Internal Audit vs External Audit: What You Need to Know

Consider when you are about to undergo an end of year financial audit and identify a material financial variance a week or so before the scheduled audit. Records are left uncorrected and error eradication traced months later, when a well-formed internal process would have picked them up. It is a typical situation many companies have to deal with because once there is a little slip there is a big risk. Being aware of the difference between Internal Audit vs External Audit assists companies in establishing tiers of responsibility and up-front surveillance. These audits do not only make their value in matters of conformity, but in measures of maintaining healthy financial circumstances and risk resilience systematic after extended periods of time.

With the development of regulatory frameworks in the gulf region, particularly, the implementation of e-invoicing in Saudi Arabia and e-ivoicing in Riyadh, businesses are forced to adapt their audit procedures to the new norms. Having an understanding of the purpose, role and advantages of both Internal Audit vs External Audit enables the companies to be ahead of any financial anomalies, great legal compliance, and assures stakeholder satisfaction. This guide will lead you through the discrepancies in span, reporting, autonomy and timing- so that you might find your place in leading your organization with force and command.

What is an Internal Audit?

Internal audit is an objective and independent assessment process that happens to be performed by the internal team of an organization. The aim is to evaluate and enhance risk control systems, risk management procedures and governance procedures. Internal audits are also part of the best practices, particularly in industries facing a fast rate of digitalization such as the ones facing e-invoicing in Saudi Arabia, avoiding problems before they pose a threat to compliance.

Important Characteristics of an Internal Audit:

•  Performed by the employees or internal audit departments.
•  Is orientated on the enhancement of operational efficiency and internal controls, as well as on compliance.
•  Reports are retained in the organization to be used by the management and the audit committees.
•  Conducted either regularly, systematically or on occasion depending on internal risk drivers.

What is External Audit?

To verify the accuracy of financial accounts presented by a specific company, an external audit is carried out by an impartial third-party practitioner, typically a certified public accountant. It is a compulsory audit that is applied in publicly listed firms and provides an assurance to the shareholders, lenders and regulators about the fairness of the financial reporting.

Major features of an External audit:

•  Undertaken by the auditors that are independent of the organization to the maximum extent possible.
•  Concentrates on financial statements accuracy and compliance with any regulatory rules.
•  Results are disclosed to external stake holders such as regulators, investors and the people.
•  Legal and professional standards operate which are conducted on an annual basis.

Internal Audit vs External Audit: Scope and Responsibilities

Comparing Internal Audit and External Audit, it is important to familiarize yourself with the domains of their responsibilities.

Internal Audit Responsibilities:

• Assess the system of internal controls and track policies compliance.
•  Dissuade and detect fraud, or inefficiency in operations.
•  Suggest betterment at departments and processes.
•  Track risk and aid strategic decision on long-term basis.
•  Offer insidership to governance and oversight work teams.

External Audit Responsibilities:

•  Ensure that the financial statements are true and fair.
•  Make sure that the company follows international standards of accounting (IFRS, GAAP).
•  Select material misstatements or the fraud.
•  Provide a formal opinion on audit that the stakeholders can trust.
•  Inform regulators and bank lenders of the reports.

Regulatory Frameworks: Who Sets the Rules?

During the comparison of Internal Audit and External Audit, there are various norms and authorities by which there is their structure and expectation:

•  A guideline or mandate of the Institute of internal auditors (IIA) directs internal auditing mostly on policies and frameworks on corporate governance. Not applicable to everyone, yet they are stipulated in particular spheres, particularly those which are heavily regulated.
•  It has been legislated that companies undergo external audit, especially when they are publically listed. In Saudi Arabia, the police ineffectively ensure regularity in public transport system and poor rule of law.
•  External auditing will be required in all the companies listed in Tadawul at least once a year.
•  The auditors have to adhere to the rules of SOCPA (Saudi Organization for Chartered and Professional Accountants).
•  The CMA (Capital Market Authority) and other authorities of the government have the authority to review reports.

Independence in Internal Audit vs External Audit

In Internal Audit vs External Audit independence is essential to achieve objectivity and credibility.

Internal Auditors:

• They work in the organization but are independent of operations.
•  Key to reporting: report to the audit committee or the board.
•  Make sure not to audit any of the areas in which they have involvement in operations.

External Auditors:

• Has to be totally independent of the client.
• May not possess financial interests, neither to have close relationships, nor to participate in internal decisions.
•  Independence enhances the confidence of people and audit credibility.

Timing: When Do Audits Occur?

Internal Audit- flexible and on going

Internal audits are flexible and can be aroused by internal risks or management issues. Audits can be scheduled by the companies:

•  On a monthly, quarterly or transition basis of the system.
•  As reaction to the regulatory trends or the concerns within the company.
•  Depending on requests in audit committees or risks assessment.
•  The flexibility enables firms to keep up with goals in the operations and emerging regulations such as e-invoicing in Riyadh.

External Audit – Fixed and Legally Mandated

External audits are done along a rigid yearly calendar which usually coincides with the financial year end of the company. At the Kingdom of Saudi Arabia:

• Listed Companies are obliged to report audited statements within 90 days after the end of the year.
•  The timing is associated with filing taxes, meeting investors and stock market rules.
•  The lateness of audits may attract fines, regulatory fines or market mistrust.

Reporting: Internal vs External Audit Reports

Internal Audit Reports:

•  The information exchanged only among the organization (management, audit committees, etc.).
•  Formed to detect risks, suggest variations and fulfill conformity.
•  Ask it to contain action plans, follow-up reviews and control recommendations.

External Audit Reports:

•  Disclosed to the outside world of shareholders, regulators and the investing populace.
•  Include an opinion in the formal audit (e.g. unqualified, qualified, adverse).
•  Trust by impact investors, share prices and legal status.

Internal Audit vs external audit has one major distinction, which is reporting structure, when it comes to transparency and accountability to the public.

Conclusion:

To sum up, it is important to realize that Internal Audit vs External Audit are the two most distinct entities of any business that wants to remain transparent, efficient, and in control. Internal audits facilitate constant checks and internal improvements, whereas external audits help in giving credibility and confidence to the regulators and investors. Compliance requirements such as e-invoicing in Saudi Arabia are increasing by the day, hence the need by businesses to ensure both types of audit are prioritized in order to remain legally compliant and operationally sound.

Furthermore, with the evolution of financial systems in various regions like e-invoicing in Riyadh, business entities should learn to be pro-active in the area of audit to reduce risks associated with the same and escaping at the 11th minute. By capitalizing on the advantages of Internal Audit and the External Audit, the government can improve its governance, fast decision-making process, and the trustworthy relationship with the stakeholders. The firms which have successfully integrated both the audit functions respond well to being in a position to grow and achieve long-term success whereby the environment has become very regulated.