Learn the critical policies the Chief Audit Executive should implement to maintain the objectivity and independence of the internal audit function. Prepare for the IIA CIA Part 1 certification exam.
Table of Contents
Question
To encourage internal audit objectivity, which of the following is an appropriate policy the chief audit executive should establish?
A. Internal auditors should report their audit findings directly to the audit committee.
B. To receive an outstanding performance rating, internal auditors are required to generate audit findings.
C. Prior to hiring a new internal auditor, the chief audit executive must determine whether the auditor owns stock in the organization.
D. Internal auditors are permitted to audit an entity managed by a close friend or relative, as long as they notify the chief audit executive.
Answer
To best encourage internal audit objectivity, the most appropriate policy for the Chief Audit Executive (CAE) to establish is:
A. Internal auditors should report their audit findings directly to the audit committee.
Explanation
Having internal auditors report their findings directly to the audit committee, rather than to management, helps ensure the objectivity and independence of the internal audit function. The audit committee provides independent oversight separate from the influence of management who may have a vested interest in the areas being audited.
Reporting findings to the audit committee allows internal audit issues and risks to be escalated to the highest level of the organization. It enables the audit committee to assess audit results objectively and empowers them to ensure management takes appropriate corrective actions.
The other options are not appropriate policies for the CAE to implement:
B. Tying internal auditor performance ratings to generating findings could incentivize auditors to manufacture issues that may not be valid. Audit findings should be based on facts and evidence, not quotas or performance targets.
C. While the CAE should be aware of any potential conflicts of interest, simply owning stock in the company does not necessarily impair an internal auditor’s objectivity. Many companies even encourage employee stock ownership. The key is to have policies in place to manage and disclose any conflicts.
D. Permitting auditors to audit areas managed by friends or relatives would be a clear threat to objectivity and independence. Internal auditors should not be allowed to assess operations where they have close personal relationships, even if disclosed to the CAE. Strict independence is required.
In summary, having internal auditors report findings directly to the audit committee is the most effective policy to maintain the internal audit function’s objectivity and independence from management. This reporting line ensures significant issues are communicated to the highest level for proper oversight and remediation.
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