The subject of these thesis includes the clarification of the state and internal audit, their historical origin and development, emergence in certain countries and entire process, international principles, auditing standards and code of professional ethics which are the basis for the implementation of state audits, description of internal audit in public sector, and interaction between state and internal audit in public sector including the analysis of the financial audit report on the example of Zagreb Municipality for the 2018. The important part of these theses is dedicated to the role of state and internal audit in public sector of Republic of Croatia, their mutual interactions and example of audit done for the Zagreb Municipality. The municipalities are one of the many users of government budget therefore their financial statements fall under mandatory audit requirements done by the state audit department which is the authorized audit institution in Republic of Croatia. In these theses, the audit report analysed relates to the financial audit of Zagreb Municipality for the 2018. The state audit has important role in public sector as it shows the correctness and real picture of the financial statements for the constituents as well as the potential irregularities and illegalities incurred in business. The analysed report is based on the example of Zagreb Municipality yearly financial statements and compliance of the Municipality with the applicable laws and internal regulations which have important influence on its business. The state audit department issued an unqualified audit report on the financial statements and the business compliance of the Zagreb Municipality for the 2018.