Running a growing B2C company in Australia can involve many different aspects beyond simply generating sales and serving customers. Your organisation will be subject to potential risks that may arise from minor process flaws, stock loss, or the financial impact of unplanned tax or regulatory non-compliance issues.
Auditing can provide some of the necessary oversight, as there are two types of audits: internal audits and external audits. One type of audit is performed on behalf of your organisation to identify areas for improvement (the internal audit) and the other type of audit is conducted for outsiders to verify the accuracy of your organisation’s financial statements (the external audit).
To make informed decisions regarding risk management and accountability, it is important to understand the differences between an internal audit and an external audit.
What is an Internal Audit?
Internal Audits are essentially an internal “Health Check” on how well a business operates and is run (by management for management) through an ongoing assessment of risk, internal controls, and corporate governance. The primary focus of an internal audit is to add value and enhance an organisation’s operations.
- Identify Errors and Weaknesses: To assist with identifying potential errors, redundant operations and weaknesses within internal controls early and prevent costly losses to the business due to lost cash flow.
- Improve Operations: To evaluate and assess the operational efficiency of all aspects of a business, including inventory management, cybersecurity protocols, etc.
- Risk Reduction: To provide a primary defence against fraud, error and non-compliance with internal policy.
A key point about internal audits is that they are generally not mandated under law for most small business owners; therefore, they are often optional (voluntary). For example, some small business owners may choose to maintain their own internal audit teams; however, it may be too expensive for other business owners to do so, and as such, they may decide to hire external/internal audit professionals to perform their internal audits on their behalf.
What is an External Audit?
If your internal audit is your proactive health check for your company, then the external audit is your formal examination to the outside world. An external audit is an outside review of your company’s financial statements and records. This vital service is carried out by a registered and licensed auditor, like a CPA or CA, who must remain independent of your business.
The central purpose is simple: To give an independent opinion as to whether your key financial statements, such as your balance sheet, income statement, and cash flow statement, give a “fair and accurate picture of your financial position” within the meaning of Australian Accounting Standards and company law.
Why This Independent Assurance is Vital
- Builds Confidence: It reassures external stakeholders, such as lenders if you need financing, investors if you need capital injection and regulators such as the Australian Securities and Investment Commission (ASIC) that your numbers are reliable.
- Ensures Statutory Compliance: External audit is mandatory by law in Australia for certain entities, as a matter of public and/or regulatory accountability.
Who Must Be Audited in Australia?
As per the Corporations Act 2001, the requirement for an external audit applies to:
- All Public Companies (regardless of their size).
- All large proprietary companies (meeting at least two of the three following criteria):
- Consolidated revenue of ≥ A$50 million.
- Consolidated gross assets of ≥ A$25 million.
- ≥ 100 employees.
- Small proprietary companies that are controlled overseas or have been instructed to have an external audit by ASIC or a shareholder with greater than 5% voting rights.
For most small proprietary companies in Australia, an external audit is optional; however, undertaking one can be a strong demonstration of your company’s financial condition and governance practices to potential acquirers or fund providers.
Internal Audit vs. External Audit: Key Differences
While both audit types are essential for a healthy organisation, they differ significantly in their operation, audience, and scope. Understanding the internal versus external audit distinction is crucial for strategic business planning.
| Feature | Internal Audit | External Audit |
| Purpose | To monitor internal controls, accuracy, operational efficiency, and risk management. | To verify financial statements and ensure compliance with statutory laws and accounting standards. |
| Conducted By | In-house team or outsourced internal audit professionals (appointed by management). | Independent, licensed External Auditors (appointed by shareholders or the board). |
| Scope | Broad. Covers all internal processes, policies, risks, and governance across the entire business. | Narrower. Focuses almost exclusively on the financial statements and compliance requirements. |
| Frequency | Continuous or periodic, based on a risk-based audit plan. | Usually annual or as required by statute (e.g., for ASIC lodging). |
| Reporting | Reports to Management or the Audit Committee/Board of Directors. | Reports to Shareholders, Regulators, and the public (external stakeholders). |
| Regulation | Recommended for internal governance and best practice. | Statutory requirement for many organisations (e.g., large proprietary companies). |
| Primary Objective | Identify errors, prevent fraud, and improve processes and efficiency. | Provide an independent assurance (opinion) on financial accuracy and legal compliance. |
Why Internal Audits are Conducted
The goals of an internal audit are entirely focused on adding value from the inside out. When management commissions an internal audit, they are seeking to achieve four key objectives:
- Risk Management: Internal auditors identify, assess, and prioritise risks across the organisation from financial risks like poor credit control to operational risks like weak IT security. Their role is to act as an early warning system.
- Fraud Prevention and Detection: By constantly evaluating internal controls, the internal audit function strengthens the systems designed to prevent fraud and promptly detects anomalies if fraud occurs.
- Internal Control Evaluation: Internal audits help to check whether the policies and procedures you have in place for things like approving expenses, handling cash, or managing inventory are operating to the mark.
- Operational Review: An internal audit checks if processes are running as efficiently as possible, flags redundancies and recommends ways to improve workflows and reduce costs. All this directly supports better management decision-making.
Why External Audits are Conducted
External audits are driven by the need for public trust and legal accountability. The goals are outward-facing:
- Verification of Financial Statements: The core function is to offer an objective, unbiased opinion as to whether the business’s financial reporting is Correct, Fair, and not materially misstated.
- Statutory Compliance: They ensure the company has followed Australian laws, regulations and Accounting Standards (such as the Australian Accounting Standards Board, or AASB).
- Assurance to Stakeholders: The final report assures banks, shareholders and government agencies that the financial data it reviews is reliable for lending, investment and tax purposes. This is particularly relevant for businesses that want investment or take on substantial debt.
When Internal and External Audits Work Together
Although separate functions, the relationship of the two audit functions is usually complementary. They should not be viewed as two separate burdens, but as two parts of a unified governance strategy.
- Smoother External Audits: Once errors have been found and fixed by internal audit, external audit is much faster and more cost-effective. External auditors can often rely on the standard of internal audit work to reduce their own testing scope.
- Improved Governance: Internal audit maintains continuous oversight to ensure a mature, risk-aware culture within the business. This type of systematic approach impresses external auditors & generally improves your reputation for financial accountability.
- Unified Compliance: Both audits check compliance with internal policies and external legislation. Together, they give your business total assurance that every facet of your financial and operational life is under control.
Wrapping Up: Internal Vs External Audit
Understanding the internal audit versus external audit distinction is critical for any Australian business aiming for sustainable growth. Both play an indispensable role in promoting financial accuracy, compliance, and accountability. Both will help you make a long-term investment in the future credibility and reliability of your company. Managing your own internal department may seem overwhelming, but professional audit outsourcing services can offer you the same level of independence and rigour as having a full-time staff, while minimising the costs associated with an in-house team. If you’re considering audit support, speak with our team to explore how outsourced audit services can work for your business.