BAC 3624

Advanced Auditing

Tutorial 13

Question 1
Explain the advantages and disadvantages of outsourcing a companys internal audit services to a firm
specialising only in the provision of internal audit services.
Answer
Advantages of outsourcing the internal audit services to a firm specialising in provision of internal audit
services
Expertise available
The outside firm will be able to provide the necessary expertise for internal audit work. They may be able to
provide a broader range of expertise as they serve many different clients and therefore staff may be available for
specialist work that the company could not afford to employ.
Buy-in skills as necessary
If internal audit is only required for specific functions or particular jobs each year then the expertise can be
purchased as required. Taking this approach will minimise in-house costs.
Independence/Qualifications
As an independent firm it is likely that care will be taken that staff do remain independent and have the
appropriate qualifications in order that they can provide an appropriate high level of service.
Audit techniques training
Outsourcing will remove the need for training internal staff. Effectively training will be provided for free as the
outsourcing firm will be responsible for keeping staff up-to-date with new auditing techniques and processes.
Disadvantages of outsourcing the internal audit services to a firm specialising in provision of internal
audit services
Fee pressure
The company may experience some fee pressure, but only in respect of maintaining cost effectiveness of the
internal audit department.
The relationship needs to be managed carefully to ensure that the firm providing the internal audit services do
not decrease the quality of their work due to insufficient fees.
Knowledge
The firm providing the internal audit services will not have any prior knowledge of the company. This will be a
disadvantage as this will mean that firm providing the internal audit services will need time to ascertain the
accounting systems and internal controls etc in the company before commencing work.
However, provision of an independent view may identify control weaknesses etc that the current internal audit
department have missed.

Question 2
If an audit client wants its external auditor firm to also provide internal audit services discuss the issues the
external auditor needs to consider before they could accept appointment as internal auditors.
ANSWER
Issues to be considered by the external auditors firm
Independence
The external auditor needs to ensure that independence can be maintained in a number of areas:

BAC 3624

Advanced Auditing

Tutorial 13

Independence regarding recommending systems or preparing working papers and subsequent checking of
those systems or working papers. While the internal audit department may need to carry out these functions, the
external must ensure that separate staff are used to provide the internal and external audit functions.
Staff from external auditors firm will be expected to follow the ethical guidance of MIA which means that steps
will be taken to avoid conflicts of interest or other independence issues such as close personal relationships
building up with staff in the audit clients company.
Any real or perceived threats to independence will lower the overall trust that can be placed on internal audit
reports produced by the external audit firm..
Training
As a firm of auditors, the external auditors will automatically provide training for its staff as part of the in-house
compliance with association regulations. The external auditors firm must ensure that staff providing the internal
audit function to the client are aware of relevant guidance for internal auditors.
Skills
The external auditor must ensure that they have staff with the necessary skills and sufficient time to undertake
the internal audit work.
Fee pressure
There may be fee pressure on the external audit firm to either maintain the cost effectiveness of the internal
audit department, or to maintain the competitiveness of the audit fee itself in order to keep the internal audit
work.
Knowledge
As external auditors, they will already have knowledge of audit client. This will assist in establishing the internal
audit departments systems. Documentation will already be available and the audit firm will already be aware of
potential weaknesses in the control systems.

Question 3
When an audit client decides to outsource its internal audit services to its external auditor, describe the control
activities that the audit client should apply to ensure that the internal audit service is being maintained to a high
standard.
Answer
Controls to maintain the standard of the internal audit department
If the external auditors are appointed, ensure that the internal and external audit is managed by different
departments in the audit firm.
Setting and review of performance measures such as cost, areas reviewed etc with explanations obtained for
any significant variances.
Use of appropriate audit methodology, including clear documentation of audit work carried out, adequate
review, and appropriate conclusions drawn.
Review of working papers, ensuring adherence to Malaysian Approved Standards on Auditing where
appropriate and any in-house standards on auditing.
The work plan for internal audit is agreed prior to work commencing and this is followed by the outsourcing
company.