Certified Internal Auditor (CIA) Practice Test

What reporting structure is most likely to enable the internal audit activity to fulfill its responsibilities effectively?

1. Board and functionally to the chief executive officer

2. Controller and functionally to the chief financial officer

3. Chief executive officer and functionally to the board

4. Chief executive officer and functionally to the external auditor

The correct answer is: Chief executive officer and functionally to the board

The reporting structure that is most likely to enable the internal audit activity to fulfill its responsibilities effectively is one where the chief executive officer reports directly to the board of directors. This arrangement is advantageous because it ensures that the internal audit function operates independently and is free from interference from management. When the internal audit reports directly to the board, it allows for a more objective and impartial evaluation of the organization's processes, controls, and risk management. This structure fosters transparency and accountability, as the board has oversight of the internal audit's activities, ensuring that significant issues can be addressed directly at the highest levels of governance. Additionally, this setup enhances the internal audit's authority and credibility, allowing auditors to have direct access to board members and facilitating important conversations about findings and recommendations. In contrast, if internal audit were to report through other management figures, like the chief financial officer or the controller, there could be potential conflicts of interest, limiting the effectiveness of the internal audit's work. The other structures provided, such as reporting solely to the chief executive officer or to the external auditor, do not provide the same level of independence and oversight that a direct line to the board does.