The audit committee is required to evaluate the independence of both the internal and external audit functions.

Required

a. What factors would you suggest an audit committee look at in evaluating the external auditor’s independence?

b. How can the audit committee influence the independence of the internal audit function?

c. The audit committee must pre-approve all non-audit services provided by the external auditor. Assume the audit committee must make a decision to allow or not allow the external audit firm to perform the following activities. Indicate whether you would approve or not approve each activity and state the rationale for your decision.

Proposed Service Reason for Approval or Disapproval

(1) Prepare the company’s income tax return after the completion of the audit.

(2) Prepare the tax returns for all directors and managers as part of the fees paid for the overall audit.

(3) Prepare tax returns for managers and directors as requested and paid for by the individuals.

(4) Assist the internal audit department in their control reviews of an overseas operation (audit firm has personnel based in the country who speak the language but the internal audit department does not).

(5) Perform an independent security audit of information systems and report the results to management and the audit committee.

(6) Train operating personnel on internal control concepts and a framework to implement to improve the quality of internal controls.

(7) Take over the internal audit function to provide a full “integrated” audit of the company’s operations and controls to achieve audit efficiency.

(8) Provide, at no cost, seminars on updates to accounting and auditing standards to clients’ audit committee members.

(9) Same as item 8 except the seminars are provided to both audit clients and non-audit clients, but by invitation only.