Internal Audit

A functional reporting relationship establishes a connection between positions or organizational units at different management levels based on the specialized nature of the function for which a mutual responsibility is shared. Though it is not always clear, generally the functional reporting relationship is stronger than the administrative one, because the functional body controls the individual’s compensation and evaluations.
According to the IIA’s Practice Advisory 1110-2, report functionally means that the governing authority would:

? Approve the overall charter of the internal audit function, the risk assessment, and the
related audit plan;

? Receive communications from the results of internal audit activities or other matters that the CAE determines are necessary, including private meetings (executive sessions)
without management present;

? Approve all decisions regarding the appointment or removal of the CAE including
approving the annual compensation and salary adjustment of the CAE; and

? Make appropriate inquiries of management and the CAE to determine whether there are scope or budgetary limitations that impede the ability of the internal audit function to
execute its responsibilities

In contrast, administrative reporting is the reporting relationship within the organization’s
management structure that facilitates the day-to-day operations of the internal audit function.
Administrative reporting typically includes:
? Budgeting and management accounting;
? Human resource administration, including personnel evaluations and compensation of
department staff;
? Internal communications and information flows; and
? Administration of the organization’s internal policies and procedures.