Case 1

Pat Goodly accepted the CAE position at a large, global organization with a well-established internal
audit function. The organization is admired as an industry leader and as having very strong corporate
governance practices. The organization's board is predominantly made up of outside, independence
directors, all of whom are qualified. The chair of the audit committee is designated as the audit
committee's financial expert.

The organization's fiscal year-end is approaching; only a little over a month away. After a brief 2 months
in the new position, Pat is preparing for the upcoming audit committee meeting. This typically is the
meeting at which next year's internal audit plan and budget would be presented for approval by the
audit committee, as well as any necessary fiscal year-end reporting.

Recently, Pat received a "welcome" call from the audit committee chair, indicating "full" support for Pat
and the internal audit function. The audit committee chair expressed an interest in meeting Pat and
gaining an understanding of the vision and direction. Pat has for the internal audit function going
forward. The audit committee chair indicated that periodic communications between them were
important and would allow for open and candid dialog in the future.

Pat was hired by, and currently reports to, the chief financial officer (CFO). Historically, the audit
committee meeting agenda, and related topic selections for such, have been performed by the CFO. The
CFO also has presided over the meetings in the past.

Senior management, including the CEO and the CFO, expressed support for the internal audit function
and Pat's vision for the function both during the recruiting process and subsequent to Pat's joining the
organization. However, the CFO firmly stated in a recent staff meeting, "I know everyone is very busy
and things are going to get even more hectic with year-end upon us. I think it is in everyone's best
interest not to make any "radical" changes in our organizational reporting structure until we get through
the fiscal-year end closing and reporting cycle. If we keep our heads down and work hard, we should be
able to get through this year-end okay."

In preparation for the upcoming audit committee, Pat contemplated the CFO's comments and reflected
on the IIA's professional standards as they relate to the CAE's reporting responsibilities to management
and the board. Put yourself in Pat's position as the newly hired CAE and consider the following:

A: How should Pat proceed with the audit committee chair? What obligations does Pat have, if any, to
the audit committee chair? As the CAE, what are Pat's role and responsibilities with respect to the
audit committee and the audit committee chair?

Pat needs to remind herself that as the Chief Audit Executive (CAE), she is responsible to the Board of
Directors audit committee. Standard 1110 states “The chief audit executive must report to a level within
the organization that allows the internal audit activity to fulfill its responsibilities.” More specifically,
standard 1110.A1 specifies that “the internal audit activity must be free from interference in
determining the scope of internal auditing, performing work, and communicating results. The chief

MJD742
Internal Audit and Risk Management
Week 9 Assignment
audit executive must disclose such interference to the board and discuss the implications. Pat needs to
move forward with her job and not take the CFO’s remarks as a command and if further discussions look
to impose her role, she has the responsibility to report that to the board.

Pat’s obligation, under IIA Standard 2060, is to report into the committee on audit activity and its
purpose, authority, responsibility, and performance related to overall plans and compliance with the
Standards. Pat must assess and report out on risk and control activities in reports such as:

- Business unit monitoring and risk monitoring

- Independent outside auditor activity
- Key financial activity
- Risk management activity
- Legal and compliance monitoring

B: Discuss the key issues that must be understood and addressed (and with whom) to properly
discharge any reporting responsibilities noted.

One immediate key issue is the CFO’s comment "I know everyone is very busy and things are going to
get even more hectic with year-end upon us. I think it is in everyone's best interest not to make any
"radical" changes in our organizational reporting structure until we get through the fiscal-year end
closing and reporting cycle. If we keep our heads down and work hard, we should be able to get through
this year-end okay." They key word here is ‘radical’ so one can assume he’s ok with modifying some
structure, however the CFO needs to affirm that the job of the CAE is to audit and report back to the
board on any challenges precluding the CAE from doing her job. So, while the CFO is worried about the
fiscal year ending in a month, Pat has to worry about her report that is due in a month. Without the
proper support to complete her job, it puts her at risk of not having it done. Another important item to
note is the job of the CAE is to remain objective and the charter differs from that of other jobs, whereby
the CFO is only worried about his work, Pat’s job is to avoid conflicts that cause delays in reporting.

While employee morale is important to consider, at the end of the day, this is a company who obviously
needed to hire someone as a CAE to help assure they are being compliant and assessing their internal
controls, should this not be assessed prior to the end of the current fiscal year, this puts the company at
risk for the following year by not starting off with a solid oversight plan. It is Pat’s responsibility to not
only report on any misalignments, but to coordinate and resolve such conflicts so it is vital that Pat
address the comments of the CFO quickly to assure alignment prior to the audit committee meeting.

Reference:

Anderson, U., Head, M., Ramamoorti, S., Riddle, C., Salamasick, M., & Sobel, P. (2017). Internal Auditing:
Assurance & Advisory Services (Fourth ed.). Lake Mary, FL: Internal Audit Foundation.

MJD742
Internal Audit and Risk Management
Week 9 Assignment