Internal and External Auditors duty overlap

The American Accounting Association Defined auditing as;
“A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events , to ascertain the degree of correspondence between those assertions and established criteria , and communicating the results to interested users”.
An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm).
As defined by the Institute of Internal Auditors (IIA), "Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Internal Auditors' roles include monitoring, assessing, and analyzing organizational risk and controls; and reviewing and confirming information and compliance with policies, procedures, and laws. Working in partnership with management, internal auditors provide the board, the audit committee, and executive management assurance that risks are mitigated and that the organization's corporate governance is strong and effective. And, when there is room for improvement, internal auditors make recommendations for enhancing processes, policies, and procedures."
External Auditing can be defined as a periodic examination of the books of account and records of an entity carried out by an independent third party (the auditor), to ensure that they have been properly maintained, are accurate and comply with established concepts, principles, accounting standards, legal requirements and give a true and fair view of the financial state of the entity.’
(CIMA’s Management Accounting Official Terminology)
Both internal and external auditing provide stakeholders with reasonable assurance that risks are appropriately mitigated. External auditors are primarily concerned with financial statement presentation. As a result, there is a lot of effort surrounding controls that impact revenue, expense, income or liability line items.
Internal auditors also provide reasonable assurance that risks are appropriately mitigated. However, an internal auditor’s scope extends beyond financial statements. The scope may include an organizations operations, information technology, strategic initiatives, fraud investigations, process and control optimization and compliance.

COMMON INTEREST AND WORK OVERLAP BETWEEN INTERNAL AND EXTERNAL AUDITORS
Internal and external audit have different roles and different priorities but there can be a lot of overlap in what they do and why they do it. Good co-operation between them will minimise duplication of effort and maximise the benefits of working together towards the same goals.
Final accounts work
Internal audit can assist external audit with work on year end balances or on the verification of assets. In some cases year end work is not within internal audit’s ambit but where it is or can be accommodated then cooperation is possible.

Visits to establishments
In cases where there are many entities within the audited body requiring audit visits (eg, schools, GP fundholders, cash offices, social services units) it will often be sensible for internal audit to take the lion’s share of the necessary audit visits, since their greater familiarity with the business being conducted and their year-round presence provide potential efficiencies for the audited body.

Management arrangements
External audit is required to assess management’s arrangements for the economic, efficient and effective use of resources. Internal auditors will often be required to appraise the economy and efficiency with which resources are employed (Institute of Internal Auditors Standard 340). There is good potential for cooperation here too.
Fraud and corruption
Internal and external audit will both have audit objectives concerning fraud and corruption. In the case of external audit, it is to give an independent assessment of the audited body’s arrangements for preventing and detecting fraud and corruption, while internal audit’s objectives will vary depending on their terms of reference and may be wider than those of external audit. For instance, the NHS Internal Audit Manual requires internal audit to:
‘Review, appraise and report upon the extent to which the Trust/Authority’s assets and interests are accounted for and safeguarded from loss of any kind, arising from: fraud and other offences; waste, extravagance, inefficient administration; poor value for money or other causes.’ Internal audit may be seen as part of management’s arrangements in the prevention or detection of fraud and corruption. External audit is obliged to follow guidance issued from time to time by the Audit Commission. Internal and external audit should keep each other fully informed of their plans and work in progress on the prevention and detection of fraud and corruption, and should be able to co-operate. For instance, they should be able to agree a joint programme for cyclical coverage of selected audit areas. But external auditors will generally be expected to carry out some work themselves in addition to relying on the work done by internal audit.
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The difference between internal and external audit
While sharing some characteristics, internal and external audit have very different objectives. These are explained in the table below: External audit Internal audit
Reports to shareholders or members who are outside the organisations governance structure. The board and senior management who are within the organisations governance structure.

Objectives Add credibility and reliability to financial reports from the organisation to its stakesholders by giving opinion on the report Evaluate and improve the effectiveness of governance, risk management and control processes. This provides members of the boards and senior mangement with assurance that helps them fulfil their duties to the organisation and its stakeholders.

Coverage Financial reports, financial reporting risks. All categories of risk, their management, including reporting on them.

Responsibility for improvement None, however there is a duty to report problems.
Improvement is fundamental to the purpose of internal auditing. But it is done by advising, coaching and facilitating in order to not undermine the responsibility of management.

AUDIT REPORTS
The independent audit report sets forth the independent auditor's opinion regarding the financial statements. The auditor's opinion indicates whether the financial statements are fairly presented in conformity with generally accepted accounting principles, and applied on a basis consistent with that of the preceding year (or in conformity with some other comprehensive basis of accounting that is appropriate for the entity). A fair presentation of financial statements is generally understood by accountants to refer to whether:
1. The accounting principles used in the statements have general acceptability.
2. The accounting principles are appropriate in the circumstances.
3. The financial statements are prepared so they can be used, understood, and interpreted.
4. The information presented in the financial statements is classified and summarized in a reasonable manner.
5. The financial statements reflect the underlying events and transactions in a way that presents the financial position, results of operations, and cash flows within reasonable and practical limits.
The auditor's unqualified report contains three paragraphs. The introductory paragraph identifies the financial statements audited, states that management is responsible for those statements, and asserts that the auditor is responsible for expressing an opinion on them. The scope paragraph describes what the auditor has done and specifically states that the auditor has examined the financial statements in accordance with generally accepted auditing standards and has performed appropriate tests. The opinion paragraph expresses the auditor's opinion on whether the statements are in accordance with generally accepted accounting principles.
Various audit opinions are defined by the AICPA's Auditing Standards Board as follows:
1. Unqualified opinion: An unqualified opinion states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the business in conformity with generally accepted accounting principles.
2. Explanatory language added to the auditor's standard report: Circumstances may require that the auditor add an explanatory paragraph (or other explanatory language) to the report.
3. Qualified opinion: A qualified opinion states that, except for the effects of the matter(s) to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the business in conformity with generally accepted accounting principles.
4. Adverse opinion: An adverse opinion states that the financial statements do not represent fairly the financial position, results of operations, or cash flows of the business in conformity with generally accepted accounting principles.
5. Disclaimer of opinion: A disclaimer of opinion states that the auditor does not express an opinion on the financial statements.
The fair presentation of financial statements does not mean that the statements are fraud-proof. The independent auditor has the responsibility to search for errors or irregularities within the recognized limitations of the auditing process. An auditor is subject to risks that material errors or irregularities, if they exist, will not be detected.
Investors should examine the auditor's report for citations of problems such as debt-agreement violations or unresolved lawsuits." Going concern"' references can suggest that the company may not be able to survive as a functioning operation. If an "except for" statement appears in the report the investor should understand that there are certain problems or departures from generally accepted accounting principles in the statements that question whether the statements present fairly the company's financial statements and that will require the company to resolve the problem or somehow make the accounting treatment acceptable.
In contrast to the standardized report of external auditors, internal and governmental auditors prepare a variety of reports that serve a variety of purposes, depending on the auditing assignment and goals. Both internal and governmental reports strive to communicate information clearly and concisely. Government reports tend to emphasize the efficient use of resources by the government departments being audited, whereas internal reports tend to vary greatly because of the plethora of interests and purposes companies may have for auditing.