What is the difference between internal audits and external audits?

• A. Internal audits are performed by external firms.
• B. External audits are conducted by the organization's internal staff.
• C. Internal audits are conducted by organization staff to improve controls; external audits provide independent assurance on financial statements.
• D. External audits replace internal audits in small organizations.

Answer: (C)

Internal audits focus on improving how the organization manages risk, complies with policies, and governs its operations, and they’re carried out by people inside the organization. External audits, on the other hand, are conducted by independent outside auditors to provide assurance that the financial statements are presented fairly and in accordance with the relevant accounting standards. This contrast—internal audits aimed at strengthening controls and conducted by organization staff versus external audits providing independent assurance on financial statements—is what makes the stated option correct. The other descriptions misstate who conducts the audits or the purpose, such as internal work being done by outsiders, external work by internal staff, or external audits replacing internal audits in small organizations.