4 (a) Discuss the advantages and disadvantages of outsourcing an internal audit department. (8 marks)
(b) MonteHodge Co has a sales income of $253 million and employs 1,200 people in 15 different locations.
MonteHodge Co provides various financial services from pension and investment advice to individuals, to
maintaining cash books and cash forecasting in small to medium-sized companies. The company is owned by
six shareholders, who belong to the same family; it is not listed on any stock-exchange and the shareholders have
no intention of applying for a listing. However, an annual audit is required by statute and additional regulation of
the financial services sector is expected in the near future.
Most employees are provided with on-line, real-time computer systems, which present financial and stock market
information to enable the employees to provide up-to-date advice to their clients. Accounting systems record
income, which is based on fees generated from investment advice. Expenditure is mainly fixed, being salaries,
office rent, lighting and heating, etc. Internal control systems are limited; the directors tending to trust staff and
being more concerned with making profits than implementing detailed controls.
Four of the shareholders are board members, with one member being the chairman and chief executive officer.
The financial accountant is not qualified, although has many years experience in preparing financial statements.
Required:
Discuss the reasons for and against having an internal audit department in MonteHodge Co. (12 marks)
(20 marks) 4 (a) Outsourcing internal audit
Advantages of outsourcing internal audit
Staff recruitment
There will be no need to recruit staff for the internal audit department; the outsourcing company will provide all staff and
ensure staff are of the appropriate quality.
Skills
The outsourcing company will have a large pool of staff available to provide the internal audit service. This will provide access
to specialist skills that the company may not be able to afford if the internal audit department was run internally.
Set up time
The department can be set up in a few weeks rather than taking months to advertise and recruit appropriate staff.
Costs
Costs for the service will be agreed in advance. This makes budgeting easier for the recipient company as the cost and
standard of service expected are fixed.
Flexibility (staffing arrangements)
Staff can be hired to suit the workloads and requirements of the recipient company rather than full-time staff being idle for
some parts of the year.
Disadvantages of outsourcing internal audit
Staff turnover
The internal audit staff allocated to one company may change frequently; this means that company systems may not always
be fully understood, decreasing the quality of the service provided.
External auditors
Where external auditors provide the internal audit service there may be a conflict of interest (self-review threat), where internal
audit work is then relied upon by external auditors.
Cost
The cost of the outsourced service may be too high for the company, which means that an internal audit department is not
established at all. There may be an assumption that internal provision would be even more expensive.
Confidentiality
Knowledge of company systems and confidential data will be available to a third party. Although the service agreement should
provide confidentiality clauses, this may not stop breaches of confidentiality e.g. individuals selling data fraudulently.
Control
Where internal audit is provided in-house, the company will have more control over the activities of the department; there is
less need to discuss work patterns or suggest areas of work to the internal audit department.
(b) Need for internal audit
For establishing an internal audit department
Value for money (VFM) audits
MonteHodge has some relatively complex systems such as the stock market monitoring systems. Internal audit may be able
to offer VFM services or review potential upgrades to these systems checking again whether value for money is provided.
Accounting system
While not complex, accounting systems must provide accurate information. Internal audit can audit these systems in detail
ensuring that fee calculations, for example, are correct. Computer systems
Maintenance of computer systems is critical to MonteHodge’s business. Without computers, the company cannot operate.
Internal audit could review the effectiveness of backup and disaster recovery arrangements.
Internal control systems
Internal control systems appear to be limited. Internal audit could check whether basic control systems are needed,
recommending implementation of controls where appropriate.
Effect on audit fee
Provision of internal audit may decrease the audit fee where external auditors can place reliance on the work of internal audit.
This is unlikely to happen during the first year of internal audit due to lack of experience.
Image to clients
Provision of internal audit will enable MonteHodge Co to provide a better ‘image’ to its clients. Good controls imply client
monies are safe with MonteHodge.
Corporate governance
Although MonteHodge does not need to comply with corporate governance regulations, internal audit could still recommend
policies for good corporate governance. For example, suggesting that the chairman and chief executive officer roles are split.
Compliance with regulations
MonteHodge is in the financial services industry. In most jurisdictions, this industry has a significant amount of regulation.
An internal audit department could help ensure compliance with those regulations, especially as additional regulations are
expected in the future.
Assistance to financial accountant
The financial accountant in MonteHodge is not qualified. Internal audit could therefore provide assistance in compliance with
financial reporting standards, etc as well as recommending control systems.
Against establishing of internal audit department
No statutory requirement
As there is no statutory requirement, the directors may see internal audit as a waste of time and money and therefore not
consider establishing the department.
Accounting systems
Many accounting systems are not necessarily complex so the directors may not see the need for another department to review
their operations, check integrity, etc.
Family business
MonteHodge is owned by a few shareholders in the same family. There is therefore not the need to provide assurance to other
shareholders on the effectiveness of controls, accuracy of financial accounting systems, etc.
Potential cost
There would be a cost of establishing and maintaining the internal audit department. Given that the directors consider focus
on profit and trusting employees to be important, then it is unlikely that they would consider the additional cost of establishing
internal audit.
Review threat
Some directors may feel challenged by an internal audit department reviewing their work (especially the financial accountant).
They are likely therefore not to want to establish an internal audit department. | 
发表于 2008-10-11 15:50
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