HOCK ExamSuccess P2

Part 2 (3-Part) : 02/22/15 21:26:39
Question 1 - CIA 595 1.58 - Report to Senior Management & Board
Reporting to senior management and the board is an important part of the auditor's obligation. Which of the following items is not required to be reported to senior management and/or the board?
A. An audit plan was approved by senior management and the board. Subsequent to the approval, senior management informed the chief audit executive not to perform an audit of a division because the division's activities were very sensitive.
B. Subsequent to the completion of an audit, but prior to the issuance of an audit report, the audit senior in charge of the audit was offered a permanent position in the auditee's department.
C. Significant interim changes to the approved audit work schedule and financial budget.
D. An annual report summary of the department's audit work schedule and financial budget.
Question 2 - CIA 590 II.5 - Report to Senior Management & Board
Which of the following audit committee activities is of the greatest benefit to the internal audit activity?
A. Support for appropriate monitoring of the disposition of recommendations made by the internal audit activity.
B. Review and endorsement of all internal auditing engagement communications prior to their release.
C. Review and approval of engagement work programs.
D. Assurance that the external auditor will rely on the work of the internal audit activity whenever possible.
Question 3 - CIA QZP1C.2 - Risk Management
Which of the following would be considered risk factors to an organization?
I. A significant improvement in the competitor's product.
II. The purchase of new equipment that will improve profitability.
III. A planned audit engagement that was not completed on a timely basis.
IV. No organizational commitment to develop employees' technical skills.
A. I, II, III and IV.

B. II, III and IV only.
C. II only.
D. I, III and IV only.
Question 4 - HOCK CIA P2B H5 - Control Self-Assessment (CSA)
The advantages of implementing a Control Self-Assessment (CSA) program are:
I. Employee understanding of the company’s risk and controls is enhanced.
II. There is enhanced accountability.
III. It encourages more open communication, teamwork and continuous improvement.
IV. It is a good technique for uncovering organizational fraud.
A. II and III only.

B. I, II and III only.
C. I and II only.
D. I, II, III and IV.
Question 5 - CIA QZP2B.2 - Types of Engagements
The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is
A. Audit risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.
The audit committee strengthens the control processes of an organization by
A. Using the chief audit executive as a major resource in selecting the external auditors.
B. Approving internal audit activity policies.
C. Following up on recommendations made by the chief audit executive.
D. Assigning the internal audit activity responsibility for interaction with governmental agencies.
Question 7 - CIA QZP1B.20 - Strategic Role of Internal Auditing
The internal and external auditing work should be coordinated to
A. All the answers presented are correct.

B. Minimize duplication of efforts.
C. Ensure adequate audit coverage.
D. Potentially reduce the cost of the external audit.
Which of the following is true concerning the internal audit’s investment in a Control Self-Assessment (CSA) program?
I. Its role may be quite significant. It may sponsor, design, implement, and in effect, own the process, conducting the training, supplying the facilitators, scribes, and reporters, and orchestrating the participation of management and work teams.
II. Its role may be minimal, serving as interested party and consultant of the whole process and as ultimate verifier of the evaluations produced by the teams.
A. I only.
B. II only.
C. Somewhere between I and II.
D. None of the above.
Question 9 - CIA 697 1.28 - Types of Engagements
As part of cash management procedures, the treasurer of a nonprofit organization has decided to invest in a variety of new financial instruments. The audit committee has asked the internal audit activity (IAA) to conduct an audit of the adequacy of controls over the new investing techniques. Which of the following would not be required as part of such an audit?
A. Determine the nature of controls established by the treasurer to monitor the risks in the investments.
B. Determine the extent of management oversight over investments in sophisticated instruments.
C. Determine if policies exist which describe the risks the treasurer may take and the types of instruments in which the treasurer may make investments.
D. Determine whether the treasurer is getting higher or lower rates of return on investments than are treasurers in comparable organizations.
Question 10 - CIA 1189 II.5 - Managing Resources
Which of the following is a necessary part of a program for selecting and developing internal audit activity (IAA) staff?
A. Developing a written job description for each level of the staff.

B. Requiring a written examination prior to employment.
C. Counseling each member of the staff on career opportunities.
D. Specifying that an accounting degree is necessary for employment.
Question 11 - CIA 1193 I.45 - Strategic Role of Internal Auditing
A primary purpose for establishing a code of conduct within a professional organization is to
A. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.
B. Promote an ethical culture among professionals who serve others.
C. Ensure that all members of the profession perform at approximately the same level of competence.
D. Reduce the likelihood that members of the profession will be sued for substandard work.
Question 12 - CIA 1196 III.32 - Strategic Role of Internal Auditing
Internal auditors can be considered as leading agents for change within an organization. Which of the following is not a good way to promote this concept?
A. Postengagement questionnaires to obtain information on how engagement clients perceive the internal audit activity.
B. A brochure describing what internal auditing can do and the qualifications of the internal auditors.
C. Bulletins that highlight widespread or universal applications of engagement observations.
D. A directive from top management, stating that internal auditors will be used for all process-improvement projects.
Question 13 - CIA 595 III.2 - Planning
The consultative approach to internal auditing emphasizes
A. Imposition of corrective measures.

B. Implementation of policies and procedures.
C. Participation with engagement clients to improve methods.
D. Fraud investigation.
Question 14 - CIA 596 3.38 - Risk Management
In the annual review of the data center of a nationwide mortgage servicing company, the internal audit manager was concerned about the data center not having an adequate contingency plan. The audit manager was especially concerned because the data center was located close to a river that occasionally flooded and in the vicinity of a major railroad and a major highway.
Management acted on the internal auditor's recommendation to prepare a contingency plan. The most critical aspect of the plan would be to provide for
A. Continuation of mortgage servicing.

B. Minimizing expenses during recovery periods.
C. Security and control over information assets.
D. Monitoring for fraud or abuse during recovery.
Question 15 - CIA QZP1B.6 - Managing Resources
In regards to resource management the CAE has the responsibility for establishing a program for selecting and developing the internal auditing staff. All of the following should be part of that program except
A. Developing a compensation plan for the internal auditing staff.

B. Appraising each internal auditor’s performance at least annually.
C. Establishing annual performance objectives for internal auditors.
D. Developing a job description for each member of the auditing staff.
Senior management of an entity has requested that the internal audit activity (IAA) provide ongoing internal control training for all managerial personnel. This is best addressed by
A. A formal consulting engagement agreement.

B. A special consulting engagement agreement.
C. An emergency consulting engagement agreement.
D. An informal consulting engagement agreement.
Question 17 - CIA QZP2B.19 - Control Self-Assessment (CSA)
Which phrase best describes a control-based control self-assessment process?
A. Determining the cost-effectiveness of controls.

B. Examining how well controls are working in managing key risks.
C. Analyzing the gap between control design and control frameworks.
D. Evaluating, updating, and streamlining selected control processes.
Question 18 - CIA 591 I.11 - Planning
Which of the following is the best source of a chief audit executive's information for planning staffing requirements?
A. Interviews with existing internal audit staff.

B. Review internal audit staff size and composition of similarly sized organizations in the same industry.
C. Discussions of internal audit needs with senior management and the board.
D. Review of internal audit staff education and training records.
(c) HOCK international, page 1

Part 2 (3-Part) : 02/22/15 21:26:39
Question 19 - CIA 1190 I.21 - Risk Management
You are an internal auditing supervisor reviewing the working papers of a staff internal auditor's overall examination of the firm's sales function. The pages are not numbered or cross-referenced. Further, the working papers were dropped and reassembled at random before they were brought to you. You decide to put the working papers in the proper order according to the Standards. The first stage of this activity is to identify each page as a part of: (A) the preliminary survey, (B) the
review of the adequacy of control processes, (C) the review for effectiveness of control processes, or (D) the review of results.
The first page you select documents a test of controls performed during the course of the engagement. This page belongs with which activity?
A. Review for effectiveness of control processes.

B. Preliminary survey.
C. Review of results.
D. Review for adequacy of control processes.
In reviewing a cost-plus construction contract for a new catalog showroom, the internal auditor should be cognizant of the risk that
A. Income taxes related to construction equipment depreciation may have been calculated erroneously.
B. Payroll taxes may have been inappropriately omitted from billings.
C. Contractor cash budgets could have been inappropriately compiled.
D. The contractor could be charging for the use of equipment not used in the construction.
Question 21 - CIA 1193 II.9 - Planning
The internal auditor found that the purchasing department has a policy of setting all purchasing lead times to the highest number of days experienced within each product subassembly, even though some subassemblies required 3 or more months to complete. To address the objective of reducing inventory holding costs related to this policy, the internal auditor should focus on
A. Testing those products having the highest sales to determine the average number of days that the completed products were held in inventory.
B. Reviewing production requirements for a sample of products to determine at which point in the production process materials and subassemblies are needed.
C. Identifying signature approval authority among members of the purchasing department in relation to any computer system controls.
D. Evaluating whether product-line assignments were rotated among the members of the purchasing department.
A consulting activity appropriately performed by the internal audit activity (IAA) is
A. Installing systems of control.

B. Drafting procedures for systems of control.
C. Designing systems of control.
D. Reviewing systems of control before implementation.
An internal audit activity (IAA) uses the pool concept to assign all staff and most senior internal auditors to engagements. Which of the following would most likely ensure effective staff use?
A. Monthly engagement work schedules.

B. Annual activity reports for the internal audit activity.
C. Results of the last external assessment of the internal audit activity.
D. Permanent files of the activities to be reviewed.
During discussions with senior management, the chief audit executive (CAE) identified several strategic business issues to consider in preparing the annual engagement work schedule. Which of the following does not represent a strategic issue for this purpose?
A. Joint venture candidates will be sought to provide manufacturing and sourcing capabilities in European and Asian markets.
B. An international marketing campaign will be started to develop product recognition and also to leverage the new organization-based advertising department.
C. A monthly budgeting process will be implemented.
D. A human resources database will be established to ensure consistent administration of policies and to improve data retention.
In recent years, which two factors have changed the relationship between internal auditors and external auditors so that internal auditors are partners rather than subordinates?
A. The use of computerized accounting systems and the evolving economics of external auditing.
B. The increasing liability of external auditors and the increasing professionalism of internal auditors.
C. The globalization of audit entities and the increased reliance on computerized accounting systems.
D. The increasing professionalism of internal auditors and the evolving economics of external auditing.
Which of the following should be considered by the staff auditor when deciding whether or not to report the situation?
A. The mistake in signing off work that was not done.

B. The correction of the control weakness.
C. Securities were used improperly as collateral.
D. The repayment of loans and return of the securities.
Which of the following would be the least effective control procedure to address the proper use of funds donated to a nonprofit organization?
A. Periodic presentation of audited financial statements for review by the public and major donors.
B. Periodic internal audit of expenditures to determine compliance with stated objectives, with the results reported to the audit committee.
C. Periodic payroll audits by the internal auditor to determine compliance with authorized pay rates.
D. Requirement that the board of directors review and approve all expenditures in excess of a specified dollar amount.
Question 28 - CIA 591 III.12 - Managing Resources
Which of the following items would not be an appropriate staffing issue?
A. Appraising each internal auditor's performance at least annually.

B. Providing a competitive selection of employee benefits.
C. Selecting qualified and competent individuals.
D. Providing continuing educational opportunities for each internal auditor.
Question 29 - CIA 594 H1 - Managing Resources
Which of the following is not a good technique in providing feedback?
A. Make feedback well timed.

B. Focus on specific behaviors.
C. Keep feedback personal.
D. Direct negative feedback toward behavior, which is controllable by the recipient.
Risk modeling or risk analysis is often used in conjunction with development of long-range engagement work schedules. The key input in the evaluation of risk is
A. Management concerns and preferences.

B. Previous engagement results.
C. Specific requirements of professional standards.
D. Judgment of the internal auditors.
The advantage attributed to the establishment of internal auditing field offices for work at foreign locations is best described as
A. The possibility of increased objectivity of personnel assigned to a field office.

B. The increased ease of maintaining uniform organization-wide standards.
C. More contact with senior personnel leading to an increase in control.
D. A reduction of travel time and related travel expense.
Question 32 - CIA 1194 I.12 - Report to Senior Management & Board
As a particular engagement is being planned in a high-risk area, the chief audit executive (CAE) determines that the available staff does not have the requisite skills to perform the assignment. The best course of action consistent with engagement planning principles is to
A. Not perform the engagement because the requisite skills are not available.
B. Perform the engagement but limit the scope in light of the skill deficiency.
C. Consider using external resources to supplement the needed knowledge, skills, and other competencies and complete the assignment.
D. Use the engagement as a training opportunity and let the internal auditors learn as the engagement is performed.
Question 33 - CIA 1191 I.17 - Types of Engagements
An operational engagement relating to the production function includes a procedure to compare actual costs with standard costs. The purpose of this engagement procedure is to
A. Measure the effectiveness of the standard cost system.

B. Assess the reasonableness of standard costs.
C. Determine the accuracy of the system used to record actual costs.
D. Assist management in its evaluation of effectiveness and efficiency.
Which of the following directives would be most useful to a sales department manager in controlling and evaluating the performance of the manager's customer service group?
A. All customer inquiries should be answered within seven days of receipt.

B. Customer complaints should be processed promptly.
C. The customer is always right.
D. Employees should maintain a positive attitude when dealing with customers.
The chief audit executive (CAE) for a retail merchandise sales organization is considering engagement assignments for inclusion in the work schedule for the upcoming year. The following areas have not been evaluated recently and there are no known reasons that they should be given immediate attention. If resources are scarce, which project should be given priority?
A. Cash management and credit policy.

B. Corporate code of ethics and conflict of interest policy.
C. Budget preparation and forecasts.
D. Employee time reporting system.
The term "risk" is best defined as the uncertainty that
A. Management will, either knowingly or unknowingly, make decisions that increase the potential liability of the organization.
B. An event could occur affecting the achievement of objectives.
C. Financial statements or internal records will contain material misstatements.
D. An internal auditor will fail to detect a material misstatement that causes financial statements or internal reports to be misstated or misleading.
An organization is considering purchasing a commercial property. Because of the location of the property and the known recent history of activities on the property, management has asked the internal audit activity (IAA), in cooperation with legal counsel, to provide a preliminary identification of any environmental liability. The strongest reason supporting management's decision to request such an investigation is
A. The potential for future liability may outweigh any advantages achieved by obtaining the property.
B. Regulatory agencies require a purchaser to identify and disclose all actual and potential instances of contamination.
C. The current owner would be required by law to clean up all identified contamination before the sale is closed.
D. Management will be able to pay a lower price for the property if environmental contamination can be identified.

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Question 38 - CMA 1286 3.26 - Types of Engagements
Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as
A. Inherent risk.
B. Detection risk.
C. Sampling risk.
D. Audit risk.
The chief audit executive (CAE) can best ensure that staff internal auditors are prepared to meet their existing responsibilities by
A. Enforcing established recruiting and selection criteria.

B. Counseling them on their performance and providing appropriate training opportunities.
C. Conducting formal evaluations of their performance on each assignment.
D. Having experienced internal auditors supervise their work closely.
Which of the following represent(s) appropriate internal audit action in response to the risk assessment process?
I. The low-risk areas may be delegated to the external auditor, but the high-risk areas should be performed by the internal audit activity.
II. The high-risk areas should be integrated into an engagement work schedule along with the high-priority requests of senior management and the audit committee.
III. The risk analysis should be used in determining an annual engagement work schedule; therefore, the risk analysis should be performed only on an annual basis.
A. I and III only.

B. I only.
C. III only.
D. II only.
There are three primary Control Self-Assessment (CSA) approaches. Which one of the approaches does management produced a staff of business processes, which can then be used by the internal auditor to combine the results with information gathered from sources such as other mangers and key personnel?
A. Survey.
B. Facilitated team workshop.
C. Management-produced analysis.
D. Controlled-based analysis.
Question 42 - CIA QZP1B.9 - Report to Senior Management & Board
Which of the following would be true concerning the internal audit activity relationship with management and audit committee?
I. Management has the responsibility to review and forward engagement communications to the audit committee.
II. The accuracy of the engagement information should be verified with management.
III. Final engagement communications should be distributed to those members of the organization who are able to ensure that the engagement results are given due consideration.
A. I and II only.
B. II and III only.
C. I only.
D. I, II and III.
The internal audit activity's goals should specify
A. Measurement criteria and target dates for completion.

B. Staffing plans and financial budgets.
C. Engagement work schedules and activities to be reviewed.
D. Policies and procedures to guide the internal audit staff.
To avoid creating conflict between the chief executive officer (CEO) and the audit committee, the chief audit executive (CAE) should
A. Discuss all pending engagement communications to the CEO with the audit committee.
B. Request board establishment of policies covering the internal audit activity's relationships with the audit committee.
C. Strengthen independence through organizational status.
D. Submit copies of all engagement communications to the CEO and audit committee.
Feedback allows the chief audit executive (CAE) to monitor the internal audit activity's efficiency and effectiveness. Actions resulting from feedback include all of the following except
A. Identifying areas for future engagements.

B. Performing periodic follow-up procedures for outstanding recommendations.
C. Revising risk assessments made during the planning phase of an engagement.
D. Revising the actual engagement hours to reflect only budgeted hours.
Question 46 - CIA 1194 I.69 - Planning the Engagement
The internal auditor reviewed documentation showing that a customer had recently returned three expensive products to the regional service center for warranty replacement. The documentation also showed that the warranty clerk had rejected the claim and sent it to the customer's local distributor. The claim was rejected because the serial numbers listed in the warranty claim were not found in the computer's sales history file. Subsequently, the distributor supplied three different
serial numbers, all of which were validated by the computer system, and the clerk completed the warranty claim for replacements. What is the best course of action for the internal auditor under the circumstances?
A. Notify the appropriate authorities within the organization that there are sufficient indicators that a fraud has been committed.
B. Determine if the original serial numbers provided by the customer can be traced to other records, such as production and inventory records.
C. Summarize this item along with other valid transactions in the internal auditor's test of warranty transactions.
D. Verify with the appropriate supervisor that the warranty clerk had followed relevant procedures in the processing and disposition of this claim.
Question 47 - CIA 1194 2.20 - Communicate Engagement Results
An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives - verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of
the machinery to company accounting records.
It was confirmed that of the 30 machines selected from purchasing records for the sample, 10 were present on the warehouse floor and another five were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by
policy.
A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, there are both situational factors and message characteristics which can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The following elements are usually included in final audit reports: purpose, scope, results, conclusions, and recommendations. Which of the following describes all of the elements missing from the above report?
A. Purpose, scope, recommendation.

B. Result, conclusion, recommendation.
C. Scope, conclusion, recommendation.
D. Purpose, result, recommendation.
Question 48 - CIA 1189 II.19 - Communicate Engagement Results
An internal auditor's working papers should be reviewed by the
A. Audit committee of the board.

B. Chief audit executive.
C. Management of the organization's security division.
D. Management of the engagement client.
Management of a telephone and cable television enterprise has requested an engagement to evaluate its service department. The department is responsible for handling all customer inquiries regarding telephone or cable performance and assigning staff personnel to fix the problem, installing new cable lines and hooking them up to the customer's home, selling complementary products such as designer telephones, selling complementary services such as premium cable
television services, and additional telephone services such as call-waiting, three-line hookup, etc.
Management is very customer oriented and has a policy that 95% of customer complaints or inquiries must be fully addressed to the customer's satisfaction within 24 hours of receiving the call. All customer service inquiries that require a service technician must be logged in by the responding service agent. Although the department exists to handle customer needs, it is also viewed by management as a profit center. All revenue is generated from the sale of complementary services
or equipment and from service revenue. The department has been in existence for only three years and management has not developed a mechanism to evaluate the department's performance. However, management is concerned that the department might not be meeting management's goals.
During the preliminary planning, the following information is gathered.

Current Year Prev. Year Prior Year
Preliminary Information (2010) (2009) (2008)
Number of complaints logged 37,500 35,000 34,000
Number of service calls at customer
10,080 10,000 8,640
locations
Number of customers 1,250,000 1,100,000 1,000,000
Service call revenue $510,000 $500,000 $432,000
Sales of complementary services or
$6,250,000 $4,400,000 $3,750,000
equipment
No. of Staff Supp. Staff-7 Supp. Staff-7 Supp. Staff-5
Technicians Technicians-7 Technicians-7 Technicians-6
Total Service Department Costs $1,344,000 $1,275,000 $1,056,000
The internal auditor wishes to investigate whether the number of service calls is based more on the number of service technicians than on the number of complaints that actually merit service. The following are four engagement procedures that would be performed in sequence. Indicate when the internal auditor should have sufficient information to reach a conclusion on the assertion.
Step 1: Perform an analytical review by comparing the number of service calls per service technician and determine the average number of calls per year by technician.
Step 2: Obtain the customer complaint backlog file and determine the extent to which there is a backlog of service complaints that need to be addressed. Calculate an average number of backlogged complaints per technician.
Step 3: Send a confirmation to all customers who are shown on the backlog of complaints requesting information on the length of time for the backlog.
Step 4: Based on the customer's response in step 3, calculate an average number of backlog complaints and determine the number of new service technicians that would have to be added to address the complaints.
The engagement assertion will be sufficiently addressed when the following steps are completed.
A. Steps 1 and 2.
B. Steps 1, 2, and 3.
C. Steps 1, 2, 3, and 4.
D. Step 1.
According to the Standards, the findings in an internal audit report should include
A. Statements of both fact and opinion developed during the course of the audit.
B. Statements of opinion about the cause of a finding.
C. Statements of fact concerning the control weaknesses which were identified during the course of the audit.
D. Statements that may deal with potential future events and might be helpful to the audited department.
Question 51 - CIA 596 2.4 - Planning the Engagement
Data gathered in support of an audit conclusion can be rated on a continuum of reliability. The most reliable form of evidence would be an
A. Internal document subject to rigorous internal review procedures.

B. Internal document that has been circulated through an outside party.
C. External document obtained directly from an outside source.
D. Internal document obtained from the auditee.
If an auditor does not receive a response to a positive accounts receivable confirmation, alternative audit procedures may be necessary. Which of the following is the least effective alternative procedure?
A. Verify subsequent customer payment by reconciling payment with open items.

B. Examine supporting documentation, such as a shipping document.
C. Send an additional request to the customer.
D. Obtain a written confirmation from management guaranteeing the valuation and future receipt of payment.

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Shipments are made from the warehouse based on customer purchase orders. The matched shipping documents and purchase orders are then forwarded to the billing department for sales invoice preparation. The shipping documents are neither accounted for nor prenumbered. Which of the following substantive tests should be extended as a result of this control weakness?
A. Select bills of lading from the warehouse and trace the shipments to the related sales invoices.
B. Trace quantities and prices on the sales invoice to the customer purchase order and test extensions and footings.
C. Trace a sample of purchase orders to the related sales invoices.
D. Foot the sales register and trace the total to the general ledger.
A sales department has been giving away expensive items in conjunction with new product sales to stimulate demand. The promotion seems successful, but management believes the cost may be too high. Which of the following audit procedures would be the least useful to determine the effectiveness of the promotion?
A. Performing an analysis of marginal revenue and marginal cost for the promotion period, compared to the period before the promotion.
B. Performing a review of the sales department’s benchmarks used to determine the success of a promotion.
C. Comparing the unit cost of the products sold before and during the promotion period.
D. Comparing product sales during the promotion period with sales during a similar non-promotion period.
Which of the following is false with respect to the use of interim engagement communications? Interim engagement communications
A. Eliminate the need for issuing final engagement communications.

B. Are used to communicate information that requires immediate attention.
C. Keep management informed of engagement progress when engagements extend over a long period of time.
D. Are used to communicate a change in engagement scope for the activity under review.
Which of the following is not a benefit of using an interim report?
A. Interim reporting can be conducted on an informal basis.

B. An interim report allows information requiring immediate attention to be communicated.
C. The time required for writing the final report can be minimized.
D. A formal, written interim report may eliminate the need for a final report.
A standardized (pro forma) internal engagement work program would not be appropriate for which of the following situations?
A. A complex or changing operating environment.

B. A stable operating environment undergoing only minimal changes.
C. Subsequent inventory audits performed at the same location.
D. Multiple locations with similar operations.
Management of a telephone and cable television enterprise has requested an engagement to evaluate its service department. The department is responsible for handling all customer inquiries regarding telephone or cable performance and assigning staff personnel to fix the problem, installing new cable lines and hooking them up to the customer's home, selling complementary products such as designer telephones, selling complementary services such as premium cable
television services, and additional telephone services such as call-waiting, three-line hookup, etc.
Management is very customer oriented and has a policy that 95% of customer complaints or inquiries must be fully addressed to the customer's satisfaction within 24 hours of receiving the call. All customer service inquiries that require a service technician must be logged in by the responding service agent. Although the department exists to handle customer needs, it is also viewed by management as a profit center. All revenue is generated from the sale of complementary services
or equipment and from service revenue. The department has been in existence for only three years and management has not developed a mechanism to evaluate the department's performance. However, management is concerned that the department might not be meeting management's goals.
During the preliminary planning, the following information is gathered.

Current Year Prev. Year Prior Year
Preliminary Information (2010) (2009) (2008)
Number of complaints logged 37,500 35,000 34,000
Number of service calls at customer
10,080 10,000 8,640
locations
Number of customers 1,250,000 1,100,000 1,000,000
Service call revenue $510,000 $500,000 $432,000
Sales of complementary services or
$6,250,000 $4,400,000 $3,750,000
equipment
No. of Staff Supp. Staff-7 Supp. Staff-7 Supp. Staff-5
Technicians Technicians-7 Technicians-7 Technicians-6
Total Service Department Costs $1,344,000 $1,275,000 $1,056,000
The best engagement procedure to determine whether the organization is meeting its objective of satisfying 95% of customer inquiries within 24 hours is to
A. Select a mean-per-unit statistical sample from the total population base and trace the sample to the customer complaint log to determine whether or not 95% of the sample had their complaints addressed within 24 hours.
B. Develop a customer satisfaction survey and send it to a statistically selected sample of customers based on mean-per-unit sampling and ask them to identify the time it took for the service department to satisfactorily address their problem. Calculate a mean and standard deviation.
C. Develop a customer satisfaction survey and send it to all customers, and include a question about the timeliness of service.
D. Select an attribute sample from the population of logged-in customer complaints and trace to records indicating its disposition, noting time and nature of disposition.
Which of the following procedures should be performed as part of a preliminary review in an audit of a bank’s investing and lending activities?
A. Review reports of audits performed by regulatory and outside auditors since the last internal audit.
B. Interview management to identify changes made in policies regarding investments or loans.
C. Review minutes of the board of directors’ meetings to identify changes in policies affecting investments and loans.
D. All of the above.
While testing a division's compliance with company affirmative action policies, an auditor found that:
1. Five percent of the employees are from minority groups.
2. No one from a minority group has been hired in the past year.
The most appropriate conclusion for the auditor to reach is that
A. With five percent of its employees from minority groups, the division is effectively complying.
B. Insufficient evidence exists of compliance with affirmative-action policies.
C. The division is violating the company’s policies.
D. The company’s policies cannot be audited and hence cannot be enforced.
In the preparation of an engagement work program, which of the following items is not essential?
A. A review of criteria established by management to determine whether operating goals and objectives have been accomplished.
B. A review of material from prior engagement communications.
C. The preparation of a budget identifying the costs of resources needed.
D. The performance of a preliminary survey.
In deciding whether recorded sales are valid, which of the following items of information is most reliable?
A. Accounts receivable records showing cash collections from the customer.

B. The shipping document, independent bill of lading, and the invoice for the merchandise.
C. A memorandum from the director of the shipping department stating that another employee verified the personal delivery of the merchandise to the customer.
D. A copy of the customer's purchase order.
An internal auditor is performing an operational engagement at a division and observes that an unusually large quantity of goods is on hand in the shipping and materials rework areas. The items are labeled as re-ship items. Upon inquiry the internal auditor is told that they are goods that have been returned by customers and have either been repaired and shipped back to the original customer or repaired and shipped out as new products because they are fully warranted.
Assume the internal auditor found that most of the goods were repaired and sold as new items. Such sales are both (1) against organizational policy, and (2) against governmental regulations. The internal auditor does not know whether fraud was involved or the extent of divisional management’s involvement in the scheme. The internal auditor should report the observations to
A. Divisional management and relevant regulatory bodies.

B. Divisional management, the board, and senior management.
C. Divisional management only because it is responsible for correcting the problem.
D. The board and senior management only.
Question 64 - CIA 1191 II.9 - Planning the Engagement
An outside consultant is developing methods for the management of a city's capital facilities. An appropriate scope of an engagement to evaluate the consultant's product is to
A. Establish the parameters of the value of the items being managed and controlled.
B. Determine the adequacy of the risk management and control systems for the management of capital facilities.
C. Review the handling of idle equipment.
D. Review the consultant's contract to determine its propriety.
The scope of an internal auditing engagement is initially defined by the
A. Scheduling and time estimates.

B. Preliminary survey.
C. Engagement work program.
D. Engagement objectives.
Question 66 - CIA 594 I.38 - Communicate Engagement Results
The chief audit executive (CAE) for a city has just completed a quarterly meeting with the audit committee. The committee has expressed two major concerns they would like the internal audit activity (IAA) to examine as part of its operational audits during the next year:
1. Is the "downsizing" that the city has been going through resulting in the "right-sizing" of staff for the city? The audit committee has suggested that a review of a few areas might be appropriate and could provide some preliminary evidence in addressing the committee's concerns.
2. Is the city making suboptimal long-run decisions in an effort to improve short-run cash flow? In particular, the audit committee has suggested that the IAA perform an operational audit of the transportation department, which is responsible for the operation of the city bus line.
Indicate whether the following statement is true or false regarding the first area of audit committee concern.
"The CAE should communicate to the audit committee that such an audit cannot be performed because no criteria exist to evaluate right-sizing."
A. This is a true statement.

B. This is a false statement.
C. -
D. -
Which of the following techniques is best for emphasizing a point in a written communication?
A. Use a passive rather than active voice.

B. Use a short sentence with one idea rather than a longer sentence with several ideas.
C. Highlight the point through the use of non-parallel structure.
D. Place the point in the middle rather than at the beginning or end of the paragraph.
Which of the following techniques is best for emphasizing a point in a written communication?
A. Use a passive rather than active voice.

B. Use a short sentence with one idea rather than a longer sentence with several ideas.
C. Highlight the point through the use of non-parallel structure.
D. Place the point in the middle rather than at the beginning or end of the paragraph.
A transportation department maintains its vehicle inventory and maintenance records in a database. Which of the following audit procedures is most appropriate for evaluating the accuracy of the database information?

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A. Use program tracing to show how, and in what sequence, program instructions are processed in the system.
B. Simulate normal processing by using test programs.
C. Submit batches of test transactions through the current system and verify with expected results.
D. Verify a sample of the records extracted from the database with supporting documentation.
An internal auditor observes that controls over the perpetual inventory system are weak. An appropriate engagement response is to
A. Perform turnover ratio tests.

B. Recommend that a physical inventory count be scheduled.
C. Apply gross profit analyses by product lines and compare the results with prior-years' information for reasonableness.
D. Increase the testing of the inventory controls.
One of the primary roles of an engagement work program is to
A. Provide for a standardized approach to the engagement.

B. Serve as a tool for planning and conducting engagement work.
C. Assess the risks associated with the activity under review.
D. Document an internal auditor's evaluations of controls.
The best description of the principal purpose for retaining working papers is to
A. Provide a basis for supervisory review.

B. Maintain the engagement work program for reuse in the next engagement.
C. Provide support for the final engagement communication.
D. Help perform the engagement in an orderly fashion.
An internal auditor found that employees in the maintenance department were not signing their time cards. This situation also existed during the last engagement. The internal auditor should
A. Withhold conclusions about payroll internal control in the maintenance department.

B. Include this observation in the current engagement communication.
C. Instruct the employees to sign their time cards.
D. Ask the manager of the maintenance department to assume the resulting risk.
Question 73 - IIA, adapted CIA H148 - Communicate Engagement Results
A medium-sized municipality provides 8.5 billion gallons of water per year for 31,000 customers. The water meters are replaced at least every 5 years to ensure accurate billing. The water department tracks unmetered water to identify water consumption that is not being billed. The department recently issued the following water activity report:
Month Month Month 1st Quarter 1st Quarter
Activity One Two Three Actual Goal
Meters Replaced 475 400 360 1,235 1,425
Leaks Reported 100 100 85 285
Leaks Repaired 100 100 85 285 100%
Unmetered Water 2% 6% 2% 4% 2%
Based on the activity reported for the unmetered water, an internal auditor would conclude that
A. Deviations from the goal were probably not corrected.

B. The operating standard should be changed.
C. Established operating standards are understood and are being met.
D. Further audit investigation of unmetered water is not warranted.
Which of the following is least likely to be placed on the agenda for discussion at a pre-engagement meeting?
A. Records and client personnel needed.

B. Purpose and scope of the engagement.
C. Sampling plan and key criteria.
D. Expected starting and completion dates.
Indicate whether the following statement is true or false regarding the first area of audit committee concern.
"Although the audit was requested by the audit committee, the audit results should still be formally communicated to the affected departmental manager and the city executive."
A. -
B. -
C. This is a false statement.
D. This is a true statement.
Which of the following is not likely to be included as an audit step when assessing vendor performance?
A. Determine whether vendors delivered desired lot sizes.

B. Determine whether the balances owed to vendors are correct.
C. Determine whether only authorized items were received from vendors.
D. Determine whether the quality of the goods purchased from vendors has been satisfactory.
To identify the amount of obsolete inventory which might exist, an internal auditor would probably collect evidence using all the following except
A. Confirmation.
B. Analytical review.
C. Recomputation.
D. Scanning.
An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives - verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of
the machinery to company accounting records.
It was confirmed that of the 30 machines selected from purchasing records for the sample, 10 were present on the warehouse floor and another five were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by
policy.
A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, there are both situational factors and message characteristics which can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The objectives of an audit report are to inform and to influence. Whether these objectives are met depends on the clarity of the writing. Which of the following principles of report clarity was violated in the above audit report?
A. Appropriately organize the report.

B. Keep most sentences short and simple.
C. Use active voice verbs.
D. All of the above.
In preparing for the review of transportation costs, the internal auditor gathers the following information for the past few years.
Current Last 2 Years 3 Years
Year Year Ago Ago
Bus miles driven 9.0 million 8.4 million 7.2 million 6.8 million
Number of buses in operation 40 40 40 36
Average age of bus 10 years 9 years 8 years 7.5 years
Maintenance costs $1.6 million $1.2 million $750,000 $800,000
Other operating costs $1 million $900,000 $720,000 $680,000
Driver overtime cost $400,000 $240,000 $80,000 $20,000
Accidents or breakdowns per year 480 360 120 50
Purchases of new buses $0 $0 $0 $800,000
Total number of drivers 80 80 75 72
New drivers 30 25 15 5
Total cost of bus operation $5.4 million $4.15 million $3.20 million $3.45 million
Revenue generated $2.98 million $2.52 million $2.16 million $2.42 million
Bus fare throughout the year $1.00 $.80 $.80 $.60
Growth rate of city population 5% 5% 10% 3%
Bus drivers' salaries have been constant at $30,000 per year.
The average cost of a bus is $200,000.
Buses are depreciated over 20 years using the straight-line method.
A staff auditor has made the following four conclusions about the current year from the data:
1. Bus driver turnover has increased in relation to prior years.
2. Bus ridership in terms of the number of passengers has increased in relation to prior years.
3. The operating cost per bus mile has increased in relation to prior years.
4. Average maintenance cost per bus has increased in relation to prior years.
Which of the above represent appropriate conclusions from the data presented?
A. 1, 2 and 3.
B. 2, 3 and 4.
C. 1, 2, 3 and 4.
D. 1, 3 and 4.
In spite of all the arguments, the CAE decides to go ahead and perform preliminary investigation in two areas to address the audit committee's first concern. Which of the following procedures would not be appropriate in performing the preliminary investigation?
A. Develop a preliminary questionnaire that might be used to gather objective information on employee morale.
B. Interview executive management to determine whether or not criteria exists to determine the right size of departments?
C. Interview departmental managers to determine the approach used to make cuts in their operating budgets.
D. Use risk analysis and select the two departments that would hold the largest risk of potential misstatement of account balances.
Question 81 - CIA QZP2A.10 - Communicate Engagement Results
The primary reason for having written formal audit reports is to
A. Record observations and recommended courses of action.

B. Document the corrective actions required of senior management.
C. Provide an opportunity for engagement client response.
D. Provide a formal means by which the external auditor assesses potential reliance on the internal audit activity.
When making a presentation to management, the internal auditor wants to report observations, conclusions, and recommendations and to stimulate action. These objectives are best accomplished by

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A. Handing out copies of the final engagement communication, asking the participants to read it, and asking for questions.
B. Delivering a lecture on the engagement results.
C. Showing a series of slides or overheads, which graphically depict the engagement results; limit verbal commentary.
D. Using slides/overheads to support a discussion of major points.
An internal auditor is assigned to perform an engagement to evaluate the organization's insurance program, including the appropriateness of the approach to minimizing risks. The organization self-insures against large casualty losses and health benefits provided for all its employees. It is a large national entity with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The organization's medical costs
have been rising by approximately 8% per year for the past five years, and management is concerned with controlling these costs.
Which of the following analytical review procedures would provide the most insight into the reasonableness of the increase in health care costs?
A. Obtain the government index of health care costs for the comparable period of time and compare the rate of increase with that of the cost per employee incurred by the company.
B. Develop a comparison of overall health insurance costs incurred by the company.
C. Obtain a bid from another health care administrator to provide the same administrative services as the current health care administrator.
D. Develop a comparison of the costs incurred with similar costs incurred by other companies.
Question 84 - CIA 1193 II.20 - Supervise Engagement
An internal auditing manager is reviewing the engagement working papers prepared by the staff. Which of the following review comments is true?
A. Each working paper should include the actual and the budgeted times related to such engagement work.
B. Each working paper should include a statement regarding the engagement client's cooperation.
C. Including copies of all the forms and directives of the engagement client constitutes over documentation.
D. Conclusions need not be documented in the working papers when the engagement objectives are achieved.
During an engagement relating to purchasing, the internal auditor finds that the largest blanket purchase order is for tires, which are expensed as vehicle maintenance items. The fleet manager requisitions tires against the blanket order for the company's 400-vehicle service fleet based on a visual inspection of the cars and trucks in the parking lot each week. Sometimes the fleet manager picks up the tires but always signs the receiving report for payment. Vehicle service data are
entered into a maintenance database by the mechanic after the tires are installed. What is the best course of action for the internal auditor in these circumstances?
A. Determine whether the number of tires purchased can be reconciled to maintenance records.
B. Count the number of tires on hand and trace them to the related receiving reports.
C. Compare the number of tires purchased under the blanket purchase order with the number of tires purchased in the prior year for reasonableness.
D. Select a judgmental sample of requisitions and verify that each one is signed by the fleet manager.
Question 86 - CIA 596 1.1 - Monitor Engagement Outcomes
An internal audit team recently completed an audit of the company's compliance with its lease versus purchase policy concerning company automobiles. The audit report noted that the basis for several decisions to lease rather than purchase automobiles had not been documented and was not auditable. The report contained a recommendation that operating management ensure that such lease agreements not be executed without proper documentation of the basis for the
decision to lease rather than buy. The internal auditors are about to perform follow-up work on this audit report. The primary purpose for performing a follow-up review is to
A. Ascertain that appropriate action was taken on reported findings.

B. Allow the internal auditors to evaluate the effectiveness of their recommendations.
C. Ensure timely consideration of the internal auditors' recommendations.
D. Document what management is doing in response to the audit report and close the audit file in a timely manner.
In evaluating the quality of housekeeping services performed in a large hospital, the most reliable source of evidence would be
A. Interviews with top hospital officials.

B. Interviews with a sample of medical personnel.
C. A review of housekeeping records maintained by the medical records department of the hospital.
D. A review of survey forms returned by medical personnel directly to the manager of housekeeping services.
Question 88 - CIA QZP2A.5 - Planning the Engagement
Which of the following examples of audit evidence is the most persuasive?
A. Real estate deeds, which were properly recorded with a government agency.
B. Canceled checks written by the treasurer and returned from a bank.
C. Vendor invoices filed by the accounting department.
D. Time cards for employees that are stored by a manager.
An inexperienced internal auditor notified the senior auditor of a significant variance from the engagement client's budget. The senior told the new internal auditor not to worry because the senior had heard that there had been an unauthorized work stoppage that probably accounted for the difference. Which of the following statements is most appropriate?
A. The senior used proper judgment in curtailing what could have been a wasteful investigation.
B. The new internal auditor should have investigated the matter fully and not bothered the senior.
C. The senior should have aided the new internal auditor in formulating a plan for accumulating appropriate information.
D. The senior should have halted the engagement until the variance was fully explained.
Engagement work programs testing internal controls should
A. Reduce costly duplication of effort by ensuring that every aspect of an operation is examined.
B. Be generalized to fit all situations without regard to departmental lines.
C. Be generalized so as to be usable at all locations of a particular department.
D. Be tailored for the audit of each operation.
Question 91 - CIA 1194 I.66 - Fraud Risks & Controls
The following are facts about a subsidiary:

1. The subsidiary has been in business for several years and enjoyed good profit margins although the general economy was in a recession, which affected competitors.
2. The working capital ratio has declined from a healthy 3 to 0.9.
3. Turnover for the last several years has included three controllers, two supervisors of accounts receivable, four payables supervisors, and numerous staff in other financial positions.
4. Purchasing policy requires three bids. However, the supervisor of purchasing at the subsidiary has instituted a policy of sole-source procurement to reduce the number of suppliers.
When conducting a financial audit of the subsidiary, the internal auditor should
A. Most likely not detect 1, 2, or 3.

B. Ignore 2 since the economy had a downturn during this period.
C. Consider 3 to be normal turnover, but be concerned about 2 and 4 as warning signals of fraud.
D. Consider 1, 2, 3, and 4 as warning signals of fraud.
Question 92 - CIA 591 II.47 - Fraud Risks & Controls
Purchases from two new vendors increased dramatically after a new buyer was hired. The buyer was obtaining kickbacks from the two vendors based on sales volume. A possible means of detection is
A. The receipt of an invoice to put new vendors on the master file.

B. Periodically surveying vendors regarding potential buyer conflict of interest or ethics violations.
C. The use of purchase orders for all purchases.
D. The use of change analysis and trend analysis of buyer or vendor activity.
Question 93 - CIA 595 1.69 - Fraud Risks & Controls
During an audit, the internal auditor found a scheme in which the warehouse director and the purchasing agent for a retail organization diverted approximately $500,000 of goods to their own warehouse, then sold the goods to third parties. The fraud was not noted earlier since the warehouse director forwarded receiving reports (after updating the perpetual inventory records) to the accounts payable department for processing.
Assume the perpetrators confessed to the auditors. What is the appropriate auditor action?
A. Orally report the confession to management and suggest they report it to legal authorities because a crime was involved. Do not document.
B. Omit the documentation from the working papers because it is subjective, sensitive, and may become legal evidence. Report the details to management and have them request legal counsel to document the confession.
C. Request the perpetrators sign the auditor's summary of the confession and include it in the working papers. Report the details to senior management for further action.
D. Inform the perpetrators of their rights, document their confession on tape, and inform the local legal authorities of the crime.
During an engagement involving the purchasing department, an internal auditor learned that one vendor rewarded buyers in proportion to the size of the orders received from them. What recommendation should the internal auditor make to reduce the likelihood of future acceptance of such rewards by the buyers?
A. A strong, written statement of management’s commitment to organizational ethics.

B. A policy of identifying and reducing buyer situational pressures.
C. Periodic review of buyer lifestyles.
D. Establishing an employee counseling program.
Management of a non-profit organization has been monitoring spending and is concerned because payments to some vendors appear to be unusually high. Most purchases are made through the purchasing function which is organized around three buyers, each with defined purchasing areas. The purchasing agents place the purchase orders and receive copies of receiving reports to ensure goods are received. They review the reports and compare them with the purchase orders
before sending the items to accounts payable with their approval for payment. All vendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasing agents. The organization has a policy of requiring three bids on all purchases which exceed $10,000.
Management has requested that the auditor investigate the possibility of kickbacks going to a purchasing agent. Which of the following procedures would be least effective in addressing management's concern?
A. Observe any changes in the lifestyles or individual consumption habits of the purchasing agents involved.
B. Confirm all contract terms with vendors.
C. Analyze, by purchasing agent, all increases in cost of procured goods from specific vendors.
D. Take a statistical sample of goods purchased and compare purchase prices for goods with those of other sources of similar goods, such as other companies or catalogs.
Which of the following statements is (are) true regarding the deterrence of fraud?
I. The primary means of deterring fraud is through an effective control system initiated by senior management.
II. Internal auditors are responsible for assisting in the deterrence of fraud by examining and evaluating the adequacy of the internal control system.
III. Internal auditors should determine whether communication channels provide management with adequate and reliable information regarding the effectiveness of the control system and the occurrence of unusual transactions.
A. I and II only.
B. I, II, and III.
C. I only.
D. II only.
An internal auditor’s field work uncovers a series of transactions that indicate a possible embezzlement. Which of the following actions should the chief audit executive (CAE) take?
A. Discuss the case with the board.

B. Consult with security personnel.
C. Confront the suspected embezzler to determine that the facts are correct.
D. Review the finding with the suspect's fellow workers to see whether they can furnish additional evidence.
Which of the following is both an appropriate personnel function and a deterrent to payroll fraud?
A. Authorization of changes to the payroll.

B. Collection and retention of unclaimed paychecks.
C. Authorization of overtime.
D. Distribution of paychecks.
The internal auditor of a company has been assigned to perform an audit of the company's investment activities with particular emphasis on the company's use of new financial instruments referred to as derivatives.
An investment portfolio manager has the authority to use financial derivatives to hedge transactions but is not supposed to take speculative positions. However, the manager launches a scheme which includes: (1) taking a position larger than required by the hedge; (2) putting the speculative gains in a suspense account; and (3) transferring the funds to a non-existent broker and from there to a personal account.
Which of the following audit procedures would be least effective in detecting this fraud?
A. Sample fund transfers to brokers and determine if the brokers are on the authorized list for company transactions.
B. Sample all debits to the suspense account and examine their disposition.
C. Sample individual trades and determine the exact matching of a hedge. Schedule and investigate all differences.

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D. Examine individual trades to determine whether the trades violate the authorization limit for the manager.

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A. The audit plan had been approved by both senior management and the board. The change dictated by senior management should be reported to the board.
B. This would not have to be communicated. The audit work was done. The CAE would have to determine that there was no impairment of the independence of the senior's work. If there was none, the report could be issued without reporting the personnel change.
C. This is a standard part of the required reporting to senior management and the board.
D. This is a standard part of the required reporting to senior management and the board.
A. The organizational status of the IAA is to enhance when the audit committee and board support it.
B. The audit committee would generally receive the final summary engagement communications. It is the responsibility of the CAE to review and endorse the engagement communications prior to their release.
C. The review and approval of specific engagement work programs is the responsibility of the internal auditing supervisors. These plans would then be included in the overall annual IAA plan that is reviewed and approved by the audit committee.
D. The audit committee will not decide whether the external auditor is to use the work of the internal auditors.
Question 3 - CIA QZP1C.2 - Risk Management
A. The purchase of new equipment that will improve profitability is not a risk factor. The other items (I, III and IV) are risk factors.
B. The purchase of new equipment that will improve profitability is not a risk factor. The other items (I, III and IV) are risk factors.
C. The purchase of new equipment that will improve profitability is not a risk factor.
D. A significant improvement in the product of a competitor will make the competitor more competitive, so therefore adversely affecting the organization. In addition, a planned audit engagement that was not completed on a timely basis and no organizational commitment to further develop employee technical skills are factors that can also adversely affect the organization.
A. CSA enhances employee understanding and accountability. In addition, it encourages more open communication, teamwork and continuous improvement.
B. There are several advantages of implementing a CSA program. These advantages are: (1) Enhanced employee understanding of risk and controls; (2) Empowers the employees and enhances accountability; (3) Enhances employee consciousness; (4) Provides mechanism for early risk detection; and (5) Encourages more open communication, teamwork and continuous improvement.
C. CSA enhances employee understanding and accountability. In addition, it encourages more open communication, teamwork and continuous improvement.
D. CSA is not a technique used to uncover fraud. At best, it can be used to show were control weaknesses are in the organization.
A. Audit risk is the risk that the auditor will give an unqualified opinion, when in fact; there is a material misstatement in the area being audited.
B. Control risk is the risk that the internal controls will not detect, or prevent the error.
C. Detection risk is the risk that the auditor will not detect a material misstatement. Detection risk is affected by the auditor's procedures and can be changed at his or her discretion.
D. Inherent risk is the risk that there is an error in the first place.
A. According the Sarbanes-Oxley, the audit committee is to be directly responsible for the appointment, compensation, and oversight of the registered public accounting firm employed to perform the audit.
B. Approving internal audit activity policies does not strengthen the control process.
C. The audit committee should provide support to the internal auditors. One way to do this is to follow up on recommendations made by the chief audit executive.
D. Assigning the internal audit activity responsibility for interaction with governmental agencies does not strengthen the control process.
Question 7 - CIA QZP1B.20 - Strategic Role of Internal Auditing
A. All of the answers are correct. Coordination with the external auditor is important for the company. There is potential for increased efficiency of both audits areas and reduced cost of the external audit. Also, the internal and external auditors should coordinate together to ensure adequate audit coverage and to minimize duplicate efforts.
B. All the answers are correct.
C. All the answers are correct.
D. All the answers are correct.
A. This describes the most significant role that the IAA may have in the organization's CSA effort. But, it is possible that the IAA’s role may be minimal.
B. This describes the smallest role that the IAA may have in the organization's CSA effort. But, it is possible that the IAA's role may be quite significant.
C. In most programs, internal audit's investment in the organization’s CSA effort is somewhere between the two extremes. Its role may be quite significant. It may sponsor, design, implement, and in effect, own the process, conducting the training, supplying the facilitators, scribes, and reporters, and orchestrating the participation of management and work teams. In other CSA programs, its role may be minimal, serving as interested party and
consultant of the whole process and as ultimate verifier of the evaluations produced by the teams. In most programs, internal audit’s investment in the organization’s CSA efforts is somewhere between the two extremes.
D. It's most likely the internal auditor will have some role to play in the organization's CSA effort.
A. A fundamental control concept over cash is that someone establishes a mechanism to monitor the risks.
B. Oversight by a management committee is an important control. Therefore, the auditor should determine the nature of the oversight set up to monitor and authorize such investments.
C. Part of the audit is to determine compliance with company policies. Since new financial instruments are very risky, the first step of such an audit should be to determine the nature of policies established for the investments.
D. Although this might be informational, there is no need to develop a comparison of investment returns with other organizations. Indeed, recent financial investment scandals show that such comparisons can be highly misleading because high returns were due to taking on a high level of risk. Also, this is not a test of the adequacy of the controls.
A. Job (position) descriptions facilitate recruiting by: (a) stating explicit job requirements; (b) providing objective promotion criteria; (c) used to justify adequate salaries; (d) express organizational expectations of employees; and (e) compel the IAA to engage in personnel planning.
B. Written examinations are not part of the program of selecting and developing IAA staff.
C. Counseling should be done in regards to enhancing the internal auditors job performance, not career opportunities.
D. Accounting degrees are necessary if the internal auditor is engaged in analyzing financial and accounting data. But, in some cases the IAA may need a different type of specialist.
A. Responsibility to the public takes precedence over the loyal to one’s organization.
B. The purpose of the internal auditing activity is to be an independent, objective assurance and consulting activity designed to add value and improve operations. The IIA Code of Ethics is intended to be the ethical guide of conduct for internal auditors.
C. There are different levels of competence, and thus, it would be impossible for all members of the profession to have approximately the same level of competence.
D. Although, reduced lawsuits might result from establishing a code of conduct, this is not its primary purpose.
A. A postengagement questionnaire is a good method to get the engagement client to make change.
B. Brochures are a good method to promote ideas, concepts, etc.
C. Bulletins are a good method to promote ideas, concepts, etc.
D. Directives are not a good method of promoting. There may be resentment towards the internal auditors.
Question 13 - CIA 595 III.2 - Planning
A. This could lead to an adversarial relationship.
B. Internal auditors are not considered independent if they implement policies and procedures for the engagement client.
C. Consultation with the engagement client helps to facilitate good relations. This is important because the engagement client will then be more likely to accept the recommendations of the internal auditor.
D. Consultation is not likely if it involves a fraud investigation.
Question 14 - CIA 596 3.38 - Risk Management
A. The most critical aspect of the planning would be to provide for continuation of mortgage servicing because without mortgage servicing, the company would be out of business.
B. Of course, the company would want to minimize expenses during recovery periods but not at the expense of continuing to service mortgages.
C. There should be control over information assets at all times, but that is not the most critical aspect
D. Deterring and detecting fraud or abuse while processing in recovery mode is important, but that is not the most critical aspect to consider.
Question 15 - CIA QZP1B.6 - Managing Resources
A. Developing a compensation plan for the internal auditing staff would not be part of the CAE's program for selecting and developing the IAA. This program would be developed by the human resource department.
B. Appraising each internal auditor's performance at least annually would be part of the CAE’s program for selecting and developing the internal auditing staff.
C. Part of the CAE's responsibility for selecting and developing the internal auditing staff is to make sure that annual performance objectives for internal auditors are established.
D. Part of the CAE's program for selecting and developing the internal auditing staff is to make sure each staff member has a written job description.
A. Consulting services may be conducted as either part of the internal auditor's normal or routine activity, or as a special request made by management. Because this consulting service is for on-going internal control training it should be subject to a formal consulting agreement.
B. Special consulting engagements apply more to one-time special arrangements.
C. Emergency consulting engagements apply more to unplanned engagements, such as participation on a team established for recovery or maintenance of operations after a disaster or other extraordinary business event.
D. An informal consulting agreement is generally for routine activities, such as participation on steering committees, etc.
Question 17 - CIA QZP2B.19 - Control Self-Assessment (CSA)
A. Determining the cost-effectiveness of controls is not the primary focus of the control-based process.
B. A control-based format focuses on how well the controls in place are working. The aim of the workshop is to produce an analysis of the gap between how controls are working and how well management expects those controls to work. An important aspect of this workshop is identifying the key risks and controls before the beginning of the workshop. Then during the workshop, the work team assesses how well the controls mitigate risks.
C. Analyzing the gap between control design and control framework does not adequately describe a control-based process.
D. This situation describes a process-based approach.
A. The work schedule would be the first consideration to determine the number and skills of the required staff. Interviews with staff would probably occur later.
B. The staffing plan is unique to every company.
C. It will be the CAE's responsibility to establish risk-based plans to determine the priorities of the IAA. In order to establish these risk based plans, input from senior management is critical.
D. The first consideration would be the work schedule to determine the number and skills of the required staff.

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A.
The IAA must evaluate the adequacy and effectiveness of controls in responding to risks within the organization's governance, operations, and information systems regarding the:
Reliability and integrity of financial and operational information;
Effectiveness and efficiency of operations;
Safeguarding of assets; and
Compliance with laws, regulations, and contracts (Standard 2130.A1).
The testing of controls is performed in reviews for effectiveness of control systems.
B. The preliminary survey might include a review of tests from a prior engagement as background material. But, a current test would not have yet been performed.
C. The test of controls is not performed in the review of results.
D. The adequacy of control processes will be present if management has planned in a manner that will provide a reasonable assurance that the organization's goals and objectives will be achieved efficiently and economically. The testing of controls is performed in reviews for effectiveness of control systems.
A. Whether or not the income tax calculations related to depreciation were done correctly is not relevant to the contract.
B. Whether or not payroll taxes were omitted does not impact the chances of being charged too much for the contract.
C. Whether the contractor compiled their cash budgets correctly is irrelevant to the internal auditor as it will not impact the amount that the company is charged.
D. In a cost-plus contract, the supplier is charging for all of the costs that are incurred, plus some additional amount. Therefore, the internal auditor will need to check to confirm that all costs for which the company is being charged were actually related to the job.
A. Testing products with the highest sales to determine days in inventory will not impact the inventory storage costs.
B. By investigating when in the production process the materials need to be ordered, the internal auditor will be able to reduce the number of days that parts are held in inventory and this will reduce the inventory storage costs.
C. The signature approval process is not related to the reduction of inventory storage costs.
D. The rotation of job assignments is not related to the reduction of inventory storage costs.
A. Installing systems of control is presumed to impair independence.
B. Drafting procedures for systems of control is presumed to impair independence.
C. Designing a system of control is presumed to impair objectivity.
D. Reviewing systems of control before implementation is not presumed to impair objectivity.
A. Monthly engagement work schedules would be the best method of ensuring an effective use of staff. Staffing plan and financial budgets, including the number of auditors and the knowledge, skills, and other competencies required to perform their work, should be determined from engagement work schedules, administrative activities, education and training requirements, and audit research and development efforts.
B. Annual activity reports should be periodically submitted to management and the board with comparison of actual performance with stated IAA goals. But, these reports would not provide control over future usage of staff.
C. Results of external assessments of the IAA provide good feedback information but would not directly contribute to the effective use of the IAA staff.
D. Maintenance of files will not directly contribute to the effective use of IAA staff.
A. Seeking joint venture candidates would be part of the long-term strategic issues that would be considered by the CAE.
B. An international marketing campaign would be a long-term strategic issue for the CAE.
C. A monthly budgeting process is part of the short-term operating decision making process, so therefore would not be considered by the CAE.
D. Establishing a human resource database is a long-term strategic issue that would be considered by the CAE.
A. The use of computerized accounting systems would have no effect on the relationship between internal and external auditors.
B. The increasing liability of external auditors has not led to a change in the relationship between internal auditors and external auditors so that they are partners rather than subordinates.
C. The globalization of the audit entities would have no effect on the relationship between internal and external auditors.
D. The two primary factors that have changed the relationship between internal and external auditors are: (1) The internal auditing profession has become more and more professional with more internal auditors being professional auditors. This has increased the quality level of work done by the internal auditors and also increased the scope of the work that is done by them. (2) The cost of the external audit has grown so much in recent years that
the companies are looking for any way to reduce that cost. This can be accomplished by having a strong, objective, competent internal auditor function that the external auditor can reply on to some extent.
A. A mistake was made in signing off work that was not done, but since it was a mistake and not done with intent, this fact would probably not be reported by the internal auditor.
B. Since the correction has been made, it probably does not need to be reported by the internal auditor.
C. The internal auditor would report the situation to ensure that the situation could not occur again.
D. This is a situation that would not be reported by the internal auditor.
A. This is an effective control because it provides accountability to the public at large. It provides detail on the amount of expenditures for administrative purposes. Donors and sponsors can utilize this information to determine whether the appropriate amounts are used for designated purposes.
B. This audit procedure provides direct assurance that expenditures are used for designated purposes.
C. This is the least effective control because it only addresses whether payroll is made at the correct rates. Problems with the use of funds could relate to inappropriate payments other than payroll.
D. Board of directors’ approvals in a nonprofit organization provide an effective control against unauthorized administrative actions.
Question 28 - CIA 591 III.12 - Managing Resources
A. The appraisal of a staff members work is a staffing issue.
B. Providing employee benefits that are competitive is an HR decision that the company makes and it is not relating to the staffing of the internal audit function.
C. Selecting qualified and competent individuals is a staffing issue.
D. The provision of continuing professional education opportunities for each staff member is a staffing issue. Therefore, this is the correct answer.
Question 29 - CIA 594 H1 - Managing Resources
A. Feedback is most meaningful to a recipient when there is a very short time interval between his or her behavior and the receipt of feedback about that behavior.
B. Feedback should be specific rather than general.
C. Feedback, particularly negative feedback, should be impersonal. It should be descriptive rather than judgmental or evaluative.
D. There is little value in reminding a person of some shortcoming over which he or she has no control.
A. In order to assess the risk posed by management, judgment on part of the internal auditor is required.
B. Previous engagement results are not the key input in the evaluation of risk.
C. The professional standards are not the key input in the evaluation of risk.
D. Matters to be considered in establishing engagement work schedule priorities include an updated assessment of risks and effectiveness of risk management and control processes. Risk is the probability of an event occurring that will have an impact on the achievement of objectives. Thus, in assessing the probability of risk of a long-range engagement work the judgment of the internal auditor is required.
A. It's possible that the internal auditors objectivity could be diminished because of the closer contact with the engagement clients.
B. It's more likely that maintaining the organization's wide standards is more difficult because of decentralization.
C. The establishment of an internal auditing office in a foreign country would lead to reduced contact and control, not more.
D. A reduction of travel time and related expenses would be a primary advantage to establishing a field office.
Question 32 - CIA 1194 I.12 - Report to Senior Management & Board
A. Not performing the engagement is not an acceptable alternative.
B. Limiting the scope of the engagement would be done only if external resources are not available. With a scope limitation management would have to be informed.
C. The knowledge, skills, and other competencies of the IAA should be considered in selecting internal auditors for the engagement. The CAE should consider the use of external resources when additional knowledge, skills, and other competencies are needed.
D. The engagement should be properly conducted and supervised. Using the engagement as a training opportunity and let the internal auditors learn as the engagement is performed would not be acceptable.
A. An operational engagement is concerned with examining and evaluating systems of internal control, overall company operations, and the quality of performance in carrying out assigned responsibilities. The purpose of an operational engagement is to assist management in its evaluation of effectiveness and efficiency. A comparison between actual costs and standard costs will not necessarily fulfill that purpose.
B. An operational engagement is concerned with examining and evaluating systems of internal control, overall company operations, and the quality of performance in carrying out assigned responsibilities. The purpose of an operational engagement is to assist management in its evaluation of effectiveness and efficiency. A comparison between actual costs and standard costs will not necessarily fulfill that purpose.
C. An operational engagement is concerned with examining and evaluating systems of internal control, overall company operations, and the quality of performance in carrying out assigned responsibilities. The purpose of an operational engagement is to assist management in its evaluation of effectiveness and efficiency. A comparison between actual costs and standard costs will not necessarily fulfill that purpose.
D. An operational engagement is concerned with examining and evaluating systems of internal control, overall company operations, and the quality of performance in carrying out assigned responsibilities. The purpose of an operational engagement is to assist management in its evaluation of effectiveness and efficiency. A comparison between actual costs and standard costs can be used to fulfill that purpose.
A. Performance can be measured against the "seven days" standard to see if the objective is being met.
B. An inadequate measure has been specified to the employee.
C. No standard has been set by which to measure employee perfection.
D. No measure of positive attitude has been specified for the employee.
A. Because of the risk inherent in cash management and credit policy, these areas would be given the highest priority of the areas listed. The other areas do not represent such a direct and immediate risk to the company as does the cash management especially and also credit policies.
B. The corporate code of ethics and conflict of interest policy do not represent the most direct and financial risk to the company of the choices given.
C. Budget preparation and forecasts do not represent the most direct and financial risk to the company of the choices given.
D. The employee time reporting system does not represent the most direct and financial risk to the company of the choices given.

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A. Risk is not just limited to the potential increase in the organization's liability based on management's decision making.
B. Risk is the probability that some event will have an impact on the achievement of the organization's objectives. Risk is measured in terms of impact and likelihood.
C. Risk is not just limited to the uncertainty that the financial statements or internal records will contain material misstatements.
D. This is the definition of detection risk that is a component of risk.
A. The management of the company would want to know if there are potential environment issues with purchasing the land because if so, then the potential for future liability may outweigh the advantages.
B. Purchasers are not obligated to identify and disclose instances of contamination.
C. The current owner may not be obligated to clean up the site.
D. Even with a lower price management may still not be willing to purchase the land because of potential future liabilities.
Question 38 - CMA 1286 3.26 - Types of Engagements
A. The definition of inherent risk is the susceptibility of an assertion to a material misstatement, assuming that there are no related internal control structure policies or procedures. Complex calculations are subject to inherent risk just because they are complex and there are many opportunities for errors.
B. The definition of detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion.
C. The definition of sampling risk is the risk that a particular sample will not be representative of the entire population.
D. The definition of audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.
A. While this is the starting point of making sure that the staff are prepared to perform their jobs, it is only the start. Training and other professional development tools need to be provided on an ongoing basis to ensure staff are able to perform their duties.
B. Through training and counseling (or feedback) the CAE can best assure that staff have the skills and competencies necessary to perform their jobs.
C. Conducting formal evaluations after each assignment only identifies whether the staff member was or was not prepared. It does nothing to make certain that they will be prepared for the next engagement.
D. Having supervisors monitor the work of the junior staff does nothing to ensure that the staff are prepared to perform their duties. All this does identify very quickly when the staff do not perform their jobs.
A. Risk analysis should be performed anytime there is a change in the work environment, and work with the external auditor should be coordinated in order to minimize duplication of the work effort.
B. Work with the external auditor should be coordinated in order to minimize duplication of work effort.
C. Risk analysis should be performed anytime there is a change in the work environment.
D. Risk assessment is part of the planning process. Higher perceived risk areas are generally given higher priority than lower perceived risk areas. Requests by senior management, the audit committee, and the governing are also considered in establishing engagement work schedule priorities.
A. Surveys or questionnaires tend to ask simple "Yes or No" questions.
B. Facilitated team workshop is the process of gathering information from work teams that represent different levels in the business unit or function. The primary format of the workshop may be based on objectives, risks, controls or processes.
C. The form of self-assessment called "management –produced analysis" covers most approaches by management groups to produce information about selected business processes, risk management activities, and control procedures. The internal auditor may synthesize this analysis with other information to enhance the understanding about controls and to share the knowledge with managers in business or functional units as part of the
organization’s CSA program.
D. Controlled-based analysis is not one of the three approaches used in CSA.
Question 42 - CIA QZP1B.9 - Report to Senior Management & Board
A. Item I is not true. All engagement communications should go directly from the internal audit activity to the audit committee. The accuracy of the engagement information should be verified with management.
B. Items II and III are true. Internal auditors discuss conclusions and recommendations with appropriate levels of management before the CAE issues the final engagement communications. The CAE distributes the final engagement communication to the management of the audited activity and to those members of the organization who can ensure engagement results are given due consideration and take corrective action or ensure that corrective
action is taken (PA 2440-1).
C. Item I is not true. All engagement communications should go directly from the internal audit activity to the audit committee.
D. Item I is not true. All engagement communications should go directly from the internal audit activity to the audit committee.
A. The goals of the IAA should be capable of being accomplished within specified operating plans and budgets and, to the extent possible, should be measurable. They should be accompanied by measurement criteria and targeted dates of accomplishment.
B. Staffing plans and financial budgets are a means of accomplishing specified goals.
C. Goals are statements of activities that are to be accomplished. Engagement work schedules are a means to achieve goals.
D. Goals are statements of activities that are to be accomplished. Policies and procedures are the means in which the goals are achieved.
A. It is more likely that the CEO and audit committee would receive only summary reports. Also, discussing engagement communications with both the CEO and audit committee might not necessarily help avoid a conflict between the parties (CEO and audit committee).
B. The best method to help avoid a conflict between the CEO and audit committee is to have specific policies and procedures that cover the IAA relationship with the audit committee.
C. Strengthening the CAE's independence through organizational status might not necessarily help avoid a conflict between the parties (CEO and audit committee).
D. It is more likely that the CEO and audit committee would receive only summary reports. Also, submitting copies of all engagement communications might not necessarily help avoid a conflict between the parties (CEO and audit committee).
A. This is one of the results of feedback.
B. This is one of the benefits of feedback, enabling the company to follow up on recommendations in a more timely manner.
C. Feedback enables the auditor to make adjustments to preliminary assessments, not only those relating to risk.
D. The budget should not be revised once the actual hours are known. This is not a resulting action from feedback.
A. The auditor should try to get other information before approaching authorities within the organization.
B. The best course of action for the internal auditor is to determine if the original serial numbers provided by the customer can be traced to other records, such as production and inventory records.
C. The internal auditor needs to gather more information on the validity of the claim.
D. Verifying that the warranty clerk had followed procedures in the processing and disposition of the claim will not provide information on the validity of the warranty claim.
A. See the correct answer for the explanation.
B. See the correct answer for the explaantion.
C. While a portion of the scope is discussed, (30 machines selected), the reader cannot recognize the significance or insignificance of this amount without knowing the total amount of machines which could have been selected. The value of the machinery is not given. Also, the conclusion or auditor's opinion of the operation is not given and the report does not make any recommendations.
D. The purpose or objective of the audit was clearly stated. Results of the audit were also given.
A. The audit committee will review summarized communications. The audit committee will rarely review the auditor's working papers.
B. The auditor's working papers should be reviewed by the CAE. It is the CAE who is responsible for the performance of the review.
C. An organization's security division might need to review the auditor's working papers when conducting an investigation, but they are not part of the general review process.
D. Management of the engagement client will rarely see or review the auditor's working papers.
A. Step 1 addresses the relationship between service calls and technicians. However, the step still does not fully address the engagement assertion. Step 2 goes a step further and gathers information on the backlog of service complaints and calculates the average number of backlogged complaints per technician.
B. Confirmation information from customers will not provide any more useful information than was acquired in step 2.
C. Confirmation information from customers will not provide any more useful information than was acquired in step 2.
D. Step 1 does not fully address the engagement assertion. The step does address the relationship between service calls and technicians, but does not address the number of complaints that merit service.
A. Audit findings cannot be both facts and opinions. They must only describe facts or conditions that exist.
B. Audit findings must be statements of fact rather than statements representing an auditor's opinion. Opinions (not findings) represent the auditor's evaluations of the effects of audit findings on the activities reviewed.
C. The Standards state, "Findings are pertinent statements of fact." Audit findings must be factual evidence regarding control strengths and weaknesses, which the auditor has found during the course of examination.
D. Audit findings deal with present, not future, factual conditions or events.
A. Internal documents may be altered by the auditee, even if internal control procedures are followed.
B. Circulation through an outside party does not mean the document is correct, unless it is received directly by the auditor.
C. An external document obtained directly from its source cannot be altered by the auditee.
D. Internal documents may be altered by the auditee.
A. Verification of subsequent payment is a common alternative procedure.
B. Review of supporting documentation is a common alternative procedure.
C. Second or even third requests are often made for positive confirmations to which there is no response.
D. Statements of management concerning the validity of the account balance are given little weight. The inclusion of the account balance already implies such management statements.
A. Since shipping documents are neither accounted for nor prenumbered, it is likely that some shipments will leave the warehouse without being billed. Selecting bills of lading from the warehouse and tracing the shipments to the related customer invoices is a test to see whether all shipments are being billed.
B. Tracing quantities and prices on the sales invoice to the customer purchase order and testing extensions and footings would not test to see whether all shipments are being billed.
C. Tracing a sample of purchase orders to the related sales invoices would not test to see whether all shipments are being billed.
D. Footing the sales register and tracing the total to the general ledger would not test to see whether all shipments are being billed.

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A. This is the key analysis as it would show the extent of additional revenue versus cost.
B. This would be helpful because the sales department may have useful information on new customers and repeat purchases.
C. There is no indication that cost of the products sold has changed. The challenge is to address the effectiveness of the promotion.
D. This comparison would help highlight the effectiveness of the promotion in increasing sales.
A. Interim reports are issued before the final report. These interim reports may be written or oral and they will be used to communicate: (1) information that requires immediate action; (2) a change in the scope of the engagement; and (3) the status of the project when the project is a long-term project. Interim reports do not eliminate the need for issuing final engagement communications.
B. Interim reports are used to communicate information that needs immediate action.
C. Interim reports are used to communicate to management the status of the project when the project is a long-term project.
D. Interim reports are used to communicate a change in the scope of the engagement.
A. Interim reports may be written or oral and may be transmitted formally or informally (PA 2410-1).
B. Improved communications is an advantage.
C. The interim report can minimize report writing time.
D. Interim reports are written or oral and may be transmitted formally or informally. Use of interim reports to communicate information that requires immediate attention, to communicate a change in engagement scope for the activity under review, or to keep management informed of engagement progress when engagements extend over a long period. The use of interim reports does not diminish or eliminate the need for a final report (PA 2410-1).
A. A standard engagement work program would not be appropriate for a complex or changing operating environment because the audit objectives and related work steps may no longer have relevance.
B. A standard engagement work program would be appropriate for use in a minimally changing operating environment.
C. A standard engagement work program would be acceptable for conducting subsequent inventory audits at the same location.
D. A standard engagement work program could be used to audit multiple locations with similar operations.
A. Mean-per-unit (MPU) testing is not appropriate. MPU is a variable sampling technique and variable sampling is used to test account balances and transactions, not to test controls.
B. Sending out a survey might not provide the necessary information: (1) the customer might not respond, and (2) it is highly unlikely the customer is going to remember the timeliness of service unless the service was unusual; either very fast, or very slow. Also, MPU is a variable sampling technique. Variable sampling is used to test account balances and transactions, not to test controls.
C. Developing a customer satisfaction survey and sending to all customers would be costly and still might not provide the necessary information: (1) the customer might not respond, and (2) is highly unlikely the customer is going to remember the timeliness of service unless the service was unusual; either very fast, or very slow.
D. The best engagement procedure to determine whether the organization is meeting its objective of satisfying 95% of customer inquiries within 24 hours is to select an attribute sample from the population of logged-in customer complaints and trace to records indicating its disposition, noting time and nature of disposition. This procedure should provide evidence of when the customers were serviced.
A. Reviewing reports of audits performed by regulatory and outside auditors since the last internal audit should be part of the preliminary review.
B. Interview management to identify changes made in policiies regarding investments or loans should be part of the preliminary review.
C. Review minutes of the board of directors' meetings to identify changes in policies affecting investments and loans should be part of the preliminary review.
D. All of the procedures should be performed as part of the preliminary review.
A. This conclusion cannot be reached without knowledge of the actual company policy.
B. Without knowledge of guidelines for compliance, a reasonable conclusion cannot be reached.
C. The fact that no minority has been hired this year is irrelevant until we know the total hires for the period.
D. An affirmative-action policy is clearly auditable.
A. Internal auditors should conduct a review of criteria established by management to determine whether operating goals and objectives have been accomplished.
B. Reviewing material from prior engagement communications is useful because it informs the internal auditor about the prior engagement's observations and what corrective actions were taken, if any.
C. Preparing the budget is not an essential part of writing the engagement work program. The work program, however, should state what resources would be necessary to carry out the engagement.
D. The performance of a preliminary survey is part of preparing the engagement work program.
A. Accounts receivable records showing cash collections from the customer is less reliable than the shipping document and invoice.
B. Information is reliable if it is the best attainable information through the use of appropriate engagement techniques (Interpretation: Standard 2310). The shipping document and invoice is the most reliable information that a sale was made. The bill of lading will show that the merchandise was shipped.
C. The memorandum in this problem cannot be verified.
D. A copy of the customer's purchase order will only prove that the customer ordered the item, not that the customer purchased it.
A. Divisional management, the board, and senior management should be informed. The internal auditor is not responsible for reporting such matters to parties outside the organization (i.e., regulatory bodies).
B. The appropriate authorities within the organization should be informed. In this situation, the divisional management, the board, and senior management should be informed.
C. Divisional management, the board, and senior management should be informed.
D. The observations should also be reported to divisional management as well.
A. The establishment of the parameters of the value of the items being managed and controlled is the responsibility of management.
B. In planning the engagement, internal auditors must consider the adequacy and effectiveness of the activity's risk management and control systems compared to a relevant control framework or model (Standard 2201).
C. The review of the handling of idle equipment is management's responsibility.
D. The review of the consultant's contract to determine its propriety is a procurement decision.
A. Scheduling and time estimates will be based on the engagement objectives and scope of work.
B. The preliminary survey is done before determining the engagement objectives.
C. The engagement work program is based on the engagement objectives.
D. The established scope must be sufficient to satisfy the objectives of the engagement (Standard 2220).
A. It is not unusal for criteria to be established and agreed upon during an audit if management has not already established them.
B. It is not unusal for criteria to be established and agreed upon during an audit if management has not already established them.
C. -
D. -
A. Use of the active voice best emphasizes the point.
B. Long sentences with several ideas will create information overload and disguise the important point.
C. Parallel structure will emphasize the point better. Non-parallel structure will usually detract from the point.
D. The point is best emphasized by placing it at the beginning or end of the paragraph.
A. Use of the active voice best emphasizes the point.
B. Long sentences with several ideas will create information overload and disguise the important point.
C. Parallel structure will emphasize the point better. Non-parallel structure will usually detract from the point.
D. The point is best emphasized by placing it at the beginning or end of the paragraph.
A. Tracing would require that additional coding be inserted into the database system programs.
B. Simulating normal processing would test the program but not the accuracy of data.
C. Testing the program will not test the accuracy of data in the database.
D. Verifying is the most often used technique in testing the accuracy of information maintained by a system, whether manual or automated.
A. Performing turnover ratio tests would not provide sufficient information.
B. The most appropriate response would be to recommend a physical inventory count. Observing a physical inventory count would be the most persuasive form of information.
C. Applying gross profit analyses would not be sufficient.
D. If the internal auditor observes that controls are weak then increasing the testing of controls would probably be inefficient.
A. The engagement work program will probably not be standardized, and will probably change from year-to-year given the changing conditions of the company.
B. Internal auditors should develop work programs that achieve the engagement objectives. An engagement work program collects, analyze, interpret, and documents information.
C. Risk assessment is done in the planning phase of the engagement, which helps to identify objectives. This has to be done before the work program can be developed.
D. The working papers will contain an evaluation of controls.

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A. Providing a basis for supervisory review is a secondary purpose.
B. Maintaining the engagement work program for reuse in the next engagement is a secondary purpose.
C. Working papers document the information obtained, the analyses made, and the support for the conclusions and engagement results (PA 2330-1). Working papers provide the principal support for the engagement communications.
D. Helping perform the engagement in an orderly fashion is a secondary purpose.
A. The final engagement communication has to include conclusions about the payroll internal control in the maintenance department.
B. Internal auditors must communicate the engagement results (Standard 2400). Thus, the internal auditor should include this observation in the current engagement communication.
C. The internal auditor does not have the proper authority to instruct the employees to sign their time cards.
D. It is not within the internal auditor's authority to ask the manger to assume the resulting risk. But, senior management may have decided to assume the risk of noncompliance.
Question 73 - IIA, adapted CIA H148 - Communicate Engagement Results
A. Deviations from the goal were probably corrected.
B. There is not enough information given to warrant changing the operating standards.
C. Since actual result was greater than planned established operating standards are not being met.
D. Since month three results (2%) met the goal it is assumed that deviations from the goal were probably corrected. Therefore, no further investigation is warranted.
A. Records and client personnel needed would be on the agenda of pre-engagement meetings.
B. Purpose and scope of the engagement would be on the agenda of pre-engagement meetings.
C. The sampling plan and key criteria would not be discussed until after the preliminary survey work has been completed.
D. Starting and completion dates would be expected to be on the agenda of pre-engagement meetings.
A. -
B. -
C. Audit results are required by the Standards to be communicated to those members of the organization who can ensure engagement results are given due consideration (Standard 2440.A1).
D. Audit results are required by the Standards to be communicated to those members of the organization who can ensure engagement results are given due consideration (Standard 2440.A1).
A. Lot size is directly related to vendor performance.
B. Balance confirmations usually are performed to assess internal accounting procedures.
C. Delivery of only authorized items is directly related to vendor performance.
D. Quality of goods is directly related to vendor performance.
A. Confirmation is used to verify the physical existence of an item. Obsolete inventory represents a question of value, not physical existence.
B. Analytical review offers a means to identify part numbers that have a high likelihood of being obsolete.
C. Recomputation of the value of identified obsolete items is necessary in order to establish current inventory carrying value.
D. Scanning is an excellent means of noting unusual relationships such as very old items with no activity.
A. The report is not organized in a clear and concise manner.
B. The opening sentence is 73 words, while the next sentence is 37 words.
C. There are at least two passive sentences.
D. All of the listed principles of report clarity were violated in the audit report.
A. Conclusion 2 is incorrect. Although revenue has increased, the increase is due to the increase in the bus fare not an increase in the number of riders. The number of riders has actually decreased from 4.033 million riders three years ago ($2.42 / $0.60 per bus fare) to 2.98 million riders in the current year ($2.98 / $1.00 per bus fare).
B. Conclusion 2 is incorrect. Although revenue has increased, the increase is due to the increase in the bus fare not an increase in the number of riders. The number of riders has actually decreased from 4.033 million riders three years ago ($2.42 / $0.60 per bus fare) to 2.98 million riders in the current year ($2.98 / $1.00 per bus fare).
C. Although revenue has increased, the increase is due to the increase in the bus fare not an increase in the number of riders. The number of riders has actually decreased from 4.033 million riders three years ago ($2.42 / $0.60 per bus fare) to 2.98 million riders in the current year ($2.98 / $1.00 per bus fare).
D. Conclusions 1, 3 and 4 are correct. Conclusion 2 is incorrect. Although revenue has increased, the increase is due to the increase in the bus fare not an increase in the number of riders. The number of riders has actually decreased from 4.033 million riders three years ago ($2.42 / $0.60 per bus fare) to 2.98 million riders in the current year ($2.98 / $1.00 per bus fare).
A. Objective information on the morale of remaining employees is relevant to the audit objective.
B. The criteria use to determine the correct size is relevant to the audit objective.
C. The approach to making cuts, i.e. what is cut, is relevant to the audit objective.
D. Misstatement of account balances is not the objective of the audit. More appropriately, the auditor should look for departments that have experienced large reductions in size.
Question 81 - CIA QZP2A.10 - Communicate Engagement Results
A. Although the format and content of the engagement final communications may vary by organization or type of engagement, they should contain, at a minimum, the purpose, scope, and results of the engagement. Purpose statements describe the engagement objectives and may inform the reader why the engagement was conducted and what it was expected to achieve. Scope statements identify the audited activities and may include supportive
information such as time period reviewed and related activities not reviewed to delineate the boundaries of the engagement. They may describe the nature and extent of engagement work performed. Results include observations, conclusions, opinions, recommendations, and action plans (PA 2410-1).
B. Internal auditors make only recommendations.
C. The engagement client should have an opportunity to respond before the report is written.
D. When appropriate, external auditors review the internal auditors' reports and working papers for this purpose. However, external auditor assessment is at best a secondary reason for formal reporting.
A. Getting the participants to read the final engagement communication, and asking for questions would be the least effective method to stimulate action.
B. Verbal lectures tend not to be the most effective method of reporting and stimulating action.
C. Using slides or overheads is more effective than lecturing, but the internal auditor should not limit verbal commentary.
D. Using slides/overheads to support a discussion of major points would be the most effective way for the internal auditor to stimulate action.
A. This is the best approach because it considers that the number of employees may have changed.
B. This approach would be effective if it were scaled by the number of employees and the coverage provided. This is a good step, but not as good as obtaining a government index of health care costs and comparing it with the rate of increase with that of the cost per employee.
C. This is not an analytical procedure. Further, it considers only once aspect of the total health care costs (the cost of processing) and does not consider the underlying health care coverage.
D. This approach does not consider that the number of employees covered may have changed during the time period considered.
Question 84 - CIA 1193 II.20 - Supervise Engagement
A. Actual and budgeted times would be covered in the budget section of the working papers, not in each working paper.
B. It is more likely that noncooperation will be documented.
C. All engagement working papers are reviewed to ensure they support the engagement communications and necessary audit procedures are performed (PA 2340-1.1). Including copies of all the forms and directives of the engagement client might not be necessary, so therefore it could constitute over documentation.
D. Conclusions should be documented in the working papers even if engagement objectives are not achieved.
A. The best course of action for the internal auditor is to determine whether the number of tires purchased can be reconciled to maintenance records. The fact that the fleet manager requisitions tires and also signs the receiving report provides an opportunity to commit fraud. The internal auditor should try to determine whether fraud has occurred.
B. This method would be ineffective in revealing fraud since the fleet manager signs the receiving report.
C. Comparing tire purchases with prior years would not be effective in revealing fraud since fraud could have been committed in the previous year as well.
D. This method would be ineffective in revealing fraud since the fleet manager signs the receiving report.
Question 86 - CIA 596 1.1 - Monitor Engagement Outcomes
A. The CAE must establish a follow-up process to monitor and ensure that management actions have been effectively implemented or that senior management has accepted the risk of not taking action (Standard 2500).
B. This is not the best choice. This implies that the auditor's recommendations, not the findings, are primary.
C. This is not the best answer. It implies that the auditor's recommendations, not the findings, are the most important elements of the report.
D. This implies that processes in the internal auditing activity are primary.
A. It's unlikely top hospital officials would be able to evaluate the quality of the housekeeping services.
B. Evidence gathered first-hand by the auditor and also originating with unbiased parties is considered most competent.
C. The medical records department would be unlikely to maintain any records except those of patients.
D. Prior to the auditor’s visit, the manager could have removed survey forms with critical comments.
Question 88 - CIA QZP2A.5 - Planning the Engagement
A. Real estate deeds are considered to be purely external information. External information is information that the auditor receives directly from a third party. This is the most persuasive form of information because the client has not had access to it.
B. Canceled checks written by the treasurer and returned from a bank is internal-external information. This originates with the engagement client but is processed externally. This information is not as persuasive as purely external information.
C. Vendor invoices filed by the accounting department are considered external-internal information. Even though the invoices were created externally, the client is the last party to have the document. Thus, the document may be altered by the client without the knowledge of the third party. This information is more reliable than purely internal information, but less reliable than purely external information.
D. Time cards for employees that are stored by a manager are considered internal information, and thus, less reliable than purely external information.

Part 2 (3-Part) : 02/22/15 21:26:39
A. Without proper review the senior auditor's statement cannot be supported. Thus, it cannot be assumed that curtailing the investigation would be wasteful.
B. The internal auditor was correct to refer the matter to the senior auditor.
C. The variance does need to be fully investigated and explained. When analytical auditing procedures identify unexpected results or relationships, internal auditors should examine and evaluate such or relationships. The examination and evaluation of unexpected results or relationships from applying analytical auditing procedures should include inquiries of management and the application of other engagement procedures until internal auditors
are satisfied that the results or relationships are sufficiently explained.
D. The variance does need to be fully explained. Thus, the engagement should continue.
A. Every aspect of an operation need not be examined--only those likely to conceal problems and difficulties.
B. A generalized program cannot take into account variations resulting from changing circumstances and varied conditions.
C. A generalized program cannot take into account variations in circumstances and conditions.
D. A tailored program will be more relevant to an operation than will a generalized program.
A. Items 1, 2 and 3 would all be detected during a financial audit.
B. Even though the economy experienced a downturn, the company still experienced good profit margins. Thus, working capital should not have declined as it did. This might indicate that funds were diverted for personal use.
C. The high employee turnover, the drastic drop in working capital, and sole-source procurement would all be indicators of potential fraud.
D. Items 1, 2, 3 and 4 are all warning signs of potential fraud. If the company is experiencing good profit margins during a recession, it's possible that management is distorting the financial statements in order to improve results. The large drop in working capital may indicate that funds were diverted for personal use. The high employee turnover indicates that employees are not happy in their positions, and maybe, they do not want to disclose
existing problems. The sole-procurement practice does not stimulate competition and does indicate favoritism. Favoritism often results from kickbacks, etc.
A. The receipt of an invoice to put new vendors on the master file will not detect the fraudulent activity.
B. If the vendor and the buyer are colluding together then a survey will not detect the fraudulent activity.
C. The use of purchase orders for all purchases will not detect the fraudulent activity.
D. Analytical analysis is one method to detect possible fraudulent activity. A dramatic increase in a specific vendor’s activity would be indicated by change and trend analysis.
A. The confession should be documented.
B. The auditor should document the findings because they are an important part of the audit.
C. Since the parties confessed to the auditor, it should become part of the audit working papers related to the investigation. It is important to have the confession properly recorded; thus, it is best that the confession be reviewed and signed by the perpetrators.
D. The auditor is not a legal authority. The auditor has no basis on which to inform the perpetrators of their rights. The decision on whether to call in the legal authorities rests with management, not the auditors.
A. Management is responsible for establishing and maintaining effective internal control to prevent or detect fraud at a reasonable cost. Thus, a strong, written statement of management’s commitment to organizational ethics will reduce the likelihood of future acceptance of such rewards by the buyers.
B. Pressures within the organization should not be cause for the buyer to accept brides from the vendor.
C. Reviewing the buyer's lifestyle would be difficult to analysis, unless there was a noticeable change in lifestyle.
D. Establishing an employee counseling program is unlikely to change the behavior of dishonest employees.
A. Most (although not all) frauds are accompanied by changes in lifestyles of those committing the fraud. Although not the best procedure, it provides more information than the correct answer.
B. This would be the least useful procedure because the contract terms are already known. The confirmation would have to be expanded to inquire as to whether pressure was brought to bear by the purchasing agent to generate kickbacks, and such an approach would only be successful if the kickbacks were initiated by the purchasing agent rather than the vendor.
C. This would be the best procedure to gather more insight as to what products and which purchasing agent might be involved. It would be an important first step.
D. This would provide information on excess purchase prices.
A. Item III is also true. Internal auditors should determine whether communication channels provide management with adequate and reliable information.
B. All items are true regarding the deterrence of fraud. Internal auditors are responsible for assisting in the deterrence of fraud by examining and evaluating the adequacy and the effectiveness of the system of internal control, commensurate with the extent of the potential exposure/risk in the various segments of the organization's operations.
C. Items II and III are also true. Internal auditors are responsible to assist in the deterrence of fraud by evaluating the adequacy of the internal control system, and they should determine whether communication channels provide management with adequate and reliable information.
D. Items I and III are also true. Management has a responsibility to establish and maintain an effective control system. Internal auditors should determine whether communication channels provide management with adequate and reliable information.
A. Senior management and the board should be notified immediately when incidents of fraud have been established to a reasonable certainty.
B. When there is sufficient evidence that fraud has occurred, the internal auditor should notify the appropriate authorities within the organization, e.g., security, to recommend an investigation.
C. The internal auditor should avoid confronting the suspected embezzler. Employees have certain rights that should not be infringed upon. Improper infringement could lead to the suspect filing a lawsuit against the organization.
D. The internal auditor should not review the finding with the suspect’s fellow workers since they may be involved in the embezzlement.
A. Personnel records comprise an independent source of authority for payroll operations such as hiring and termination.
B. Retention of unclaimed checks is normally a treasury function.
C. Authorization of overtime is an operating department supervisory function.
D. Distribution of paychecks is normally a treasury function.
A. This would provide evidence on expenditures made to unauthorized brokers, which would have been the case with a false broker.
B. This would provide useful information on transactions used to clear the suspense account. This is especially true when the credits to the account arose through the recording of speculative gains.
C. This procedure would provide evidence on the nature of the hedges and whether the trading is matching the hedges.
D. This would be the least effective procedure because the problem is not with the amount of individual trades, but with the nature of the positions taken.

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What are some of the risks that could impact an organization?

What are some of the risks that could impact an organization?

What are some of the responsibilities of internal auditors regarding fraud?

What are some of the responsibilities of internal auditors regarding fraud?

Part 2 (3-Part) : 02/22/15 21:26:39

Question 1 - CIA 595 1.58 - Report to Senior Management & Board

Question 2 - CIA 590 II.5 - Report to Senior Management & Board

Question 3 - CIA QZP1C.2 - Risk Management

Which of the following would be considered risk factors to an organization?

I. A significant improvement in the competitor's product.

II. The purchase of new equipment that will improve profitability.

IV. No organizational commitment to develop employees' technical skills.

A. I, II, III and IV.

Question 4 - HOCK CIA P2B H5 - Control Self-Assessment (CSA)

The advantages of implementing a Control Self-Assessment (CSA) program are:

I. Employee understanding of the company’s risk and controls is enhanced.

II. There is enhanced accountability.

III. It encourages more open communication, teamwork and continuous improvement.

IV. It is a good technique for uncovering organizational fraud.

A. II and III only.

Question 5 - CIA QZP2B.2 - Types of Engagements

Question 6 - CIA 1189 II.8 - Report to Senior Management & Board

The audit committee strengthens the control processes of an organization by

Question 7 - CIA QZP1B.20 - Strategic Role of Internal Auditing

The internal and external auditing work should be coordinated to

A. All the answers presented are correct.

Question 8 - HOCK CIA P2B H10 - Control Self-Assessment (CSA)

Question 9 - CIA 697 1.28 - Types of Engagements

Question 10 - CIA 1189 II.5 - Managing Resources

A. Developing a written job description for each level of the staff.

Question 11 - CIA 1193 I.45 - Strategic Role of Internal Auditing

A primary purpose for establishing a code of conduct within a professional organization is to

Question 12 - CIA 1196 III.32 - Strategic Role of Internal Auditing

Question 13 - CIA 595 III.2 - Planning

The consultative approach to internal auditing emphasizes

A. Imposition of corrective measures.

Question 14 - CIA 596 3.38 - Risk Management

A. Continuation of mortgage servicing.

Question 15 - CIA QZP1B.6 - Managing Resources

A. Developing a compensation plan for the internal auditing staff.

Question 16 - CIA QZP2B.15 - Types of Engagements

A. A formal consulting engagement agreement.

Question 17 - CIA QZP2B.19 - Control Self-Assessment (CSA)

Which phrase best describes a control-based control self-assessment process?

A. Determining the cost-effectiveness of controls.

Question 18 - CIA 591 I.11 - Planning

A. Interviews with existing internal audit staff.

(c) HOCK international, page 1

Question 19 - CIA 1190 I.21 - Risk Management

A. Review for effectiveness of control processes.

Question 20 - CIA 1191 I.13 - Risk Management

Question 21 - CIA 1193 II.9 - Planning

Question 22 - CIA QZP2B.16 - Types of Engagements

A consulting activity appropriately performed by the internal audit activity (IAA) is

A. Installing systems of control.

Question 23 - CIA 588 I.12 - Planning

A. Monthly engagement work schedules.

Question 24 - CIA 1193 I.6 - Strategic Role of Internal Auditing

Question 25 - CIA 594 III.90 - Strategic Role of Internal Auditing

Question 26 - CIA 594 1.29 - Report to Senior Management & Board