Question 85

The audit function should report to the audit committee of the board of directors to maintain independence.

Reporting to the audit committee of the board of directors is crucial for ensuring the independence of the audit function, as stipulated by the Basel Committee guidance. This structure allows the audit function to operate without undue influence from management, thereby enhancing the integrity of the audit process.

A) Conduct AML audits no less often than every 12 months for consistency in annual reporting

While regularity in conducting AML audits is important for effective oversight, this option does not address the independence aspect of the audit function. Conducting audits annually does not ensure that the audit remains unbiased or free from management influence.

B) Be involved in the day-to-day operations of the AML program to immediately prevent control failures

Involvement in the daily operations of the AML program can compromise the independence of the audit function. The third line of defense should maintain a level of separation from operational roles to provide an objective evaluation of the effectiveness of controls without direct involvement in their implementation.

C) Remain independent from expressing opinions on the sufficiency of remediation or action plans to address findings and recommendations

This option suggests a lack of engagement in necessary discussions regarding findings and recommendations, which is not the intent of the Basel Committee guidance. The audit function must be able to express informed opinions to enhance the effectiveness of remediation efforts, provided it maintains independence in its overall reporting structure.

D) Report to the audit committee of the board of directors to maintain independence

This option aligns with the guidance from the Basel Committee, emphasizing that the audit function must report to the audit committee. This reporting structure helps to uphold the independence essential for an effective audit process, ensuring that findings are communicated directly to those who can take appropriate action without interference from management.

Conclusion

The correct answer highlights the necessity of independence in the audit function, as it directly reports to the audit committee of the board of directors. Other options, while relevant to aspects of audit practice, do not address the critical requirement for independence, making them less suitable in the context of the Basel Committee's guidance. Thus, option D is definitively the best choice.