Question

To what extent can an auditor rely on the work of the internal auditor? What are the main advantages and disadvantages for a company when considering whether to out source their IA Function?

Answer 1

Much of the tasks and activities performed by a company’s internal audit function tends to overlap with the work conducted by the external auditor’s functions and tasks, specifically in areas covering the assessment of control processes. The external auditor can rely on the work of the internal auditor because in carrying out detailed work entailing the evaluating and reviewing the company’s internal control framework internal audit performs various processes and procedures on financial controls hich are relevant to the external audit. This aids the external auditor because instead of duplicating these procedures, the external auditor may be able to place trust and reliance on the work carried out by the internal auditor.

With the knowledge of the internal auditors, the external auditor can get additional insights into the entity

The external auditor can use internal auditors who may have relevant knowledge , specialization and expertise in certain areas, and that helps the external audit team as they can focus their time and energy on the more significant audit issues.

The external auditor, during their functioning and when in the process of discharging their responsibilities must take an informed decision whether it is appropriate in the given circumstances to use internal audit to provide direct assistance.

Outsourcing is the process in which the management acquires or purchases the services of auditing from outside. The main reason behind the decision of outsourcing is that the process of monitoring and reviewing required by certain companies could be done in a small amount of time and therefore involving full time employees cannot be justified or it may prove to be very costly to maintain an internal audit function consisting of their own employees.

The advantages of outsourcing the audit function are as follows:

1. Service providers have high quality staff i.e. they are experts and have the specialized knowledge ,skill and assess what the management expects from them. Also they have a high degree of expertise and professionalism since they are trained in multiple areas thereby increasing the quality of the advice to the management on best practices
2. Outsourcing can provide a prompt and immediate audit department thereby doing away with appointment of audit staff and in the process cutting costs e.g. salaries to the employees, benefits and allowances.
3. Outsourcing leads to the work be done independent of the organization staff and that leads to greater independence in the internal audit function with minimal room for collision thereby giving value added reports
4. Outsourcing improves ,increases and aids the auditor in understanding the business environment policies and procedures thereby enhancing the credibility of the financial reports and reducing their liability.

The disadvantages of outsourcing the audit function are as follows:

1. The cost of outsourcing the internal audit functions tend to be very high and expensive thereby inducing the directors to not to have the internal audit functions at all.
2. The company may end up getting the same firm’s services for internal and external audit services leading to inferior reports.
3. Outsourcing leads to duplication of work if the same procedures are used in gathering evidence in the final audit also.
4. Outsourcing is not suitable for small businesses having lesser transactions.