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

Harbor Textiles plc has a head of internal audit who reports day-to-day to the finance director and whose annual plan is approved by the finance director. The audit committee chair is concerned about the independence of the function. Which change would most directly strengthen internal audit independence?

Independence is strengthened when the head of internal audit reports functionally to the audit committee, which approves the plan and the appointment and removal of the head. Reporting to the finance director, whose area is audited, undermines objectivity.

  1. AHave the head of internal audit report functionally to the audit committee, which approves the plan and the head's appointment and removalCorrect
  2. BMove the internal audit team into the finance department to share accounting expertise
  3. CAllow the finance director to set the audit budget so resources match operational needs
  4. DRotate internal audit staff into finance roles each year to improve business knowledge

Explanation

Independence is best secured through functional reporting to the audit committee (or board), which approves the plan, resources and the head's appointment. Placing the function within finance or under executive control does the opposite, and rotating staff into operational roles creates self-review threats.

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