A critical analysis of the independence of the internal audit function: evidence from Australia

Abstract

PurposeThis study aims to critically analyse the independence of the internal audit function through its relationship with management and the audit committee.Design/methodology/approachResults are based on a critical comparison of responses from questionnaires sent out to Australian chief audit executives (CAEs) versus existing literature and best practice guidelines.FindingsWith respect to the internal audit function's relationship with management, threats identified include: using the internal audit function as a stepping stone to other positions; having the chief executive officer (CEO) or chief finance officer (CFO) approve the internal audit function's budget and provide input for the internal audit plan; and considering the internal auditor to be a “partner”, especially when combined with other indirect threats. With respect to the relationship with the audit committee, significant threats identified include CAEs not reporting functionally to the audit committee; the audit committee not having sole responsibility for appointing, dismissing and evaluating the CAE; and not having all audit committee members or at least one member qualified in accounting.Originality/valueThis study introduces independence threat scores, thereby generating analysis of the internal audit function's independence taking into account a combination of threats.