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Internal ControlInternal AuditExternal AuditCorporate Governance

ACCA · Question 08 · Internal Control

CASE SCENARIO: AgriGrow Tech Ltd
AgriGrow Tech Ltd is an agricultural technology startup developing drone-based crop monitoring systems. You are planning the audit for the year ended 30 September 20X6. AgriGrow has capitalized significant Research & Development (R&D) costs this year related to a new AI-driven drone model. They also received a substantial government grant conditional on creating jobs in rural areas. Due to rapid growth, AgriGrow recently established an internal audit department, which has spent the last three months reviewing the company's payroll controls.

QUESTION:
Which of the following best describes a key difference between the internal audit department and the external auditor?

Answer options:

A.

Internal audit is responsible for preparing the financial statements, whereas external audit reviews them.

B.

Internal audit reports to management or those charged with governance, whereas external audit reports to the shareholders.

C.

Internal audit focuses solely on financial risks, whereas external audit focuses on operational risks.

D.

Internal auditors must be qualified chartered accountants, whereas external auditors do not need specific qualifications.

How to approach this question

Compare the objectives, reporting lines, and scope of internal vs. external audit.

Full Answer

B.Internal audit reports to management or those charged with governance, whereas external audit reports to the shareholders.✓ Correct
The external auditor's primary responsibility is to express an opinion on the financial statements to the shareholders. The internal audit function is an appraisal activity established within an entity, reporting to management and/or the audit committee, focusing on evaluating and improving the effectiveness of risk management, control, and governance processes.

Common mistakes

Believing internal audit is responsible for preparing financial statements or that they only look at financial data.
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