Internal and External Audit

Abstract

The basic distinction between internal and external auditing lies in the organizational status of the auditor relative to the entity being audited. Over the past several decades, this distinction has been most highly explored and sharply developed in the private sector. In that context, “internal” means that the auditor is an employee of the business corporation while “external” refers to the professional public accountant who operates independently of his client (the corporation). The internal auditor’s examinations—as part of the overall control structure of the firm—are carried out for the benefit of managers at all levels in the firm and, accordingly, his reports go to them. By contrast, although the precise terms of the external auditor’s appointment vary from country to country, his basic purpose is to report to the owners (e.g., shareholders) whether the financial statements present fairly the current position of the firm and the results of its operations for the year just ended.