i) Definition of Outsourcing:
Outsourcing is the process of purchasing key functions from an outside supplier. In other words, it involves contracting out certain functions, such as internal audit or information technology, to third-party service providers.
(2 marks)

ii) Advantages of Outsourcing the Internal Audit Function:

1. Cost Efficiency:
   • Outsourcing can be more cost-effective than maintaining an in-house internal audit function, as it reduces the need for full-time staff and infrastructure.
2. Access to Expertise:
   • Outsourcing provides access to specialized skills and expertise that may not be available internally, ensuring a high level of service.
3. Indemnity Coverage:
   • Third-party service providers may offer indemnity insurance, protecting the company from losses due to errors or mismanagement during the audit.
4. Flexibility and Scalability:
   • Outsourced services can be scaled up or down based on the company’s changing needs without the commitment to full-time employees.

(4 points for 4 marks)

Disadvantages of Outsourcing the Internal Audit Function:

1. Loss of Control:
   • The company may lose direct control over the internal audit process, leading to concerns about the quality or timeliness of the work.
2. Time Demand on Management:
   • Management may spend more time managing the contract and overseeing the outsourced provider, which can be time-consuming.
3. Risk of Litigation:
   • If the outsourced provider fails to deliver as expected, the company may face legal action or challenges in enforcing contractual obligations.
4. Lack of Organizational Knowledge:
   • External auditors may not have an in-depth understanding of the company’s culture, processes, and internal operations, which can affect the quality of the audit.

(4 points for 4 marks)

(Total: 10 marks)