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ACCA · Question 12 · Internal Control

SECTION A - CASE 3: GLOBAL WATER INITIATIVE

SCENARIO:
Global Water Initiative (GWI) is an international NGO providing clean water solutions in developing nations. You are advising the board on corporate governance and internal audit. GWI currently does not have an internal audit department. The board consists of the CEO, the CFO, and two non-executive directors (NEDs), one of whom is the CEO's brother. GWI receives significant grant funding, which requires strict compliance with donor conditions. Recently, a whistleblower alleged that procurement contracts in a regional office were awarded to a company owned by the regional director.

QUESTION:
Which of the following factors from the scenario provides the strongest justification for GWI to establish an internal audit department?

Answer options:

A.

The board consists of only four members.

B.

The strict compliance required by grant funding and the recent whistleblower allegations of fraud.

C.

The fact that GWI operates in developing nations.

D.

The lack of independence of one of the non-executive directors.

How to approach this question

Identify the factors that increase risk and require continuous monitoring of internal controls.

Full Answer

B.The strict compliance required by grant funding and the recent whistleblower allegations of fraud.✓ Correct
The need for an internal audit function is driven by the scale, complexity, and risk profile of the organization. Strict donor compliance requirements necessitate strong, continuously monitored internal controls. Furthermore, the whistleblower allegation indicates a potential breakdown in procurement controls and fraud, strongly justifying the need for an internal audit function to investigate and strengthen the control environment.

Common mistakes

Selecting geographic location (C) as the primary reason, missing the immediate risk posed by compliance requirements and actual fraud allegations.
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