Internal Audit vs Statutory Audit: Understanding the Key Differences

When comparing internal audit vs statutory audit, it is crucial to understand their key differences. Internal audits are conducted by an organisation’s internal team to improve processes, mitigate risks, and support strategic goals.

Statutory audits, by contrast, are legally mandated external evaluations of financial statements to ensure accuracy and compliance. This guide explores the scope, objectives, and distinct roles of both types of audits to help businesses strengthen governance, transparency, and trust.

Key Takeaways

• Internal audits aim to enhance operational efficiency and risk management; statutory audits validate financial accuracy and legal compliance.
• Internal audits are flexible in frequency and scope, while statutory audits must occur annually as per corporate laws.
• Statutory auditors are independent professionals appointed by shareholders; internal auditors are engaged by management and may be in-house or outsourced.
• Both audits play a pivotal role in ensuring accountability, transparency, and long-term sustainability.

Understanding Internal Audits

Internal audits form a core part of an organisation’s governance and risk management framework. These audits are performed by an internal team or independent professionals hired by the company to assess internal processes, systems, and controls.

Internal audits cover a broad range of activities — from financial controls to IT systems and compliance reviews. They are often aligned with enterprise risk management (ERM) frameworks. According to the Institute of Internal Auditors (IIA), modern internal audits increasingly focus on areas such as ESG reporting, cybersecurity, data privacy, and third-party risk.

The primary aim of internal audits is to ensure continuous improvement, support strategic decision-making, and reinforce corporate governance. Unlike statutory audits, which are periodic, internal audits are ongoing. Many companies now adopt a risk-based internal audit (RBIA) approach, focusing resources on high-risk areas, allowing for more agile and proactive interventions and preventing issues before they escalate.

What is a Statutory Audit?

A statutory audit is a legally required financial examination conducted by independent external auditors. Its purpose is to determine whether a company’s financial statements give a true and fair view of its financial position, in accordance with applicable laws and accounting standards.

In jurisdictions like Singapore, statutory audits are governed under the Companies Act, with the Accounting and Corporate Regulatory Authority (ACRA) responsible for oversight. Companies exceeding specific thresholds in revenue and total assets must undergo annual statutory audits.

Statutory audits play a critical role in building trust among shareholders, investors, and regulators as well as enhancing financial transparency and accountability. They also help companies prepare for public listings or due diligence processes during mergers and acquisitions.

Key Differences Between Internal and Statutory Audits

While both types of audits are integral to a robust governance ecosystem, their objectives and execution vary significantly.

• Statutory auditors must maintain complete independence and are appointed by shareholders.
• Internal auditors, though independent in function, may report to senior management or the audit committee.

• Statutory auditors must be Chartered Accountants (CAs) licensed by regulatory bodies like ACRA (in Singapore) or ICAI (in India).
• Internal auditors may be CAs, Certified Internal Auditors (CIAs), or professionals with operational expertise.

• Statutory audits occur annually and focus on financial records.
• Internal audits occur regularly or continuously, covering operational, compliance, financial, and technological domains.

Objectives of Internal Audits

The role of internal audits is evolving from being merely compliance-focused to being value-generating. Key objectives include:

• Enhancing risk management: Identifying financial, reputational, strategic, or cybersecurity risks.
• Improving operational efficiency: Streamlining processes and reducing redundancies.
• Supporting decision-making: Offering data-driven insights for senior leadership.
• Fostering ethical conduct: Reinforcing codes of conduct, anti-fraud measures, and policy adherence.

Modern internal audits also assist in preparing for ESG disclosures and navigating evolving data protection regulations, particularly under regimes like the GDPR or Singapore’s PDPA.

Objectives of Statutory Audits

The central purpose of a statutory audit is to provide an independent assurance that a company’s financial statements are:

• Free from material misstatement,
• In compliance with relevant accounting standards (e.g., IFRS, SFRS, or GAAP),
• Accurately portraying the company’s financial position and performance.

This assurance is especially critical for lenders, investors, regulators, and the public. It reduces the risk of financial fraud, misreporting, and investor misinformation.

Scope and Frequency

• Legally required for qualifying companies.
• Must be conducted annually, regardless of the company’s internal review processes.
• Focused on historical financial data, cash flows, and compliance.

• Not legally mandated, but strongly recommended for effective governance.
• Can occur monthly, quarterly, or continuously, depending on risk priorities.
• Their scope may include procurement, cybersecurity, inventory, HR, and ESG metrics.

Reporting and Compliance

Reports are submitted to the Audit Committee or senior management. They focus on:

• Identifying operational risks and inefficiencies,
• Recommending improvements,
• Supporting compliance with internal policies.

Post-audit actions include risk remediation and performance benchmarking.

These reports are filed with regulatory authorities and presented to shareholders during Annual General Meetings (AGMs). They provide an independent opinion on the company’s financial statements, which can take one of the following forms:

• Unqualified Opinion (or a Clean Report): Indicates that the financial statements present a true and fair view in accordance with applicable accounting standards, with no material misstatements.
• Qualified Opinion: Issued when the auditor identifies specific exceptions or limitations, but the overall financial statements are still largely accurate.
• Adverse Opinion: Reflects that the financial statements contain significant misstatements or inaccuracies, and do not provide a true and fair view of the company’s financial position.
• Disclaimer of Opinion: Given when the auditor is unable to obtain sufficient evidence to form an opinion, often due to lack of access to records or significant uncertainty.

Role of Internal Auditors vs. Statutory Auditors

• Work within or in partnership with the company.
• Focus on improvement, risk mitigation, and strategic alignment.
• May contribute to cost-saving initiatives and innovation tracking.

• Function entirely independent of the organisation.
• Conduct a thorough audit of financial records based on legal frameworks.
• Their opinion significantly influences shareholder confidence and regulatory perception.

Importance of Internal Controls

Effective internal controls prevent fraud, enforce accountability, and ensure operational integrity. Both internal and statutory audits enhance these controls:

• Internal audits design and evaluate controls continuously.
• Statutory audits review their effectiveness from a financial accuracy and compliance perspective.

Legal Requirements for Statutory Audits

In Singapore, under the Companies Act (Cap.50):

• All companies (except exempt private companies) must appoint auditors within 3 months of incorporation. Auditors must be licensed by ACRA.
• Failure to appoint or notify the Registrar can result in penalties up to S$5,000 per director. Companies classified as “small” (i.e., with revenue < S$10 million and total assets < S$10 million) for the past two years may be exempt from audit requirements.

Benefits of Internal Audits for Organisations

Internal audits go beyond risk identification. They also improve preparedness for external audits, public offerings, and regulatory inspections. Some of their long-term benefits include:

• Improving organisational transparency and accountability.
• Reducing waste through process optimisation.
• Encouraging ethical conduct by spotlighting non-compliance or misconduct.
• Driving cost efficiency through better resource allocation.

Challenges Faced by Internal Auditors

• Talent shortages: Internal audit is facing a global skill gap, especially in areas like data analytics, cybersecurity, and sustainability.
• Keeping pace with technology: Emerging tech like AI, blockchain, and cloud computing requires auditors to upskill constantly.
• Limited budgets and visibility: Some organisations undervalue internal audits, limiting their strategic contribution.

How to Effectively Manage Both Audits

• Integrating audit calendars and aligning priorities between internal and statutory audits reduces redundancy and improves risk coverage.
• Foster communication between compliance, finance, and internal audit teams to harmonise efforts and ensure timely remediation.

Adopting an agile audit methodology helps in responding to changes dynamically, increasing audit value and relevance. While internal audits are strategic tools for enhancing operations and mitigating risk, statutory audits are legally mandated for financial and legal reasons. By investing in both, companies not only meet regulatory standards but also gain deeper insights for long-term success.

Partner with InCorp and let our experts guide you with your Statutory report and auditing. Our audit approach is designed to provide reasonable assurance that the financial statements are not materially misstated and are presented fairly in accordance with applicable accounting standards and relevant statutory requirements.

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