In corporations, we see a number of out-sourced Internal Auditors partnering with the internal team in executing audit assignements . How do we leverage and monitor this activity to deliver high quality audits ?

1. “Managing Outsourced Internal Audits”

2. -Sourcing decisionInternal Audit & other Corporate Services
Is there a difference between “Outsourcing” the
other Corporate functions & Internal Audit?
ie. Outsourcing,
Accounting activity (Say Payroll, Bills processing
etc.) (or)
Fixed Deposit System (or)
Share registry work etc.
&
Outsourcing the “Internal Audit” work?

3. IIA’s Perspective
What is so unique about IA that it should be exempt from the
outsourcing decision?
“Internal Auditing is an unique effort that is aligned with the
Management of the organisation and overall Corporate Governance”
“Internal Auditors who are engaged full-time in an enterprise can
assimilate the organisational culture and use this cultural awareness
to understand risks and potential strategic outcomes. By being
continually involved in business processes, they understand the interrelationships that can impact the control environment”.

4. IIA’s Perspective...
“They (IA) have a vested interest in the long run success of the
business. Internally housed IA functions can draw staff
expertise from the many facets of the Business to provide
independent reviews of operations.”
“IA is best performed by an independent entity that is an
integral part of the organisation which functions under the
policies established by senior management & the Board of
directors” , fully resourced & Professionally competent.

5. IIA’s Perspective...
At the Same time,
“Recent studies and new developments in services
provided by external entities challenge management, audit
committees and existing Internal Audit departments to
carefully examine alternatives to the ‘traditional internal
auditing’ function.

6. IIA’s Perspective...
Fundamental Position
….. that internal auditing is designed to serve the
organisation. Therefore it is the responsibility of
Management and the audit committee to provide effective
oversight and management of the function - whether it is
housed internally or provided by an outside service
provider.

7. IIA’s Principal Interest
“Promote IA activities that provide maximum overall
effectiveness in achieving the organisation’s strategic
objectives”.

8. Situation Specific
Some basic Questions
“Audit Management” outsourcing or “Audit Assignment”
outsourcing?
“Audit Skills” outsourcing or “Audit Manpower” outsourcing?
Outsourcing or Co-sourcing?
Objective “Cost Effectiveness” or “Quality Improvement”?

9. Situation Specific...
Some more basic Questions...
Is there a full time internal Executive - Auditor in place or audits
co-ordinated by a part time Executive?
Is the entire work outsourced (or) part of it also done by internal
team?
What is the level of the Head of Audit / Audit Co-ordinator ?
Is the audit responsibility lies with the Finance Head / Company
Secretary etc ., who have other primary responsibilities?

10. Size of the organisation
[Large Corporates]
Can afford full time internal team
Function would have been there for longer years
Need for strengthening the internal function to serve the
growing organisation better. (Internal Consultant role)
Staff- Competent / trained
Will posses experience / insight needed to deliver high
quality service
Best Practices for specific industries

11. Size of the organisation...
[Medium / Small size Companies]
Company cannot afford Senior level Audit professional full time
Required skills may not be available internally
Would be cost effective if outsourced
Flexibility
Easier to tailor audit services to meet clients needs
Offer best potential for a long term relationship
(Comparatively less expensive)

12. Takes many forms
Purchase of specialised audit services
Purchase of services in a specific geographic location
Full outsourcing of IA department
Outside providers entering into partnering agreements
with internal auditing department in performing audit
services.

13. “Cost” perspective of Internal Audit
Trend……..
Business Divisions / Profit centres looking at audit
service Cost as an allocated overhead and from the
perspective of whether the “traffic can bear” - Not a
healthy sign
Need for defining ‘negotiables’ and non-negotiables
to audit customers

14. Arguments in favour of outsourcing
Allows management to focus on core competencies
Economies of scale should result in cost savings for the
same services, or improved services for the same costs.
Flexibility in staffing leads to better resource allocation.
Access to leading best practices / Outsiders can add fresh
perspective
A clear customer focus
Better international and cultural coverage

15. Arguments in favour of outsourcing…
Better access to and use of specialised skills (Availability
of varied Audit Skills - readily)
Eg., Information systems audit skills
Pairing in house auditors with service partners can broaden
the auditors’ knowledge & skills
Easier to remove an outsourced auditor than employees
Will enable meet customer’s urgent & unexpected
requirement

16. Arguments in favour of in house - sourcing
Overtime, outsourcing providers may command an evergreater premium for their services
An external provider won’t know the business as well as
an Internal Auditing Department
A valuable management Training ground is lost.
The outsourcing employee’s allegiance is to the
outsourcing provider, not the client

17. Arguments in favour of in house - sourcing...
‘Corporate Governance’ is a Management Function that
cannot be outsourced
- Corporate Governance
- Internal Controls
- Internal Audit
Independence of the External Auditor may be impaired
when the outsourcing provider is also the External
Auditor (The SARBANES - OXLEY ACT of 2002)

18. Arguments in favour of in house - sourcing...
Management and the Audit Committee lose an objective
source of information (ie. IA)
Institutional knowledge may be lost
Structure may replace internal knowledge (eg: risk
analysis approach - may not fit a particular
organisational climate)
New / first time service providers may not deliver what we want
In house staff may resent the assignment of a service partner to a
project that they believe they can perform.[ high profile project]

19. Successful Outsourcing
PLANNING, MANAGEMENT , EXECUTION
Criteria based selection of Service Providers
Evaluation of Audit Team effectiveness / audit outcomes
Feed back from Auditees / changes in IA system
Audit learnings / Knowledge management effectiveness
Confidentiality agreement
Proper Vendor Selection & Evaluation System
Have a Strategic Alliance !

20. Successful Outsourcing
Clarity in defining the Scope of audit
Adequate pre-audit briefing.
Usage of Tools
Close monitoring of audit execution at the site
Internal Audit Co-ordinators & their effective role
Effective participation by the Audit Project Owner (IA Team)
in closing meetings

21. Source Identification - A Practical Approach
INTERNAL
Guest Auditors Pool
Specialised skills within the organisation pooled together
Executives drawn from different disciplines of the
organisation
Proactive Executives keen to learn & develop themselves
join the Internal Audit Team for a shorter duration as
Guest Auditors

22. Working arrangement - Corporate Service Teams
 Internal Technology Cells
 Process Safety Cells
 Energy Conservation Teams
 TQM Centres
 Safety Management Cells
 BPR teams etc.,

23. EXTERNAL
• Big Fours ( Force ? )
• Medium Sized Audit firms ?
• Young skilled Professionals ( owning growing
Internal Audit Firms ) who could directly involve
in field work ?

24. Achieve effective co sourcing
Combine expertise of a service partner with the
cultural perspective of internal auditing
Enhance value by expanding scope of audit
coverage
Gain access to specialized skills that internal
auditing could not justify developing and
maintainng in house

25. Subject matter experts
required in many cases
Insurance specialists for an Insurance Management
Audit
A fraud investigator / forensic expert for alleged
fraud situation
Civil Engineers while doing Building Contract Audits
Security Experts when doing Data Centre Security
Audit
A Marketing Expert for conducting Marketing
Department Audits etc.,

26. Criteria for selection
Projects & Skill set of service provider match
Fitting into the organisation’s culture
Single service provider may not have all the skills
required to meet the diverse needs of Internal Audit.

27. Partnership with Audit Customers
 Involving audit customers in the selection process
 Understanding & communicating the deliverables
expected

28. Effective Contracts
 Clearly communicating the Projects Scope, key
deliverables & expected standards & performance.
Reporting requirement (Report reinforces the
outcomes of audit)
Format and delivery date
Billing format & frequency
(Arrangement should be combination of price,
deliverability, reliability & dependability)

29. Managing the Engagement
(Some practical tips)
 Effective Project Management skills required for keeping
the project on track.
 Responsibility & Accountability for Project Management
should be clear (Audit Project Owner drives)
 Manage the first day of the project effectively (It can
make or break it!)

30. Managing the Engagement
(Some practical tips)
 Discuss Corporate Vision, Mission, Values & Principles
 Audit Philosophy / Policies / Procedures / Methodology &
Performance Standards
 Reiterate scope of audit
 Review performance standards / project deliverables
 Introduce the service partner to the rest of the Audit Team

31. Managing the Engagement
(Some practical tips)
 Familiarise them with Internal communication system /
Business Applications, Audit Tools used & Audit work
paper system in vogue etc.
 Above all, keep giving early ‘feedback’ regarding the
service partner’s performance (Deal with issues
effectively)
Terms of outsourcing should be clear to all

32. Managing the Engagement
(Some practical tips)
Scope should be clearly understood and rules for
changing them should be spelt out.
Weekly progress reports should include key performance
indicators
(Eg: Lumpsum contract – No cutting into the scope!
Manday rates – monitoring the time spent!)

33. Address all risks
Poor planning / Bad contract / ineffective management!
Interview the Audit Team to gain an understanding of the
Qualifications / role each will play
Get the Resumes & experience of Team Members
Do reference check in case of first time engagements

34. Address all risks
Substituting a lesser qualified staff in the place of a
high flier (who might have left for greener postures!)
Should not ‘sell’ other products during the
performance of a project

35. To conclude….
“A properly sized IA function with the ability to employ
outside service providers, as needed, may be more
economical, efficient, effective and responsive to
organisation needs”
“When Internal Auditors collaborate with experts outside
the audit department , it can be a winning proposition for all
involved”
THEN, THIS WILL BECOME A WIN WIN CO SOURCING!

36. THANK YOU