As a company grows, financial oversight becomes more important—and more complex. This is where auditors come in. But not all auditors serve the same purpose. Founders often confuse internal auditors with external auditors, even though their roles, goals, and responsibilities are very different.

Understanding these differences is essential for building strong compliance, protecting your assets, and preparing for investors or regulatory reviews. This guide breaks down both roles in simple terms so you know exactly when your business needs each type of auditor.

1. What Is an Internal Auditor?

An internal auditor works inside your organization. Their goal is to help the business operate better, reduce risks, and strengthen internal controls. They assess whether your processes are working effectively—and recommend improvements.

Key Responsibilities

Internal auditors typically:

• Evaluate internal controls and workflows
• Review financial and operational processes
• Identify inefficiencies, risks, and compliance gaps
• Test whether policies are being followed
• Prevent or detect fraud
• Provide ongoing feedback to management and the board

Internal audits are continuous and proactive, not just once a year.

Who They Report To

Internal auditors report to:

• Senior management
• The audit committee
• The board of directors

Their job is to help management make better decisions and operate with accountability.

2. What Is an External Auditor?

An external auditor is an independent professional or audit firm hired from outside the company. Their main focus is verifying whether your financial statements are accurate and comply with accounting standards such as GAAP or IFRS.

Key Responsibilities

External auditors typically:

• Review financial statements
• Examine transactions, balances, and accounting practices
• Verify compliance with reporting standards
• Provide an independent audit opinion
• Highlight any material misstatements
• Build trust with investors, lenders, and regulators

External audits are usually annual and required by law or investors.

Who They Report To

External auditors report to:

• Shareholders
• Investors
• Regulators
• The board of directors

Their independence ensures credibility and transparency.

3. Internal Auditor vs. External Auditor: Key Differences

Here’s a simple comparison founders can use to understand the distinctions clearly:

Feature	Internal Auditor	External Auditor
Employment	Works inside the company	Independent professional/firm
Main Purpose	Improve processes, reduce risk	Verify financial statements
Focus Area	Operations, controls, compliance	Financial accuracy, reporting standards
Reporting Line	Management & audit committee	Shareholders or board
Frequency	Ongoing, regular reviews	Usually annual
Scope	Broad—financial + operational	Narrow—financial statements
Independence	Not fully independent	Must remain independent
Goal	Improve internal efficiency	Provide external assurance

Both roles are necessary—but they serve very different needs.

4. When Do You Need an Internal Auditor?

Growing companies often underestimate the value of an internal US auditor. You should consider hiring one when:

✔ Your operations are expanding

More employees, more customers, more processes—more things can go wrong without oversight.

✔ You want stronger internal controls

An internal auditor helps protect assets, reduce errors, and prevent fraud.

✔ You’re preparing for funding or scaling

Investors expect discipline and structured internal processes.

✔ You operate in a regulated industry

Finance, manufacturing, healthcare, e-commerce, and government-related sectors often require internal audits.

✔ You need continuous improvement

Internal auditors highlight inefficiencies and help streamline systems as the company grows.

Internal auditors are like internal advisors who keep your operations healthy and compliant.

5. When Do You Need an External Auditor?

External auditors are often required at specific milestones or for statutory compliance.

✔ When investors require audited financials

Most VC and PE investors expect audited financial statements before major funding rounds.

✔ When the law mandates it

Growing companies often reach thresholds where annual external audits become mandatory.

✔ When stakeholders need independent assurance

Banks, partners, acquirers, and regulators rely on external audits for trust and transparency.

✔ When preparing for mergers or acquisitions

Clean, audited financial statements simplify due diligence.

✔ When you want credibility in the market

External audits signal professionalism and strong financial practices.

External auditors validate the financial picture you present to the outside world.

6. How Internal and External Auditors Work Together

Although their roles differ, internal and external auditors often collaborate.

They share insights on:

• Financial reporting risks
• Internal control weaknesses
• Compliance gaps
• Fraud risks
• Process inefficiencies

Internal auditors strengthen the systems, and external auditors validate the financial statements built on those systems. This partnership leads to better governance, stronger compliance, and smoother audits.

7. Which One Should Your Business Hire First?

The answer depends on your stage and needs:

Early-Stage Startups

Start with external auditors only if required by investors or regulators. Internal auditors aren’t essential yet unless you’re handling large financial volumes.

Growth-Stage Companies

As teams grow and processes become complex, bring in internal auditors to strengthen controls and reduce risks.

Pre-Series A to Series B

Both may be needed—internal auditors for improving systems and external auditors for investor reporting.

Established Companies

Most mature companies rely on both for governance and compliance.

Conclusion

Internal auditors and external auditors both play essential roles in ensuring accuracy, transparency, and accountability. The key difference is this:

• Internal auditors help you run your business better.
• External auditors help you prove your numbers to others.

Knowing when and why to use each one helps founders build stronger financial systems, gain investor confidence, and reduce risk as they scale.

Choosing the right auditor at the right time is not just a compliance step—it’s a smart business strategy.