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ACCA Strategic Professional · Strategic Business Leader · Management and internal control systems

Brindle Retail has an internal audit department that reports to the finance director. The internal auditors recently found significant expense irregularities in the finance director's own department, but their report was softened before reaching the board. Which recommendation best addresses this weakness?

Internal audit should report functionally to the audit committee, made up of independent non-executives. This removes the finance director's ability to filter findings about his own area, restoring objectivity and ensuring significant control failures reach the board unchanged.

  1. ARotate the internal auditors into the finance department every two years
  2. BRequire the head of internal audit to report functionally to the audit committee, which is independent of executive managementCorrect
  3. CReplace internal audit with an annual external audit only
  4. DIncrease the number of internal audit staff within the finance department

Explanation

The problem is the independence of internal audit, as it reports to an executive whose area it reviews. Reporting to an independent audit committee protects objectivity and ensures findings reach the board. Rotation into finance would worsen independence, and external audit has a different purpose and scope.

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