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ACCA Strategic Professional · Strategic Business Leader · Management and internal control systems

Kestrel Bank outsources internal audit to Harlow & Co, which is also the bank's external auditor. The audit committee chair is concerned. Which is the most significant governance problem with this arrangement?

The main problem is the self-review and objectivity threat. The same firm would evaluate the controls it also relies on when forming its external audit opinion, compromising independence. Cost and regulatory knowledge are not inherent difficulties, and an outsourced provider can still report directly to the audit committee.

  1. AThe firm will lack knowledge of banking regulation
  2. BOutsourced internal audit is always more expensive than in-house audit
  3. CSelf-review and objectivity threats arise because the firm would be assessing controls it also relies on for the external audit opinionCorrect
  4. DThe internal audit reports cannot be sent to the audit committee

Explanation

Using the external auditor for internal audit creates self-review and independence threats, as the firm would review its own work and may be unable to remain objective. Cost and regulatory knowledge are not inherent problems, and the outsourced provider can report to the audit committee.

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