1100 – Independence and Objectivity
The internal audit activity must be independent, and internal auditors must be objective in performing their work.

Interpretation:
Independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. To achieve the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive has direct and unrestricted access to senior management and the board. This can be achieved through a dual-reporting relationship. Threats to independence must be managed at the individual auditor, engagement, functional, and organizational levels.

Objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others. Threats to objectivity must be managed at the individual auditor, engagement, functional, and organizational levels.

1110 – Organizational Independence
The chief audit executive must report to a level within the organization that allows the internal audit activity to fulfill its responsibilities. The chief audit executive must confirm to the board, at least annually, the organizational independence of the internal audit activity.

Interpretation:
Organizational independence is effectively achieved when the chief audit executive reports functionally to the board. Examples of functional reporting to the board involve the board:

• Approving the internal audit charter;
• Approving the risk based internal audit plan;
• Approving the internal audit budget and resource plan;
• Receiving communications from the chief audit executive on the internal audit activity’s performance relative to its plan and other matters;
• Approving decisions regarding the appointment and removal of the chief audit executive;
• Approving the remuneration of the chief audit executive; and
• Making appropriate inquiries of management and the chief audit executive to determine whether there are inappropriate scope or resource limitations.

1110.A1 – The internal audit activity must be free from interference in determining the scope of internal auditing, performing work, and communicating results. The chief audit executive must disclose such interference to the board and discuss the implications.

1111 – Direct Interaction with the Board
The chief audit executive must communicate and interact directly with the board.

1112 – Chief Audit Executive Roles Beyond Internal Auditing
Where the chief audit executive has or is expected to have roles and/or responsibilities that fall outside of internal auditing, safeguards must be in place to limit impairments to independence or objectivity.

Interpretation:
The chief audit executive may be asked to take on additional roles and responsibilities outside of internal auditing, such as responsibility for compliance or risk management activities. These roles and responsibilities may impair, or appear to impair, the organizational independence of the internal audit activity or the individual objectivity of the internal auditor. Safeguards are those oversight activities, often undertaken by the board, to address these potential impairments, and may include such activities as periodically evaluating reporting lines and responsibilities and developing alternative processes to obtain assurance related to the areas of additional responsibility.

1120 – Individual Objectivity
Internal auditors must have an impartial, unbiased attitude and avoid any conflict of interest.

Interpretation:
Conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual's ability to perform his or her duties and responsibilities objectively.

1130 – Impairment to Independence or Objectivity
If independence or objectivity is impaired in fact or appearance, the details of the impairment must be disclosed to appropriate parties. The nature of the disclosure will depend upon the impairment.

Interpretation:
Impairment to organizational independence and individual objectivity may include, but is not limited to, personal conflict of interest, scope limitations, restrictions on access to records, personnel, and properties, and resource limitations, such as funding.

The determination of appropriate parties to which the details of an impairment to independence or objectivity must be disclosed is dependent upon the expectations of the internal audit activity’s and the chief audit executive’s responsibilities to senior management and the board as described in the internal audit charter, as well as the nature of the impairment.

1130.A1 – Internal auditors must refrain from assessing specific operations for which they were previously responsible. Objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for which the internal auditor had responsibility within the previous year.

1130.A2 – Assurance engagements for functions over which the chief audit executive has responsibility must be overseen by a party outside the internal audit activity.

1130.A3 – The internal audit activity may provide assurance services where it had previously performed consulting services, provided the nature of the consulting did not impair objectivity and provided individual objectivity is managed when assigning resources to the engagement.

1130.C1 – Internal auditors may provide consulting services relating to operations for which they had previous responsibilities.

1130.C2 – If internal auditors have potential impairments to independence or objectivity relating to proposed consulting services, disclosure must be made to the engagement client prior to accepting the engagement.

SIAAB Requirements:

FCIAA Section 10/2002(a)(b) requires chief internal auditors (IIA - chief audit executives) to report directly to the chief executive officer and have direct communication with the chief executive officer and the governing board, if applicable, in the exercise of auditing activities. All chief internal auditors and all full-time members of an internal audit staff shall be free of all operational duties.

In State of Illinois government, an audit committee only exists if it has been established by law, executive order, or other enacting language or is authorized by a board established pursuant to the provisions of Illinois law. If an Agency has an audit committee it is necessary for its internal audit function to achieve its independence under IIA Attribute Standard – 1110 Organizational Independence. The audit committee should follow the IIA’s recommended guidance provided by the most recent corresponding Implementation Guidance and Supplemental Guidance.

Further, the internal auditor’s objectivity is not adversely affected when the auditor recommends standards of control for systems or review procedures before they are implemented. The internal auditor’s objectivity is considered to be impaired if the auditor designs, installs, drafts procedures for, or operates such systems. The occasional performance of non-audit work by the internal auditor, with full disclosure in the reporting process, would not necessarily impair objectivity. However, it would require careful consideration by management and the internal auditor to avoid adversely affecting the internal auditor’s objectivity.

Internal auditors must report to the chief audit executive any situations in which an actual or potential impairment to independence or objectivity may reasonably be inferred, of if they have questions about whether a situation constitutes an impairment to objectivity or independence. If the chief audit executive determines that impairment exists or may be inferred, he or she needs to reassign the auditor(s).

The chief audit executive should have the support of senior management and the board, if applicable, in gaining the cooperation of engagement clients and performing audit engagements without interference. The chief audit executive reporting functionally to the board, if applicable, and administratively to the organization’s chief executive officer, facilitates organizational independence. At a minimum the chief audit executive needs to report to an individual in the organization with sufficient authority to promote independence and to ensure broad audit coverage, adequate consideration of engagement communications, and appropriate action on engagement recommendations.

A scope limitation may arise that places a restriction on the internal audit activity from accomplishing its objectives and plans. Such scope limitations impair independence and objectivity by restricting the:

• Scope defined in the internal audit charter;
• Access to records, personnel, and physical properties relevant to the performance of the engagement;
• Approved engagement work schedule;
• Performance of necessary engagement procedures; and
• Approved staffing plan and financial budget.

It should be noted that not all restrictions are inappropriate. For example, restrictions to matters related to litigation, or to access to information restricted by law, may be deemed appropriate by the chief audit executive. In such circumstances, the rationale should be clearly documented.

The chief audit executive must disclose, preferably in writing, a scope limitation and its implications to the board.

From: The IIA’s International Professional Practices Framework Copyright 2017 by The Institute of Internal Auditors, Inc., 1035 Greenwood Blvd, Suite 401, Lake Mary, FL 32746. Reprinted with permission.

Please close this window to return to Ability LMS to take the quiz for this lesson.