Question :

The role of internal audit is toprovide independent assurance that an organisation's risk management, governance and internal control processes are operating effectively. ABCD Limited is concerned about its Internal Audit (IA) function. Recently, ABCD Limited is expanding and reorganizing its Internal Audit (IA) function. Currently the Director of Internal Audit, Shuja Mehboob, reports to the corporate controller, who receives and reviews all internal audit reports. Mehboob forwards copies of the internal audit reports to the audit committee of the board of directors and to the manager directly responsible for the function being audited.

An issue of contention among the management team pertains to which department or function the Director of Internal Audits should report. Martin Stevens the CEO wants to ensure that ABCD Limited complies with the SOX and that the internal audit department is structured such that it strengthens the company's internal control system. Also, an overarching objective for the reorganized audit function is that the external auditors are able to rely on the work performed by the internal audit department to a substantial degree. Arguments put forth by interested parties as to where the IA department should be organizationally located are presented below:

Chief Operations Officer (COO). Robert, the COO of ABCD Limited, believes that the Director of IA should report to him. Under this arrangement the IA staff members would be involved in the preparation of policy statements on internal control regarding safeguarding of assets and in the design of business processes.

Chief Information Officer (CIO). Marry, the CIO, has pushed hard to have the IA function report to him and take on an active role in the design, installation, and initial operation of a new computerized systems. IA staff will be primarily concerned with the design and implementation of internal accounting controls and conduct the evaluation of these controls during the test runs and audits.

Corporate Controller. The controller Bailey Eder, believes the IA group should remain within her functional area. Currently the IA staff performs a number of controller related tasks. These include:

• Internal auditors reconcile bank statements of the corporation each month. The controller believes this strengthens the internal control function because the internal auditor is not involved in either the receipt or the disbursement of cash.
• Internal auditors review the annual budget each year for relevance and reasonableness before the budget is approved. At the end of each month, the controller's staff analyzes the variances from budget and prepares explanations of these variances. These variances and explanations are then reviewed by the internal audit staff.
• Lastly, the internal auditors make accounting entries for complex transactions when employees of the accounting department are not adequately trained to handle such transactions. The controller believes this gives an added measure of assurance to the accurate recording of such transactions.

Required:

1. For each of the proposed tasks to be performed by the IA function, explain whether ABCD Limited's internal audit independence will be materially impaired. For this explanation, consider each manager's arguments independently.

2. To maintain independence, where should the Director of Internal Audits report?