INDEPENDENCE AND OBJECTIVITY Flashcards
What is Independence?
“Independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.
To achieve the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive has direct and unrestricted access to senior management and the board. This can be achieved through a dual-reporting relationship. Threats to independence must be managed at the individual auditor, engagement, functional, and organizational levels.”
What is Objectivity?
“Objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others. Threats to objectivity must be managed at the individual auditor, engagement,
functional, and organizational levels.”
What does Organizational Independence mean?
Organizational Independence means that the internal audit activity must not have any current or previous relationships with the departments that it audits.
Organizational independence can be achieved through a properly designed Internal Audit Charter.
What are examples of functional reporting?
- Approving the internal audit charter;
- Approving the risk based internal audit plan;
- Approving the internal audit budget and resource plan;
- Receiving communications from the chief audit executive on the internal audit activity’s performance relative to its plan and other matters;
- Approving decisions regarding the appointment and removal of the chief audit executive;
- Approving the remuneration of the chief audit executive; and
- Making appropriate inquiries of management and the chief audit executive to determine whether there are inappropriate scope or resource limitations.
What are examples of administrative reporting?
- Budgeting and management accounting.
- Human resource administration, including personnel evaluations and compensation.
- Internal communications and information flows.
- Administration of the internal audit activity’s policies and procedures.
Who does the CAE report to?
The CAE should report to an audit committee, or its equivalent, for any functional and engagement issues.
For administrative issues, the CAE should report to the
CEO (or a similar position).
What is Individual Objectivity?
“Internal auditors must have an impartial, unbiased attitude and avoid any conflict of interest.”
What are common impairments?
1) A personal conflict of interest.
2) A scope limitation, including a restriction of access to records, personnel, or properties.
3) Resource limitation, which includes funding limitations.
4) Situations where the auditor is assessing operations for which they were previously responsible.
5) Assurance engagements for functions over which the CAE previously had responsibility.
6) Consulting engagements in areas where assurance
engagements are also performed.
What is a Conflict of Interest?
A situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual’s ability to perform his or her duties and
responsibilities objectively.
May auditors assess operations that they were previously responsible for?
Internal auditors must refrain from assessing specific operations for which they were previously responsible. Objectivity is presumed to be impaired if an auditor provides assurance services for an activity for which the auditor had responsibility within the previous year.
May auditors provide consulting for operations that they were previously responsible for?
Yes, internal auditors may provide consulting services relating to operations for which they had previous responsibilities.
What must be done if Independence is impaired
in fact or in appearance?
“The details of the impairment must be disclosed to appropriate parties.”
What responsibilities does the CAE have to report Independence and Objectivity issues to the board?
1) The CAE will confirm at least annually to the board that the IAA is organizationally independent. The CAE will need to make certain that the IAA maintains its organizational independence at all times.
2) The CAE will disclose to the board any interference
with the IAA determining the scope of work, performing the work, or communicating the results.
