External Auditor vs Internal Auditor

As per Institute of Internal auditor of India, “Internal auditing is an independent, objective assurance and consulting activity designed to add value to and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

On the other hand, External Auditor means examination by independent body of the accounts and financial statements of the organisation required by prescribed law and regulations.

Roles of Internal and External Auditor

External auditor prepares reports for shareholders independent of the management, whereas internal auditors works as part of the management.

The extent of work undertaken by the internal auditor is determined by the management, whereas the extent of work for external auditor is determined by the statute.

• Internal Auditors functions include

Review of

1. Internal control system and procedures
2. System regarding custodianship and safeguard of assets
3. Compliance with the policies, plan and procedures
4. Whether system of collecting data is relevant and reliable
5. Efficient and economic use of available resource
6. Evaluation of various operations of entity
7. Organisational Structure of enterprise and its congruence with objectives

• Scope of External Auditors function includes

1. Examination of the financial statements with the objective to give opinion on the financial statements (Whether the financial statements give true and fair of state of affairs of the company).

The purpose is to enhance degree of confidence of intended users of financial statements.

2. The auditor should obtain reasonable assurance that financial statements as a whole are free from material misstatement.
3. They are required to obtain sufficient appropriate evidence to reduce audit risk to acceptably low level.
4. As per Companies Act 2013, Statutory auditors are required to report on the principal assertions of the company.

Applicability of Internal and External Auditors

Internal audit Applicability

Internal Audit is evaluation of internal control system, so generally management keeps internal audit as part of their structure for ensuring sufficient internal control compliance

1. However, statute mandates Internal Audit in certain cases

As per Companies Act 2013, Internal audit is applicable for the following

1. Listed company
2. Every private company having

Outstanding loans or borrowings from banks or PFIs >= Rs. 100crore

Turnover >= Rs.100 crore

3. Every unlisted public company having

Outstanding deposits >=Rs. 25crore

Paid up Share Capital >= Rs.50crore

Outstanding loans or borrowings from banks or PFIs >= Rs.100 crore

Turnover >= 200crore

External Audit applicability

Every company is required get its Financial Statements audited by a Statutory Auditor and submit the same to MCA within 30 days of AGM.

Other Differences

Basis	External Audit	Internal Audit
Periodicity	Single Annual Audit (3 times for Publicly held companies)	Conducted throughout the year
Format	Standard Format as per statute	Specific format as per management
Relation to company	Outsider	Employee of the company
Qualifications	1.    CA 2.    Majority of partners practicing in India must be CA 3.    Only partners who are CA shall be authorised to sign on behalf of firm	1.    CA (whether in practice or not) 2.    Cost Accountant (whether in practice or not) 3.    Such other professional body.
Independence	Should be independent and appear to be Independent.	May or may not be Independent

SA 610 – Using the work of Internal auditor

To perform the audit, external statutory auditor can use the work of internal audit provided external auditor evaluates

1. Whether internal auditor applies systematic and disciplined approach?
2. Is level of competence of Internal auditor adequate?
3. Does Organisational status support the objectivity of internal auditor?
4. Effective communication between internal and external auditor
5. Does Policies and procedures support the objectivity of internal auditor?

Apart from using the work performed by internal auditor, it can use internal audit for direct assistance provided

1. There is no threat to the objectivity of internal auditor
2. Internal auditors are competent enough.

Areas where direct assistance cannot be taken from Internal auditors are

1. Decisions regarding significant judgements
2. Areas of higher ROMM
3. Areas specifically reported by Internal Audit function
4. Evaluation of sufficiency
5. Evaluation of Going Concern Assumption
6. Evaluation of significant accounting estimates

If you require any assistance regarding Auditors, their Appointment or Removal please reach our experts at +91-7008804070