Comprehensive and Detailed Step-by-Step Explanation:
* Reference to IIA Standards:
* Standard 1000 - Purpose, Authority, and Responsibility: The internal audit charter must define the purpose, authority, and responsibility of the internal audit activity and establish its position within the organization.
* The charter is foundational to the independence, authority, and effectiveness of the internal audit activity.
* Reasoning:
* Option Ais correct because the charter formalizes the internal audit activity's role and ensures alignment with organizational governance. Without a charter, the internal audit function cannot operate effectively or independently.
* Option B(establishing a code of ethics) is important but is part of overall compliance withIIA Standard 1300 - Quality Assurance and Improvement Programand is not the first step.
* Option C(approving the budget) is administrative and secondary to establishing the internal audit charter.
* Importance of the Audit Charter:
* The charter provides the internal audit activity with the mandate to perform its duties, ensuring accountability and defining its scope and authority.