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​Identify whether the internal audit activity has any impairments to its independence

audit and impairment
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Independence is one of the essential attributes of an effective internal audit activity. According to the International Standards for the Professional Practice of Internal Auditing (Standards), “The internal audit activity must be independent, and internal auditors must be objective in performing their work.” (Standard 1100)

Independence is defined as “the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.” (Standard 1100.A1) Independence enables internal auditors to render impartial and unbiased judgments and opinions on the activities and operations they audit.

However, independence can be impaired by various factors, such as organizational structure, reporting relationships, resource constraints, conflicts of interest, undue influence, or lack of support from senior management or the board. These impairments can compromise the credibility, quality, and value of the internal audit activity and its services.

Therefore, it is crucial for internal auditors to identify whether the internal audit activity has any impairments to its independence and to disclose them to senior management and the board. This blog post will provide some guidance on how to do so.

Step 1: Assess the Internal Audit Activity’s Conformance with the Standards

The first step is to assess whether the internal audit activity conforms with the Standards, which provide the framework for ensuring independence and objectivity. The Standards cover various aspects of independence, such as:

– The organizational status and reporting lines of the chief audit executive (CAE) and the internal audit activity (Standard 1110)
– The scope and nature of internal audit services (Standard 1120)
– The avoidance or disclosure of conflicts of interest (Standard 1130)
– The assurance or consulting role of internal auditors (Standard 1210)
– The quality assurance and improvement program (Standard 1300)

The internal audit activity should conduct periodic self-assessments and external assessments to evaluate its conformance with the Standards and identify any gaps or deficiencies. The results of these assessments should be communicated to senior management and the board, along with any recommendations for improvement.

Step 2: Identify Potential Impairments to Independence

The second step is to identify any potential impairments to independence that may exist or arise in the course of performing internal audit work. These impairments can be categorized into two types: factual impairments and perceived impairments.

Factual impairments are those that actually affect or threaten the independence of the internal audit activity or individual internal auditors. Examples of factual impairments include:

– Reporting to a manager who is also responsible for an audited area
– Having direct operational responsibility or authority over an audited area
– Having a personal or financial interest in an audited area
– Receiving incentives or rewards from an audited area
– Being pressured or coerced by senior management or the board to modify or omit audit findings or recommendations
– Being restricted or denied access to information, records, personnel, or resources necessary for conducting audits

Perceived impairments are those that may create a reasonable doubt in the minds of stakeholders about the independence of the internal audit activity or individual internal auditors. Examples of perceived impairments include:

– Having a close relationship or affiliation with an audited area or its personnel
– Having a previous role or involvement in an audited area
– Having a long tenure or rotation in an audited area
– Having a lack of technical competence or expertise in an audited area
– Having a low profile or visibility in the organization
– Having a limited scope or authority for conducting audits

Step 3: Disclose and Mitigate Impairments to Independence

The third step is to disclose and mitigate any impairments to independence that have been identified. Disclosure is the process of informing senior management and the board about the existence and nature of any impairments that may affect or appear to affect the independence of the internal audit activity or individual internal auditors. Disclosure should be timely, complete, accurate, and transparent.

Mitigation is the process of taking actions to reduce or eliminate the impact or risk of any impairments that may affect or appear to affect the independence of the internal audit activity or individual internal auditors. Mitigation may involve:

– Changing the reporting lines or organizational status of the CAE or the internal audit activity
– Restricting or recusing internal auditors from auditing areas where they have factual or perceived impairments
– Assigning independent and competent internal auditors to audit areas where there are factual or perceived impairments
– Obtaining external assurance or consulting services from qualified providers
– Enhancing the quality assurance and improvement program
– Seeking guidance from professional bodies or standards setters

The disclosure and mitigation of impairments should be documented and reported to senior management