Skip to content

CS Professional · Internal and Forensic Audit · Internal Audit of Specific Functions

Internal auditors of Bharat Engineering Ltd review its short-term investment of surplus funds. Board policy permits investment only in instruments rated at least AA and capped at ₹5 crore per issuer. The treasury has placed ₹6 crore in a single AA-rated issuer's commercial paper with the CFO's verbal approval. What should the auditor conclude?

This is a policy breach. Although the rating meets the requirement, the ₹6 crore exposure exceeds the board's ₹5 crore issuer limit by ₹1 crore, and verbal CFO approval cannot override a board-approved limit. The breach exists regardless of default and should be reported.

  1. ANo exception, because the CFO approved it and the rating is acceptable
  2. BAn exception exists only if the issuer defaults
  3. CA policy breach exists because the exposure exceeds the issuer limit by ₹1 crore and verbal approval is not a valid authorisation as per the board-approved policyCorrect
  4. DThe breach concerns the rating only, so the exposure limit is irrelevant

Explanation

Rating is compliant but the ₹6 crore exposure exceeds the ₹5 crore cap by ₹1 crore. A limit set by the board cannot be overridden by informal verbal approval from an executive. The breach exists irrespective of default, so it must be reported with the need for ratification or correction.

Did you get it right without looking?

One question tells you little. A timed set on Internal Audit of Specific Functions shows your real accuracy, how long you take and where you lose marks.

Practise Internal Audit of Specific FunctionsFree diagnostic mock

More Internal Audit of Specific Functions questions