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ACCA Applied Skills · Audit and Assurance

Scope of the Internal Audit Function, Outsourcing and Assignments

Internal audit is an in-house or outsourced function that evaluates and improves risk management, control and governance for management and those charged with governance. To answer questions, identify the scenario's need, independence and reporting line, then apply the right assignment type, such as value for money or compliance, and explain your reasoning.

What this chapter covers

This chapter explains what internal audit does, who needs it, how a company can outsource it, and what internal auditors actually review. You learn the scope of the function: evaluating risk management, internal control and governance, plus operational, financial, compliance and value for money work.

The chapter also covers the decision to have an internal audit function at all. Size, complexity, regulation, management style and cost all push the answer one way or the other. Then it covers outsourcing, with its benefits and risks, and the independence and reporting arrangements that keep the function credible.

It connects to the rest of the paper in three ways. Internal audit links to governance and internal control, because the function is part of a company's monitoring of controls. It links to risk assessment, because internal audit work is risk-based. It also links to external audit, where the external auditor considers whether and how to rely on internal audit work. Expect it in Section A objective questions, in OT cases about a company's governance, and in written constructed-response questions.

Internal audit questions are usually practical. You are given a company and asked whether it needs internal audit, whether to outsource it, or what an assignment should cover. These are application questions where a clear, scenario-based point earns marks, and the same ideas appear in objective tests and written answers. The content is also easy to organise into lists such as benefits, risks and factors, so careful practice pays off quickly. Because the objective tests are all or nothing, you need precise knowledge of the differences between internal and external audit, and between assignment types.

The scope of the internal audit function, outsourcing and internal audit assignments: topics in the order to study them

  1. 1Internal Audit Function: Role and ScopeStart here because every other topic depends on knowing what internal audit does and how it differs from external audit.
  2. 2Factors Affecting the Need for Internal AuditOnce you know the role, you can judge when a company needs it, which is a common scenario question.
  3. 3Outsourcing Internal AuditThis builds on the need for the function by asking who should perform it, in-house or an external provider.
  4. 4Internal Audit Assignments: Value for Money and Other ReviewsStudy the work itself after the structure of the function, so you can match assignment types to scenarios.
  5. 5Internal Audit Independence, Reporting and EvaluationFinish with independence and reporting, which tie the earlier topics together and are tested through judgement.

How to prepare The scope of the internal audit function, outsourcing and internal audit assignments

Treat this chapter as a set of short lists that you must apply to a scenario. Memorising lists alone will not earn written marks.

  1. Write a one-page comparison of internal and external audit covering objectives, appointment, reporting, independence and scope.
  2. Learn the factors for and against having an internal audit function, then test yourself on short scenarios to decide which factors apply.
  3. List the advantages and disadvantages of outsourcing, and practise pairing each with a specific company situation.
  4. Memorise the main assignment types, such as value for money, financial, operational, compliance and IT reviews, and what each would examine.
  5. Practise independence questions by identifying the reporting line, the threats and the safeguards, such as reporting to the audit committee.
  6. Do objective test questions first, then write two or three short answers in which every point is tied to the scenario.
  7. Revisit your errors a few days later and rewrite any list you missed.

Common mistakes in The scope of the internal audit function, outsourcing and internal audit assignments

  • Treating internal audit as just a smaller version of external audit.

    Fix: Compare them on purpose, appointment, reporting and independence, and remember internal audit scope is set by management.

  • Listing general advantages and disadvantages of outsourcing without using the scenario.

    Fix: Choose only the points that fit the company described and say why each matters to it.

  • Mixing up economy, efficiency and effectiveness.

    Fix: Define each in one line and attach a simple example, such as cost of purchases, output per hour and goal achievement.

  • Assuming the company must have internal audit because it is large.

    Fix: Weigh several factors, including complexity, regulation, risk, culture and cost.

  • Ignoring reporting line when asked about independence.

    Fix: Always check who the function reports to, who sets its work and who decides pay and appointment.

Last-day revision: The scope of the internal audit function, outsourcing and internal audit assignments

  • Internal audit evaluates and improves risk management, control and governance.
  • Internal audit objectives are set by management or those charged with governance; external audit objectives are set by law and standards.
  • Internal auditors report to management or the audit committee; external auditors report to shareholders.
  • Need for internal audit rises with size, complexity, regulation and risk.
  • Lack of an internal audit function does not by itself prevent the audit of financial statements.
  • Outsourcing can bring expertise and flexibility but may weaken company knowledge and control.
  • Value for money work looks at economy, efficiency and effectiveness.
  • Economy is low cost for the quality, efficiency is output per input, effectiveness is achieving objectives.
  • Operational reviews look at processes; compliance reviews check adherence to laws and policies.
  • Reporting to the audit committee supports independence.
  • Evaluate any internal audit function for objectivity, competence and due professional care.
  • Always link each point to the scenario facts.

The scope of the internal audit function, outsourcing and internal audit assignments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The scope of the internal audit function, outsourcing and internal audit assignments: frequently asked questions

What is the main purpose of internal audit?

Internal audit provides assurance and advice on risk management, internal control and governance. Its work is set by management or those charged with governance. It helps the organisation improve, not just find errors.

Is internal audit compulsory for every company?

Not in general. Some listed or regulated entities may be expected to have one, but many companies decide based on need. In the exam, argue the decision from size, complexity, risk and cost.

What is the difference between internal and external audit?

External audit gives an opinion on financial statements for shareholders and is required by law for many entities. Internal audit is set up by the organisation and covers wider areas such as controls and efficiency. Internal audit reports internally.

How do I answer a value for money question?

Split the activity into economy, efficiency and effectiveness. Say what you would examine under each heading and what evidence you would use. Tie each point to the business in the scenario.

Why is outsourcing internal audit a risk?

The provider may know the business less well, and control over the work is reduced. There can also be threats to independence, especially if the same firm provides other services. Costs and confidentiality may also be concerns.