Practical controls over the performance of outsourced internal audits

Memorandum
To: Board of directors, Slimming Down Limited
From: Executive Director – Mrs Very Skinny
Subject: Proposal to outsource Internal Audit
Date: 12th June, 20x1

This memorandum will outline the needed quality controls when outsourcing the IA function.

Setting Performance Measures
Outsourced IA will focus on crucial core operations namely the evaluation & degree of compliance of IC in warehouse’s inventory management. Requirement to evaluate if warehouse & purchasing functions have performed VFM process so as to achieve efficiency, effectiveness and economical.

Stock turnover will expose the risks of obsolete stocks or non-saleable stocks, IA will include that in IA report.

Customer’s complaints performance measures:
IA to evaluate customers complaints file & see if management including myself has taken necessary corrective actions. Evaluate the current IC policies such as refund or discounts given to customers.

Audit methodology suitability
Outsourced IA should propose with the knowledge of NED with audit experience a methodology striking a balance between TOC and ST.

Review working papers
Propose to obtain samples of 5 copies inventory sheets for IA to conduct TOD. This provides the valuation & existence of stocks. Propose to obtain samples of 5 receipts issued to customers. Trace back to confirm the calculation & invoicing amounts are consistent with firm’s pricing policies.

End results expectations
Agree in advance on the expected findings in report. Recommend that outsourced IA provide a sample template report form if it suits firm’s requirements. Focus is on inventory security & customers’ service.

Ethical considerations
Discuss with EA on need for ethical safeguards so as to prevent self-review threats when they come in as IA.

Corporate Governance Best Practice
I as ED am pleased to propose firm hire outsourced IA. However to protect independence of IA, for best corporate governance practice, these should report directly to Audit Committee comprising of mainly NEDS.

Conclusion
I wish that the Board of Directors consider this proposal & discuss in the next Board meeting.

Yours faithfully,

Angeline