Difference between Internal audit & Statutory audit:- In terms of the employment of auditors, their eligibility requirements, scope of operations, level of independence, salary and payment, removal from the post, etc., there is perpetual confusion surrounding the distinction between internal audit and statutory audit. This essay goes into great length on each of these issues.
What is Internal Audit?
Internal auditing is an unbiased, impartial assurance and consultation process intended to enhance an organization’s operations. It is a methodical and thorough assessment of the governance, internal controls, and risk management procedures within an organisation. Internal audit’s main goal is to give management the assurance that operations are efficient, effective, and compliant with internal policies and procedures.
Internal audit is essential to a listed company’s ability to assure the board of directors and shareholders that business operations are being managed effectively and carefully.
In order to ensure compliance with relevant laws, regulations, internal rules, and procedures, the internal audit function of a listed business is in charge of conducting routine audits of the organization’s financial and non-financial activities.
Consider the Internal Audit department of a publicly traded industrial business as an example. The company’s financial operations, including accounts receivable, accounts payable, and inventory management, are routinely audited by the internal audit team. The team also examines the business’ non-financial operations, including procurement, production, and quality assurance.
What is Statutory Audit?
A licenced and qualified auditor conducts a statutory audit, which is an impartial examination of a company’s financial statements and accounting records. An opinion on whether financial statements have been prepared in conformity with applicable accounting standards, laws, and regulations as well as whether they are accurate and dependable is the main goal of a statutory audit.
Statutory audits, which are mandated by law in listed companies, are essential for maintaining the integrity of financial reporting and guaranteeing that investors have access to accurate and trustworthy financial data. An external auditor is chosen by the company’s shareholders to undertake the Statutory Audit.
The following tasks are primarily carried out by internal auditors:
- Verify and affirm that the company’s recorded financial assets are present.
- Provide appropriate safety advice to safeguard the assets that have been recorded.
- Interpret and analyse the internal system’s fairness.
- Value, analyse, and assess actual performance and accounting procedures in relation to standard corporate procedures.
- Analyse whether various laws and agreements are being followed.
- Examine the actual procedures and approaches to see if the outcomes are consistent with the intended goals.
- Identify, look into, and report numerous frauds, wastes, thefts, money laundering, etc.
The following actions are part of the statutory audit of the company’s financial statements:
Planning: The external auditor will prepare for the audit by learning about the operations of the organisation, identifying major risks, and creating auditing procedures to deal with those risks.
Fieldwork: To acquire evidence for his or her audit, the external auditor will test the company’s internal controls, account balances, and financial transactions.
Reporting: The external auditor will form an opinion on the company’s financial statements based on the evidence gathered. This opinion will include whether the financial statements are accurate and reliable and whether they were prepared in conformity with the relevant accounting standards, rules, and regulations.
The company’s management and board of directors will be informed of the audit results by the external auditor, who will also offer suggestions for strengthening internal controls and accounting procedures.
Difference between Internal audit & Statutory audit
The difference between an internal audit and a statutory audit cannot be distinguished by a non-specialist.
Clarification on the “internal audit vs. statutory audit” comparison will come from the following points:
An internal auditor is typically chosen by internal parties from within the company’s top management for the position. On the other hand, shareholders or the AGM (Annual General Meeting) choose a statutory auditor to ensure better accuracy.
The legal requirement is the most significant yet fundamental distinction between the two audits. An additional layer of security and a reality check of the business’s practises are obtained through internal audit. A statutory audit must be conducted in opposition to it. The government has established a number of legislation to address the failure to conduct required audits.
A statutory audit can only be started after the making of final accounts, however an internal audit is typically undertaken whenever necessary without any rigid pronouncements beforehand. It is not something the management does frequently.
For a person to be eligible for a position as an internal auditor, the government has not established any qualifying standards or educational prerequisites. Contrary to popular belief, being a statutory auditor involves meeting a number of credentials and requirements. The latter is therefore more trustworthy than the internal auditor.
The internal auditor is chosen by management, whereas a statutory auditor operates with more independence.
The main distinction is in the range of tasks that each auditor is accountable for. An internal audit carries out a number of tasks, including account analysis and numerous organisational functions. A statutory audit, on the other hand, only focuses on inspecting, identifying mistakes in, and verifying the financial reports, accounts, and related documentation. This suggests that internal audits have a wider scope than statutory audits.
Compared to the statutory auditor, an internal auditor can be fired with more ease. A statutory auditor can only be removed from their job by the AGM, while the former can be terminated at any time by the management.
Comparing Internal Audit with Statutory Audit Examples
Let’s use the example of the global corporation XYZ to better grasp the distinction between internal audit and statutory audit.
An organization’s risk management, control, and governance systems are evaluated and made more effective through the internal audit function. The internal audit team would be in charge of examining XYZ’s operational and financial systems in order to spot potential risk areas and make suggestions for controls and procedure enhancements.
For instance, to make sure that invoices are processed appropriately and promptly, the internal audit team may examine XYZ’s accounts payable procedure. In order to ensure that inventory levels are appropriately reported and that there are sufficient controls in place to avoid theft or loss, they may also examine the company’s inventory management procedure.
A licenced and qualified auditor, however, conducts an independent audit of a company’s financial statements and accounting records as part of a statutory audit. An external auditor chosen by the company’s shareholders would undertake a statutory audit in the instance of XYZ.
For instance, to make sure that XYZ’s financial accounts were prepared in conformity with generally accepted accounting standards (GAAP), the external auditor would examine them. In order to make sure that they are effective in preventing and detecting fraud and financial misstatements, the auditor would also examine the company’s internal controls.
The scope of their job is the primary distinction between Internal Audit and Statutory Audit. The main goals of internal audit are to assess and enhance an organization’s risk management, control, and governance procedures. The goal of statutory audit, in contrast, is to express an opinion regarding the veracity and accuracy of a company’s financial accounts.
Let’s imagine that XYZ has a flaw in its inventory management procedure that was discovered by the internal audit team to better illustrate this point. To resolve this flaw, the internal audit team would suggest process modifications to management. The financial statements of XYZ may not necessarily contain a material misstatement as a result of this vulnerability.
The contrasts between internal audit and statutory audit are evident from the explanation above, yet there is no disputing their respective relevance and usefulness in their respective fields.
In order to create any company’s financial and fiscal reputation, it is crucial to understand the differences between statutory audit and internal audit. Therefore, for the efficient and reliable operation of their commercial activities, all organisations, no matter how small or large, must employ auditors.