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ACCA Applied Knowledge · Business and Technology · Internal controls

The internal audit department of Kestrel Co reports directly to the finance director, who also decides its budget and promotion of its staff. Which of the following is the main threat this creates?

The main threat is to independence and objectivity. Because internal audit reports to, and depends for budget and promotion on, the finance director whose area it must review, it may be reluctant to criticise. Better practice is reporting to the audit committee or non-executive directors.

  1. AA threat to the independence and objectivity of internal audit, because it reports to the executive it auditsCorrect
  2. BA threat to the external auditor's right to attend general meetings
  3. CA breach of the requirement that internal audit must be outsourced

Explanation

Internal audit will review finance department controls, so reporting to and depending on the finance director for budget and promotion weakens independence. Governance guidance suggests reporting to the audit committee or non-executive directors. Outsourcing is not a requirement, and the external auditor's rights are unrelated.

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