The current business environment is rapidly changing and companies in the UAE are experiencing pressure to be more transparent, accurate and compliant. As a startup, SME or an established enterprise, knowing the distinction between External vs Internal Audit is essential to financial integrity and gaining the trust of stakeholders.

Although both of these types of audits have their role to play, they are radically different in their purposes, implementation, and results. We will divide it into a simple, human way so that you can clearly see the effects of each one of them on your business.

What is an Internal Audit?

An internal audit is similar to a health check-up of your business, but it is done internally. It is performed either by an internal team or outsourced specialists who access the processes, controls and operations of your company.

An internal audit is not only aimed at identifying errors, but also enhancing the manner in which your business operates.

Key objectives of internal audit:

• Evaluate control and risk management internal controls.
• Improve operational efficiency
• Detect and prevent fraud
• Make sure internal policies are adhered to.

Consider internal auditors as advisors. They constantly watch over your operations and make recommendations that enable your business to operate in a more intelligent and efficient manner.

What is an External Audit?

External audit, on the other hand, is an audit conducted by an independent auditor on your company financial statements. It is also carried out by a licensed audit company in UAE and is in most cases a legal obligation, particularly to mainland companies and most of the free zone companies.

An external audit is supposed to give a fair view of your business by giving an unbiased opinion of whether your financial statements are a true and fair presentation of your business.

Key objectives of external audit:

• Check the accuracy of financial statements.
• Establish trust among stakeholders.
• Meet regulatory requirements
• Enhance investor confidence

Independent validators are external auditors. They are not involved in operations but to ensure that whatever is being reported is accurate and in compliance.

External vs Internal Audit: Key Differences

It would be easier to understand External vs Internal Audit by observing their difference in various aspects:

1. Purpose

Internal audit aims at the enhancing of internal processes and controls.

External audit is concerned with the verification of the financial statements.

2. Independence

They could be employees or outsourced internal auditors who closely liaise with the management.

Third parties External auditors are totally independent.

3. Frequency

Internal audit is conducted on a regular basis during the year.

External audits are usually done once in a year.

4. Reporting

Reports of internal audits are exchanged to management to improve.

Shareholders, regulators and stakeholders are provided with external audit reports.

5. Scope

Internal audit is inclusive of all operations, risk and compliance.

The primary concern of external audits is financial records and statements.

Why Both Audits Matter in the UAE

In the UAE, the regulatory environment is getting increasingly organized, particularly, the appearance of corporate tax and stricter compliance demands. Business entities are supposed to keep proper records and be accountable.

The importance of the two audits is as follows:

Internal Audit Benefits:

• Allows identifying the inefficiencies at an early stage before it becomes an expensive problem.
• Strengthens internal controls
• Get your business ready to be audited.
• Supports better decision-making

External Audit Benefits:

• Assures that laws and regulations in the UAE are met.
• Develops confidence with investors and banks.
• Enhances company reputation
• Minimizes the chances of penalties.

Internal and external audits provide a solid financial and operational base to your company when they are combined.

Common Misconceptions

The role of audits is confused with many businesses, particularly SMEs.Let us deal with some of the widely-known misconceptions:

• “Internal audit may be optional, but that does not make it unimportant.”

 Internal audits can be mandatory, but are necessary to grow and manage risk in the long-term.

• “External audit will find all problems.”

External auditors are dependent on sampling and they are not accountable to uncover all issues. That’s where internal audits play a key role.

• “Audits are only about compliance.”.

 Indeed, audits, particularly internal audits, have the potential to contribute actual value in terms of efficiency and performance.

How to Choose the Right Approach

Any business is unique, but a middle ground is most effective. External vs Internal Audit should not be viewed as either or both by companies in the UAE. Rather, they are supposed to consider them as complementary functions.

If you’re a growing business:

• Begin by internal audits in order to fortify your processes.
• Make sure you are prepared to undergo external audits that are mandatory.

If you’re an established company:

• Have frequent internal audits.
• External audits to confirm and establish credibility.

Both functions could also be outsourced to skilled individuals, thereby saving you time, cost and accuracy.

Conclusion

Knowing External vs Internal Audit is not merely a matter of compliance- it is a matter of creating a strong and reliable business. Internal audits assist you to remain efficient and active and external ones offer the credibility and assurance that your stakeholders desire.

Companies that have committed resources to both forms of audit will have sustainable growth in a competitive market such as the UAE. Incorporating internal and external checks and balances, you will have a sound framework that will aid in transparency, efficiency, and long-term success.

In JAKS, we make it easy and comfortable to go through the procedures of External vs Internal Audit. Our professional team offers customized audit solutions that are compliant, improve internal controls and increase financial transparency. You require continuous internal audit assistance or an audit firm that you trust, JAKS is dedicated to provide accuracy, integrity, and value to your business.