Internal and External Audit: Difference and Importance

Internal and External Audit: Difference and Importance

Ever since the announcement of VAT in the Gulf Region, the importance and necessity of auditing have been the top concern among the businesses. The business owners have become cautious and conscious of their approach. But auditing has been the pivotal part even before the VAT era. As per the new UAE Commercial Companies Law, Federal Law No. 2 of 2015, Article 27, Chapter 2, every company shall appoint auditors for auditing their books of accounts by a licensed auditor registered under Ministry of Economy in the UAE. But many companies do not follow this requirement and they may have to face the aftermath in the form of penalties and difficulty in paying their taxes.

The provisions of the newly issued federal law on taxation have mandated the Federal Tax Authority (FTA) with the legal right to perform a tax audit on any person to determine their compliance with the provisions of the relevant laws.

The FTA may perform the audit at its office or the place of business of the person or any other place where they conduct business, store goods or keep records, in which case, the person must be given a prior notice of at least five business days.

While conducting a tax audit, the tax auditor may ask for original records or copies thereof or take samples of the goods, equipment or other assets available at the person’s place of business. The tax audit will be conducted during the official working hours of the authority. The Director-General may, by way of exception, issue a decision to conduct the audit outside regular hours if necessary.

Businesses can get a decent idea of how they are doing in operations by examining company data on their own. To truly gain a good picture of whether the company is operating well and get fresh ideas on how to improve their businesses, organizations may turn to internal audit done by external firm or auditing firms in Dubai,who specializes in this area and can also do benchmarking for its client and give a constructive audit report which makes value addition to the business. Let us try and understand the meaning of internal audit, its advantages, how internal audit has evolved over a period of time, what is the process followed in internal audit and lastly how to measure the effectiveness and efficiency of internal audit.

Traditionally Internal Audit functions were set up by corporate management to assess the internal control system that management is responsible for establishing. It acted more as a control mechanism to review the financial controls of the company.  Then the scope of the internal auditor was increased to review internal controls in other areas of the business. It was moreover used as a control mechanism.

The new definition of Internal Audit is given by the “Institute of Internal Auditors” (IIA) the USA as follows: Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.  It helps the organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

The external audit involves the review and examination of the books of accounts and financial statements in line with IFRS and GAAP as well as issue opinion regarding the financial statement.

In audit we adhere to professional independence, integrity, and objectivity. Our highly trained and professional staff will help you to comply with International Financial Reporting Standards (IFRS), Generally Accepted Accounting Practices (GAAP) and other laws.

In an external audit, we are verifying the accounting records and examining other shreds of evidence supporting the financial statements. The objective of the external audit is to provide assurance to the management that the financial statement presents a “true and fair” view of the company’s financial performance.

External audit is recommended to every organization due to dynamic global market, change in business pattern and also increase in complexity of reporting standard due to mandatory compliance with GAAP, IFRS and company law requirement. External audit is compulsory for all the companies registered in the UAE.

Many times companies need to submit audited financial statements for the renewal of licenses, especially in free zone. For attaining loans/ overdraft facility or any such type of financial need, banks required an audited financial statement. We are registered as an auditor in Dubai mainland as well as in the free zones like DAFZA, JAFZA, and DMCC.

The following are the major differences between an internal audit and external audit:

  • Internal Audit is a constant audit activity performed by the internal audit department of the organization. External Audit is an examination and evaluation by an independent body, of the annual accounts of an entity to give an opinion thereon.
  • Internal Audit is discretionary, but the External audit is compulsory.
  • Internal Audit Report is submitted to the management. However, the External Audit Report is handed over to the stakeholders like shareholders, debenture holders, creditors, suppliers, government, etc.
  • Internal Audit is a continuous process while the External Audit is conducted on a yearly basis.
  • The purpose of Internal Audit is reviewing the routine activities of the business and give suggestions for improvement. Conversely, External Audit aims at analyzing and verifying the accuracy and reliability of the financial statement.
  • Internal Audit provides an opinion on the effectiveness of operational activities of the organization. On the other hand, External Audit gives an opinion of the true and fair view of the financial statement.
  • The scope of internal audit is decided by Those Charged With Governance (TCWG). As opposed to external audit, whose scope is determined by law.
  • Internal Auditors are the employees of the organization as they are appointed by the management itself, whereas External Auditors are not the employees, they are appointed by the members of the company.

Internal Audit and External Audit are not opposed to each other. Instead, they complement each other. External Auditor may use the work of the internal auditor if he thinks fit, but it does not reduce the responsibility of the external auditor. Internal Audit acts as a check on the activities of the business and assists by advising on various matters to gain operational efficiency.

Our audit approach assimilates rigorous standards of professional independence and objectivity, with a methodology that emphases on crucial risk areas and co-ordinates together our technical skill and practical knowledge commensurate with detailed knowledge of your organization and the financial services industry in the conduct each audit assignment.

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