Skip to content

ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

Orlando Pharma's board plans to outsource its internal audit function to cut costs. The head of internal audit would be made redundant, and the contract would be managed by the finance director, whose department is the main subject of the audits. The contract's scope will be set annually by the finance director. Which is the most significant weakness in this arrangement?

The key weakness is the reporting line: the finance director controls scope of a provider auditing his own area, damaging independence. Outsourcing is acceptable if the audit committee oversees appointment, scope, fees and receives reports directly.

  1. AOutsourcing is always inconsistent with good governance
  2. BThe provider will lack knowledge of the industry, which cannot be addressed by contract
  3. COversight of the provider by the finance director compromises independence, since the auditee controls scope and reporting; the audit committee should oversee the appointment, scope and reportingCorrect
  4. DThe redundancy of one employee will reduce morale, which is the only real risk

Explanation

Outsourcing can be acceptable, but independence depends on reporting lines. Where the audited function sets scope and receives reports, objectivity is undermined. The audit committee should approve scope, fees and removal, and receive reports directly. Industry knowledge can be handled by contract and selection.

Did you get it right without looking?

One question tells you little. A timed set on Audit and compliance shows your real accuracy, how long you take and where you lose marks.

Practise Audit and complianceFree diagnostic mock

More Audit and compliance questions