Acca aaa s21 Notes

September 2021 to June 2022 exams
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2. Potential advantages and disadvantages of outsourcing
Advantages
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Access to specialist expertise
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Reduction in cost with efficiency gains
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Flexibility in responding to uneven demand
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Greater cost certainty through fixed-fee arrangements
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Transfer of risk
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Unburdens management from having to closely manage the out-sourced function (though the 
process of out-sourcing does itself have to be managed).
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For internal audit, greater independence.
Disadvantages
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Loss of control
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Damage to reputation if the outsource company does not perform well
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Difficult to reverse (and hence, prices can be steep because the outsource company knows this)
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Lack of responsiveness to new requirements
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Different aims of the outsourcer and the outsource company leading to a lack of goal 
congruence
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Confidentiality. Company and client data are held by another party.
3. Impact on the audit
Often, the outsource company (the service company) simply becomes a supplier. For example, 
outsourcing delivery of products to a logistics company will have little effect on audit work. However, 
if IT and finance functions are outsourced that means that the financial information, records and 
processing are controlled by a third party and this will have implications for the audit. The auditor 
cannot ignore what happens to the client's data at the service company. For example, when assessing 
the valuation of receivables, the auditor would typically examine the client’s aged receivables analysis 
and ensure that it was properly prepared so that it could be used reliably (e.g. to evaluate the 
adequacy of an allowance for credit losses). If a service provider, such as a factor, produces that 
analysis instead, the auditor simply cannot assume that it has been prepared correctly and base the 
carrying amount of receivables on that.
The auditor needs an understanding of the processing and maintenance of client data by the service 
organisation to be able to draw conclusions about the risk of material misstatement. There are two 
situations:
(1)
The service company simply processes client’s transactions. Here, the client should be able to 
implement its own controls (e.g. comparing output against input to ensure all transactions 
processed).
(2)
The service company additionally executes and takes responsibility for the client’s transactions. 
Then the client company will have to rely on the controls and procedures within the service 
company.