Understand the main differences and the cooperation between internal auditing and external auditing with a succinct and effective explanation
When we approach the cooperation between internal auditing and external auditing, we first need to understand their differences. Internal auditing is a function that, although operating independently of other departments and reporting directly to the auditing committee or president of the entity, resides within an organization (that is, they are employees of the company or outsourced). It is responsible for carrying out audits (financial and non-financial) within a wide range of areas within a company, as indicated by the annual audit plan. The internal audit focus is on the main risks faced by the company and what is being done to manage those risks effectively, to help the organization achieve its objectives. For example, they may look at risks to the company's reputation, such as the use of cheap labor in foreign countries, or strategic risks, such as the production of many products, compared to available resources, assessment of internal controls, and so on.
In the current economic scenario, developing a strategic vision is one of the main challenges for internal auditing. Your professionals need to verify and evaluate operations to effectively minimize the likelihood of fraud or errors. Thus, the main objective of internal auditing services is to add value and improve an entity's operations through a systematic and disciplined approach that evaluates and improves the efficiency of risk management, control, and governance processes.
Internal auditing professionals need to understand not only the company's internal processes, but also the business area in which it operates. They must be highly qualified and have extensive experience in different business areas, develop strategic vision and easily identify the risks to which the company is vulnerable.
These professionals have a high strategic vision and offer services that help transform the company's internal auditing function, expanding coverage, improving quality and increasing efficiency, using experienced professionals and advanced methodologies and tools to carry out internal auditing.
Internal audit plans also assist in the establishment of a plan that allows an appropriate balance between the activities of compliance , risk management and opportunity development. In reviewing the structure, internal auditing assists the company in the development of mission and policies, creating a risk-based auditing plan, analyzing its people model options, and selecting appropriate methodologies and technologies.
Internal auditing also offers process auditing focusing on risks and controls, that is, specific actions that help the company achieve its strategic objectives through a disciplined and systematic approach to improve risk management, processes, and governance controls.
Other various services are offered by internal auditing professionals, such as auditing focused on financial integrity, which involves balance sheets, costs and internal alignment of the company and certification of controls to comply with Sarbanes-Oxley laws, and also technical and operational auditing, which performs audits on information technology, contracts with third parties and joint ventures, evaluation of royalties, rights and obligations.
External auditing, on the other hand, is suitable for different company sizes, as it is a fundamental procedure for corporate governance. External auditing comprises a systematic and independent examination of an organization's books, accounts, legal records, documents, and receipts to determine how the financial statements, as well as non-financial disclosures, present a true and appropriate picture.
The independent auditor perceives and recognizes the propositions. You take exams, obtain evidence, evaluate it and formulate an opinion based on your judgment, which is communicated through your audit report. So how do we understand the cooperation between internal auditing and external auditing?
What can be analyzed by the external audit? The purpose of the external audit is to provide an assurance to third parties and various interested parties that the matter is free from relevant distortion. The term is most often used for external auditing of financial information. Other areas that are commonly audited include: accounting auditing, internal auditing, internal controls, quality management, project management, water management, and energy conservation, etc. As a result of an audit, stakeholders can effectively evaluate and improve the effectiveness of risk management, control, and the corporate governance process.
The origin of the term “audit”: The word audit is derived from the Latin word “audire”, What does it mean to listen . During medieval times, when the accounting manual was predominant, auditors in Britain would often hear the accounts read to them and ascertain that those involved in the organization were not negligent or that there was fraud. Nowadays, external auditing offers a multitude of contributions on technical-accounting issues, taxes, internal controls, corporate governance, business advice, internal auditing, risks, compliance and many related topics.
An external audit is an independent examination of the financial statements prepared by the organization. It is generally carried out for statutory purposes (because the law requires it), but hiring an external auditing firm can support corporate governance with diagnoses, accounting and tax issues, internal controls, and numerous related issues.
An audit results in an audit opinion as to whether the financial statements give a “true and appropriate” picture of the organization's financial and economic position and operations for the period. Uma external auditing may be conducted as part of the annual audit or as a special review for specific periods and areas. It is carried out by a registered firm of accountants with recognized professional qualifications, such as the CRC, CVM, IBRACON, CPA, ACA, or ACCA.
External auditing belongs to the organization, which means that the auditor must not have been involved in keeping the accounting records and not be personally connected in any way with the organization to be audited. The auditor and auditing firm must comply with standards and document the procedures that guarantee this independence, which is subject to oversight by regulatory entities such as CRCs and CVM.
The purpose of the external audit: The purpose of the external audit is to verify that the annual accounts provide a true and appropriate image of the organization's finances; and that the use of the funds is in accordance with the objectives and formal objects of the entities. It is not the primary role of auditing to detect fraud, although this can obviously come to light during the checks that take place.
The purpose of external auditing in improving processes: The auditor only has a limited amount of time to plan, execute, and complete their work. Thus, the auditor focuses on testing the validity of a sample of operations and results, rather than vigorously verifying everything. The audit should be a positive experience and not one to be dreaded; it's an opportunity to receive feedback on the strengths and weaknesses of the systems. Use your auditor to discuss ways to improve your accounting systems and procedures and always encourage the submission of a letter of recommendation, which summarizes findings, highlights weaknesses, and makes recommendations for improvements.
A external auditing it is an independent body that resides outside the organization that is the auditing. They are focused on the financial, accounting, and economic information or risk associated with the finances and are appointed by the shareholders/owners of the company. The main responsibility of the external audit is to carry out the legal review of the annual accounts (quarterly or biannual) of the financial information, providing an opinion on whether they are a true and appropriate reflection of the company's financial position. As part of this, external auditors must often examine and evaluate the internal controls implemented to manage risks that may affect financial, accounting, and economic information, to determine if they are working as expected.
Understand how cooperation between internal auditing and external auditing can help with corporate governance, acting as a team to obtain better results
Although internal auditing, external auditing, and auditing committees have different roles, their functions often intersect. External auditors may utilize the work of internal auditors to the extent permitted by auditing and regulatory standards. The auditing committee, in turn, hires the external auditor and often oversees the internal auditing work.
The intersection between audits Cooperation between internal auditing and external auditing is sometimes an undefined point in practice. Over the past few years, there have been occasions when external auditors relied on the work of internal auditors without a sufficient basis to do so.
As a result, external auditors may be unwilling or unable to rely on the work of internal auditors. Audit committees may be reluctant to have internal auditors work much like an extension of external auditors, testing internal controls when internal auditing has many other functions.
The aspects between cooperation between audits Efforts to intersect functions between internal auditing, external auditing and auditing committees can be crucial for raising the level of corporate governance, so this process can take into account the following aspects:
Frequent communication between external and internal auditors can eliminate duplication of work and improve the quality of the audit. Formal and informal communication channels between the auditing committee, external auditors, and internal auditors are necessary. Internal auditors receive training on the auditing evidence that external auditors may desire. Audit committees can act as intermediaries in managing expectations for external and internal auditors, and can facilitate communication between them. The role of internal auditing in external auditing should not be considered less relevant than the other internal auditing services provided to the organization. In circumstances where external auditors frequently engage with internal auditing, they are well placed to share with the auditing committee their observations of internal audit performance. THE ROLE OF AUDITING COMMITTEES IN THE CAPITAL MARKET Auditing is extremely important for the capital market, as it helps ensure that the financial information disclosed by companies is accurate and reliable. This is critical so that investors can make informed investment decisions with lower risk.
Auditing is an independent process of reviewing a company's financial statements, carried out by an external and independent auditor, who verifies that the accounting and financial information provided is accurate, reliable, and in compliance with applicable accounting standards and principles.
Investors benefit from the information provided by the audit in a variety of ways, such as increasing the reliability of the financial information provided by the company, allowing investors to make more informed investment decisions. Another benefit is the identification of risks and opportunities, as auditing helps identify financial and business risks, as well as growth opportunities, allowing investors to better assess the risks and opportunities associated with an investment.
Auditing also helps ensure that the company complies with applicable rules and regulations, thus minimizing the risk of fines and other sanctions, which may negatively affect the value of the company's shares. In addition, it provides investors with greater transparency about the company's accounting and financial practices, allowing them to better understand how the company operates and how it uses its resources.
In this context, audit committees are bodies created by publicly traded companies to assist in overseeing the company's auditing, internal control, and financial disclosure activities. These committees are comprised of independent members of the company's board of directors with skills and knowledge in finance, accounting, and corporate governance.
The role of auditing committees is extremely important for the capital market, as they act as an additional line of defense to guarantee the integrity and transparency of the financial information disclosed by companies.
Some of the key responsibilities of auditing committees include: Oversight of auditing activity: the auditing committee is responsible for overseeing the activities of the external auditor, including the selection and appointment of the auditor, as well as the evaluation of the auditor's performance; Internal control monitoring: the auditing committee is responsible for monitoring the effectiveness of the company's internal control, including the identification and assessment of financial and business risks; Review of financial statements: the auditing committee is responsible for reviewing the company's financial statements prior to disclosure to ensure that they are accurate, reliable, and in compliance with applicable accounting standards; Oversight of financial disclosure: the auditing committee is responsible for overseeing the company's financial disclosure, ensuring that financial information is disclosed in a transparent and consistent manner; Corporate governance assessment: the auditing committee is responsible for evaluating the company's corporate governance, including policies and practices related to risk management, business ethics, and regulatory compliance; Audit committees play a crucial role in the capital market, assisting in overseeing the auditing, internal control, and financial disclosure activities of publicly traded companies. By ensuring the integrity and transparency of financial information, audit committees help maintain investor confidence in the capital market and promote a culture of responsible and ethical corporate governance.
Cooperation between internal and external auditing is crucial to ensure a comprehensive and effective assessment of an organization's internal controls, processes, and financial reporting. Both internal and external auditing play distinct but complementary roles in evaluating corporate governance and mitigating risks. Learn more about our auditing services:
Get in touch with TATICCA Allinial Global Brazil , which provides integrated auditing, internal auditing, accounting, tax, corporate finance, financial advisory, risk advisory, technology, business consulting and training services, for more information, at www.taticca.com.br or e-mail taticca@taticca.com.br and learn more. Our company has certified methodologies for carrying out activities.
