OUTSOURCING THE INTERNAL AUDIT FUNCTIONS

Outsourcing

Outsourcing involves the transfer of management’s day-to-day execution of
an entire business function to an external service provider. An outsourcing
arrangement is a contract between an organisation and an outsourcing vendor
to provide internal audit services. Some institutions consider entering into these
arrangements to enhance the quality of their control environment by obtaining
the services of a vendor with the knowledge and skills to critically assess, and
recommend improvements to their internal control systems. The internal audit
services under contract can be limited to helping internal audit staff in an
assignment for which they lack expertise. Such an arrangement is typically
under the control of the institution’s manager of internal audit, and the
outsourcing vendor reports to him or her.
Entities often use outsourcing vendors for audits of areas requiring more
technical expertise, such as electronic data processing. Such uses are often
referred to as internal audit assistance or audit co-sourcing. Some outsourcing
arrangements are structured so that an outsourcing vendor performs virtually
all the procedures or tests of the system of internal control. Under such an
arrangement, a designated manager of internal audit in the entity oversees
the activities of the outsourcing vendor and typically is supported by internal
audit staff. The outsourcing vendor may assist the audit staff in determining
risks to be reviewed and may recommend testing procedures, but the internal
audit manager is responsible for approving the audit scope, plan, and
procedures to be performed. Furthermore, the internal audit manager is
responsible for the results of the outsourced audit work, including findings,
conclusions, and recommendations. The outsourcing vendor may report these
results jointly with the internal audit manager to the audit committee.

Internal Audit

Effective internal control is a foundation for the safe and sound operation of
any organisation. The board of directors and senior management of an entity
are responsible for ensuring that the system of internal control operates
effectively. Their responsibility cannot be delegated to others within the
institution or to outside parties. An important element in assessing the
effectiveness of the internal control system is an internal audit function. When
properly structured and conducted, internal audit provides directors and senior
management with vital information about weaknesses in the system of internal
control so that management can take prompt, remedial action.
The Institute of Internal Auditors define Internal auditing as an independent,
objective assurance and consulting activity designed to add value and improve
an organisation’s operations. It helps an organisation accomplish its objectives
by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.
In addressing various quality and resource issues, many institutions have been
engaging independent public accounting firms and other outside professionals
(outsourcing vendors) in recent years to perform work that traditionally has
been done by internal auditors. These arrangements are often called internal
audit outsourcing, internal audit assistance, audit co-sourcing, or extended
audit services.

Reasons for Outsourcing the Internal Audit Function

The reasons for outsourcing the internal audit functions are:
(a) Available Resources
Appropriate internal audit resources may be scarce or unavailable in
certain situations and for a number of reasons. Whether selected as a
temporary alternative or permanent solution, outsourcing may be
necessary to acquire timely, professional internal audit services and
competent internal auditing staff.
(b) Size of the Organisation
Both large and small organisations may need to take advantage of
outsourcing alternatives. Common reasons include temporary staff
shortages, specialty skills, coverage of remote business locations, special
project work, and supplemental staff to meet tight deadlines. Small
organisations may also find it necessary to explore outsourcing due to
the inability to hire permanent or full-time internal audit staff.

Types of Outsourcing Alternatives

Organisations may need to define the types of outsourcing engagements or
practices to be considered. Outsourcing alternatives include:
(a) Total outsourcing; where 100 percent of the internal audit services
are obtained from external sources, usually on an ongoing basis.
(b) Partial outsourcing; where less than 100 percent of the internal audit
services are obtained from external sources, usually on an ongoing basis.
(c) Co-sourcing; where external resources participate on joint
engagements with in-house internal audit staff. Engagements may be
ongoing or for specific terms.
(d) Sub-contracting; where a specific engagement or portion of some
engagement is performed by an external party, typically for a limited
time period. Management and oversight of the engagement is normally
provided by in-house internal audit staff.

Advantages and Disadvantages of Outsourcing

(a) Outsourcing affords the client the luxury of having access to global
expertise and cutting edge technology in internal auditing. Because
internal audit is not a core experience area for many companies, many
internal audit functions are not adequately equipped with either
intellectual or human capital, to execute their mandate effectively.
Outsourcing it to professionals provides the organisation with the best
expertise in this area.
(b) Due to the prohibitive cost involved; most organisations do not make
sufficient investment to improve their internal audit functions and
generally lack access to updated methodologies and technologies
because of the prohibitive costs. This results in high staff turnover as
they struggle to hire and retain talented personnel, who wish to make a
career in internal auditing. Outsourcing saves the organisation this
dilemma.
The following items, while not all-inclusive, should be considered when
outsourcing the internal audit function:
(a) Independence of the service providers;
(b) Allegiance of in-house versus external service provide;
(c) Professional standards followed by the service provider;
(d) Qualifications of the service provider;
(e) Staffing, training, turnover, rotation of staff, management;
(f) Flexibility in staffing resources to meet engagement needs or special
requests;
(g) Availability of resources;
(h) Retention of institutional knowledge for future assignments;
(i) Access to best practice or insight to alternative approaches;
(j) Culture of the organisation receptiveness to service providers;
(k) Insight into the organisation by the service provider;
(l) Coverage of remote locations;
(m) Coordination with in-house internal audit services;
(n) Coordination with external auditor;
(o) Use of internal auditing as a training ground for internal promotions;
(p) Retention, access to and ownership of working papers;
(q) Acquisition and availability of specialty skills;
(r) Cost considerations; and
(s) Good standing membership in an appropriate professional organisation.

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