Statutory Audit vs Internal Audit

Internal audit takes into consideration if business practices are helpful to manage the business and meet related strategic objectives – it can cover both operational as well as financial issues. Statutory audit takes into consideration whether the annual accounts give an impartial and fair view and are prepared according to several legal requirements. The process of statutory audit is conducted by a practicing Chartered Accountant. The process of internal audit is described as a limited one and managed generally by a qualified person to audit the governance of an organization, manage risk etc. In this article, we look at the differences between statutory audit and internal audit.

Statutory Audit

Statutory audit is an audit by a practicing Chartered Accountant which has its operations exterior to the organization which it is auditing. Statutory Auditors are a part of the external audit process are focused on the various financial accounts or risks associated with the domain of finance and are appointed by the shareholders of the company. The chief responsibility of statutory auditors is to perform the process of annual statutory audit of the company’s financial accounts, providing opinions if they are an impartial and fair reflection of the company’s financial position. As part of this effort, statutory auditors by means of the statutory audit process often deal with the examination and evaluation of internal controls to manage the risks that could possibly affect the financial accounts, to decide if they are working as according to intended plans.

Internal Audit

Internal audit is a function that, even though operating independently from other departments and involves reporting directly to the audit committee, the function remains within an organization i.e. the company employees. It is essential for performing audits of both financial and non-financial nature within a wide of areas of operation in a business, as that are directed by the annual audit plan. Internal audit looks at main risks facing the business and what action is being taken to manage those risks in an effective manner, to help the organization achieve its various objectives. For example, they may look at risks threatening a company’s reputation such as the employment of cheap labor in foreign countries, or the strategic risks such as producing too many products in comparison to available resources etc.

Statutory Audit vs Internal Audit

• Internal audit is limited to the governance of an organization, management controls over the operations of an organization and risk management. External audit is related to the reports on financial statements of the corporate entity.
• External audit is a legal requirement while internal audit is conducted based on the personal resolve of the business owners to measure the operation’ efficiency as conducted by the business.
• External audit is performed by an external auditor or audit firm while the process of internal audit is performed by the firm’s employees, nevertheless, an audit firm can also be selected and appointed to conduct the process of internal audit.
• Internal auditor is selected or appointed by the company while the selection of the external auditor is at the shareholder’s annual general meeting.
• External audit is performed while maintaining in perspective the various requirements of any acceptable financial reporting standards while no such rules hold for internal audit.
• Internal auditor by means of the internal audit process is responsible to report to the management or audit committee while statutory auditor as part of the statutory audit process reports to the company shareholders.