See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/343904407

OUTSOURCING INTERNAL AUDIT SERVICES: A REVIEW

Article  in  INTERNATIONAL JOURNAL OF MANAGEMENT · August 2020

DOI: 10.34218/IJM.11.8.2020.048

CITATIONS READS

4 2,553

5 authors, including:

Sajjad nawaz Khan Kalsoom Akhtar

Universiti Utara Malaysia The Islamia University of Bahawalpur
24 PUBLICATIONS   158 CITATIONS    4 PUBLICATIONS   7 CITATIONS   

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Linguistics Analysis View project

Entrepreneurship View project

All content following this page was uploaded by Sajjad nawaz Khan on 27 August 2020.

The user has requested enhancement of the downloaded file.

International Journal of Management (IJM)
Volume 11, Issue 8, August 2020, pp. 503-517, Article ID: IJM_11_08_048
Available online at http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=8
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
DOI: 10.34218/IJM.11.8.2020.048

© IAEME Publication Scopus Indexed

OUTSOURCING INTERNAL AUDIT SERVICES:

A REVIEW
Dr. Sajjad Nawaz Khan
Assistant Professor, Department of Management Sciences,
University of Central Punjab, Pakistan

Dr. Muzaffar Asad*

Assistant Professor, Department of Management and Marketing,
College of Business Administration, University of Bahrain
ORCID.ORG/0000-0001-5620-9282

Arooj Fatima
Lecturer, School of Business, Management and Administrative Sciences
The Islamia University of Bahawalpur, Pakistan

Kaleem Anjum
Ph.D. Scholar, University Utara, Malaysia

Kalsoom Akhtar
Lecturer, School of Business, Management and Administrative Sciences
The Islamia University of Bahawalpur, Pakistan
*Corresponding Author

ABSTRACT
In the corporate world the internal audit function of an organization is established
and used to provide an unbiased and objective review on the organizations processes
and activities. When organizations consider that their internal audit services are
either costly or are inefficient they prefer to outsource. An organization might want to
outsource their internal audit function to an outsourced service providing to acquire
better services from the function. They might outsource it because they want to have a
better quality of the audit or they are unable to run the function in-house. When an
organization will outsource its internal audit function, they will have an impact
affecting their processes and activities either in a constructive or else in a destructive
way. However, this is not the end there are several other motives for which the
organizations may wish to outsource internal audit services. The study is an attempt to
highlight and reveal the motives of the organizations behind outsourcing their internal
audit services according to the existing literature. The findings highlighted those

http://www.iaeme.com/IJM/index.asp 503 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

areas which are not very common, hence findings of the study open the horizons for
future research to analyze empirically.
Key words: Outsourcing, Internal audit, External audit, Performance
Cite this Article: Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima,
Kaleem Anjum and Kalsoom Akhtar, Outsourcing Internal Audit Services: A Review,
International Journal of Management, 11(8), 2020, pp. 503-517.
http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=8

1. INTRODUCTION
An audit is an independent and systematic examination of the statutory records, accounts,
book and the documents of an organization. It evaluates that whether the financial reports as
well as non-financial disclosures represents a true and a fair view. It also evaluates that the
accounts and books are properly documented and maintained as described and required by the
law (William, Glover, & Prawitt, 2016). The audit process include knowing your
client/organization, planning and strategizing audit, collecting information and obtaining
evidences relating to audit, assessing and evaluating the impact of the evidence of audit,
exercising professional skepticism, and documenting and reporting the working of audit to the
stakeholders (Yoon, Hoogduin, & Zhang, 2015).
Internal Audit provides an objective and an unbiased review of the operations and
processes of the organization. The internal auditor reports to the highest level management of
the organization, typically the Board of Governors or the Board of Trustees (Bartlett, Kremin,
Saunders, & Wood, 2016). To regulate the effectiveness of the internal audit, the pursuit must
be exercised by some qualified, experienced and skilled personnel‟s (Alkhuzaie & Asad,
2018). The internal auditor works in the accordance of the International Standards of
Accounting and Auditing and the Code of Ethics.
The internal auditors of an organization have a professional duty and a responsibility to
deliver an objective and unbiased view of the organization (Almansour, Asad, & Shahzad,
2016). They review that the risk management processes, governance and internal controls are
working efficiently and effectively (Asad, 2011, Khan & Numan, 2019). It plays a vital role in
the firm‟s internal control structure, management of risk analysis and corporate governance
(Chambers & Odar, 2015).
The internal audit department of an organization helps the organization to ensure that the
operations of the business are in orderly and efficient manner and that the management
policies of the organization are adhered properly (Bashir & Asad, 2018). They provide
safeguarding of the non-current assets and control of the current assets of the organization and
ensure that the statutory requirements of the organization are adhered (Khalil, Asad, & Khan,
2018). They determine that the organizations records and accounts are reliable and accurate
(Paape, Scheffe, & Snoep, 2003).
While outsourcing firms outsource their function to improve the quality of processes or to
decrease the cost of processes by maintaining or improving the quality of business process
(Mclvor, 2008). The Audit Committee of the organization hires a professional firm to plan the
working of Audit, after evaluating the business processes and risk management of the
organization (Aldamen, Duncan, Kelly, McNamara, & Nagel, 2012). Implement the audit
planning of the organization to evaluate the processes and report the relevant findings to the
Audit Committee regarding the compliance of the processes of the organization (Widener &
Selto, 1999).
The outsourcing firms fill the needs of the organization‟s internal audit requirements with
the help of their personnel‟s, methodologies and technical expertise. The management of the

http://www.iaeme.com/IJM/index.asp 504 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

organization purchases the auditing services from outside because the monitoring and
reviewing of the controls and risk of the company can be done in an efficient and cheaper way
(Carey, Subramaniam, & Ching, 2006). Organizations having inadequate resources and
expertise to execute the internal audit function face certain problems (Ahlawat & Lowe,
2004). Organizations having adequate expertise and resources to perform audit function
usually do not outsource. But if they lack such expertise and outsource to a firm that do not
possess required expertise may face problems which may affect their process (Mclvor, 2008;
Smita & Ankush, 2012). The staff quality of the function might not get improved as they
might have less knowledge of best practice as compared to outsourced staff, providing the
same services (Thomas & Clements, 2002; Carey, Subramaniam, & Ching, 2006). The cost
and time incurred to the company to hire and train the staff might be high and the cost of
performing such activity might also be high (Shaker, Asad, & Zulfiqar, 2018). The person
might not be independent of the company as he will be having an interest while working in
the organization (Pforsich, Kramer, & Just, 2008).
On the basis of the above mentioned discussion the current review is conducted to find out
the impact of outsourcing audit services. The review included the importance as well as need
of outsourcing of internal audit services for the organization, the edge and drawback linked
with the services of outsourcing of Internal audit , and the challenges associated with the
outsourcing services of internal audit.

2. LITERATURE REVIEW
Internal Audit provides an objective and an unbiased review of the operations and processes
of the organization. The internal auditor reports to the highest level management of the
organization, typically the Board of Governors or the Board of Trustees. To ascertain the
effectiveness of the internal audit, the activity must be exercised by some qualified,
experienced and skilled personnel‟s. The internal auditor works in the accordance of the
International Standards of Accounting and Auditing and the Code of Ethics (Beelde &
Everaert, 2009).
The world, and the organizations which operate in this world are becoming more complex
and internal audit is gaining success as time passes. In the public, private and not for profit
sector, in which the function provides the service of identifying and managing the risks in
some organizations controls and processes is also becoming more complex and is gaining
success (Asad & Farooq, 2009; Asad & Qadeer, 2014). It is an appraisal function which
provides independent service to the organization by evaluation its activities and processes
(Beelde & Everaert, 2009).
Internal Audit helps to accomplish and achieve the objectives of an organization. They
bring a controlled and a well-organized approach to gauge and ameliorate the efficiency of the
risk management ,controls and governance (Almansour, Asad, & Shahzad, 2016). The
internal audit department of an organization is not responsible for the execution of the
activities and processes of the company. But they are responsible to advice the upper
management or to the governance of the company on how to better execute the processes and
activities of the company (Nagy & Cenker, 2002).
The professionals who provide the services of the internal audit are called as internal
auditors. They are responsible for a broader aspect of involvement in the internal controls and
the processes, so they might have a variety of experience professionals and educational.
Institute of Internal Auditor (IIA) is the most common governing body (Asad, Iftikhar, &
Jafary, 2019). They develop and review the international standards and practice guides for
internal auditing, and work for the improvement of the internal auditing profession (Alič &
Rusjan, 2010).

http://www.iaeme.com/IJM/index.asp 505 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

Internal audit is a control developed by the management and the department reviews the
efficiency of other controls within a company. With the aim of confirming that other controls
are working correctly, it is the part of the control system of the company (Asad, Haider, &
Fatima, 2018). To have an internal audit is a statutory requirement in some regimes. In the
other regimes, the code of governance sturdily suggests that an internal audit department is
essential. The effort of an internal auditor is varied from reviewing the financial controls to
inspecting the compliance with legislation. A chief internal auditor normally controls the
internal audit department and reports to the audit committee (Gramling, Maletta, Schneider, &
Church, 2004).
As entities increases in size and complexity, and become global in nature, the task of
monitoring controls become more difficult. An internal audit function helps management to
monitor these controls (Al-Twaijry, Brierley, & Gwilliam, 2003). Similarly, as market
becomes increasingly competitive, it is important that entities should be very competitive
themselves. In many countries there are a large amount of statutory and accounting regulation,
including corporate governance regulation.
Specialist‟s internal auditors can help management to review the effectiveness of controls
within IT systems (Tazilah, Majid, & Suffari, 2019). The increasing cost of the external
auditor‟s services means that it may be cheaper to use internal auditors to perform audit tasks
whenever possible. There is no legal requirement for an entity to institute an internal audit
function. The fact that many organizations do so indicates that there are significant benefits to
be gained (Abbott, Daugherty, Parker, & Peters, 2015).
For companies that operate over multiple sites, internal audit may be an essential tool for
effective management. Senior management can use an internal audit department to carry out
„external‟ checks on its operational departments (Mustapha & Lee, 2020). Random visits or
surprise visits by internal auditors may be used to confirm that all locations are applying
internal controls properly, and are complying with relevant laws and regulations. The largest
location, or locations where there is a high risk of control failure, may be visited more
frequently by the internal auditors (Files & Liu, 2015).
Internal audit department of an organization performs a vast set of activities, which may
include reviewing the accounting and internal control systems of the organization. Examining
the financial and operating information and identifying the significant risk within or outside
the organization and assisting the management on those risks (Chambers & Odar, 2015).
Internal Auditors are required to be independent of managing the activities and processes of
the company, of which they are performing internal audit. The organizational placement of
internal audit section will help to achieve the independence and objectivity of the internal
auditors (Ahmad & Taylor, 2009). The internal auditor required independence from the
management of the company enables the auditor to un-affectedly evaluate the management
activities and the personnel‟s and conduct their work effectively. Though the internal auditors
are hired and paid by the company, but to effectively maintain their independence they
directly report to the directors or a specifically formed sub-committee called as Audit
Committee (Ahlawat & Lowe, 2004). Internal audit is an independent and objective vow
activity. To guarantee that the action is conceded out objectively, the internal auditor must
have his/her independence intact. Independence is secured in amount by having a suitable
arrangement within which internal auditors work. Independence is also secured in amount by
the internal auditor following adequate work and ethical standard.
The independence of the internal auditor may get affected if he/she fails to report the
control breaches within the organization or ignore the inconsistencies. Back down on matters
of principle and accepts the descriptions from the staff or the management without scrutiny.

http://www.iaeme.com/IJM/index.asp 506 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

The independence will be affected if the auditor turns a blind eye to the unethical practices or
else give unfair positive feedback (Ahlawat & Lowe, 2004).
Internal auditing of a company primarily focuses on the effectiveness and efficiency of the
internal controls of the company (Spira & Page, 2003). The internal controls are defined
broadly as a procedure which is affected directly by the board of directors, personnel‟s and
other management They are intended to deliver reasonable assurance about the attainment of
the following core objectives of the businesses are to ensure usefulness and competence of the
operations, and acquiescence with laws and regulations. Furthermore, reliability of
management and financial reporting is ensured for the safeguard of assets (Sawalqa & Qtish,
2012).
Internal auditors evaluate and provide review on the effectiveness of the management‟s
controls of a company and provide recommendations for improvements.
The professional standard of auditing indispensable the internal auditor to evaluate the
efficiency and effectiveness of the risk management activities of the organization. The
process, in which an internal auditor identifies, analyzes, respond and gather information
about the strategic risks. And monitor the strategic risk that actually or potentially could affect
the ability of the organization to achieve its objectives and to acquire its mission (Cohen,
Hoitash, Krishnamoorthy, & Wright, 2014).
The management of the business assesses risks as part of their normal course of business
activities and processes. But the internal auditor is required by Sarbanes Oxley Act to perform
extensive risk assessment of the financial matters and reporting processes and evaluate their
effectiveness. Internal auditor of a company may help them to formulate and maintain an
Enterprise Risk Management (ERM) process, through which the organization can address its
risk of fraud while adopting a fraud risk assessment (Spira & Page, 2003; Abdullatif, 2013,
Khan & Ali, 2017). In the past, the internal auditing activity has been performed very casually
when it comes to corporate governance. But the international standards and regulations have
changed the mind set to evaluate the corporate governance in internal auditing process. The
internal audit is now considered as the fourth support of corporate governance, whereas the
other columns being board of directors, management and external auditors (Bansal & Sharma,
2016).
Internal auditing‟s primary focus relates to help the audit committee of the board of
directors to perform their activities and processes efficiently. These activities and processes
may include the reporting of the coordination with the external auditors, critical management
control issues, and management to ensure that the audit committee receives the information
which will be effective (Almansour, Asad, & Shahzad, 2016). And suggest points for the
meeting agenda of the audit committee (Abbott, Daugherty, Parker, & Peters, 2015).
Internal audit assignment may include the following procedures during its execution.
Establishing and communicating the scope and the objectives of the internal audit assignment
to the relevant members of the upper management. Develop an understanding of the business
area and processes of the organization, whose audit is under review. The key risks facing the
organizations activities should be identified and described to the audit committee (Cohen,
Hoitash, Krishnamoorthy, & Wright, 2014).
To determine whether the management controls are operating as intended, a risk-based
testing and sampling approach should be established and implemented during the course of
audit. The issues and challenges identified should be reported, and to address these problems,
the action plans should be negotiated with the management. At appropriate intervals, the
internal auditors should take follow-ups on reported findings.

http://www.iaeme.com/IJM/index.asp 507 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

The working and length of the internal audit assignment varies depending on the
complexity and sensitivity of the activity which is being audited and, on the resources,
available for the internal audit department.

3. FUNCTIONAL AREAS OF INTERNAL AUDIT

Internal audit function of an organization is responsible to perform vast operations in an
organization. They perform to evaluate the risks in the organization and the effectiveness of
the controls of the organization (Ruud, 2003). Internal auditors of an organization identify the
vital activities and germane risks factors of the organization and weigh their significance. The
way the internal auditors assess the risks have been changed by the changing trends and the
economic or business conditions (Bagley, Barnes, & Harp, 2019). At one level the internal
auditor‟s work contains gauging and reporting on the usefulness of the implementation of
management policies, through to the evaluation of the voice and risk management culture of
the firm. Compliance review is all about confirming that the firms is obeying to the rules,
policies, guidelines, ciphers of practices and philosophies as they are applied to every part of
the organization, either collectively or individually (Alzeban, 2019).
The organization might face some implications while formulating the internal audit
function in their organization (Pforsich, Kramer, & Just, 2008). The audit committee of the
organization might face some difficulties while formulating the internal audit function and in
developing the mission statement of the internal audit function. The charter states the
responsibility, purpose and authority of the internal audit activity. It forms that what board of
directors and senior management should be expecting from the Chief Audit Executive and the
internal audit staff. The audit committee should approve the audit charter on behalf of the
board of directors (Lankton, Price, & Karim, 2020). The charter should clearly establish the
independence of the department from the operations of the organization (Asad, 2020). They
should clearly establish the auditor will perform their tasks without the influence and bias of
management in their audit issues. The organizations sometimes strategize that an internal
audit function can be too cumbersome and inefficient in terms of cost. So they plan to
outsource this function to an outsource firm to provide this service to the organization
(Haider, Asad, & Fatima, 2017). It is the organizations which plan to prefer developing this
function in-house in their emerging stage. The audit committee appoints a professional firm to
develop an audit plan for the organization based on their observation of the risk that they
perceive in the organization. The professional firm then execute the plan, report on their
observations to the audit committee and report on the compliance of the internal controls of
the company (Chadwick, 2000).
The firm to which the internal audit function has been outsourced directly report to the
audit committee of the organization. Hereafter, the quality of the assurance provided is only
the responsibility of the firm. Since it is the audit committee which commences the evaluation
process of the appointment of the firm to which they have to outsource internal audit function.
Audit committee want to ensure the quality of the services given by the firm (Smita &
Ankush, 2012).

3.1. Role of the Audit Committee in Internal Audit

An administration that is charged of the misunderstanding of the firms auditing and control
capacities, is referred as Audit Committee. These fiduciary obligations are often proxy to an
audit committee of the board of directors, but the exercise advisory is also envisioned to apply
to other failure groups with corresponding authority and accountability (Klein, 2002). As part
of their responsibility to confirm effective and adequate internal controls, the audit committee
is responsible for managing the work of the internal audit function. Roles of audit committee

http://www.iaeme.com/IJM/index.asp 508 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

in overseeing internal audit function are to monitor and assess effectiveness, and analysis and
evaluate annual internal audit work plan (Alkhuzaie & Asad, 2018). Approve the appointment
or termination of the head of internal audit. Preserve independence of the internal auditors and
check efficiency of the work of internal auditors. Ensure recommendations are worked upon
and internal audit staff‟s accountability to the audit committee (Zain, Subramaniam, &
Stewart, 2006).
The vital roles of the audit committee are „assessment‟, „review‟ and „oversight‟ of other
systems and functions in the company. Most of the board aims concerning to the internal
controls will be surrogated to the audit committee (Files & Liu, 2015). The main role of audit
committee is to assess the internal controls, supervise internal audit, administer integrity of
financial statements, and assessing the work of external auditor.
The board is responsible for the total process of risk management, which includes
confirming that the system of internal control is effective and adequate. The objectives of the
audit committee regarding the internal controls of the organization are to ensure that
recommendations of internal audit regarding internal controls are implemented. Review the
organization‟s strategies and risk limits. Hold discussion with management about the
efficiency of the internal controls of the organization. Review the assessment and evaluation
of the internal control system (Krishnan, 2005).
To oversight the association between the company and the external auditors is the
obligation of the audit committee. Audit committee „Oversee‟ the process of selection when
new auditors are being considered and should have the principal obligation for making a
commendation to the board on the appointment, re-appointment or removal of the external
auditors (Mustapha & Lee, 2020). The audit committee approves the remuneration of their
audit services and terms of engagement of the external auditors. Review the scope of audit
with the auditor, and satisfy the sufficiency of the scope of the audit. Carry out a post-
completion audit review and conduct annual procedures for ensuring the objectivity and
independence of the external auditors. Make sure that appropriate plans are in place for the
audit at the start of each annual audit (Stewart & Munro, 20017).

3.2. Outsourcing Internal Audit

Arranging an external entity to perform a task, which would otherwise be performed by the
company‟s own staff, is known as „Outsourcing‟. It usually refers to routine and repetitive
procedure and operations (Bansal & Sharma, 2016). The Audit Committee of the organization
implement the audit planning of the organization to evaluate the processes and report the
relevant findings to the Audit Committee regarding the compliance of the processes of the
organization (Rittenberg & Covaleski, 1999). Some entities outsource the work of the internal
audit function. When this happens the service provider is often the accountancy firm that
provides the entity with its external audit services (William, Glover, & Prawitt, 2016).
Several factors need to be considered when an entity outsources its internal audit function
which includes that the audit firm must have a greater level of independence than the entity‟s
own internal audit staff. If the external audit firm is not properly independent from the
executive management of the entity; it should not be given any internal audit work. The audit
firm may have access to more highly trained, specialist employees. This can create immediate
accessibility to a fully operational and trained internal audit department (Lowe, Geiger, &
Pany, 1999).
The audit firm will have greater number of employees available for any urgent internal
audit assignment. This provides the client with greater flexibility in capacity without having
to maintain a large internal audit headcount of its own. Professional codes of conduct and
standards of behavior will regulate the audit firm. This might not be the case with an in house

http://www.iaeme.com/IJM/index.asp 509 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

internal audit section. The audit firm may be sued for the breach of the contract with the client
organization or for the negligent work. So, the firm should have professional indemnity
insurance to claim for the losses due to the negligent working (Subramaniam, Ng, & Carey,
2004).

3.3. Primary Drivers of Outsourcing

A drive for change may be required to alter the current processes according to the need. Same
is the case with the outsourcing of the internal audit department. There may be same core
basis or reason on which the organization or its audit committee decides to outsource their
audit function to an external firm (Rao & Young, 1994; Quélin & Duhamel, 2003). The
organization or the audit committee of the organization might feel to outsource the internal
audit department so that they may increase the customer value towards their organization
(Akhtaruddin & Haron, 2010).

3.4. Modes Available for Outsourcing Internal Audit Function

An organization can use different types of outsourcing pattern which are referred to as the
modes of outsourcing (Smita & Ankush, 2012). The modes available to the organizations for
outsourcing their Internal Audit functions are described below:
The organization hires a firm for outsourcing its Internal Audit function by evaluating the
capabilities of the firm upon certain parameters which is set by the Audit Committee. The
organization sets the scope of working for the firm. The firm conducts the Audit assignment
based on the scope set by the Audit Committee and submits the report to them (Martin &
Lavine, 2000). The observations and evaluation made by the firm providing the internal audit
service are summarized and included in the report by the in-house audit function along with
their own working report. The report is then compiled and is reported to the audit committee,
at the end of the period of the audit. There are two different schools of thoughts which are
exercised by the organizations; The Audit Partner should submit the report to the Audit
Committee of the organization. Or, the In-house team of the audit should present the report, as
the firm is only a service provider to the organization. The In-house team of the audit should
present the report and is the responsible party for the quality of the report in the eyes of the
audit committee.
The Co-Sourcing of the internal audit adopts almost a similar approach as the full
outsourcing. But the audit planning in this model of outsourcing is done collectively by both
parties of the team. In this mode the organization acquires some professional personnel‟s from
the firm to conduct the project (Speklé, Elten, & Kruis, 2007). The audit team visibly defines
the extents within the audit assignment between themselves (Agoglia, Hatfield, & Lambert,
2015). A joint report is submitted by the team to the Audit Committee and both the parties in
the team are made responsible for the quality of the Audit report (Augustine, Mgbame, Lucky,
& Kuegbe, 2013). Co-Sourcing model is adopted by the organization where there is a lack of
expertise in the organization. The area to be audited is a specialized area or the audit of a
confidential area.
In this mode of outsourcing, the In-house audit teams of the organizations fall short of
manpower resources to conduct the activity. So, they hire a firm to conduct the assignment
with them by providing manpower. The planning, methodology and conduct of the audit is
under the supervision of the In-house team (Barac & Motubatse, 2009). The in-house team is
solely responsible for the quality of the audit so they should make optimum use of the
outsourced services of Internal Audit. The in-house team should check availability of the in-
house personnel to conduct the audit. Whether the audit assignment is of low risk and whether
it can be executed by a mid-sized firm (Budescu, Peecher, & Solomon, 2012). Whether the

http://www.iaeme.com/IJM/index.asp 510 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

geographical is spread is so wide that it is cost efficient to deploy a local firm for the
assignment. Check the monetary resources for outsourcing the assignment. The in-house team
should check whether the outsourcing of assignment will prove to be efficient and effective
for the organization.

3.5. Potential Benefits of Outsourcing

An organization might outsource its internal audit function to a firm to gain some benefits and
advantages through that. The corporate is not burdened with the course of setting up an
internal audit department, resourcing it effectively, reporting training, etc. Thus the senior
management can devote their time better in the administration of the function. The cost to
outsource an internal audit function is generally less than the cost suffered to maintain the
internal audit services in-house (Rittenberg & Covaleski, 2001). There is no “bias”
attributable by the auditor to an outsourced professional firm. Outsourcing the internal audit
to a firm may provide a better experience. As, the firm may be better equipped to cater the
information and provide expertise on industry practices. Internal employees of the internal
audit section may be able to better accept the recommendations made by the firm than those
made by the in-house team (Raiborn, Butler, & F.Massoud, 2009).
An independent internal audit evaluation allows an impartial assessment specific to the
organization‟s industry of maneuver. This allows for new ideas to be communicated to
improve efficiency and effectiveness of operations, improve internal controls, and reduce risk.
The individual organization may be uninformed or unaware of the general or industry specific
issues, that the independent consultants are aware of. Therefore, to help alleviate the risks and
possible negative impact on the organization, the independent consultants are in a position to
offer guidance across those areas (Barr & Chang, 1993).

3.6. Challenges and Risks while Outsourcing Internal Audit Function

Outsourcing an internal audit can be a major risk to the organization as it creates uncertainties
over costs, security, quality, management and delivery of the service. Things can and do go
wrong when an internal audit function is outsourced. The common challenge that arises when
the organization outsources an internal audit functions are that a firm may adopt a lack of
risk-based approach to the management of the outsourced organization. The organization does
not or might not be able to clearly define the service levels or key performance indicators.
This inability might result in the inability to effectively manage and monitor the service
deliver, quality and price in line with the outsourced contract (Caplan & Kirschenheiter,
2000).
No evaluation of the outsourcing service provider can take place, if there is a lack of
„Right to Audit‟ or the „Right to Audit‟ may not get exercised effectively. The visibility of the
individual contract performance with the service providing firm might be poor. The
organization might have poor interactions and relationships with the service providing firm
(Mubako, 2018). The procurement framework may be underpinned if there is a limited use of
technology or system capabilities. The roles and responsibilities within the contract
management team may be unclear. The firm may lack with the contract management skills.
The outsourced service provider may possess some ethical or legal issues (Beasley &
Marianne, 2004). Sometimes organizations are unable to provide the required internal audit
services to their organization. So they may intend to outsource the internal audit function to a
professional firm to obtain such service (Yiannakas, 2003; Stringfellow, B.Teagarden, & Nie,
2008).
The risks will not get reduced when a firm outsources its internal audit function; the risks
just get transferred to the outsourced service providers (Caplan & Kirschenheiter, 2000).

http://www.iaeme.com/IJM/index.asp 511 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

Professional firms may not have the same level of detailed knowledge of the entity and its
operations that in-house internal auditors have (Lankford & Parsa, 1999). Similarly, the
outsourced internal auditor may not be available all the time to the organization (Ketler &
Walstrom, 1993). The consequences of a poor contract management with the outsourced
service providing firm may be categorized as follows (Gadde & Hulthén, 2009). Likewise,
outsourced internal audit service providers are projected to apply and sustain the certain
principles (Lowe, Geiger, & Pany, 1999; Ahlawat & Lowe, 2004). These principles are being
explained in detail below:

4. CONCLUSIONS
An internal audit function of an organization is used to provide an objective and unbiased
view about the effectiveness and efficiency of the organization‟s internal controls and risk
management activities. An organization may think to outsource its internal audit department
to gain some competitive advantage. An organization outsources their internal audit function
to a professional service providing firm to plan the working of the internal audit working of
the organization and evaluate the business process and risk management of the organization.
The firm should be professionally able to apply the relevant techniques and processes to
find the weaknesses in the controls and risks in the processes of the organization. To
outsource the internal audit function to a service providing firm will be a very better option
for the organization, if the organization and the firm take care of the ethical issues being
implicated during the outsourcing and the organization is able to evaluate the capabilities of
the firm in providing the required service and that the cost while outsourcing the function will
be enough in order to acquire the services. But if an organization does not evaluate the quality
of the service the firm will provide or else outsource the function to a firm which is unable to
deliver the required services, the organization may have to face some huge disadvantages and
future risks affecting their organization

REFERENCES
[1] Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2015). Internal auditors‟ perceptions
of their role in environmental, social and governance assurance and consulting. Managerial
Auditing Journal, 30(1), 80-111. doi:org/10.1108/MAJ-08-2014-1075
[2] Abdullatif, M. (2013). Fraud risk factors and audit programme modifications: Evidence from
Jordan. Australasian Accounting, Business and Finance Journal, 7(1), 59-77.
doi:10.14453/aabfj.v7i1.5
[3] Agoglia, C. P., Hatfield, R. C., & Lambert, T. A. (2015). Audit team time reporting: An
agency theory perspective. Accounting, Organizations and Society, 44, 1-14.
doi:10.1016/j.aos.2015.03.005
[4] Ahlawat, S. S., & Lowe, D. J. (2004). An examination of internal auditor objectivity: In‐house
versus outsourcing. AUDITING: A Journal of Practice & Theory, 23(2), 147-158.
[5] Ahmad, Z., & Taylor, D. (2009). Commitment to independence by internal auditors: The
effects of role ambiguity and role conflict. Managerial Auditing Journal, 24(9), 899-925.
[6] Akhtaruddin, M., & Haron, H. (2010). Board ownership, audit committees' effectiveness and
corporate voluntary disclosures. Asian Review of Accounting, 18(1), 68-82.
doi:10.1108/13217341011046015
[7] Aldamen, H., Duncan, K., Kelly, S., McNamara, R., & Nagel, S. (2012). Audit committee
characteristics and firm performance during the global financial crisis. Accounting & Finance,
52(4), 971-1000. doi:10.1111/j.1467-629X.2011.00447.x

http://www.iaeme.com/IJM/index.asp 512 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

[8] Alič, M., & Rusjan, B. (2010). Contribution of the ISO 9001 internal audit to business
performance. International Journal of Quality & Reliability Management, 27(8), 916 - 937.
[9] Alkhuzaie, A. S., & Asad, M. (2018). Operating cash flow, corporate governance, and
sustainable dividend payout. International Journal of Entrepreneurship, 22(4), 1-9.
[10] Almansour, A. Z., Asad, M., & Shahzad, I. (2016). Analysis of corporate governance
compliance and its impact over return on assets of listed companies in Malaysia. Science
International, 28(3), 2935-2938.
[11] Al-Twaijry, A. A., Brierley, J. A., & Gwilliam, D. R. (2003, July). The development of
internal audit in Saudi Arabia: An institutional theory perspective. Critical Perspective on
Accounting, 14(5), 507-531.
[12] Alzeban, A. (2019). An examination of the impact of compliance with internal audit standards
on financial reporting quality: Evidence from Saudi Arabia. Journal of Financial Reporting
and Accounting, 17(3), 498-518. doi:org/10.1108/JFRA-09-2018-0085
[13] Asad, M. (2011). Working capital management and corporate performance of textile sector in
Pakistan. Paradigms: A Research Journal of Commerce, Economics and Social Sciences, 6(1),
100-114. doi:10.24312/paradigms060101
[14] Asad, M. (2020). Human resource practices and employee turnover intentions: Do
organizational commitment mediates and social support moderates the relationship?
International Journal of Psychosocial Rehabilitation, 24(7), 5685-5695.
doi:10.37200/IJPR/V24I7/PR27527
[15] Asad, M., & Farooq, A. (2009). Factors influencing KSE 100 index / share prices. Pardigms A
Journal of Commerce, Economics, and Social Sciences, 3(1), 34-51.
doi:10.24312/paradigms030102
[16] Asad, M., & Qadeer, H. (2014). Components of working capital and profitability: A case of
fuel and energy sector of Pakistan. Pardigms A Journal of Commerce, Economics, and Social
Sciences, 8(1), 50-64. doi:10.24312/paradigms08010
[17] Asad, M., Ahmad, I., Haider, S. H., & Salman, R. (2018). A critical review of islamic and
conventional banking in digital era: A case of Pakistan. International Journal of Engineering
& Technology, 7(4.7), 57-59.
[18] Asad, M., Chethiyar, S. D., & Ali, A. (2020). Total quality management, entrepreneurial
orientation, and market orientation: Moderating effect of environment on performance of
SMEs. Paradigms; A Research Journal of Commerce, Economics, and Social Sciences, 14(1),
102-108. doi:10.24312/193014016
[19] Asad, M., Haider, S. H., & Fatima, M. (2018). Corporate social responsibility, business ethics,
and labor laws: A qualitative analysis on SMEs in Sialkot. Journal of Legal, Ethical and
Regulatory Issues, 21(3), 1-7.
[20] Asad, M., Iftikhar, K., & Jafary, A. Y. (2019). Relationship between capital structure and
financial performance of textile sector companies. Kashmir Economic Review, 28(1), 39-52.
[21] Asad, M., Muhammad, R., Rasheed, N., Chethiyar, S. D., & Ali, A. (2020). Unveiling
antecedents of organizational politics: An exploratory study on science and technology
universities of Pakistan. International Journal of Advanced Science and Technology, 29(6s),
2057-2066.
[22] Asad, M., Rizwan, A., Shah, M., & Munir, A. (2018). Impact of innovation practices on
sustainable performance of SMEs. Herald National Academy of Managerial Staff of Culture
and Arts, 3, 537-546.
[23] Augustine, O. E., Mgbame, C., Lucky, G. O., & Kuegbe, K. (2013). Impact of Audit Evidence
on Auditor‟s Report. Research Journal of Finance and Accounting, 4(13).

http://www.iaeme.com/IJM/index.asp 513 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

[24] Bagley, P. L., Barnes, B. G., & Harp, N. L. (2019). Evaluating risk and processing integrity
controls over spreadsheets: An educational case. Issues in Accounting Education, 34(3), 21-
40. doi:org/10.2308/iace-52426
[25] Bansal, N., & Sharma, A. K. (2016). Audit committee, corporate governance and firm
performance: Empirical evidence from India. International Journal of Economics and
Finance, 8(3). doi:10.5539/ijef.v8n3p103
[26] Barac, K., & Motubatse, K. N. (2009, December 31). Internal audit outsourcing practices in
South Africa. Academic Journals, 3(13), 969-979.
[27] Barr, R. H., & Chang, S. Y. (1993). Outsourcing internal audits: A boon or bane? Managerial
Auditing Journal, 8(1).
[28] Bartlett, G. D., Kremin, J., Saunders, K. K., & Wood, D. A. (2016). Attracting applicats from
in house and outsourced internal audit positions: Views from external auditors. Accounting
Horizons, 30(1), 143-156.
[29] Bashir, A., & Asad, M. (2018). Moderating effect of leverage on the relationship between
board size, board meetings and performance: A study on textile sector of Pakistan. American
Scientific Research Journal for Engineering, Technology, and Sciences (ASRJETS), 39(1), 19-
29.
[30] Beasley, M., & Marianne, D. P. (2004, July). Outsourcing? at your own risk. Strategic
Finance, 86(1), 22-29.
[31] Beelde, I. D., & Everaert, P. (2009, February). Internal audit: A comfort provider to the audit
committee. 41(2), 90-106.
[32] Budescu, D. V., Peecher, M. E., & Solomon, I. (2012). The joint influence of the extent and
nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk.
AUDITING: A Journal of Practice & Theory, 31(2), 19-41. doi:org/10.2308/ajpt-10239
[33] Caplan, D. H., & Kirschenheiter, M. (2000, September 1). Outsourcing and audit risk for
internal audit services. Contemporary Accounting Research, 17(3).
[34] Carey, P., Subramaniam, N., & Ching, K. C. (2006, March). Internal audit outsourcing in
Australia. Accounting & Finance, 46(1).
[35] Chadwick, W. E. (2000). Keeping internal audit in-house. Internal Audit, 57(3), 88-88.
[36] Chambers, A. D., & Odar, M. (2015). A new version for internal audit. Managerial Auditing
Journal(30), 34-55.
[37] Cohen, J. R., Hoitash, U., Krishnamoorthy, G., & Wright, A. M. (2014). The effect of audit
committee industry expertise on monitoring the financial reporting process. The Accounting
Review, 89(1), 243-273. doi:http://dx.doi.org/10.2308/accr-50585
[38] Farrukh, W., & Asad, M. (2017). The determinants of capital structure: A study on cement
sector of Pakistan. International Journal of Management Sciences and Business Research,
6(2), 16-26.
[39] Files, R., & Liu, a. M. (2015). Unraveling financial fraud: The role of audit committees and
outside advisors in conducting internal investigations. Texas: The University of Texas at
Dallas.
[40] Gadde, L.-E., & Hulthén, K. (2009, August-September). Improving logistics outsourcing
through increasing buyer–provider interaction. Industrial Marketing Management, 38(6), 633-
640.
[41] Gramling, A. A., Maletta, M. J., Schneider, A., & Church, B. K. (2004). The role of the
internal audit function in corporate governance: A synthesis of the extant internal auditing
literature and directions for further research. Journal of Accounting Literature, 23, 194-224.

http://www.iaeme.com/IJM/index.asp 514 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

[42] Haider, S. H., Asad, M., & Fatima, M. (2017). Responsibility of global corporations towards
human resource to attain competitive advantage: A review. Journal of Research in
Administrative Sciences, 6(2), 9-12.
[43] Ketler, K., & Walstrom, J. (1993, December). The outsourcing decision. International Journal
of Information Management, 13(6), 449-459.
[44] Khalil, R., Asad, M., & Khan, S. N. (2018). Management motives behind the revaluation of
fixed assets for sustainability of entrepreneurial companies. International Journal of
Entrepreneurship, 22(Special), 1-9.
[45] Khan, A. A., Haider, S. H., & Asad, M. (2010). Impact assessment of Microfinance: A case
study of Akhuwat. Faculty of Commerce, Research and Development Center. Lahore:
University of Central Punjab.
[46] Khan, S. N., Yaseen, M. N., Mustafa, F., & Abbasi, S. (2019). The Interaction Effect of
Financial Leverage on the Relationship Between Board Attributes and Firm Performance;
Evidence of Non-financial Listed Companies of Pakistan. Journal of Accounting and Finance
in Emerging Economies, 5(1), 115-122
[47] Khan, S. N., Ali, E. I. E., & Boudiab, M. (2017). The Role of Audit Committee on
Performance of Listed Companies in Pakistan; an Empirical Evidence. International Journal
of Innovative Knowledge Concepts, 5, 12.
[48] Khan, S. N., & Ali, E. I. E. (2017). The moderating role of intellectual capital between
enterprise risk management and firm performance: A conceptual review. American Journal of
Social Sciences and Humanities, 2(1), 9-15.
[49] Klein, A. (2002, August). Audit committee, board of director characteristics, and earnings
management. Journal of Accounting and Economics, 33(3), 375-400.
[50] Krishnan, J. (2005, August). Audit committee quality and internal control: An empirical
analysis. Auditing: A JOurnal of Practice & Theory, 80(2), 649-675.
[51] Lankford, W. M., & Parsa, F. (1999). Outsourcing: a primer. Management Decision, 37(4),
310-316.
[52] Lankton, N., Price, J. B., & Karim, M. (2020). Cybersecurity breaches and information
technology governance roles in audit committee charters. Journal of Information Systems.
doi:org/10.2308/isys-18-071
[53] Lowe, D. J., Geiger, M. A., & Pany, K. (1999). The effects of internal audit outsourcing on
perceived external auditor independence. AUDITING: A Journal of Practice & Theory, 18(1),
7-26.
[54] Martin, C. L., & Lavine, M. K. (2000, February). Outsourcing the internal audit function. The
CPA Journal, 70(2), 58-59.
[55] Mclvor, R. (2008, February). What is right Outsourcing strategy for your process? European
Management Journal, 26 (1), 24-34.
[56] Mubako, G. (2018). Internal audit outsourcing: A literature synthesis and future directions.
Australian Accounting Review, 29(3), 532-545. doi:org/10.1111/auar.12272
[57] Mustapha, M., & Lee, Y. K. (2020). Sourcing arrangement of internal audit services: does it
matter to the external auditors? International Journal of Business Continuity and Risk
Management, 10(3), 99-111. doi:org/10.1504/IJBCRM.2020.108513
[58] Nagy, A. L., & Cenker, W. J. (2002). An assessment of the newly defined internal audit
function. Managerial Auditing Journal, 17(3), 130-137.
[59] Paape, L., Scheffe, J., & Snoep, P. (2003, 11 14). The relationship between the internal audit
function and corporate governance in the EU – a survey. International Journal of Auditing,
7(3), 247-262.

http://www.iaeme.com/IJM/index.asp 515 editor@iaeme.com

 Outsourcing Internal Audit Services: A Review

[60] Pforsich, H., Kramer, B. K., & Just, G. R. (2008). Establishing an Internal Audit Department.
Global perspective on accounting education, 5, 1-16.
[61] Quélin, B., & Duhamel, F. (2003, October). Bringing together strategic outsourcing and
corporate strategy: Outsourcing motives andrRisks. European Management Journal, 21(5),
647-661.
[62] Raiborn, C. A., Butler, J. B., & F.Massoud, M. (2009, July-August). Outsourcing support
functions: Identifying and managing the good, the bad, and the ugly. Business Horizons,
52(4), 347-356.
[63] Rao, K., & Young, R. R. (1994). Global supply chains: Factors influencing outsourcing of
logistics functions. International Journal of Physical Distribution & LOgistic Management,
24(6), 11-19.
[64] Rittenberg, L. E., & Covaleski, M. (1999). Outsourcing the internal audit function: The British
government experience with market testing. International Journal of Auditing, 225-235.
[65] Rittenberg, L., & Covaleski, M. A. (2001, October-November). Internalization versus
externalization of the internal audit function: an examination of professional and
organizational imperatives. Accounting Organizations and Society, 26(7-8), 617-641.
[66] Ruud, T. F. (2003, January). The internala udit function: An integral part of organizational
governance. The Institute of Internal Auditors Research Foundation, 37-96.
[67] Sawalqa, F. A., & Qtish, A. (2012). Internal control and audit program effectiveness:
Empirical evidence from Jordan. International Business Research, 5(9), 128-137.
[68] Shaker, R. Z., Asad, M., & Zulfiqar, N. (2018). Do predictive power of fibonacci retracements
help the investor to predict future? A study of Pakistan Stock Exchange. International Journal
of Economics and Financial Research, 4(6), 159-164.
[69] Sheikh, U. A., Asad, M., & Mukhtar, U. (2020). Modelling asymmetric effect of foreign direct
investment inflows, carbon emission and economic growth on energy consumption of South
Asian region: A symmetrical and asymmetrical panel autoregressive distributive lag model
approach. Accountancy Business and the Public Interest, 19, 193-221.
[70] Sheikh, U. A., Asad, M., Ahmed, Z., & Mukhtar, U. (2020). Asymmetrical relationship
between oil prices, gold prices, exchange rate, and stock prices during global financial crisis
2008: Evidence from Pakistan. Cogent Economics & Finance, 8(1), 1-20.
doi:https://doi.org/10.1080/23322039.2020.1757802
[71] Smita, G., & Ankush, P. (2012). Internal Audit Outsourcing vs. In-House. Income Tax Review,
68-72.
[72] Speklé, R., Elten, H. V., & Kruis, A. M. (2007, March). Sourcing of internal auditing: An
empirical study. Management Accounting Research, 18(1), 102-124.
[73] Spira, L. F., & Page, M. (2003). Risk management: The reinvention of internal control and the
changing role of internal audit. Accounting, Auditing & Accountability Journal, 16(4), 640-
661.
[74] Stewart, J., & Munro, L. (20017, July 11). The impact of audit committee existence and audit
committee meeting frequency on the external audit: Perceptions of Australian auditors.
International Journal of Auditing, 11(1), 51-69.
[75] Stringfellow, A., B.Teagarden, M., & Nie, W. (2008, March). Invisible costs in offshoring
services work. Journal of Operations Management, 26(2), 164-179.
[76] Subramaniam, N., Ng, C., & Carey, P. (2004, November 1). Outsourcing internal audit
services: An empirical study on queensland public‐sector entities. Australian Accounting
Review, 14(34), 86-95.

http://www.iaeme.com/IJM/index.asp 516 editor@iaeme.com

 Dr. Sajjad Nawaz Khan, Dr. Muzaffar Asad, Arooj Fatima, Kaleem Anjum and Kalsoom Akhtar

[77] Tazilah, M. D., Majid, M., & Suffari, N. F. (2019). Effects of outsourcing internal audit
functions among small & medium enterprises. International Journal of Business and
Technology Management, 1(1), 28-34. doi:103.8.145.246/index.php/ijbtm/article/view/5745
[78] Thomas, W. C., & Clements, C. E. (2002). The internal auditor's role in the detection and
prevention of fraud: A post-SAS No. 82 analysis. Internal Auditing, 17(4), 3-13.
[79] Widener, S. K., & Selto, F. H. (1999). Management control systems and boundaries of the
firm: Why do firms outsource internal auditing activities? Journal of Management Accounting
Research, 11, 45-73.
[80] William, M. J., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A
systematic approach. Metadata.
[81] Yiannakas, G. S. (2003, September 17). Outsourcing the internal audit function: A survey of
the UK public and private sectors. International Journal of Auditing, 4(3), 213-226.
[82] Yoon, K., Hoogduin, L., & Zhang, L. (2015). Big data as complementary audit evidence.
Accounting Horizons, 29(2), 431-438. doi:org/10.2308/acch-51076
[83] Zain, M. M., Subramaniam, N., & Stewart, J. (2006, August 31). Internal auditors‟ assessment
of their contribution to financial statement audits: The relation with audit committee and
internal audit function characteristics. International Journal of Auditing, 10(1), 1-18.

http://www.iaeme.com/IJM/index.asp 517 editor@iaeme.com

View publication stats