What is the difference between an internal and an external audit?

Čo v článku nájdete:

• Internal audit: a tool for management and prevention
• External audit: independent verification
• Does a company need both an internal and an external audit?
• Conclusion: audit as part of healthy corporate governance

Audit is generally a systematic and independent process of reviewing selected areas of a company’s operations. It is most often associated with checking accounting records and financial statements, but its significance is broader. The aim is not to look for mistakes at any cost, but to objectively assess whether a company operates correctly, transparently and in accordance with applicable legislation and internal rules.

The two types of audit we encounter most often are internal and external. Although they share the goal of increasing the transparency and reliability of a company’s operations, their role, scope and benefits differ. While one primarily serves the company’s management as a tool for governance and control, the other provides independent confirmation of credibility to external stakeholders.

If a company wants to set up its audit properly, it is important to understand the differences between these two forms. In this article, we explain what an internal audit is, what an external audit is, and when each type is most suitable for a company.

Internal audit: a tool for management and prevention

Internal audit is part of a company’s internal governance. In most cases, it is carried out by an internal employee or department, or by an external professional who works primarily for the company’s management.

The main objectives of an internal audit are to identify weaknesses in processes, prevent errors, improve management efficiency and support the proper design of internal procedures.

It examines processes, control mechanisms, risk management, the efficiency of operations and compliance with internal policies. It is therefore an ongoing tool for control and optimisation. It is particularly valuable when a company is growing rapidly, expanding its team or dealing with increasingly complex operations. The results of an internal audit are primarily intended for the company’s management and are not an official confirmation for external stakeholders, as is the case with an external audit.

External audit: independent verification

External audit is performed by an independent auditor or audit firm. It provides an objective and impartial assessment of a company’s financial statements and selected areas of its operations. Its independence is its greatest value.

The main objective of an external audit is to verify whether the financial statements give a true and fair view of the company’s financial position. The result is an audit report that carries significant weight for third parties.

For many companies, an external audit is also a legal obligation. When does a company become subject to a statutory audit?

An audit is required by law for accounting entities that meet at least two of three statutory criteria during an accounting period:

• Total assets exceed €4,000,000;
• Net turnover exceeds €8,000,000;
• The average number of employees exceeds 50.

Tip: Statutory limits may change as legislation is amended, so it is always advisable to verify the current conditions with an audit or accounting professional. If you need advice in this area, you can also contact our experts.

Despite the statutory obligation, some companies commission an external audit voluntarily. This is particularly the case when they want to strengthen their transparency, credibility or negotiating position. Thus, even when a company has no statutory obligation, an audit can be a strategic advantage — for example, when negotiating with a bank or investor, or when planning to sell the company.

Does a company need both an internal and an external audit?

Many companies ask whether one type of audit is sufficient, or whether it makes sense to combine an internal and external audit. The answer depends on the company’s size, its objectives and the complexity of its business. In practice, however, these two types of audit are not mutually exclusive.

Internal audit helps a company manage risks on an ongoing basis and improve processes from within. It is flexible, can take place regularly throughout the year and responds to the current needs of management. It serves as a preventive tool that makes it possible to identify weaknesses before they cause financial or reputational damage.

External audit, on the other hand, provides an independent and objective assessment for external stakeholders. Its main value is credibility: it confirms the accuracy of financial statements and thereby strengthens the company’s position with investors, banks and business partners.

For smaller companies, an external audit may be sufficient (where it is mandatory or strategically necessary). Larger and fast-growing companies, however, often use both types so that they can keep their internal processes under control while maintaining a high level of credibility in the market.

Conclusion: audit as part of healthy corporate governance

Properly designed auditing is an important part of modern and responsible corporate governance. Internal audit supports the efficient operation of a company from within, helps manage risks and improve processes. External audit provides independent confirmation that financial information is correct and strengthens credibility with third parties.

The decision about which type of audit a company needs should therefore be based not only on legislative requirements, but also on the company’s strategic objectives. An audit can be a powerful tool for growth, preventing problems and building company value.