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CS Professional · Internal and Forensic Audit · Internal Audit: Introduction and Overview

Halder Foods Ltd. appoints an external firm to carry out internal audit under an outsourcing arrangement while the CFO continues to decide the audit scope and receives all reports. What is the main weakness of this arrangement from an internal audit independence perspective?

The main weakness is that the audit scope and reporting are controlled by the CFO, whose own function is subject to audit, which weakens independence. Internal audit, whether in-house or outsourced, should report functionally to the audit committee or board, not to the executive being audited.

  1. AThe function reports to the CFO, an executive whose area is audited, which impairs independence; reporting should be to the audit committee or boardCorrect
  2. BOutsourcing internal audit is prohibited for all companies
  3. CAn external firm cannot understand the business
  4. DInternal audit reports may never be shared with management

Explanation

Independence requires the function to report functionally to the audit committee or board, not to executives whose areas it reviews. Outsourcing is permitted and does not itself breach independence, and management may receive reports.

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