An organization is considering purchasing a new banking software system and has asked the internal audit activity to evaluate the system. An internal auditor assigned to perform the engagement…

Question

Options

• AThis situation does not necessitate any action related to the auditor's objectivity.
• BThe auditor should decline to perform the audit because personal conflicts of interest are likely.
• CThe auditor must disclose to the chief audit executive that this situation may impair her
• DThe auditor can provide only consulting services, not assurance.

• A
  6% (2)
• B
  3% (1)
• C
  78% (25)
• D
  13% (4)

Explanation

Option C is correct because IIA Standards (Standard 1120 - Individual Objectivity) require an auditor to disclose any situation that may impair objectivity to the chief audit executive (CAE). Prior employment at the software vendor creates a plausible bias - the auditor may unconsciously favor or unduly criticize a former employer - so disclosure is mandatory. The CAE then decides the appropriate response, such as adding oversight or reassigning the auditor.

Why the distractors fail:

• A is wrong because the Standards explicitly require action (disclosure) whenever objectivity may be impaired - not just when it definitely is.
• B is wrong because automatic declination is not the required step; disclosure comes first, and the CAE determines whether reassignment is needed. There is no confirmed "personal conflict of interest" here, just a potential impairment.
• D is wrong because the consulting-vs-assurance distinction is irrelevant to this scenario. Objectivity is required for both service types, and the issue is disclosure - not a categorical restriction on service type.

Memory tip: Use the phrase "Disclose, don't decide." The auditor's job is to flag the potential impairment upward to the CAE - it is the CAE's role, not the auditor's, to determine what happens next.

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