Business owners often use "audit" as one word, but there are two quite different services behind it. Knowing which one you need saves time and money.
External audit
An external audit is an independent examination of your financial statements by an auditor who is not part of your organisation. The purpose is to give an opinion on whether the statements present a true and fair view. Banks, regulators, investors and shareholders rely on that opinion. External audits are usually done once a year, after the year-end.
Internal audit
Internal audit looks inward and runs throughout the year. It reviews how the business operates: whether controls work, whether policies are followed, where fraud or waste could occur, and how risks are managed. Its audience is management and the board, and its aim is to help the organisation improve.
Side by side
- Main question. External: are the financial statements fairly stated? Internal: are our processes and controls working?
- Timing. External: annual. Internal: ongoing, on a risk-based plan.
- Reports to. External: shareholders and other stakeholders. Internal: management and the board.
- Focus. External: financial reporting. Internal: operations, controls, compliance and risk.
Which one do you need?
If a law, lender or investor requires audited accounts, you need an external audit. If you want to find weaknesses before they become losses, for example in procurement, inventory or payroll, internal audit is the tool. Many growing businesses benefit from both, with internal audit making the external audit smoother.
This article is general information, not tax, legal or financial advice. Rules change and every business is different, so speak to a qualified professional about your situation.
