Audits are at the heart of sound governance, but the term ‘audit’ encompasses a wide range of activities. Both internal and external auditing protect the business, but in different ways. Internal audit improves how the company runs; external audit checks that the figures the company publishes are accurate and trustworthy. The two are more often than not easy to mix up. This guide outlines the key differences between internal and external auditing, explains why they are critical in 2025, and gives advice on choosing the right audit partner.
What is an Internal Audit?
An internal audit examines the company’s internal systems, controls and procedures to identify areas for improvement of operations and risk management. Internal auditors check whether processes such as procurement, access control or expense approvals are efficient, data are processed properly, and controls work in practice.
Most internal audits are ongoing or cyclical rather than one-time events. Internal audit teams may be built internally or outsourced to specialist providers. Internal auditors present their insights to the management and the board, allowing leadership to address identified risks and implement improvements. Updated professional guidance sets higher standards for internal audit quality and calls for greater independence and proactive, forward-looking risk assessment.
What is an External Audit?
The independent, regulated review of the company’s financial statements is called an external audit. The external auditor’s job is narrower but critical: to present an opinion as to whether the accounts present a “true and fair view” and are in accordance with the relevant reporting framework (UK GAAP or IFRS). External auditors test balances, inspect evidence and report formally to shareholders, lenders and regulators.
External audits remain a legal requirement for many companies, although thresholds for mandatory audits have changed. The external audit gives assurance to third parties that use those financial statements for decisions (lending, investment, regulatory oversight), etc.
Differences Between Internal and External Audit
| Aspect | Internal Audit | External Audit |
|---|---|---|
| Purpose | Improve operations, strengthen controls, reduce risks | Verify financial accuracy and provide independent assurance |
| Conducted By | Company employees or internal audit teams | Independent, third-party auditors |
| Frequency | Ongoing or periodic throughout the year | Typically annual |
| Reporting To | Senior management and the board | Shareholders, lenders, and regulators |
| Regulatory Requirement | Optional, depends on the organisation | Mandatory for medium and large companies |
Internal vs External Auditor: Roles and Responsibilities
Internal Auditors: What They Do
- Analyse how processes work across departments, not just in policy.
- Map end-to-end workflows to locate bottlenecks, omissions and unnecessary steps.
- Testing controls such as approvals, delegating duties, system access, and data handling.
- Do some risk assessments and some simulations on how the business would react to failures or to adverse events.
- Examine how teams store, share and use information – including cybersecurity.
- Evaluate whether operations comply with internal policies, contractual obligations and applicable regulations.
- Discuss with staff real-world challenges and find issues that don’t appear in documentation.
- Offer practical recommendations, with timelines and risk impact, that managers can actually use.
- Follow up on follow-ups to ensure problems are not reported but actually solved.
External Auditors: What They Do
- Examine financial records, sampling transactions to confirm their authenticity and completeness.
- Test account balances (revenues, expenses, assets, liabilities) against invoices, contracts, bank statements and other evidence.
- Assess whether financial estimates, such as provisions or asset valuations, are reasonable and based on management assumptions.
- Verify compliance with accounting standards like UK GAAP or IFRS.
- Examine statutory disclosures to determine if financial statements comply with regulatory presentation requirements.
- Assess the risk of material misstatement through error or fraud by focusing on the highest-impact financial transactions.
- Maintain professional skepticism. Question inconsistencies, challenge unusual trends, and validate explanations.
- Document findings so shareholders, lenders and regulators know the basis of the audit opinion.
Why Both Audits Matter for Business Growth
When both audit functions work in parallel, companies benefit from:
- Better access to finance: Lenders are more likely to lend when external audit opinions complement robust internal controls.
- Best price for risk: Insurers/investors rate risk more favourably if internal controls are demonstrably effective.
- Operational resilience: Internal audit drives process improvements that reduce downtime and fraud exposure.
- Statutory audit cleaner: Companies that conduct regular internal reviews typically face fewer external audit queries, lower audit fees and quicker sign-off.
Choosing the Right Audit Partner
- For internal audit: Seek advisers who have sector experience alongside remediation experience. They should provide actionable results, not checklists.
- For external audit: Pick an approved firm with good inspection results and the bandwidth to handle your business complexity.
befree supports UK businesses with audit readiness and compliance from internal control reviews to year-end audit preparation. Having dedicated specialists allows the management to prioritise strategy whilst addressing control weaknesses before formal external review. What befree helps with:
- Builds complete audit-ready documentation packs (working papers, reconciliations, supporting schedules).
- Prepares transaction trails and evidence files that external auditors need to test balances.
- Performs control testing on key finance processes (payroll, purchasing, revenue, journals).
- Identifies weak spots in internal controls and flags them early to management.
- Ensures compliance with UK GAAP, HMRC rules, Companies House filing expectations, and audit checklists.
- Coordinates with external auditors to reduce rework, delays, and repetitive information requests.
- Reduces the internal workload on finance teams during the busiest period of the year.
Final Thoughts
The key difference is clear: internal audits improve how your business operates, while external audits provide assurance on your financial statements. Understanding the differences between internal and external auditing lets you build a framework that drives transparency, compliance, and performance. Need to strengthen your audit process? Get a free consultation from befree today. In just one call, our experts will reveal any gaps and put you on track for smooth, stress-free reviews.