Outsourced vs. Co-Sourced Internal Audit: Choosing the Right Model

When mid-market companies decide they need internal audit coverage, they face a fundamental question: build an internal team, fully outsource, or do something in between?

As a CPA firm providing internal audit services, you’re often the one helping clients navigate this decision. Here’s how to guide them—and position your services appropriately.

Understanding the Models

Fully Outsourced Internal Audit

The CPA firm is the client’s internal audit function. You handle everything:

Developing the risk-based audit plan
Executing all audit procedures
Reporting directly to the audit committee
Managing the internal audit budget
Tracking and following up on remediation

The client has minimal internal audit staff—perhaps just an executive sponsor who liaises with the board.

Co-Sourced Internal Audit

The client maintains some internal audit capability, and you supplement it:

Client staff handles routine monitoring and lower-risk testing
You provide specialized expertise (IT audit, complex transactions)
You provide surge capacity during peak periods
You bring technology and methodology the client can’t develop internally

Responsibility is shared, with clear delineation of who does what.

Hybrid Approaches

Many arrangements don’t fit neatly into one category:

Project-based co-sourcing: Client handles most work, brings you in for specific projects
Managed co-sourcing: You manage the function but client staff do some execution
Rotating model: Full outsourcing initially, transitioning to co-sourcing as client builds capability

Decision Factors

Help your clients think through these questions:

1. Do They Have Existing Capability?

If the client has no internal audit staff, outsourcing is often the only practical option. Building a team from scratch takes time, and boards typically want coverage now.

If they have one or two people, co-sourcing lets those resources focus on areas where internal knowledge matters most.

2. What Are Their Compliance Requirements?

Heavy requirements (SOX compliance, heavily regulated industry): Outsourcing provides consistent, specialized expertise. Co-sourcing works if internal staff can handle routine testing while you focus on complex areas.

Moderate requirements (SOC 2, general IT controls): Either model works. Decision often comes down to cost and internal priorities.

3. How Sensitive Is Their Data?

Some clients prefer co-sourcing because their own staff handles sensitive areas:

Executive compensation
HR investigations
Proprietary process audits

You handle everything else while internal resources cover sensitive topics.

4. What’s Their Budget?

Outsourcing typically has lower total cost than building an internal team, but higher annual fees to the CPA firm.

Co-sourcing can reduce CPA firm fees but requires investment in internal staff. Total cost may be similar or higher than outsourcing once you factor in salary, benefits, and management overhead.

Help clients do the real math—don’t just compare your fees to salary cost.

5. Where Are They in Their Maturity Journey?

Early-stage compliance: Outsourcing makes sense. Get coverage quickly while the client focuses on building processes.

Established operations: Co-sourcing may be more appropriate. The client understands their risks and can contribute meaningfully.

Pre-transaction: Full outsourcing often preferred. Due diligence buyers want independent, external assessment.

Positioning Your Services

As a CPA firm, you can offer both models. Here’s how to position each:

Selling Outsourced Internal Audit

Emphasize:

Complete solution with no client management burden
Access to specialized expertise across multiple domains
Consistent quality and methodology
Independence that satisfies audit committee and external parties
Scalability as the company grows

Address concerns about:

Cost (compare to fully-loaded internal team cost)
Knowledge transfer (you become expert in their business)
Responsiveness (SLA commitments, dedicated engagement team)

Selling Co-Sourced Internal Audit