Final answer:
An internal auditor must disclose any potential impairment of independence or objectivity to the engagement client before accepting a consulting engagement, as per ethical standards and professional conduct guidelines. Option C. The internal auditor must disclose the potential impairment to the engagement client prior to accepting the engagement is the correct answer.
Step-by-step explanation:
When an internal auditor faces a potential impairment to their independence or objectivity relating to a proposed consulting engagement, professional ethics, and standards dictate that they must take appropriate action to address this issue. According to the Institute of Internal Auditors (IIA) Standards and Code of Ethics, maintaining objectivity and independence are critical to the integrity of the audit process.
The correct course of action in such a scenario is that the internal auditor must disclose the potential impairment to the engagement client before accepting the engagement. This aligns with option C: The internal auditor must disclose the potential impairment to the engagement client before accepting the engagement. This disclosure is important because it allows the engagement client to make an informed decision about the auditor's ability to perform the work objectively and without bias.
If after the disclosure the potential impairment is deemed to be significant, the internal auditor or audit team should not proceed with the engagement. It is important for internal auditors to avoid any situation that could potentially impact their judgment and thus undermine the trust placed in their work.
In conclusion, when faced with a potential impairment of independence or objectivity, an internal auditor must follow ethical standards and professional conduct by disclosing this information to the engagement client, and this is the mention of the correct option in the final answer.