Independence & Objectivity

Question 1

Standard 1100 - independence and objectivity

Answer 1

“The internal audit activity must be independent, and internal auditors must be objective in performing their work.”

Question 2

Independence is an attribute of what, while objectivity is an attribute of what?

Answer 2

Internal audit activity
Internal Auditor

Independence is an attribute of the internal audit activity while objectivity is an attribute of the internal auditor.

Question 3

IPPF defines independence as

Answer 3

“the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.”

Question 4

IPPF defines objectivity as

Answer 4

“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.”

Question 5

According to standard 1110, the CAE must report to what level? And confirm what to the board at least annually?

Answer 5

“The CAE must report to a level within the organisation that allows the internal audit activity to fulfill its responsibilities. The chief audit executive must confirm to the board, at least annually, the organisational independence of the internal audit activity.”

Question 6

Recite standard 1110.A1 in respect of interference

Answer 6

“The internal audit activity must be free from interference in determining the scope of internal auditing, performing work, and communicating results. The CAE must disclose such interference to the board and discuss the implications.”

Question 7

What does standard 1111 require in respect of the CAE’s interaction with the Board.

Answer 7

Standard 1111 - Direct interaction with the Board

“The CAE must communicate and interact directly with the board.”

Question 8

What does standard 1112 - CAE roles beyond internal auditing, require?

Answer 8

It requires that safeguards are put in place to limit impairments to independence and objectivity.

“Where the CAE has or is expected to have roles and/or responsibilities that fall outside of internal auditing, safeguards must be in place to limit impairments to independence and objectivity.”

Question 9

Give examples of safeguards to independence and objectivity where the CAE has roles outside of internal audit?

Answer 9

1. Reporting functionally to the Board
2. Board oversight and monitoring
3. Developing alternative means of obtaining assurance over the additional areas of responsibility. Usually this would be a competent provider that also reports independently to the Board and not the CAE.

Question 10

If the CAE has responsibilities in areas outside the internal audit activity that are subject to internal auditing, what actions should be taken in respect of providing assurance over those areas?

Answer 10

The provision of assurance would be outsourced to an objective, competent assurance provider that reports independently to the board, rather than the CAE. Such an assurance provider could be either internal or external.

Question 11

According to standard 1120 - individual objectivity, internal auditors must have

Answer 11

“Internal auditors must have an impartial, unbiased attitude and avoid any conflict of interest.”

Question 12

The IPPF defines conflict of interest as

Answer 12

Any relationship that is, or appears to be, not in the best interest of the organisation. A conflict of interest would impair an individual’s ability to perform his or her duties and responsibilities objectively.

Question 13

Performance evaluation and compensation system can impact an internal auditor in what way?

Answer 13

It can significantly impact an internal auditors objectivity.

For example, if an internal auditor’s performance evaluation, salary or bonus are significantly based on client satisfaction surveys, the internal auditor may hesitate to report negative results

Question 14

What should a CAE do to manage internal audit objectivity?

Answer 14

1. Develop an audit policy manual that may describe:
   - the importance of objectivity
   - typical situations that could undermine objectivity
   - actions the IA should take if they become aware of an objectivity concern
   - reporting requirement where the IA periodically considers and discloses conflicts of interest.
2. Hold workshops or training.
3. When assigning IAs to audits, consider potential objectivity impairments.

Question 15

What does standard 1130 require in respect of impairments to objectivity and independence.

Answer 15

If independence or objectivity is impaired in fact or appearance, the details of the impairment must be disclosed to appropriate parties.

The nature of the disclosure will depend upon the impairment.

Question 16

Impairment to organizational independence and individual objectivity may include

Answer 16

• personal conflict of interest;
• scope limitations;
• restrictions on access to records, personnel, and properties;
• resource limitations

Question 17

What is the first step an internal auditor should take when they become aware of or concerned about a possible impairment to objectivity or independence?

Answer 17

Typically, the first step is to discuss the concern with an internal audit manager or the CAE to determine whether the situation is truly an impairment and how best to proceed.

Question 18

Impairment situations generally include what?

Answer 18

• self-interest
• self-review
• Familiarity
• bias, or
• undue influence.

Question 19

Provide three examples of impairments to organisational independence

Answer 19

• The CAE has other areas of responsibility than internal audit and executes an audit of that area that is also under the CAE’s oversight.
• The CAE does not have direct communication or interaction with the board
• The budget for the internal audit activity is reduced to the point that internal audit cannot fulfill its responsibilities.

Question 20

Provide three examples of impairments to internal auditor objectivity

Answer 20

• An internal auditor audits an area in which he or she recently worked
• An internal auditor audits an area where a relative or close friend is employed
• An internal auditor modifies the planned approach or results based on the undue influence of another person

Question 21

Describe the three actions the CAE should take when determining the appropriate parties to notify of an impairment.

Answer 21

• CAE believes the impairment is not real, but there is a perception - discuss with operating management - include in final report
• CAE believes the impairment is real - inform senior management and Board and seek support
• impairment comes to light after audit - inform operating and senior management and board.

Question 22

Can an auditor audit a specific operation they were previously responsible for?

Answer 22

No

When is objectivity presumed to be impaired? How much time should pass before they can?

Objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for which the internal auditor had responsibility within the previous year.

Question 23

What action should be taken when performing an assurance engagement in an area that the CAE has responsibility for?

Answer 23

Assurance engagements for functions over which the CAE has responsibility must be overseen by a party outside the internal audit activity.

Question 24

Can the internal audit activity provide assurance services where it had previously provided consulting services?

Answer 24

Yes, provided the consulting engagement did not impair objectivity.

Question 25

Can internal auditors provide consulting services over a function they had previous responsibility?

Answer 25

Yes

Question 26

If internal auditor has potential impairments to objectivity or independence relating to a proposed consulting engagement, what must the auditor do before accepting the engagement?

Answer 26

The auditor must disclose the potential impairment to the engagement client prior to accepting the engagement.

Question 27

What is professional skepticism?

Answer 27

Professional skepticism is an attitude that includes being alert to:

• Evidence that is inconsistent with other evidence obtained.
• Information that calls into question the reliability of documents to be used as evidence.
• Conditions that may indicate likely misstatement.