External audit and internal control review are two distinct processes that organizations undertake to ensure effective financial management, risk mitigation, and compliance. While they both contribute to assessing and enhancing internal controls, they have different objectives, scopes, and responsibilities. The following table outlines the key differences between external audit and internal control review:
Internal Control Review
To express an independent opinion on the fairness and reliability of the organization’s financial statements
To assess and evaluate the effectiveness of internal controls and risk management processes
Focuses on financial statements, including income, balance sheet, and cash flow statements, as well as accompanying disclosures
Encompasses a broader scope, including financial and operational controls, risk management practices, and compliance with policies and regulations
Conducted by external auditors who are independent of the organization
Conducted by internal auditors or external consultants who may or may not be independent, depending on the circumstances
Provides an audit opinion in the form of an audit report that expresses an opinion on the fairness of the financial statements
Provides a report or assessment on the effectiveness of internal controls and risk management processes, including identified weaknesses and recommendations for improvement
Focuses on compliance with applicable accounting standards, laws, regulations, and auditing standards
Assesses compliance with internal policies and procedures, as well as relevant laws and regulations
Typically conducted annually as part of the financial statement audit
Conducted periodically or as needed, depending on the organization’s risk profile and internal audit plan
The responsibility of external auditors who are engaged by the organization’s management or appointed by shareholders
The responsibility of the internal audit function or other designated individuals or departments within the organization
Conclusion: In summary, external audit focuses on expressing an independent opinion on the fairness and reliability of the organization’s financial statements. It is conducted by external auditors who are independent of the organization and provides an audit report with an opinion on the financial statements. On the other hand, internal control review assesses and evaluates the effectiveness of internal controls, risk management processes, and compliance with policies and regulations. It is conducted by internal auditors or external consultants and provides a report or assessment on the organization’s internal control environment. While external audit primarily focuses on financial statements and compliance with accounting and auditing standards, internal control review has a broader scope, encompassing financial and operational controls, risk management practices, and compliance with internal policies and external regulations. Both processes contribute to enhancing an organization’s governance, risk management, and control practices, albeit with different objectives and areas of focus.
Audit risk and control risk are two fundamental concepts in the field of auditing. They are used to assess and manage the risks associated with conducting an audit engagement. While both risks are related to the audit process, they have distinct meanings and implications.
Table: Difference between Audit Risk and Control Risk
The risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
The risk that a misstatement in an assertion or the underlying transaction level will not be prevented, detected, or corrected by the entity’s internal controls.
Inherent to the audit process and arises due to the possibility of errors, fraud, or other misstatements in the financial statements.
Specific to the effectiveness and reliability of an organization’s internal control system in preventing or detecting material misstatements.
Assessed by considering the combination of inherent risk, control risk, and detection risk.
Assessed by evaluating the design and implementation of internal controls within the organization.
Impact on Audit
High audit risk increases the likelihood of the auditor issuing an incorrect or inappropriate audit opinion, compromising the credibility of the audit engagement.
High control risk indicates a higher likelihood of material misstatements not being prevented or detected by the entity’s internal controls, which may require the auditor to perform more substantive procedures.
Managed and controlled by the auditor through appropriate planning, assessment of risk, and the application of audit procedures.
Managed and controlled by the entity’s management through the design, implementation, and monitoring of effective internal controls.
Focuses on the overall risk of the audit engagement and the auditor’s responsibility to express an appropriate opinion on the financial statements.
Focuses on the effectiveness of internal controls in mitigating the risk of material misstatements in the financial statements.
Mitigated through the application of audit procedures, including substantive testing and tests of controls, to obtain sufficient and appropriate audit evidence.
Mitigated through the design and implementation of effective internal controls, monitoring their operation, and remediation of control deficiencies.
Audit risk is a combination of inherent risk, control risk, and detection risk, where control risk is one component.
Control risk is a specific component of audit risk that relates to the effectiveness of internal controls in preventing or detecting material misstatements.
Conclusion: Audit risk and control risk are essential concepts in auditing that address different aspects of the audit process. Audit risk pertains to the overall risk associated with the possibility of issuing an inappropriate audit opinion when the financial statements are materially misstated.
It considers inherent risk, control risk, and detection risk. Control risk, on the other hand, focuses specifically on the risk associated with the effectiveness of an organization’s internal controls in preventing or detecting material misstatements. Control risk impacts the auditor’s assessment of the entity’s internal controls and may influence the nature and extent of substantive procedures performed. Both audit risk and control risk are managed and mitigated through appropriate planning, risk assessment, and the application of audit procedures and internal controls, respectively.
Auditing is the independent examination of financial statements or any other subject matter in order to give the assurance that the financial statement complies with the acceptable financial reporting framework
In many countries, auditing is mandatory to companies listed on the stock exchange authorities and is required by many banks when companies are seeking loans
The following is the importance of auditing to the economy of any country
it increase the faith of investors who want to invest in companies
Auditing provides reasonable assurance to the users of financial statements that the financial statements have no material misstatement which can lead to the wrong decision to the user.
One of the key users of financial statements are investors who want to invest their capital in companies.
When investors know that the independent third party (auditor) have given an unqualified opinion on the financial statement then they will easily be convinced to invest their money in the company
Auditing help companies to seek loans from money lenders
To be sure of the company’s transactions and financial position banks require the companies who seek loans from them to submit the audited financial statements.
Through audited financial statements the lenders are able to know the assets and liabilities of the companies.
Auditing helps the companies to improve their processes and increase efficiency
Through auditing, auditors test internal controls and when they find a weakness in the internal control they provide a recommendation that rectifies or removes the weakness.
Internal controls help the company to achieve its objectives by minimizing the risk associated with achieving the objectives.