How do internal and external auditors differ and how should they relate?
-Internal auditors are appointed by management and report to management. External auditors are independent auditors and report to the owners. -External auditors are statutory auditors and internal auditors are part of the internal control system. -Internal Auditors are representing Management and do check on behalf of management and report to Audit Committee comprises of few Board members/mgt team (i.e not compulsory to have as well not compulsorily to do by a qualified CA / CPA). -Although they are independent of the activities they audit, internal auditors are integral to the organization and provide ongoing monitoring and assessment of all activities. On the contrary, external auditors are independent of the organization, and provide an annual opinion on the financial statements. The work of the internal and external auditors should be cordinated for optimal effectiveness and efficiency. -Internal and external auditors have mutual interests regarding the effectiveness of internal financial controls. Both professions adhere to codes of ethics and professional standards set by their respective professional associations. There are, however, major differences with regard to their relationships to the organization, and to their scope of work and objectives. -Internal auditors are part of the organization. Their objectives are determined by professional standards, the board, and management. Their primary clients are management and the board. External auditors are not part of the organization, but are engaged by it. Their objectives are set primarily by statute and their primary client — the board of directors. -The internal auditor's scope of work is comprehensive. It serves the organization by helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes. Concerned with all aspects of the organization — both financial and non financial — the internal auditors focus on future events as a result of their continuous review and evaluation of controls and processes. They also are concerned with the prevention of fraud in any form. -The primary mission of external auditors is to provide an independent opinion on the organization's financial statements, annually. Their approach is historical in nature, as they assess whether the statements conform with generally accepted accounting principles, whether they fairly present the financial position of the organization, whether the results of operations for a given period of time are accurately represented, and whether the financial statements have been materially affected. -The internal and external auditors should meet periodically to discuss common interests; benefit from their complementary skills, areas of expertise, and perspectives; gain understanding of each other's scope of work and methods; discuss audit coverage and scheduling to minimize redundancies; provide access to reports, programs and working papers; and jointly assess areas of risk. In fulfilling its oversight responsibilities for assurance, the board should require coordination of internal and external audit work to increase economy, efficiency, and effectiveness of the overall audit process.
"Dear Friend, as far as your query is concerned that How do internal and external auditors differ and how should they relate? Let me explain > Internal vs. External Audit Internal auditors work within an organisation and report to its audit committee and/or directors. They help to design the company’s organising systems and help develop specific risk management policies. They also ensure that all policies implemented for risk management are operating effectively. The work of the internal auditor tends to be continuous and based on the internal control systems of a business of any size. External auditors are independent of the organisation they are auditing. They report to the company’s shareholders. They provide their experienced opinion on the truthfulness of the company’s financial statements and perform work on a test basis to monitor systems in place. The Differences There are three key differences in the activities of internal and external auditors. Each is discussed in depth below: Appointment External auditors are appointed by the shareholders of a company, although this usually comes through discussion with directors. External auditors must be appointed from a different company independent of their own whilst internal auditors are usually employees of the organisation. Keeping clients happy as an external auditor is often more difficult than internally as you already know those around you in the second instance. Objectives The objectives for an external auditor are usually defined by statute whilst management will set the objectives for internal audits. External auditors generally have free reign to examine and assess every aspect of the system whilst management can pinpoint and highlight certain areas they want internal auditors to focus on. There are various types of internal audit. Responsibility External auditors are responsible to the owners of the company which could be anybody from its owners to the shareholders to the government or general public. Internal auditors are responsible solely to the company’s senior management. A Closer Look An internal audit is designed to look at the key risks facing the business and how the business is managing those risks effectively. It usually results in recommendations for improvement across departments. Both financial and non-financial elements are usually included and the company’s reputation may be a factor which is assessed. An external audit focuses on finance and the key risks associated with the business’ financial business. They are usually performed on at least an annual basis to provide the annual statutory audit of the financial accounts. This audit is designed to show whether the accounts are a true and fair reflection of where the company sits financially. External auditors will evaluate all the internal controls put in place to manage financial risk to assess whether they’re working effectively. Working in the auditing sector is always challenging and whether you work as an external or internal auditor you will face plenty of career challenges. Many people opt to work in internal roles to have the camaraderie and rapport of working with a single company whilst others enjoy the variety of work they come across in an external role where every day is different. Regards, Arjun Pratap Singh"