demonstrates the organizational independence of the internal audit activity?

Question

Options

• AThe CAE seeks senior management approval of the internal audit charter
• BThe CAE obtains senior management's approval to hire staff
• CThe CAE reports significant issues to the organization's CEO
• DThe CAE provides the board with an annual budget for approval

• A
  10% (5)
• B
  2% (1)
• C
  4% (2)
• D
  84% (41)

Explanation

Option D demonstrates organizational independence because it shows the board - not senior management - holds authority over internal audit resources. When the CAE brings the budget to the board for approval, the board controls whether internal audit has the people and tools it needs, preventing management from starving or influencing the function it is supposed to be audited by.

Why the distractors fail:

• A is wrong because the charter should be approved by the board, not senior management - seeking management's approval over the charter subordinates the audit function to the very people it audits.
• B is wrong for the same structural reason: staffing decisions approved by senior management give management leverage over who conducts audits of them.
• C is wrong because reporting significant issues only to the CEO means management controls what the board learns; true independence requires the CAE to report directly to the board or audit committee, bypassing management on critical matters.

Memory tip: Ask yourself "who has the power here - management or the board?" Independence is demonstrated whenever authority flows from the board, not from management. The IIA Standards are clear: the CAE must have a functional reporting line to the board - budget approval is one of the clearest expressions of that relationship.

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