Sources of Information about Internal Audit - Assignment Example

A critical analysis report for sources of information about internal audit Contents Contents 2 Question 3 The advantages of preparing report by theoutsource auditors. The auditors of the internal audit outsourcing has the access to a wide range of resources, the outsourced auditors have the access to the advanced and the developed technologies, the clients sometimes prefer and favour the report that is prepared by the outsourced auditors as the knowledge of the outsourced auditors is more related to the business and they avoid overlapping of their activities by providing more flexibility in their work and minimizing their workload or work force. 4 The disadvantages of preparing report by the outsource auditors is that it lacks competency and lack of integrity towards the firm. 4 Differences between the in house and outsourced auditors 4 Question 2 5 Question 3 7 Question 4 9 Question 5 11 Question 6 13 Co-sourcing internal audit 13 References 15 Question 1 The in house auditors conduct the internal audit activity that is mainly staffed or performed by the permanent employees of the organization and now days it is being preferred by most of the organizations and the outsourced auditors are considered as the external entity who is assigned to consider all the aspects for providing the service of internal audit (Ahlawat and Lowe, 2004). The internal auditors are well aware of the various strategies for handling the issues related to fraud and misrepresentation which is not possible for the external auditors to detect properly the fraud and misrepresentation in the report prepared by the company and the in-house auditors are always available in the urgent and adhoc situation . The in-house auditors focus on objectivity and also maintain independence in preparing the audit report of the company. The limitations of in house auditors are the loyalties in preparing the report by the in-house auditors are restricted to their own organizations, the in-house auditors generally lacks flexibility and diversity of skill in preparing the report and the in-house auditors sometimes come too close to their clients who may result in publish of bias report (Mutchler, 2003). The advantages of preparing report by the outsource auditors. The auditors of the internal audit outsourcing has the access to a wide range of resources, the outsourced auditors have the access to the advanced and the developed technologies, the clients sometimes prefer and favour the report that is prepared by the outsourced auditors as the knowledge of the outsourced auditors is more related to the business and they avoid overlapping of their activities by providing more flexibility in their work and minimizing their workload or work force. The disadvantages of preparing report by the outsource auditors is that it lacks competency and lack of integrity towards the firm. Differences between the in house and outsourced auditors The in-house auditors prepares the report on the basis of objectivity , The in house auditors receive incentive in providing information that are consistent with the expectation of the management and the in-house auditors are capable of influencing the value of the firm. The internal auditors generally perform in the environment where there is limited penalty as the penalty is only imposed on the failure of delivering the report by the auditors whereas the outsource auditors may be biased towards their clients. The internal auditors are not able to diversify the risk of the company properly but the outsource auditors have a wide portfolio of clients with whom they are related and associated with offering the internal audit services and thus they are capable of diversifying the risk properly. The incentive received is more for the outsource auditors as compared to the internal auditors because the outsource auditors are expected to behave rationally and avoid the cost that is related to malpractice (Stewart and Subramaniam, 2010). The corporate failure in the past and in the present scenario such as the failure of Enron, Satyam and WorldCom encompasses that internal audit plays a vital role in evaluating and mitigating the risk of the business or the firm. The countries like UK, Belgium and USA generally prefer the preparation of report by the internal auditors. Therefore from the above explanation it is clear that the internal audit functions increases the greater objectivity in-house as compared to the internal audit function outsourced (Ahlawat and Lowe, 2004). Question 2 The functions of internal audit increase the independence and the objectivity of the in-house and the out sourced auditors. The independence in house or outsourced auditors can be explained by the involvement of the internal auditors and outside experts in providing the services that reflects the independence of the information that is provided by the auditors (Swanger, and Chewning, 2001).The dependence of the internal auditors on the management and increase in the importance of the audit activities of the internal auditors and the growing demand of the internal auditor and also the increase I the outsourcing activities results in the matter of concern in determining the independence of the in-house and outsourced auditors. The good side or the positive aspect of the internal audit functions resulting in greater independence of the in house auditors can be explained by the fact that the internal audit function assist the in-house auditors in providing consulting services to its clients , incorporating recommendations for reengineering of verities of business process of the clients which results in greater independence of the in-house auditors On The contrary the internal audit functions of the in-house auditor results in the lack of independence and objectivity as it compels the company to face greater trade off and risk that is associated with providing independence to the internal auditors (Goodwin and Yeo, 2001).The positive aspects of the internal audit functions in increasing the greater independence of the outsource auditors can be observed by the fact that it will increase the work quality, assessment of the competency in the work and the overall quality of the work On the contrary the internal audit function of the outsource auditors as the greater independence increases the conflict in the interest of the auditors (Lowe, Geiger and Pany, 1999). The internal audit an activity results in increasing the independence of the in house and the outsource auditors since the internal audit is required to be conducted by the auditor independently. The internal auditors play an important and vital role in government auditing. AICPA suggests and assists that the independence of the auditors, the accuracy and the reliability in the financial statements has improved the decision making ability of the auditors regarding the financial statement of the company (Abbott, Parker, Peters and Rama, 2007). The fact can be analyzed with the help of the example of a company in United Kingdom which explains the function of the internal audit conditions and the process that affects the operation, efficiency and effectiveness of the auditors which reveals the increase in the independence of the internal auditors. It can also be observed by taking a sample size of 55 internal auditors of US which includes both the in house and outsource auditors explains that the auditors perform their role on the best interest of the employer which reflects the level of independence. The statistical comparison explains that the audit function has significantly lower level of independence for the external auditors. Therefore it can be referred that internal audit function will increase greater independence for the in house as compared to the outsource auditors (Geiger, Lowe and. Pany, 2002). Question 3 The outsourcing of the auditor is common activity. The audit integrity measures the risk adequately and properly. The internal audit conducted by the in-house auditor reduces the risk as compared to the audit performed by the outsource auditors. This can be explained with the fact that outsourcing of the auditor increases the accounting risk which leads to the risk that is associated or related to the fraud and misrepresentation of facts and figure and the fraudulent practice that is related to the publish of the financial reporting and controlling and maintaining the overall quality of the corporate governance (Rittenberg and Covaleski, 2001). The difference in the in-house and the outsource auditor in performing the various internal audit functions and whether it will increase the in-house or the outsourced risk can be explained or observed as the outsource auditors generally provides the audit report and offers the services that are less appropriate and are not proper or appropriate according to the accounting treatment or concepts and they are involved in preparing report and providing misleading information for the fear of losing revenue from their non audit services whereas the in house auditors provides better report covering and considering all related aspects because the in house auditors have the advantages and benefit in gathering more information about the company. The outsource auditors generally provides non audit services which results in lowering the accounting risk of the firm or the organization as compared to the in house auditors who are not engaged in performing the non audit services (Frost, 2000).On the basis of the International accounting Framework it can be analyzed that the in house internal auditors can understand the performance and function of the organization properly as compared to the outsource internal auditors. The lack of commitment and objectivity of the outsource internal auditors towards the company for whom they are auditing may not comply with the adequate approach of auditing that is suitable to the situation of the client and this may result in reducing the capability of the outsource auditors in preparing adequate report and thus resulting in the preparation of inappropriate accounting and report and the outsource internal auditors are faced with increase in liability and risk as compared to the risk and liability of the outsource internal auditors which mainly influences or affects the external financial reporting of the company (Spekle, Elten and Kruis, 2007) The arguments in favour and against the fact that outsourcing increases the risk of the company can be analyzed by the fact that internal audit outsourcing is associated with the accounting risk of the company. The outsourcing of the internal auditor improves the quality of the financial reporting and improves the internal audit related work. It can be analyzed that increase in the quality of the IAF regarding the internal outsources auditor’s results in lowering or reducing of risk of the company or the firm. On the contrary it can be observed that the outsource internal auditors generally collect information directly from the client which may result in the increase in the reputation capital of the firm and the increase in the incentive of the firm for conducting independent audit by the auditors. The auditors may provide misleading and inappropriate information. In order to analyze and find whether the outsource of the internal auditor increases the risk for the firm different test has been conducted such as the logistic regression model, the covariate balance model, the univariate test and the multivariate test has been conducted and through the calculation and determination of various test it has been observed that the outsourcing of the internal auditors reduces the risk of the firm as compared to the in house auditors (Aldbizer, Cashell and Martin, 2003). Question 4 The internal department are responsible for safeguarding and providing protection to the in-house and outsource internal auditors against the conduct of the fraudulent practice. The in-house department of the company are responsible or accountable for reporting to the audit committee and the team of the outsource audit is also accountable for reporting to the audit committee. The internal audit detects the misleading and fraud information and fact (James, 2003). The difference between the in house and the outsource of the internal audit functions in relation to the better control can be explained as the in house internal audit department mainly reports to the senior management or official for firing and hiring the chief auditor of the company or the firm (Careya, Subramaniam and Chingc, 2006).This can be explained with the example of the stock exchange commission who has assigned the in house internal auditors to have free and direct access to the audit committee. The outsourcing is considered and regarded as the important and the key factor that will distinguish the various internal audit functions. it has been observed that the outsource of the internal auditors has been able in safeguarding and protecting the fraudulent practices of the firm as compared to the in house internal auditor of the firm. The role of the outsourced of the internal auditor can be best understood by the impact and the influence of outsourcing in detection of fraud. The quarterly data of the organization or the firm is influenced by the reliability that is provided by the internal control system and the internal audit function outsources the auditor for evaluating and controlling the data of the organization but the limitation or the bad side of the outsource internal auditor in prevention of fraud and misrepresentation and also controlling the data of the firm is its limited knowledge and information about the operation and functioning of the firm due to its limited presence in the firm whereas in case of the in house internal auditors they are well aware about the operation and function of the firm or the organization. The test that are conducted and experimented provides results which indicate that the in house internal auditors that are responsible for reporting to the audit committee of the firm are considered and regarded as more capable and efficient in detecting fraud and misrepresentation by the firm (Prawitt, Sharp and Wood, 2012). The sample study of Rogers corporation case was conducted and observed and it was found that the company internal in house auditors were more capable of controlling the data and preventing the misrepresentation and fraud since they were directly related to the firm and they reported directly to the CFO of the firm and disclosed and revealed all important information as compared to the outsource internal auditors who are less aware of the various financial information of the company (Griffiths, 2012. ) This can be explained with the help of the example such as in UK, The building societies act that was imposed in the year 1986 establishes statutory responsibility for protecting and safeguarding against the fraud and misrepresentation. Therefore this act motivated and initiated the government to maintain internal control system by the auditors with the intention of preventing fraud and misrepresentation (Subramaniam, NG, C. and Carey, 2004). The research reveals and it has also been observed that in house and outsource of internal audit both affects the reliability in the financial statement in similar manner unless the firm is engaged in outsourcing the auditors to the same firm or organization without the separation of staff. The reporting structure of the internal audit system is similar in case of both in house auditors as well as in case of outsources auditors. The limitation of this study is that the test that are conducted in evaluating and comparing the efficiency is of the control system of the in-house audit control system and outsources internal audit function is that the sample size that has been selected or assumed is very small in size (Dauber, 2009). Therefore the above analyzes reveals or concludes that the internal audit function results in better control in case of both the in house and the outsource auditors . But comparatively the internal audit function results in the better control of the in-house auditors as compared to the outsource (Griffiths, 2012).  Question 5 The internal audit functions relating to the cost structure can be explained with the help of the agency theory. The main role of the internal audit function can be explained as the process by which the senior managers bear the cost for satisfying the demand for accountability. The function of the internal audit also deals with determining the cost of conducting the audit process. The cost saving develops or is the result of the specific knowledge and expertise of the in house and the outsourced auditors. The cost of the internal audit deals with evaluating and monitoring the expenditure that is expected to be safeguarded and protected by the auditors in relation to their economic interest (Adams, 1994). The difference between the audits functions resulting in higher cost of the in-house or the outsourced auditors are that the relevance of the internal auditing function in relation to the in house auditors can be explained as the outsourced auditors performs the services of the public accounting firms and the auditors focuses and emphasizes on the flexibility, improving the quality and saving the cost of preparing the report of the firm (Gupta, 2004) The main advantages of the outsource auditors in controlling the cost is that it takes into consideration various aspects of the firms and the disadvantage of the outsource auditor is that the outsource auditors generally lack in the loyalty towards the firm and the knowledge or information about the operation , activity and performance of the firm and also the firm incurs loss in training the outsource auditors in providing or imparting valuable and important training to the outsource auditors. This can be explained with the help of the example such as the local authorities of UK are obliged and bound to abide by the services of the internal audit function. The disadvantage or the limitations is the cost is more in preparing the report by the outsource auditors and they are not readily and easily available when they are required and they lack in understanding the functioning of the company and the industry (Sharma, 2011). On the contrary it can be evaluated and analyzed that in case of the insurance sectors the in house internal auditors performs more efficiently and effectively in reducing the cost as the in house internal auditors already has the knowledge about the industry therefore they can perform the audit function in more cost effective and cost efficient way and the in house internal auditors generally adopt the contractual mechanism for controlling the increase in the cost and performing its activity in a responsible manner (Tritschler, 2013).The US companies generally prefer to adopt the leverage buy out as the internal audit function for gaining cost advantage and retaining and strengthening the internal audit function (Roy and Edwards, 2014).On the contrary it cannot be neglected that Arthur Andersen which is considered s one of the most famous and active internal audit outsource firm which is focusing and adopting the strategy of reduction in cost and adding more value to the business. Outsourcing of the internal auditor decreases the cost in recruiting and maintaining of the employs and therefore it reduces the cost and the flexibility in the technology adopted by them reduces or minimizes the cost. The in house auditors mainly focus on providing the value added services (Martin and Lavine, 2000). Therefore it can be concluded from the above analysis that the internal audit functions do not increase the cost in house or outsourced. The internal audit function focuses on cost efficiency and minimization of cost. By comparing the in house and the outsourced auditors it is observed that the outsource auditors are focusing more on cost reduction as compared to the in house auditors (Selima and Yiannakas, 2000). Question 6 Co-sourcing internal audit Co sourcing of the internal audit can be defined as the establishment or development of partnership between the service provider outsider and the customers and it has been regarded and recommended as the most effective and efficient way of managing the internal audit function The co-sourcing of the internal audit has the capability or the ability in directly controlling the internal audit activities of the firm or the organization (Gavin and Matherly, 1997). In the present scenario while considering the long term perspective of the firm and taking long term decision of the firm it has been observed that only outsourcing the internal auditor is not sufficient and it may create more problem or obstacle when there is a risk associated with poor management and the lack of skill and knowledge of the outsource auditors regarding the cost and benefit of the services that is provided and also it involves the increase in the cost related to monitoring the activities of the outsourced auditors . In case of the independence the co sourcing or the partnership play an important role for determining both the internal and the external audit services. By considering the sample size of 27 respondents it has been observed that the co sourcing auditors provides both the internal and the external services independently and when it is compared with the in house and the out sourced auditors it has been observed that sometimes the in house auditors may be biased and the outsource auditors may lack knowledge therefore it is preferred to appoint the co source auditors (Sherer and Turley, 1997). The co source auditors as they are exposed to both internal and the external audit functions therefore they have wide exposure to various measures for protecting and safeguarding the risk and prevention of fraud therefore it is suggested that it can better control the risk as compared to the in house and the outsource auditors. While considering the control of the cost and reducing the cost it is preferred to co source the auditors as they are ware with the change in technology as compared to the in house auditors and outsource auditors. But the problem with co sourcing the auditor is that the audit work may be misaligned therefore it is suitable for co sourcing the auditors along with the in house and outsource auditors (Arena and Azzone, 2009). The limitation of the study is that the internal audit function of the in house , outsourced and co source are associated and related to each other in broader perspective but it varies when the narrower perspective is taken into consideration. The limitation of the study conducted that the entire test that is experimented does not provide the same result and the result varies according to the change in the hypothesis and test conducted. References Abbott, L. J., Parker, S., Peters, G.F. and Rama, D.V. 2007. Corporate Governance, Audit Quality, and the Sarbanes-Oxley Act: Evidence from Internal Audit Outsourcing. The Accounting review, pp. 803-835. Adams, M.B., 1994. Agency Theory and the Internal Audit. Managerial Auditing Journal, 9(8). pp. 8-12. Ahlawat, S. S. 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