Beta Ltd.

Beta Ltd. has an internal audit department headed by the Chief Internal Auditor.

The Board has assigned the internal audit department the following responsibilities:

evaluate the effectiveness of risk management processes;
review internal controls;
recommend improvements in operational efficiency;
investigate unusual transactions when specifically instructed by the Audit Committee;
design controls for newly introduced business processes;
approve the final operating procedures for those processes.

The Chief Internal Auditor reports functionally to the Audit Committee and administratively to the Managing Director.

The statutory auditor concludes:

“Because internal audit reports functionally to the Audit Committee, all activities performed by the internal audit department are independent and the department can therefore assume management responsibilities whenever required.”

Which ONE of the following is most appropriate?

A. The conclusion is correct because functional reporting to the Audit Committee is sufficient to establish independence for every activity undertaken by internal audit.

B. The conclusion is incorrect because designing and approving controls are management responsibilities and should not be assumed by an internal audit function merely because it reports to the Audit Committee.

C. The conclusion is correct because internal audit is permitted to perform management functions provided that the statutory auditor does not rely upon such work.

D. The conclusion is incorrect only because investigation of unusual transactions cannot form part of the internal audit function’s scope under any circumstances.