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

Calder Pharma has no internal audit function. The audit committee of this listed company is concerned that management reports on controls are not independently verified. A consultant proposes an internal audit function reporting to the finance director to save cost. Which assessment is most appropriate?

The function should report functionally to the audit committee. Reporting to the finance director, who is responsible for many of the controls being reviewed, would compromise independence and objectivity. An audit committee reporting line lets internal audit give unbiased assurance to the board on control effectiveness.

  1. AReporting to the finance director weakens independence; the function should report functionally to the audit committeeCorrect
  2. BReporting to the finance director is ideal because the finance director owns the controls being reviewed
  3. CInternal audit should be avoided because external audit already gives sufficient assurance on all controls
  4. DInternal audit should report to the sales director to ensure commercial awareness

Explanation

Internal audit must be independent of the management whose controls it reviews, so best practice is a functional reporting line to the audit committee. The finance director is responsible for many of the controls under review, which creates a conflict. External audit is not designed to give assurance on all controls.

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