External vs. Internal Auditors: Where to go?

              When finishing up college and starting the job hunting process, the big question most accounting students have is do I want to go into the tax or auditing field?  The problem is most students are focusing too much on the big picture rather than looking at the different aspects of what these two major fields of accounting have to offer.  In the case of auditing, a student can choose to practice internal or external auditing, both of which are similar but different in many unique ways.  Theses differences are what students should consider when thinking about choosing a career in auditing so that they may chose the right avenue of auditing and ensure themselves an exciting and rewarding career.

External Auditors’ Roles and Responsibilities

            External auditing companies seem to be more dominant on the college campus. Students learn about external auditing firms and job opportunities from faculty members and other peers. Because of this students might have a little better understanding of what an external auditor does.  For those who are not so sure, an external auditor is an accounting professional who performs audits on the financial statements of a company, government, or any other legal entity or organization, and who is independent of the entity in which they audit.  An external auditor is important because many outside people, such as investors, government agencies, and the public rely on the reports of the external auditors to provide an unbiased opinion of the organization being audited.  Within these opinions, the auditor states any concerns about the company that might be important to the shareholders and public, such as, for example, the going concern of a company.  Also, external auditors may mention if they had any major problems during the audit, which could misrepresent the financial statements.  The goals of the auditors are to make sure that the financial statements are free of misrepresentation.

            External auditors are not only responsible for full audits of companies and entities, but they also provide services such as reviews of financial statements and compilations. Reviews are much simpler than a full audit, because the auditor is only in charge of tying numbers to the general ledger, question management about some items, analytical procedures and sometimes give focus on only the major accounts.  Analytical procedures are methods used by auditors to evaluate financial statement accounts by studying and comparing the relationships between financial and nonfinancial data.  For example, auditors may compare current year account balances to previous year’s balances. 

Compilations are even easier than reviews.  Compilations are when an accountant performs few to none auditing procedures, but its primary goal is to compile the financial statements.  Compilations do not provide any assurance on the financial statements being prepared.

Another new job of external auditors arose in 2002 when the Sarbanes-Oxley Act was passed.  The Sarbanes-Oxley Act was passed because many business failures were arising, corporate fraud was on the upswing, and many financial statements had to be restated, because internal controls were not adequate enough.  The Sarbanes-Oxley Act does not apply to all companies, generally only to those on the stock exchange or with market capitalization of over $75 million.  The Sarbanes-Oxley Act now requires that the auditor must also now report an opinion on the effectiveness of the internal controls of a company.  In order to do so, the auditor must perform tests to gather enough evidence to see if the internal controls are effective and efficient, compliant with laws and regulations and reliable for financial reporting (Banks and McConnell).

External Auditing:  The Job

            External auditors mainly work for public accounting firms or are self employed.  They are usually salary based, and require at least an undergraduate degree, but getting advanced education is helpful.  Also, passing the CPA exam is extremely beneficial and encouraged among public accounting firms to make the auditor more creditable.  It is also important to pass the CPA exam when going into external auditing, because the SEC requires any reports to be filed by a CPA.  Being an external auditor sometimes requires extensive traveling to the different client locations, and much of the auditing work is done on site at the client’s place of business (Auditor Job Description).

Internal Auditing:  Roles and Responsibilities

            Unlike external auditors, internal auditors do not give any opinion about the financial statements to the public, but rather the job of an internal auditor is to make sure that their company or entity’s internal controls are running smoothly and to be on the look out for mismanagement, waste or fraud.  They do this by investigating their company’s financial and information systems, management procedures, and internal controls.  Internal controls, which are set by management, that are being examined by the internal auditors are the processes that the Board of Directors, management and personnel use to be able to do their jobs.  It is also their responsibility to review their company’s operations by making sure they are efficient, effective and compliant with policies and regulations. 

            When auditing their company, the internal auditors look at the various data from the different departments within the organization to make sure the whole company is efficient.  Internal auditors also have the responsibility to research and document issues they might come across within the company, and make suggestions about improving any procedures that are inefficient.  Management and the Board of Directors plan the activities of a company, and the internal auditors help by giving advice to management and the Board of Directors about how to better carry out the activities and their responsibilities. If the company gets audited by external auditors, it is the job of the internal auditors to help the external auditors get the information needed, answer questions, and help solve discrepancies so that the external auditors can perform an accurate audit (Bureau of Labor Statistics). 

            Internal auditors monitor the company’s risk management processes, as well.  Risk management is how a company sets objectives, then after setting the objectives, finds, analyzes and acts on the risks that are associated with the objectives set.  It is the job of the auditors to follow how management handles the risks that were found within the objectives, to make sure that management has accurate procedures and to be able to have an accurate plan of audit engagements, which is an internal auditing standard.

Internal Auditors:  The Job

Typically, larger corporations and publically traded companies have an internal auditing department.  This department is made up of internal auditors who report to the Chief Audit Executive.  The Chief Audit Executive reports to the Audit Committee of the Board of Directors and also the Chief Executive Officer for administrative reporting.  It is the duty of the Chief Audit Executive to report serious issues to the Audit Committee and also provide what management is doing to solve the problem. 

The Institute of Internal Auditors sets the standards for internal auditing which companies follow.  Internal auditors are independent from the management of the company they work for so that there is no unrestricted assessment of management and other employees (Internal Audit).    

The median starting salary for an internal auditor is around $47,000.00 annually and the auditor is required to have an undergraduate degree, with experience being a plus.  It is important for the auditor to have knowledge about commonly used practices and procedures in the type of company one is working for when starting out.  Internal auditors are not required to pass the CPA exam, but rather CIA exam, which is the certified internal auditor test (Salary).  

Internal vs. External:  Which works for you?

            There are many great benefits to working as an internal or external auditor.  Students should need to examine all of the options and benefits that both external and internal auditing has to offer so they can better figure out which field they would like to pursue.  Overall, external auditors examine many different types of companies and do can possibly do a lot more traveling than internal auditors.  External auditors are responsible for giving an opinion on the financial statements that they prepare.  Depending on the company being audited, external auditors might have to give a full audit and report to the SEC or only compile financial statements. 

On the other hand, internal auditors do not have to prepare and give opinions on the financial statements; they rarely travel, and only work on the type of company they are employed with.  Internal auditors are responsible for making sure internal controls are maintained and that management is taking care of the risk management associated with decisions that were made.  Internal auditors report to the Board of Directors rather than to management so there is flexibility when needing to evaluate management’s controls.

The field of accounting offers many possibilities for students to fit their individual personalities and circumstances and students can usually find what they are looking for in either branch of accounting.  With regard to external accounting, students can find employment with large firms that can be found on the stock exchange who have offices all over the world to a mom and pop accounting office that caters to local businesses and residents.  On the other hand, many internal auditing jobs can be found in large to mid-size companies that are located in many different areas and students can interview with companies that are in a specific area in where they wish to reside.  All in all, it is up to the individual student, but with both external and internal auditing jobs available, the possibilities for accounting jobs are considerable.