Audits have become a large part of doing business. This is especially true for those companies which are publicly traded and must comply with the mandates of the Sarbanes-Oxley Act (SOX).

SOX was created in the U.S. in 2002 as a means to decrease fraudulent accounting activity and increase transparency with how businesses control their finances. A big part of complying with SOX is the auditing process.

Internal audits are of value because the company can go through all processes and determine whether or not they are in compliance with the law, practicing company ethical standards or abiding by standardized internal policies.

External audits are also important to consider. Through legislation such as SOX, which Section 404 outlines the reporting stipulations, an external audit is an important part of compliance and companies must go through an annual audit to determine whether or not sufficient attempts to remain within the confines of the law are being made.

Here are some more differences between the two kinds of audits:

>Internal Audits

Internal audits are conducted within the organization and are done for the purpose of identifying issues, deficiencies or weaknesses. This type of audit is primarily an assessment for management to use to examine what's working, what's not and where changes can or need to be made. The internal audit is a great tool and is performed by someone internal to the organization.

When problems can be quickly and accurately identified, fixing issues can come much easier before something goes wrong. This can be especially true in terms of corporate governance. Some may consider an internal audit as a "pretest" of sorts before the external auditors come in to ensure compliance is occurring. Internal audits help ensure that controls are in place that abide by company policy and legislative mandates.

With internal audits, companies determine the scope of the audit and choose which processes they want examined.

>External Audits

External audits are conducted by an outside party and are done for the benefit of shareholders. The audit focuses on whatever parameters is set by an external entity, such as governmental law.

Most of the time external controls have a focus on financial reporting and much of their concern is related to the information shared on financial statements. A primary concern of external auditors is going to be whether or not any fraudulent or illegal activity is occurring. In addition, waste may be another area that auditors are concerned with.

External auditors are usually not as concerned with internal operations, unless it impacts the integrity of the areas they need to examine.

Both internal and external audits serve a valuable purpose. The former can be used as a good tool and source of information to improve and address issues before they become problems, whereas the latter is usually more concerned with ethics, compliance and a generalized overview of the integrity of the organization.

Learn more about this author, Leigh Goessl.
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