G. Johnson, a local real estate broker, is a member of the board of directors of Pennset Corporation. At a recent Board meeting, called to discuss financial plans, Mr. Johnson discovered two planned expenditures for auditing. In the Controller's Department budget, he found an estimate for internal audit activity and in the Treasurer's budget he found an estimate for the annual audit by a CPA firm.

Mr. Johnson could not understand the need for two different expenditures for auditing. Since the CPA fee for the annual audit was less than the cost of the internal audit activity he proposed eliminating the internal audit function.

Required

a. Explain to Mr. Johnson the different purposes served by the two audit activities.

b. What benefits does the CPA firm performing an audit derive from the existence of an internal audit function?

CMA