COMPARISON BETWEEN EXTERNAL &

INTERNAL AUDIT
External Audit Internal Audit
1. Auditors are appointed by the owners Auditors are appointed by the
of the organisation management of the organisation
2. Scope of work is determined by the Scope is defined the management
particular statue
3. The main concern of Auditor is to Internal auditors are concerned with the
collect the adequate and reliable evidence compliance of various policies, rules and
to support his opinion as to the truth and procedures, compliance with applicable
fairness of the Financial Stmnts laws and GAAP
4. Auditors are directly responsible to the Internal auditors do not have any freedom
owners and in some cases to the third to report to the outsiders.
parties
 Basic Types of Audit
Depending on

Independence and interference of the Functional classification

client

Statutory Audit, Statutory Audit

Statutory Statutory cost
or Cost Audit, Internal Audit of a Company
Special Audit audit
or Tax Audit or a LLP
 Classification of types of Audit
(i) Based on ORGANISATIONAL STRUCTURE
• Voluntary/Private Audit-Non-statutory Audit of sole
trader,partnership firms(except u/s 44AB) . May be conducted
voluntarily because of advantages

• Statutory Audit-Required by Law. Covers Companies(governed by

Companies Act,2013),Govt. body (C&AG),Insurance Cos. (IRDA)

• Government Audit: Government auditing is the objective,

systematic, professional and independent examination of
financial, administrative and other operations of a public entity
 DIFFERENCE BETWEEN STATUTORY AUDIT &
GOVERNMENT AUDIT
Basis Statutory Audit Government Audit
Applicability Applicable to Applicable to
(a) All private companies (a) Government
(b) All co-operative departments
societies (b) Statutory corporations
(c) Proprietorship and (c) Government companies
partnership
concerns in some cases.
E.g. Tax
audit under section 44AB
of the
Income Tax Act.
 Contd..
Basis Statutory Audit Government Audit
Appointing (a) In case of private (a) In case of government
Authority companies: departments: Comptroller
shareholders. and
(b) In case of sole Auditor General
proprietor and (b) In case of statutory c o r
partnership: proprietor or por
partners. ation : as per the
(c) In case of trust: trustee provisions of
or the special statute for that
Managing corporation.
Commi t tee . (c) In case of government
(d) In case of co-operative company: Company Law
societies: Board, on the ad- vice of
Managing Committee with the
prior Comptroller and Auditor
approval of the Registrar General.
Report submitted to the owners/ Report is submitted to the
Shareholders as per Shareholders & copy to
Companies Act,2013 C&AG
 Types of Government Audit
• Audit of operations of a PUBLIC ENTITY
• The Comptroller & Auditor General (CAG) of
India is the Supreme Audit Institution
• Types:
(a) Transaction audit
i. Expenditure Audit-ensure that there is provision of funds
authorized by competent authority fixing the limits within which
expenditure can be incurred
ii. Receipts Audit
(b) Efficiency cum Performance Audit
i. Economy Audit ii. Efficiency Audit iii. Effectiveness
 Contd…Classification of types of Audit

(ii) BASED ON OBJECTIVE OF AUDIT

• Independent Financial Audit- conducted by a qualified auditor at the request of a
client,which may be a sole-proprietorship, partnership, non-profit organization or
any other entity. May be compulsory under some Acts

• Internal Audit-Independent management function, which involves a continuous and

critical appraisal of the functioning of entity with a view to suggest improvements
thereto and to add value and strengthen the overall governance mechanism of the
entity
• Cost Audit-Audit of Cost records
• Management Audit-
(a)Comprehensive & thorough examination of organisation
(b) Identify problems/weakness in the organisation, provides management with
tool to address & repair the problem area.
 Contd..
© Now widely accepted in business field.
• Tax Audit
(a) Main objective is to compute TAXABLE INCOME & maintain transparancy in
Financial statements filed with IT Department
(b) Compulsory u/s 44AB of Income Tax Act(Total sales,turnover or gross
receipts exceeds Rs. 1 Crore in case of business & Rs.50 Lakh in case of profession,
in any previous year)
• Secretarial Audit- Audit of Secretarial & related records.
• Forensic Audit-Forensic audit is an examination & evaluation of a firm’s or
individual’s financial information for use as evidence in court. The objective is to
find out whether or not true business value has been reflected in the Financial
Statements and in the course of examination to find whether any fraud has taken
place.
• Information Security Audit-Audit of computer based information. An examination
of the management controls within an IT infrastructure. Required due to:
(i) The consequences of losing the data resource;
(ii) The possibility of misallocating resources because of decision based on
incorrect data or decision rules
 Contd..
(iii) The possibility of computer abuse if computer systems are not controlled;
(iv) The high value of computer hardware, software, and personnel;
(v) The high costs of computer error;
(vi) The need to maintain the privacy of individual persons; and
(vii) The need to control the evolutionary use of computers.”

• Social Audit-A social audit is a way of measuring, understanding, reporting

and improving an organization’s performance towards meeting its social and
ethical objectives.Increases efficacy and effectiveness of the organization’s CSR
programmes
Advantages- (i) Encourages community participation among business entities
(ii) Promotes collective decision making & sharing responsibility
(iii) Builds customer satisfaction & trust through ethical practice
(iv) Develops human resources
• Environment Audit-Systematic & periodic review of operations and practices
related to meeting environmental requirements
 Contd..
• Propriety Audit-
(a) not just concerned with the truthfulness and fairness of the Financial
Statements and books of accounts of the client, but also ensures that the
transactions entered into by the client, business practices and activities undertaken
are not against public interest
(b) It is an essential element of a Government Audit. C&AG examines the
propriety of all government expenditures to ensure that they have been incurred in
the interest of the general public
• Operational Audit-Examination of all the operations and activities of the
entity under audit. Main objectives include-
(a) The examination of the control structure of the entity
(b) It provides an appraisal of whether the department is operating in conformity
with prescribed standards and procedures laid down by the management.
(c) It checks whether capacity utilization in production department and
achievement of short term targets in marketing departments and other activities
(d) It is more useful in an entity where the management is at a distance from
actual operations
 Contd..
(iii) BASED ON TIMING OF AUDIT:
• Continuous Audit(Usually performed by Internal Auditors)-
(a) examination and verification of a firm’s financial transactions and their
supporting documents, continuously throughout the year, at regular or irregular
intervals.
(b) generates alarm triggers that provide advance notice about anomalies and
errors detected by the system.
© focuses on testing 100% of transactions,Increases efficiency & accuracy of
accounts
(d) Involves surprise visits,more check on staff
(e) Reduces pressure at close of Financial year- Early preparation of Final accounts

• Annual Audit-Annual Audit is conducted at the end of the accounting year, after
the books of accounts have been closed
• Interim Audit-Interim audit is an audit conducted between two annual audits. It may
be conducted for a specific period, such as a quarter or half year, with an interim object
of declaration of interim dividend or valuation of shares on a certain date, in case of
mergers.
 Contd..
Balance Sheet Audit- Generally synonymous with statutory
audit. auditor reviews and critically examines the Financial
Statements, which include the Balance Sheet and Profit & Loss
Account prepared by the management

(iv) BASED ON SCOPE OF AUDIT

(a) Complete Audit-scope of audit is not confined to specific limits,
which may be set by the management or any other authority
(b) Partial Audit-Non statutory audit, which restricts the scope of
the auditor to checking of certain specific aspects only.
(c) Detailed audit-It involves checking of transactions from the
time of their recording till their final effect on the Financial
Statements