financial accounting class

5 challenges of outsourcing internal audit function.

Internal audit is function in the organization responsible for monitoring internal control and helping  management to manage and control risk. In many cases internal auditors are employed staff of organization but in some cases management may decide to hire the internal audit services from third party (outsourcing). There are number of advantages of outsourcing internal audit services such as more independence to internal auditor, readily available skills and expertise and low cost of maintaining the internal audit function. However, outsourcing of internal audit faces number of challenges.

The following are possible challenges which may be caused by outsourcing internal audit function:

  • Control: An entity may not have the same control over its internal audit work if the work is outsourced. For employed internal audit staff the entity have direct control over what they can do but if the service is outsourced the staff performing internal audit are directly under the control of third party.
  • Conflict of interest: If internal audit work is carried out by the entity’s firm of outsourced auditors, there is likely to be conflict of interest bordering on loyalty which in turn affects the independence and objectivity in reporting. The hired auditors may have a conflict of interest( on independence and objectivity in reporting).
  • Cost: An accountancy firm could charge high fees for internal audit services. the cost may be higher due to fact that the cost charged by third party include both service cost and profit portion.
  • Confidentiality: The internal auditors provided by an external firm will be expected to maintain complete Confidentiality about the client’s affairs. However, the risk of leak maybe higher than if full time internal auditors are employed.
  • Changing personnel: The internal auditors provided by external firm may change continually and there may be lack of continuity as consequence. The internal auditors being used may not have an immediate understanding of the client’s business.

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