What’s the Difference Between an Internal Auditor and an External Auditor?

business woman at her desk

As an auditor for eleven years with two of the big eight accounting firms and an internal auditor for ten years, Bill Blix, MBA, CPA, has extensive experience in evaluating internal controls and the auditing field. His positions have ranged from staff auditor to the head of the internal audit department. Auditing, a major function of accounting and finance, involves examining an organization's (or individual's) financial records to determine if they are accurate and in accordance with any applicable rules, regulations, and laws. In addition to serving in a CPA capacity, Bill is an Associate Professor in the Forbes School of Business & Technology™, instructing on best practices and helping students prepare to move into different functions of the accounting world, such as auditing.

Who are Internal Auditors?

Internal auditors are employees of the company, and the manager of the internal audit department usually reports to an audit committee. Audit committee meetings are usually held on a quarterly basis, and the results of the audits performed are discussed with the committee. The audit department has no restrictions as to what department they audit, and the audits are not announced in advance.

What Do Internal Audits Include?

The audits of the company departments will include the documentation of the flow of transactions, using a flow chart in order to evaluate internal controls and the development of an audit program to test a sample of transactions. The results of the audit are documented in an audit report and discussed with the department manager.

There are many practical, and similar, applications of internal and external auditing.

Small companies generally do not have an internal audit department, but medium and large companies hire accounting graduates at an entry level as staff auditors. Future advancements may include senior, supervisor, and manager promotions.

Internal auditors do not develop financial statements, but rely on internally generated financial statements to audit financial results. The Institute of Internal Auditors is a professional organization that offers the Certified Internal Auditor designation after meeting education and experience requirements and also passing an exam. The requirements to take the exam do not require a bachelor’s degree but require a combination of education and experience.

Who are External Auditors and What Do They Do?

The external auditor is not an employee of the company but is employed by an independent accounting firm. There are four large CPA firms that audit the largest companies in the world. The company desiring an audit hires the auditing firm to audit and express an opinion on the financial statements. This audit and opinion (see Reports on Audited Financial Statements) is required by public companies, but not private companies. They perform similar audit duties as the internal auditors, such as flowcharting department operations and testing transactions. In larger companies, they will not duplicate the duties performed by the internal audit staff, but they will review their audit results.

The Importance of Audits in the Working World: Enron

In 2002, a former employee of Arthur Andersen who worked for Enron in the controller’s office disclosed that Enron was hiding millions of liabilities in limited partnerships that it owned. This disclosure prompted the partner of Arthur Andersen to shred all Enron working papers. Within a month, Arthur Andersen collapsed, and 5,000 employees were without a job. After the Enron collapse, the Sarbanes-Oxley act was instituted in 2002, and the Public Company Accounting Oversight Board (PCAOB) was created to oversee and discipline CPAs and public accounting firms that audit public companies. Multiple mergers then occurred leaving the big eight accounting firms as the big four: Ernst & Young, Deloitte & Touche, KPMG, and PriceWaterhouseCoopers.

Requirements to Practice

Each state has different requirements to take the certified public accounting exam, but most states require a bachelor’s degree in accounting and 30 hours of graduate courses. The exam is a 16-hour, computer-based test, consisting of four parts that are taken at independent testing sites in most large cities. The American Institute of Certified Public Accountants regulates the requirements and the test.

While there are many practical applications of accounting and finance, internal and external auditing is a popular choice for those who have pursued the proper certifications. To learn more about building a foundation in accounting, explore your options at the undergraduate level or at the graduate level.

 

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Written by William Blix, Associate Professor, Forbes School of Business and Technology™

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