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

Orient Foods Ltd's internal auditor, Mr. Das, reports to the Chief Financial Officer, who also decides his remuneration and can remove him. Mr. Das discovers that the CFO's department bypassed approval limits. He softens the report. Which conclusion, drawing on the contrast with external audit, is most appropriate?

The arrangement impairs objectivity. Since an internal auditor lacks the statutory protection a statutory auditor has, independence should be secured by functional reporting to the audit committee or board rather than to the executive whose function is being audited.

  1. AThe arrangement is acceptable because internal auditors are expected to be subordinate to the functions they audit
  2. BThe arrangement threatens objectivity; unlike the statutory auditor, whose independence is statutory, the internal auditor's independence must be secured through functional reporting to the audit committee or boardCorrect
  3. CThe arrangement is acceptable because the statutory auditor will automatically correct the report
  4. DThe problem arises only because Mr. Das is an employee and would vanish if he were a shareholder

Explanation

An internal auditor who reports to the person being audited faces self-interest and intimidation threats. The statutory auditor's independence is protected by law, but the internal auditor's depends on organisational design such as functional reporting to the audit committee. Relying on the statutory auditor to fix it is wrong, as that audit has a different scope.

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