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ACCA Strategic Professional · Strategic Business Leader · Internal control and management reporting

Kestrel Foods plc has no internal audit function. Its board is considering outsourcing internal audit to a professional firm. The board wants to retain strong knowledge of the company's operations and avoid dependence on a single external supplier. Which of the following is the most significant risk of full outsourcing in this situation?

The key risk is loss of in-house business knowledge and over-reliance on the external provider. Outsourcing removes a permanent team that understands the organisation. Reporting rights to the audit committee remain, and providers often have strong skills and independence, so other options are wrong.

  1. AThe audit committee loses the right to receive internal audit reports
  2. BInternal audit staff will always lack the technical skills needed for control testing
  3. CThe outsourced provider cannot be independent of management by definition
  4. DLoss of in-house business knowledge and over-reliance on the external providerCorrect

Explanation

Full outsourcing removes a permanent in-house team, so organisational knowledge may be lost and the company becomes dependent on the supplier. The audit committee still receives reports, and external providers are often well qualified and can be independent, so the other options overstate or misstate the risks.

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