Question

Distinguish between the roles of an internal and an external auditor. Cite at least two examples of auditing procedures that might reasonably be expected of an internal auditor but not an external auditor. Which type of auditor would you rather be? Why?

Answer 1

An internal auditors reports to the management of the company. The basic objective of an internal audit is for the auditor to add value and suggest measures which can be useful to run an organization's operations effectively.

An external auditor reports to the external stakeholders of the company. The objective of an external audit is for the auditor to give an opinion on the past financial transactions and whether the representation of these transactions in a company's financial statements presents a true and fair view of the company's operations.

Examples of auditing procedures which will be deployed by an internal auditor and not an external auditor are as follows:

A) An internal auditor shall study the delegation of authority document of a company and determine what threshold is required for what activity. Suppose all invoices above $10000 shall go to the CFO for approval. He might suggest that this monetary limit be brought down to $ 5000, as he may see a risk of fraud for transactions conducted between the $5000-$10000 bracket.

B) An internal auditor may look into the frequency of preparation of bank reconciliation statements. He might suggest that these be prepared more frequently say fortnightly for the company to have a better control on its funds.

I would rather be an internal auditor of the organozation as he/she dives into the intricate details of the working of the organization and truly suggests measures to strengthen the procedures. Value addition is done to a greater extent by the internal auditor.