Aldwick Utilities is redesigning where internal audit sits. Under the current proposal the chief audit executive would report functionally to the chief executive, who would approve the audit plan, the budget, and the appointment and removal of the chief audit executive, while the audit committee would receive only a courtesy copy of finished reports. Advising on the design, which arrangement best preserves the function's organisational independence?
- AKeep the functional line to the chief executive but require the chief executive to consult the audit committee before removing the chief audit executive.
- BHave the chief audit executive report functionally to the chief financial officer, who is closer to the financial controls that internal audit most often examines.
- CHave the chief audit executive report functionally to the audit committee, which approves the plan and budget and oversees the appointment and removal of the chief audit executive. Correct
- DRetain the chief executive as the functional reporting line but transfer approval of the budget alone to the audit committee.
Why A is wrong: Adding a consultation step looks like a safeguard, but the chief executive still controls the plan, budget and appointment, leaving the function dependent on a party it audits.
Why B is wrong: Proximity to finance sounds efficient, but the chief financial officer is a senior manager whose area is audited, so this is the same impairment moved to a different seat.
Why C is correct: A functional line to the audit committee that controls the plan, budget and the chief audit executive's appointment is the primary structural support for organisational independence, insulating the function from the management it assesses.
Why D is wrong: Splitting off the budget helps a little, but plan approval and the chief audit executive's appointment still rest with management, so the function's independence remains compromised.