Whilst fundamentally different, external audit and internal audit are complimentary functions; issues flagged internally, throughout the year, can help to inform aspects of the external audit.
Together, external, and internal audit should serve to endorse and contribute to the overall pursuit of effective governance within an organisation.
In the very simplest terms, external audit involves the examination of a business from the outside, whilst the other is concerned with looking from the inside.
External audit vs. Internal audit
|External audit||Internal audit|
|Largely concerned with the financials of the business – i.e., business accounts, compliance with accounting and reporting standards and the overall financial state of the organisation.||Typically deals with non-financial aspects of the business; more geared towards the day-to-day governance, risk management and operational performance of the business.|
|Undertaken annually, following the business’s financial year-end.||Carried out on an ongoing basis, throughout the year.|
|Purpose is to assess the extent to which financial records are compliant and represent a ‘true and fair’ view of the company’s position. |
An external audit will give an opinion on whether the financial statements are fair but will also identify problems and the associated corrective actions that the business could take.
|Internal audit will analyse the core systems and controls and is centred around making improvements to better safeguard against particular risks and better manage others.|
|Objectives of an external audit are dictated by statute.||Objectives of an internal audit are determined by those charged with governance, within the organisation itself.|
|Results of an external audit are typically distributed or available to stakeholders including investors, shareholders, customers, regulators, or public interests.||The primary audience for an internal audit is most commonly the senior management and other parties involved with the governance of the organisation.|
Does my business need both?
Some larger businesses will derive benefit from implementing both internal and external audit, as they seek to ensure that the effectiveness of their controls are monitored recurrently and that they are compliant at all times.
For other, smaller businesses, engaging in internal and external audit may not be as useful, necessary or, indeed, as economically viable.
Academy Schools: External audit and internal scrutiny
For academy schools, in particular, the subject of external and internal audit is a pertinent one given updates we’ve observed in the Academies Financial Handbook (AFH), in recent years.
Despite requiring both external and internal audit support, where academies are concerned, these functions now cannot be carried out by the same auditors.
How can George Hay help?
We can act as internal auditors, or independent external auditors, depending on the requirements of your organisation.
Our approach to your audit will be efficient, pragmatic, and robust, built around an understanding of the particular risks that you face, what you want to get out of the experience, and the solutions that could benefit your business.