of the financial statements of an entity.
  • An Internal audit is conducted by the internal auditors who are the employees of the organisation.
  • However, there are companies that get performed an internal audit also to ensure they are following the rules and regulations of accounting and to verify the statements prepared by accountants.

However, Assurance gives true information to the stakeholders for better decision-making. On the contrary, External Audit which is obligatory for every separate legal entity, where a third party is brought to the organization to perform the process of Audit and give its opinion on the Financial Statements of the company. Here the working scope is determined by the respective statute.


Audit alludes to a process of independent checking of financial records of an organization, so as to give an opinion on the financial statement. It can be grouped into two categories, namely, Internal Audit and External Audit. Internal Audit is not compulsory by nature but can be conducted to review the operational activities of the organization.

  • Certified Internal Auditors (CIA) must comply with the IIA’s standards.
  • It is basically the process of verifying the records available in the company’s accounting record, is as per accounting standard and principle, and it also confirms that accounting record is accurate or not.
  • The approach of internal auditor to the work is through the organisation chart and procedures manual.
  • This lawful control of count is performed by virtue of the dispositions of Companies Act of1956 (to give opinions in accordance with the article 227 of Law).
  • Further, it is important to note that the effectiveness of any system implemented in the organization greatly depends on the staff employed to undertake the same.

One of the most important difference between internal audit and statutory audit[1] is on the basis of the legal need for appointing one. An internal auditor is appointed as an additional layer of security so that all the processes are being complied properly. This acts as an additional layer of protection and gives a company reality check. It also ensures that statutory flaws are not found at the time of statutory audit.


As against internal audit, statutory audit is mandatory to be performed. The government has laid down various laws in case statutory audit is not performed. This lawful control of count is performed by virtue of the dispositions of Companies Act of1956 (to give opinions in accordance with the article 227 of Law).

distinguish between internal audit and statutory audit

In the US, only CPA firms can perform external audits. This means that they must comply with the AICPA’s auditing standards. Auditing is a means of evaluating the effectiveness of a company’s internal controls.

Definition of Internal Check

The internal audit function is especially necessary in larger organizations with high levels of process complexity, where it is easier for process failures and control breaches to occur. Audit vs Assurance are the processes that are linked to each other and are utilize most in evaluating a company’s financial records and its performance. Both of these are companion to each other rather alternative or substitute which is very basic thing to understand for every auditor but this distinction is almost never taught whether it’s articleship, job or even when preparing for exams.

Both internal and independent auditors contribute to a company’s audit system in different but important ways. Confusion always looms over the difference between internal audit and statutory audit in terms of the appointment of auditors, their eligibility criteria, scope of activities, degree of independence, pay and remuneration, removal from the position etc. This piece of writing discusses all these aspects in detail. Internal audit is not obligatory and it is the choice of the direction of the firm to make it by his internal controllers.

There is no way internal management can change the scope of statutory audit as is the case with internal audit where the mutual consent of the management and the auditors is enough to decide the scope of the audit exercise. While the auditors of a statutory audit submit their final report to the shareholders in their general meeting, the report of the internal audit is handed over to the management by the auditors. Once appointed, statutory auditor is extremely hard to get removed and the management has to take permission of the central government after its board of directors recommends a proposal to this effect. On the other hand, management can at any time remove internal auditors. Another major difference between internal audit and statutory audit is the scope of activities that both are involved in. An internal audit’s scope of work is usually broader as compared to an internal audit.

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Although the internal controllers are named by the direction of the firm, auditors are named by the stockholders of the firm. Another difference is the domiciles in skills of the listeners. While it is obligatory for the auditors to be certified as recognized accountants, he is not necessary for internal audit and director can name persons that he considers opportune.

Key Differences between Internal and External Audit You Should Know

External audit activities not only check for errors and misstatements, they also evaluate if those errors likely came from the intentional actions of the employees of the organization. Like external auditors, internal auditors must comply with auditing standards. Certified Internal Auditors (CIA) must comply with the IIA’s standards.

distinguish between internal audit and statutory audit

Emma’s 70-person geographically distributed accounting team improved internal controls and streamlined the audit thanks to FloQast. In short, the two functions share one word in their names, but are otherwise quite different. Larger organizations typically have both functions, thereby ensuring that their records, processes, and financial statements are closely examined at regular intervals. On the other hand, external audit is entirely independent in which a third party is brought to the organisation to carry out the procedure. It checks the accuracy and validity of the annual accounts of the organisation.

Distinguish between Statutory Audit and Non-Statutory Audit

There is a difference between both types of audits in terms of their timing i.e. when such an audit can be conducted. An internal audit can be conducted at any time of the year without giving any prior rigid announcements whereas a statutory audit can be initiated once the final accounts have been prepared by the company. Conducting statutory audit is not a regular activity distinguish between internal audit and statutory audit of the management. An internal Auditor is usually appointed by the people in the top echelons of the management of the company. On the other hand, a statutory auditor is appointed by the shareholders or at the Annual General Meeting (AGM) of the Company for ensuring greater scrutiny. The most obvious difference is the domiciles in the nomination of the controller.

But that misleading impression overlooks the foundational role that internal and external auditors play in the world of business. Without these two types of audit, our capital markets would lack integrity, and business operations would be less efficient. An external audit is an examination that is conducted by an independent accountant. This type of audit is most commonly intended to result in a certification of the financial statements of an entity.

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The primary object here is to aid the Central Government for reliable cost accounting and authentic cost data. This function aims at appraising the ef­fectiveness of new operations in differ­ent departments or any organisational unit of the enterprise. The statute dictates the powers, rights and duties of an auditor.

In this type of auditing, the work area is determined by the entity’s management. The cost auditor’s approach to the work is through various cost statements and other relevant books of cost accounts in terms of the relevant cost accounting record rules. The law does not provide any specific eligibility criteria or qualification norms for any person to qualify as an internal auditor of the company. As against it, a number of eligibility criteria have been laid down by the law in order to become a statutory auditor of a company. Therefore, a statutory auditor to a certain degree is more credible than an internal auditor. When many people hear the word audit, they first think of a painful and grueling interrogation to uncover real or imagined misdeeds.

distinguish between internal audit and statutory audit

For both types of auditors, risk assessment is a vital consideration, and a keen understanding of the industry and the company is required. However, how they do their work is a bit different. The process of the removal of an auditor is a major difference between internal audit and statutory audit. However, a statutory auditor is appointed because of the statutory requirements and can be discharged from the position at the AGM by the members. Therefore, flexibility in the removal of a statutory auditor is fairly very low. Internal auditors, as the name implies, work within an organization as employees, while external auditors are independent of the organizations they audit.

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