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ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

At Brandt Pharma, internal audit reports directly to the finance director, who also decides its budget, work plan and the promotion of its staff. The finance director is responsible for the financial controls internal audit reviews. Which change would best improve the effectiveness of the internal audit function's review of controls?

Internal audit should report functionally to the audit committee, which approves its plan, budget and appointments. This removes the conflict created by the finance director controlling the function that reviews his own area, and strengthens objectivity and the credibility of its conclusions on control effectiveness.

  1. AMake internal audit's work plan subject to approval by the finance director each quarter
  2. BMerge internal audit into the finance department to improve its knowledge of the accounts
  3. CReduce the scope of internal audit to compliance testing only
  4. DHave internal audit report functionally to the audit committee, which approves its plan, budget and appointmentsCorrect

Explanation

Independence is secured by reporting lines to the audit committee, which oversees plan, resources and the head of internal audit's appointment and removal. The finance director is the owner of the controls being reviewed, so the current arrangement creates a conflict. Merging or giving the finance director more control worsens independence.

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