All you need to know about the differences between internal and external audits

In the dynamic landscape of corporate governance in Ireland, both internal and external auditing stand as pillars of assurance and oversight within organisations, ensuring comprehensive cross-sectoral analysis.

The two types of audits complement each other, collectively contributing to integrity, transparency, and organisational trust.

Internal audits by internal audit departments or outsourced firms focus on enhancing operational efficiency and risk identification and ensuring regulatory compliance.

On the other hand, external audits by independent auditors provide an objective assessment of financial records. It also promotes trust and confidence among stakeholders and regulatory bodies.

Understanding the alignment between internal and external audits in Ireland is essential for companies to navigate the complexities of governance, compliance, and stakeholders’ trust.

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What is an internal audit?

An internal audit is an independent and objective evaluation of an organisation’s systems, internal processes, and risks.

These audits are conducted by the internal audit department or outsourced to independent contractors. The primary focus of an internal audit is to provide insights and recommendations that improve organisational operations and governance.

The advantages of internal audit are as follows

  • Risk management: An internal audit in Ireland helps an organisation identify and mitigate specific risks and ensures that potential problems are identified early and thus prevented.
  • Compliance and governance: An internal audit ensures compliance with Irish financial regulations, corporate governance, and industry standards.
  • Business improvements: Recommend operational improvements, cost savings, and resource optimisation.
  • Tailored insights: Corporate auditors have a deep understanding of a company’s operations and culture, resulting in tailored and appropriate recommendations.
  • Continuous improvement: Internal audit helps in continuous cultural learning, improvement, and development within the organisation.

The disadvantages of internal audit

  • Conflict of interest: Internal auditors might face conflicts between their duty to the organisation and their objectivity.
  • Resource intensive: Internal audits require significant time, human resource, and financial resources.
  • Limited external perspective: They might overlook industry-wide best practices due to their internal focus.
  • Potential management pressure: There could be pressure from the management to gloss over specific issues to maintain a favourable image.

What is an external audit?

An external audit in Ireland is concerned with an audit of financial statements to express an audit opinion.

It is usually performed annually by an external third party with no connection with the company.

It is usually mandatory once the company or the group reaches a certain threshold.

The advantages of external audit

  • Credibility and trust: External audits assure stakeholders, including shareholders, creditors, and regulatory bodies, ensuring the reliability of financial statements.
  • Compliance: Ensure compliance with Irish financial regulations and accounting standards.
  • Objective assessment: Offer an impartial, third-party view of the financial position, reducing the chances of manipulation or bias.
  • Industry best practices: External auditors bring expertise from auditing various companies, offering insights into industry best practices.
  • Enhanced accountability: Due to their independence, external auditors uphold a high level of accountability in their assessments.

The disadvantages of external audit are as follows

  • Cost: External audits can be expensive, especially for smaller businesses, impacting financial resources.
  • Limited Scope: Focus primarily on financial statements and missing insights into operational efficiencies or internal controls.
  • Periodic Nature: Conducted annually or semi-annually, they may not offer real-time insights into the company’s operations.
  • Potential Strain on Internal Resources: The process can demand considerable time and resources from the internal team to collaborate with external auditors.

What are the key differences between internal audit and external audit?

This chart summarises the key differences between internal and external audits.

PointsInternal auditExternal audit
PurposeTo assess and improve an organisation’s internal processes, controls, and risk management.The purpose is to give an audit opinion on whether the financial statements provide a true or fair view.  
FocusInternal processes and controls.Financial statements.
Relationship with the companyAn employee of the company conducts it.A registered professional outside of the company conducts it.
FocusContinuous improvement and meeting strategic goalsFair reporting of financial or other compliance matters.
IndependenceThe people concerned are primarily senior management and employees.The people concerned are not employees appointed by the shareholders.
ReportingUsually, reports are addressed to the Chief internal auditor, audit committee or Board of directors.The report is addressed to the shareholders.
PerspectiveHistorical and the future.Primarily historical.
FrequencyIt is continuously carried out throughout the year.Usually, it is conducted at the end of a financial year.
Professional designationThe auditor requires no professional designation, though many are usually accountants or hold qualifications in internal audit.An audit firm performs this audit.
LiabilityTypically, they are not liable for their findings.External auditors may be legally liable for issuing incorrect audit opinions.
Records accessibilityUsually, full access.Limited, as determined by the management.

Bottom line

In conclusion, internal and external audits are crucial in ensuring an organisation’s integrity, compliance, and operational efficiency.

While each type has its distinct advantages and limitations, a balanced approach integrating both can provide a comprehensive evaluation of an organisation’s overall health and credibility.

Integrating the strengths of both types of audits can help companies achieve optimal performance while maintaining accountability and transparency.