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CS Professional · Compliance Management, Audit and Due Diligence · Internal Audit and Performance Audit

Ravi Agro Ltd is owned and run by its promoter-manager Mr Ravi, who personally reviews daily cash, approves all payments and checks monthly stock reports. He calls this his 'internal audit'. The statutory auditor considers using this as an internal audit function under SA 610 (Revised). What is the correct view?

The owner-manager's reviews do not constitute an internal audit function. SA 610 (Revised) states that managers with operational duties face objectivity threats, and owner-manager monitoring controls are not equivalent to internal audit, though they are control activities that can be tested under SA 330.

  1. AIt qualifies, as the owner-manager has the greatest knowledge of the business
  2. BIt qualifies if the monthly stock reports are documented in writing
  3. CIt qualifies for compliance review but not for financial information
  4. DIt does not qualify; monitoring controls by an owner-manager are not equivalent to an internal audit function, though they are control activities that can be tested under SA 330Correct

Explanation

The standard says people with operational and managerial duties outside the internal audit function face objectivity threats that preclude treating them as part of the function, and that monitoring controls performed by an owner-manager are not equivalent. Such controls remain control activities the auditor may test under SA 330. Documentation or knowledge does not cure the objectivity threat.

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