Outsourcing internal audit

Below are the topics regarding issues of outsourcing,which for me a grey area in the syllabus, but a worth while to read it!!

Procedures to outsource internal audit

In some cases the company will outsource most of the function but retain the head of internal audit as employee.This leaves high level of responsibility within the company. The company and service provider should draw up a written contract or terms of reference covering issues as:

• What services will be provided?


• What does the service provider report to?


• What form will reports take?


• What action will be taken if problem occur?


• How will fees be determined and charged?

Benefits to the company

There are number of advantages to the company of outsourcing their internal audit function.

1.Independence

-contracting out increases independence as an in-house department can never be truly independent. Staff from an external firm will be subject to the same ethical guidelines as for external audit,and the firm should have mechanisms to ensure compliance. In addition contracting out facilitates the rotation of staff, so close relationship do not build up between auditor and auditee.

2. Skills.

-contracting out internal audit allow the company to bring in new skills. The external provider will have a range wider experience gained by auditing other companies.

3.Costs.

-A company with an in-house internal audit service must pay salaries,training and overheads. Whilist the contractors' fees will also be set to cover these there may be economies of scale. The company would only be paying resources when required and so overall the total cost may be cheaper.

4. New techniques.

-The audit market, both internal and external is very competitive. This encourages firms to develop new techniques which are more efficient and effective. I.e; E&Y have recently invested $150m to develop internal auditing methodologies. Contracting out the internal audit services gives the company access to these techniques without a high level of investment.

5. Management time.

-If internal audit is outsourced it frees management time and resources to focus on core areas of the business.

Disadvantages to the company of outsourcing

1. Constraints on service.

-The service provider will need to act in accordance with the terms of reference. This may mean they are unable to follow up suspicious circumstances outside their duties without first seeking permission from the cpmpany and re-negotiating the terms of reference.

2.Corporate culture.

-Contracting out any service involves a change to corporate culture. The change needs sensitive management to avoid a loss of morale or from other areas,who may fear for their job or resent an 'outsider' questioning them.

3. Flexibility.

-An inhouse department will provide a permanent presence whilist contracted out sevicees may only be at company discrete periods. In-house staff may also have more royalty and commitment to the company. Outsourcing may result in reduced staff availability and flexibility as an external provider may not have staff available at short notice, i.e a problem suddenly arises.

4. Skills

-An external contractor may lack the specialist skills relevant to a particular company which an in house service will possess.Once a contactor is brought in these skills may be lost forever.

Issues for provider of service.

a) Independence

• There is danger that an external provider could become dependent on client, particularly where they are also the external auditor. The ethical guidelines do not specifically deal with external auditor providing internal audit services but there are some general guidelines which are relevant.


• An auditor should not accept an audit appointment from a company which regularly provides him with unduly large proportion of his gross practice income.

b) Care must be taken so that external audit does not perform management functions or make management decisions.

c) Providing internal audit services may gives rise to the need for self review. For example the internal auditor may have recommendations regarding the system of internal controls. The external audit team,when reviewing the system,must ensure that their judgements are objective.

d) Skills - The auditor ensure he has appropriate skills and expertise to undertake the internal audit roles. For example, they may need to carry out environmental or social audits.Does the external auditor have relevant experience for this type of audit?

e) Effect on external audit - Internal audit and external audit, currently performs different roles. If both roles are performed by the same firm,the distinction could become blurred. This could lead to a reduced level of service overall and a lower level of credibility being attached to the external audit report.

Measures to be taken.

They are number of measures which the external auditor can introduced to help overcome these problems:

• Separate department which deals with internal and external audit services.


• Proper client acceptance procedures for internal audit work


• training staff to ensure they are aware of the issues involves.


• Separate audit manuals and documentation for internal and external audit work.


• regular review by independent partner to ensure independence.