IIA-CIA-PART1 · Question #223
Which of the following situations is most likely to threaten the independence of the internal audit activity?
The correct answer is B. The annual budget for the internal audit activity is approved by the chief financial officer. Budget approval by the CFO places a management executive in control of internal audit's resources, creating a structural conflict: the internal audit activity may avoid or soften findings related to finance out of fear that the CFO could retaliate by cutting the budget. IIA…
Question
Which of the following situations is most likely to threaten the independence of the internal audit activity?
Options
- AThe chief audit executive reports functionally to the board and administratively to the CEO.
- BThe annual budget for the internal audit activity is approved by the chief financial officer.
- CThe internal audit activity is completely outsourced to an external service provider.
- DThe internal audit manager provides consulting services to the procurement department, where
How the community answered
(15 responses)- A7% (1)
- B87% (13)
- D7% (1)
Explanation
Budget approval by the CFO places a management executive in control of internal audit's resources, creating a structural conflict: the internal audit activity may avoid or soften findings related to finance out of fear that the CFO could retaliate by cutting the budget. IIA Standard 1110 requires organizational independence to be free from management interference, and budget authority is a core lever of that control - it should rest with the board (typically the audit committee), not management.
Why the distractors are wrong:
- A is actually the IIA's recommended dual-reporting structure: functional reporting to the board preserves independence; administrative reporting to the CEO handles day-to-day logistics. This is best practice, not a threat.
- C outsourcing is permitted and doesn't inherently impair independence - external providers can be objective, provided a qualified internal oversight function remains.
- D (likely refers to consulting in an area the auditor will later audit, or previously worked in) affects an individual auditor's objectivity, not the independence of the entire internal audit activity - a narrower issue than B.
Memory tip: Think of independence as "who controls the purse strings controls the auditor." Whenever management (not the board) has budget authority over internal audit, independence is compromised. The rule is: Board approves budget → independence protected; Management approves budget → independence threatened.
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