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ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

Calloway Retail outsources internal audit to Hale & Co, which also audits Calloway's financial statements as external auditor. The audit committee asks about the risk. Which is the principal concern?

The main concern is a self-review threat to independence. If the external auditor also performs internal audit, it ends up evaluating its own work and may take on management responsibilities, undermining objectivity in the financial statement audit.

  1. AHale & Co would be unable to access the company's records
  2. BHale & Co could face a self-review threat, reviewing controls and systems it helped assess as internal auditor, and its objectivity as external auditor may be compromisedCorrect
  3. CThe cost will always be higher than an in-house function
  4. DInternal audit reports could not be sent to the audit committee

Explanation

Providing internal audit services to an audit client creates self-review and management-responsibility threats, particularly where the external auditor relies on or evaluates its own work. Access to records is not a problem, and cost is not the principal issue. Reporting to the audit committee remains possible.

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