Question #1
Which of the following is the most effective way for internal auditors to determine whether ethical values are followed throughout the organization?
- A . Review the organization’s ethical value structure and reporting procedures.
- B . Review what the organization considers to be ethical behavior, such as the employee code of conduct.
- C . Review employee survey responses and follow up on those that suggest weaknesses in the ethical climate.
- D . Review the organization’s records to ensure all employees have signed statements that they will follow ethical practices.
Correct Answer: C
C
Explanation:
To effectively determine whether ethical values are followed throughout an organization, internal auditors should review employee survey responses and follow up on those that suggest weaknesses in the ethical climate. This approach allows auditors to gather firsthand insights from employees about the actual ethical environment, which can be more telling than formal documentation or compliance with written policies alone. It provides a direct measure of the ethical culture as experienced and perceived by the employees themselves.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing; Guidance on assessing organizational culture.
C
Explanation:
To effectively determine whether ethical values are followed throughout an organization, internal auditors should review employee survey responses and follow up on those that suggest weaknesses in the ethical climate. This approach allows auditors to gather firsthand insights from employees about the actual ethical environment, which can be more telling than formal documentation or compliance with written policies alone. It provides a direct measure of the ethical culture as experienced and perceived by the employees themselves.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing; Guidance on assessing organizational culture.
Question #2
Which of the following best describes the Standards requirement for collective proficiency of the internal audit activity?
- A . The internal audit activity must have auditors on staff who collectively possess all of the competencies required to fulfill the internal audit plan,
- B . All internal auditors on staff should possess the knowledge, skills, and competencies needed to perform any assurance engagement on the audit plan.
- C . The internal audit activity must possess or obtain the competencies needed to carry out their professional responsibilities, including providing relevant advice and recommendations.
- D . Internal auditors collectively are responsible for ensuring that the internal audit activity has the competencies required to fulfill the internal audit plan.
Correct Answer: A
A
Explanation:
According to the IIA’s International Standards for the Professional Practice of Internal Auditing, the internal audit activity must ensure that auditors collectively possess all of the competencies necessary to fulfill the internal audit plan. This standard recognizes that not every auditor will have every skill needed for every engagement, but collectively, the team should cover all necessary competencies.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
A
Explanation:
According to the IIA’s International Standards for the Professional Practice of Internal Auditing, the internal audit activity must ensure that auditors collectively possess all of the competencies necessary to fulfill the internal audit plan. This standard recognizes that not every auditor will have every skill needed for every engagement, but collectively, the team should cover all necessary competencies.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #3
A snow removal company is conducting a scenario planning exercise where participating employees consider the potential impacts of a significant reduction in annual snowfall for the coming winter.
Which of the following best describes this type of risk?
- A . Residual.
- B . Net.
- C . Inherent.
- D . Accepted.
Correct Answer: C
C
Explanation:
Inherent risk is the exposure to loss in an organization that arises from the nature of its activities without taking into account any actions the organization takes to alter that risk level. A scenario planning exercise that considers a significant reduction in annual snowfall addresses inherent risk, as it relates to potential impacts that naturally arise from changes in weather patterns, which are intrinsic to the business of a snow removal company.
Reference: Risk management terminology and frameworks.
C
Explanation:
Inherent risk is the exposure to loss in an organization that arises from the nature of its activities without taking into account any actions the organization takes to alter that risk level. A scenario planning exercise that considers a significant reduction in annual snowfall addresses inherent risk, as it relates to potential impacts that naturally arise from changes in weather patterns, which are intrinsic to the business of a snow removal company.
Reference: Risk management terminology and frameworks.
Question #4
An internal auditor is performing testing to gather evidence regarding an organization’s inventory account balance and is mindful of the possibility that the sample used might support the conclusion that the recorded account balance is not materially misstated when, in fact, it is.
The auditor’s concern best describes which of the following risks?
- A . incorrect rejection risk
- B . Incorrect acceptance risk.
- C . Tolerable misstatement risk.
- D . Anticipated misstatement risk
Correct Answer: B
B
Explanation:
Incorrect acceptance risk refers to the risk that an auditor concludes that a financial statement assertion is not materially misstated when, in reality, it is. This type of risk is particularly relevant when performing substantive testing on balances such as inventory, where the auditor uses sampling to draw conclusions about the entire account balance.
Reference: Auditing standards regarding audit sampling and risk assessment, including the concepts of Type I and Type II errors in auditing.
B
Explanation:
Incorrect acceptance risk refers to the risk that an auditor concludes that a financial statement assertion is not materially misstated when, in reality, it is. This type of risk is particularly relevant when performing substantive testing on balances such as inventory, where the auditor uses sampling to draw conclusions about the entire account balance.
Reference: Auditing standards regarding audit sampling and risk assessment, including the concepts of Type I and Type II errors in auditing.
Question #5
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 most effective way to ensure that a newly formed internal audit activity remains free from undue management influence is to establish the internal audit activity’s position within the organization through an audit charter. According to the Institute of Internal Auditors (IIA) standards, the audit charter should define the purpose, authority, and responsibility of the internal audit activity, clearly outlining the scope of internal auditing within the organization. This foundational document formalizes the internal audit function’s role and provides a framework that supports its operational independence.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
D
Explanation:
The most effective way to ensure that a newly formed internal audit activity remains free from undue management influence is to establish the internal audit activity’s position within the organization through an audit charter. According to the Institute of Internal Auditors (IIA) standards, the audit charter should define the purpose, authority, and responsibility of the internal audit activity, clearly outlining the scope of internal auditing within the organization. This foundational document formalizes the internal audit function’s role and provides a framework that supports its operational independence.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #6
Which of the following statements is true with regard to services provided by the internal audit activity?
- A . For consulting engagements, internal auditors do not need to be alert to control issues.
- B . Assurance and consulting services have similar objectives.
- C . Internal auditors may not perform assurance and consulting roles at the same time.
- D . Both assurance and consulting engagements require a final engagement report
Correct Answer: D
D
Explanation:
According to IIA standards, both assurance and consulting engagements require a final engagement report. This report communicates the results and recommendations of the internal audit activity’s findings, regardless of the type of engagement. The final engagement report is critical for ensuring transparency and accountability in both assurance and consulting services, providing essential feedback to stakeholders.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
D
Explanation:
According to IIA standards, both assurance and consulting engagements require a final engagement report. This report communicates the results and recommendations of the internal audit activity’s findings, regardless of the type of engagement. The final engagement report is critical for ensuring transparency and accountability in both assurance and consulting services, providing essential feedback to stakeholders.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #7
The internal audit activity completed its analysis of sample transactions to determine occurrences of double billings According to If A guidance, which of the following best demonstrates that internal auditors exercised due professional care during the review?
- A . Internal auditors found no instances of double billing and concluded there were no significant risks in this area.
- B . Internal auditors documented the scope and methodology of the data testing.
- C . Internal auditors discussed with management how data is safeguarded.
- D . Internal auditors received formal performance feedback from the engagement supervisor.
Correct Answer: B
B
Explanation:
According to IIA guidance, demonstrating due professional care includes adequately planning and supervising the engagement, and documenting the scope and methodology of the audit procedures performed. Option B best demonstrates that internal auditors exercised due professional care by documenting the scope and methodology of the data testing, which is essential for ensuring the engagement’s objectives are achieved, and any conclusions drawn are well-supported.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
B
Explanation:
According to IIA guidance, demonstrating due professional care includes adequately planning and supervising the engagement, and documenting the scope and methodology of the audit procedures performed. Option B best demonstrates that internal auditors exercised due professional care by documenting the scope and methodology of the data testing, which is essential for ensuring the engagement’s objectives are achieved, and any conclusions drawn are well-supported.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #8
While auditing an organization’s credit approval process, an internal auditor learns that the organization has made a large loan to another auditor’s relative.
Which course of action should the auditor take?
- A . Proceed with the audit engagement, but do not include the relative’s information.
- B . Have the chief audit executive and management determine whether the auditor should continue with the audit engagement.
- C . Disclose in the engagement final communication that the relative is a customer.
- D . Immediately withdraw from the audit engagement.
Correct Answer: B
B
Explanation:
When faced with a potential conflict of interest, as in the case where an internal auditor learns of a large loan made to another auditor’s relative, the appropriate action is to refer the matter to higher authorities within the organization. Option B, having the chief audit executive and management determine whether the auditor should continue with the audit engagement, ensures that any potential conflict is managed properly and maintains the integrity of the audit process.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
B
Explanation:
When faced with a potential conflict of interest, as in the case where an internal auditor learns of a large loan made to another auditor’s relative, the appropriate action is to refer the matter to higher authorities within the organization. Option B, having the chief audit executive and management determine whether the auditor should continue with the audit engagement, ensures that any potential conflict is managed properly and maintains the integrity of the audit process.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #9
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: D
D
Explanation:
A control weakness in the context of internal control over purchasing might be seen in the process where department managers initiate purchase requests that must be approved by the plant superintendent. If the approval process is not robust, this could lead to conflicts of interest or lack of independent review, especially if the superintendent has significant influence or control, and there are no further checks or balances. This situation could potentially allow for inappropriate approvals without sufficient oversight, representing a control weakness.
Reference: Internal control frameworks, such as COSO (Committee of Sponsoring Organizations of the Treadway Commission).
D
Explanation:
A control weakness in the context of internal control over purchasing might be seen in the process where department managers initiate purchase requests that must be approved by the plant superintendent. If the approval process is not robust, this could lead to conflicts of interest or lack of independent review, especially if the superintendent has significant influence or control, and there are no further checks or balances. This situation could potentially allow for inappropriate approvals without sufficient oversight, representing a control weakness.
Reference: Internal control frameworks, such as COSO (Committee of Sponsoring Organizations of the Treadway Commission).
Question #10
An internal audit activity includes in its audit reports the assertion that its work is performed in conformance with the International Standards for the Professional Practice of Internal Auditing (Standards). A recent external quality assessment concluded that the internal audit activity had substantial deficiencies that impact its overall operations.
According to IIA guidance, which of the following is the most appropriate action for issuing future audit reports?
- A . Refrain from indicating that the internal audit activity operates in conformance with the Standards until the chief audit executive confirms that the internal audit activity
has addressed all areas of nonconformance and the audit committee has been notified. - B . Refrain from indicating that the internal audit activity operates in conformance with the Standards until another external assessment confirms that the significant areas of nonconformance have been addressed.
- C . Indicate that the internal audit activity operates in partial conformance with the Standards t as the internal audit activity has a quality assurance and improvement program in place to address deficiencies and has met the requirement for conducting an external assessment.
- D . Update and reissue previous audit reports, removing the assertion that the internal audit activity operates in conformance with the Standards, and distribute them to ail parties who received the original reports.
Correct Answer: A
A
Explanation:
According to IIA guidance, the internal audit activity should refrain from indicating conformance with the Standards until all areas of nonconformance identified in a quality assessment have been addressed and the chief audit executive has confirmed this to the audit committee. This ensures that the internal audit activity only claims conformance when it fully meets the Standards, maintaining the credibility of the audit function.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, and guidance on external quality assessments.
A
Explanation:
According to IIA guidance, the internal audit activity should refrain from indicating conformance with the Standards until all areas of nonconformance identified in a quality assessment have been addressed and the chief audit executive has confirmed this to the audit committee. This ensures that the internal audit activity only claims conformance when it fully meets the Standards, maintaining the credibility of the audit function.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, and guidance on external quality assessments.
Question #11
Which of the following types of policies best helps promote objectivity in the interna! 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:
Policies that provide examples of inappropriate business relationships best promote objectivity in the internal audit activity’s work by explicitly defining what constitutes a conflict of interest and guiding auditors on how to avoid situations that might impair their objectivity. This clear delineation helps maintain the independence and unbiased perspective necessary for effective auditing.
Reference: Institute of Internal Auditors (IIA) – Code of Ethics and Professional Standards; literature on maintaining objectivity in internal auditing.
D
Explanation:
Policies that provide examples of inappropriate business relationships best promote objectivity in the internal audit activity’s work by explicitly defining what constitutes a conflict of interest and guiding auditors on how to avoid situations that might impair their objectivity. This clear delineation helps maintain the independence and unbiased perspective necessary for effective auditing.
Reference: Institute of Internal Auditors (IIA) – Code of Ethics and Professional Standards; literature on maintaining objectivity in internal auditing.
Question #12
According to NA guidance, which of the following conditions would enhance the independence of the internal audit activity?
- A . The organizational culture rewards critical and objective thinking.
- B . The quality of work performed by the internal audit activity is periodically reviewed,
- C . The organization establishes effective governing body oversight,
- D . Audit assignments are rotated among internal audit staff
Correct Answer: C
C
Explanation:
Establishing effective governing body oversight enhances the independence of the internal audit activity by providing a high-level check on the audit function, ensuring that it operates without undue influence from management. This helps maintain the autonomy necessary for the internal audit to effectively challenge and assess management practices and controls.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing; governance frameworks.
C
Explanation:
Establishing effective governing body oversight enhances the independence of the internal audit activity by providing a high-level check on the audit function, ensuring that it operates without undue influence from management. This helps maintain the autonomy necessary for the internal audit to effectively challenge and assess management practices and controls.
Reference: Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing; governance frameworks.
Question #13
A series of incidents over the past year reveals several members of senior management possess a limited understanding of the concept and impact of fraud.
Which of the following would be the most effective way to approach this issue?
- A . The board should ask the internal audit activity to perform additional assurance engagements.
- B . A comprehensive fraud risk assessment and management program should be carried out.
- C . The organization should conduct training sessions on fraud, which should be attended by senior management and staff.
- D . Anti-fraud and whistleblowing policies should be implemented and their importance should be clearly stated.
Correct Answer: C
C
Explanation:
Conducting training sessions on fraud that should be attended by senior management and staff is the most effective approach to address the issue of senior management’s limited understanding of fraud. Training provides direct education on what constitutes fraud, how it impacts the organization, and the role of management in preventing and detecting fraud, thereby increasing awareness and reducing the risk of fraud.
Reference: Fraud risk management guidelines; IIA guidance on fraud awareness and training.
C
Explanation:
Conducting training sessions on fraud that should be attended by senior management and staff is the most effective approach to address the issue of senior management’s limited understanding of fraud. Training provides direct education on what constitutes fraud, how it impacts the organization, and the role of management in preventing and detecting fraud, thereby increasing awareness and reducing the risk of fraud.
Reference: Fraud risk management guidelines; IIA guidance on fraud awareness and training.
Question #14
In which of the following situations may the internal audit activity report conformance with the Standards?
- A . An internal audit activity has been in existence at least five years and has not completed an
external assessment, - B . An internal auditor was assigned to an audit engagement but did not meet individual objectivity requirements.
- C . The internal audit activity prepared an internal audit plan that was not risk-based.
- D . The internal audit activity has been in existence fewer than five years, but periodic self-assessments were conducted.
Correct Answer: D
D
Explanation:
According to the Standards set by the Institute of Internal Auditors (IIA), an internal audit activity may report conformance with the Standards even if it has not been in existence for more than five years provided that it has conducted periodic self-assessments and meets the other necessary criteria of the IIA standards. External assessments are required at least once every five years, but conformance can still be reported if internal assessments are conducted in the interim.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
D
Explanation:
According to the Standards set by the Institute of Internal Auditors (IIA), an internal audit activity may report conformance with the Standards even if it has not been in existence for more than five years provided that it has conducted periodic self-assessments and meets the other necessary criteria of the IIA standards. External assessments are required at least once every five years, but conformance can still be reported if internal assessments are conducted in the interim.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #15
A chief audit executive (CAE) identifies that the internal audit activity lacks a necessary skill to perform a management request for a consulting engagement.
According to IIA guidance, which of the following is the most appropriate action the CAE should take regarding the request?
- A . Assign the engagement to a more senior internal auditor.
- B . Decline the engagement request.
- C . Allow the internal auditors to acquire the needed skills while performing the engagement.
- D . Supervise the assigned internal auditors throughout the engagement.
Correct Answer: B
B
Explanation:
When an internal audit activity lacks the necessary skills to perform a requested consulting engagement, the most appropriate action according to IIA guidance is for the Chief Audit Executive (CAE) to decline the engagement request. This decision ensures the integrity and quality of the audit service, adhering to the standard of only undertaking work where the internal audit staff possesses or has the ability to obtain the necessary knowledge and skills.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
B
Explanation:
When an internal audit activity lacks the necessary skills to perform a requested consulting engagement, the most appropriate action according to IIA guidance is for the Chief Audit Executive (CAE) to decline the engagement request. This decision ensures the integrity and quality of the audit service, adhering to the standard of only undertaking work where the internal audit staff possesses or has the ability to obtain the necessary knowledge and skills.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #16
Which of the following statements best demonstrates application of due professional care during an assurance engagement?
- A . The engagement detected irregularities and noncompliance instances.
- B . The engagement supervisor had no significant comments in the supervisory review.
- C . The audit procedures were systematically planned, executed, and documented.
- D . The engagement objectives were designed to assist the engagement client.
Correct Answer: C
C
Explanation:
Demonstrating due professional care during an assurance engagement, according to IIA standards, includes systematically planning, executing, and documenting audit procedures. This ensures that all aspects of the engagement are covered comprehensively and that findings and conclusions are well-supported and credible. This approach aligns with the IIA’s definition of due professional care, which emphasizes thoroughness and accuracy in the audit process.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
C
Explanation:
Demonstrating due professional care during an assurance engagement, according to IIA standards, includes systematically planning, executing, and documenting audit procedures. This ensures that all aspects of the engagement are covered comprehensively and that findings and conclusions are well-supported and credible. This approach aligns with the IIA’s definition of due professional care, which emphasizes thoroughness and accuracy in the audit process.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #17
Which of the following best describes the risk contained in an initial public offering for a new stock?
- A . Residual risk.
- B . Net risk.
- C . Inherent risk.
- D . Underlying risk.
Correct Answer: C
C
Explanation:
In the context of an initial public offering (IPO), the best description of the risk involved is "inherent risk." Inherent risk refers to the exposure inherent in the company’s operations or industry without considering the effectiveness of any risk management measures. An IPO’s inherent risks include market volatility, investor sentiment, regulatory changes, and economic factors that could affect the offering’s success.
Reference: Financial risk management literature and common usage in financial audits.
C
Explanation:
In the context of an initial public offering (IPO), the best description of the risk involved is "inherent risk." Inherent risk refers to the exposure inherent in the company’s operations or industry without considering the effectiveness of any risk management measures. An IPO’s inherent risks include market volatility, investor sentiment, regulatory changes, and economic factors that could affect the offering’s success.
Reference: Financial risk management literature and common usage in financial audits.
Question #18
An internal auditor is updating the risk register for risks identified during a recent organizational risk assessment.
According to the Standards, which of the following would the auditor include in the risk register?
- A . Management’s acceptance of inadequate controls for cybersecurity risk.
- B . Discussions with senior management relating to a new revenue stream.
- C . Mitigating controls implemented by the engagement supervisor
- D . Project manager planned hours versus time spent for all prior year projects
Correct Answer: A
A
Explanation:
According to the Standards, the risk register should include information about identified risks and how these are being managed. Management’s acceptance of inadequate controls for a significant risk such as cybersecurity should be documented as it represents a known risk exposure that the organization has chosen to accept. This helps ensure transparency and informs subsequent audit activities and decisions.
Reference: International Standards for the Professional Practice of Internal Auditing, specifically on risk assessment and management.
A
Explanation:
According to the Standards, the risk register should include information about identified risks and how these are being managed. Management’s acceptance of inadequate controls for a significant risk such as cybersecurity should be documented as it represents a known risk exposure that the organization has chosen to accept. This helps ensure transparency and informs subsequent audit activities and decisions.
Reference: International Standards for the Professional Practice of Internal Auditing, specifically on risk assessment and management.
Question #19
Which of the following would be considered a monitoring activity in organization wide risk management?
- A . Validate the results of management’s self-assessment.
- B . Perform reviews of personnel.
- C . Maintain rigorous and comprehensive documentation.
- D . Obtain authorizations and signatures.
Correct Answer: A
A
Explanation:
A monitoring activity in organization-wide risk management would include validating the results of management’s self-assessment. This activity ensures that risk management processes are effective and that self-assessments accurately reflect the risk status, aligning with the role of internal audit in providing assurance over risk management activities.
Reference: COSO framework for risk management; IIA guidance on risk management.
A
Explanation:
A monitoring activity in organization-wide risk management would include validating the results of management’s self-assessment. This activity ensures that risk management processes are effective and that self-assessments accurately reflect the risk status, aligning with the role of internal audit in providing assurance over risk management activities.
Reference: COSO framework for risk management; IIA guidance on risk management.
Question #20
Which of the following documents are internal auditors most likely to be asked to sign as a demonstration of due professional care?
A description of their job responsibilities,
- A . A non-disclosure agreement.
- B . An annual declaration of commitment to
- C . The IIA s Code of Ethics.
- D . The internal audit charter.
Correct Answer: B
B
Explanation:
Internal auditors are most likely to be asked to sign a non-disclosure agreement as a demonstration of due professional care. This helps ensure the confidentiality of information encountered during audits, maintaining integrity and trustworthiness in their professional conduct.
Reference: IIA Code of Ethics and standards on confidentiality and professional conduct.
B
Explanation:
Internal auditors are most likely to be asked to sign a non-disclosure agreement as a demonstration of due professional care. This helps ensure the confidentiality of information encountered during audits, maintaining integrity and trustworthiness in their professional conduct.
Reference: IIA Code of Ethics and standards on confidentiality and professional conduct.
Question #21
Which of the following processes does the board manage to ensure adequate governance?
- A . Establish and measure performance objectives for the internal audit activity.
- B . Select board members with necessary knowledge and skills.
- C . Develop, approve, and execute the strategic plan of the organization.
- D . Develop strategies to mitigate the risks to achieving the organization’s objectives
Correct Answer: C
C
Explanation:
The board manages the process of developing, approving, and executing the strategic plan of the organization to ensure adequate governance. This responsibility includes aligning the strategic plan with the organization’s goals and monitoring its execution, which is a key governance role.
Reference: Corporate governance principles; IIA guidance on the role of the board in strategic planning.
C
Explanation:
The board manages the process of developing, approving, and executing the strategic plan of the organization to ensure adequate governance. This responsibility includes aligning the strategic plan with the organization’s goals and monitoring its execution, which is a key governance role.
Reference: Corporate governance principles; IIA guidance on the role of the board in strategic planning.
Question #22
Which of the following best describes the internal audit activity’s contribution to the implementation of the risk management framework?
- A . Internal audit identifies key risk areas during assurance reviews and provides audit findings.
- B . Internal audit assists with the prioritization of identified risks.
- C . Internal audit participates in setting the risk appetite.
- D . Internal audit takes part in the design of risk mitigation measures.
Correct Answer: B
B
Explanation:
The internal audit activity contributes to the implementation of the risk management framework by assisting with the prioritization of identified risks. This is done through the provision of assurance and consulting services that help the organization to understand which risks are most significant and how they should be addressed based on their impact and likelihood.
Reference: IIA Performance Standards on risk management; literature on internal audit’s role in risk assessment and management.
B
Explanation:
The internal audit activity contributes to the implementation of the risk management framework by assisting with the prioritization of identified risks. This is done through the provision of assurance and consulting services that help the organization to understand which risks are most significant and how they should be addressed based on their impact and likelihood.
Reference: IIA Performance Standards on risk management; literature on internal audit’s role in risk assessment and management.
Question #23
During a review of employee benefits, a staff internal auditor observed an ambiguity in the incentive compensation policy. If reported, it could negatively impact the internal auditor’s compensation.
Which of the following would encourage the internal auditor to be objective in his work?
- A . Periodic reinforcement of the internal audit activity’s code of ethics disclosure practices.
- B . External assessments of the internal audit activity every five years.
- C . Audit committee review of every engagement report at the conclusion of the audit.
- D . Internal audit charter approved by the board.
Correct Answer: A
A
Explanation:
Periodic reinforcement of the internal audit activity’s code of ethics disclosure practices would encourage the internal auditor to maintain objectivity, even when personal compensation might be affected. The IIA’s Code of Ethics emphasizes integrity and objectivity, and regular reinforcement helps auditors adhere to these principles, ensuring that they act impartially and do not allow conflict of interest or undue influence to impair their judgment.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics.
A
Explanation:
Periodic reinforcement of the internal audit activity’s code of ethics disclosure practices would encourage the internal auditor to maintain objectivity, even when personal compensation might be affected. The IIA’s Code of Ethics emphasizes integrity and objectivity, and regular reinforcement helps auditors adhere to these principles, ensuring that they act impartially and do not allow conflict of interest or undue influence to impair their judgment.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics.
Question #24
During an assurance engagement, an internal auditor uses benchmarking research to support preparation of a report to stakeholders that contains significant findings about control deficiencies.
Which of the following skills did the auditor demonstrate?
- A . Internal audit management.
- B . Conflict negotiation.
- C . Critical thinking.
- D . Persuasion and collaboration.
Correct Answer: C
C
Explanation:
The use of benchmarking research to support the preparation of a report on control deficiencies demonstrates critical thinking. This skill involves analyzing and evaluating information from multiple sources to form a well-rounded view of the audit area, leading to significant findings and effective recommendations in the audit report.
Reference: Commonly recognized audit practices and skills as documented in auditing literature and the IIA’s Competency Framework.
C
Explanation:
The use of benchmarking research to support the preparation of a report on control deficiencies demonstrates critical thinking. This skill involves analyzing and evaluating information from multiple sources to form a well-rounded view of the audit area, leading to significant findings and effective recommendations in the audit report.
Reference: Commonly recognized audit practices and skills as documented in auditing literature and the IIA’s Competency Framework.
Question #25
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:
The internal auditor should examine application controls, which directly relate to specific computer applications. These controls ensure the accuracy, completeness, and authorization of transactions processed by the system. Since the auditor’s concern is whether sales staff can modify orders after shipping, which involves transactional changes in a specific application, application controls are the appropriate focus.
Reference: Information systems auditing standards and best practices.
B
Explanation:
The internal auditor should examine application controls, which directly relate to specific computer applications. These controls ensure the accuracy, completeness, and authorization of transactions processed by the system. Since the auditor’s concern is whether sales staff can modify orders after shipping, which involves transactional changes in a specific application, application controls are the appropriate focus.
Reference: Information systems auditing standards and best practices.
Question #26
Which of the following statements best illustrates why internal auditors assess soft controls?
- A . Assessing soft controls are an effective method of assessing risk related to personnel.
- B . Assessing soft controls, as opposed to hard controls, makes it easier to evaluate operating effectiveness.
- C . Assessing soft controls can help internal auditors in undertaking root-cause analysis.
- D . Assessing soft controls provides more objective information than assessing hard controls.
Correct Answer: C
C
Explanation:
Assessing soft controls can help internal auditors in undertaking root-cause analysis because soft controls, such as corporate culture and employee behavior, often provide insights into the underlying causes of observed deficiencies. By evaluating these soft controls, auditors can identify why certain hard controls may be failing and what might be influencing employee actions and attitudes, thus facilitating a more effective audit.
Reference: The Institute of Internal Auditors (IIA) guidance on behavioral and cultural audits and risk management practices.
C
Explanation:
Assessing soft controls can help internal auditors in undertaking root-cause analysis because soft controls, such as corporate culture and employee behavior, often provide insights into the underlying causes of observed deficiencies. By evaluating these soft controls, auditors can identify why certain hard controls may be failing and what might be influencing employee actions and attitudes, thus facilitating a more effective audit.
Reference: The Institute of Internal Auditors (IIA) guidance on behavioral and cultural audits and risk management practices.
Question #27
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:
Given the unusual observation in the travel expenses reports, the most appropriate next step for the internal auditor is to investigate whether there are any special arrangements regarding senior management travel. This investigation could reveal explanations for the absence of typical travel-related expenses, such as pre-paid packages, special corporate arrangements, or even potentially unreported expenses, which could be critical for compliance and ethical standards.
Reference: Internal Auditing Standards on performing audit work and investigating anomalies.
C
Explanation:
Given the unusual observation in the travel expenses reports, the most appropriate next step for the internal auditor is to investigate whether there are any special arrangements regarding senior management travel. This investigation could reveal explanations for the absence of typical travel-related expenses, such as pre-paid packages, special corporate arrangements, or even potentially unreported expenses, which could be critical for compliance and ethical standards.
Reference: Internal Auditing Standards on performing audit work and investigating anomalies.
Question #28
Which of the following best illustrates the application of due professional care during an audit of the procurement department?
- A . The internal auditor began checking purchase requisitions for proper authorizations. He stopped when he discovered an instance of noncompliance. and he concluded the controls were ineffective.
- B . The internal auditor discovered an instance where management did not follow the standard bidding processes. The auditor assessed the validity of management’s
reasons for deviating from standard practice and the supporting documentation, and determined that the deviation was acceptable. - C . The internal auditor selected a sample of purchase orders with amounts greater than S5.000, the threshold at which the organization requires a bidding process. The auditor obtained documentation of the bidding process for each purchase order in the sample.
- D . The internal auditor analyzed bidding documents provided by management. Management indicated that the documents were purchase orders issued to a sole-source vendor Based on the analysis and management’s declaration, the internal auditor determined that the procurement process was effective.
Correct Answer: C
C
Explanation:
Demonstrating due professional care involves thorough testing and evaluation of evidence. The internal auditor exhibited due professional care by selecting a sample of purchase orders above a specific threshold and obtaining documentation for each to verify compliance with the required bidding process. This methodical approach ensures that audit findings are based on sufficient, appropriate evidence and that conclusions about the effectiveness of controls are well-supported.
Reference: International Standards for the Professional Practice of Internal Auditing, particularly those related to due professional care and evidence evaluation.
C
Explanation:
Demonstrating due professional care involves thorough testing and evaluation of evidence. The internal auditor exhibited due professional care by selecting a sample of purchase orders above a specific threshold and obtaining documentation for each to verify compliance with the required bidding process. This methodical approach ensures that audit findings are based on sufficient, appropriate evidence and that conclusions about the effectiveness of controls are well-supported.
Reference: International Standards for the Professional Practice of Internal Auditing, particularly those related to due professional care and evidence evaluation.
Question #29
Which of the following procedures will best help an internal auditor assess operating effectiveness of fraud prevention and detection controls?
- A . Benchmarking best practices
- B . Testing,
- C . Mapping,
- D . Interviewing
Correct Answer: B
B
Explanation:
Testing is the most effective procedure for assessing the operating effectiveness of fraud prevention and detection controls. By testing specific controls designed to prevent and detect fraud, the auditor can evaluate whether the controls are functioning as intended and whether they are being applied consistently. This approach provides direct evidence about the effectiveness of the controls in the operational environment.
Reference: IIA guidance on assessing controls; Auditing standards on testing control effectiveness.
B
Explanation:
Testing is the most effective procedure for assessing the operating effectiveness of fraud prevention and detection controls. By testing specific controls designed to prevent and detect fraud, the auditor can evaluate whether the controls are functioning as intended and whether they are being applied consistently. This approach provides direct evidence about the effectiveness of the controls in the operational environment.
Reference: IIA guidance on assessing controls; Auditing standards on testing control effectiveness.
Question #30
Operational management in the IT department has developed key performance indicator reports, which are reviewed in detail during monthly staff meetings.
This activity is designed to prevent which of the following conditions?
- A . Knowledge/skills gap,
- B . Monitoring gap.
- C . Accountability/reward failure,
- D . Communication failure.
Correct Answer: D
D
Explanation:
The development and detailed review of key performance indicator (KPI) reports during monthly staff meetings primarily address potential communication failures. This activity ensures that all team members are aware of the department’s performance, expectations, and areas needing attention, thus enhancing transparency and communication within the department.
Reference: Management and organizational theory on performance management and communication; IIA guidance on operational effectiveness.
D
Explanation:
The development and detailed review of key performance indicator (KPI) reports during monthly staff meetings primarily address potential communication failures. This activity ensures that all team members are aware of the department’s performance, expectations, and areas needing attention, thus enhancing transparency and communication within the department.
Reference: Management and organizational theory on performance management and communication; IIA guidance on operational effectiveness.
Question #31
Which of the following would be considered a violation of The HAfs mandatory guidance on independence?
- A . The chief audit executive (CAE) reports functionally to the board and administratively to the chief financial officer.
- B . The board seeks senior management’s recommendation before approving the annual salary adjustment of the CAE.
- C . The CAE confirms to the board, at least once every five years, the organizational independence of the internal audit activity,
- D . The CAE updates the internal audit charter and presents it to the board for approval periodically, not on a specific timeline
Correct Answer: B
B
Explanation:
According to the IIA’s mandatory guidance on independence, allowing senior management to have influence over the CAE’s salary adjustments could potentially compromise the independence of the internal audit function. The board should independently approve the CAE’s salary without seeking senior management’s recommendation to maintain the internal audit function’s independence.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically standards related to independence.
B
Explanation:
According to the IIA’s mandatory guidance on independence, allowing senior management to have influence over the CAE’s salary adjustments could potentially compromise the independence of the internal audit function. The board should independently approve the CAE’s salary without seeking senior management’s recommendation to maintain the internal audit function’s independence.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically standards related to independence.
Question #32
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: A
A
Explanation:
Workshops are likely the most efficient way for management to self-assess the overall effectiveness of the controls in a 200-person manufacturing department. Workshops can facilitate interactive discussions and group activities that help identify control gaps, understand employee perspectives, and consolidate feedback effectively across a large group.
Reference: Best practices in internal control assessments and organizational development literature.
A
Explanation:
Workshops are likely the most efficient way for management to self-assess the overall effectiveness of the controls in a 200-person manufacturing department. Workshops can facilitate interactive discussions and group activities that help identify control gaps, understand employee perspectives, and consolidate feedback effectively across a large group.
Reference: Best practices in internal control assessments and organizational development literature.
Question #33
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 structures can increase risks to the organization’s control environment by potentially motivating undesirable behaviors such as taking undue risks or manipulating results to meet targets that trigger compensation rewards. This can undermine the integrity of controls and reporting within the organization.
Reference: Governance and risk management literature, including studies and guidance on compensation structures and their impact on organizational behavior and risk.
B
Explanation:
Incentive-based compensation structures can increase risks to the organization’s control environment by potentially motivating undesirable behaviors such as taking undue risks or manipulating results to meet targets that trigger compensation rewards. This can undermine the integrity of controls and reporting within the organization.
Reference: Governance and risk management literature, including studies and guidance on compensation structures and their impact on organizational behavior and risk.
Question #34
A chief audit executive (CAE) has no direct access to the board.
According to IIA guidance, which of the following is the most appropriate way for the CAE to react?
- A . Ensure all subsequent audit reports include a disclaimer as to the lack of access to the board,
- B . Focus on operational audit work and disregard lack of direct access to the members of the board.
- C . Initiate changes to the internal audit charter to report to senior management for the time being,
- D . Engage in written communications with the board and present relevant issues in writing
Correct Answer: D
D
Explanation:
If a CAE has no direct access to the board, the most appropriate action, according to IIA guidance, is to maintain communication with the board through written communications. This method ensures that the board is informed of relevant audit findings and issues, upholding the governance role of the internal audit function even without direct access. This approach aligns with IIA standards on communicating and reporting to senior management and the board.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically standards related to communication and reporting.
D
Explanation:
If a CAE has no direct access to the board, the most appropriate action, according to IIA guidance, is to maintain communication with the board through written communications. This method ensures that the board is informed of relevant audit findings and issues, upholding the governance role of the internal audit function even without direct access. This approach aligns with IIA standards on communicating and reporting to senior management and the board.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically standards related to communication and reporting.
Question #35
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: A
A
Explanation:
The inclusion of the clause stating that engagements are conducted in conformance with the International Standards for the Professional Practice of Internal Auditing can be justified if internal audit activity policies and engagement records provide relevant, sufficient, and competent evidence that the statement is correct. This evidence shows adherence to the Standards in audit planning, execution, and reporting, ensuring the quality and reliability of audit results as per the Standards’ requirements.
Reference: International Standards for the Professional Practice of Internal Auditing; guidelines on quality assurance and improvement programs.
A
Explanation:
The inclusion of the clause stating that engagements are conducted in conformance with the International Standards for the Professional Practice of Internal Auditing can be justified if internal audit activity policies and engagement records provide relevant, sufficient, and competent evidence that the statement is correct. This evidence shows adherence to the Standards in audit planning, execution, and reporting, ensuring the quality and reliability of audit results as per the Standards’ requirements.
Reference: International Standards for the Professional Practice of Internal Auditing; guidelines on quality assurance and improvement programs.
Question #36
Who is responsible for ensuring internal auditors’ continuing professional development?
- A . Individual internal auditors.
- B . Chief audit executive.
- C . The board.
- D . Engagement supervisors.
Correct Answer: B
B
Explanation:
The Chief Audit Executive (CAE) is primarily responsible for ensuring internal auditors’ continuing professional development. The CAE plays a crucial role in setting the tone and priorities for the audit function, including the professional growth of the audit staff, to maintain the competence and effectiveness of the internal audit activity.
Reference: International Standards for the Professional Practice of Internal Auditing, particularly those related to human resources management within audit functions.
B
Explanation:
The Chief Audit Executive (CAE) is primarily responsible for ensuring internal auditors’ continuing professional development. The CAE plays a crucial role in setting the tone and priorities for the audit function, including the professional growth of the audit staff, to maintain the competence and effectiveness of the internal audit activity.
Reference: International Standards for the Professional Practice of Internal Auditing, particularly those related to human resources management within audit functions.
Question #37
Which of the following controls would best mitigate the risk of fraud in the bidding process?
- A . Have a bidding committee open the tender bids.
- B . Restrict the time to submit tender bids.
- C . Keep minutes of pre-bid meetings.
- D . Allow the higher tenders to rebid.
Correct Answer: A
A
Explanation:
Having a bidding committee open the tender bids is the best control to mitigate the risk of fraud in the bidding process. This approach ensures transparency and reduces the risk of manipulative practices by involving multiple stakeholders in the bid opening, thereby preventing any single individual from influencing the outcome unduly.
Reference: Best practices in procurement and internal controls related to tender processes.
A
Explanation:
Having a bidding committee open the tender bids is the best control to mitigate the risk of fraud in the bidding process. This approach ensures transparency and reduces the risk of manipulative practices by involving multiple stakeholders in the bid opening, thereby preventing any single individual from influencing the outcome unduly.
Reference: Best practices in procurement and internal controls related to tender processes.
Question #38
Evidence discovered during the course of an engagement suggests that multiple incidents of fraud have occurred. There do not appear to be sufficient controls in place to prevent reoccurrence.
Which of the following is the internal auditor’s most appropriate next step?
- A . Immediately notify management of the area under review and the other internal auditors involved in the engagement.
- B . Discuss the situation with the engagement supervisor to determine whether fraud investigation experts are required to investigate the matter properly.
- C . Fully document in the workpapers the evidence that has been discovered and recommend appropriate controls to address the fraud.
- D . Provide the evidence that was discovered to local law enforcement for possible prosecution of the suspected fraud.
Correct Answer: B
B
Explanation:
When evidence of multiple incidents of fraud is discovered and there are insufficient controls in place, the internal auditor’s most appropriate next step is to discuss the situation with the engagement supervisor to determine whether fraud investigation experts are needed. This step ensures that specialized expertise is considered and engaged if necessary to properly investigate the matter and to determine the appropriate response, including the potential involvement of law enforcement.
Reference: International Standards for the Professional Practice of Internal Auditing on responding to findings and incidents of fraud; guidance on fraud investigation.
B
Explanation:
When evidence of multiple incidents of fraud is discovered and there are insufficient controls in place, the internal auditor’s most appropriate next step is to discuss the situation with the engagement supervisor to determine whether fraud investigation experts are needed. This step ensures that specialized expertise is considered and engaged if necessary to properly investigate the matter and to determine the appropriate response, including the potential involvement of law enforcement.
Reference: International Standards for the Professional Practice of Internal Auditing on responding to findings and incidents of fraud; guidance on fraud investigation.
Question #39
Which of the following is the primary engagement responsibility of an entry-level internal auditor?
- A . Leadership.
- B . Documentation.
- C . Analysis.
- D . Reporting.
Correct Answer: B
B
Explanation:
For entry-level internal auditors, the primary engagement responsibility typically involves documentation. This includes accurately and thoroughly documenting audit evidence and findings, which is essential for supporting the audit’s conclusions and for review by more senior auditors. This task is fundamental for ensuring that audit work is recorded and traceable, aligning with the IIA’s standards on performance (specifically, documenting information to support conclusions and engagement results).
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
B
Explanation:
For entry-level internal auditors, the primary engagement responsibility typically involves documentation. This includes accurately and thoroughly documenting audit evidence and findings, which is essential for supporting the audit’s conclusions and for review by more senior auditors. This task is fundamental for ensuring that audit work is recorded and traceable, aligning with the IIA’s standards on performance (specifically, documenting information to support conclusions and engagement results).
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #40
Which of the following factors is most important for internal auditors to consider when prioritizing fraud risks?
- A . The organization’s code of conduct.
- B . The organization’s competition.
- C . The organization’s code of ethics.
- D . The organization’s culture
Correct Answer: D
D
Explanation:
When prioritizing fraud risks, the most important factor for internal auditors to consider is the organization’s culture. A culture that does not robustly promote ethical behavior or where management overrides controls can significantly increase the likelihood and impact of fraud. This aligns with risk management principles that consider organizational culture as a key element in the effectiveness of controls to prevent, detect, and respond to fraud.
Reference: The Institute of Internal Auditors (IIA) guidance on assessing and managing fraud risks and organizational culture.
D
Explanation:
When prioritizing fraud risks, the most important factor for internal auditors to consider is the organization’s culture. A culture that does not robustly promote ethical behavior or where management overrides controls can significantly increase the likelihood and impact of fraud. This aligns with risk management principles that consider organizational culture as a key element in the effectiveness of controls to prevent, detect, and respond to fraud.
Reference: The Institute of Internal Auditors (IIA) guidance on assessing and managing fraud risks and organizational culture.
Question #41
According to IIA guidance, which of the following statements is true regarding due professional care?
- A . Internal auditors must exercise due professional care to Insure 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:
According to IIA guidance, due professional care means that internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor. This involves considering the cost of assurance in relation to potential benefits and exercising judgment and care in accordance with the complexity of the task. It does not imply an exhaustive review of all transactions or guarantees that all significant risks will be identified or that fraud does not exist.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional
Practice of Internal Auditing, specifically those related to due professional care.
B
Explanation:
According to IIA guidance, due professional care means that internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor. This involves considering the cost of assurance in relation to potential benefits and exercising judgment and care in accordance with the complexity of the task. It does not imply an exhaustive review of all transactions or guarantees that all significant risks will be identified or that fraud does not exist.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional
Practice of Internal Auditing, specifically those related to due professional care.
Question #42
Senior management has decided to adopt the key principles approach of the ISO 31000 risk management framework.
According to IIA guidance, which of the following principles is most appropriate when implementing the risk management process in a dynamic agency?
- A . Everyone in the agency has a primary responsibility for identifying and managing risks as part of the risk management process.
- B . The risk management process, while evaluating risk, should develop a mechanism to rank the relative importance of each risk.
- C . The risk management process should be regularly reviewed and respond to changes in the environment, to remain relevant.
- D . The risk management process should use a formal technique to consider the consequence and likelihood of each risk.
Correct Answer: C
C
Explanation:
According to IIA guidance, when implementing the risk management process in a dynamic agency, it is most appropriate that the risk management process should be regularly reviewed and respond to changes in the environment to remain relevant. This principle ensures that the risk management practices are flexible and adaptive, reflecting the dynamic nature of risk within a changing organizational and external environment. This approach is consistent with both the IIA’s guidance on risk management and the principles outlined in ISO 31000.
Reference: The Institute of Internal Auditors (IIA) – Guidance on Risk Management, ISO 31000 Risk Management Guidelines.
C
Explanation:
According to IIA guidance, when implementing the risk management process in a dynamic agency, it is most appropriate that the risk management process should be regularly reviewed and respond to changes in the environment to remain relevant. This principle ensures that the risk management practices are flexible and adaptive, reflecting the dynamic nature of risk within a changing organizational and external environment. This approach is consistent with both the IIA’s guidance on risk management and the principles outlined in ISO 31000.
Reference: The Institute of Internal Auditors (IIA) – Guidance on Risk Management, ISO 31000 Risk Management Guidelines.
Question #43
A multinational organization has asked the internal audit activity to assist in setting up the organization’s risk management system. The chief audit executive (CAE) agrees to take on the engagement as a consultant.
Which of the following tasks is appropriate for the CAE to undertake?
- A . Coordinate and facilitate risk workshops for management to attend.
- B . Establish the degree of risk appetite for management to accept.
- C . Set risk indicators and mitigation plans for management to implement
- D . Determine the number of significant risks for management to report to the board.
Correct Answer: A
A
Explanation:
The chief audit executive (CAE) taking on a consultative role can appropriately coordinate and facilitate risk workshops for management. This task aligns with the advisory function of internal audit, where they support and facilitate the risk management process without directly setting the risk appetite or determining risk mitigation strategies, thereby maintaining their advisory and facilitative role without assuming management responsibilities.
Reference: International Standards for the Professional Practice of Internal Auditing; guidance on internal audit’s role in consulting.
A
Explanation:
The chief audit executive (CAE) taking on a consultative role can appropriately coordinate and facilitate risk workshops for management. This task aligns with the advisory function of internal audit, where they support and facilitate the risk management process without directly setting the risk appetite or determining risk mitigation strategies, thereby maintaining their advisory and facilitative role without assuming management responsibilities.
Reference: International Standards for the Professional Practice of Internal Auditing; guidance on internal audit’s role in consulting.
Question #44
Upon joining the internal audit activity, each new auditor receives a copy of the audit handbook.
Which of the following handbook policies has the greatest risk of compromising audit objectivity?
- A . Internal auditors should obtain 80 hours of continuing professional education every two years, 20 of which should be audit-related, and the remainder may be operations-related.
- B . Internal auditors should rotate to other areas of the organization for nonaudit assignments to gain an understanding of the organization’s operations.
- C . Internal auditors should have direct and unrestricted access to personnel and information throughout the organization and the governing board.
- D . Internal auditors should undergo annual performance appraisals conducted by the chief audit executive, who reports administratively to the chief financial officer.
Correct Answer: B
B
Explanation:
Having internal auditors rotate to other areas of the organization for non-audit assignments poses the greatest risk of compromising audit objectivity. This practice can lead to conflicts of interest and familiarity threats, as auditors may become too closely aligned with the operations of the areas they audit later, potentially impairing their impartiality and independent judgment.
Reference: IIA Standards on objectivity and independence; guidelines on auditor rotation and non-audit assignments.
B
Explanation:
Having internal auditors rotate to other areas of the organization for non-audit assignments poses the greatest risk of compromising audit objectivity. This practice can lead to conflicts of interest and familiarity threats, as auditors may become too closely aligned with the operations of the areas they audit later, potentially impairing their impartiality and independent judgment.
Reference: IIA Standards on objectivity and independence; guidelines on auditor rotation and non-audit assignments.
Question #45
Which of the following resources would be most effective for an organization that would like to improve how it informs stakeholders of its social responsibility performance?
- A . ISO 26000.
- B . Global Reporting Initiative.
- C . Open Compliance and Ethics Group.
- D . COSO’s enterprise risk management framework
Correct Answer: B
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
Question #45
Which of the following resources would be most effective for an organization that would like to improve how it informs stakeholders of its social responsibility performance?
- A . ISO 26000.
- B . Global Reporting Initiative.
- C . Open Compliance and Ethics Group.
- D . COSO’s enterprise risk management framework
Correct Answer: B
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
Question #45
Which of the following resources would be most effective for an organization that would like to improve how it informs stakeholders of its social responsibility performance?
- A . ISO 26000.
- B . Global Reporting Initiative.
- C . Open Compliance and Ethics Group.
- D . COSO’s enterprise risk management framework
Correct Answer: B
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
Question #45
Which of the following resources would be most effective for an organization that would like to improve how it informs stakeholders of its social responsibility performance?
- A . ISO 26000.
- B . Global Reporting Initiative.
- C . Open Compliance and Ethics Group.
- D . COSO’s enterprise risk management framework
Correct Answer: B
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
Question #45
Which of the following resources would be most effective for an organization that would like to improve how it informs stakeholders of its social responsibility performance?
- A . ISO 26000.
- B . Global Reporting Initiative.
- C . Open Compliance and Ethics Group.
- D . COSO’s enterprise risk management framework
Correct Answer: B
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
B
Explanation:
The Global Reporting Initiative (GRI) is the most effective resource for an organization looking to improve how it informs stakeholders of its social responsibility performance. The GRI provides a comprehensive set of standards for sustainability reporting, which includes guidelines on how to communicate social responsibility efforts transparently and effectively to stakeholders.
Reference: Global Reporting Initiative (GRI) standards; literature on sustainability reporting.
Question #50
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
B
Explanation:
According to IIA guidance, the internal audit activity can consult on CSR program design and implementation, serve as an advisor on CSR governance and risk management, and identify and mitigate risks to help meet the CSR program objectives. These roles enable the internal audit to add value through both advisory and assurance services regarding CSR, aligning with their expertise in governance, risk management, and control.
Reference: IIA guidance on the role of internal auditing in corporate social responsibility; Standards on advisory services.
B
Explanation:
According to IIA guidance, the internal audit activity can consult on CSR program design and implementation, serve as an advisor on CSR governance and risk management, and identify and mitigate risks to help meet the CSR program objectives. These roles enable the internal audit to add value through both advisory and assurance services regarding CSR, aligning with their expertise in governance, risk management, and control.
Reference: IIA guidance on the role of internal auditing in corporate social responsibility; Standards on advisory services.
Question #51
Which of the following is an example of a directive control?
- A . Segregation of duties.
- B . Exception reports.
- C . Training programs.
- D . Supervisory review.
Correct Answer: C
C
Explanation:
Training programs are an example of directive controls as they are designed to direct staff behaviors towards compliance with organizational policies and procedures. Directive controls guide or mandate specific behaviors to achieve desired outcomes, unlike preventive controls like segregation of duties, or detective controls like exception reports and supervisory review.
Reference: Internal control frameworks and definitions commonly used in internal auditing practices.
C
Explanation:
Training programs are an example of directive controls as they are designed to direct staff behaviors towards compliance with organizational policies and procedures. Directive controls guide or mandate specific behaviors to achieve desired outcomes, unlike preventive controls like segregation of duties, or detective controls like exception reports and supervisory review.
Reference: Internal control frameworks and definitions commonly used in internal auditing practices.
Question #52
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:
Whistleblowing is indeed one of several possible ethical structures an organization can undertake to encourage ethical behavior. This option correctly reflects that whistleblowing programs are part of a broader ethical framework designed to encourage transparency and integrity, rather than just being a response to employee dissatisfaction or retaliation.
Reference: Ethical guidelines and standards from the Institute of Internal Auditors (IIA) and corporate governance literature.
A
Explanation:
Whistleblowing is indeed one of several possible ethical structures an organization can undertake to encourage ethical behavior. This option correctly reflects that whistleblowing programs are part of a broader ethical framework designed to encourage transparency and integrity, rather than just being a response to employee dissatisfaction or retaliation.
Reference: Ethical guidelines and standards from the Institute of Internal Auditors (IIA) and corporate governance literature.
Question #53
Which of the following actions is a chief audit executive most likely to take in order to identify gaps in the internal audit activity’s knowledge, skills, and competencies?
- A . Complete a skills assessment of the internal audit activity based on. The IIA Global Internal Audit Competency Framework.
- B . Develop a competency assessment tool for the internal audit activity based on The IIA Global Internal Audit Competency Framework.
- C . Incorporate the basic criteria for competency of the internal audit activity into the job descriptions of potential internal auditors,
- D . Develop an internal audit activity plan for training internal auditors to perform required assurance and consulting activities.
Correct Answer: A
A
Explanation:
The most likely action a chief audit executive would take to identify gaps in the internal audit activity’s knowledge, skills, and competencies is to complete a skills assessment of the internal audit activity based on The IIA Global Internal Audit Competency Framework. This framework provides a structured and comprehensive approach to assess the current capabilities and identify any areas requiring improvement or development within the audit team.
Reference: The Institute of Internal Auditors (IIA) – Global Internal Audit Competency Framework.
A
Explanation:
The most likely action a chief audit executive would take to identify gaps in the internal audit activity’s knowledge, skills, and competencies is to complete a skills assessment of the internal audit activity based on The IIA Global Internal Audit Competency Framework. This framework provides a structured and comprehensive approach to assess the current capabilities and identify any areas requiring improvement or development within the audit team.
Reference: The Institute of Internal Auditors (IIA) – Global Internal Audit Competency Framework.
Question #54
Which of the following skills is most important for an internal auditor who facilitates control self-
assessment workshops to possess?
- A . Groupthink.
- B . Collaboration skills.
- C . Process analysis skills.
- D . Project management skills.
Correct Answer: B
B
Explanation:
For an internal auditor who facilitates control self-assessment workshops, collaboration skills are most important. These skills enable the auditor to effectively engage with participants, foster open communication, and facilitate group interactions that lead to more comprehensive and accurate assessments. Collaboration is essential for guiding discussions, resolving conflicts, and ensuring that the workshop objectives are met effectively.
Reference: Best practices in facilitating workshops and internal auditor competency requirements as outlined in professional development resources and the IIA’s standards.
B
Explanation:
For an internal auditor who facilitates control self-assessment workshops, collaboration skills are most important. These skills enable the auditor to effectively engage with participants, foster open communication, and facilitate group interactions that lead to more comprehensive and accurate assessments. Collaboration is essential for guiding discussions, resolving conflicts, and ensuring that the workshop objectives are met effectively.
Reference: Best practices in facilitating workshops and internal auditor competency requirements as outlined in professional development resources and the IIA’s standards.
Question #55
In which of the following ways can a chief audit executive demonstrate to the board that the internal audit activity collectively possesses all of the skills needed to complete its annual goals?
- A . Involve board members in hiring activities and request advice.
- B . Require all internal audit staff to complete the same training course on a general audit subject,
- C . Require senior auditors to obtain a professional certification.
- D . Provide a competency assessment of the internal audit staff.
Correct Answer: D
D
Explanation:
The most effective way a chief audit executive (CAE) can demonstrate to the board that the internal audit team has the necessary skills to achieve its annual goals is through a competency assessment. This assessment measures and documents the collective skills and knowledge within the internal audit activity, ensuring they align with the requirements of the audit plan and the organization’s objectives. Competency assessments can identify gaps and provide a basis for training and development, making it an essential tool for demonstrating capability.
Reference: The Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF)
D
Explanation:
The most effective way a chief audit executive (CAE) can demonstrate to the board that the internal audit team has the necessary skills to achieve its annual goals is through a competency assessment. This assessment measures and documents the collective skills and knowledge within the internal audit activity, ensuring they align with the requirements of the audit plan and the organization’s objectives. Competency assessments can identify gaps and provide a basis for training and development, making it an essential tool for demonstrating capability.
Reference: The Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF)
Question #56
An engagement supervisor obtains facilities maintenance reports from a contractor during an audit of third-party services.
Which of the following is the source of authority for the engagement supervisor to make such contact outside the organization?
- A . The policies and procedures of the internal audit activity.
- B . The provisions of the internal audit charter.
- C . The authority of the CEO.
- D . The IIA’s Code of Ethics.
Correct Answer: B
B
Explanation:
The source of authority for an engagement supervisor to make contact with external parties, such as obtaining maintenance reports from a contractor, typically comes from the provisions outlined in the internal audit charter. This charter formally defines the purpose, authority, and responsibility of the internal audit activity, including interactions with third-party service providers. It is essential as it sets the audit activity’s scope, allowing auditors to access necessary information and resources.
Reference: The Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF), specifically the Audit Charter guidelines.
B
Explanation:
The source of authority for an engagement supervisor to make contact with external parties, such as obtaining maintenance reports from a contractor, typically comes from the provisions outlined in the internal audit charter. This charter formally defines the purpose, authority, and responsibility of the internal audit activity, including interactions with third-party service providers. It is essential as it sets the audit activity’s scope, allowing auditors to access necessary information and resources.
Reference: The Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF), specifically the Audit Charter guidelines.
Question #57
Applying ISO 31000, which of the following is part of the external context for risk management?
- A . Risk treatment method based on risk evaluation.
- B . Organizational culture, objectives, and processes.
- C . The regulatory and competitive environment
- D . The method of determining the risk level.
Correct Answer: C
C
Explanation:
ISO 31000 outlines risk management principles and guidelines, including the consideration of external context in the risk management process. The external context refers to the environment in which the organization operates. This includes, but is not limited to, cultural, social, political, legal, regulatory, financial, technological, economic, and competitive environments, both international and national. Therefore, option C, "The regulatory and competitive environment," is part of the external context for risk management according to ISO 31000.
Reference: ISO 31000:2018, Risk management – Guidelines
C
Explanation:
ISO 31000 outlines risk management principles and guidelines, including the consideration of external context in the risk management process. The external context refers to the environment in which the organization operates. This includes, but is not limited to, cultural, social, political, legal, regulatory, financial, technological, economic, and competitive environments, both international and national. Therefore, option C, "The regulatory and competitive environment," is part of the external context for risk management according to ISO 31000.
Reference: ISO 31000:2018, Risk management – Guidelines
Question #58
The internal audit activity is asked to review the effectiveness of controls around the disposal of chemical waste. However, the internal auditors on staff lack the necessary skills to conduct this review.
Which of the following would be the most appropriate approach?
- A . An internal auditor who recently attended a three-day workshop on chemical waste disposal, and therefore has the most knowledge on the topic, should lead the engagement.
- B . A team of available internal auditors should be assembled and should consult with an external
nonaudit expert on chemical waste disposal to plan and conduct the engagement. - C . A team of the most knowledgeable auditors could be assembled and use the engagement work program from the previous year to gather additional insight regarding recommended audit procedures.
- D . A nonaudit employee from the chemical disposal area may share his expertise with the audit team, provided the internal audit manager conducts a detailed review of all engagement work performed.
Correct Answer: B
B
Explanation:
When the internal audit staff lacks the necessary skills for a specific audit, such as reviewing controls around the disposal of chemical waste, the most appropriate approach is to assemble a team of internal auditors and consult with an external expert on chemical waste disposal. This ensures that the audit is conducted with the requisite level of technical expertise and objectivity, supported by professional guidance. This approach is in line with best practices that recommend leveraging external expertise when internal competencies do not meet the specific needs of an audit.
Reference: The Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF), specifically guidelines on using external experts in audit engagements.
B
Explanation:
When the internal audit staff lacks the necessary skills for a specific audit, such as reviewing controls around the disposal of chemical waste, the most appropriate approach is to assemble a team of internal auditors and consult with an external expert on chemical waste disposal. This ensures that the audit is conducted with the requisite level of technical expertise and objectivity, supported by professional guidance. This approach is in line with best practices that recommend leveraging external expertise when internal competencies do not meet the specific needs of an audit.
Reference: The Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF), specifically guidelines on using external experts in audit engagements.
Question #59
A newly appointed chief audit executive (CAE) started analyzing the organization’s policies in an attempt to customize them to address internal audit specifics.
Which of the following organizationwide practices is most likely to be acceptable to the CAE?
- A . Internal auditors1performance evaluation is primarily based on both client satisfaction surveys and cost savings identified from the audits.
- B . Standard training for each employee, including internal auditors, is 10 hours per year.
- C . To enhance efficiency, internal auditors should not be rotated regularly among engagements.
- D . Hiring practices include requiring potential auditors to disclose any significant stock ownership in the organization.
Correct Answer: D
D
Explanation:
Among the options, requiring potential auditors to disclose any significant stock ownership in the organization is most likely to be acceptable to a CAE aiming to ensure the integrity and independence of the internal audit function. This practice helps manage potential conflicts of interest and aligns with the principles of objectivity and independence in internal auditing standards.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics and International Standards for the Professional Practice of Internal Auditing.
D
Explanation:
Among the options, requiring potential auditors to disclose any significant stock ownership in the organization is most likely to be acceptable to a CAE aiming to ensure the integrity and independence of the internal audit function. This practice helps manage potential conflicts of interest and aligns with the principles of objectivity and independence in internal auditing standards.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics and International Standards for the Professional Practice of Internal Auditing.
Question #60
After being assigned to an audit of the accounts payable process, an internal auditor privately notifies the chief audit executive that she is a finalist for an open manager position within the accounts payable department.
Which of the following is the IIA Code of Ethics principle that the auditor upheld?
- A . Independence.
- B . Confidentiality.
- C . Objectivity.
- D . Competency
Correct Answer: C
C
Explanation:
By notifying the chief audit executive of her candidacy for a position within the accounts payable department, the auditor upheld the principle of Objectivity. This principle requires auditors to disclose any potential conflicts of interest that could influence their independence and objectivity during the audit process.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics.
C
Explanation:
By notifying the chief audit executive of her candidacy for a position within the accounts payable department, the auditor upheld the principle of Objectivity. This principle requires auditors to disclose any potential conflicts of interest that could influence their independence and objectivity during the audit process.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics.
Question #61
If the skills and competencies are not present within the internal audit activity to complete an ad-hoc assurance engagement, which of the following is an acceptable resolution?
- A . Politely decline the engagement due to a lack of qualified staff available at the time.
- B . Complete the engagement as requested, with the best of the current staffs abilities.
- C . Consider using employees from other departments in the organization on the audit team.
- D . Change the scope of the testing to ensure that only available staff proficiencies are used
Correct Answer: A
A
Explanation:
If the internal audit activity lacks the necessary skills and competencies to complete an ad-hoc assurance engagement, the most appropriate and professional action is to politely decline the engagement due to a lack of qualified staff. This decision upholds the IIA’s standards on professional proficiency and due professional care.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
A
Explanation:
If the internal audit activity lacks the necessary skills and competencies to complete an ad-hoc assurance engagement, the most appropriate and professional action is to politely decline the engagement due to a lack of qualified staff. This decision upholds the IIA’s standards on professional proficiency and due professional care.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #62
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 department’s objectives.
Correct Answer: A
A
Explanation:
During an audit engagement that examines the effectiveness of risk management processes, the internal audit activity should evaluate how the organization manages fraud risk. This approach ensures that the organization’s risk management practices are comprehensive and effectively address all significant areas of risk, including the potential for fraud.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, especially those related to risk management.
A
Explanation:
During an audit engagement that examines the effectiveness of risk management processes, the internal audit activity should evaluate how the organization manages fraud risk. This approach ensures that the organization’s risk management practices are comprehensive and effectively address all significant areas of risk, including the potential for fraud.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, especially those related to risk management.
Question #63
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:
The most appropriate idea to include in the CSR policy is that management is responsible for ensuring that the organization’s CSR principles are communicated, understood, and integrated into decision-making processes. This aligns with good corporate governance practices which hold management accountable for embedding CSR into the corporate culture and daily operations of the organization, thus ensuring its effective implementation across all levels.
Reference: Corporate governance and CSR integration best practices as documented in business management literature.
C
Explanation:
The most appropriate idea to include in the CSR policy is that management is responsible for ensuring that the organization’s CSR principles are communicated, understood, and integrated into decision-making processes. This aligns with good corporate governance practices which hold management accountable for embedding CSR into the corporate culture and daily operations of the organization, thus ensuring its effective implementation across all levels.
Reference: Corporate governance and CSR integration best practices as documented in business management literature.
Question #64
In which scenario might it be considered problematic for the chief audit executive (CAE) to provide assurance services over the payroll function?
- A . The CAE previously undertook a consulting assignment in that area to improve processes,
- B . A couple of years ago, the CAE performed accounting functions for the payroll department.
- C . Prior to becoming the CAE, the CAE was the payroll manager.
- D . The assurance review was initiated following issues identified during a consulting assignment requested by management.
Correct Answer: C
C
Explanation:
It would be considered problematic for the chief audit executive (CAE) to provide assurance services over the payroll function if, prior to becoming the CAE, the CAE was the payroll manager. This scenario poses a conflict of interest and impacts the objectivity required for assurance services, as the CAE might have inherent biases or a conflict due to previous roles and responsibilities within the payroll function.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics and International Standards for the Professional Practice of Internal Auditing.
C
Explanation:
It would be considered problematic for the chief audit executive (CAE) to provide assurance services over the payroll function if, prior to becoming the CAE, the CAE was the payroll manager. This scenario poses a conflict of interest and impacts the objectivity required for assurance services, as the CAE might have inherent biases or a conflict due to previous roles and responsibilities within the payroll function.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics and International Standards for the Professional Practice of Internal Auditing.
Question #65
Which of the following would be the most effective fraud prevention control?
- A . Email alert sent to management for checks issued over $100,000.
- 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: A
A
Explanation:
The most effective fraud prevention control among the listed options is an email alert sent to management for checks issued over $100,000. This control directly addresses a potential high-risk area (large transactions) and ensures that transactions of significant amounts are reviewed and approved by management, thus providing a strong deterrent and detection mechanism for fraudulent activity.
Reference: Common financial control practices and fraud prevention mechanisms in financial management.
A
Explanation:
The most effective fraud prevention control among the listed options is an email alert sent to management for checks issued over $100,000. This control directly addresses a potential high-risk area (large transactions) and ensures that transactions of significant amounts are reviewed and approved by management, thus providing a strong deterrent and detection mechanism for fraudulent activity.
Reference: Common financial control practices and fraud prevention mechanisms in financial management.
Question #66
At a conference, an interna! auditor presented a new computer-assisted audit technique developed by his organization. The presentation included sample data derived from performing audit engagements for the organization. Travel costs were paid by the conference organizers, and the trip was approved by the chief audit executive (CAE).
However, neither management nor the CAE was aware that the internal auditor would be making a
presentation based on work completed for the organization.
According to IIA guidance, which of the following statements is most relevant regarding the actions of the auditor?
- A . The auditor did not violate the standard of objectivity because the presentation had no impact on the organization.
- B . The auditor violated the principle of confidentiality by disclosing information about the organization without approval.
- C . The auditor should have obtained permission before using the material, but did not violate the IIA Code of Ethics or Standards,
- D . The auditor breached the conflict of interest standard by accepting payment for travel costs
Correct Answer: B
B
Explanation:
The auditor violated the principle of confidentiality by disclosing information about the organization without approval. According to IIA guidance, internal auditors are expected to respect the confidentiality of information acquired in the course of their duties and not disclose any such information without proper authorization, unless there is a legal or professional obligation to do so.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics and International Standards for the Professional Practice of Internal Auditing.
B
Explanation:
The auditor violated the principle of confidentiality by disclosing information about the organization without approval. According to IIA guidance, internal auditors are expected to respect the confidentiality of information acquired in the course of their duties and not disclose any such information without proper authorization, unless there is a legal or professional obligation to do so.
Reference: The Institute of Internal Auditors (IIA) – Code of Ethics and International Standards for the Professional Practice of Internal Auditing.
Question #67
The board of a newly established organization was discussing the contents of the draft internal audit charter One board member suggested adding to the charter an obligation for the internal audit activity to develop controls in business procedures. The board member explained that the new organization needs professional-level developers, internal auditors have the necessary skills and competencies, and the internal audit activity is well positioned to assume this responsibility.
Which of the following would be a potential concern if the board member’s suggestion is adopted?
- A . Due professional care.
- B . Internal audit objectivity.
- C . Risk management assurance.
- D . Professional development.
Correct Answer: B
B
Explanation:
According to the standards and practices of internal auditing, the internal audit function is primarily responsible for providing an independent and objective assurance and consulting service aimed at adding value and improving an organization’s operations. If internal auditors were tasked with developing controls in business procedures, it could compromise their objectivity. Objectivity is crucial as it allows auditors to carry out audits impartially and without bias. Involvement in control creation could lead internal auditors to later audit their own work, which is a conflict of interest and undermines the principle of independence and objectivity as set by the Institute of Internal Auditors (IIA).
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
B
Explanation:
According to the standards and practices of internal auditing, the internal audit function is primarily responsible for providing an independent and objective assurance and consulting service aimed at adding value and improving an organization’s operations. If internal auditors were tasked with developing controls in business procedures, it could compromise their objectivity. Objectivity is crucial as it allows auditors to carry out audits impartially and without bias. Involvement in control creation could lead internal auditors to later audit their own work, which is a conflict of interest and undermines the principle of independence and objectivity as set by the Institute of Internal Auditors (IIA).
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #68
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 activity’s reporting
Correct Answer: C
C
Explanation:
In an assurance engagement examining the adequacy of organization-wide risk management practices, a primary area of interest would be the alignment of management decisions with the level of risk the organization is willing to accept. This focus helps determine whether the risk management framework is effectively informing strategic decision-making and aligning with the business objectives and risk appetite of the organization. Effective risk management practices should guide management in making decisions that align with the entity’s predefined risk thresholds.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
In an assurance engagement examining the adequacy of organization-wide risk management practices, a primary area of interest would be the alignment of management decisions with the level of risk the organization is willing to accept. This focus helps determine whether the risk management framework is effectively informing strategic decision-making and aligning with the business objectives and risk appetite of the organization. Effective risk management practices should guide management in making decisions that align with the entity’s predefined risk thresholds.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #69
Which of the following documents would promote objectivity within an organization’s internal audit activity?
- A . Internal audit charter.
- B . Internal audit manual.
- C . Audit committee charter
- D . Human resources employee handbook.
Correct Answer: A
A
Explanation:
The internal audit charter is a formal document that defines the purpose, authority, and responsibility of the internal audit activity. It establishes the internal audit activity’s position within the organization, authorizes access to records, personnel, and physical properties relevant to the performance of engagements, and defines the scope of internal audit activities. Final approval of the internal audit charter by the board ensures that there is a clear understanding and agreement on how the internal audit activity should function, thus supporting objectivity in carrying out its duties.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
A
Explanation:
The internal audit charter is a formal document that defines the purpose, authority, and responsibility of the internal audit activity. It establishes the internal audit activity’s position within the organization, authorizes access to records, personnel, and physical properties relevant to the performance of engagements, and defines the scope of internal audit activities. Final approval of the internal audit charter by the board ensures that there is a clear understanding and agreement on how the internal audit activity should function, thus supporting objectivity in carrying out its duties.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #70
According to NA guidance, which of the following provides the best evidence of conformance with the Standards with respect to the proficiency required of the internal audit activity?
- A . Discussions with the chief audit executive.
- B . A listing of employee profiles and certifications.
- C . Inquiry of external auditors.
- D . Validation by human resources.
Correct Answer: B
B
Explanation:
The best evidence of conformance with the Standards concerning the proficiency required of the internal audit activity would be a listing of employee profiles and certifications. This documentation provides concrete evidence of the knowledge, skills, and competencies of the internal audit staff, ensuring that they meet the requirements set forth by the professional standards and are capable of performing their duties effectively. This also aligns with the Standards’ requirement for the internal audit activity to possess the knowledge, skills, and other competencies needed to perform its responsibilities.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
B
Explanation:
The best evidence of conformance with the Standards concerning the proficiency required of the internal audit activity would be a listing of employee profiles and certifications. This documentation provides concrete evidence of the knowledge, skills, and competencies of the internal audit staff, ensuring that they meet the requirements set forth by the professional standards and are capable of performing their duties effectively. This also aligns with the Standards’ requirement for the internal audit activity to possess the knowledge, skills, and other competencies needed to perform its responsibilities.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #71
An internal auditor believes that the internal audit activity’s independence is impaired.
Which of the following actions should the internal auditor take first?
- A . Report the impairment to senior management
- B . Discuss the impairment with the audit manager
- C . Ascertain the best approach to disclose the impairment.
- D . Decide on the extent of impact of the impairment
Correct Answer: B
B
Explanation:
If an internal auditor believes that the internal audit activity’s independence is impaired, the first action to take should be to discuss the impairment with the audit manager. This step is crucial as the audit manager can provide guidance, support, and potentially escalate the issue appropriately within the governance framework. It ensures that the concerns are addressed promptly and effectively within the internal audit function before reaching out to higher levels of management or the audit committee, maintaining a proper chain of communication and resolution.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
B
Explanation:
If an internal auditor believes that the internal audit activity’s independence is impaired, the first action to take should be to discuss the impairment with the audit manager. This step is crucial as the audit manager can provide guidance, support, and potentially escalate the issue appropriately within the governance framework. It ensures that the concerns are addressed promptly and effectively within the internal audit function before reaching out to higher levels of management or the audit committee, maintaining a proper chain of communication and resolution.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #72
Management assessed the organization’s risk of expanding operations into a new, but volatile, region and began looking for a compatible local partner to manage sales and distribution.
Which of the following best describes this risk management technique?
- A . Avoidance.
- B . Acceptance.
- C . Reduction.
- D . Sharing
Correct Answer: D
D
Explanation:
The risk management technique described by finding a local partner to manage sales and distribution in a new, volatile region is best characterized as "Sharing." This approach involves sharing the risk with another party that can better manage or absorb part of the risk, thus reducing the organization’s direct exposure to potential adverse outcomes.
Reference: Risk management literature and practices, including frameworks such as ISO 31000.
D
Explanation:
The risk management technique described by finding a local partner to manage sales and distribution in a new, volatile region is best characterized as "Sharing." This approach involves sharing the risk with another party that can better manage or absorb part of the risk, thus reducing the organization’s direct exposure to potential adverse outcomes.
Reference: Risk management literature and practices, including frameworks such as ISO 31000.
Question #73
In which of the following ways could stakeholders be engaged in corporate social responsibility efforts?
- A . Investigation of health and safety incidents.
- B . Auditing of controls and management systems.
- C . Communication of disclosures and external reporting,
- D . Involvement in focus groups and complaint management
Correct Answer: D
D
Explanation:
Engaging stakeholders in corporate social responsibility (CSR) efforts is effectively done through their involvement in focus groups and complaint management. This method facilitates direct interaction and feedback from stakeholders, ensuring that their concerns and insights are considered in the CSR activities, thereby enhancing transparency and stakeholder engagement in the organization’s CSR strategy.
Reference: Best practices in stakeholder engagement and CSR from business management literature.
D
Explanation:
Engaging stakeholders in corporate social responsibility (CSR) efforts is effectively done through their involvement in focus groups and complaint management. This method facilitates direct interaction and feedback from stakeholders, ensuring that their concerns and insights are considered in the CSR activities, thereby enhancing transparency and stakeholder engagement in the organization’s CSR strategy.
Reference: Best practices in stakeholder engagement and CSR from business management literature.
Question #74
According to IIA guidance, which of the following statements is true regarding reporting the results of the quality assurance and improvement program?
- A . Results of internal assessments need to be reported to the board at least once every five years.
- B . The external assessor must present the findings from the external assessment to senior management and the board upon completion.
- C . Deficiencies within the internal audit activity must be reported to the board as soon as they are noted.
- D . Results of ongoing monitoring of the internal audit activity’s performance must be reported to senior management and the board at least annually
Correct Answer: D
D
Explanation:
According to IIA guidance, the results of ongoing monitoring of the internal audit activity’s performance must be reported to senior management and the board at least annually. This ensures that the board and senior management are regularly informed about the effectiveness and efficiency of the internal audit function, aligning with the IIA’s standards on quality assurance and improvement.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
D
Explanation:
According to IIA guidance, the results of ongoing monitoring of the internal audit activity’s performance must be reported to senior management and the board at least annually. This ensures that the board and senior management are regularly informed about the effectiveness and efficiency of the internal audit function, aligning with the IIA’s standards on quality assurance and improvement.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #75
Which of the following best describes the internal audit activity’s responsibility within a risk and control framework?
- A . The internal audit activity constitutes the first line of defense in effective risk management.
- B . The internal audit activity provides direction regarding internal controls implementation.
- C . The internal audit activity verifies that management has met its responsibility for implementing effective controls.
- D . The internal audit activity implements the internal control framework and advises management regarding best practices.
Correct Answer: C
C
Explanation:
The primary responsibility of the internal audit activity within a risk and control framework is to verify that management has met its responsibility for implementing effective controls. This aligns with the IIA’s definition of the internal audit function’s role, which is to provide independent and objective assurance that an organization’s risk management, governance, and internal control processes are operating effectively.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
C
Explanation:
The primary responsibility of the internal audit activity within a risk and control framework is to verify that management has met its responsibility for implementing effective controls. This aligns with the IIA’s definition of the internal audit function’s role, which is to provide independent and objective assurance that an organization’s risk management, governance, and internal control processes are operating effectively.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #76
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 analysts techniques
Correct Answer: B
B
Explanation:
The use of due professional care by the internal audit activity is best demonstrated by internal auditors undertaking the necessary training to complete their audit work. Due professional care involves applying the diligence and judgment needed to conduct audits effectively. This includes continuous training and development to ensure auditors are proficient in their field and up-to-date with relevant audit standards, technologies, and methodologies, which aligns with the International Standards for the Professional Practice of Internal Auditing from the Institute of Internal Auditors (IIA).
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
B
Explanation:
The use of due professional care by the internal audit activity is best demonstrated by internal auditors undertaking the necessary training to complete their audit work. Due professional care involves applying the diligence and judgment needed to conduct audits effectively. This includes continuous training and development to ensure auditors are proficient in their field and up-to-date with relevant audit standards, technologies, and methodologies, which aligns with the International Standards for the Professional Practice of Internal Auditing from the Institute of Internal Auditors (IIA).
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #77
Which of the following best demonstrates conformance with the Standards relating to continuing professional development of internal auditors?
- A . Regulatory approval from an accrediting agency.
- B . Self-assessments against a competency framework.
- C . Approval and signoff from the board of directors.
- D . A review by external auditors on an annual basis
Correct Answer: B
B
Explanation:
Conformance with the Standards relating to continuing professional development of internal auditors is best demonstrated by self-assessments against a competency framework. Such self-assessments allow internal auditors to evaluate their skills and knowledge against defined criteria to identify areas for improvement and ensure ongoing professional development. This approach is directly aligned with the IIA’s Standards, which emphasize the importance of continuous improvement and competency in internal audit practices.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
B
Explanation:
Conformance with the Standards relating to continuing professional development of internal auditors is best demonstrated by self-assessments against a competency framework. Such self-assessments allow internal auditors to evaluate their skills and knowledge against defined criteria to identify areas for improvement and ensure ongoing professional development. This approach is directly aligned with the IIA’s Standards, which emphasize the importance of continuous improvement and competency in internal audit practices.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #78
If an internal auditor suspects fraud during an engagement which of the following is expected of the auditor?
- A . Evaluate the suspected activities to determine whether a forma! investigation is warranted,
- B . Immediately inform senior management and the board of the suspected fraud.
- C . Ascertain the level of resources needed to formally investigate the fraud, and proceed with the investigation if resources permit,
- D . Include in the engagement documentation all possible effects and the potential impact of the fraud to the organization
Correct Answer: A
A
Explanation:
If an internal auditor suspects fraud during an engagement, the expected action is to evaluate the suspected activities to determine whether a formal investigation is warranted. This step is crucial as it ensures that suspicions are substantiated before escalating the issue, thereby maintaining the integrity and objectivity of the internal audit process. This approach aligns with the IIA’s guidance on handling fraud, including assessing and responding to risks of fraud during audit engagements.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
A
Explanation:
If an internal auditor suspects fraud during an engagement, the expected action is to evaluate the suspected activities to determine whether a formal investigation is warranted. This step is crucial as it ensures that suspicions are substantiated before escalating the issue, thereby maintaining the integrity and objectivity of the internal audit process. This approach aligns with the IIA’s guidance on handling fraud, including assessing and responding to risks of fraud during audit engagements.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #79
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:
The statement that best describes the difference between risk appetite and risk tolerance is that risk appetite refers to an organization’s general level of acceptance of risk, while risk tolerance is a more specific and subordinate concept. Risk appetite is the broad-based amount of risk an organization is willing to accept in pursuit of its mission, while risk tolerance defines the acceptable level of variation that management is willing to allow for any particular risk as it pursues its objectives.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
The statement that best describes the difference between risk appetite and risk tolerance is that risk appetite refers to an organization’s general level of acceptance of risk, while risk tolerance is a more specific and subordinate concept. Risk appetite is the broad-based amount of risk an organization is willing to accept in pursuit of its mission, while risk tolerance defines the acceptable level of variation that management is willing to allow for any particular risk as it pursues its objectives.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #80
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:
The greatest benefit of using forensic auditing techniques when fraud is discovered in an organization’s procurement process is achieving a greater understanding of fraud through better evidence collection. Forensic auditing techniques are specialized procedures designed to collect, analyze, and evaluate evidence in a way that meets the standards of a legal process, which is crucial for understanding the mechanisms of fraud and potentially pursuing legal actions.
Reference: Forensic auditing practices and literature on fraud investigation techniques.
D
Explanation:
The greatest benefit of using forensic auditing techniques when fraud is discovered in an organization’s procurement process is achieving a greater understanding of fraud through better evidence collection. Forensic auditing techniques are specialized procedures designed to collect, analyze, and evaluate evidence in a way that meets the standards of a legal process, which is crucial for understanding the mechanisms of fraud and potentially pursuing legal actions.
Reference: Forensic auditing practices and literature on fraud investigation techniques.
Question #81
Which of the following best describes the type of risk that an adequately designed and effectively operating system of internal controls should mitigate?
- A . Net.
- B . Controllable.
- C . inherent,
- D . Residual.
Correct Answer: C
C
Explanation:
The type of risk that an adequately designed and effectively operating system of internal controls should mitigate is "Residual" risk. Residual risk is what remains after internal controls are applied to inherent risk. This is the primary focus of most internal control systems, which are intended to reduce risks to an acceptable level.
Reference: Risk management frameworks and internal control literature, such as COSO and the Institute of Internal Auditors (IIA) guidance.
C
Explanation:
The type of risk that an adequately designed and effectively operating system of internal controls should mitigate is "Residual" risk. Residual risk is what remains after internal controls are applied to inherent risk. This is the primary focus of most internal control systems, which are intended to reduce risks to an acceptable level.
Reference: Risk management frameworks and internal control literature, such as COSO and the Institute of Internal Auditors (IIA) guidance.
Question #82
Which of the following is an example of a detective control?
- A . Automatic shut-off valve.
- B . Auto-correct software functionality.
- C . Confirmation with suppliers and vendors.
- D . Safety instructions.
Correct Answer: C
C
Explanation:
An example of a detective control is confirmation with suppliers and vendors. This control involves verifying transactions after they occur to ensure accuracy and authenticity, helping to detect errors or fraud in the organization’s operations with external parties.
Reference: Internal control concepts and definitions from authoritative sources like the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
C
Explanation:
An example of a detective control is confirmation with suppliers and vendors. This control involves verifying transactions after they occur to ensure accuracy and authenticity, helping to detect errors or fraud in the organization’s operations with external parties.
Reference: Internal control concepts and definitions from authoritative sources like the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Question #83
Which of the following needs to be established prior to undertaking an assessment of the quality assurance and improvement program?
- A . Department performance standards.
- B . Remediation timeframes.
- C . Nonconformance disclosures.
- D . External assessment resources
Correct Answer: D
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
Question #83
Which of the following needs to be established prior to undertaking an assessment of the quality assurance and improvement program?
- A . Department performance standards.
- B . Remediation timeframes.
- C . Nonconformance disclosures.
- D . External assessment resources
Correct Answer: D
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
Question #83
Which of the following needs to be established prior to undertaking an assessment of the quality assurance and improvement program?
- A . Department performance standards.
- B . Remediation timeframes.
- C . Nonconformance disclosures.
- D . External assessment resources
Correct Answer: D
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
Question #83
Which of the following needs to be established prior to undertaking an assessment of the quality assurance and improvement program?
- A . Department performance standards.
- B . Remediation timeframes.
- C . Nonconformance disclosures.
- D . External assessment resources
Correct Answer: D
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
D
Explanation:
Before undertaking an assessment of the quality assurance and improvement program, it is necessary to establish external assessment resources. This includes determining who will conduct the external assessment, the methodology to be used, and other logistical considerations to ensure that the assessment is thorough and conforms to the IIA’s standards for quality assurance.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing, specifically those related to quality assurance and improvement.
Question #87
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.
- B . 1 and 4.
- C . 2 and 3.
- D . 2 and 4.
Correct Answer: D
D
Explanation:
According to typical descriptions of fraud schemes, Tax evasion (intentional reporting of false or misleading information on a tax return by an organization to reduce taxes owed) and Disbursement fraud (occurs when a person causes the organization to issue a payment for fictitious goods or services) are true statements. These are common schemes that involve intentional misrepresentation to achieve financial gain at the expense of the organization or government.
Reference: Fraud examination and prevention literature and standards from professional organizations such as the Association of Certified Fraud Examiners (ACFE) and the Institute of Internal Auditors (IIA).
D
Explanation:
According to typical descriptions of fraud schemes, Tax evasion (intentional reporting of false or misleading information on a tax return by an organization to reduce taxes owed) and Disbursement fraud (occurs when a person causes the organization to issue a payment for fictitious goods or services) are true statements. These are common schemes that involve intentional misrepresentation to achieve financial gain at the expense of the organization or government.
Reference: Fraud examination and prevention literature and standards from professional organizations such as the Association of Certified Fraud Examiners (ACFE) and the Institute of Internal Auditors (IIA).
Question #88
Which of the following most accurately describes the role of the board when it comes to organizational governance?
- A . Responsibility for outcome of the process.
- B . Responsibility to be involved in management of the organization.
- C . Responsibility to determine who is accountable for outcomes.
- D . Responsibility to identify risks in the organization’s business environment
Correct Answer: A
A
Explanation:
The role of the board in organizational governance most accurately involves the responsibility for the outcome of the process. This encompasses overseeing the strategic direction of the organization, ensuring that corporate objectives are met, and that the management’s activities align with the overall strategic vision and risk appetite of the organization. The board’s oversight role is crucial in ensuring effective governance and accountability throughout the organization.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
A
Explanation:
The role of the board in organizational governance most accurately involves the responsibility for the outcome of the process. This encompasses overseeing the strategic direction of the organization, ensuring that corporate objectives are met, and that the management’s activities align with the overall strategic vision and risk appetite of the organization. The board’s oversight role is crucial in ensuring effective governance and accountability throughout the organization.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #89
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:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #89
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:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #89
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:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #89
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:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #89
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:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
C
Explanation:
Engaging a fraud specialist is most likely required when interrogating a suspected fraudster. This specific activity demands specialized skills in interviewing and understanding behavioral cues that are outside the typical expertise of internal auditors. The use of fraud specialists ensures that interrogations are conducted effectively and that the information obtained is reliable, without compromising legal or ethical standards.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #94
Assisting the controller in developing and monitoring a series of business process indicators, which are historically correlated with, but independent of sales.
- A . 1 and 2 only.
- B . 2 and 3 only.
- C . 2 and 4 only.
- D . 3 and 4 only
Correct Answer: A
A
Explanation:
The most likely actions by a chief audit executive to prevent division management from exaggerating sales reports would be announcing a series of internal audit engagements focusing on compliance with corporate sales-reporting policies and asking the president and the board to issue a statement of corporate policy stressing the importance of accurate management reporting and the negative consequences of intentional misreporting. These actions directly address the behavior of management by establishing oversight and reinforcing the importance of ethical reporting practices through policy reinforcement and targeted audits.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
A
Explanation:
The most likely actions by a chief audit executive to prevent division management from exaggerating sales reports would be announcing a series of internal audit engagements focusing on compliance with corporate sales-reporting policies and asking the president and the board to issue a statement of corporate policy stressing the importance of accurate management reporting and the negative consequences of intentional misreporting. These actions directly address the behavior of management by establishing oversight and reinforcing the importance of ethical reporting practices through policy reinforcement and targeted audits.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #95
Which of the following scenarios would most significantly restrict the areas where internal audit could perform assurance services?
- A . Regulators mandate specific audit engagements to be included in the audit plan.
- B . The internal audit activity reports functionally to the chief financial officer
- C . The internal audit activity reports administratively to the CEO and functionally to the audit committee.
- D . The internal audit activity reports administratively to the chief financial officer.
Correct Answer: D
D
Explanation:
The scenario that would most significantly restrict the areas where internal audit could perform assurance services is if the internal audit activity reports administratively to the chief financial officer (CFO). Reporting to the CFO could impair the perceived independence of the internal audit activity because the CFO is typically responsible for the financial and operational aspects of the organization that internal audit frequently assesses. This relationship could create a conflict of interest and limit the scope of audits that can be performed impartially.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
D
Explanation:
The scenario that would most significantly restrict the areas where internal audit could perform assurance services is if the internal audit activity reports administratively to the chief financial officer (CFO). Reporting to the CFO could impair the perceived independence of the internal audit activity because the CFO is typically responsible for the financial and operational aspects of the organization that internal audit frequently assesses. This relationship could create a conflict of interest and limit the scope of audits that can be performed impartially.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing
Question #96
According to NA 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:
According to guidance on corporate responsibility and sustainability, the primary reason to implement environmental and social safeguards within an organization is to achieve and maintain sustainable development. These safeguards help ensure that the organization’s operations do not adversely affect the environment or society, supporting long-term sustainability goals, which is a core aspect of modern corporate governance and ethics.
Reference: Sustainability and environmental management guidance from international standards such as ISO 14001 and the Global Reporting Initiative (GRI).
C
Explanation:
According to guidance on corporate responsibility and sustainability, the primary reason to implement environmental and social safeguards within an organization is to achieve and maintain sustainable development. These safeguards help ensure that the organization’s operations do not adversely affect the environment or society, supporting long-term sustainability goals, which is a core aspect of modern corporate governance and ethics.
Reference: Sustainability and environmental management guidance from international standards such as ISO 14001 and the Global Reporting Initiative (GRI).
Question #97
The chief audit executive (CAE) of a new internal audit activity is creating an internal audit charter According to IIA guidance, which of the following terms is most likely to be included in the charter?
- A . Senior management will be present whenever the CAE interacts with the board, to ensure effective communication among all three parties.
- B . Internal auditors will advise on the design of control policies and procedures in any area where the organization does not possess the requisite expertise,
- C . Internal auditors will demonstrate competence, concern, and the dedication expected of a professional,
- D . Internal auditors will receive performance-based compensation, including bonuses for reporting more than a stipulated number of observations.
Correct Answer: C
C
Explanation:
According to IIA guidance, an internal audit charter would likely include a statement that internal auditors will demonstrate competence, concern, and the dedication expected of a professional. This aligns with the IIA’s Code of Ethics and Standards, which emphasize the professional demeanor and commitment required from internal auditors.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing and Code of Ethics.
C
Explanation:
According to IIA guidance, an internal audit charter would likely include a statement that internal auditors will demonstrate competence, concern, and the dedication expected of a professional. This aligns with the IIA’s Code of Ethics and Standards, which emphasize the professional demeanor and commitment required from internal auditors.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing and Code of Ethics.
Question #98
According to NA 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, the practice by the chief audit executive (CAE) that best enhances the organizational independence of the internal audit activity is meeting privately with the board at least annually. This practice ensures that the internal audit activity can operate independently of management and directly report and discuss significant matters with the board, which is critical for maintaining its independence and objectivity.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
C
Explanation:
According to IIA guidance, the practice by the chief audit executive (CAE) that best enhances the organizational independence of the internal audit activity is meeting privately with the board at least annually. This practice ensures that the internal audit activity can operate independently of management and directly report and discuss significant matters with the board, which is critical for maintaining its independence and objectivity.
Reference: The Institute of Internal Auditors (IIA) – International Standards for the Professional Practice of Internal Auditing.
Question #99
Which of the following statements is true regarding electronic funds transfer (EFT)?
- A . EFT is a popular mechanism for improving efficiency, but results in less internal control.
- B . EFT significantly reduces the risk of fraud by eliminating the need for authorizations.
- C . EFT eliminates payment delays due mostly to the introduction of automated cash controls,
- D . EFT makes use of numerous automated controls, but is still vulnerable to fraudulent accounting entries.
Correct Answer: D
D
Explanation:
Electronic funds transfer (EFT) makes use of numerous automated controls, which improve efficiency and reduce the risk of some types of fraud. However, it is still vulnerable to fraudulent accounting entries, such as those arising from overriding existing controls or exploiting security weaknesses. Therefore, while EFT systems incorporate significant controls, they do not completely eliminate the risk of fraud.
Reference: Best practices and guidelines on electronic funds transfer from financial management and information systems security sources.
D
Explanation:
Electronic funds transfer (EFT) makes use of numerous automated controls, which improve efficiency and reduce the risk of some types of fraud. However, it is still vulnerable to fraudulent accounting entries, such as those arising from overriding existing controls or exploiting security weaknesses. Therefore, while EFT systems incorporate significant controls, they do not completely eliminate the risk of fraud.
Reference: Best practices and guidelines on electronic funds transfer from financial management and information systems security sources.
Question #100
According to the 11A 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: B
B
Explanation:
According to the IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) 2420.A1, it is stated that the internal auditor must disclose all material information obtained by the date of the final engagement communication, which could impact the engagement conclusion or decision-making process. This ensures that all relevant facts are communicated to stakeholders appropriately.
Reference: International Standards for the Professional Practice of Internal Auditing (Standards) 2420.A1
B
Explanation:
According to the IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) 2420.A1, it is stated that the internal auditor must disclose all material information obtained by the date of the final engagement communication, which could impact the engagement conclusion or decision-making process. This ensures that all relevant facts are communicated to stakeholders appropriately.
Reference: International Standards for the Professional Practice of Internal Auditing (Standards) 2420.A1
Question #101
Which of the following should a general internal auditor be able to characterize as an IT-related risk?
- A . Computer servers are in a room that is accessible to all employees,
- B . An IT architect avoids taking vacations and sharing his workload with coworkers,
- C . Hours billed by IT developers exceed 24 hours daily.
- D . Audit logs are lacking in a system that processes personal data.
Correct Answer: D
D
Explanation:
Audit logs are crucial for monitoring and reviewing the activities within IT systems, especially those processing personal data. The lack of audit logs presents a significant IT-related risk as it undermines the ability to trace any unauthorized or inappropriate access and actions within the system, thereby impacting the integrity and security of data.
Reference: Best practices in IT security and internal control frameworks like COBIT and ISO/IEC 27001.
D
Explanation:
Audit logs are crucial for monitoring and reviewing the activities within IT systems, especially those processing personal data. The lack of audit logs presents a significant IT-related risk as it undermines the ability to trace any unauthorized or inappropriate access and actions within the system, thereby impacting the integrity and security of data.
Reference: Best practices in IT security and internal control frameworks like COBIT and ISO/IEC 27001.
Question #102
Which of the following situations is most likely to heighten an internal auditor’s professional skepticism regarding potential fraud?
- A . A procurement manager does not have the expected academic credentials for his position.
- B . A salesperson frequently complains about the organization’s policy on sales commissions.
- C . The accounts payable supervisor has requested advances against her monthly salary on several occasions.
- D . A financial accountant is absent from work frequently due to regular medical procedures.
Correct Answer: C
C
Explanation:
Requesting advances against a monthly salary frequently, as in option C, could indicate financial stress or potentially dubious financial management behaviors. This situation could heighten an auditor’s professional skepticism regarding potential fraud due to possible motives or incentives to commit fraud.
Reference: Internal Auditing Standards and professional guidelines on fraud risk awareness and assessment.
C
Explanation:
Requesting advances against a monthly salary frequently, as in option C, could indicate financial stress or potentially dubious financial management behaviors. This situation could heighten an auditor’s professional skepticism regarding potential fraud due to possible motives or incentives to commit fraud.
Reference: Internal Auditing Standards and professional guidelines on fraud risk awareness and assessment.
Question #103
Which of the following situations undermines the independence of the internal audit activity?
- A . The internal audit activity is responsible for the company’s risk management function, and its head manager reports to the chief audit executive.
- B . A senior member of the internal audit activity once worked in the corporate finance department.
- C . The organization’s CEO reviews the internal audit activity’s annual budget per the organization’s policies and procedures.
- D . The internal audit activity often uses management’s risk profile to build its own risk profile for annual planning.
Correct Answer: D
D
Explanation:
According to IIA standards, particularly Standard 1100 on Independence and Objectivity, using management’s risk assessment to build the internal audit’s risk profile can potentially undermine the independence of the internal audit activity. This dependence on management’s view could bias the audit planning and scope, hence not entirely independent in evaluating management’s assertions or risks identified by management alone.
Reference: IIA Standard 1100 – Independence and Objectivity.
D
Explanation:
According to IIA standards, particularly Standard 1100 on Independence and Objectivity, using management’s risk assessment to build the internal audit’s risk profile can potentially undermine the independence of the internal audit activity. This dependence on management’s view could bias the audit planning and scope, hence not entirely independent in evaluating management’s assertions or risks identified by management alone.
Reference: IIA Standard 1100 – Independence and Objectivity.
Question #104
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:
According to the IIA’s guidelines, the internal audit charter should clearly define the internal audit activity’s position within the organization. This is essential to establish the authority and scope of the internal audit function, ensuring that it has the necessary independence and resources to fulfill its duties effectively.
Reference: The Institute of Internal Auditors (IIA) guidelines on internal audit charter.
D
Explanation:
According to the IIA’s guidelines, the internal audit charter should clearly define the internal audit activity’s position within the organization. This is essential to establish the authority and scope of the internal audit function, ensuring that it has the necessary independence and resources to fulfill its duties effectively.
Reference: The Institute of Internal Auditors (IIA) guidelines on internal audit charter.
Question #105
During a payroll audit, the internal auditor discovered that several individuals who have the same position classification as he are earning a significantly higher salary. The auditor noted the names and amounts of each, and he planned to prepare a request to the chief audit executive for a salary increase based on this information.
Which of the following IIA Code of Ethics principles was violated in this scenario?
- A . Competency.
- B . Objectivity,
- C . Integrity.
- D . Confidentiality
Correct Answer: D
D
Explanation:
The scenario described involves a violation of the principle of confidentiality as defined in The IIA’s Code of Ethics. The internal auditor misused information obtained during the course of an audit (salary data of colleagues) for personal gain (requesting a salary raise). This breaches the ethical principle of confidentiality, which mandates that auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.
Reference: The IIA’s Code of Ethics on Confidentiality.
D
Explanation:
The scenario described involves a violation of the principle of confidentiality as defined in The IIA’s Code of Ethics. The internal auditor misused information obtained during the course of an audit (salary data of colleagues) for personal gain (requesting a salary raise). This breaches the ethical principle of confidentiality, which mandates that auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.
Reference: The IIA’s Code of Ethics on Confidentiality.
Question #106
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:
The chief audit executive should consider explaining the rating conclusions and the impact of the results from the external assessment when communicating the results of the quality assurance and improvement program to the board. This is crucial as it directly relates to the effectiveness and efficiency of the internal audit function, providing key insights into the internal audit’s performance and its compliance with established standards and practices.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing.
B
Explanation:
The chief audit executive should consider explaining the rating conclusions and the impact of the results from the external assessment when communicating the results of the quality assurance and improvement program to the board. This is crucial as it directly relates to the effectiveness and efficiency of the internal audit function, providing key insights into the internal audit’s performance and its compliance with established standards and practices.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing.
Question #107
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:
Demonstrating proficiency as an internal auditor is best reflected through continuous professional development. This involves adhering to The IIA’s requirement for ongoing education to maintain proficiency and relevancy in the field of internal auditing. Continuous professional development ensures that auditors are up-to-date with the evolving audit practices, standards, and relevant regulatory requirements, thus enhancing their capability to perform effectively.
Reference: The IIA’s Code of Ethics and Continuing Professional Development standards.
D
Explanation:
Demonstrating proficiency as an internal auditor is best reflected through continuous professional development. This involves adhering to The IIA’s requirement for ongoing education to maintain proficiency and relevancy in the field of internal auditing. Continuous professional development ensures that auditors are up-to-date with the evolving audit practices, standards, and relevant regulatory requirements, thus enhancing their capability to perform effectively.
Reference: The IIA’s Code of Ethics and Continuing Professional Development standards.
Question #108
Which of the following statements is most accurate with respect to the required elements of the quality assurance and improvement program?
- A . Internal assessments provide sufficient objectivity to provide evidence to the board that the internal audit activity understands the organization’s control processes.
- B . Quality assessments focus on the internal audit activity’s structure, relationships with stakeholders, compliance with the Standards, and internal audit staff proficiency.
- C . In order to comply with the Standards, the internal audit activity must obtain an objective assessment of its processes and function at least once a year.
- D . Internal auditors completing internal assessments must demonstrate certification to perform quality assessments.
Correct Answer: B
B
Explanation:
The most accurate statement with respect to the required elements of the quality assurance and improvement program is that quality assessments focus on the internal audit activity’s structure, relationships with stakeholders, compliance with the Standards, and internal audit staff proficiency. This description aligns with the IIA’s standards on quality assurance, emphasizing the comprehensive scope of internal assessments, which are integral for ensuring the internal audit function operates effectively and adheres to professional standards.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing and Guidance on Quality Assurance.
B
Explanation:
The most accurate statement with respect to the required elements of the quality assurance and improvement program is that quality assessments focus on the internal audit activity’s structure, relationships with stakeholders, compliance with the Standards, and internal audit staff proficiency. This description aligns with the IIA’s standards on quality assurance, emphasizing the comprehensive scope of internal assessments, which are integral for ensuring the internal audit function operates effectively and adheres to professional standards.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing and Guidance on Quality Assurance.
Question #109
Which of the following situations best describes an internal auditor who may have violated the IIA Code of Ethics principle of confidentiality?
- A . The auditor intentionally omitted from his resume that he was fired from his previous job for fraud allegations,
- B . The auditor decided not to notify her supervisor that her brother-in-law was responsible for the project the auditor was expected to evaluate.
- C . The auditor asked the audit client to copy requested files to her personal unencrypted memory stick because it was faster and more convenient.
- D . The auditor was assigned to analyze the organization’s incentive program and spent long hours reviewing other employees’ bonuses,
Correct Answer: C
C
Explanation:
According to the IIA Code of Ethics, the principle of confidentiality emphasizes that internal auditors must refrain from disclosing confidential information acquired in the course of their duties unless legally obligated to do so. Using a personal unencrypted memory stick for transferring audit files not only risks the security of the information but also contravenes the confidentiality principles by potentially exposing sensitive data to unauthorized access.
Reference: IIA Code of Ethics, Principle of Confidentiality
C
Explanation:
According to the IIA Code of Ethics, the principle of confidentiality emphasizes that internal auditors must refrain from disclosing confidential information acquired in the course of their duties unless legally obligated to do so. Using a personal unencrypted memory stick for transferring audit files not only risks the security of the information but also contravenes the confidentiality principles by potentially exposing sensitive data to unauthorized access.
Reference: IIA Code of Ethics, Principle of Confidentiality
Question #110
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: D
D
Explanation:
For a new board chair, the first step to ensure effective leadership involves gaining an understanding of the needs of key stakeholders. This foundational knowledge is critical as it shapes the chair’s approach to governance, strategic alignment, and stakeholder engagement, providing a direct line of sight into the expectations and concerns that may influence the organization’s direction.
Reference: Best governance practices and board leadership guidelines
D
Explanation:
For a new board chair, the first step to ensure effective leadership involves gaining an understanding of the needs of key stakeholders. This foundational knowledge is critical as it shapes the chair’s approach to governance, strategic alignment, and stakeholder engagement, providing a direct line of sight into the expectations and concerns that may influence the organization’s direction.
Reference: Best governance practices and board leadership guidelines
Question #111
Which of the following must be in existence as a precondition to developing an effective system of internal controls?
- A . A monitoring process,
- B . A risk assessment process.
- C . A strategic objective-setting process.
- D . An information and communication process.
Correct Answer: B
B
Explanation:
A risk assessment process is a crucial precondition for developing an effective system of internal controls. It helps identify and analyze risks relevant to achieving the organization’s objectives, thereby informing the design and implementation of appropriate controls to mitigate those risks. This foundational step ensures that the internal controls are aligned with the specific risk landscape of the organization.
Reference: COSO Framework on Internal Control, Principle Related to Risk Assessment
B
Explanation:
A risk assessment process is a crucial precondition for developing an effective system of internal controls. It helps identify and analyze risks relevant to achieving the organization’s objectives, thereby informing the design and implementation of appropriate controls to mitigate those risks. This foundational step ensures that the internal controls are aligned with the specific risk landscape of the organization.
Reference: COSO Framework on Internal Control, Principle Related to Risk Assessment