IIA-CIA-PART1 · Question #1
In a small company with a small budget, the board and senior management asked the chief audit executive (CAE) to develop specific controls prompted by a new regulatory requirement affecting a…
The correct answer is C. The functional reporting of the CAE to senior management. Functional reporting to senior management impairs the internal audit activity's organizational independence because the IIA Standards require the CAE to report functionally to the board (or audit committee) - not to senior management, who are themselves subject to audit…
Question
In a small company with a small budget, the board and senior management asked the chief audit executive (CAE) to develop specific controls prompted by a new regulatory requirement affecting a specific process. The CAE was also directed to report functionally to senior management. An audit engagement on this process was already set in the internal audit plan. Which of the following represents an impairment to the internal audit activity's independence?
Options
- AThe development of controls by the CAE.
- BThe audit engagement regarding this process.
- CThe functional reporting of the CAE to senior management.
- DThe small budget.
How the community answered
(39 responses)- A3% (1)
- B5% (2)
- C79% (31)
- D13% (5)
Explanation
Functional reporting to senior management impairs the internal audit activity's organizational independence because the IIA Standards require the CAE to report functionally to the board (or audit committee) - not to senior management, who are themselves subject to audit scrutiny. When management oversees the audit function, they can influence scope, resource allocation, or findings, undermining the structural safeguard that independence is meant to provide.
Why the distractors are wrong:
- A (CAE developing controls): This creates a self-review threat to objectivity for that specific engagement, but it is a manageable impairment at the engagement level - not a blanket impairment to the audit activity's independence. Proper disclosure and safeguards can address it.
- B (Audit engagement on the process): Auditing a process already in the plan is exactly what internal audit is supposed to do. No impairment.
- D (Small budget): Resource constraints affect capability and effectiveness, not independence. Underfunded ≠ not independent.
Memory tip: Think of independence as "who holds the leash?" - if senior management (the auditee) holds it, the watchdog can't bite. True independence requires the CAE to report functionally to the board, placing audit above the reach of those being audited.
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