Internal and external audits are both essential for a business, which is why it’s common practice to hire an independent professional to conduct either one.
A noticeable trend among businesses is the preference for external auditors when they require in-depth monitoring of procedures and need to ensure proper security and reliability. For those who understand the distinction between the two types of audits, expectations for external audits tend to be higher, which influences their more frequent selection.
But if one is expected to deliver more than the other, why does a business need both, and how do they complement each other?
Internal Audit
Internal auditing is carried out by both an external specialist and an in-house team. This process primarily focuses on:
- Monitoring and improving internal processes
- Identifying risks and taking preventive measures
- Ensuring that internal control systems are effective and functional
The primary goal of internal auditing is to support managers in making strategic decisions by offering a clear insight into the financial and operational health of the business.
Internal departments can use various tools within legal boundaries (such as data protection laws, labor laws, etc.) and their budget. While this makes their work easier, it does not guarantee complete transparency and security. This is where the need for External Auditing arises.
External Audit
External auditing, which is typically required by a legislator or legal auditor (also known as statutory audit), is carried out by an independent firm or specialist. Its primary purpose is:
- The verification of financial statements to ensure compliance with national and international standards.
- Strengthening the trust of external parties, such as investors, partners, and financial institutions.
This type of audit plays a critical role in building credibility in the market and protecting against reputational or legal damages. External audits, conducted in accordance with International and National Auditing Standards, are planned and carried out to detect fraud and other irregularities. Traditionally, businesses expect external auditors to be responsible for identifying fraud, errors, and other issues.
Therefore, the importance of external auditing is crucial and indispensable, even when a business has the budget for an internal department. However, combining both ensures complete reliability in the results of a professional service.
How do internal and external audits work together?
The external auditor begins with general questionnaires, which are tailored according to the business’s characteristics in collaboration with management. They then analyze the client’s systems, controls, and identify key issues.
The evaluation of key controls varies between internal auditors, who focus on operational assessments, and external auditors, who carry out control tests and detailed analyses.
The effectiveness of which depends on a deep understanding of the business. External auditors often have more limited sector-specific knowledge compared to internal auditors, which is why their integration is necessary.
Conclusion
Auditors apply specific procedures by reviewing a selected sample of documents to identify potential errors. They set a tolerance level for errors in advance, based on the risk and significance of each transaction. However, since only a limited number of documents are examined, detecting errors becomes more difficult.
For effective work, the external expert must first become familiar with all the work done by the internal audit department. This includes:
- What have they planned to check?
- What controls have they already carried out?
- What issues have they found?
With this information, the external auditor can focus on new areas that require attention, without repeating controls that have already been performed, thereby reducing time.
Internal specialists view this collaboration positively. They prefer that funds spent on external auditing be used to uncover new risks and provide a more comprehensive view of the organization. However, this is only achieved when both parties work closely together and understand each other well.
Although many internal auditors have previously worked as external auditors, few currently perform both roles. This would be ideal, as it would provide them with a deeper understanding of all aspects of business security.
Audit services by Prospera Finance & Consulting – Our approach!
While the article discussed the importance of combining internal and external auditing, Prospera Finance & Consulting takes it a step further by offering an integrated approach to auditing and security services.
We serve as a bridge between internal and external auditing, enabling businesses to:
- Optimize their costs
- Better coordinate the audit process
- Maximize the value gained from both types of auditing
- Ensure the accuracy and reliability of financial statements
- Reduce overlaps and eliminate unnecessary repetitions
What sets us apart?
Our team brings extensive experience in both internal and external auditing, giving us a unique perspective on your business needs and allowing us to:
- Collaborate with top legal auditors (commonly referred to as statutory auditors)
- We provide independent consulting to improve auditing processes.
- We assist in creating effective internal control systems.
- We ensure that your financial statements meet the highest standards of quality and reliability.
- We develop customized strategies for risk management.
- We guarantee full compliance with national and international financial reporting standards.
With Prospera Finance & Consulting, you don’t just receive a simple service, but a strategic partner who deeply understands both perspectives of auditing and knows how to integrate them for the maximum benefit of your business.