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ACCA Strategic Professional · Strategic Business Leader · Internal control and management reporting

At Halden Bank, the head of internal audit reports functionally to the chief financial officer, who also approves the audit budget. The audit committee wants to strengthen the independence of internal audit. Which action is most appropriate?

Internal audit should report functionally to the audit committee, which should approve the head's appointment, removal and budget. This removes dependence on the CFO whose area is audited. Designing controls, auditing former departments or management-limited scope would each weaken objectivity.

  1. AHave the head of internal audit report functionally to the audit committee chair, with the committee approving appointment, removal and budgetCorrect
  2. BMake internal audit responsible for designing the bank's controls so it understands them
  3. CRotate finance staff into internal audit to audit their own former departments
  4. DLimit internal audit's scope to areas the CFO nominates

Explanation

Independence is best supported by a functional reporting line to the audit committee, which also oversees appointment, removal and resources. Designing controls creates a self-review threat, auditing one's former department creates familiarity bias, and management-set scope restricts independence.

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