According to IIA guidance, which of the following actions by the chief audit executive (CAE) best demonstrates the organizational independence of the…

Question breakdown

Tests

Recognize indicators of organizational independence

Difficulty

Easy

Key idea: Organizational independence is shown when the CAE reports functionally to the board, and the board approves key items such as the charter, plan, budget and CAE matters.

How to reach the answer

1. Recall that IIA guidance ties organizational independence to functional reporting to the board.
2. List the board's functional reporting duties: approving the charter, the risk-based plan, the budget and resource plan, and CAE appointment and pay.
3. Scan the options for an action that involves the board rather than senior management.
4. Only option D gives the board approval authority, here over the budget.

Each option

• AIncorrect. The charter needs board approval; relying on senior management approval would weaken independence.
• BIncorrect. Needing management's approval to hire staff lets management limit audit resources, which threatens independence.
• CIncorrect. Reporting to the CEO is administrative reporting; organizational independence depends on direct access to the board.
• DCorrect. Board approval of the internal audit budget is a recognized hallmark of functional reporting to the board.

Common trap: Reporting significant issues to the CEO sounds high-level, but the CEO is senior management, not the board.

In practice: Audit committee charters typically require the committee to review and approve the internal audit budget, the plan and the CAE's appointment.

Remember: Independence comes through the board: board approval of the charter, plan and budget signals organizational independence.

Drafted with AI assistance and checked against the answer key.