Audit and Assurance · The scope of the internal audit function, outsourcing and internal audit assignments

Internal Audit Function: Role and Scope Explained

Updated 11 October 2026 · Fact-checked

Internal audit is an assurance and advisory activity inside an organisation. It evaluates and improves risk management, governance and internal control. Management decides its scope and it reports to those charged with governance. External audit differs: it gives an independent opinion on the financial statements to shareholders.

Understand Internal Audit Function: Role and Scope

Internal audit is a function set up by an organisation to review its own operations. It is not required by company law. Management or those charged with governance choose to have it, and they decide what it does.

The purpose is to add value and help the organisation reach its objectives. It does this by bringing a systematic, disciplined approach to evaluating and improving three areas: risk management, governance and internal control. You should link every point you make to one of these three.

The scope is wide and can include more than finance. Typical work covers: reviewing the design and operation of internal controls, examining financial and operating information, reviewing value for money (economy, efficiency and effectiveness), checking compliance with laws, regulations and internal policies, assisting with risk identification and assessment, and investigating fraud. Management sets the scope, so it can change from year to year.

Internal audit differs from external audit in several ways. External audit is a statutory requirement for many companies. Its objective is an opinion on whether the financial statements give a true and fair view (or are presented fairly). It reports to shareholders and is independent of the company. Internal audit reports to management or the audit committee, and its work is about improving the business, not giving a published opinion. Internal auditors are usually employees, so their independence is limited. They achieve objectivity through status, reporting lines and the audit committee.

The two functions can help each other. The external auditor may consider using the work of internal audit, but remains solely responsible for the audit opinion.

Key rules to remember

Three areas of internal audit scope: Scope = risk management + governance + internal control; Use these three headings to structure any answer on the role of internal audit.
Value for money (the three Es): VFM = economy + efficiency + effectiveness; Economy is low cost for the right quality. Efficiency is the best output for the input. Effectiveness is achieving the objectives.
Who decides scope: Internal audit scope: set by management or those charged with governance. External audit scope: set by law and auditing standards; A key difference. The external auditor decides procedures independently of management.
Responsibility for opinion: External auditor's responsibility for the opinion is not reduced by using internal audit work; Applies whenever the external auditor uses internal audit work.

How to solve Internal Audit Function: Role and Scope questions

Use this method for any question on the role, scope or comparison of internal audit.

1Read the requirement and note the verb: describe the role, explain the scope, or compare with external audit.
2Identify the scenario facts: size of the company, its risks, who internal audit reports to, whether it exists.
3Frame the answer around risk management, governance and internal control, plus any extras such as value for money, compliance and fraud.
4For a comparison, pick headings: objective, appointment, reporting, independence, scope, and who it benefits. Give both sides for each.
5Tie each point to the scenario. Say what internal audit could do for this company, not just the general theory.
6Make one point per mark, in a separate line or sentence, and keep each point short.
7Check you have not said internal audit gives the statutory opinion or is required by law.

Quickest way: Three headings plus a comparison grid

When to use it: Use it for objective test questions and for short written parts when time is tight.

Write RGC: risk management, governance, control. Match each option or point to one of them.
For comparison questions, think: who appoints, who sets scope, who receives the report, what is the aim.
For objective tests, remove options that say internal audit is a legal requirement or gives the financial statement opinion.
Select the option that states the correct difference and move on.

Common mistakes in Internal Audit Function: Role and Scope

Saying internal audit is a legal requirement for all companies.
Students confuse it with the statutory external audit.
Fix: Remember that internal audit is a choice made by the organisation. Only external audit may be required by law, depending on size and rules.
Describing internal audit only as checking the accounts.
Students focus on the financial side learned from external audit.
Fix: Include operational work, value for money, compliance, risk management and fraud investigation, as well as financial controls.
Claiming internal auditors are fully independent.
Students copy the independence language used for external auditors.
Fix: Say they are usually employees, so independence is limited. Explain safeguards such as reporting to the audit committee and no operational duties.
Saying the external auditor can pass responsibility to internal audit.
Students overstate the benefit of relying on internal audit work.
Fix: State that the external auditor alone is responsible for the opinion, even when using internal audit work.
Giving a list of differences with no scenario link.
Students memorise a table and write it out.
Fix: Apply each point to the company in the question, for example its size, risks or structure, and say why it matters.

Worked examples

Example 1

Briefly describe the scope of internal audit work that might be carried out in a retail company. (6 marks)

Show the solution

Frame by the three areas: risk management, governance and internal control.
Risk management: help management identify and assess risks such as stock loss, supplier failure and cyber risk, and review how the risks are managed.
Governance: review whether decisions, ethics and reporting lines work properly, and support the audit committee with information.
Internal control: test controls over cash handling, stock and purchasing in stores, and recommend improvements where there are weaknesses.
Other work: value for money reviews of store operations, compliance with laws and company policies, and fraud investigations such as till theft.

Answer: Internal audit would review risk management, governance and internal controls in the retail company. It would also carry out value for money work, check compliance, and investigate fraud, with the exact scope set by management or the audit committee.

Example 2

Explain three differences between internal audit and external audit. (6 marks)

Show the solution

Objective: external audit gives an opinion on whether the financial statements are true and fair. Internal audit evaluates and improves risk management, governance and controls.
Appointment and requirement: external audit is usually required by law and the auditor is appointed by shareholders. Internal audit is optional and is set up by management or the board.
Reporting and independence: the external auditor reports to shareholders and is independent of the company. Internal auditors usually report to management or the audit committee and are normally employees, so independence is more limited.
Scope: the external auditor decides procedures independently within the audit standards. Management decides the internal audit scope and it can change.

Answer: Three differences are: objective (an opinion on the financial statements versus improving risk, governance and control), appointment and requirement (a statutory shareholder appointment versus an optional management decision), and reporting and independence (shareholders and fully independent versus management or the audit committee and employee status).

Exam tips

Always organise answers around risk management, governance and internal control. It shows structure and covers the core scope.
In comparison questions, give both sides of each difference in the same sentence to earn the mark.
Use scenario details such as company size, sector and existing controls to make points specific.
In objective questions, watch for options that give internal audit the external auditor's duties, such as signing the audit opinion. They are wrong.
Remember that scope is decided by management, so say so when asked who sets it.

Internal Audit Function: Role and Scope in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Internal Audit Function: Role and Scope: frequently asked questions

What is the main purpose of internal audit?

Its purpose is to add value and improve the organisation's operations. It does this by evaluating and improving risk management, governance and internal control. It supports management in achieving its objectives.

What is the main difference between internal and external audit?

External audit gives an independent opinion on the financial statements to shareholders and is usually required by law. Internal audit is an optional function that reports to management or the audit committee and focuses on improving the business. The scope of internal audit is set by the organisation.

Is internal audit independent?

Not in the same way as external audit. Internal auditors are usually employees, so independence is limited. Reporting to the audit committee, avoiding operational duties and having proper status help protect objectivity.

Does internal audit have to be done by employees?

No. An organisation can use its own staff or outsource the function to a third party such as an accountancy firm. Either way, management or those charged with governance remain responsible for the function.