Internal Audit vs External Audit: CFO's Role

Internal and external audits are highly interconnected control functions serving different purposes within a company. The CFO's role in these audits is the backbone of the system as they act as the link between the two, giving the internal and external audits the assistance, visibility, and understanding they need to perform their tasks. Let’s deep dive into the internal and external audits and core differences.

What Is an Internal Audit?

An internal audit is an independent and objective process where a department within or hired by the company reviews how well the organisation is managing its internal controls, risk management, and governance. The main goal of Internal audit is to help the company improve its systems, follow rules properly, and prevent future problems. 

As per Section 138 of the Companies Act 2013 and Rule 13 of the Companies (Accounts) Rules 2014 the following categories of companies are required to appoint an internal auditor if they meet the Threshold criteria.

The internal auditor can be a Chartered Accountant, a Cost Accountant, or any other professional approved by the board and has the mandate to review the operations of the company as well as internal procedures.

What is an External Audit?

An external audit is an independent examination of a firm's accounts and accounting books to check for accuracy, transparency, and conformity with relevant standards and regulations. It is conducted by a third-party auditor independent of the firm and results in an audit report as to whether the accounts give a "true and fair view" under accounting standards. 

As per Section 139(1) of the Companies Act 2013, every such company must appoint its external auditor in its very first Annual General Meeting for a period of not more than five years to carry out a statutory audit. The external auditor helps in ensuring Ind AS or any similar GAAP and statutory compliance. External audits provide assurance to the shareholders, lenders and regulators that the company's financial reporting is reliable and free of material misstatements.

Differences Between Internal and External Audit

Both audits review risks and controls, but the internal audit is voluntary and prospective, while the external audit is compulsory and retrospective.

CFO's Role in Internal Audit

• Effective internal auditing is made possible mainly by the role of the CFO. 
• Ensuring a strong system of internal controls and risk management across the entire company is a primary duty of the CFO. 
• Granting sufficient resources and access to the internal audit team, and including audit findings in financial planning and controls. While the internal audit function is formally accountable to the audit committee (to maintain objectivity), the CFO needs to work closely with it: approving audit plans, considering major risks identified, and monitoring remediation of control weaknesses. The CFO usually chairs or attends the audit committee, relaying management's answers to audit matters. Notably, company rules (e.g. SEBI LODR Schedule II) mandate the CFO to attest that the financial controls are adequate and to report any shortcomings identified. 
• CFOs leverage internal audit findings to sharpen budgeting, governance and compliance. For example, a 2025 industry analysis notes that CFOs are increasingly “overseeing” internal audits as a strategic function – extending beyond finance into IT, HR and legal compliance – to identify risks early and ensure organisational resilience.

CFO’s Role in External Audit

• CFO is the key liaison between management and the external auditors. 
• Prepares and signs off on the financial statements and accompanying notes according to relevant standards and makes available books, records, and explanations to the auditors when necessary. In India, there is also the requirement that the CFO signs a certificate to the board and audit committee, asserting that the statements are "true and fair" and in accordance with accounting standards and laws. 
• CFO facilitates the auditors' comprehension of accounting policies, internal controls and difficult transactions. 
• CFO ensures transparency: timely responses to audit questions, furnishing supporting documentation, and disclosure of related-party or material transactions. 
• CFO collaborates with management to carry out recommendations. While undertaking this task, the CFO needs to uphold professional integrity and ensure the auditors' independence. In practice, CFOs must balance providing complete information with not unduly influencing audit findings.

Common Challenges CFOs Face During Audits

CFOs frequently struggle on both internal and external fronts. 

• Constraints on resources (limited staff or budget) can make it difficult to sustain ongoing internal audit coverage while preparing for the yearly external audit. 
• Sustaining proper segregation of duties presents another challenge: for smaller firms, the CFO or finance unit may be required to perform multiple roles, complicating internal control. 
• Data integrity and IT systems are barriers if records are decentralised or absent. 
• CFOs also risk "audit fatigue" from simultaneous audits and regulatory compliance reviews. 

Internal and external audit have separate but complementary roles to perform and are integral elements of effective corporate governance. External audit delivers independent confirmation of the health of a company's finances, whereas internal audit supports operating efficiency and risk management internally. Both are required by CFOs in order to get effective internal controls, foster transparent communication, and secure audits independence.

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