Written by a human
While external audits get a bad rep, they are a necessary part of proving compliance with financial regulations and managing internal control. Internal audits are a great way to familiarize staff with the audit process so that they are prepared when the regulators come around.
What is an internal audit?
Internal audits are assessments of a company’s internal policies, efficiency, and operations. They are conducted to provide feedback around any gaps in these areas before an external audit, where the consequences of any weakness could be more severe.
They also provide confidence to stakeholders around the strategies and progress of the business, which can be challenging to prove otherwise. Some think of internal audits as a practice version of an external audit.
Internal auditors are often focused on a single area of the business, such as the finances, regulatory compliance, or the environmental sustainability.
Each audit involves an assessment of the area in question – both in terms of raw performance and subjective colleague feedback – to understand how well its meeting regulations and goals. Then, the internal auditor will submit a report of their findings to leadership and may be retained to oversee improvements highlighted in their report.
Who conducts an internal audit?
Internal auditors can technically be anyone, but are most likely independent person hired from external audit firms. They are on the business’ side and take a more relaxed approach than external auditors, such as by collecting data that might be outside the original scope of the investigation.
While there is no requirement for internal auditors to be qualified, there are internal audit standards, which improve technology strategies and uphold the integrity of regular evaluations.
When are internal audits most effective?
Companies typically perform internal audits in preparation for external audits, so they can be completed at any point. Most departments will be subject to an internal audit once per quarter, with particular processes more frequently reviewed.
If a risk event occurs, an internal audit report might occur alongside an external investigation to determine what happened, how it happened, and how to prevent it in the future. The bottom line is that internal audits are a form of internal controls, so they’re conducted to ensure that employees are all following protocol, or to detect when and where weaknesses occur.
Keeping a regular schedule for internal audits is also an effective way to maintain policies and determine if any updates need to be made to business processes or risk profiles to keep pace with modernization. What is an external audit?
External audits are independently conducted by specialist firms to assess the strengths and weaknesses of a company’s operational set up. For most external audits, the focus is on e-discovery, which entails the verification of financial accounts and statements.
External financial auditors follow the money (and the audit trail) to ensure these are:
- Calculated accurately
- Transparent, and not hiding any transactions, which may indicate money laundering
The primary aim of most audits is to verify accounting data, although organizations may also be assessed for sustainability performance, security best practices, or other regulatory compliance requirements.
External audit reports typically focus on the hard numbers, particularly the accounting and finance data, instead of subjective information from employees. This enables external auditing companies to maintain their impartiality.
External reports are submitted to regulatory bodies at the same time as the companies themselves, meaning that any consequences of poor compliance are determined before the organization is able to make changes.
Who conducts an external audit?
Typically, external auditors work in the financial sector and must be qualified by a regulatory body in order to practice. This type of audit is less relaxed than internal audits, sd the boundaries are stringent and must be clearly impartial.
This is primarily due to the potential consequences of any failings found by the audit, which include the following:
- Companies could be fined for non-compliance with standards
- Businesses may be struck off their license registers for severe weaknesses
- Individual employees and board members may be penalised in a financial or civil case if they are found responsible for faults
That being said, many companies pass their audits without any recommendations or with only gentle suggestions for improvement.
External auditors are inserted into a company for any time from around three weeks to three months, or even longer if the business accounts are disorganised or if there are suspicious findings.
When are external audits most effective?
External audits are typically more detailed than internal audits, therefore they work well in providing confidence to management and external stakeholders (investors) that a company is complying with laws and maintaining accurate financial reporting.
From an external perspective, these audits also serve the regulators effectively. They can confirm whether a company is adhering to the rules and meeting the requirements of compliance.
Investigations conducted after a risk event has materialized also count as an external audit, although this is not what most people think of when considering an external audit. In these cases, the audits can act as a framework for investigators to uncover the reasons why events have occurred.
Internal audit vs. external audit
| Internal audit | External audit |
| Completed as a form of internal control to see how well systems and processes are working | Completed as part of regulatory compliance on a regular basis |
| May be focused on any department, including finance, IT, compliance, or more | Typically only focused on finances |
| Relaxed: they are conducted to help the company | Strict: boundaries must not be blurred, as the findings of an external audit can lead to penalties |
| Completed by anyone, including in-house team members | Only completed by impartial external assessors, typically from a purpose-made auditor or accounting firm |
| Does not require a qualification, although the assessor has likely had some training | Requires training and qualifications |
| Subjective feedback from employees may play a part in the final report | Usually relies on objective accounting data for reporting |
| Internal audit reports to management in order to improve internal processes | External audit reports to management, regulators, stakeholders, and investors in order to offer independent opinions |
Are you ready for your next audit?
As vendor management and due diligence are best practices for all organizations, Global Relay regularly engages with third-party auditors to conduct testing on our services, internal controls, and data centers.
We also help clients prepare for internal and external audits by providing impregnable storage for your confidential communications, and continual monitoring to ensure compliance – providing confidence against all types of audits.