ACCA Strategic Professional · Strategic Business Leader · Audit and compliance
Brandt Pharma's chief executive proposes outsourcing internal audit to the firm that is also its external auditor, arguing it will give efficiency and a consistent view of risk. The audit committee is asked for advice. What is the most significant concern?
The main concern is threats to the external auditor's independence: it would be assessing and relying on internal audit work it performed itself (self-review) and might assume management responsibilities. Outsourcing internal audit is not banned generally, but doing so with the same firm is problematic.
- AOutsourcing internal audit is prohibited in all circumstances
- BThe external auditor would risk reviewing and relying on its own work, and could take on management responsibilities, creating self-review and management threats to independenceCorrect
- CThe firm would be unable to understand the company's controls
- DOutsourced internal audit cannot cover operational risks
Explanation
Providing internal audit services to an audit client creates self-review and management participation threats, since the auditor would evaluate controls it helped design or operate. Outsourcing is not prohibited generally, and the firm would understand the controls well, so the other options miss the independence issue.
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