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

Halvorsen Retail plc has an internal audit function that reports to the finance director. The non-executive directors worry that internal audit findings on weak inventory controls are being softened before reaching the board. Which governance arrangement would best address this concern?

Internal audit should report functionally to the audit committee, made up of independent non-executive directors. This prevents executives such as the finance director from filtering findings, so weaknesses in inventory controls reach the board unaltered and the function's objectivity is protected.

  1. AHave the head of internal audit report functionally to the audit committeeCorrect
  2. BReplace internal audit with the external auditor for all control testing
  3. CMake the finance director chair of the audit committee
  4. DLimit internal audit to compliance checks on financial reporting only

Explanation

Independence of internal audit is strengthened when its head reports functionally to the audit committee, which is made up of non-executives. Having the finance director chair the committee would worsen the conflict. Replacing internal audit with the external auditor would not provide ongoing operational assurance and may threaten auditor independence.

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