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

Brindle Retail has no internal audit function. Its audit committee must decide whether to establish one. The company has a stable single-country operation, strong management information and few control failures in recent years. Which factor would most strongly justify creating an internal audit function?

Rapid expansion into new markets most strongly justifies internal audit, because greater scale, complexity and risk raise the need for independent assurance over controls. The other reasons are flawed: internal audit cannot replace external audit or the committee, and designing controls it tests would compromise its objectivity.

  1. AA recent rapid expansion into new markets increasing risk and complexityCorrect
  2. BThe wish to reduce the external audit fee to zero
  3. CA desire to replace the audit committee's monitoring role
  4. DThe belief that internal audit can design the controls it later tests

Explanation

Growth into new markets increases risk, complexity and the need for independent assurance, which supports an internal audit function. Internal audit cannot replace the audit committee or remove the need for external audit. Designing the controls it later tests impairs objectivity through self-review.

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