Leigh Industries has an internal audit department consisting of a director and four staff auditors. The director of internal audit, Diane Bauer, reports to the corporate controller, who receives copies of all internal audit reports. In addition, copies of all internal audit reports are sent to the audit committee of the board of directors and the individual responsible for the area of activity being audited.

In the past, the company’s external auditors have relied on the work of the internal audit department to a substantial degree However, in recent months, l3auer has become concerned that the objectivity of the nonaudit work that the department has performed is affecting the internal audit function. This possible loss of objectivity could result in external auditors performing more extensive testing and analysis. The percentage of nonaudit work that the internal auditors perform has steadily increased to about 25 percent of the total hours worked. A sample of five recent nonaudit activities is presented in the following section.

One of the internal auditors assisted in the preparation of policy statements on internal control. These statements included such things as policies regarding sensitive payments and the safeguarding of assets.

Reconciling the bank statements of the corporation each month is a regular assignment of one of the internal auditors. The corporate controller believes this strengthens the internal control function because the internal auditor is not involved in either the receipt or the disbursement of cash.

The internal auditors are asked to review the annual budget each year for relevance and reasonableness before the budget is approved. At the end of each month, the corporate controller’s staff analyzes the variances from budget and prepares explanations of these variances. The internal audit staff then reviews these variances and explanations.

One of the internal auditors has been involved in the design, installation, and initial operation of a new computerized inventory system. The auditor was primarily concerned with the design and implementation of internal accounting controls and conducted the evaluation of these controls during the test runs.

The internal auditors are sometimes asked to make the accounting entries for complex transactions as the employees in the accounting department are not adequately trained to handle such transactions. The corporate controller believes this gives an added measure of assurance to the accurate recording of these transactions.

Required

a. Define objectivity as it relates to the internal audit function.

b. For each of the five nonaudit activities presented, explain whether the objectivity of Leigh Industries’ Internal Audit Department has been materially impaired. Consider each situation independently.

c. The director of internal audit reports directly to the corporate controller.

1. Does this reporting relationship affect the objectivity of the internal audit department? Explain your answer.

2. Would your evaluation of the five situations in question b. change if the director of internal audit reported to the audit committee of the board of directors? Explain your answer.