Exercise 2
Reporting system
The chief internal auditor at Barker Co reports into the finance
director. This limits the effectiveness of the internal audit reports
as the finance director will also be responsible for some of the
financial systems that the internal audit function is reporting on.
Similarly, the chief internal auditor may soften or limit criticism in
reports to avoid confrontation with the finance director.
To ensure independence, the chief internal auditor should report
into the audit committee, as the head of internal audit at Murray
Co does.
Recruitment of staff
All of the internal audit team at Barker Co are recruited by the
finance director. The finance director may appoint personnel who
are less likely to criticise his work. To ensure independence, the
head of internal audit should be appointed by the audit
committee, and they should then recruit and appoint the rest of
the team, as at Murray Co.
Scope of work
The scope of work of internal audit at Barker Co is decided by the
finance director in discussion with the chief internal auditor. This
means that the finance director may try and influence the chief
internal auditor regarding the areas that the internal audit
department is auditing, possibly directing attention away from
any contentious areas that the director does not want auditing.
To ensure independence, the scope of work of the internal audit
department should be decided by the chief internal auditor,
perhaps with the assistance of an audit committee, as at Murray
Co.
Audit work
The internal audit team at Barker Co review their own work. This
limits independence as the auditor may overlook or fail to identify
errors or deficiencies in those areas. This is a self-review threat.
If possible, the internal audit team should not have operational
responsibility. However, if this is not possible, the internal audit
work should be arranged so that no member of the team reviews
areas where they have operational responsibility, as Murray Co
does.
Lengths of service of internal audit staff
The internal audit team staff of both companies have been
employed for a long time. This may limit their effectiveness as
they will be very familiar with the systems being reviewed and
therefore may not be sufficiently objective to identify errors in
those systems.
However, there are sufficient staff at Murray Co to ensure that the
team can be rotated into different areas of internal audit work,
and their work can be independently reviewed. Due to the small
number of staff in the internal audit team, Barker Co may not be
able to achieve this.
Given the extent of limitations, it may be appropriate for Barker
Co to outsource its internal audit function.
Variation of standards
Staff at Barker Co follow the auditing standards with which they
are familiar. Standards of internal audit are not uniform across
the profession. This could lead to inconsistency in the way each
internal audit assignment is performed. This can lead to
manipulation of internal audit aims and measurement. Barker Co
should follow an agreed, recognised set of professional internal
audit standards, such as those followed by Murray Co.
Exercise 2
(a)Benefits of outsourcing to NFA
Expertise available
The NFA partnership will be able to provide the necessary
expertise for internal audit work. They may be able to provide
a broader range of expertise as they serve many different
clients therefore staff may be available for specialist work that
Octball could not afford to employ.
Obtain skills as and when required
If internal audit is only required for specific functions or
particular jobs each year then the expertise can be purchased
as required. Taking this approach will minimise in-house costs.
Independence
As an independent firm which does not perform the audit of
the financial statements it is likely that they can provide a high
level of service with appropriate objectivity. In particular, there
will be no self review threats.
Audit techniques – training
Outsourcing will remove the need for training internal staff.
The outsourcing firm will be responsible for providing training
for their staff and keeping them up-to-date with new auditing
techniques and processes.
Continuity of service – staffing
As provision of internal audit services is the NFA partnership's
main activity, they should also be able to budget for client
requirements. As a larger internal auditing firm, they may be
able to offer staff better career progression which should assist
staff retention.
Problems with outsourcing to NFA
Fee pressure
NFA may experience some fee pressure, but only in respect of
maintaining cost effectiveness of the internal audit
department. The relationship needs to be managed carefully
to ensure that NFA do not decrease the quality of their work
due to insufficient fees.
Knowledge
The NFA partnership will not have any prior knowledge of
Octball. This is a disadvantage as it will mean the partnership
will need time to ascertain the accounting systems and
controls in Octball before commencing work. However,
provision of an independent view may identify control
deficiencies that the current internal audit department have
missed.
Location
The NFA partnership may not be able to provide this service to
Octball as they are a local firm and therefore the issue of
travel and working away from home would remain.
(b)Matters to be considered by T&M
Independence
T&M need to ensure that independence can be maintained in a
number of areas:
Independence regarding recommending systems or
preparing working papers and subsequent checking of those
systems or working papers. While the internal audit
department may need to carry out these functions, T&M
must ensure that separate staff are used to provide the
internal and external audit functions.
Staff from T&M will be expected to follow the ethical
guidance of ACCA which means that steps will be taken to
avoid conflicts of interest or other independence issues such
as close personal relationships building up with staff in
Octball. Any real or perceived threats to independence will
lower the overall trust that can be placed on the internal
audit reports produced by T&M.
Skills
T&M must ensure that they have staff with the necessary skills
and sufficient time to undertake the internal audit work in
Octball. As a firm of auditors, T&M will automatically provide
training for its staff as part of the in-house compliance with
association regulations (e.g. compulsory CPD). T&M will need
to ensure that staff providing the internal audit function to
Octball are aware of relevant guidance for internal auditors.
Fee pressure
There may be fee pressure on T&M, either to maintain the cost
effectiveness of the internal audit department, or to maintain
the competitiveness of the audit fee itself in order to keep the
internal audit work.
Knowledge
As external auditors, T&M will already have knowledge of
Octball. This will assist in establishing the internal audit
department as systems documentation will already be
available and the audit firm will already be aware of potential
deficiencies in the control systems.
(c)Controls to maintain the standard of the internal audit
department
If T&M are appointed, the internal and external audits should
be performed by different departments within the firm.
Performance measures such as cost, areas reviewed, etc.
should be set and reviewed. Explanations should be
obtained for any significant variances.
Appropriate audit methodology should be used, including
clear documentation of audit work carried out, adequate
review, and appropriate conclusions drawn.
Working papers should be reviewed, ensuring adherence to
International Standards on Auditing where appropriate and
any in-house standards on auditing.
The work plan for internal audit should be agreed prior to
the work commencing and this should be followed by the
outsourcing company.