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ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

Zephyr Foods plc is a listed company with no internal audit function. The audit committee is considering whether to establish one. Operations are simple, there is a single site, and the finance director personally reviews most transactions. Which conclusion best fits the case?

Where operations are simple and existing controls are strong, an internal audit function may not be justified. Governance codes require the audit committee to review the need annually and explain its conclusion, rather than making an in-house department compulsory.

  1. AInternal audit is mandatory under all corporate governance codes, so an in-house department must be created immediately
  2. BAn internal audit function is not clearly justified, and the audit committee should annually review the need and record its reasonsCorrect
  3. CThe external auditor should take over internal audit work to save cost
  4. DInternal audit should be created only if the company becomes unprofitable

Explanation

Governance codes such as the UK Code expect companies without internal audit to review annually whether one is needed, rather than imposing it. Factors include scale, complexity, risk and existing controls. Option A is wrong because it is not mandatory. Option C would impair the external auditor's independence.

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