Domain 2 – Independence and Objectivity

Question 1
All of the following are major concerns for a chief audit executive (CAE) except:
a) Audit clients rejecting major audit
findings.
b) Audit work failures.
c) False assurances to audit clients.
d) Audit department's reputation
issues.
It is common for audit client management to reject major audit findings for various
reasons, such as: (1) little or no value added to the audit client department, (2) unclear
audit scope and audit objectives, (3) the audit client manager is new to his or her
department, or (4) other reasons. These rejections can be fixed by, for example,
revising the audit scope and objectives and/or redoing the same audit with the same
auditor or with a different auditor. These issues should not be the major concern for
the CAE.

Question 2
Which of the following is not compromised when an internal auditor has
compromised her independence of mind?
a) Integrity
b) Objectivity
c) Continuing
education
d) Professional
scepticism
An internal auditor receives continuing education whether she has independence of
mind or not because independence and continuing education are two separate and
unconnected activities and events.
Question 3
Organizational politics is a part of which of the following threats to independence of
an internal audit organization and to an individual internal auditor?
a) Bias threat
b) Familiarity threat
c) Undue influence threat
d) Management participation
 threat
. Organizational politics is a major challenge in maintaining independence from its
undue influence from power playing. Extreme and unnecessary playing of
organizational politics can slowly lead to an organization's failure or decline.

Question 4
A peer review can help in mitigating which of the following threats to an auditor's
objectivity?
a) Target
fixation trap
b) Mirror-
imaging trap
c) Analogy trap
d) Projection
trap
A mirror-imaging trap is an auditor's false assumption that his or her followers and
others think exactly like him- or herself. Auditors who fall into this trap are unwilling
to examine or analyze other views, variations, or alternatives of the subject matter at
hand. Peer reviews can help in mitigating this trap.

Question 5
A silo trap, which is a threat to an auditor's objectivity, is like a:
a) Stereotyping trap.
b) Culture trap.
c) Stove piping trap.
d) Conflicts-of-
interest trap
A stove piping trap means acknowledging only one source of information or
knowledge as the official source and disregarding other sources of information or
knowledge as unofficial sources. This trap is similar to a silo trap or legacy trap.

Question 6
When internal audit work is performed based on facts, the audit work is referring to
which of the following ethical principles?
a) Integrity
b) Objectivity
 c) Resource
utilization
d) Professional
behaviour
Integrity refers to auditors performing their work with an attitude that is objective,
fact-based, nonpartisan, and nonideological with regard to audit clients and users of
the audit reports.

Question 7
Which of the following actions would be a violation of independence?
a) Continuing on an audit assignment at a division for which the auditor
will soon be responsible as the result of a promotion.
b) Reducing the scope of an audit due to budget restrictions.
c) Participating on a task force which recommends standards for control
of a new distribution system.
d) Reviewing a purchasing agent's contract drafts prior to execution.
IIA Standard 1130 – Impairment to Independence or Objectivity specifies that an
auditor who has been promoted to an operating department should not continue on an
audit of his or her new department.

Question 8
Which of the following will best promote the independence of the internal auditing
function?
a) A quality control system within the internal auditing function
designed to ensure that departmental objectives are met.
b) Direct lines of communication between the audit committee and the
chief audit executive (CAE).
c) A written charter that reflects the concepts contained in
the International Standards for the Professional Practice of Internal
Auditing.
d) Direct reporting responsibilities to the company's chief financial
officer.

IIA Standard 1110 – Organizational Independence and IIA Standard 1111 – Direct
Interaction with the Board note that access to the board helps assure independence
and provides a means for the board and the CAE to keep each other informed on
matters of mutual interest.
Question 9
According to the IIA Organizational Independence Standard, which of the following
is not a part of functional reporting to the board?
a) Audit charter.
b) Audit risk
assessment.
c) Audit budgets.
d) Audit plan.

. The chief audit executive, reporting functionally to the board and administratively to
the organization's chief executive officer, facilitates organizational independence
(IIA Standard 1110 – Organizational Independence). Functional reporting to the
board typically involves the board approving the internal audit activity's overall
charter and approving the internal audit risk assessment and related audit plan.
Administrative reporting is the reporting relationship within the organization's
management structure that facilitates the day-to-day operations of the internal audit
activity. Administrative reporting typically includes audit budgets among other things.

Question 10
According to the IIA Organizational Independence Standard, which of the following
is not a part of administrative reporting to organization's management?
a) Human resource administration.
b) Annual confirmation of the audit's organizational
independence.
c) Management accounting.
d) Audit policies and procedures.
. The chief audit executive, reporting functionally to the board and administratively to
the organization's chief executive officer, facilitates organizational independence.
Administrative reporting is the reporting relationship within the organization's
management structure that facilitates the day-to-day operations of the internal audit
activity. Administrative reporting typically includes management accounting; human
resource administration, including personnel evaluations and compensation;
administration of the internal audit activity's policies and procedures; and other things
(IIA Standard 1110 – Organizational Independence). Annual confirmation of the
internal audit activity's organizational independence belongs to the functional
reporting to the board.

Question 11
According to the IIA Standards, the independence of internal auditors is achieved
through:
a) Staffing and supervision.
b) Continuing education and due
professional care.
c) Human relations and communications.
d) Organizational status and objectivity.
. Organizational status and objectivity permit internal auditors to render the impartial
and unbiased judgments essential to the proper conduct of audits (IIA Standard 1100 –
Independence and Objectivity).

Question 12
Which of the following relationships best depicts the appropriate dual reporting
responsibility of the internal auditor? Administratively to the:
a) Board of directors, functionally to the chief
executive officer.
b) Controller, functionally to the chief financial officer.
c) Chief executive officer, functionally to the board of
directors.
d) Chief executive officer, functionally to the external
auditor.
This is an ideal reporting relation as per IIA Standard 1100 – Independence and
Objectivity.

Question 13
The chief audit executive (CAE) for a large retail organization reports to the controller
and is responsible for designing and installing computer applications relating to
inventory control. Which of the following is the major limitation of this arrangement?
a) It prevents the audit organization from devoting full time to auditing.
b) Auditors generally do not have the required expertise to design and
implement such systems.
c) It potentially affects the CAE's independence and thereby lessens the
 value of audit services.
d) Such arrangements are unlawful because the director participates in
incompatible functions.
. Independence would be adversely affected since internal auditors would be expected
to review systems for which the CAE and the CAE's immediate superior were
responsible (IIA Standard 1110 – Organizational Independence; IIA Standard 1120 –
Individual Objectivity).

Question 14
An auditor's objectivity could be compromised in all of the following
situations except:
a) A conflict of interest.
b) Auditee familiarity with auditor due to lack of rotation in
assignments.
c) Auditor assumption of operational duties on a temporary
basis.
d) Reliance on outside expert opinion when appropriate.
. Auditors sometimes must rely on outside experts; the standards allow this reliance
(Standard 1120 – Individual Objectivity).

Question 15
When evaluating the independence of an internal audit department, a quality review
team considers several factors. Which of the following factors has the least amount of
influence when judging an internal audit department's independence?
a) Criteria used in making auditors assignments.
b) The extent of auditor training in communications
skills.
c) Relationship between audit working papers and audit
report.
d) Impartial and unbiased audit judgments.
Training is a factor of skill, not independence (IIA Standard 1110 – Organizational
Independence; IIA Standard 1312 – External Assessments).
Question 16
You have been asked to be a member of a peer review team. In assessing the
independence of the internal audit department being reviewed, you should consider all
the following factors except:
a) Access to and frequency of communications with the board of
directors or its audit committee.
b) The criteria of education and experience considered necessary when
filling vacant positions on the audit staff.
c) The degree to which auditors assume operating responsibilities.
d) The scope and depth of audit objectives for the audits included in the
review.
. This criterion is related to skill, not independence (IIA Standard 1110 –
Organizational Independence; IIA Standard 1311 – Internal Assessments).

Question 17
In the past, the internal auditing department of XYZ Company designed and installed
computerized systems for the company. A newly appointed member of the audit
committee has questioned the auditing department's independence due to its
performance of that activity. Which of the following actions would best satisfy the
committee's concern regarding independence?
a) The internal audit department should continue to design and install
other computer systems as long as the internal audit staff possesses
the expertise to do so.
b) The internal audit department should refrain from designing and
installing any computer systems for the organization in the future.
c) The internal audit department should not assign those internal
auditors who designed and installed the payroll system to audit the
payroll area.
d) The internal audit department should refrain from operating and
drafting procedures for any of its organization's systems.

IIA Standard 1120 – Individual Objectivity states that internal auditors are
independent when they carry out their work freely and objectively. Independence
permits internal auditors to render the impartial and unbiased judgments essential to
the proper conduct of audits. It is achieved through organizational status and
objectivity. Furthermore, these Standards state that designing, installing, and
operating systems are not audit functions. Also, the drafting of procedures for systems
is not an audit function. Performing such activities is presumed to impair audit
objectivity. Accordingly, it would be inappropriate for the internal audit department to
continue to design and install other computer systems, regardless of the expertise of
the audit staff in such areas, because such functions impair independence.

Question 18
Which of the following most seriously compromises the independence of the internal
auditing department?
a) Internal auditors frequently draft revised procedures for departments
whose procedures they have criticized in an audit report.
b) The chief audit executive has dual reporting responsibility to the
firm's top executive and the board of directors.
c) The internal auditing department and the firm's external auditors
engage in joint planning of total audit coverage to avoid duplicating
each other's work.
d) The internal auditing department is included in the review cycle of
the firm's contracts with other firms before the contracts are executed.
. If the auditing department drafts procedures, it will be in the position of auditing its
own work during the next audit cycle (IIA Standard 1120 – Individual Objectivity).

Question 19
Which of the following reporting structures would best depict the internal audit
organizational guidelines contained in the IIA Standards?
a) Administratively to the board of directors, functionally to the chief
executive officer.
b) Administratively to the controller, functionally to the chief financial
officer.
c) Administratively to the chief executive officer, functionally to the
board of directors.
d) Administratively to the chief executive officer, functionally to the
external auditor.
. The chief executive officer has the highest authority to promote independence and to
ensure broad audit coverage, adequate consideration of audit reports, and appropriate
action on audit recommendations. This is an ideal reporting relation per IIA Standard
1100 – Independence and Objectivity.
Question 20
As the chief audit executive for your organization, you have developed a plan that
includes a detailed schedule of areas to be audited during the coming year, an estimate
of the time required for each audit, and the approximate starting date of each audit.
The scheduling of specific audits was based on the time elapsed since the last audit in
each area. The plan is inadequate because it fails to:
a) Cite authoritative support, such as the IIA Standards, for such a plan.
b) Consider factors such as risk, exposure, and potential loss to the
organization.
c) State whether all audit resources had been committed to the plan.
d) Seek management approval of the plan.
. IIA Standard 2010 – Planning states that audit priorities should be based on financial
exposure, potential loss and risk, requests from management, and opportunities to
achieve operating benefits as well as the date and results of the last audit.

Question 21
The audit committee can serve several important purposes, some of which directly
benefit internal auditing. The most significant benefit provided by the audit committee
to the internal auditor is:
a) Protecting the independence of the internal auditor free from
interference.
b) Reviewing annual audit plans and monitoring audit results.
c) Approving audit plans, scheduling, staffing, and meeting with the
internal auditor as needed.
d) Reviewing copies of the internal control procedures for selected
company operations and meeting with company officials to discuss
them.
. Supporting independence by senior management and the board allows the auditor to
perform necessary duties. This is an important purpose (IIA Standard 1110 –
Organizational Independence).

Question 22
The IIA Standards indicate that independence permits internal auditors to render the
impartial and unbiased judgments essential to the proper conduct of audits. Which of
the following would best promote independence?
 a) A policy that requires internal auditors to report to the chief audit
executive any situation in which a conflict of interest or bias on the
part of the individual auditor is present or may reasonably be inferred.
b) An internal audit department policy that prevents it from
recommending standards of controls for systems that it audits.
c) An organizational policy that allows internal audits of sensitive
operations to be contracted out to other audit providers.
d) An organizational policy that prevents personnel transfers from
operating activities to the internal audit department.
Such a policy is called for by the IIA Standards to promote independence (IIA
Standard 1120 – Individual Objectivity).

Question 23
An audit committee of the board of directors of a corporation is being established.
Which of the following would normally be a responsibility of the committee?
a) Approval of the appointment and removal of the chief audit
executive.
b) Development of the annual internal audit schedule.
c) Approval of internal audit programs.
d) Determination of findings appropriate for specific internal audit
reports.
. This is a recommended responsibility of audit committees (IIA Standard 1110 –
Organizational Independence).

Question 24
The audit committee of an organization has charged the chief audit executive (CAE)
with bringing the department into full compliance with the IIA Standards. The CAE's
first task is to develop a charter. Identify the item that should be included in the
statement of objectives:
a) Report all audit findings to the audit committee every quarter.
b) Notify governmental regulatory agencies of unethical business
practices by organization management.
c) Determine the adequacy and effectiveness of the organization's
systems of internal controls.
d) Submit departmental budget variance reports to management every
month.
. This is a primary function of any internal auditing department (IIA Standard 1110 –
Organizational Independence).

Question 25
In which of the following situations does the auditor potentially lack objectivity?
a) An auditor reviews the procedures for a new electronic data
interchange connection to a major customer before it is implemented.
b) A former purchasing assistant performs a review of internal controls
over purchasing four months after being transferred to the internal
auditing department.
c) An auditor recommends standards of control and performance
measures for a contract with a service organization for the processing
of payroll and employee benefits.
d) A payroll accounting employee assists an auditor in verifying the
physical inventory of small motors.
. The IIA Standard 1130 – Impairment to Independence or Objectivity says that
persons transferred to the internal auditing department should not be assigned to audit
those activities they previously performed until a reasonable period of time has
elapsed.

Question 26
Which of the following actions would be a violation of auditor independence?
a) Continuing on an audit assignment at a division for which the auditor
will soon be responsible as the result of a promotion.
b) Reducing the scope of an audit due to budget restrictions.
c) Participating on a task force that recommends standards for control of
a new distribution system.
d) Reviewing a purchasing agent's contract drafts prior to their
execution.

. IIA Standard 1130 – Impairment to Independence or Objectivity specifies that an

auditor who has been promoted to an operating department should not continue on an
audit of the new department.

Question 27
Which of the following activities would not be presumed to impair the independence
of an internal auditor?
 I. Recommending standards of control for a new information system application
II. Drafting procedures for running a new computer application to ensure that
proper controls are installed
III. Performing reviews of procedures for a new computer application before it is
installed

a) I
only.
b) II
only.
c) III
only.
d) I and
III.
. Items I and III are presumed not to impair independence per IIA Standard 1130 –
Impairment to Independence or Objectivity.

Question 28
An organization was in the process of establishing its new internal audit department.
The controller had no previous experience with internal auditors. Due to this lack of
experience, the controller advised the applicants that they would be reporting to the
external auditors. However, the new chief audit executive (CAE) would have free
access to the controller to report anything important. The controller would convey the
CAE's concerns to the board of directors. Which of the following is true?
a) The internal audit department will be independent because the CAE
has direct access to the board of directors.
b) The internal audit department will not be independent because the
CAE reports to the external auditors.
c) The internal audit department will not be independent because the
controller has no experience with internal auditors.
d) The internal audit department will not be independent because the
company did not specify that the applicants must be Certified Internal
Auditors.
. According to IIA Standard 1100 – Independence and Objectivity, the CAE of the
internal auditing department should be responsible to an individual in the organization
with sufficient authority to promote independence. External auditors are not
individuals in the organization.
Question 29
During a year-end planning meeting with senior management, the chief audit
executive (CAE) learns that a recent draft audit report on one of the company's
inventory costing systems had provoked a discussion in the accounting area. The audit
report proposed a relatively large adjustment due to an error in the local inventory
system. The auditor's conclusion stated that six other production facilities using the
same costing system would require similar inventory adjustments. The total required
adjustment for all seven locations represented a material adjustment to the financial
statements, according to the chief financial officer (CFO). The CFO questioned the
method used by the auditor to calculate the amount of the inventory adjustment and
asked the CAE to delay processing the audit report until all aspects of the finding had
been fully considered. The CAE reports directly to the CFO. The audit committee has
not been apprised of this audit because the audit report is still in draft stage awaiting
management comment.
Assuming that there is a meeting later the same day with the audit committee of the
board, which of the following is not a responsibility of the director of internal
auditing?
a) Inform the audit committee of senior management's decisions on all
significant audit findings.
b) Highlight significant audit findings and recommendations and report
on the approved audit work schedule.
c) Inform the audit committee of the outcome of earlier meetings with
the CFO and the options being considered for recording the inventory
adjustment.
d) Attempt to resolve the inventory issue before reporting the finding to
the audit committee.
. There is no provision for the discussion of the meeting or the related options for
handling the necessary transaction in IIA Standard 1111 – Direct Interaction with the
Board.

Question 30
During a year-end planning meeting with senior management, the chief audit
executive (CAE) learns that a recent draft audit report on one of the company's
inventory costing systems had provoked a discussion in the accounting area. The audit
report proposed a relatively large adjustment due to an error in the local inventory
system. The auditor's conclusion stated that six other production facilities using the
same costing system would require similar inventory adjustments. The total required
adjustment for all seven locations represented a material adjustment to the financial
statements, according to the chief financial officer (CFO). The CFO questioned the
method used by the auditor to calculate the amount of the inventory adjustment and
asked the CAE to delay processing the audit report until all aspects of the finding had
been fully considered. The CAE reports directly to the CFO. The audit committee has
not been apprised of this audit because the audit report is still in draft stage awaiting
management comment.
Which of the following actions should the CAE take?
a) Schedule audits to review the inventory costing systems at all
locations after year-end.
b) Recall all copies of the draft audit report sent out for management
review and response.
c) Tell the representatives of senior management that distorting financial
reports is not acceptable.
d) Offer to review the basis for the conclusion about the inventory
valuation at all locations.

. Because the case indicates that the amount of the inventory adjustment is in question,
this would be the appropriate step for the CAE to take (IIA Standard 1111 – Direct
Interaction with the Board).

Question 31
Management has requested the internal auditing department to perform an operational
audit of the telephone marketing operations of a major division and to recommend
procedures and policies for improving management control over the operation. The
auditor should:
a) Not accept the engagement because recommending controls would
impair future objectivity of the department regarding this auditee.
b) Not accept the engagement because audit departments are presumed
to have expertise on accounting controls, not marketing controls.
c) Accept the engagement but indicate to management that
recommending controls would impair audit independence so
management knows that future audits of the area would be impaired.
d) Accept the audit engagement because independence would not be
impaired.
. The auditor should accept the engagement, assign staff with sufficient control
knowledge, and make recommendations where appropriate. This would not impair
objectivity (IIA Standard 1100 – Independence and Objectivity).

Question 32

According to the IIA Standards, internal auditors must be objective in performing

audits. Assume that the chief audit executive (CAE) received an annual bonus as part
of that individual's compensation package. The bonus may impair the CAE's
objectivity if:

I. The bonus is administered by the board of directors or its salary administration

committee.
II. The bonus is based on dollar recoveries or recommended future savings as a
result of audits.
III. The scope of internal auditing work is reviewing control rather than account
balances.
IV. All of the above.

a) I.
b) II.
c) III.
d) IV.
. According to IIA Standard 1130 – Impairment to Independence or Objectivity,
objectivity may be impaired if the bonus is based on dollar recoveries or
recommended future savings as a result of audits. A bonus based on either of these
criteria could unduly influence the type of audits performed or the recommendations
made.

Question 33
A company is planning to develop and implement a new computerized purchase order
system in one of its manufacturing subsidiaries. The Vice President of Manufacturing
has requested that internal auditors participate on a team consisting of representatives
from Finance, Manufacturing, Purchasing, and Marketing. This team will be
responsible for the implementation effort. Eager to take on this high-profile project,
the chief audit executive (CAE) assigns a senior auditor to the project to assist "as
needed." Assuming the senior auditor performed all of the following activities, which
one would impair objectivity if asked to review the purchase order system on a
postaudit basis?
a) Helping to identify and define control objectives.
b) Testing for compliance with system development
standards.
c) Reviewing the adequacy of systems and programming
standards.
d) Drafting operating procedures for the new system.
. According to IIA Standard 1130 – Impairment to Independence or Objectivity, the
internal auditor's objectivity is not impaired when the auditor recommends standards
of control for systems or reviews procedures before they are implemented. Designing,
installing, and operating systems are not audit functions. Also, the drafting of
procedures for systems is not an audit function. Performing such activities is
presumed to impair audit objectivity. Internal auditors are not independent if they
cannot do their work objectively.

Question 34
An internal audit department is currently undergoing its first external quality
assurance review since its formation three years ago. From interviews with a few of
the staff auditors, the review team is informed of certain auditor activities that
occurred over the past year. Which of the following activities could affect the quality
assurance review team's evaluation of the objectivity of the internal audit department?
a) One internal auditor told the review team that during the payroll
audit, the payroll manager approached him. The manager indicated he
was looking for an accountant to prepare his financial statements for
his part-time business. The internal auditor agreed to perform this
work for a reduced fee during nonwork hours.
b) During the audit of the company's construction of a building addition
to the corporate office, the Vice-President of Facilities Management
gave the auditor a commemorative mug with the company's logo.
These mugs were distributed to all employees present at the
groundbreaking ceremony.
c) After reviewing the installation of a data processing system, the
auditor made recommendations on standards of control. Three months
after completing the audit, the auditee requested the auditor's review
of certain procedures for adequacy. The auditor agreed and performed
this review.
d) An auditor's participation was requested on a task force to reduce the
company's inventory losses from theft and shrinkage. This is the first
 consulting assignment undertaken by the audit department. The
auditor's role is to advise the task force on appropriate control
techniques.
. According to IIA Standard 1130 – Impairment to Independence or
Objectivity and IIA Standard 1312 – External Assessments, internal auditors should be
independent of the activities they audit. Accepting a fee or gift from an auditee would
impair the auditor's objectivity. As a result, the auditor might feel obligated to render a
more favourable result than would be warranted if the auditor maintained professional
objectivity.

Question 35
A medium-size publicly owned corporation operating in Country X has grown to a
size that the directors of the corporation believe warrants the establishment of an
internal auditing department. Country X has legislated internal auditing requirements
for government-owned companies. The company changed the corporate by-laws to
reflect the establishment of the internal auditing department. The directors decided
that the chief audit executive (CAE) must be a Certified Internal Auditor (CIA) and
will report directly to the newly established audit committee of the board of directors.
Which of the items discussed above will contribute the most to the new CAE's
independence?
a) The establishment of the internal auditing department is documented
in corporate by-laws.
b) Legislated internal auditing requirements in Country X.
c) The fact that the CAE will report to the audit committee of the board
of directors.
d) The fact that the CAE is to be a Certified Internal Auditor (CIA).
. IIA Standard 1110 – Organizational Independence states that independence is
achieved through organizational status and objectivity. The auditor is reporting to the
highest level possible.

Question 36

internal auditor reports directly to the board of directors. The auditor discovered a
material cash shortage. When questioned, the person responsible explained that the
cash was used to cover sizable medical expenses for a child and agreed to replace the
funds. Because of the corrective action, the internal auditor did not inform
management. In this instance, the auditor:
 a) Has organizational independence but not objectivity.
b) Has both organizational independence and objectivity.
c) Does not have organizational independence but has
objectivity.
d) Does not have either organizational independence or
objectivity.
. The auditor reports directly to the board of directors and so has organizational
independence (IIA Standard 1110 – Organizational Independence; IIA Standard 1120
– Individual Objectivity).

Question 37
Rejection of unauthorized modifications to application systems could be accomplished
through the use of:
a) Programmed
checks.
b) Batch controls.
c) Implementation
controls.
d) One-for-one
checking.
. Implementation controls are designed to ensure that only authorized program
procedures are introduced into the system (IIA Standard 2130—Control).

Question 38
The proper organizational role of internal auditing is to:
a) Assist the external auditor in order to reduce external audit fees.
b) Perform studies to assist in the attainment of more efficient
operations.
c) Serve as the investigative arm of the audit committee of the board of
directors.
d) Serve as an appraisal function to examine and evaluate activities as a
service to the organization.
. This alternative describes the basic role concept of internal auditing (IIA Standard
1110—Organizational Independence).

Question 39
In some cultures and organizations, managers insist that the internal auditing function
is not needed to provide a critical assessment of the organization's operations. A
management attitude such as this will most probably have an adverse effect on the
internal auditing function's:
a) Operating budget
variance.
b) Effectiveness.
c) Performance
appraisals.
d) Policies and
procedures.
. In this type of situation, management is highly averse to analysis or possible
criticism of its actions and will inhibit the internal audit department's effectiveness
(IIA Standard 1110—Organizational Independence).

Question 40
A service company is currently experiencing a significant downsizing and process
reengineering. Its board of directors has redefined the business goals and established
initiatives using technology developed in house to meet these goals. As a result, a
more decentralized approach has been adopted to run the business functions by
empowering the business branch managers to make decisions and perform functions
traditionally done at a higher level.
The internal auditing staff is made up of the director, two managers, and five staff
auditors, all with financial background. In the past, the primary focus of successful
audit activities has been the service branches and the six regional division
headquarters, which support the branches. These division headquarters are the primary
targets for possible elimination. The support functions, such as human resources,
accounting, and purchasing, will be brought into the national headquarters, and
technology will be enhanced to enable and augment these operations.
Up to this point, internal auditing has reported to the chief operating officer. Due to
the significant changes, there has been some discussion as to changing this reporting
relationship. What would be the best reporting relationship for internal auditing?
a) Administrative and functional to the president.
b) Administrative to the president, functional to the board.
c) Administrative to the chief financial officer and functional to the
president.
 d) Administrative and functional to the chief operating officer.
. Independence is less likely to be impaired if the internal auditing department reports
to the board (IIA Standard 1110—Organizational Independence).