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ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

Brenmoor Ltd's internal audit function reports solely to the finance director. The internal auditors recently found that the finance director approved several unusual journal entries, but they did not include this in their report to him. The board is considering a change to strengthen governance. Which change would be most effective?

Internal audit should report functionally to the audit committee chair, with only administrative reporting to the finance director. This secures independence and lets auditors report concerns about senior management without fear of influence, which is the structural weakness in the current arrangement.

  1. AHave the internal audit head report functionally to the audit committee chair, with administrative reporting to the finance directorCorrect
  2. BRotate the internal audit staff into the finance team every year
  3. CReplace internal audit with a larger external audit engagement
  4. DAsk the finance director to sign a declaration of integrity each year

Explanation

The issue is a lack of independence caused by reporting to the person being scrutinised. Functional reporting to the audit committee gives internal audit authority and protection to report concerns about senior management. Rotation into finance weakens objectivity, external audit does not replace internal audit's role, and a declaration adds no structural independence.

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