Introduction:

Internal Audit and External Audit are the two most important types of audit which are performed in an
organization. Internal Audit is not compulsory by nature, but can be conducted to review the operational activities
of the organization.
Other term 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. It
happens many times that we consider both as one, but they are thoroughly different from each other and therefore
we have compiled the most important difference between internal audit and external audit.

Definition of Internal Audit:

Internal Audit, we mean that an unbiased and systematic appraisal function, performed within the business
organization, with the purpose of reviewing the day to day activities of the business and providing necessary
suggestions for the improvement.
Internal audit performs a wide spectrum of activities like:

Evaluating the accounting and internal control system.

Examining the routine operational activities.

Physical verification of inventory at regular intervals.

Analyzing financial and non-financial information of the organization.

Detection of frauds and errors.

The main aim of internal audit is to increase the value of an organizations operation and monitoring the internal
control, internal check and risk management system of the entity. An Internal audit is conducted by the internal
auditors who are the employees of the organization. It is a separate department, within the organization where a
continuous audit is performed throughout the year.

Definition of External Audit:

The periodic, systematic and independent examination of the financial statements of the company conducted by a
third party for specific purposes, as required by statute is known as External Audit. The main aim of external audit to
publicly express an opinion on:

The truthfulness and fairness of the financial statement of the company

The accounting records are complete in all respects and prepared as per the policies outlined by GAAP
(Generally Accepted Accounting Principles) or not.

All material facts are disclosed in the annual accounts.

For carrying out external audit, the auditor is appointed by the members of the company. He should be independent,
i.e. he should not be connected to the organization in any way so that he can work in an impartial way without any
influence. The auditor has the right to access books of accounts in order to obtain necessary information and provide
his opinion to the members by way of the audit report.

Sr.

Points

Internal Audit

External Audit

No
.
The scope of internal audit is
determined by the management.
The scope of internal audit can
be change by the management
at any time
Internal Audit is a part of the
entity
The main objective of internal
audit is to detect and prevent
errors and frauds.
Internal audit does not fulfill
the legal requirement of any
firm.
Internal audit is optional.

The scope of External audit is

determined by the relevant law.
The scope of external audit cannot
be changed by the management.

Scope

Change of
Scope

Legal Entity

Objective

Legal
Requirement

Optional or
Compulsory
Internal
Control
Duration

Report

10

Test Checking

11

Time

12

Auditing
Standards

13

Appointment

14

Removal

15

Qualification

16

Status

Internal auditor is an employee

of the organization.

The external auditor must be a

chartered accountant within the
meeting of chartered.
External Auditor is an independent
professional person.

17

Meeting

18

Liable

Internal Auditor has no right to

attend statutory or annual
general meeting of the Co.
In case of fraud the internal
Auditors is liable to

External auditor has a right to attend

the statutory or annual general
meeting of the company.
In case of fraud the external auditor
is liable to share holders.

Internal audit is a part of

internal control.
Internal Audit may be for any
duration.
In internal audit the report is
submitted to the management.
In Internal Audit the test
checking techniques cannot be
adopted.
The internal Audit may
continue for the whole year.
It is not necessary in internal
audit to comply with the
international standards on
auditing.
The internal auditor is
appointed by the management.
The internal auditor can be
remove by the management at
any time.
For the internal Auditor there is
no prescribed qualification.

External Audit has a separate entity

apart from the organization.
The main objective of external audit
is to show fair and true view of
accounting records.
External audit fulfils the legal
requirement of any public Ltd
company.
External audit is compulsory for
public Ltd. Company.
External audit is not a part of
internal control
External audit is only for certain
period
In external audit the report is
submitted to the shareholders.
In external audit test checking
techniques can be adopted.
The external audit may be completed
within a week or a month
It is necessary in external audit to
comply with the international
standards on auditing.
The external audit is appointed by
the shareholders.
The Shareholders can remove the
external auditor.

19

Legal
Proceedings

20

Suggestions

management.
The internal auditor cannot be
called by the court in any legal
proceedings.
Internal auditor can give
suggestions to improve
accounting and other systems
of the organization.

The external auditor many be called

by court in any legal proceedings.
The external Auditor cannot give
suggestions to shareholders for the
improvement of internal Control.

Conclusion:
Internal Audit and External Audit are not opposed to each other, instead they complement each other. External
Auditor may use the work of internal auditor, if he thinks fit, but it does not reduce the responsibility of the external
auditor. Internal Audit acts as a check on the activities of the business and assists by advising on various matters to
gain operational efficiency.
On the other hand, external audit is completely independent in which a third party is brought to the organization to
carry out the procedure. It checks the accuracy and validity of the annual accounts of the organization.