Question #1
Which of the following best demonstrates internal auditors performing their work with proficiency?
- A . internal auditors meet with operational management at each phase of the audit process.
- B . Internal auditors adhere to The IIA’s Code of Ethics.
- C . Internal auditors work collaboratively with their engagement team.
- D . Internal auditors complete a program of continuing professional development.
Correct Answer: D
D
Explanation:
Proficiency in internal auditing is not only about technical skills but also involves continuous education and staying updated with the latest practices and standards in the field.
Option D reflects the commitment to ongoing professional development, ensuring that internal auditors maintain and enhance their proficiency over time.
The Institute of Internal Auditors (IIA) emphasizes the importance of continuing professional development as a means to ensure auditors remain competent in their roles
D
Explanation:
Proficiency in internal auditing is not only about technical skills but also involves continuous education and staying updated with the latest practices and standards in the field.
Option D reflects the commitment to ongoing professional development, ensuring that internal auditors maintain and enhance their proficiency over time.
The Institute of Internal Auditors (IIA) emphasizes the importance of continuing professional development as a means to ensure auditors remain competent in their roles
Question #2
The internal audit activity is responsible for which of the following actions related to an organization’s internal controls?
- A . Mitigating risks affecting achievement of organizational objectives.
- B . Enabling opportunities affecting achievement of organizational objectives.
- C . Analyzing and advising regarding costs versus benefits of control activities.
- D . Attesting to fairness of financial statements
Correct Answer: C
C
Explanation:
Internal audit activities include evaluating the effectiveness and efficiency of internal controls, and part of this process involves analyzing and advising on the cost-benefit relationship of control activities.
This function helps ensure that the internal controls in place are not only effective in mitigating risks but are also economically justified
C
Explanation:
Internal audit activities include evaluating the effectiveness and efficiency of internal controls, and part of this process involves analyzing and advising on the cost-benefit relationship of control activities.
This function helps ensure that the internal controls in place are not only effective in mitigating risks but are also economically justified
Question #3
A newly appointed chief audit executive (CAE) of a small organization is developing a resource management plan.
Which of the following approaches would be most beneficial to help the CAE obtain details of the internal audit activity’s collective knowledge, skills, and other competencies?
- A . Review or establish a documented skills assessment of the internal audit staff and gather information from post-audit surveys.
- B . Obtain from the human resources department the job descriptions and position requirements for all internal audit staff.
- C . Conduct an objective written test of the internal audit staff to assess their knowledge and skills related to core internal audit competencies.
- D . Request the internal audit staff to submit a document that summarizes their most recent performance appraisals and post audit reviews.
Correct Answer: A
A
Explanation:
Conducting a documented skills assessment helps in identifying the existing competencies and any gaps within the internal audit team.
Post-audit surveys can provide feedback on the performance and areas for improvement, which can be used to further refine the skills and competencies of the audit staff (Ref: [16†source])
A
Explanation:
Conducting a documented skills assessment helps in identifying the existing competencies and any gaps within the internal audit team.
Post-audit surveys can provide feedback on the performance and areas for improvement, which can be used to further refine the skills and competencies of the audit staff (Ref: [16†source])
Question #4
Which of the following could increase risks to the organization’s control environment?
- A . Strong board of directors oversight.
- B . Incentive-based compensation structures
- C . Lower than average employee turnover.
- D . Implementation of a fraud hotline
Correct Answer: B
B
Explanation:
Incentive-based compensation can increase the risk of unethical behavior or fraudulent activities as employees might be tempted to manipulate results to achieve their performance targets.
This could undermine the control environment and lead to significant risks if not managed properly
B
Explanation:
Incentive-based compensation can increase the risk of unethical behavior or fraudulent activities as employees might be tempted to manipulate results to achieve their performance targets.
This could undermine the control environment and lead to significant risks if not managed properly
Question #5
According to IIA guidance, which of the following describes the primary reason to implement environmental and social safeguards within an organization?
- A . To enable Triple Bottom Line reporting capability.
- B . To facilitate the conduct of risk assessment
- C . To achieve and maintain sustainable development.
- D . To fulfill regulatory and compliance requirements.
Correct Answer: C
C
Explanation:
Implementing environmental and social safeguards aligns with the broader organizational goal of achieving sustainable development.
These safeguards ensure that the organization operates in a manner that is environmentally responsible and socially conscious, which is crucial for long-term sustainability
C
Explanation:
Implementing environmental and social safeguards aligns with the broader organizational goal of achieving sustainable development.
These safeguards ensure that the organization operates in a manner that is environmentally responsible and socially conscious, which is crucial for long-term sustainability
Question #6
The board of directors of a global organization has found an increased number of reported cases of unethical practices since last year.
To assist the board in gaining a better understanding of the degree of ethics awareness within the organization, which of the following actions should be undertaken?
- A . Request the internal audit activity to perform an ethics-related assurance engagement.
- B . Offer in-house ethics-related training seminars for employees to attend
- C . Reaffirm the importance of the organization’s code of ethics to all employees
- D . Conduct an organization wide employee survey on ethical practices.
Correct Answer: D
D
Explanation:
To assist the board of directors in understanding the degree of ethics awareness within the organization, an organization-wide employee survey on ethical practices (option D) is the most effective action.
Here’s why:
Direct Insight from Employees: Surveys can capture the perspectives of a broad employee base, providing direct insights into the awareness and attitudes towards ethics within the organization. Quantitative and Qualitative Data: A well-designed survey can gather both quantitative data (e.g., percentage of employees aware of the code of ethics) and qualitative data (e.g., specific instances of ethical dilemmas faced by employees).
Identifying Areas of Improvement: Surveys can identify specific areas where employees feel the organization is lacking in terms of ethical practices, which can guide targeted improvements. Confidentiality and Anonymity: Surveys often ensure confidentiality and anonymity, encouraging more honest and comprehensive responses from employees, which might not be achievable through other means.
Comprehensive Scope: Compared to internal audits or training, surveys can provide a comprehensive overview of the entire organization’s ethical climate, from various departments and levels.
This approach aligns with the best practices in internal auditing and organizational assessments as outlined by the Institute of Internal Auditors (IIA) and other related guidance.
D
Explanation:
To assist the board of directors in understanding the degree of ethics awareness within the organization, an organization-wide employee survey on ethical practices (option D) is the most effective action.
Here’s why:
Direct Insight from Employees: Surveys can capture the perspectives of a broad employee base, providing direct insights into the awareness and attitudes towards ethics within the organization. Quantitative and Qualitative Data: A well-designed survey can gather both quantitative data (e.g., percentage of employees aware of the code of ethics) and qualitative data (e.g., specific instances of ethical dilemmas faced by employees).
Identifying Areas of Improvement: Surveys can identify specific areas where employees feel the organization is lacking in terms of ethical practices, which can guide targeted improvements. Confidentiality and Anonymity: Surveys often ensure confidentiality and anonymity, encouraging more honest and comprehensive responses from employees, which might not be achievable through other means.
Comprehensive Scope: Compared to internal audits or training, surveys can provide a comprehensive overview of the entire organization’s ethical climate, from various departments and levels.
This approach aligns with the best practices in internal auditing and organizational assessments as outlined by the Institute of Internal Auditors (IIA) and other related guidance.
Question #7
According to IIA guidance, which of the following best describes the purpose of a planning memorandum for an audit engagement?
- A . It documents the audit steps and procedures to be performed.
- B . it documents preliminary information useful to the audit team.
- C . It documents events that could hinder the achievement of process objectives.
- D . It documents existing measures that manage risks in the area under review
Correct Answer: A
A
Explanation:
The planning memorandum serves as a comprehensive blueprint for an audit engagement, outlining the specific steps, procedures, and strategies that will be employed to carry out the audit. According to IIA guidance, the purpose of this document is to ensure that the audit team is well-prepared and that the audit process is systematic and thorough.
Documentation of Audit Steps and Procedures: The primary purpose of a planning memorandum is to detail the steps and procedures that the audit team will follow. This ensures consistency and clarity throughout the audit process and provides a clear framework for team members to follow.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2201 C Planning Considerations, which states that the internal auditor must develop and document a plan for each engagement, including the engagement’s objectives, scope, timing, and resource allocations.
Preparation and Coordination: It serves as a preparatory document that helps in coordinating the activities of the audit team, ensuring that everyone is aware of their roles and responsibilities. Practical Example: If an audit is being conducted on the financial reporting processes, the planning memorandum would include specific procedures for testing internal controls over financial reporting, timelines for each phase of the audit, and responsibilities assigned to each team member.
Risk Management: While it includes information on preliminary risks, its main focus is on documenting the audit steps rather than managing risks or existing measures, which would be covered in other documents or sections of the audit plan.
Clarification: Options B, C, and D may include elements found within broader audit planning, but the planning memorandum specifically focuses on the procedural roadmap.
Conclusion: The correct answer is A, as the planning memorandum’s primary function is to document the audit steps and procedures to be performed, ensuring a structured and organized approach to the audit engagement.
A
Explanation:
The planning memorandum serves as a comprehensive blueprint for an audit engagement, outlining the specific steps, procedures, and strategies that will be employed to carry out the audit. According to IIA guidance, the purpose of this document is to ensure that the audit team is well-prepared and that the audit process is systematic and thorough.
Documentation of Audit Steps and Procedures: The primary purpose of a planning memorandum is to detail the steps and procedures that the audit team will follow. This ensures consistency and clarity throughout the audit process and provides a clear framework for team members to follow.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2201 C Planning Considerations, which states that the internal auditor must develop and document a plan for each engagement, including the engagement’s objectives, scope, timing, and resource allocations.
Preparation and Coordination: It serves as a preparatory document that helps in coordinating the activities of the audit team, ensuring that everyone is aware of their roles and responsibilities. Practical Example: If an audit is being conducted on the financial reporting processes, the planning memorandum would include specific procedures for testing internal controls over financial reporting, timelines for each phase of the audit, and responsibilities assigned to each team member.
Risk Management: While it includes information on preliminary risks, its main focus is on documenting the audit steps rather than managing risks or existing measures, which would be covered in other documents or sections of the audit plan.
Clarification: Options B, C, and D may include elements found within broader audit planning, but the planning memorandum specifically focuses on the procedural roadmap.
Conclusion: The correct answer is A, as the planning memorandum’s primary function is to document the audit steps and procedures to be performed, ensuring a structured and organized approach to the audit engagement.
Question #8
Management would like to self-assess the overall effectiveness of the controls in place for its 200-person manufacturing department.
Which of the following client-facilitated approaches is likely to be the most efficient way to accomplish this objective?
- A . Workshops.
- B . Surveys.
- C . Interviews.
- D . Observation.
Correct Answer: B
B
Explanation:
Self-assessment of controls can be efficiently conducted using various client-facilitated approaches. The choice of method depends on factors such as the size of the department, the nature of the controls, and the need for comprehensive feedback.
Efficiency in Large Groups: Surveys are particularly effective for large groups (such as a 200-person department) as they allow for the collection of data from many individuals quickly and efficiently.
Reference: IIA Practice Guide on "Control Self-Assessment," which suggests using surveys for broad-based data collection when assessing control effectiveness across larger groups.
Standardized Feedback: Surveys provide standardized questions, ensuring consistent data collection and making it easier to analyze the responses.
Practical Example: A survey might include questions rating the effectiveness of different control measures on a scale, allowing management to identify areas of strength and weakness. Anonymity and Honest Responses: Surveys can be conducted anonymously, encouraging more honest and candid feedback from employees who might hesitate to speak openly in workshops or interviews.
Advantage: This anonymity can lead to more accurate assessments of the controls’ effectiveness, as employees might feel more comfortable pointing out issues without fear of repercussions. Comparison to Other Methods:
Workshops (A): While useful for in-depth discussions, they are time-consuming and less efficient for large groups.
Interviews (C): Provide detailed insights but are also time-consuming and not practical for a 200-person department.
Observation (D): Useful for firsthand assessment but not efficient for gathering widespread feedback across a large department.
Conclusion: The correct answer is B, as surveys are the most efficient method for self-assessing the overall effectiveness of controls in a large department, offering a balance of broad coverage, standardized data, and anonymity.
B
Explanation:
Self-assessment of controls can be efficiently conducted using various client-facilitated approaches. The choice of method depends on factors such as the size of the department, the nature of the controls, and the need for comprehensive feedback.
Efficiency in Large Groups: Surveys are particularly effective for large groups (such as a 200-person department) as they allow for the collection of data from many individuals quickly and efficiently.
Reference: IIA Practice Guide on "Control Self-Assessment," which suggests using surveys for broad-based data collection when assessing control effectiveness across larger groups.
Standardized Feedback: Surveys provide standardized questions, ensuring consistent data collection and making it easier to analyze the responses.
Practical Example: A survey might include questions rating the effectiveness of different control measures on a scale, allowing management to identify areas of strength and weakness. Anonymity and Honest Responses: Surveys can be conducted anonymously, encouraging more honest and candid feedback from employees who might hesitate to speak openly in workshops or interviews.
Advantage: This anonymity can lead to more accurate assessments of the controls’ effectiveness, as employees might feel more comfortable pointing out issues without fear of repercussions. Comparison to Other Methods:
Workshops (A): While useful for in-depth discussions, they are time-consuming and less efficient for large groups.
Interviews (C): Provide detailed insights but are also time-consuming and not practical for a 200-person department.
Observation (D): Useful for firsthand assessment but not efficient for gathering widespread feedback across a large department.
Conclusion: The correct answer is B, as surveys are the most efficient method for self-assessing the overall effectiveness of controls in a large department, offering a balance of broad coverage, standardized data, and anonymity.
Question #9
According to IIA guidance, which of the following statements is true regarding due professional care?
- A . Internal auditors must exercise due professional care to ensure that all significant risks will be identified.
- B . Internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor.
- C . Due professional care requires the internal auditor to conduct extensive examinations and verifications to ensure fraud does not exist.
- D . Due professional care is displayed during a consulting engagement when the internal auditor focuses on potential benefits of the engagement rather than the cost
Correct Answer: B
B
Explanation:
Due professional care is a critical concept in internal auditing, ensuring that auditors conduct their work with the necessary diligence and competence.
Definition and Standards: According to the IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 1220 C Due Professional Care, internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor.
Reference: Standard 1220 emphasizes that internal auditors must consider the extent of work needed to achieve the engagement’s objectives and the cost of assurance in relation to potential benefits.
Expectation of Competence: The standard requires auditors to use their professional judgment and to exercise the level of skill and care that a reasonably prudent internal auditor would use in similar circumstances.
Practical Example: This includes evaluating the nature and complexity of the engagement, the adequacy and effectiveness of risk management, and control processes relevant to the engagement. Comprehensive, Not Excessive: While due professional care involves being thorough, it does not mandate exhaustive procedures such as those implied in options A and C.
Clarification: Option A overstates the requirement by implying that all significant risks must be identified, which is not always feasible.
Clarification: Option C misinterprets due professional care by suggesting that extensive examinations and verifications to ensure fraud does not exist are always necessary, which is beyond the typical scope of many audits.
Cost vs. Benefit in Consulting: Option D refers to consulting engagements and the consideration of benefits over cost, which is a part of due professional care but does not capture the comprehensive expectation of care and skill.
Clarification: Due professional care in consulting engagements is about balancing benefits and costs but also involves ensuring quality and thoroughness appropriate to the engagement’s objectives. Conclusion: The correct answer is B, as it accurately reflects the IIA’s guidance that internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor.
B
Explanation:
Due professional care is a critical concept in internal auditing, ensuring that auditors conduct their work with the necessary diligence and competence.
Definition and Standards: According to the IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 1220 C Due Professional Care, internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor.
Reference: Standard 1220 emphasizes that internal auditors must consider the extent of work needed to achieve the engagement’s objectives and the cost of assurance in relation to potential benefits.
Expectation of Competence: The standard requires auditors to use their professional judgment and to exercise the level of skill and care that a reasonably prudent internal auditor would use in similar circumstances.
Practical Example: This includes evaluating the nature and complexity of the engagement, the adequacy and effectiveness of risk management, and control processes relevant to the engagement. Comprehensive, Not Excessive: While due professional care involves being thorough, it does not mandate exhaustive procedures such as those implied in options A and C.
Clarification: Option A overstates the requirement by implying that all significant risks must be identified, which is not always feasible.
Clarification: Option C misinterprets due professional care by suggesting that extensive examinations and verifications to ensure fraud does not exist are always necessary, which is beyond the typical scope of many audits.
Cost vs. Benefit in Consulting: Option D refers to consulting engagements and the consideration of benefits over cost, which is a part of due professional care but does not capture the comprehensive expectation of care and skill.
Clarification: Due professional care in consulting engagements is about balancing benefits and costs but also involves ensuring quality and thoroughness appropriate to the engagement’s objectives. Conclusion: The correct answer is B, as it accurately reflects the IIA’s guidance that internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor.
Question #10
According to the IIA Code of Ethics, which of the following is required with regard to communicating results?
- A . The internal auditor should present material information to appropriate personnel within the organization without revealing confidential matters that could be detrimental to the organization
- B . The internal auditor should disclose all material information obtained by the date of the final engagement communication.
- C . The internal auditor should obtain all material information within the established time and budget parameters.
- D . The internal auditor should reveal material facts that could potentially distort the reporting of activities under review
Correct Answer: D
D
Explanation:
The IIA Code of Ethics sets forth principles and expectations for ethical behavior in internal auditing,
particularly regarding the communication of results.
Integrity and Transparency: According to the IIA Code of Ethics, internal auditors are expected to exhibit integrity and transparency in their reporting, ensuring that material facts are disclosed accurately to avoid misrepresentation.
Reference: IIA Code of Ethics, Principle 4 C Integrity, which emphasizes the need for internal auditors to disclose all material facts known to them that, if not disclosed, could distort the reporting of activities under review.
Revealing Material Facts: The principle of integrity mandates that internal auditors must reveal material facts necessary to avoid any misrepresentation of the activities being reviewed. This ensures that stakeholders receive a truthful and complete picture of the audit findings.
Practical Example: If an auditor discovers significant control weaknesses that could impact financial reporting, these must be disclosed in the audit report to provide a true representation of the entity’s control environment.
Confidentiality and Appropriateness: While confidentiality is important, it does not supersede the need to report material facts that are essential for accurate reporting. Confidential matters that are not material or do not distort the reporting can be withheld to protect sensitive information. Clarification: Option A incorrectly suggests that all confidential matters can be withheld even if they are material and could distort reporting, which contradicts the principle of integrity. Comprehensive Disclosure: The requirement to disclose all material information by the date of the final engagement communication (Option B) and obtaining all material information within established parameters (Option C) are important but secondary to the fundamental ethical obligation to ensure accurate and truthful reporting.
Clarification: These options focus on procedural aspects rather than the core ethical obligation of integrity and accurate reporting.
Conclusion: The correct answer is D, as it aligns with the IIA Code of Ethics requirement that internal auditors should reveal material facts that could potentially distort the reporting of activities under review, ensuring transparency and integrity in their communications.
D
Explanation:
The IIA Code of Ethics sets forth principles and expectations for ethical behavior in internal auditing,
particularly regarding the communication of results.
Integrity and Transparency: According to the IIA Code of Ethics, internal auditors are expected to exhibit integrity and transparency in their reporting, ensuring that material facts are disclosed accurately to avoid misrepresentation.
Reference: IIA Code of Ethics, Principle 4 C Integrity, which emphasizes the need for internal auditors to disclose all material facts known to them that, if not disclosed, could distort the reporting of activities under review.
Revealing Material Facts: The principle of integrity mandates that internal auditors must reveal material facts necessary to avoid any misrepresentation of the activities being reviewed. This ensures that stakeholders receive a truthful and complete picture of the audit findings.
Practical Example: If an auditor discovers significant control weaknesses that could impact financial reporting, these must be disclosed in the audit report to provide a true representation of the entity’s control environment.
Confidentiality and Appropriateness: While confidentiality is important, it does not supersede the need to report material facts that are essential for accurate reporting. Confidential matters that are not material or do not distort the reporting can be withheld to protect sensitive information. Clarification: Option A incorrectly suggests that all confidential matters can be withheld even if they are material and could distort reporting, which contradicts the principle of integrity. Comprehensive Disclosure: The requirement to disclose all material information by the date of the final engagement communication (Option B) and obtaining all material information within established parameters (Option C) are important but secondary to the fundamental ethical obligation to ensure accurate and truthful reporting.
Clarification: These options focus on procedural aspects rather than the core ethical obligation of integrity and accurate reporting.
Conclusion: The correct answer is D, as it aligns with the IIA Code of Ethics requirement that internal auditors should reveal material facts that could potentially distort the reporting of activities under review, ensuring transparency and integrity in their communications.
Question #11
Which of the following is the most appropriate way to ensure that a newly formed internal audit activity remains free from undue influence by management?
- A . Appoint the chief audit executive as a member of the board.
- B . Adopt written policies and procedures for the internal audit activity, approved by the board.
- C . Ensure the chief audit executive reports administratively to the audit committee.
- D . Establish the internal audit activity’s position within the organization in an audit charter
Correct Answer: D
D
Explanation:
The internal audit charter is a formal document that defines the internal audit activity’s purpose, authority, and responsibility.
Establishing the internal audit activity’s position within the organization in an audit charter ensures independence and objectivity by clearly stating the internal audit’s role and its reporting lines.
The charter should be approved by the board and senior management to reinforce its authority and protect the internal audit activity from undue influence by management
D
Explanation:
The internal audit charter is a formal document that defines the internal audit activity’s purpose, authority, and responsibility.
Establishing the internal audit activity’s position within the organization in an audit charter ensures independence and objectivity by clearly stating the internal audit’s role and its reporting lines.
The charter should be approved by the board and senior management to reinforce its authority and protect the internal audit activity from undue influence by management
Question #12
The internal audit activity plans to assess the effectiveness of management’s self-assessment activities regarding the risk management process.
Which of the following procedures would be most appropriate to accomplish this objective?
- A . Review corporate policies and board minutes for examples of risk discussions.
- B . Conduct interviews with line and senior management on current practices.
- C . Research and review relevant industry information concerning key risks.
- D . Observe and test control and monitoring procedures and related reporting.
Correct Answer: D
D
Explanation:
To assess the effectiveness of management’s self-assessment activities regarding the risk management process, internal auditors should directly observe and test the control and monitoring procedures.
This hands-on approach allows auditors to verify the implementation and functionality of risk management controls and the accuracy of related reporting.
Direct observation and testing provide the most reliable evidence of the effectiveness of these procedures
D
Explanation:
To assess the effectiveness of management’s self-assessment activities regarding the risk management process, internal auditors should directly observe and test the control and monitoring procedures.
This hands-on approach allows auditors to verify the implementation and functionality of risk management controls and the accuracy of related reporting.
Direct observation and testing provide the most reliable evidence of the effectiveness of these procedures
Question #13
Which of the following statements is true regarding engagement planning?
- A . The scope of the engagement should be planned according to the internal audit activity’s budget and then aligned to the risk universe.
- B . The audit engagement objectives should be based on operational managements view of risk objectives
- C . The planning phase of the engagement should be completed and approved before the fieldwork of the engagement begins.
- D . The main purpose of the engagement work program is to determine the nature and timing of procedures required to gather audit evidence
Correct Answer: C
C
Explanation:
Proper engagement planning is essential to ensure that the internal audit engagement is conducted effectively and efficiently.
Completing and approving the planning phase before starting the fieldwork ensures that all objectives, scope, resources, and methodologies are well-defined and agreed upon.
This preparation helps in aligning the engagement with the overall audit strategy and reduces the risk of scope changes or misalignments during fieldwork
C
Explanation:
Proper engagement planning is essential to ensure that the internal audit engagement is conducted effectively and efficiently.
Completing and approving the planning phase before starting the fieldwork ensures that all objectives, scope, resources, and methodologies are well-defined and agreed upon.
This preparation helps in aligning the engagement with the overall audit strategy and reduces the risk of scope changes or misalignments during fieldwork
Question #14
According to IIA guidance, which of the following statements regarding the internal audit charter is true?
- A . The nature of consulting services typically is not included in the charter.
- B . The chief audit executive must formally review the charter at least once a year
- C . The nature of assurances provided to parties outside of the organization typically is not included in the charter.
- D . The charter typically defines the internal audit activity’s position within the organization.
Correct Answer: D
D
Explanation:
The internal audit charter outlines the internal audit activity’s purpose, authority, and responsibility within the organization.
It defines the internal audit activity’s position within the organization, including reporting lines, independence, and access to records, personnel, and physical properties relevant to the performance of engagements.
This clarity helps ensure that the internal audit activity can operate independently and effectively
D
Explanation:
The internal audit charter outlines the internal audit activity’s purpose, authority, and responsibility within the organization.
It defines the internal audit activity’s position within the organization, including reporting lines, independence, and access to records, personnel, and physical properties relevant to the performance of engagements.
This clarity helps ensure that the internal audit activity can operate independently and effectively
Question #15
Which of the following would be the most effective fraud prevention control?
- A . Email alert sent to management for checks issued over S100.000.
- B . installation of a video surveillance system in a warehouse prone to inventory loss
- C . New hire training to explain fraud and employee misconduct.
- D . Daily report that Identifies unsuccessful system log-in attempts
Correct Answer: C
C
Explanation:
Training new hires on fraud and employee misconduct is a proactive measure that raises awareness and educates employees about the organization’s policies and the consequences of fraudulent behavior.
Such training helps create a culture of integrity and compliance, making employees less likely to engage in or tolerate fraud.
Continuous education and reinforcement of ethical behavior are essential components of an effective fraud prevention strategy
C
Explanation:
Training new hires on fraud and employee misconduct is a proactive measure that raises awareness and educates employees about the organization’s policies and the consequences of fraudulent behavior.
Such training helps create a culture of integrity and compliance, making employees less likely to engage in or tolerate fraud.
Continuous education and reinforcement of ethical behavior are essential components of an effective fraud prevention strategy
Question #16
While conducting an engagement in the procurement department, the internal auditor noticed that the department head’s travel reports showed minor travel expenses, and there were no charges for hotels, meals, or transportation However, the auditor knew that the department head frequently traveled worldwide to meet with suppliers and visit their production sites.
Which of the following would be the most appropriate next step for the auditor?
- A . The auditor should make a note of the issue for follow-up when employee travel expenses are audited.
- B . The auditor should analyze trends and changes among the organization’s suppliers over the past few years.
- C . The auditor should investigate whether there are any special arrangements regarding senior management travel.
- D . The auditor should analyze the list of destinations the department head visited to estimate typical costs
Correct Answer: C
C
Explanation:
Identifying the Anomaly: The internal auditor has identified a discrepancy in the travel expenses of the department head, who frequently travels yet reports minimal expenses. This raises a red flag that needs further investigation.
Understanding the Context: It is important to determine if there are legitimate reasons for the discrepancy, such as special arrangements made for senior management travel, which could explain the absence of typical travel expenses like hotels, meals, and transportation.
Appropriate Next Step: Investigating whether there are any special arrangements for senior management travel (Option C) is the most logical next step. This helps in understanding the context and validating whether the discrepancy is justified or indicative of potential issues such as fraud or misreporting.
Reference: Internal auditing standards emphasize the need for auditors to understand the environment and context of the organization’s operations when anomalies are detected. Other Options Considered:
Option A: Making a note for future follow-up is not proactive and delays addressing a potential issue.
Option B: Analyzing supplier trends, while useful, does not directly address the travel expense anomaly.
Option D: Estimating costs based on destinations can provide insights but does not explain potential legitimate arrangements made by the organization.
Conclusion: Investigating special arrangements regarding senior management travel (Option C) is the most appropriate step to understand the discrepancy and ensure there are no irregularities.
C
Explanation:
Identifying the Anomaly: The internal auditor has identified a discrepancy in the travel expenses of the department head, who frequently travels yet reports minimal expenses. This raises a red flag that needs further investigation.
Understanding the Context: It is important to determine if there are legitimate reasons for the discrepancy, such as special arrangements made for senior management travel, which could explain the absence of typical travel expenses like hotels, meals, and transportation.
Appropriate Next Step: Investigating whether there are any special arrangements for senior management travel (Option C) is the most logical next step. This helps in understanding the context and validating whether the discrepancy is justified or indicative of potential issues such as fraud or misreporting.
Reference: Internal auditing standards emphasize the need for auditors to understand the environment and context of the organization’s operations when anomalies are detected. Other Options Considered:
Option A: Making a note for future follow-up is not proactive and delays addressing a potential issue.
Option B: Analyzing supplier trends, while useful, does not directly address the travel expense anomaly.
Option D: Estimating costs based on destinations can provide insights but does not explain potential legitimate arrangements made by the organization.
Conclusion: Investigating special arrangements regarding senior management travel (Option C) is the most appropriate step to understand the discrepancy and ensure there are no irregularities.
Question #17
Which of the following statements best describes the difference between risk appetite and risk tolerance?
- A . Risk appetite applies to specific objectives, while risk tolerance refers to an organization’s general attitude toward risk.
- B . Risk appetite refers to the degree of risk acceptance for a particular objective, while risk tolerance is one approach to risk management
- C . Risk appetite refers to an organization’s general level of acceptance, while risk tolerance is a more specific and subordinate concept
- D . There is no significant difference between the two terms
Correct Answer: C
C
Explanation:
Definition of Risk Appetite: Risk appetite is the amount and type of risk an organization is willing to pursue or retain to achieve its objectives. It reflects the organization’s overall approach to risk-taking and is typically articulated at the highest level of the organization.
Reference: COSO’s Enterprise Risk Management Framework.
Definition of Risk Tolerance: Risk tolerance refers to the acceptable variation relative to the achievement of specific objectives. It is more granular and specific than risk appetite, detailing the levels of risk that are acceptable within the parameters set by the organization’s risk appetite.
Reference: IIA’s Practice Guide on Risk Management.
Distinguishing the Two Concepts: Risk appetite is broad and sets the overall boundaries for risk-taking, while risk tolerance is more specific, outlining acceptable risk levels for particular objectives within the broader risk appetite framework.
Practical Example: An organization may have a high risk appetite, accepting significant risks to achieve growth, but its risk tolerance for operational risks (such as system failures) may be low, indicating minimal acceptable deviations from expected performance.
Conclusion: The correct answer is C, as risk appetite represents the organization’s general level of risk acceptance, whereas risk tolerance is more specific and detailed, falling under the broader scope of risk appetite.
C
Explanation:
Definition of Risk Appetite: Risk appetite is the amount and type of risk an organization is willing to pursue or retain to achieve its objectives. It reflects the organization’s overall approach to risk-taking and is typically articulated at the highest level of the organization.
Reference: COSO’s Enterprise Risk Management Framework.
Definition of Risk Tolerance: Risk tolerance refers to the acceptable variation relative to the achievement of specific objectives. It is more granular and specific than risk appetite, detailing the levels of risk that are acceptable within the parameters set by the organization’s risk appetite.
Reference: IIA’s Practice Guide on Risk Management.
Distinguishing the Two Concepts: Risk appetite is broad and sets the overall boundaries for risk-taking, while risk tolerance is more specific, outlining acceptable risk levels for particular objectives within the broader risk appetite framework.
Practical Example: An organization may have a high risk appetite, accepting significant risks to achieve growth, but its risk tolerance for operational risks (such as system failures) may be low, indicating minimal acceptable deviations from expected performance.
Conclusion: The correct answer is C, as risk appetite represents the organization’s general level of risk acceptance, whereas risk tolerance is more specific and detailed, falling under the broader scope of risk appetite.
Question #18
Which of the following is a true statement regarding whistleblowing?
- A . Whistleblowing is one of several possible ethical structures an organization can undertake to encourage ethical behavior.
- B . Whistleblowing programs help employees deal with ethical questions and instill ethical values into everyday behavior
- C . Whistleblowers are current or former employees who are disgruntled and looking to retaliate.
- D . Whistleblowers should inform the organization about actual criminal circumstances, not assumed allegations.
Correct Answer: A
A
Explanation:
Purpose of Whistleblowing: Whistleblowing is a mechanism that allows employees to report unethical or illegal activities within the organization. It is a vital part of an organization’s ethical framework, providing a structured way for concerns to be raised and addressed.
Reference: IIA’s Practice Guide on Whistleblowing Programs.
Encouraging Ethical Behavior: By having a whistleblowing program, an organization encourages employees to come forward with concerns, which helps in maintaining ethical standards and preventing misconduct.
Practical Example: Employees who notice financial discrepancies can report these through the whistleblowing system without fear of retaliation, supporting a culture of transparency and accountability.
Other Options Considered:
Option B: While whistleblowing programs can support ethical behavior, they are primarily designed for reporting issues rather than instilling values.
Option C: This is a misconception; whistleblowers often report genuine concerns rather than acting out of retaliation.
Option D: Whistleblowers can report suspected unethical or illegal activities, which may not always be criminal but are still significant for organizational integrity.
Conclusion: The correct answer is A, as whistleblowing is one of several ethical structures that organizations can adopt to encourage reporting of unethical behavior and maintain high ethical standards.
A
Explanation:
Purpose of Whistleblowing: Whistleblowing is a mechanism that allows employees to report unethical or illegal activities within the organization. It is a vital part of an organization’s ethical framework, providing a structured way for concerns to be raised and addressed.
Reference: IIA’s Practice Guide on Whistleblowing Programs.
Encouraging Ethical Behavior: By having a whistleblowing program, an organization encourages employees to come forward with concerns, which helps in maintaining ethical standards and preventing misconduct.
Practical Example: Employees who notice financial discrepancies can report these through the whistleblowing system without fear of retaliation, supporting a culture of transparency and accountability.
Other Options Considered:
Option B: While whistleblowing programs can support ethical behavior, they are primarily designed for reporting issues rather than instilling values.
Option C: This is a misconception; whistleblowers often report genuine concerns rather than acting out of retaliation.
Option D: Whistleblowers can report suspected unethical or illegal activities, which may not always be criminal but are still significant for organizational integrity.
Conclusion: The correct answer is A, as whistleblowing is one of several ethical structures that organizations can adopt to encourage reporting of unethical behavior and maintain high ethical standards.
Question #19
An internal auditor discovered fraud while performing an audit of an organization’s procurement process.
Which of the following describes the greatest benefit of using forensic auditing techniques in this scenario?
- A . Enhanced capability to prevent frauds from occurring.
- B . Greater assurance that procurement frauds will be detected in a timely manner
- C . Improved capability of evaluating fraud risks within the organization.
- D . Greater understanding of fraud through better evidence collection
Correct Answer: D
D
Explanation:
Forensic auditing techniques provide a systematic approach to collecting and analyzing evidence related to fraud. The primary benefit of these techniques is the enhanced ability to gather comprehensive and detailed evidence, which leads to a greater understanding of how the fraud occurred and who was involved. This detailed evidence collection supports legal proceedings and helps in identifying control weaknesses that need to be addressed to prevent future frauds.
Reference: "Forensic Auditing: Principles and Practices," which outlines the importance of evidence collection in understanding and combating fraud.
D
Explanation:
Forensic auditing techniques provide a systematic approach to collecting and analyzing evidence related to fraud. The primary benefit of these techniques is the enhanced ability to gather comprehensive and detailed evidence, which leads to a greater understanding of how the fraud occurred and who was involved. This detailed evidence collection supports legal proceedings and helps in identifying control weaknesses that need to be addressed to prevent future frauds.
Reference: "Forensic Auditing: Principles and Practices," which outlines the importance of evidence collection in understanding and combating fraud.
Question #20
An internal auditor observed that sales staff are able to modify or cancel an order in the system prior to shipping She wonders whether they can also modify orders after shipping.
Which of the following types of controls should she examine?
- A . Batch controls.
- B . Application controls
- C . General IT controls.
- D . Logical access controls
Correct Answer: B
B
Explanation:
Application controls are specific to software applications and ensure that transactions are processed correctly and accurately. They include controls over input, processing, and output. In this scenario, examining application controls will help determine if sales staff can modify orders after shipping, as these controls directly impact how data is handled within the system.
Reference: "Information Technology Auditing," which explains the role of application controls in maintaining data integrity and security.
B
Explanation:
Application controls are specific to software applications and ensure that transactions are processed correctly and accurately. They include controls over input, processing, and output. In this scenario, examining application controls will help determine if sales staff can modify orders after shipping, as these controls directly impact how data is handled within the system.
Reference: "Information Technology Auditing," which explains the role of application controls in maintaining data integrity and security.
Question #21
The organization’s internal audit charter was last updated six years ago to update the charter, which of the following actions is most appropriate for the chief audit executive to take?
- A . Wait for the next external assessment and address all of the missing information in the charter based on the recommendations from the external assessment team
- B . Perform a review of HA guidance to become acquainted with the latest mandatory elements prior to updating the charter
- C . Use an internal audit charter template from another organization that operates within the same industry.
- D . Identify an individual within the internal audit activity who has in-depth knowledge of mandatory IIA guidance elements to address any gaps or areas of the current version of the charter that could be improved
Correct Answer: B
B
Explanation:
The chief audit executive should review the latest guidance from the Institute of Internal Auditors (IIA) to ensure the internal audit charter complies with current standards. This approach ensures the charter reflects up-to-date practices and mandatory elements, maintaining the integrity and effectiveness of the internal audit function.
Reference: "International Standards for the Professional Practice of Internal Auditing," which provides mandatory guidance on the internal audit charter.
B
Explanation:
The chief audit executive should review the latest guidance from the Institute of Internal Auditors (IIA) to ensure the internal audit charter complies with current standards. This approach ensures the charter reflects up-to-date practices and mandatory elements, maintaining the integrity and effectiveness of the internal audit function.
Reference: "International Standards for the Professional Practice of Internal Auditing," which provides mandatory guidance on the internal audit charter.
Question #22
What would be the effect if an organization paid one of its liabilities twice during the year, in error?
- A . Assets, liabilities, and owners’ equity would be understated.
- B . Assets, net income, and owners’ equity would be unaffected
- C . Assets and liabilities would be understated.
- D . Assets, net income, and owners’ equity would be understated, but liabilities would be overstated
Correct Answer: D
D
Explanation:
If an organization pays one of its liabilities twice, its assets (cash) would be reduced more than necessary. This results in an understatement of net income and owners’ equity because the additional payment is an expense that should not have been recorded. Liabilities would be overstated because the duplicate payment does not reduce the liability correctly.
Reference: "Financial Accounting Principles," which discusses the impact of errors on financial statements.
D
Explanation:
If an organization pays one of its liabilities twice, its assets (cash) would be reduced more than necessary. This results in an understatement of net income and owners’ equity because the additional payment is an expense that should not have been recorded. Liabilities would be overstated because the duplicate payment does not reduce the liability correctly.
Reference: "Financial Accounting Principles," which discusses the impact of errors on financial statements.
Question #23
Which of the following best demonstrates that the internal audit activity is using due professional care?
- A . The internal audit activity reports directly to the board on the engagements it performs.
- B . Internal auditors undertake the necessary training to complete their audit work.
- C . The completion of engagements is based on the assumption that fraudulent activities may exist.
- D . Internal auditors consider the use of technology-based audit and other data analysis techniques
Correct Answer: D
D
Explanation:
Demonstrating due professional care involves using appropriate technology and data analysis techniques to enhance the audit’s effectiveness and efficiency. These tools help auditors identify anomalies, trends, and potential areas of risk more accurately and timely, reflecting a higher standard of care in their audit activities.
Reference: "Auditing Standards and Guidelines," which emphasize the importance of using advanced techniques in audit processes.
D
Explanation:
Demonstrating due professional care involves using appropriate technology and data analysis techniques to enhance the audit’s effectiveness and efficiency. These tools help auditors identify anomalies, trends, and potential areas of risk more accurately and timely, reflecting a higher standard of care in their audit activities.
Reference: "Auditing Standards and Guidelines," which emphasize the importance of using advanced techniques in audit processes.
Question #24
A manager has allowed a subordinate employee to have greater control and responsibility over the tasks that he performs.
This is an example of which of the following?
- A . Job enlargement
- B . Job enrichment
- C . Horizontal loading of the job.
- D . Job rotation.
Correct Answer: B
B
Explanation:
Job enrichment involves giving an employee more responsibility and control over their work, which increases the employee’s sense of ownership and involvement in the task. This concept is about enhancing the role by adding more meaningful tasks and duties to it, rather than simply increasing the quantity of tasks (which would be job enlargement).
Reference: This concept can be found in management and organizational behavior theories, such as Herzberg’s Two-Factor Theory, which discusses how job enrichment can lead to higher job satisfaction.
B
Explanation:
Job enrichment involves giving an employee more responsibility and control over their work, which increases the employee’s sense of ownership and involvement in the task. This concept is about enhancing the role by adding more meaningful tasks and duties to it, rather than simply increasing the quantity of tasks (which would be job enlargement).
Reference: This concept can be found in management and organizational behavior theories, such as Herzberg’s Two-Factor Theory, which discusses how job enrichment can lead to higher job satisfaction.
Question #25
According to IIA guidance, which of the following statements is true regarding engagement planning?
- A . For both assurance and consulting engagements, planning typically occurs after the engagement objectives and scope have already been determined.
- B . The expectations and objectives of an assurance engagement are usually determined by. or in conjunction with, the engagement client
- C . Internal auditors may not need to complete a preliminary risk assessment for a consulting engagement as they would when planning an assurance engagement.
- D . For both consulting and assurance engagements, internal auditors usually form the engagement objectives prior to completing the preliminary risk assessment
Correct Answer: B
B
Explanation:
The expectations and objectives of an assurance engagement are often determined in conjunction with the engagement client, aligning with the client’s needs and the scope of the engagement. In consulting engagements, internal auditors provide advice and services tailored to the client’s requests, which may not always follow a preliminary risk assessment process like in assurance engagements.
Reference: The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) provide detailed guidance on this aspect of engagement planning, particularly in Standards 2200 and 2201.
B
Explanation:
The expectations and objectives of an assurance engagement are often determined in conjunction with the engagement client, aligning with the client’s needs and the scope of the engagement. In consulting engagements, internal auditors provide advice and services tailored to the client’s requests, which may not always follow a preliminary risk assessment process like in assurance engagements.
Reference: The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) provide detailed guidance on this aspect of engagement planning, particularly in Standards 2200 and 2201.
Question #26
An internal audit activity maintains a quality assurance and improvement program that includes annual self-assessments The internal audit activity includes in each engagement report a clause that the engagement is conducted in conformance with the International Standards for the Professional Practice of Internal Auditing (Standards).
Which of the following justifies inclusion of this clause in the reports?
- A . Internal audit activity policies and engagement records provide relevant, sufficient, and competent evidence that the statement is correct.
- B . The audit committee has reviewed the annual self-assessment results and approved the use of the clause.
- C . The self-assessment results were validated by a qualified external review team three years prior.
- D . The internal audit charter, approved by the audit committee, requires conformance with the Standards
Correct Answer: C
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
Question #26
An internal audit activity maintains a quality assurance and improvement program that includes annual self-assessments The internal audit activity includes in each engagement report a clause that the engagement is conducted in conformance with the International Standards for the Professional Practice of Internal Auditing (Standards).
Which of the following justifies inclusion of this clause in the reports?
- A . Internal audit activity policies and engagement records provide relevant, sufficient, and competent evidence that the statement is correct.
- B . The audit committee has reviewed the annual self-assessment results and approved the use of the clause.
- C . The self-assessment results were validated by a qualified external review team three years prior.
- D . The internal audit charter, approved by the audit committee, requires conformance with the Standards
Correct Answer: C
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
Question #26
An internal audit activity maintains a quality assurance and improvement program that includes annual self-assessments The internal audit activity includes in each engagement report a clause that the engagement is conducted in conformance with the International Standards for the Professional Practice of Internal Auditing (Standards).
Which of the following justifies inclusion of this clause in the reports?
- A . Internal audit activity policies and engagement records provide relevant, sufficient, and competent evidence that the statement is correct.
- B . The audit committee has reviewed the annual self-assessment results and approved the use of the clause.
- C . The self-assessment results were validated by a qualified external review team three years prior.
- D . The internal audit charter, approved by the audit committee, requires conformance with the Standards
Correct Answer: C
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
Question #26
An internal audit activity maintains a quality assurance and improvement program that includes annual self-assessments The internal audit activity includes in each engagement report a clause that the engagement is conducted in conformance with the International Standards for the Professional Practice of Internal Auditing (Standards).
Which of the following justifies inclusion of this clause in the reports?
- A . Internal audit activity policies and engagement records provide relevant, sufficient, and competent evidence that the statement is correct.
- B . The audit committee has reviewed the annual self-assessment results and approved the use of the clause.
- C . The self-assessment results were validated by a qualified external review team three years prior.
- D . The internal audit charter, approved by the audit committee, requires conformance with the Standards
Correct Answer: C
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
C
Explanation:
According to the IIA Standards, an internal audit activity must have an external assessment conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The validation by an external team ensures that the internal audit activity’s self-assessments and quality assurance practices meet the required standards.
Reference: IIA Standard 1312 (External Assessments) and IIA Standard 1320 (Reporting on the Quality Assurance and Improvement Program) provide detailed guidelines for this process.
Question #30
Skimming involves stealing cash or assets from the organization and is normally concealed by adjusting the organization’s records
4 Disbursement fraud occurs when a person causes the organization to issue a payment for fictitious goods or services
- A . 1 and 3.
- B . 1 and 4
- C . 2 and 3.
- D . 2 and 4
Correct Answer: D
D
Explanation:
Diversion typically involves redirecting resources or assets for personal use, not just having an undisclosed interest.
Tax evasion involves deliberate falsification of financial information to avoid tax liabilities.
Skimming is taking cash before it is recorded in the accounting system, usually difficult to detect.
Disbursement fraud involves creating fictitious invoices or vendors to divert funds.
Reference: These definitions are aligned with common fraud schemes outlined in the ACFE (Association of Certified Fraud Examiners) Fraud Tree and various IIA practice guides.
D
Explanation:
Diversion typically involves redirecting resources or assets for personal use, not just having an undisclosed interest.
Tax evasion involves deliberate falsification of financial information to avoid tax liabilities.
Skimming is taking cash before it is recorded in the accounting system, usually difficult to detect.
Disbursement fraud involves creating fictitious invoices or vendors to divert funds.
Reference: These definitions are aligned with common fraud schemes outlined in the ACFE (Association of Certified Fraud Examiners) Fraud Tree and various IIA practice guides.
Question #31
Which of the following types of policies best helps promote objectivity in the internal audit activity’s work?
- A . Policies that are distributed to all members of the internal audit activity and require a signed acknowledgment.
- B . Policies that match internal auditors’ performance with feedback from management of the area under review
- C . Policies that keep internal auditors in areas where they have vast audit expertise.
- D . Policies that provide examples of Inappropriate business relationships
Correct Answer: D
D
Explanation:
Promoting objectivity in internal auditing involves ensuring that auditors avoid conflicts of interest and maintain independence in both fact and appearance. Policies that clearly define and give examples of inappropriate business relationships help auditors understand and avoid situations that could impair their objectivity.
Reference: IIA Standard 1120 (Individual Objectivity) emphasizes the importance of internal auditors maintaining an unbiased mindset and avoiding conflicts of interest.
D
Explanation:
Promoting objectivity in internal auditing involves ensuring that auditors avoid conflicts of interest and maintain independence in both fact and appearance. Policies that clearly define and give examples of inappropriate business relationships help auditors understand and avoid situations that could impair their objectivity.
Reference: IIA Standard 1120 (Individual Objectivity) emphasizes the importance of internal auditors maintaining an unbiased mindset and avoiding conflicts of interest.
Question #32
Which of the following statements is true regarding partnership liquidation?
- A . Operations can continue after the liquidation, if all partners agree.
- B . Partnership liquidation ends both the legal and economic life of an entity
- C . Partnership liquidation occurs when there is capital deficiency.
- D . When a partnership Is liquidated, each partner pays creditors from cash received
Correct Answer: B
B
Explanation:
Partnership liquidation refers to the process of dissolving a partnership, where all assets are sold, liabilities are paid off, and any remaining assets are distributed among the partners. This process marks the end of the partnership’s legal existence and its economic activities.
Legal and Economic Termination: Upon liquidation, the partnership ceases to exist legally and economically. This means that it can no longer operate or enter into new business transactions. Asset Distribution: The liquidation process ensures that all assets are sold, and the proceeds are used to pay off any outstanding debts. Any remaining funds are distributed to the partners according to the partnership agreement.
Capital Deficiency: While capital deficiency might prompt liquidation, it is not a defining characteristic of the process.
Creditors Payment: Creditors are paid from the partnership’s assets, not directly by the partners unless agreed otherwise or if the assets are insufficient to cover the liabilities.
Reference: "Fundamentals of Partnership Accounting," which details the steps and consequences of partnership liquidation.
B
Explanation:
Partnership liquidation refers to the process of dissolving a partnership, where all assets are sold, liabilities are paid off, and any remaining assets are distributed among the partners. This process marks the end of the partnership’s legal existence and its economic activities.
Legal and Economic Termination: Upon liquidation, the partnership ceases to exist legally and economically. This means that it can no longer operate or enter into new business transactions. Asset Distribution: The liquidation process ensures that all assets are sold, and the proceeds are used to pay off any outstanding debts. Any remaining funds are distributed to the partners according to the partnership agreement.
Capital Deficiency: While capital deficiency might prompt liquidation, it is not a defining characteristic of the process.
Creditors Payment: Creditors are paid from the partnership’s assets, not directly by the partners unless agreed otherwise or if the assets are insufficient to cover the liabilities.
Reference: "Fundamentals of Partnership Accounting," which details the steps and consequences of partnership liquidation.
Question #33
Organizations that adopt just-in-time purchasing systems often experience which of the following?
- A . A slight increase in carrying costs.
- B . A greater need for inspection of goods as the goods arrive
- C . A greater need for linkage with a vendors computerized order entry system.
- D . An Increase in the number of suitable suppliers
Correct Answer: C
C
Explanation:
Just-in-time (JIT) purchasing systems aim to minimize inventory levels by receiving goods only as they are needed in the production process, which requires tight integration with suppliers. Vendor Linkage: JIT systems demand a highly efficient and responsive supply chain. Linking with vendors’ computerized order entry systems ensures that orders are processed quickly and accurately, supporting the JIT philosophy.
Inspection: JIT systems often rely on high-quality suppliers to minimize the need for inspection upon arrival, focusing instead on preventive measures at the supplier’s end.
Carrying Costs: A JIT system typically reduces carrying costs by keeping inventory levels low.
Supplier Base: The focus is often on a few reliable suppliers rather than increasing the number of
suppliers.
Reference: "Supply Chain Management: Strategy, Planning, and Operation," which discusses the operational requirements and benefits of JIT systems.
C
Explanation:
Just-in-time (JIT) purchasing systems aim to minimize inventory levels by receiving goods only as they are needed in the production process, which requires tight integration with suppliers. Vendor Linkage: JIT systems demand a highly efficient and responsive supply chain. Linking with vendors’ computerized order entry systems ensures that orders are processed quickly and accurately, supporting the JIT philosophy.
Inspection: JIT systems often rely on high-quality suppliers to minimize the need for inspection upon arrival, focusing instead on preventive measures at the supplier’s end.
Carrying Costs: A JIT system typically reduces carrying costs by keeping inventory levels low.
Supplier Base: The focus is often on a few reliable suppliers rather than increasing the number of
suppliers.
Reference: "Supply Chain Management: Strategy, Planning, and Operation," which discusses the operational requirements and benefits of JIT systems.
Question #34
Which of the following statements is true regarding managements use of judgement to design, implement, and conduct internal control?
- A . The use of judgment enhances managements ability to make better decisions about internal control, but cannot guarantee perfect outcomes.
- B . introducing judgment generally diminishes managements ability to make good decisions about internal control
- C . It is inappropriate for management to exercise judgement in areas such as specifying and using suitable accounting principles.
- D . It is inappropriate for management to exercise judgement in assessing whether components are present, functioning, and operating together
Correct Answer: A
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
Question #34
Which of the following statements is true regarding managements use of judgement to design, implement, and conduct internal control?
- A . The use of judgment enhances managements ability to make better decisions about internal control, but cannot guarantee perfect outcomes.
- B . introducing judgment generally diminishes managements ability to make good decisions about internal control
- C . It is inappropriate for management to exercise judgement in areas such as specifying and using suitable accounting principles.
- D . It is inappropriate for management to exercise judgement in assessing whether components are present, functioning, and operating together
Correct Answer: A
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
Question #34
Which of the following statements is true regarding managements use of judgement to design, implement, and conduct internal control?
- A . The use of judgment enhances managements ability to make better decisions about internal control, but cannot guarantee perfect outcomes.
- B . introducing judgment generally diminishes managements ability to make good decisions about internal control
- C . It is inappropriate for management to exercise judgement in areas such as specifying and using suitable accounting principles.
- D . It is inappropriate for management to exercise judgement in assessing whether components are present, functioning, and operating together
Correct Answer: A
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
Question #34
Which of the following statements is true regarding managements use of judgement to design, implement, and conduct internal control?
- A . The use of judgment enhances managements ability to make better decisions about internal control, but cannot guarantee perfect outcomes.
- B . introducing judgment generally diminishes managements ability to make good decisions about internal control
- C . It is inappropriate for management to exercise judgement in areas such as specifying and using suitable accounting principles.
- D . It is inappropriate for management to exercise judgement in assessing whether components are present, functioning, and operating together
Correct Answer: A
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
Question #34
Which of the following statements is true regarding managements use of judgement to design, implement, and conduct internal control?
- A . The use of judgment enhances managements ability to make better decisions about internal control, but cannot guarantee perfect outcomes.
- B . introducing judgment generally diminishes managements ability to make good decisions about internal control
- C . It is inappropriate for management to exercise judgement in areas such as specifying and using suitable accounting principles.
- D . It is inappropriate for management to exercise judgement in assessing whether components are present, functioning, and operating together
Correct Answer: A
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
A
Explanation:
Management’s use of judgment in designing, implementing, and conducting internal control is crucial for adapting to unique circumstances and complexities within an organization.
Enhanced Decision-Making: Judgment allows management to tailor controls to the specific risks and operational realities of the organization, improving overall effectiveness.
Limitations: While judgment improves decision-making, it cannot eliminate all risks or guarantee perfect outcomes due to inherent uncertainties and limitations in predicting all possible scenarios. Appropriate Use: It is appropriate for management to use judgment in applying accounting principles and assessing internal controls’ presence and functioning.
Inappropriateness: It would be incorrect to say that judgment diminishes decision-making capabilities or is inappropriate for assessing internal control components.
Reference: "Internal Control C Integrated Framework" by COSO, which highlights the importance and limitations of judgment in internal control processes.
Question #39
Identify and mitigate risks to help meet the CSR program objectives A.1,2, and 3.
B. 1.2. and 4.
C. 1, 3, and 4.
D. 2. 3. and 4.
Correct Answer: B
Explanation:
According to the Institute of Internal Auditors (IIA) guidance, internal audit activities can encompass several aspects of evaluating corporate social responsibility (CSR) programs.
Consulting on Design and Implementation: Internal auditors can provide valuable insights into the design and implementation of CSR programs to ensure they are well-structured and aligned with organizational objectives.
Advising on Governance and Risk Management: Serving as advisors, internal auditors can help in establishing effective governance structures and identifying and managing risks associated with CSR initiatives.
Mitigating Risks: By identifying and mitigating risks, internal auditors support the achievement of CSR program objectives, ensuring these initiatives are both effective and sustainable.
Reviewing Third Parties: While internal auditors may review third parties for contractual compliance with CSR terms, this activity is more often part of broader compliance audits rather than a specific focus area for CSR evaluations.
Reference: "IIA Practice Guide: Auditing Corporate Social Responsibility," which outlines the role of internal auditors in CSR-related activities.
Explanation:
According to the Institute of Internal Auditors (IIA) guidance, internal audit activities can encompass several aspects of evaluating corporate social responsibility (CSR) programs.
Consulting on Design and Implementation: Internal auditors can provide valuable insights into the design and implementation of CSR programs to ensure they are well-structured and aligned with organizational objectives.
Advising on Governance and Risk Management: Serving as advisors, internal auditors can help in establishing effective governance structures and identifying and managing risks associated with CSR initiatives.
Mitigating Risks: By identifying and mitigating risks, internal auditors support the achievement of CSR program objectives, ensuring these initiatives are both effective and sustainable.
Reviewing Third Parties: While internal auditors may review third parties for contractual compliance with CSR terms, this activity is more often part of broader compliance audits rather than a specific focus area for CSR evaluations.
Reference: "IIA Practice Guide: Auditing Corporate Social Responsibility," which outlines the role of internal auditors in CSR-related activities.
Question #40
An organization’s health-care insurance costs have been rising approximately 10 percent per year for several years.
Which of the following analytical review procedures would best evaluate the reasonableness of the increase in health-care costs?
- A . Develop a comparison of the costs incurred with similar costs incurred by other organizations
- B . Obtain the government index of health-care costs for the comparable period of time and compare the rate of increase with that of the cost per employee incurred by the organization.
- C . Obtain a bid from another health-care administrator to provide the same administrative services as the current health-care administrator.
- D . Review all claims and compare with appropriate procedures to ensure that overpayments have not occurred
Correct Answer: B
B
Explanation:
Analytical review procedures involve evaluating financial information by studying plausible relationships among financial and non-financial data.
Government Index Comparison: Comparing the organization’s increase in health-care costs with a relevant government index provides a benchmark to assess whether the cost increases are in line with broader economic trends.
Claims Review: While reviewing all claims could help identify specific overpayments, it is more labor-intensive and less effective for evaluating overall reasonableness.
Competitive Bids: Obtaining bids from other health-care administrators might control future costs but does not evaluate the reasonableness of past cost increases.
Industry Comparison: Comparing costs with those incurred by similar organizations could be useful but might not provide a standardized measure like a government index.
Reference: "Auditing and Assurance Services: An Integrated Approach," which details the use of analytical procedures in evaluating financial data.
B
Explanation:
Analytical review procedures involve evaluating financial information by studying plausible relationships among financial and non-financial data.
Government Index Comparison: Comparing the organization’s increase in health-care costs with a relevant government index provides a benchmark to assess whether the cost increases are in line with broader economic trends.
Claims Review: While reviewing all claims could help identify specific overpayments, it is more labor-intensive and less effective for evaluating overall reasonableness.
Competitive Bids: Obtaining bids from other health-care administrators might control future costs but does not evaluate the reasonableness of past cost increases.
Industry Comparison: Comparing costs with those incurred by similar organizations could be useful but might not provide a standardized measure like a government index.
Reference: "Auditing and Assurance Services: An Integrated Approach," which details the use of analytical procedures in evaluating financial data.
Question #41
Which of the following offers the best evidence that the internal audit activity has achieved organizational independence?
- A . An independent third party has assessed the organization’s system of internal controls to be adequate and effective.
- B . The chief audit executive reports both functionally and administratively to the CEO
- C . The internal audit charter is drafted properly and approved by the appropriate parties.
- D . The mission statement and strategy of the internal audit activity demonstrates alignment to organizational objectives
Correct Answer: C
C
Explanation:
The internal audit charter is a formal document that defines the internal audit activity’s purpose, authority, and responsibility. It is crucial for establishing the internal audit function’s independence and objectivity. When the internal audit charter is properly drafted and approved by the appropriate parties, it provides a clear mandate for the internal audit activity and sets the foundation for its operations. This ensures that the internal audit activity can function independently without undue influence from management.
Reference: According to the IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 1000 (Purpose, Authority, and Responsibility), the internal audit charter is essential in defining the internal audit activity’s role and ensuring its independence.
C
Explanation:
The internal audit charter is a formal document that defines the internal audit activity’s purpose, authority, and responsibility. It is crucial for establishing the internal audit function’s independence and objectivity. When the internal audit charter is properly drafted and approved by the appropriate parties, it provides a clear mandate for the internal audit activity and sets the foundation for its operations. This ensures that the internal audit activity can function independently without undue influence from management.
Reference: According to the IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 1000 (Purpose, Authority, and Responsibility), the internal audit charter is essential in defining the internal audit activity’s role and ensuring its independence.
Question #42
With regard to project management, which of the following statements about project crashing is true?
- A . It leads to an increase in risk and often results in rework.
- B . It is an optimization technique where activities are performed in parallel rather than sequentially
- C . It involves a revaluation of project requirements and/or scope.
- D . It is a compression technique in which resources are added to the project
Correct Answer: D
D
Explanation:
Project crashing is a schedule compression technique used in project management to shorten the project duration without changing the project scope. It involves adding additional resources to critical path activities to complete them faster. This method can lead to increased costs but aims to reduce the project timeline effectively. Crashing is often used when project deadlines are tight and time is more critical than budget.
Reference: Project Management Institute (PMI) defines project crashing as a technique used to shorten the schedule duration for the least incremental cost by adding resources. This is detailed in the PMBOK Guide (Project Management Body of Knowledge).
D
Explanation:
Project crashing is a schedule compression technique used in project management to shorten the project duration without changing the project scope. It involves adding additional resources to critical path activities to complete them faster. This method can lead to increased costs but aims to reduce the project timeline effectively. Crashing is often used when project deadlines are tight and time is more critical than budget.
Reference: Project Management Institute (PMI) defines project crashing as a technique used to shorten the schedule duration for the least incremental cost by adding resources. This is detailed in the PMBOK Guide (Project Management Body of Knowledge).
Question #43
When is an organic organizational structure likely to be more successful than a mechanistic organizational structure?
- A . When a manufacturing organization has stable demand for its products.
- B . When an organization is subjected to strong political and social pressures
- C . When a manufacturer has reliable resources and suppliers.
- D . When an organization is infrequently affected by technological advances
Correct Answer: B
B
Explanation:
An organic organizational structure is more flexible and adaptive compared to a mechanistic structure. It is characterized by less formalization, decentralized decision-making, and a greater reliance on lateral communication. This type of structure is beneficial in environments that are dynamic and uncertain, such as when an organization faces strong political and social pressures. The flexibility of an organic structure allows the organization to respond more effectively to external changes and pressures.
Reference: This concept is supported by organizational theory literature, which suggests that organic structures are better suited for turbulent and changing environments where quick adaptation is necessary.
B
Explanation:
An organic organizational structure is more flexible and adaptive compared to a mechanistic structure. It is characterized by less formalization, decentralized decision-making, and a greater reliance on lateral communication. This type of structure is beneficial in environments that are dynamic and uncertain, such as when an organization faces strong political and social pressures. The flexibility of an organic structure allows the organization to respond more effectively to external changes and pressures.
Reference: This concept is supported by organizational theory literature, which suggests that organic structures are better suited for turbulent and changing environments where quick adaptation is necessary.
Question #44
According to Herzberg’s Two-Factor Theory of Motivation, which of the following factors are mentioned most often by satisfied employees9
- A . Salary and status.
- B . Responsibility and advancement
- C . Work conditions and security.
- D . Peer relationships and personal life
Correct Answer: B
B
Explanation:
Herzberg’s Two-Factor Theory, also known as the Motivation-Hygiene Theory, distinguishes between motivators and hygiene factors. Motivators, which are related to job content, lead to higher job satisfaction and are intrinsic factors such as achievement, recognition, responsibility, and advancement. In contrast, hygiene factors, which are related to job context (e.g., salary, status, work conditions), do not lead to higher satisfaction but can cause dissatisfaction if missing.
Reference: Herzberg’s research indicated that motivators like responsibility and advancement are more frequently mentioned by employees as sources of job satisfaction compared to hygiene factors like salary and status.
B
Explanation:
Herzberg’s Two-Factor Theory, also known as the Motivation-Hygiene Theory, distinguishes between motivators and hygiene factors. Motivators, which are related to job content, lead to higher job satisfaction and are intrinsic factors such as achievement, recognition, responsibility, and advancement. In contrast, hygiene factors, which are related to job context (e.g., salary, status, work conditions), do not lead to higher satisfaction but can cause dissatisfaction if missing.
Reference: Herzberg’s research indicated that motivators like responsibility and advancement are more frequently mentioned by employees as sources of job satisfaction compared to hygiene factors like salary and status.
Question #45
Which of the following is most likely to be considered a control weakness?
- A . Vendor invoice payment requests are accompanied by a purchase order and receiving report.
- B . Purchase orders are typed by the purchasing department using prenumbered forms
- C . Buyers promptly update the official vendor listing as new supplier sources become known.
- D . Department managers initiate purchase requests that must be approved by the plant superintendent
Correct Answer: C
C
Explanation:
A control weakness occurs when there is a deficiency in internal controls that could allow errors or fraud to occur. While the act of buyers promptly updating the vendor listing might seem efficient, it could bypass necessary oversight and approval processes. This could lead to unauthorized or inappropriate vendors being added, increasing the risk of fraud or favoritism. Effective internal control requires that such updates be reviewed and approved by an independent party to ensure accuracy and appropriateness.
Reference: Best practices in internal control recommend segregation of duties and independent review processes to prevent unauthorized changes and ensure control integrity.
C
Explanation:
A control weakness occurs when there is a deficiency in internal controls that could allow errors or fraud to occur. While the act of buyers promptly updating the vendor listing might seem efficient, it could bypass necessary oversight and approval processes. This could lead to unauthorized or inappropriate vendors being added, increasing the risk of fraud or favoritism. Effective internal control requires that such updates be reviewed and approved by an independent party to ensure accuracy and appropriateness.
Reference: Best practices in internal control recommend segregation of duties and independent review processes to prevent unauthorized changes and ensure control integrity.
Question #46
When determining the level of staff and resources to be dedicated to an assurance engagement, which of the following would be the most relevant to the chief audit executive?
- A . The overall adequacy of the internal audit activity’s resources
- B . The availability of guest auditors for the engagement
- C . The number of internal auditors used for the previous review of the same area.
- D . The available resources with the specific skill set required
Correct Answer: D
D
Explanation:
When determining the level of staff and resources to dedicate to an assurance engagement, the most critical factor for the chief audit executive (CAE) is ensuring that the available resources possess the specific skill sets required for the engagement. This ensures that the internal audit team can effectively address the unique challenges and risks associated with the audit.
Skill Set Relevance: The CAE must match the skills and knowledge of the audit team to the specific requirements of the audit engagement. This includes technical expertise, industry knowledge, and any specialized skills needed for the audit.
Resource Allocation: Effective allocation involves not just the number of auditors but ensuring they have the right competencies to perform the audit tasks proficiently.
Impact on Audit Quality: Allocating resources with the appropriate skill set ensures the audit is thorough and of high quality, reducing the risk of overlooking critical issues.
Reference: "Managing Internal Audit Activities," which discusses the importance of aligning audit resources with the necessary skills for specific engagements.
D
Explanation:
When determining the level of staff and resources to dedicate to an assurance engagement, the most critical factor for the chief audit executive (CAE) is ensuring that the available resources possess the specific skill sets required for the engagement. This ensures that the internal audit team can effectively address the unique challenges and risks associated with the audit.
Skill Set Relevance: The CAE must match the skills and knowledge of the audit team to the specific requirements of the audit engagement. This includes technical expertise, industry knowledge, and any specialized skills needed for the audit.
Resource Allocation: Effective allocation involves not just the number of auditors but ensuring they have the right competencies to perform the audit tasks proficiently.
Impact on Audit Quality: Allocating resources with the appropriate skill set ensures the audit is thorough and of high quality, reducing the risk of overlooking critical issues.
Reference: "Managing Internal Audit Activities," which discusses the importance of aligning audit resources with the necessary skills for specific engagements.
Question #47
Which of the following activities demonstrates an example of the chief audit executive performing residual risk assessment?
- A . Cost-benefit analysis of management not implementing a recommendation to address an observation.
- B . Inquiry of corrective action to be completed within a certain period
- C . Reporting the status of every observation for every engagement in a detailed manner.
- D . Soliciting management’s feedback after completion of the audit engagement.
Correct Answer: A
A
Explanation:
Performing a cost-benefit analysis when management decides not to implement a recommendation is a prime example of residual risk assessment. This involves evaluating the potential impacts and remaining risks associated with the decision, thereby determining the residual risk that the organization will continue to face.
Cost-Benefit Analysis: This helps in understanding the financial implications and benefits that would have been realized had the recommendation been implemented versus the risks of not implementing it.
Risk Assessment: By assessing the residual risk, the CAE can provide a clearer picture of the ongoing risks that the organization needs to manage.
Management Decision Impact: This analysis assists in making informed decisions and understanding the trade-offs involved in addressing audit observations.
Reference: "Audit and Assurance Services: An Integrated Approach," which explains residual risk assessment and the importance of cost-benefit analysis in audit recommendations.
A
Explanation:
Performing a cost-benefit analysis when management decides not to implement a recommendation is a prime example of residual risk assessment. This involves evaluating the potential impacts and remaining risks associated with the decision, thereby determining the residual risk that the organization will continue to face.
Cost-Benefit Analysis: This helps in understanding the financial implications and benefits that would have been realized had the recommendation been implemented versus the risks of not implementing it.
Risk Assessment: By assessing the residual risk, the CAE can provide a clearer picture of the ongoing risks that the organization needs to manage.
Management Decision Impact: This analysis assists in making informed decisions and understanding the trade-offs involved in addressing audit observations.
Reference: "Audit and Assurance Services: An Integrated Approach," which explains residual risk assessment and the importance of cost-benefit analysis in audit recommendations.
Question #48
According to ISO 31000, which of the following statements is correct?
- A . The board is responsible for setting the organizational attitude through tone at the top.
- B . The internal audit activity will provide assurance over operating effectiveness but not over the design of risk management activities
- C . The internal audit activity can give objective assurance on any part of the risk management framework for which it is responsible.
- D . The framework is designed to be effective for organizations no matter how small.
Correct Answer: D
D
Explanation:
According to ISO 31000, the risk management framework is scalable and applicable to organizations of all sizes, including small entities. The framework’s principles are designed to be flexible and adaptable, ensuring they can be effectively implemented regardless of the organization’s size. Scalability: The principles and guidelines of ISO 31000 can be tailored to fit the specific context, resources, and complexity of any organization, making it a universal standard.
Flexibility: The framework supports organizations in integrating risk management practices into their operations at a level that suits their size and complexity.
Effectiveness: Regardless of the organization’s size, the framework aims to enhance risk management practices and support better decision-making.
Reference: "ISO 31000: Risk Management Guidelines," which outlines the applicability and flexibility of the framework for all organizations.
D
Explanation:
According to ISO 31000, the risk management framework is scalable and applicable to organizations of all sizes, including small entities. The framework’s principles are designed to be flexible and adaptable, ensuring they can be effectively implemented regardless of the organization’s size. Scalability: The principles and guidelines of ISO 31000 can be tailored to fit the specific context, resources, and complexity of any organization, making it a universal standard.
Flexibility: The framework supports organizations in integrating risk management practices into their operations at a level that suits their size and complexity.
Effectiveness: Regardless of the organization’s size, the framework aims to enhance risk management practices and support better decision-making.
Reference: "ISO 31000: Risk Management Guidelines," which outlines the applicability and flexibility of the framework for all organizations.
Question #49
Which requirement should the chief audit executive consider when communicating results of the quality assurance and improvement program to the board of a large organization?
- A . The internal assessment results should be discussed once every five years
- B . The rating conclusions and the impact from results of the external assessment should be explained
- C . The results of the external assessment should be discussed every seven years.
- D . The qualifications and independence of the internal assessment team should be discussed
Correct Answer: B
B
Explanation:
When communicating the results of the quality assurance and improvement program (QAIP) to the board of a large organization, the chief audit executive (CAE) should explain the rating conclusions and the impact of the results from the external assessment. This ensures transparency and helps the board understand the effectiveness and areas for improvement in the internal audit function. Rating Conclusions: These provide a summary of the overall quality and performance of the internal audit function.
Impact Explanation
Discussing the impact helps the board understand how the results affect the internal audit’s ability to fulfill its responsibilities and improve its processes.
Transparency: Clear communication of these aspects helps build trust and provides a basis for informed decision-making by the board.
Reference: "Internal Audit Quality Assurance and Improvement Program," which emphasizes the importance of explaining rating conclusions and impacts to the board.
B
Explanation:
When communicating the results of the quality assurance and improvement program (QAIP) to the board of a large organization, the chief audit executive (CAE) should explain the rating conclusions and the impact of the results from the external assessment. This ensures transparency and helps the board understand the effectiveness and areas for improvement in the internal audit function. Rating Conclusions: These provide a summary of the overall quality and performance of the internal audit function.
Impact Explanation
Discussing the impact helps the board understand how the results affect the internal audit’s ability to fulfill its responsibilities and improve its processes.
Transparency: Clear communication of these aspects helps build trust and provides a basis for informed decision-making by the board.
Reference: "Internal Audit Quality Assurance and Improvement Program," which emphasizes the importance of explaining rating conclusions and impacts to the board.
Question #50
Which of the following is applicable to both a job order cost system and a process cost system’?
- A . Total manufacturing costs are determined at the end of each period.
- B . Costs are summarized in a production cost report for each department
- C . Three manufacturing cost elements are tracked: direct materials, direct labor, and manufacturing overhead.
- D . The unit cost can be calculated by dividing the total manufacturing costs for the period by the units produced during the period.
Correct Answer: C
C
Explanation:
Both job order cost systems and process cost systems track three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead. These cost elements are essential in calculating the total production cost and determining the cost per unit.
Direct Materials: The raw materials directly used in the production of goods.
Direct Labor: The wages of workers who are directly involved in manufacturing the products.
Manufacturing Overhead: Indirect costs associated with production, such as utilities, maintenance, and depreciation of equipment.
Reference: "Cost Accounting: A Managerial Emphasis," which details the tracking of manufacturing costs in different costing systems.
C
Explanation:
Both job order cost systems and process cost systems track three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead. These cost elements are essential in calculating the total production cost and determining the cost per unit.
Direct Materials: The raw materials directly used in the production of goods.
Direct Labor: The wages of workers who are directly involved in manufacturing the products.
Manufacturing Overhead: Indirect costs associated with production, such as utilities, maintenance, and depreciation of equipment.
Reference: "Cost Accounting: A Managerial Emphasis," which details the tracking of manufacturing costs in different costing systems.
Question #51
What is the primary reason that audit supervision includes approval of the engagement report?
- A . To ensure the objectives of the area under review are met
- B . To ensure senior management supports the reports conclusions
- C . To ensure report style and grammar are appropriate.
- D . To ensure report findings are substantiated
Correct Answer: D
D
Explanation:
The primary reason for audit supervision, including the approval of the engagement report, is to ensure that the findings presented in the report are substantiated by adequate and appropriate evidence. This step is crucial to maintain the credibility and reliability of the audit process and its outcomes.
Substantiation of Findings: Ensuring that findings are substantiated helps in providing a clear and defensible basis for the conclusions and recommendations made in the report.
Audit Quality: This step ensures the quality and integrity of the audit process, confirming that the evidence collected during the audit is sufficient and appropriate to support the findings. Credibility: By substantiating findings, the report gains credibility, which is essential for the stakeholders who rely on the audit report for decision-making.
Reference: "Internal Audit Standards and Procedures," which outlines the importance of evidence substantiation in audit reports.
D
Explanation:
The primary reason for audit supervision, including the approval of the engagement report, is to ensure that the findings presented in the report are substantiated by adequate and appropriate evidence. This step is crucial to maintain the credibility and reliability of the audit process and its outcomes.
Substantiation of Findings: Ensuring that findings are substantiated helps in providing a clear and defensible basis for the conclusions and recommendations made in the report.
Audit Quality: This step ensures the quality and integrity of the audit process, confirming that the evidence collected during the audit is sufficient and appropriate to support the findings. Credibility: By substantiating findings, the report gains credibility, which is essential for the stakeholders who rely on the audit report for decision-making.
Reference: "Internal Audit Standards and Procedures," which outlines the importance of evidence substantiation in audit reports.
Question #52
A multinational organization has multiple divisions that sell their products internally to other divisions.
When selling internally, which of the following transfer prices would lead to the best decisions for the organization?
- A . Full cost
- B . Full cost plus a markup.
- C . Market price of the product.
- D . Variable cost plus a markup.
Correct Answer: C
C
Explanation:
Using the market price of the product for internal transfer pricing leads to the best decisions for the organization because it reflects the true economic value of the goods or services being transferred. This method promotes efficiency and fairness within the divisions.
Economic Value: Market price reflects the true economic value, ensuring that the internal transactions are conducted at fair and competitive prices.
Performance Measurement: It provides a consistent basis for evaluating the performance of different divisions, as they are measured against external market conditions.
Resource Allocation: Helps in optimal allocation of resources by ensuring that internal transactions are economically justified and comparable to external transactions.
Reference: "Management Accounting: Principles and Practices," which discusses the advantages of using market-based transfer pricing.
C
Explanation:
Using the market price of the product for internal transfer pricing leads to the best decisions for the organization because it reflects the true economic value of the goods or services being transferred. This method promotes efficiency and fairness within the divisions.
Economic Value: Market price reflects the true economic value, ensuring that the internal transactions are conducted at fair and competitive prices.
Performance Measurement: It provides a consistent basis for evaluating the performance of different divisions, as they are measured against external market conditions.
Resource Allocation: Helps in optimal allocation of resources by ensuring that internal transactions are economically justified and comparable to external transactions.
Reference: "Management Accounting: Principles and Practices," which discusses the advantages of using market-based transfer pricing.
Question #53
The audit plan requires a review of the testing procedures used in pre-production of a large information system prior to its live launch.
If the chief audit executive (CAE) is uncertain that the current audit team has all the required knowledge to conduct the engagement, which of the following would be the most appropriate course of action for the CAE to take to preserve independence?
- A . Contract with the software vendor to provide an appropriate resource
- B . Ask for a knowledgeable resource from the IT department
- C . Make use of an external service provider.
- D . Request audit resources through the external auditor.
Correct Answer: C
C
Explanation:
If the chief audit executive (CAE) is uncertain that the current audit team has all the required knowledge to conduct the engagement, the most appropriate course of action is to use an external service provider. This helps preserve the independence and objectivity of the internal audit function. Expertise: External service providers bring specialized knowledge and expertise that may not be available within the internal team.
Independence: Utilizing an external provider ensures that the audit maintains its independence and objectivity, avoiding any potential conflicts of interest.
Quality: Ensures that the audit engagement is conducted with the highest standards, leveraging the external provider’s experience and skills.
Reference: "Internal Audit and Assurance," which outlines the benefits and considerations of engaging external service providers for specialized audit tasks.
C
Explanation:
If the chief audit executive (CAE) is uncertain that the current audit team has all the required knowledge to conduct the engagement, the most appropriate course of action is to use an external service provider. This helps preserve the independence and objectivity of the internal audit function. Expertise: External service providers bring specialized knowledge and expertise that may not be available within the internal team.
Independence: Utilizing an external provider ensures that the audit maintains its independence and objectivity, avoiding any potential conflicts of interest.
Quality: Ensures that the audit engagement is conducted with the highest standards, leveraging the external provider’s experience and skills.
Reference: "Internal Audit and Assurance," which outlines the benefits and considerations of engaging external service providers for specialized audit tasks.
Question #54
For a new board chair who has not previously served on the organization’s board, which of the following steps should first be undertaken to ensure effective leadership to the board*?
- A . Chair should learn the current organizational culture of the company.
- B . Chair should learn the current risk management system of the company
- C . Chair should determine the appropriateness of the current strategic risks.
- D . Chair should gain an understanding of the needs of key stakeholders.
Correct Answer: A
A
Explanation:
For a new board chair who has not previously served on the organization’s board, the first step should be to learn the current organizational culture of the company. Understanding the culture is crucial for effective leadership and decision-making.
Organizational Culture: It shapes the behavior, values, and practices within the company, and understanding it is essential for aligning the board’s actions with the company’s ethos.
Leadership: A deep understanding of the culture helps the chair to lead more effectively, fostering a positive environment and ensuring cohesive governance.
Strategic Alignment: Ensures that the board’s strategies and policies are in sync with the organizational culture, promoting better implementation and acceptance.
Reference: "Corporate Governance: Principles and Practices," which highlights the importance of understanding organizational culture for effective board leadership.
A
Explanation:
For a new board chair who has not previously served on the organization’s board, the first step should be to learn the current organizational culture of the company. Understanding the culture is crucial for effective leadership and decision-making.
Organizational Culture: It shapes the behavior, values, and practices within the company, and understanding it is essential for aligning the board’s actions with the company’s ethos.
Leadership: A deep understanding of the culture helps the chair to lead more effectively, fostering a positive environment and ensuring cohesive governance.
Strategic Alignment: Ensures that the board’s strategies and policies are in sync with the organizational culture, promoting better implementation and acceptance.
Reference: "Corporate Governance: Principles and Practices," which highlights the importance of understanding organizational culture for effective board leadership.
Question #55
According to IIA guidance, which of the following practices by the chief audit executive (CAE) best enhances the organizational independence of the Internal audit activity^
- A . CAE reviews and approves the annual audit plan.
- B . CAE meets privately with the CEO at least annually
- C . CAE meets privately with the board at least annually.
- D . CAE reports to the board regarding audit staff performance evaluation and compensation.
Correct Answer: C
C
Explanation:
According to IIA guidance, one of the best practices for enhancing the organizational independence of the internal audit activity is for the chief audit executive (CAE) to meet privately with the board at least annually. This practice reinforces the independence of the internal audit function by ensuring direct and unfiltered communication with the board.
Direct Communication: Private meetings with the board allow the CAE to discuss audit findings, concerns, and other important matters without management’s influence, thereby preserving the objectivity and independence of the internal audit function.
Board Support: This direct line of communication helps to secure the board’s support for the internal audit activity, which is critical for its effective functioning.
Independence: Such meetings underscore the independence of the internal audit activity from management, reinforcing its role in providing unbiased assurance.
Reference: "IIA Standards for the Professional Practice of Internal Auditing," which recommends private meetings between the CAE and the board to support independence.
C
Explanation:
According to IIA guidance, one of the best practices for enhancing the organizational independence of the internal audit activity is for the chief audit executive (CAE) to meet privately with the board at least annually. This practice reinforces the independence of the internal audit function by ensuring direct and unfiltered communication with the board.
Direct Communication: Private meetings with the board allow the CAE to discuss audit findings, concerns, and other important matters without management’s influence, thereby preserving the objectivity and independence of the internal audit function.
Board Support: This direct line of communication helps to secure the board’s support for the internal audit activity, which is critical for its effective functioning.
Independence: Such meetings underscore the independence of the internal audit activity from management, reinforcing its role in providing unbiased assurance.
Reference: "IIA Standards for the Professional Practice of Internal Auditing," which recommends private meetings between the CAE and the board to support independence.
Question #56
Which of the following is the most important determinant of the objectives and scope of assurance engagements?
The organizational chart, business objectives, and policies and procedures of the area to be reviewed
- A . The most recent risk assessment conducted by management of the area to be reviewed.
- B . The requests of operational and senior management throughout the organization.
- C . The preliminary risk assessment performed by internal auditors planning the engagement.
Correct Answer: C
C
Explanation:
The primary determinant of the objectives and scope of assurance engagements is the preliminary risk assessment performed by internal auditors. This assessment identifies the key risks associated with the area under review and helps prioritize the audit efforts based on the significance and likelihood of these risks. This approach ensures that the engagement focuses on the most critical areas, thereby adding value to the organization.
Reference: The International Standards for the Professional Practice of Internal Auditing (Standards) emphasize the importance of risk-based planning in determining the scope and objectives of audit engagements. Standard 2200 (Engagement Planning) and Standard 2210 (Engagement Objectives) provide guidance on this process.
C
Explanation:
The primary determinant of the objectives and scope of assurance engagements is the preliminary risk assessment performed by internal auditors. This assessment identifies the key risks associated with the area under review and helps prioritize the audit efforts based on the significance and likelihood of these risks. This approach ensures that the engagement focuses on the most critical areas, thereby adding value to the organization.
Reference: The International Standards for the Professional Practice of Internal Auditing (Standards) emphasize the importance of risk-based planning in determining the scope and objectives of audit engagements. Standard 2200 (Engagement Planning) and Standard 2210 (Engagement Objectives) provide guidance on this process.
Question #57
An internal auditor is asked to determine why the production line for a large manufacturing organization has been experiencing shutdowns due to unavailable parts The auditor learns that production data used for generating automatic purchases via electronic interchange is collected on personal computers connected by a local area network (LAN) Purchases are made from authorized vendors based on both the production plans for the next month and an authorized materials requirements plan (MRP) that identifies the parts needed per unit of production. The auditor suspects the shutdowns are occurring because purchasing requirements have not been updated for changes in production techniques.
Which of the following audit procedures should be used to test the auditor’s theory?
- A . Compare purchase orders generated from test data Input into the LAN with purchase orders generated from production data for the most recent period.
- B . Develop a report of excess inventory and compare the inventory with current production volume.
- C . Compare the parts needed based on current production estimates and the MRP for the revised production techniques with the purchase orders generated from the system for the same period
- D . Select a sample of production estimates and MRPs for several periods and trace them into the system to determine that input is accurate
Correct Answer: C
C
Explanation:
To test the theory that shutdowns are due to outdated purchasing requirements, the auditor should compare the parts needed according to the revised production techniques with the purchase orders generated. This comparison will reveal whether the system has been updated to reflect changes in production techniques, thereby identifying any discrepancies causing the unavailability of parts.
Reference: The practice of matching current production estimates with the materials requirements plan (MRP) aligns with standard audit procedures for validating the accuracy and relevance of system-generated purchase orders.
C
Explanation:
To test the theory that shutdowns are due to outdated purchasing requirements, the auditor should compare the parts needed according to the revised production techniques with the purchase orders generated. This comparison will reveal whether the system has been updated to reflect changes in production techniques, thereby identifying any discrepancies causing the unavailability of parts.
Reference: The practice of matching current production estimates with the materials requirements plan (MRP) aligns with standard audit procedures for validating the accuracy and relevance of system-generated purchase orders.
Question #58
In an assurance engagement focused on the adequacy of organization wide risk management practices, which of the following best describes a primary area of interest for the engagement?
- A . The effectiveness of process-level and transaction-level controls.
- B . Conflicts of interest within the organizational structure of the senior management.
- C . The alignment of management decisions with the level of risk the organization is willing to accept.
- D . The actions of upper management in response to the internal audit Atchley’s reporting
Correct Answer: C
C
Explanation:
Understanding the Engagement Scope: The primary area of interest in an assurance engagement focused on the adequacy of organization-wide risk management practices is to ensure that risk management is effectively integrated into the organization’s decision-making processes. This involves evaluating whether management decisions are aligned with the organization’s risk appetite, which is the amount of risk the organization is willing to accept in pursuit of its objectives. Key Considerations:
Effectiveness of Risk Management Framework: Ensuring that the risk management framework is robust and effectively implemented across the organization.
Risk Appetite Alignment: Assessing if the decisions made by management are within the boundaries set by the organization’s risk appetite statement.
Strategic Objectives: Evaluating if the risk management practices support the achievement of the organization’s strategic objectives.
IIA Standards: According to the IIA’s International Standards for the Professional Practice of Internal Auditing, internal auditors must evaluate the effectiveness and contribute to the improvement of risk management processes (Standard 2120 – Risk Management).
Reference: The alignment of management decisions with the level of risk the organization is willing to accept ensures that the organization does not take on more risk than it is prepared to handle, thereby protecting its assets and ensuring long-term sustainability.
Effective risk management practices help in identifying, assessing, and mitigating risks, which is crucial for the overall governance and operational effectiveness of the organization
C
Explanation:
Understanding the Engagement Scope: The primary area of interest in an assurance engagement focused on the adequacy of organization-wide risk management practices is to ensure that risk management is effectively integrated into the organization’s decision-making processes. This involves evaluating whether management decisions are aligned with the organization’s risk appetite, which is the amount of risk the organization is willing to accept in pursuit of its objectives. Key Considerations:
Effectiveness of Risk Management Framework: Ensuring that the risk management framework is robust and effectively implemented across the organization.
Risk Appetite Alignment: Assessing if the decisions made by management are within the boundaries set by the organization’s risk appetite statement.
Strategic Objectives: Evaluating if the risk management practices support the achievement of the organization’s strategic objectives.
IIA Standards: According to the IIA’s International Standards for the Professional Practice of Internal Auditing, internal auditors must evaluate the effectiveness and contribute to the improvement of risk management processes (Standard 2120 – Risk Management).
Reference: The alignment of management decisions with the level of risk the organization is willing to accept ensures that the organization does not take on more risk than it is prepared to handle, thereby protecting its assets and ensuring long-term sustainability.
Effective risk management practices help in identifying, assessing, and mitigating risks, which is crucial for the overall governance and operational effectiveness of the organization
Question #59
Which of the following actions should the internal audit activity take during an audit engagement when examining the effectiveness of risk management processes?
- A . Evaluate how the organization manages fraud risk.
- B . Establish procedures for improving risk management processes.
- C . Ensure risk responses are aligned with industry standards
- D . Verify that organizational objectives are aligned with each departments objectives.
Correct Answer: A
A
Explanation:
Risk Management Evaluation: During an audit engagement examining the effectiveness of risk management processes, the internal audit activity should focus on evaluating how the organization manages various types of risks, including fraud risk.
Fraud Risk Management: This involves assessing the organization’s mechanisms for identifying, assessing, and responding to fraud risks. It also includes reviewing the effectiveness of controls in place to prevent and detect fraudulent activities.
IIA Standards: Standard 2120 C Risk Management emphasizes that internal auditors must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk.
Comprehensive Approach:
Risk Assessment: Ensuring that the organization conducts thorough risk assessments to identify potential fraud risks.
Control Environment: Evaluating the control environment to ensure it supports ethical behavior and reduces opportunities for fraud.
Fraud Prevention and Detection: Reviewing the policies and procedures in place to prevent and detect fraud, including whistleblower mechanisms and fraud response plans.
Reference: Internal auditors play a crucial role in assessing the adequacy of fraud risk management, which is integral to the overall risk management process. By evaluating fraud risk management, auditors can provide assurance that the organization is effectively mitigating fraud risks.
A
Explanation:
Risk Management Evaluation: During an audit engagement examining the effectiveness of risk management processes, the internal audit activity should focus on evaluating how the organization manages various types of risks, including fraud risk.
Fraud Risk Management: This involves assessing the organization’s mechanisms for identifying, assessing, and responding to fraud risks. It also includes reviewing the effectiveness of controls in place to prevent and detect fraudulent activities.
IIA Standards: Standard 2120 C Risk Management emphasizes that internal auditors must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk.
Comprehensive Approach:
Risk Assessment: Ensuring that the organization conducts thorough risk assessments to identify potential fraud risks.
Control Environment: Evaluating the control environment to ensure it supports ethical behavior and reduces opportunities for fraud.
Fraud Prevention and Detection: Reviewing the policies and procedures in place to prevent and detect fraud, including whistleblower mechanisms and fraud response plans.
Reference: Internal auditors play a crucial role in assessing the adequacy of fraud risk management, which is integral to the overall risk management process. By evaluating fraud risk management, auditors can provide assurance that the organization is effectively mitigating fraud risks.
Question #60
A regional entertainment organization is in the process of developing a corporate social responsibility (CSR) policy. Management invites ideas from employees when developing the CSR policy.
Which of the following is the most appropriate idea to include?
- A . Management has overall responsibility for the effectiveness of governance, risk management, and internal control processes associated with CSR.
- B . The board Is responsible for ensuring that CSR objectives are established, risks are managed, performance is measured, and activities are appropriately monitored and reported
- C . Management is responsible for ensuring that the organization’s CSR principles are communicated, understood, and integrated into decision-making processes.
- D . Generally, CSR activities are limited to the management of the organization, thus, employees do not have a responsibility for ensuring the success of CSR objectives.
Correct Answer: C
C
Explanation:
CSR Policy Development: In developing a Corporate Social Responsibility (CSR) policy, it is important that the principles of CSR are communicated and understood throughout the organization.
Integration into Decision-Making: Management’s responsibility includes ensuring that CSR principles are not only communicated but also integrated into the organization’s decision-making processes at all levels. This ensures that CSR is part of the organizational culture and operational strategies.
Board’s Role: While the board has a role in overseeing and ensuring that CSR objectives are established and risks are managed, the day-to-day responsibility for integrating CSR into business operations lies with management.
IIA Guidance: According to IIA guidance, internal auditors should evaluate the design, implementation, and effectiveness of the organization’s ethics-related objectives, programs, and activities, which include CSR initiatives (Standard 2110 – Governance).
Reference: Effective communication and integration of CSR principles ensure that the organization operates in a socially responsible manner, aligning its business practices with societal expectations and contributing to sustainable development.
C
Explanation:
CSR Policy Development: In developing a Corporate Social Responsibility (CSR) policy, it is important that the principles of CSR are communicated and understood throughout the organization.
Integration into Decision-Making: Management’s responsibility includes ensuring that CSR principles are not only communicated but also integrated into the organization’s decision-making processes at all levels. This ensures that CSR is part of the organizational culture and operational strategies.
Board’s Role: While the board has a role in overseeing and ensuring that CSR objectives are established and risks are managed, the day-to-day responsibility for integrating CSR into business operations lies with management.
IIA Guidance: According to IIA guidance, internal auditors should evaluate the design, implementation, and effectiveness of the organization’s ethics-related objectives, programs, and activities, which include CSR initiatives (Standard 2110 – Governance).
Reference: Effective communication and integration of CSR principles ensure that the organization operates in a socially responsible manner, aligning its business practices with societal expectations and contributing to sustainable development.
Question #61
According to IIA guidance, which of the following would be the best first step to manage risk when a third party is overseeing the organization’s network and data’?
- A . Creating a comprehensive reporting system for vendors to demonstrate their ongoing due diligence in network operations.
- B . Drafting a strong contract that requires regular vendor control reports and a right-to-audit clause
- C . Applying administrative privileges to ensure right-to-access controls are appropriate
- D . Creating a standing cybersecurity committee to identify and manage risks related to data security.
Correct Answer: B
B
Explanation:
Managing Third-Party Risk: When a third party oversees the organization’s network and data, the primary concern is to manage and mitigate risks associated with outsourcing critical functions.
Strong Contract Provisions: Drafting a strong contract that includes specific provisions such as regular vendor control reports and a right-to-audit clause is essential. These provisions ensure that the organization maintains oversight and control over the third party’s activities.
IIA Standards: Standard 2201 C Planning Considerations requires that internal auditors consider the organization’s objectives and the means by which they are achieved, including the role of third parties.
Contract Management:
Control Reports: Regular control reports from the vendor provide insights into their performance and compliance with agreed-upon standards.
Right-to-Audit Clause: This clause allows the organization to periodically audit the third party to ensure compliance with contractual obligations and to assess the effectiveness of their control environment.
Reference: Ensuring that third-party vendors adhere to the same standards of risk management and control as the organization helps in mitigating risks related to data security and network management.
B
Explanation:
Managing Third-Party Risk: When a third party oversees the organization’s network and data, the primary concern is to manage and mitigate risks associated with outsourcing critical functions.
Strong Contract Provisions: Drafting a strong contract that includes specific provisions such as regular vendor control reports and a right-to-audit clause is essential. These provisions ensure that the organization maintains oversight and control over the third party’s activities.
IIA Standards: Standard 2201 C Planning Considerations requires that internal auditors consider the organization’s objectives and the means by which they are achieved, including the role of third parties.
Contract Management:
Control Reports: Regular control reports from the vendor provide insights into their performance and compliance with agreed-upon standards.
Right-to-Audit Clause: This clause allows the organization to periodically audit the third party to ensure compliance with contractual obligations and to assess the effectiveness of their control environment.
Reference: Ensuring that third-party vendors adhere to the same standards of risk management and control as the organization helps in mitigating risks related to data security and network management.
Question #62
Which of the following activities Is most likely to require a fraud specialist to supplement the knowledge and skills of the internal audit activity?
- A . Planning an engagement of the area in which fraud is suspected.
- B . Employing audit tests to detect fraud
- C . Interrogating a suspected fraudster.
- D . Completing a process review to improve controls to prevent fraud.
Correct Answer: C
C
Explanation:
Specialized Knowledge: Interrogating a suspected fraudster requires specialized knowledge and skills that go beyond the typical expertise of internal auditors. This includes understanding interrogation techniques, legal implications, and psychological aspects.
Fraud Specialist: A fraud specialist is trained in conducting investigations, including interrogations, and can provide valuable insights and evidence in cases of suspected fraud.
IIA Standards: According to Standard 1210.A2, internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.
Collaborative Approach:
Fraud Investigations: Engaging a fraud specialist ensures that the investigation is conducted thoroughly and professionally, adhering to legal and ethical standards.
Support to Internal Audit: The fraud specialist can provide support and guidance to the internal audit activity, enhancing the overall effectiveness of the fraud investigation.
Reference: Employing a fraud specialist to interrogate a suspected fraudster ensures that the investigation is handled with the necessary expertise and legal compliance, thereby increasing the chances of uncovering the truth and taking appropriate actions.
C
Explanation:
Specialized Knowledge: Interrogating a suspected fraudster requires specialized knowledge and skills that go beyond the typical expertise of internal auditors. This includes understanding interrogation techniques, legal implications, and psychological aspects.
Fraud Specialist: A fraud specialist is trained in conducting investigations, including interrogations, and can provide valuable insights and evidence in cases of suspected fraud.
IIA Standards: According to Standard 1210.A2, internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.
Collaborative Approach:
Fraud Investigations: Engaging a fraud specialist ensures that the investigation is conducted thoroughly and professionally, adhering to legal and ethical standards.
Support to Internal Audit: The fraud specialist can provide support and guidance to the internal audit activity, enhancing the overall effectiveness of the fraud investigation.
Reference: Employing a fraud specialist to interrogate a suspected fraudster ensures that the investigation is handled with the necessary expertise and legal compliance, thereby increasing the chances of uncovering the truth and taking appropriate actions.