Dec 26, 20234 min read

Internal and External Audits of Companies: Definition, Purpose, Functions, and Examples

Audit is a systematic process of evaluating and improving the effectiveness of internal control systems, risk management, and corporate governance. Audits can be conducted internally by the company itself or externally by an independent party.

Internal Audits of Companies

Internal audits are audits conducted by the company's own employees. Internal audits aim to provide assurance and consulting to company management regarding the effectiveness of internal control systems, risk management, and corporate governance.

Internal audits have several important functions, including:

Helping management achieve company goals
Improving the effectiveness and efficiency of company operations
Maintaining the integrity and reliability of financial statements
Minimizing the risks faced by the company

Internal Audit Divisions

The internal audit division in a company typically consists of internal auditors, audit managers, and audit staff. Internal auditors are responsible for conducting audits, while audit managers are responsible for managing audit activities. Audit staff assist internal auditors in conducting audits.

How to Conduct an Audit

The internal audit process begins with planning. At this stage, internal auditors will determine the audit objectives, scope, and audit methods to be used.

After planning, internal auditors will collect data and information. Data and information can be obtained from various sources, such as documents, interviews, and observations.

In the next stage, internal auditors will analyze the data and information that have been collected. This analysis aims to determine whether internal control systems, risk management, or corporate governance have been effective.

If any weaknesses are found in the internal control systems, risk management, or corporate governance, internal auditors will provide recommendations for improvement.

Examples of Internal Audits

Here are some examples of internal audits:

Financial statement audit
Operational audit
Compliance audit
Information technology audit
Environmental audit

Financial Statement Audit

A financial statement audit is an audit conducted to assess whether a company's financial statements have been presented fairly in accordance with generally accepted accounting principles (GAAP).

Operational Audit

An operational audit is an audit conducted to assess the effectiveness and efficiency of a company's operations. This audit can cover a variety of areas, such as production, sales, and marketing.

Compliance Audit

A compliance audit is an audit conducted to assess whether a company has complied with regulations and requirements in force. This audit can cover a variety of regulations, such as laws and regulations, industry standards, and company policies.

Information Technology Audit

An information technology audit is an audit conducted to assess the effectiveness and security of a company's information technology systems. This audit can cover a variety of aspects, such as data security, network security, and application security.

Environmental Audit

An environmental audit is an audit conducted to assess whether a company has met the applicable environmental requirements. This audit can cover a variety of aspects, such as waste management, natural resource management, and emission management.

Internal Audit Reports

An internal audit report is a report that contains the results of an internal audit. This report typically includes an audit summary, audit findings, and recommendations for improvement.

Internal audit reports must be prepared objectively and professionally. This report must provide relevant and useful information to company management.

Differences between Internal and External Audits

Internal audits and external audits have several differences, including:

Organizer

Internal audits are conducted by the company's own employees, while external audits are conducted by an independent party, such as a public accountant.

Purpose

The purpose of internal audits is to provide assurance and consulting to company management, while the purpose of external audits is to provide an independent opinion on the fairness of the company's financial statements.

Focus

Internal audits focus more on internal controls and the effectiveness of the company's operations, while external audits focus more on testing the company's financial statements and the internal controls related to the financial statements.

Timing

Internal audits are typically conducted on a periodic basis, while external audits are typically conducted on an annual basis..

The Role of Internal Audit in a Company

Internal audit plays an important role in a company, including:

Helping management achieve company goals

Internal audit can help company management achieve their goals by providing relevant information and recommendations.

Improving the effectiveness and efficiency of the company's operations

Internal audit can help the company to improve the effectiveness and efficiency of its operations by identifying and correcting weaknesses in internal control systems.

Maintaining the integrity and reliability of the company's financial statements

Internal audit can help the company to maintain the integrity and reliability of its financial statements by ensuring that the financial statements are presented fairly in accordance with generally accepted accounting principles.

Minimizing the risks faced by the company

Internal audit can help the company to minimize the risks it faces by identifying and managing existing risks.

Improving the Effectiveness of Internal Audit

Internal audit can be improved in its effectiveness by doing several things, including:

Developing an effective audit program

An audit program is a document that contains the audit plan for a certain period. An effective audit program will help internal auditors achieve their audit objectives.

Improving the competence of internal auditors

Internal auditors must have adequate competence to conduct audits. The competence of internal auditors can be improved through training and development.

Improving communication with management

Effective communication between internal auditors and management will help ensure that the results of the audit can be used by management to improve the company's performance.

The Importance of Internal Audit

Internal audit is an important process to ensure that a company is managed effectively and efficiently. Internal audit can provide assurance and protection to the company, and help the company achieve its goals.

Conclusion

Internal audit and external audit are important processes that can help companies achieve their goals. Both types of audits have different roles and functions, but they complement each other to provide assurance and protection to the company.

We can help you develop a comprehensive internal audit program, conduct internal audit on a regular basis, and follow up on the results of the internal audit.

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