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ACCA Strategic Professional · Strategic Business Leader · Internal control and management reporting

Orion Logistics outsourced internal audit to Fenwick LLP under a three-year contract at a fixed annual fee for 120 audit days. The head of finance, who is unhappy with critical reports, asks the board to renew only if Fenwick 'is more constructive'. The audit committee controls the appointment. Which governance response is most appropriate?

The audit committee should decide renewal and remuneration, shielding the provider from pressure by the head of finance. Critical reports are the purpose of internal audit. Letting the audited executive influence appointment, or placing audit under finance, undermines independence and objectivity.

  1. ALet the head of finance decide renewal, as the main user of the service
  2. BSwitch to an in-house team reporting to the head of finance to improve cooperation
  3. CTerminate the contract, because critical reports show the provider is ineffective
  4. DThe audit committee should decide renewal and fees, protecting the provider's independence from the executive being auditedCorrect

Explanation

Critical findings are what internal audit exists to deliver. Renewal and remuneration decisions by the executive being reviewed threaten independence, so the audit committee should hold these decisions. Moving the function under the head of finance would worsen independence, and ending the contract because of criticism misreads effectiveness.

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