outsourcing

Question 1

What is outsourcing?

Answer 1

Outsourcing is the use of external suppliers for finished products, components, or services, also known as subcontracting.

Question 2

Does outsourcing diminish the responsibility of a company’s directors?

Answer 2

No, it does not diminish the ultimate responsibility of the directors for conducting the business of the company.

Question 3

What are common business functions that are outsourced?

Answer 3

Payroll, information technology, accounting, recruitment, and internal audit.

Question 4

What is a service organisation?

Answer 4

A third-party organisation that provides services relevant to financial reporting for user entities.

Question 5

Define user entity.

Answer 5

An entity that uses a service organisation and whose financial statements are being audited.

Question 6

What is the role of a user auditor?

Answer 6

An auditor who audits and reports on the financial statements of a user entity.

Question 7

What is a service auditor?

Answer 7

An auditor who provides an assurance report on the controls of a service organisation at its request.

Question 8

What is a Type 1 report?

Answer 8

A report on the description and design of controls at a service organisation, providing reasonable assurance about the controls’ design.

Question 9

What does a Type 2 report include?

Answer 9

A report on the description, design, and operating effectiveness of controls at a service organisation, including tests of controls and results.

Question 10

Why must user auditors obtain sufficient audit evidence?

Answer 10

To express an opinion on financial statements affected by a service organisation.

Question 11

What is a challenge faced by user auditors when using service organisations?

Answer 11

User auditors typically have no direct contractual relationship with the service organisation or service auditor, impacting access and confidentiality.

Question 12

What must a user auditor understand about the service organisation?

Answer 12

The nature and significance of the services provided, including their effect on user entity controls.

Question 13

What factors influence the auditor’s planning related to service organisations?

Answer 13

The nature and materiality of transactions processed and the degree of interaction between the user entity and the service organisation.

Question 14

What sources of information can auditors use?

Answer 14

User manuals, system overviews, technical manuals, contracts/service level agreements, and reports by the service organisation or its auditor.

Question 15

What should a user auditor evaluate regarding the service organisation’s controls?

Answer 15

Whether the understanding of controls is sufficient to assess risks of material misstatement in financial statements.

Question 16

What should auditors do if they conclude that their understanding of controls is insufficient?

Answer 16

Obtain a Type 1 or Type 2 report, contact the service organisation, visit the organisation, or use another auditor to perform procedures.

Question 17

What are the auditor’s options for ensuring the effectiveness of controls at the service organisation?

Answer 17

Obtain a Type 2 report, perform tests of controls, or use another auditor to perform tests.

Question 18

What must the user auditor check regarding a Type 2 report?

Answer 18

Appropriateness of the date, adequacy of the covered time period, relevance of tests performed, and ensure complementary controls are tested if necessary.

Question 19

What should the auditor inquire about management in relation to the service organisation?

Answer 19

Any fraud, non-compliance with laws, or uncorrected misstatements that could affect the user entity’s financial statements.

Question 20

What happens if a user auditor cannot obtain sufficient evidence about the service organisation’s impact?

Answer 20

The auditor must modify the audit report, as the scope of the audit has been limited.