Internal auditors are employed to educate management and staff about how the business can function better. External auditors, on the other hand, have no such obligations. They are responsible for reviewing financial statements to ensure that they are accurate and conform to GAAP. Their findings are then reported back to shareholders, rather than management. They must assert whether financial statements are free of material misstatement, whether due to error or fraud.
It is a legal requirement for all financial statements from public companies to be audited by a third-party accountant, in accordance with the Securities Act of and the Securities Exchange Act of Many companies choose to employ an internal auditor, despite not being legally obligated to do so.
Robust internal audits are viewed as a key way to correct issues quickly, maintain a good reputation, and prevent money from being wasted. Reports filed by internal auditors IA can help companies to prosper and operate at maximum efficiency. For this reason, many executives view them as a necessary expense. Internal auditors also set the company up for success when it's annual external audit comes around. The job of an internal auditor is essentially to help catch and fix issues before an external auditor has the chance to so do.
Institute of Internal Auditors. Association of Certified Fraud Examiners. Government Publishing Office. Accessed Sept. Securities and Exchange Commission. Career Advice. Your Privacy Rights. An internal audit is conducted by the permanent staff of the office to detect weakness in system, procedures and for the improvement. Auditor employed by individual companies, partnership, Govt. These auditors may review employee performance, compliance with company regulations and financial and accounting systems.
Statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account; detect errors and frauds even though they have certain differences which are as follows:. Distinguish between Internal Audit and Statutory Audit An internal audit is conducted by the permanent staff of the office to detect weakness in system, procedures and for the improvement.
While internal auditors are appointed by the management of the company, statutory auditors are appointed by the shareholders of the company.
Another difference lies in the qualifications of the auditors. While it is mandatory for statutory auditors to be certified chartered accountants, it is not necessary for internal audit and the management may appoint persons it deems fit. The main objective of statutory audit is to give a fair and impartial assessment of the financial performance of the organization while at the same time try to spot any discrepancies and frauds.
On the other hand, the following benefits relating to provision of direct assistance by the internal auditors cannot be ignored: There will be a strengthened relationship between the external and internal auditors through a more effective dialogue With the knowledge of the internal auditors, the external auditor can gain additional insights into the entity The external auditor can use internal auditors who may have relevant expertise in particular areas, and The external audit team can focus on the more significant audit issues.
Guidance on determining if it is appropriate for internal auditors to provide direct assistance When can internal auditors be used to provide direct assistance?
Click to enlarge image Step 1: Prohibition by law or regulation The external auditor may be prohibited by law or regulation from obtaining direct assistance from internal auditors; therefore, the first task is to understand the law or regulation of the jurisdiction in which the auditor is operating. Click to enlarge image It should be noted that the main purpose here is to evaluate threats to objectivity.
The following situations are likely to support the objectivity of the internal auditors: The internal audit function reports to those charged with governance eg the audit committee rather than solely to management eg the chief finance officer The internal audit function does not have managerial or operational duties that are outside of the internal audit function The internal auditors are members of relevant professional bodies obligating their compliance with relevant professional standards relating to objectivity.
What can be assigned to internal auditors providing direct assistance? Click to enlarge image The external auditor should have performed the assessment of the first two factors when determining whether the internal auditors can provide direct assistance in the first instance. ISA Revised states that internal auditors cannot carry out procedures when providing direct assistance that: Involve making significant judgment in the audit Relate to higher assessed risks of material misstatements where the judgment required in performing the relevant audit procedures or evaluating the audit evidence gathering is more than limited Relate to decisions the external auditor makes in accordance with ISA Revised regarding the internal audit function and the use of its work or direct assistance Relate to work with which the internal auditors have been involved and which has already been or will be reported to management or those charged with governance by the internal audit function.
This restriction intends to minimise self-review threats. Responsibilities of the external auditor using internal auditors to provide direct assistance The external auditor should note the following responsibilities at different stages of the audit when using internal auditors to provide direct assistance: 1 After determining the use of internal auditors to provide direct assistance The external auditor has to: Communicate the nature and extent of the planned use of internal auditors with those charged with governance in accordance with ISA , Communication with Those Charged with Governance so as to reach a mutual understanding that such use is not excessive in the circumstances of the engagement.
Evaluate whether the external auditor is still sufficiently involved in the audit. From internal auditors stating that they will: i keep confidential specific matters as instructed by the external auditor and ii inform the external auditor of any threat to their objectivity.
It is therefore expected that such supervision and review will be of a different nature and more extensive than if members of the audit engagement team perform the work. Remind the internal auditors to bring accounting and auditing issues identified during the audit to the attention of the external auditors. Check back to the underlying audit evidence for some of the work performed by the internal auditors.
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