Everything You Need to Know About Internal vs External Auditors for UK Companies

As a UK business owner, understanding the differences between internal and external auditors is crucial for maintaining a robust financial system and ensuring compliance with legal and regulatory requirements. While both types of auditors play essential roles in your business, their functions, objectives, and scope of work differ significantly.

In this guide, we’ll break down everything you need to know about internal and external auditors, and help you understand which one your company needs, depending on your goals and business needs.

What is an Internal Auditor?

An internal auditor is an employee within your company who evaluates and improves the effectiveness of your internal controls, risk management, and governance processes. The primary focus of an internal auditor is to help your business operate more efficiently and safeguard its assets, rather than providing an independent opinion on financial statements.

Key Responsibilities of an Internal Auditor:

• Assessing Internal Controls: Internal auditors review your company’s internal controls to ensure they are effective in preventing fraud, errors, and mismanagement. They check whether financial transactions are properly authorised and recorded.
• Identifying Risks: They help identify operational, financial, and compliance risks that could impact the business’s performance and suggest ways to mitigate them.
• Improving Business Processes: Internal auditors focus on making recommendations for improving business processes, efficiency, and cost savings. This could include streamlining operations or implementing better accounting software.
• Compliance Monitoring: They monitor compliance with laws and regulations relevant to your industry and ensure that your company is adhering to both internal policies and external legal requirements.
• Ongoing Monitoring: Internal auditors are part of your business on an ongoing basis, regularly assessing business operations and financial records.

Benefits of an Internal Auditor:

• Provides continuous oversight of company activities.
• Helps identify inefficiencies and improve business processes.
• Provides insight into risk management and ensures compliance with internal policies.
• Offers cost-effective guidance for improving operations.

Tip: If you’re looking for someone to consistently monitor internal processes, flag potential issues before they become problems, and improve your operations over time, an internal auditor is the right choice.

What is an External Auditor?

An external auditor, on the other hand, is an independent third party (usually from a firm) that is hired to conduct an audit of your company’s financial statements and provide an objective assessment. The primary focus of an external auditor is to ensure that your financial records are accurate, compliant with regulations, and provide a fair representation of your business’s financial health.

Key Responsibilities of an External Auditor:

• Independent Financial Review: External auditors assess your business’s financial statements to determine whether they accurately reflect the financial position of your company. This includes verifying the accuracy of balance sheets, income statements, and cash flow statements.
• Legal and Regulatory Compliance: They ensure that your financial statements comply with UK accounting standards, such as UK GAAP or IFRS, and are in line with regulatory requirements set by HMRC and other authorities.
• Providing Assurance to Stakeholders: An external auditor provides an independent opinion on the fairness of your company’s financial records, which is important for stakeholders such as investors, creditors, and lenders.
• Detecting Fraud or Misstatements: External auditors are trained to detect fraud, misstatements, or other irregularities in financial records and highlight areas where your company may be at risk.

Benefits of an External Auditor:

• Provides independent verification of financial statements.
• Enhances trust with investors, lenders, and regulatory bodies.
• Provides objective feedback and highlights areas for improvement.
• Ensures legal and regulatory compliance to avoid penalties.

Tip: If your business is looking for an independent, unbiased review of its financial health, especially to provide confidence to external stakeholders, then an external auditor is essential.

Key Differences Between Internal and External Auditors

While both internal and external auditors assess financial records, they differ significantly in their approach, objectives, and scope. Here’s a breakdown of the key differences between internal and external auditors for UK companies:

Tip: If your business is looking for comprehensive, ongoing monitoring and improvement of operations, an internal auditor is ideal. However, for an unbiased evaluation of your financial statements for external stakeholders, an external auditor is necessary.

When Do You Need an Internal Auditor?

Not all businesses need an internal auditor, especially if they are small or just starting out. However, if your business is growing in complexity, has multiple departments, or operates in a highly regulated industry, an internal auditor can provide substantial value.

When You Should Consider an Internal Auditor:

• Large Companies: As your business grows, the complexity of managing financial operations increases. An internal auditor helps monitor and improve your internal controls and processes.
• Multiple Locations or Departments: If your business operates in multiple locations or has various departments, an internal auditor can ensure consistency and compliance across the board.
• High-Risk Operations: If your company handles sensitive data, has large cash flows, or faces significant regulatory oversight, an internal auditor can identify risks and help mitigate them.
• Ongoing Monitoring: If you want continuous monitoring and improvement of internal controls and business processes, an internal auditor will provide regular assessments and feedback.

When Do You Need an External Auditor?

In the UK, businesses that meet certain size thresholds are legally required to have an external audit. External audits are necessary to provide independent verification of your company’s financial statements, offering confidence to stakeholders and ensuring compliance with regulatory standards.

When You Must Have an External Auditor:

• Large Companies: If your company meets certain criteria (e.g., turnover of over £10.2 million, total assets exceeding £5.1 million, or more than 50 employees), you must have an external audit.
• Public Companies: If your business is listed on the stock exchange, you are legally required to have an external audit.
• Investors or Lenders: If you are seeking investment or funding, external audits provide independent assurance on the accuracy of your financial records, which is essential for gaining trust from investors or banks.
• Regulatory Compliance: If your business operates in highly regulated sectors (e.g., finance, healthcare, charity), you may be legally required to undergo an external audit for compliance purposes.

Can an Internal Auditor Also Be an External Auditor?

While some firms offer both internal and external auditing services, the two roles must remain distinct. Independence is a critical factor for external auditors, and it would be a conflict of interest for someone who works as an internal auditor to also perform an external audit for the same business.

An internal auditor works closely with the business to help improve operations, while an external auditor provides an independent, unbiased review. Keeping these roles separate ensures transparency, accuracy, and integrity in the audit process.

How to Choose Between Internal and External Auditors

The decision to hire an internal auditor or external auditor depends on your business’s size, complexity, industry, and needs. Here’s how to determine which auditor your business requires:

• Small Businesses: If you run a smaller business and don’t need regular oversight, you may only need an external auditor to verify your financial statements annually.
• Medium to Large Businesses: As your business grows in size and complexity, having an internal auditor can help manage operational risks, streamline processes, and enhance internal controls. An external auditor will still be needed for independent verification of your financial statements.
• Highly Regulated Industries: If you operate in a highly regulated industry, such as finance, healthcare, or charity, you may need both an internal auditor for day-to-day management and an external auditor for regulatory compliance.

Tip: Consider your company’s growth, complexity, and external stakeholder requirements when deciding whether you need internal, external, or both types of auditors.

Conclusion: Strengthening Your Business with the Right Auditor

Understanding the differences between internal and external auditors is essential for any UK business owner. Internal auditors help you improve operational efficiency and manage risk, while external auditors provide an independent review of your financial health and ensure compliance with regulations. Both auditors offer valuable insights, but knowing which one to choose depends on your company’s size, structure, and objectives.

Key Takeaways:

• Internal auditors focus on internal controls, process improvement, and risk management.
• External auditors verify the accuracy of your financial statements and provide an independent opinion.
• Both types of auditors play essential roles, but businesses may only need one or both depending on their size, industry, and regulatory requirements.

By understanding their distinct roles and knowing when to engage each type of auditor, you can ensure the financial health of your business, meet compliance standards, and build trust with stakeholders.