Tutorial 5

Question 1

What are the benefits of outsourcing internal audit to an independent specialist firm?

Answer 1

• Access to wider expertise
• Flexibility to hire only when needed
• Independence and objectivity
• No self-review threat
• No need to train internal staff
• Greater staff retention through career development opportunities

Question 2

What are the disadvantages of outsourcing internal audit to a specialist firm?

Answer 2

• Lack of prior knowledge of the company
• Time required to understand internal systems
• Geographic/travel constraints
• Risk of quality falling due to fee pressure

Question 3

What must an external audit firm consider before taking on internal audit work for a client?

Answer 3

• independence must be preserved (different teams, no self-review)
• Ethical compliance (e.g. ACCA Code of Ethics)
• Avoiding conflicts of interest or personal relationships
• Client trust and objectivity must be maintain

Question 4

What practical issues must be considered before taking on internal audit work?

Answer 4

• Availability of skilled staff
• Adequate time and resources
• Compliance with internal audit regulations
• Fee pressure from competitive bidding or cost-saving expectations
• Awareness of relevant internal audit guidance

Question 5

What is a potential advantage for an external auditor becoming internal auditor?

Answer 5

• Pre-existing knowledge of the company’s systems and controls
• Reduced learning curve
• Use of previous audit documentation

Question 6

What controls should a company use to ensure quality in an outsourced internal audit function?

Answer 6

• Use separate teams for internal and external audit (if same firm)
• Set and monitor performance KPIs
• Review variances and request explanations
• Ensure audit methodologies are documented and reviewed
• Review audit working papers
• Pre-agree and monitor the internal audit work plan

Question 7

What business risks were missed by auditors in the Carillion collapse?

Answer 7

• Overuse of acquisitions to inflate growth
• Taking on too many contracts without capacity
• Paying unsustainable dividends
• Misuse of financial schemes to hide liabilities
• Receivables growing faster than sales
• Falling profit margins and poor cash flow
• Rapid expansion into unmanageable sectors

Question 8

What were the consequences of the Carillion scandal?

Answer 8

• Over £1.5bn in debt
• £580m pension deficit
• Tens of thousands of job losses
• Hundreds of public sector contracts collapsed
• Massive taxpayer burden
• Damaged public trust in auditors and accountants

Question 9

What were key lessons for auditors from the Carillion case?

Answer 9

• importance of identifying and responding to business risks
• Need for scepticism and challenge of management
• Failure to act can have huge financial and reputational impact
• Regulators will scrutinise audit firms that ignore red flags