CS Annu Sharma on LinkedIn: 5 Difference Between Internal Audit and Statutory Audit

These reports point out ways that internal controls can be optimized and ideas for streamlining operations. Assurance is the process of analyzing which is used in the assessment of processes, operations, procedures, etc. It is basically the process of verifying the records available in the company’s accounting record, is as per accounting standard and principle, and it also confirms that accounting record is accurate or not.

The relevant statute or law determines the scope of work. If the report is modified, the auditor has to give reasons for the same. The primary object of this function is to aid the company management. Generally, various items of this audit work are sub-divided ‘as per operating functions and lines of management re­sponsibility’. FloQast’s suite of easy-to-use and quick-to-deploy solutions enhance the way accounting teams already work.

By Internal Audit, we mean that an unbiased and systematic appraisal function, performed within the business organisation, with the purpose of reviewing the day to day activities of the business and providing necessary suggestions for the improvement. Delegation of authority and responsibil­ity to an internal auditor is determined by the company management. The approach of internal auditor to the work is through the organisation chart and procedures manual. The approach of the Cost Audit function is to undertake a review for the purpose of determining the scope of the exami­nation of the books of cost accounts, and thereby to ensure the reliability of the cost data placed before the Cost Auditor. The basis of sub-division of cost audit work is basically determined in relation to the ‘product’ under audit and to the relevant cost statements.

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Internal Auditors are company employees which is hired by the company, meanwhile the External Auditors work for an outside audit firm and appointed by a shareholder vote. Internal Auditors help to design the company’s organising systems and help develop specific risk management policies. They also ensure that all policies implemented for risk management are operating effectively.

It has a standardised Cost Audit format, and the report may contain qualified or unqualified or adverse or disclaimer of opinion. The system binds the company to fur­nish the Central Government with full information and explanation on every reservation or qualification made in the report as per Section 233B (7) of the Companies Act. The introduc­tion of this audit is a ‘must’ for a com­pany under the orders of the Govern­ment.

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Further, it is important to note that the effectiveness of any system implemented in the organization greatly depends on the staff employed to undertake the same. An internal audit is conducted by the permanent staff of the office to detect weakness in system, procedures and for the improvement. Auditor employed by individual companies, partnership, Govt., agencies, individual and other entities are called internal auditors. These auditors may review employee performance, compliance with company regulations and financial and accounting systems. External auditors work for an independent body to assess the financal records and practices of a company.

Assurance is the assessing process, operations, procedure, etc. The main aim of assurance is to check the accuracy of financial reports. It also assures all the stakeholders that there is no misrepresentation done in financial records, no misuse of funds, no fraud, and no fraudulent activities done in a company or done by the company. The aim of internal audit is to provide an independent and objective assurance that the company’s risk management, governance, internal check and internal control systems are functioning in a satisfactory manner.

Difference between Internal Audit and Statutory Cost Audit

This certification is required by certain investors and lenders, and for all publicly-held businesses. The basic difference between internal check and internal audit is that internal check is a routine checking procedure, which involves cross-checking of every aspect of the work performed, at the time when it is performed, and recording the same. On the contrary, in internal audit, each and every component of the work is examined, by an independent staff, specially recruited for the purpose. 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.

There is a difference between both types of audits in terms of their timing i.e. when such an audit can be conducted. An internal audit can be conducted at any time of the year without giving any prior rigid announcements whereas a statutory audit can be initiated once the final accounts have been prepared by the company. Conducting statutory audit is not a regular activity of the management. An internal Auditor is usually appointed by the people in the top echelons of the management of the company. On the other hand, a statutory auditor is appointed by the shareholders or at the Annual General Meeting (AGM) of the Company for ensuring greater scrutiny. The most obvious difference is the domiciles in the nomination of the controller.

Understanding the difference between internal audit and statutory audit is very much important as both are important for building any company’s financial and fiscal reputation. Therefore, all the companies whether small or big must engage the services of auditors for smooth and sound functioning of their business ventures. The remuneration received by an auditor is also a point of difference between internal audit and statutory audit. Besides performing audits of financial statements, auditing services may also include verification that an organization is in compliance with specific regulations or laws.

The job of the internal auditor is to identify risks and weak points within the company’s processes and systems and to find errors before they can cause too much damage. For example, companies put internal controls in place to reduce the risk of errors and improve fraud prevention and detection. One goal of the internal audit process is to identify any weakness in the internal controls that could increase risks for the company. This serves both to protect the company from these issues and to ensure there are no red flags when an external auditor makes similar checks. One of the key differences between internal and external auditor is that internal auditors are employees of the company working to serve the company’s goals. External auditors tend to be public accountants working as independent auditors to assess a company’s internal control systems and accounting practices.

There are many differences in an internal audit and statutory audit and these will be highlighted in this article. The main objective of the statutory audit is to give a fair and uncommitted valuation of the financial performance of the organization at the same time to try to spot distances and fraud. Audit commits also attract to disclose anomaly and errors which can have slipped into the financial states. While the listeners of a lawful control subject their final report to the stockholders in their general meeting, the report of internal audit is put forward to the management. Once a statutory auditor has been appointed by an organization, it is quite difficult to fire him without the prior permission of the central government, even after the recommendation of the proposal by the board of directors of that organization. On the other hand, management can withdraw internal listeners at any time.

DIFFERENCE BETWEEN INTERNAL AUDITOR AND STATUTORY AUDITOR

So, for the commitment of fraud one employee has to collude with another. The examination of the books of cost accounts, statements and related activi­ties is only at the end of a year. The function is limited only to the ‘prod­uct’ for which the Central Government has ordered for audit of cost accounts.

It is a separate department, within the organisation where a continuous audit is performed throughout the year. Internal audit is not mandatory and it is the choice of the management of the company to get it done by its internal auditors. Management does not want to be red faced in case of any irregularities when statutory audit is conducted which is why, to keep a check on the operations of the company, internal audit is done. Whether an internal audit has been carried out or not, statutory audit is done that comments on the effectiveness of the financial statements of the company. It is necessary to ensure that the company is following the rules and regulations in maintaining its books and there is no compromise with the financial interests of the shareholders.

Difference between Internal Audit and Statutory Audit: A general overview

Examples of statutory audits are the audits of companies, banks, insurance, charitable trusts, corporate bodies and co-operative societies. Examples of non-statutory audits are the audits of partnership firms and individual proprietary distinguish between internal audit and statutory audit concerns. The cost auditor is independent of the company management both ‘in fact and mental attitude’. • Internal auditors are answerable to the management whereas statutory auditors are responsible to the shareholders.

External auditors can suggest changes but are not allowed to implement those changes as that would impair their independence. Internal auditors also ensure that corporate governance is functioning correctly. They may also be called upon to review the budgeting process for special projects, or to review internal processes. Internal auditors also ensure that a company is ready for an external audit. One way to point out a difference between internal audit and statutory audit is the compulsion of preparing and submission of audit report. The law does not make it mandatory for an internal auditor to prepare and present a detailed audit report to the management of the company on completion of the audit process.

It cannot embrace its activities in other products of the industry for which orders have not been issued. (b) In case of an audit firm being engaged to perform this function, such firm’s activities arc also determined as per terms of reference. The function aims at ensuring that the systems of cost and financial account­ing are efficient so that the information presented to the management through­out the period is accurate and discloses material facts.

• It can be grouped into two categories, namely, Internal Audit and External Audit.
• Contrary to it, in the case of statutory audit, the law make it mandatory for a statutory auditor to prepare and present a detailed audit report consisting of audit details to the management of the company.
• So, for the commitment of fraud one employee has to collude with another.
• Examination, review and appraisal of the company’s activities can be made con­tinuously throughout the year under the system.
• The remuneration received by an auditor is also a point of difference between internal audit and statutory audit.

The statutory cost auditor is an inde­pendent agent for and on behalf of the Government, though he earns his remu­neration from the company for such statutory services rendered. The statutory cost auditor draws his au­thority and responsibility from the Com­panies Act, by being appointed. The statutory cost auditor is responsi­ble only to the Central Government and partially to the company. In summary, internal audit helps to improve companies from the inside, while external audit ensures that what they present to the outside world reflects what really happened. Both types of audit keep the engine of our economy running efficiently and accurately. Statutory audit is authorised and governed by law or a statute; whereas the audit got done voluntarily and without any legal or statutory force is non-statutory.