In the world of accounting, two types of audits are commonly conducted: internal audits and statutory audits. While both audits serve the purpose of examining an organization’s financial records, they differ in terms of their objectives, scope, and audience. In this blog, we will discuss the difference between internal audit and statutory audit, along with their key features.
Internal Audit
An internal audit is an examination of an organization’s financial records and internal controls by an independent party, usually an internal audit department. The objective of an internal audit is to provide an objective assessment of an organization’s operations and help management identify areas for improvement. Here are some key features of an internal audit:
Objective
The objective of an internal audit is to provide assurance that an organization’s internal controls and risk management processes are functioning effectively. An internal audit typically focuses on the effectiveness, efficiency, and economy of an organization’s operations.
Scope
The scope of an internal audit is determined by the organization’s internal audit department. It can cover all aspects of an organization’s operations, including financial, operational, and compliance areas.
Frequency
Internal audits are typically conducted on a regular basis, such as quarterly, semi-annually, or annually.
Reporting
Internal audit reports are prepared for management, and the findings and recommendations are used to improve the organization’s operations.
Statutory Audit
A statutory audit is an examination of an organization’s financial records by an independent auditor who is appointed by the government or regulatory body. The objective of a statutory audit is to provide assurance that an organization’s financial statements are true and fair. Here are some key features of a statutory audit:
Objective
The objective of a statutory audit is to provide an opinion on an organization’s financial statements. The auditor’s opinion provides assurance to stakeholders, such as shareholders, investors, and lenders, that the financial statements are true and fair.
Scope
The scope of a statutory audit is determined by the regulatory body or government agency that requires the audit. It typically covers the financial statements and notes to the financial statements.
Frequency
Statutory audits are typically conducted annually, although the frequency may vary depending on the regulatory requirements.
Reporting
Statutory audit reports are prepared for the stakeholders, such as shareholders, investors, and lenders. The auditor’s opinion is included in the organization’s annual report, which is made available to the public.
Differences between Internal Audit and Statutory Audit
Here are the key differences between internal audit and statutory audit:
Objective
The objective of an internal audit is to provide assurance that an organization’s internal controls and risk management processes are functioning effectively. The objective of a statutory audit is to provide assurance that an organization’s financial statements are true and fair.
Scope
The scope of an internal audit is determined by the organization’s internal audit department and can cover all aspects of an organization’s operations. The scope of a statutory audit is determined by the regulatory body or government agency that requires the audit and typically covers the financial statements and notes to the financial statements.
Audience
Internal audit reports are prepared for management, while statutory audit reports are prepared for the stakeholders, such as shareholders, investors, and lenders.
Frequency
Internal audits are conducted on a regular basis, such as quarterly, semi-annually, or annually, while statutory audits are conducted annually.
Another key difference between internal audit and statutory audit is the level of independence of the auditor. In an internal audit, the auditor is usually an employee of the organization or a consultant hired by the organization. While they are expected to be objective and independent, there may be potential conflicts of interest, such as a fear of losing their job or a desire to please their employer. On the other hand, in a statutory audit, the auditor is an independent third party who is appointed by a regulatory body or government agency. They are required to adhere to strict ethical and professional standards, and are expected to be completely objective and independent in their examination of the financial statements.
Another difference is the level of detail of the audit. In an internal audit, the auditor may examine the organization’s processes, controls, and systems in detail to identify areas of improvement. They may also provide recommendations for improvement and work with management to implement those recommendations. In contrast, a statutory audit is primarily focused on verifying the accuracy of the financial statements and ensuring compliance with relevant laws and regulations. The auditor will typically review the financial statements and supporting documentation, and may also perform tests of the organization’s internal controls to ensure their effectiveness.
In terms of cost, internal audits are typically less expensive than statutory audits. Internal auditors are salaried employees or consultants hired by the organization, so their fees are included in the organization’s operating expenses. In contrast, statutory audits are usually more expensive because the organization is required to pay the fees of the independent auditor appointed by the regulatory body or government agency.
Conclusion
In summary, internal audit and statutory audit serve different purposes and have different objectives, scope, audience, and frequency. While they both provide assurance on an organization’s financial records, they differ in their level of independence, level of detail, and cost. Organizations should carefully consider their needs and requirements before deciding which type of audit to conduct.
Read more useful content:
Frequently Asked Questions (FAQs)
What is an audit?
An audit is an examination of an organization’s financial records and operations to ensure compliance with laws and regulations, and to provide assurance that financial statements are accurate and complete.
Why do organizations need audits?
Organizations may need audits for a variety of reasons, such as complying with regulatory requirements, attracting investors, obtaining loans, or improving internal controls.
What is the difference between an internal audit and an external audit?
An internal audit is conducted by an organization’s internal audit department or a consultant hired by the organization, while an external audit is conducted by an independent third-party auditor.
What is a statutory audit?
A statutory audit is a type of external audit that is required by law or regulation. It is typically conducted to ensure compliance with laws and regulations, and to provide assurance that financial statements are accurate and complete.
Who performs audits?
Audits are typically performed by certified public accountants (CPAs) or other qualified auditors who are trained to examine financial records and operations.
What is the audit process?
The audit process typically involves planning, fieldwork, reporting, and follow-up. During the planning stage, the auditor will determine the scope and objectives of the audit. During fieldwork, the auditor will examine financial records and operations. During reporting, the auditor will issue a report with their findings and recommendations. Finally, during follow-up, the auditor will ensure that any recommendations have been implemented.
What is the purpose of an audit report?
The purpose of an audit report is to provide assurance to stakeholders, such as shareholders, investors, and lenders, that an organization’s financial statements are accurate and complete.
What is an audit trail?
An audit trail is a record of all transactions and activities that have been performed in an information system. It is used to track changes, identify errors, and ensure the integrity of the system.
What is a management letter?
A management letter is a report that is issued by an auditor to management with findings and recommendations for improving internal controls and operations.
How often should an organization conduct an audit?
The frequency of audits depends on the organization’s needs and regulatory requirements. Internal audits may be conducted on a regular basis, such as quarterly, semi-annually, or annually, while statutory audits are typically conducted annually.
