The Pros & Cons of Internal vs External Auditors

Auditing is the verification of assertions made by management about a company's financial statement. An audit can be conducted by an internal auditor, who is an employee of the company, or an external auditor, who is a third-party contractor.

The purpose of auditing is to provide independent assurance that assertions made by management are true and fair. This article will compare and contrast the roles of internal vs external auditors.

What are External Auditors? 

An external auditor is an independent certified public accountant who is contracted to do audits, assessments, and other accounting services for businesses. 

The purpose of external auditors is to determine whether or not a company's financial statements are accurate and whether or not the company's accounting procedures follow all relevant laws and regulations. As part of their duties, auditors make sure that the numbers portrayed by the company's financial reports and records are reliable. 

Internal audits assess more than just the financial and regulatory procedures of a company; they look at the whole scope of the company's operational risks, as well as the efficiency with which those risks are managed and the impact those risks have on the company's goal and organizational performance.

What are Internal Auditors?

An organization's internal auditors are its own workers who are responsible for creating unbiased reports on the business's operations, finances, and performance. By improving operational effectiveness, financial health, and the quality of strategic decision-making, businesses can achieve their ultimate goals via internal auditing. 

A firm may, for instance, conduct an internal audit of its stock-keeping procedures. The inventory tracking system would be examined by the auditor to see whether or not it correctly represents the supplies that a business now has and whether or not there are any glitches or inconsistencies in the system.

Internal vs External Auditors: Pros & Cons

Pros of Internal Auditors

To improve decision-making, internal auditors can identify the root causes of issues and provide relevant information for formulating and evaluating strategic options.

Internal auditors can help find operational issues and inefficiencies, which can be fixed and make operations more efficient. Due to the focused nature of an audit's investigation, it can shed light on where the problem may lie. It is possible to conduct a follow-up internal audit to determine whether or not the company's new policies and processes have achieved their intended outcomes after they have been implemented.

Internal Auditors help to determine whether the measures you've put in place to prevent potential dangers are effective. Audit reports will outline your next steps for fixing problems.

When conducting an internal audit, it is important to verify that you are following all applicable laws, rules, and industry best practices. When anything is amiss, internal auditors will give you advice on how to fix it.

Cons of Internal Auditors

Internal auditors are usually the employers of the company being audited, their reports may not be independent. External auditors often disagree with findings made by internal auditors.

Since internal auditors may not be certified chartered accountants, they lack the knowledge and experience to do their work efficiently. It may be difficult for smaller businesses to afford to spend time and money on establishing and maintaining an internal auditing system. However, usually larger businesses do internal audits.

Pros of External Auditors

External auditors may help business owners find mistakes in their accounting procedures. When company owners rely on inaccurate financial data, they risk making poor judgments. In addition, external audits assure that firm owners are keeping their books under widely recognized accounting standards (GAAP). 

To ensure accuracy, financial data for businesses must be prepared in accordance with Generally Accepted Accounting Principles (GAAP).

An unbiased third party conducts external audits. The external auditors have never worked with any of the company's administrators or employers before. So, there is no need to worry about retaliation at work while conducting an audit.

External auditors are professionals who devote their whole attention to the audit. It's possible that internal auditors have additional obligations that get in the way of their auditing work.

Cons of External Auditors

An independent party does an external audit. The costs of conducting an external audit can't be overlooked. Because contractors normally charge more for auditing work than they would in permanent employment, external auditor fees will typically be greater than those of internal accounting employees. It may be more cost-effective to recruit a full-time auditor if you'll require monthly audits in the long run.

If the external auditor gives the company a negative assessment, it may seriously damage the business's standing in the marketplace. It may also cause investors to pull their money out of the firm and lose faith in its future. The possibility of this happening is another huge con of an external audit. 

Although the likelihood of this occurring is very low assuming the organization is following ethical practices, it is nevertheless possible. Negative findings in an external audit report might have far-reaching effects on a company.

As part of the auditing process, an external auditor would likely want access to classified data, such as internal employee compensation information and customer billing records.

In most cases, you'll also need to provide the external auditor with credentials to view your company's internal financial records and files. Although if you have the auditor sign a nondisclosure agreement, sensitive information may still be at stake.

HSE Audit Checklist

Companies shouldn't put off HSE audits at all costs since they have so many advantages. Use the HSE Audit Checklist to confirm compliance, build confidence among investors, and identify safety issues.

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Conclusion: Internal vs External Auditors

Internal audits are essential, but external audits have a higher probability of finding compliance concerns. Through coordinated efforts, the company and its external auditors can assure accurate reporting and appropriate implementation of standards.

Overall, external auditors usually perform better than internal auditors, as they have a greater chance of being unbiased. Internal auditors are usually more closely related to the people who own the company, which may allow them to be more effective.