- 15 Marks
Question
The Internal Audit Unit of Oluvia Bank Limited has been accused of collusion with staff in committing monumental fraud. The following types of fraud were found to be common:
- Cheque suppression
- Fraudulent bookkeeping to overstate income
- Inflation of the worth of the company’s assets
- Intercepting replaced customers’ cards
- Fraudsters impersonating Senior Managers or Chief Executive Officer
- Online banking fraud, such as phishing, malware attacks, and clone websites
- Impersonating the owner of an account or using fake documents to open an account under someone else’s name (no proper Know Your Customer conducted)
The bank examiners came and were surprised at the level of fraud in the bank and requested management to address it urgently.
After the supervisory visit, the board of directors discussed the issue with the bank’s external auditors, who suggested that the bank could outsource the internal audit functions. The Board of Directors found this suggestion favorable and mandated the Managing Director to act swiftly and report back with details at the next board meeting.
Required:
a. Discuss the main reasons for outsourcing internal audit functions. (3 Marks)
b. Outline the advantages and disadvantages of outsourcing. (10 Marks)
c. Discuss which part of the internal audit function cannot be outsourced. (2 Marks)
Answer
a. Reasons for Outsourcing Internal Audit Functions:
Some entities outsource their internal audit functions, and the primary reasons include:
- Legal Accountability: The accounting firm providing outsourced internal audit services may be held accountable for any breach of contract or negligence, and it typically carries professional indemnity insurance to cover potential claims.
- Professional Standards and Regulation: Accounting firms are subject to professional codes of conduct, ensuring a high standard of service that may not be as rigorously maintained by in-house internal audit departments.
- Specialist Expertise: Accounting firms often employ highly trained specialists with expertise in diverse areas, which might not be readily available within the organization.
- Resource Availability: External firms have a broader pool of staff, allowing them to handle urgent internal audit assignments more efficiently.
- Independence: An external provider typically maintains a higher level of independence from the entity’s management, reducing potential conflicts of interest.
b. Advantages and Disadvantages of Outsourcing:
Advantages:
- Cost Savings: Outsourcing can be more cost-effective than maintaining a fully staffed internal audit department.
- Access to Skills and Expertise: External providers often bring specialized skills and advanced technologies that may not be available in-house.
- Up-to-Date Techniques and Technology: External agencies often use the latest audit techniques and tools.
- Focus on Core Activities: Management can concentrate on core business activities without being distracted by audit functions.
Disadvantages:
- Loss of Control: The company may have less direct control over the audit process.
- Risk of Confidentiality Breaches: Sensitive information may be exposed to third parties, posing confidentiality risks.
- Dependence on the Provider: Over-reliance on external providers may reduce the company’s internal capabilities over time.
- Potential Conflicts of Interest: If the outsourced audit provider also serves as the external auditor, it may create independence issues.
c. Internal Audit Functions that Cannot be Outsourced:
Certain core aspects of the internal audit function must remain within the organization to ensure compliance, maintain confidentiality, and uphold direct oversight. These functions include:
- Governance Oversight: Oversight of governance issues and direct communication with the board or audit committee.
- Confidential Investigations: Sensitive investigations requiring in-depth knowledge of the organization’s internal workings.
- Topic: Internal Audit and Corporate Governance
- Series: NOV 2022
- Uploader: Dotse