Audit and Assurance · The scope of the internal audit function, outsourcing and internal audit assignments

Outsourcing Internal Audit: Advantages, Disadvantages and Controls

Updated 11 October 2026 · Fact-checked

Outsourcing internal audit means a company hires an outside firm to perform some or all internal audit work instead of using its own staff. Co-sourcing shares the work. For exam answers, give advantages, disadvantages, independence threats and the controls management must keep, all tied to the scenario.

Understand Outsourcing Internal Audit

Internal audit is an appraisal of an organisation's operations, risk management, controls and governance, carried out for management and those charged with governance. A company can run it in-house with its own employees. It can outsource it to an external provider, such as an accountancy firm. Or it can co-source, where in-house staff and an external provider share the work.

Why would a company outsource? Usually because an in-house team is costly, hard to staff or lacks skills. A small company may not have enough work to justify a full-time team. A provider can supply specialists, such as IT auditors, on demand.

The risks sit mostly in knowledge, control and independence. An outside firm does not know the business as well as staff do. Management has less direct control over the work. The provider may be less committed, or may let its commercial interest in the fee affect what it reports.

Independence needs care. An outsourced internal auditor is not the same as the external auditor. If the external audit firm also provides the internal audit, there is a self-review threat, and in a listed or public interest entity, the ACCA Code of Ethics restricts this. Management must not hand over its responsibility for internal control. Management also should not let the provider make management decisions.

The exam asks you to apply this to a scenario. A company with no internal audit, a fast-growing business, or a firm with a poor in-house team are typical settings. Your answer should recommend, with reasons, rather than just list points.

Key rules to remember

Forms of internal audit resourcing: In-house = own employees; Outsourced = external provider does the work; Co-sourced = shared between both; Name the form you are discussing before you list points.
Key advantages (memory aid): Skills, Flexibility, Cost, Independence/objectivity, Fresh view; Advantages are not guaranteed. Link each to the scenario.
Key disadvantages (memory aid): Knowledge, Control, Commitment, Confidentiality, Cost, Independence threat; Raise the self-review threat if the external auditor is the provider.
Management responsibility: Management stays responsible for internal control, even when internal audit is outsourced; Responsibility cannot be outsourced.

How to solve Outsourcing Internal Audit questions

Use this method for any question on outsourcing or co-sourcing internal audit.

1Read the scenario and note the company's size, complexity, current internal audit set-up and skills gaps.
2Identify exactly what is asked: advantages, disadvantages, independence, controls, or a recommendation.
3List points in a balanced way, and give a reason for each, not just a heading.
4Link each point to a fact in the scenario, such as a small finance team or specialist IT systems.
5Consider independence: who is the provider, and is it also the external auditor?
6State the controls management should keep, such as a written agreement, performance review, and reporting to the audit committee.
7Finish with a short recommendation or conclusion if the question asks for one.

Quickest way: Two-column plus controls

When to use it: Use when time is short, and the question asks for advantages and disadvantages or a discussion.

Draw two short columns: for and against.
Write three or four points in each, each with a one-line reason.
Tie at least two points to scenario facts.
Add a line on independence and on controls over the provider.
Match the number of points to the marks available.

Common mistakes in Outsourcing Internal Audit

Listing generic points with no link to the scenario.
Students memorise lists and write them out.
Fix: Add a scenario fact to every point, such as the company's size or lack of IT skills.
Saying outsourcing is always cheaper.
Outsourcing is assumed to save the cost of salaries.
Fix: Say it may reduce fixed costs, but fees can be high, especially for specialist work or if the contract is poorly managed.
Forgetting that the external auditor providing internal audit creates a self-review threat.
Students treat internal and external audit as separate by definition.
Fix: Check who the provider is. If it is the external audit firm, discuss the threat and the Code of Ethics restrictions.
Claiming management can hand over responsibility for internal control.
Students confuse doing the work with owning the responsibility.
Fix: State that responsibility stays with management and directors.
Ignoring controls over the outsourced provider.
Students only discuss advantages and disadvantages.
Fix: Add controls: a clear contract, defined scope, regular reporting, review of quality and an audit committee oversight.
Confusing outsourcing with co-sourcing.
The terms sound similar.
Fix: Define each in one line. Co-sourcing keeps an in-house team and adds external help.

Worked examples

Example 1

Greenfield Foods is a growing company with no internal audit department. The board is considering outsourcing internal audit to an external firm. Discuss the advantages and disadvantages of this for Greenfield Foods. (6 marks)

Show the solution

Advantage: Greenfield has no existing team, so outsourcing avoids the cost and delay of recruiting and training staff.
Advantage: the provider can supply specialist skills, such as IT or fraud work, when needed, which a small company could not justify employing full time.
Advantage: the provider may be more objective as it is not part of the management structure.
Disadvantage: the provider has less knowledge of Greenfield's business and may need time to learn it, which affects the quality of early work.
Disadvantage: management has less day-to-day control, and the provider may rotate staff, hurting continuity.
Disadvantage: confidential information is shared with an outsider, and fees may rise over time.

Answer: Outsourcing suits a growing company without a team, giving skills, flexibility and objectivity. The drawbacks are weaker business knowledge, less control, confidentiality risk and possibly rising fees. Greenfield should set a clear contract and have the provider report to the audit committee.

Example 2

Harbour plc is listed. Its external auditor has offered to take over its internal audit as well. Explain the ethical issues and the controls the audit committee should apply. (6 marks)

Show the solution

The external auditor would review controls that it designed or helped run, creating a self-review threat to objectivity.
There is also a management threat if the firm takes part in decisions that are management's job, and a familiarity threat from a close long-term relationship.
Because Harbour is listed, the Code of Ethics restricts providing internal audit services that would affect the external audit. The firm may have to decline.
Controls: the audit committee should approve any internal audit arrangement, and consider using a different firm for internal audit.
If any arrangement proceeds, use separate teams, keep management responsible for internal control, and review the provider's work.

Answer: The offer creates a self-review threat and possibly a management threat. For a listed company the restrictions are tight, so the better course is to use a different provider or keep internal audit in-house, with audit committee oversight and management retaining responsibility for controls.

Exam tips

Always tie points to the scenario. Generic lists score poorly.
Check who the proposed provider is. If it is the external auditor, discuss independence.
Show balance: the question may ask for a recommendation, so give a reasoned view.
Remember controls: contract, scope, reporting lines and monitoring by the audit committee.
Match your number of points to the marks, usually one mark per developed point.

Outsourcing Internal Audit in other exams

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

Outsourcing Internal Audit: frequently asked questions

What is the difference between outsourcing and co-sourcing internal audit?

Outsourcing gives all or most internal audit work to an external provider. Co-sourcing keeps an in-house team and uses an external provider for part of the work, such as specialist reviews or peak workloads.

Can the external auditor also perform internal audit?

It creates a self-review threat and may breach ethical rules, especially for listed or public interest entities. The firm must assess the threats and, where they cannot be reduced, decline the work.

Does outsourcing remove management's responsibility for internal control?

No. Management and directors remain responsible for internal control and risk management. Outsourcing only transfers the performance of the internal audit work.

What controls should a company put in place over an outsourced internal audit provider?

Use a written agreement with a clear scope and standards. Have the provider report to the audit committee, review the quality of work and monitor fees and performance.