Many company leaders see audit as a task related to compliance, and that’s a fair—if overly simplified—definition for external audit. Once per year, an external auditor will perform an annual examination and issue an objective report regarding the financial statements. This regulated activity has an impact on the reputation and financial health of a business. Internal audit is neither specifically tied to regulation, nor is it a single, time delineated task. It is, however, more vital to the ongoing resilience of the business. The effort is more flexible and tailored to the goals and qualities of the entity, and (if done well) is performed throughout the year to monitor company practices and risks.
As you’d expect, the professionals tasked with external and internal audit are fundamentally different as well. External auditors are, as the title implies, not employed by the business they’re reviewing. They report to shareholders as an objective third party. Internal auditors are more likely to work for or as a close regular consultant for the business. In addition to reporting, they may help to design and implement processes and policies.
Common Audit Functions
Both are important roles for a bank positioned for sustainable health and potential growth opportunities. You already know that an objective third party professional is necessary for your annual external audit. To help you determine what the resources can do for you, we’ve created a checklist of functions.
The Audit Purpose
- Confirmation that financials records have been prepared in accordance with legal requirements and are both fair and true = External Audit
- Confirmation that business practices (including financial) enable the business to manage risks and meet strategic objectives regularly = Internal Audit
The Audit Agenda
- Set internally based on business risks and objectives = Internal Audit
- Set by an outside firm = External Audit
The Audit Report
- Looks at specific risks and objectives for the business with a goal to help the business move forward, and likely includes a section with recommendations for improvement = Internal Audit
- Formatted to required Auditing Standards and focused on compliance = External Audit
- Issues may be reported separately to directors in a 'management letter' = External Audit
The Audit Follow-up
- Tailored follow-up based on needs and recommendations = Internal Audit
- None, until a historic review during the planning stage for the following year = External Audit
The Value of Internal Audit
Because Internal Audit is more discretionary, it can be perceived as an unnecessary expense, particularly for small and medium-sized entities. But it is a vital, flexible resource. Because your internal auditor may be in-house or outsourced, the key to a successful engagement is identifying an individual or team of people who bring the skills and personality that fits your business.
A good internal auditor should bring a list of qualifications, including:
- An accounting background
- The ability to report to an audit committee and other stakeholders
- Knowledge of regulatory specifics, deposit and lending compliance, and disclosures
A great internal auditor brings those ‘hard skill’ qualifications, as well as valuable ‘soft skills’ such as:
- High attention to detail (Type A)
- Highly principled
- Communicates with tact to put you, the audit committee, shareholders, and regulators at ease
- Ability to report and position you confidently and safely before regulators arrive
HORNE believes that internal audit is an indispensable resource and that a good ‘cultural’ fit can determine the lasting value of an engagement. We work as members of your team to know your priorities, challenges, and requirements. We have both the care—and the courage—to share the truth about the business in a way that is helpful and focused entirely on positioning you for lasting financial health.
Join the conversation and receive updates of new posts: