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CPA Now
Jan 06, 2021

The Difference Between Internal and External Auditing

Robert Forney, CPABy Robert S. Forney Jr., CPA


Making the jump from public accounting to industry or industry to public accounting can involve a steep learning curve for young CPAs. However, understanding the similarities and differences between internal and external auditing can help guide you down the road you wish to pursue as a career.

Would you like to become a subject matter expert or a jack of all trades? Do you aspire to be an industry accounting expert or a company expert, leveraging your analysis and risk mitigation tools? It’s all a matter of preference. Both serve their purpose, but knowing the difference could show you which one suits you best.

Similarities

Internal and external auditing have many similarities. Both require similar soft skills, strong technical knowledge, objectivity, and high ethical standards.

The soft skills held by successful auditors include an inquisitive mind, professional skepticism, and a diplomatic approach to problem solving. On top of that, flexibility is a must in the ever-changing world of modern business.

Review of financial paperworkBoth technical skill sets are similar too. Both must know how to structure and employ an audit methodology that best uses the available time and resources, how to create documents that properly support the outcomes they conclude upon, noting the source, objective, and procedures performed.

They must be able to analyze individual controls that are in place, visualize the impact of deficiencies found, and conclude on the effectiveness of the control environments of their clients.

Finally, both internal and external auditors must be able to perform objective analysis of what they are reviewing while maintaining their integrity. Without objectivity and integrity, an auditor is useless.

Differences

With all these similarities, there are quite a few differences worth noting. Other than the obvious differences – such as independence considerations and the users of their reports – there are differences in expertise and CPE requirements for licensed practitioners of each.

One of the biggest differences between the two is expertise.

External auditors must be experts in accounting pronouncements, such as knowing how to apply the latest revenue recognition and leasing standards. They are masters of the financial accounting profession and must know how to best wield their review to analyze the financial statements of their clients for fairness and objectivity.

Internal auditors become experts in company culture and objectives, which they use to analyze internal controls and measure for operational efficiencies across departments and product lines.

Another difference worth noting is the CPE requirement for licensed practitioners of each group.

As company employees, internal auditors are not required to obtain the 24 A&A CPE credits per biennial period that their public counterparts are required to obtain within the 80 credits for CPA license renewal.

Other Considerations

Fraud is always an exciting topic in the world of accounting and auditing. So, which type of auditor is more likely to identify it?

According to the Association of Certified Fraud Examiners (ACFE) 2020 Report to the Nations, the internal audit function initially detects three times as many instances of fraud than external audits (15% internal, 4% external).

This is likely due to the internal auditor’s familiarity with individual business processes, trust within the organization, access to information, and scope of work.

Tips are the only method of detection that has a larger proportion of fraud identification than internal audit, composing 43% of cases sampled in the study. These rankings are consistent with ACFE’s 2012, 2014, 2016, and 2018 reports, and will likely continue because of the nature of audits.

Contribution to a company’s mission can be a motivator for a CPA joining any organization. External audits could easily be viewed as an extra burden for smaller companies looking to an audit for a bank loan or to appease industry regulators.

This may be true in some instances, but a good CPA can do more.

External auditors can become trusted advisers by providing value-added services such as answering questions regarding the latest accounting pronouncements, identifying the risks of newer technologies, and helping clients adapt their internal controls as their workforce grows.

Well-executed external audits can accomplish two broad objectives that contribute to a company’s mission:

  • They provide the needed oversight by regulators with regard to financial statements.
  • They can help up-skill management’s accounting teams, contributing to a better functioning accounting department.

Internal auditors, on the other hand, can be deployed dynamically and may work more efficiently with local management due to familiarity. Additionally, they are in the best position to contribute to the overall company mission because they only have one “client” to worry about.

They not only can perform a historical analysis of operations, but, if a deficiency is found, they also can help support management and expedite resources because of their position within a company. Additionally, they, too, can be trusted advisers when a new product line is launched or when a seismic shift within an organization causes processes to be reassigned, broken apart, or melded together.

Overall, both internal and external auditors are integral components within the business world, and both have distinct and varied strengths.

What would you rather do, become an expert in an element of accounting and apply your skill set to many companies or become an expert in a company and use what you know as a CPA to help drive efficiency and risk mitigation? One of the great things about our profession is the choice in yours.


Robert S. Forney Jr., CPA, is an Internal Auditor at WSFS Bank and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at rob.forney.cpa@gmail.com.


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Disclaimer
Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.