Question

what is the importance of an external audit function in an organization that has an internal audit function

Answer 1

An internal audit is undertaken by members of your own staff who have a vested interest in the success of your company. An external audit, on the other hand, is an audit conducted by an independent agency or firm that has no connection to your business.

Unlike an external audit, the findings of an internal audit are not published or made available to all. Their findings are only forwarded to the management.

Now even if an internal audit reports points out to the shortcomings of the company or the errors in the financial statements, the management may not take corrective action.

They can choose to ignore such findings and then there will be no benefit gained from the internal audit.

An external audit provides an impartiality that the in-house internal audit team cannot. While internal auditors can’t help but be personally invested in the outcome of their findings, there are no concerns over repercussions for the external auditor if the organisation is unhappy with their report. This absence of bias is hugely important for reinforcing the credibility of a company’s financial statements and general financial health.

Key business stakeholders as well as relevant revenue and review committees can be assured of a thorough investigation into an organisation’s finances and accounting processes, with an external auditor on board. This credibility is particularly important to small and start-up companies, as well as companies that may have suffered a data breach and thus be working to repair their reputation and restore faith in customers, shareholders and the public.

In light of increasing regulation, employing an external auditor serves to strengthen company practice within the remit of government compliance. It is the job of an external auditor to identify areas of non-compliance, as well as any issues with fraud or abuse within the organisation. An external auditor is likely to dig deeper to unearth these vulnerabilities because they are removed from the business and can cast a fresh and objective eye over it.

In addition to pinpointing areas where compliance efforts may be lacking, the role of external audit will also highlight other areas for improvement. It is the external auditor’s job to locate any factions of the business where processes could be tightened in order to reduce waste and inefficiency. They will make recommendations to key decision makers within the organisation to enhance internal controls or perhaps implement automation in order to streamline business and accounting practices.

The job of external audit can also incorporate training for a company’s internal audit team. Comparing modes of analysis between the internal and external auditor can improve the former’s performance moving forward and ultimately strengthen the audit capabilities of the organisation.

External auditors provide important and valuable insight into the information that exists within an organisation. Their findings and audit processes give businesses the confidence and reassurance that their information and the way they conduct business is suitably kosher.