Khaled Al-Zubari, an executive recruiter, is a member of the board of directors of Mantilla Corporation. At a recent board meeting, called to discuss the financial plan for 20X4, Mr Al-Zubari discovered two planned expenditures for auditing. In the controller’s department budget he found an internal audit activity, and in the treasurer’s budget he found an estimate for the 20X4 annual audit by the company’s external auditing firm. Mr Al-Zubari could not understand the need for two different expenditures for auditing.

Since the fee for the annual external audit was less than the cost of the internal audit activity, he proposed eliminating the internal audit function.

Required:

A. Explain to Mr Al-Zubari the different purposes served by the two audit activities.

B. What benefits does the audit firm doing an audit of financial statements derive from the existence of an internal audit function? (CMA adapted)