Advantages of Outsourcing the Internal Audit Function:

1. Skills and Experience: International & Co. likely has a large pool of experienced staff with specialist skills. PBL would benefit from expertise in areas where its internal staff might lack proficiency.
2. Flexibility: PBL can adjust the number of internal auditors required based on the workload and requirements. Outsourcing provides the flexibility to scale up or down as needed.
3. Cost Management: Outsourcing can help control internal audit costs. Training costs and hiring additional staff are eliminated, and agreed-upon fees with the external firm make budgeting easier.
4. Immediate Solution: Given that the current internal audit department is small, outsourcing could quickly fill the staffing needs, ensuring immediate operational efficiency.
5. Focus on Core Business: Outsourcing allows management to focus on their core banking operations rather than building and managing an internal audit department. (3 points for 3 marks)

Disadvantages of Outsourcing the Internal Audit Function:

1. Confidentiality Risks: International & Co. would have access to PBL’s confidential information. While confidentiality clauses would be included in the agreement, breaches may still occur.
2. Loss of Control: PBL would have less control over the internal audit process, as it would need to coordinate work schedules with the external firm, potentially leading to delays.
3. Familiarity with the Business: External auditors may lack familiarity with PBL’s internal processes and culture, resulting in less effective audits. Rotating audit staff from the external firm could exacerbate this issue.
4. Costs Could Increase: Over time, the fees charged by International & Co. could increase, making outsourcing more expensive than maintaining an in-house audit team.
5. Redundancy Issues: If the internal audit department is outsourced, existing internal audit staff may need to be laid off, which could be costly and create dissatisfaction within the company. (3 points for 3 marks)

Advantages for International & Co:

1. Increased Fee Income: Outsourcing the internal audit function to International & Co. would generate additional fee income for the firm, boosting their revenue.
2. Specialization and Efficiency: International & Co. would be able to bring in a specialized team, making the audit process more efficient. (2 marks)

Disadvantages for International & Co:

1. Independence Concerns: If International & Co. performs both internal and external audit functions for PBL, there may be a self-review threat. The firm would need to implement safeguards, such as using separate teams for internal and external audits, to ensure independence is maintained. (2 marks)

(Total: 10 marks)