The role of an internal audit is to provide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively. ABCD Limited is concerned about its Internal Audit (IA) function. ABCD Limited has recently expanded and reorganised its Internal Audit (IA) function. The Director of Internal Audit, Shuja Mehboob, reports to the corporate controller, who receives and reviews all internal audit reports. Mehboob forwards copies of the internal audit reports to the audit committee of the board of directors and the manager directly responsible for the function being audited. An issue of contention among the management team pertains to which department or function the Director of Internal Audits should report. Martin Stevens, the CEO, wants to ensure that ABCD Limited complies with the SOX and that the internal audit department is structured to strengthen the company's internal control system. Also, an overarching objective for the reorganised audit function is that the external auditors can rely on the work performed by the internal audit department to a substantial degree. Arguments put forth by interested parties as to where the IA department should be organizationally located are presented below: Chief Operations Officer (COO). Robert, the COO of ABCD Limited, believes that the Director of IA should report to him. Under this arrangement, the IA staff members would be involved in preparing policy statements on internal control regarding the safeguarding of assets and the design of business processes. Chief Information Officer (CIO). Marry, the CIO, has pushed hard to have the IA function report to him and take on an active role in the design, installation, and initial operation of a new computerised system. IA staff will be primarily concerned with designing and implementing internal accounting controls and evaluating these controls during the test runs and audits. Corporate Controller. Bailey Eder believes the IA group should remain within her functional area. Currently, the IA staff performs several controller-related tasks. These include: Internal auditors reconcile bank statements of the corporation each month. The controller believes this strengthens the internal control function because the internal auditor is not involved in either the receipt or cash disbursement. Internal auditors review the annual budget for relevance and reasonableness each year before the budget is approved. At the end of each month, the controller's staff analyses the variances from the budget and prepares explanations of these variances. The internal audit staff then reviews these variances and explanations. Lastly, internal auditors make accounting entries for complex transactions when employees of the accounting department are not adequately trained to handle such transactions. The controller believes this gives an added measure of assurance to the accurate recording of such transactions. Required: We have discussed internal audit independence during our interactive tutorials. Your answer should be based on our discussion. Please answer the following questions. For each of the proposed tasks to be performed by the IA function, explain whether ABCD Limited's internal audit independence will be materially impaired. For this explanation, consider each manager's arguments independently
The role of an internal audit is to provide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively. ABCD Limited is concerned about its Internal Audit (IA) function. ABCD Limited has recently expanded and reorganised its Internal Audit (IA) function. The Director of Internal Audit, Shuja Mehboob, reports to the corporate controller, who receives and reviews all internal audit reports. Mehboob forwards copies of the internal audit reports to the audit committee of the board of directors and the manager directly responsible for the function being audited.
An issue of contention among the management team pertains to which department or function the Director of Internal Audits should report. Martin Stevens, the CEO, wants to ensure that ABCD Limited complies with the SOX and that the internal audit department is structured to strengthen the company's internal
Chief Operations Officer (COO). Robert, the COO of ABCD Limited, believes that the Director of IA should report to him. Under this arrangement, the IA staff members would be involved in preparing policy statements on internal control regarding the safeguarding of assets and the design of business processes.
Chief Information Officer (CIO). Marry, the CIO, has pushed hard to have the IA function report to him and take on an active role in the design, installation, and initial operation of a new computerised system. IA staff will be primarily concerned with designing and implementing internal accounting controls and evaluating these controls during the test runs and audits.
Corporate Controller. Bailey Eder believes the IA group should remain within her functional area. Currently, the IA staff performs several controller-related tasks. These include:
- Internal auditors reconcile bank statements of the corporation each month. The controller believes this strengthens the internal control function because the internal auditor is not involved in either the receipt or cash disbursement.
- Internal auditors review the annual budget for relevance and reasonableness each year before the budget is approved. At the end of each month, the controller's staff analyses the variances from the budget and prepares explanations of these variances. The internal audit staff then reviews these variances and explanations.
- Lastly, internal auditors make accounting entries for complex transactions when employees of the accounting department are not adequately trained to handle such transactions. The controller believes this gives an added measure of assurance to the accurate recording of such transactions.
Required:
We have discussed internal audit independence during our interactive tutorials. Your answer should be based on our discussion. Please answer the following questions.
For each of the proposed tasks to be performed by the IA function, explain whether ABCD Limited's internal audit independence will be materially impaired. For this explanation, consider each manager's arguments independently
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