[Unit 2] Study Unit 5

A United States organization plans to expand operations to Gambia. Which of the following are plausible assurance engagement objectives for an internal audit of the human resources department? 1. Evaluate the clarity and transparency of the design of global compensation and benefit systems. 2. Identify methods of improving communications with assignees, line management, and leadership. 3. Assess compliance with applicable requirements for visas and work permits. 4. Provide consultation to potential assignees and line management on terms and conditions of the internal assignment. - 2 and 4 only. - 3 and 4 only. - 1 and 3 only. - 1, 2, and 4 only.

1 and 3 only. (Audit engagement objectives are broad statements developed by internal auditors that define intended engagement accomplishments. Engagement objectives may be stated in various ways, but it should be clear what assurance the engagement will provide. The engagement objective to evaluate the clarity and transparency of the design of global compensation and benefit systems is intended to provide assurance about efficiency and effectiveness. The engagement objective to assess compliance with applicable requirements for visas and work permits is intended to provide assurance about compliance with laws and regulations.)

An internal audit function is charged with evaluating the compliance of the organization's human resources function with applicable laws, regulations, and internal policies. Which objective(s) is (are) appropriate for this engagement plan? 1. Evaluate compliance with residency policy. 2. Ensure that applicant pools are representative of the population. 3. Assess the process used for responding to employee complaints. 4. Question recently hired employees to assess compliance with interviewing standards. - 1 and 3 only. - 3 only. - 1 and 2 only. - 3 and 4 only.

1 and 3 only. (Engagement objectives are broad statements developed by internal auditors that define intended engagement accomplishments. For a compliance engagement, they might include evaluating compliance with residency policy and assessing the employe complaint response process.)

Which of the following best describes a preliminary survey? - A standardized questionnaire used to obtain an understanding of management objectives. - A statistical sample of key employee attitudes, skills, and knowledge. - A "walk-through" of the financial control system to identify risks and the controls that can address those risks. - A process used to become familiar with activities and risks to identify areas for engagement emphasis.

A process used to become familiar with activities and risks to identify areas for engagement emphasis. (Internal auditors may perform a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from stakeholders.)

For an upcoming engagement, an internal auditor's objective is to determine whether costs are both documented and reasonable. This is most likely an engagement involving - Asset disposals. - Advertising agency billings. - Accounts payable. - Allowance for doubtful accounts.

Advertising agency billings. (An advertising agency customarily changes for its costs plus a commission based on those costs. To avoid being overcharged, the organization requires assurance that the agency can justify (document) the costs incurred and that these costs are reasonable. A field review of the agency's books and procedures is the best means of achieving the stated objective.)

Developing engagement observations, conclusions, and recommendations involves comparing the condition with the relevant standard or criterion. Which of the following choices best represents an appropriate standard or criterion to support engagement observations, conclusions, and recommendations? - A quality standard operating procedure (number and date) for the department. - An internal accounting control principle, cited and copied from a public accounting reference. - A sound industry practice, based on the internal auditor's knowledge and experience obtained during manny engagement assignments within the organization. - All of the answers represent an appropriate standard or criterion to support engagement observations, conclusions, and recommendations.

All of the answers represent appropriate standard or criterion to support engagement observations, conclusions, and recommendations. (Acceptable industry standards, standards developed by professions or association, standards in law and government regulations, and other sound business practices are usually deemed to be appropriate criteria.)

An assurance engagement in the quality control department is being planned. Which of the following is least likely to be used in the preparation of a preliminary survey questionnaire? - An analysis of quality control documents. - Management's charter for the quality control department. - The prior engagement communications. - The permanent engagement file.

An analysis of quality control documents. (Internal auditors may perform a survey to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from stakeholders. An analysis of quality control documents is a part of field work, which follows the survey.)

Before an assurance engagement can be performed, the auditor must identify appropriate criteria. The sources of such criteria are least likely to include - Benchmarks for the leading firms in the industry. - Best practices for another industry. - Government regulations for the industry. - Historical cost information for the processes examined.

Best practices for another industry. (Acceptable industry standards, standards developed by professions or associations, standards in law and government regulations, and other sound business practices are usually deemed to be appropriate criteria.)

An internal auditor conducts a preliminary survey and identifies a number of significant engagement issues and reasons for pursuing them in more depth. The engagement client informally communicates concurrence with the preliminary survey results and asks that the internal auditor not report on the areas of significant concern until the client has an opportunity to respond to the problem areas. Which of the following engagement responses is not appropriate? - Keep the engagement on schedule and discuss with management the need for completing the engagement on a timely basis. - Work with the engagement client to keep the engagement on schedule and address the significant issues in more depth, as well as the client's responses, during the course of the engagement. - Consider the engagement to be terminated with no communication of results needed because the engagement client has already agreed to take constructive action. - Consider the risk involved in the areas involved, and, if the risk is high, proceed with the engagement.

Consider the engagement to be terminated with no communication of results needed because the engagement client has already agreed to take constructive action. (The apparently constructive action by the auditee may be a delaying tactic intended to conceal more serious problems after the internal auditor has identified significant engagement issues. Moreover, no basis is given for not pursuing the engagement. The internal auditor always considers the risk associated with the potential observations as a basis for determining the need for more immediate attention.)

Which of the following is not likely to be an assurance engagement objective related to auditing governance activities? - Determine customer satisfaction with shareholder communications. - Evaluate the design adequacy of board education and training. - Assess compliance with ethics policies. - Determine the operating effectiveness of the whistleblower process.

Determine customer satsifaction with shareholder communications. (According to The IIA Glossary, engagement objectives are broad statements developed by internal auditors that define intended engagement accomplishments. Also, an assurance service provides an independent assessment of governance, risk management, and control processes. But an evaluation of customer satisfaction is provided by a consulting service.)

An external 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 - Review the consultant's contract to determine its propriety. - Review the handling of idle equipment. - Determine the adequacy of the risk management and control systems for the management of capital facilities. - Establish the parameters of the value of the items being managed and controlled.

Determine the adequacy of the risk management and control systems for the management of capital facilities. ("In planning the engagement, internal auditors must consider: * The strategies and objectives of the activity being reviewed and the means by which the activity controls its performance. * The significant risks to the activity's objectives, resources, and operations and the means by which the potential impact of risk is kept to an acceptable level. * The adequacy and effectiveness of the activity's governance, risk management, and control processes compared to a relevant framework or model. * The opportunities for making significant improvements to the activity's governance, risk management, and control processes" (Perf. Std. 2201). )

As part of planning an engagement, the internal auditor in charge does all of the following except - Determine to whom engagement results will be communicated. - Determine the period covered. - Conduct meetings with management responsible for activity under review. - Distribute reports from meetings with management.

Determine to whom engagement results will be communicated. (The CAE determines how, when, and to whom engagement results will be communicated.)

In evaluating effectiveness and efficiency with which resources are employed, an internal auditor is responsible for - Verifying the accuracy of asset valuation. - Reviewing the reliability of operating information. - Verifying the existence of assets. - Determining the extent to which adequate operating criteria have been established.

Determining the extent to which adequate operating criteria have been established. (Internal auditors must ascertain the extent to which management has established adequate criteria to determine whether objectives and goals have been accomplished (Impl. Std. 2210.A3). )

The preliminary survey indicates that severe staff reductions at the engagement location have resulted in extensive amounts of overtime among accounting staff. Department members are visibly stressed and very vocal about the effects of the cutbacks. Accounting payrolls are nearly equal to prior years, and many key controls, such as segregation of duties, are no longer in place. The accounting supervisor now performs all operations within the cash receipts and posting process and has no time to review and approve transactions generated by the remaining members of the department. Journal entries for the last 6 months since the staff reductions show increasing numbers of prior-month adjustments and corrections, including revenues, cost of sales, and accruals that had been misstated or forgotten during month-end closing activity. The internal auditor should - Discuss these observations with management of the internal audit activity to determine whether further work would be an efficient use of internal auditing resources at this time. - Suspend further engagement work and issue the final communication of results because the conclusions are obvious. - Proceed with the scheduled engagement but add personnel based on the expected number of observations and anticipated lack of assistance from local accounting management. - Research temporary help agencies and evaluate the cost and benefit of outsourcing needed services.

Discuss these observations with management of the internal audit activity to determine whether further work would be an efficient use of internal auditing resources at this time. (A preliminary survey allows the internal auditor to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from stakeholders. In this case, additional planning is necessary to modify the engagement for the difficult circumstances discovered during the preliminary survey and to address the responsibilities of the internal audit activity.)

The internal auditor has gained an understanding of the design of an engagement client's internal controls. The most appropriate next step is to - Halt the engagement and issue a report about inadequate controls. - Draw preliminary conclusions about internal control. - Contact the engagement client's direct supervisor to recommend that the head of the department or function under audit is transferred or terminated. - Test controls to determine whether they are functioning as designed.

Draw preliminary conclusions about internal control. (Internal auditors gain an understanding of the design of the engagement client's internal controls. The auditors then draw conclusions about whether internal controls are designed adequately to achieve management's control objectives.)

In the planning phase, the scope of an internal audit engagement is defined by the - Preliminary survey. - Engagement objectives. - Scheduling and time estimates. - Engagement work programs.

Engagement objectives. (The established scope must be sufficient to satisfy the objectives of the engagement (Perf. Std. 2220). )

In planning an assurance engagement, a survey could assist with all of the following except - Identifying areas for engagement emphasis. - Obtaining engagement client comments and suggestions on control problems. - Evaluating the adequacy and effectiveness of controls. - Obtaining preliminary information on controls.

Evaluating the adequacy and effectiveness of controls. (Internal auditors may perform a survey to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from stakeholders. A survey is not sufficient for evaluating the adequacy and effectiveness of controls. Evaluation requires testing.)

If an auditor's preliminary evaluation of internal controls results in an observation that controls may be inadequate, the next step is to - Prepare a flowchart depicting the internal control system. - Implement the desired controls. - Note an exception in the engagement final communication if losses have occurred. - Expand audit work prior to the preparation of an engagement final communication.

Expand audit work prior to the preparation of an engagement final communication. (After identifying the risks, the auditor determines the procedures to be performed and the scope (nature, timing, and extent) of those procedures. If the preliminary evaluation indicates increased control risk, the auditor usually decides to apply additional engagement procedures to reach the engagement objectives.)

During a preliminary survey of the accounts receivable function, an internal auditor discovered a potentially major control deficiency while preparing a flowchart. What immediate action should the internal auditor take regarding the weakness? - Highlight the weakness to ensure that procedures to test it are included in the engagement work program. - Perform sufficient testing to determine its cause and effect. - Schedule a separate engagement to evaluate that segment of the accounts receivable function. - Report it to the level of management responsible for corrective action.

Highlight the weakness to ensure that procedures to test it are included in the engagement work program. (One purpose of the risk assessment is to highlight areas that should be addressed during the engagement. A potentially major control deficiency is a significant area warranting special emphasis and should be noted to ensure the needed coverage in the engagement work program.)

All of the following are acceptable criteria on which an internal audit may be based except - Standards or guidelines. - Control frameworks. - Policies and procedures. - Management cooperation with audit activities.

Management cooperation with audit activities. (Management cooperation with audit activities is not a measure or expectation but rather a condition. A condition is the factual evidence that the internal auditor found in the course of the examination.)

The chief audit executive was reviewing recent reports that had recommended additional engagements because of risk exposures to the organization. Which of the following represents the greatest risk and should be the next assignment? - Payment had been made for routine inventory items without a purchase order or receiving report. - There were several purchase orders issued without purchase requisitions. - Several times cash receipts had been held over an extra day before depositing. - Three prenumbered receiving reports were missing.

Payment had been made for routine inventory items without a purchase order or receiving report. (Payment vouchers for merchandise should be supported by (1) a properly authorized purchase requisition, (2) a purchase order executing the transaction, (3) a receiving report indicating all goods ordered have been received in good condition, and (4) a vendor invoice confirming the amount owed. Lack of such support for cash payments suggest a high risk of fraud.)

A page from an internal auditor's workpapers contains notes made in the prior period. They specify which controls are relevant in the current period and which controls will soon be obsolete. The notes relate to - Review for effectiveness of control processes. - Review of results. - Review for adequacy of control processes. - Preliminary survey

Preliminary survey. (A test from a prior engagement might be reviewed in the preliminary survey as background material. The notes made while evaluating controls are used by the auditor in the current period to identify matters of interest and possible deficiencies.)

Data-gathering activities such as interviewing operating personnel, identifying standards to be used to evaluate performance, and assessing risks inherent in a department's operations are typically performed in which phase of an audit engagement? - Examination and evaluation of evidence. - Engagement program development. - Field work. - Preliminary survey.

Preliminary survey. (Engagement planning should include performing, as appropriate, a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite client comments and suggestions from engagement clients. Among other things, the survey should include discussions with the engagement client (e.g., interviews with operating personnel) and documenting key control activities (including identifying performance standards). )

During which phase of the engagement does the internal auditor identify the objectives and related controls of the activity being examined? - Final communication of results. - Preliminary survey. - Work program preparation. - Staff selection

Preliminary survey. (Internal auditors may perform a survey to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from stakeholders.)

You are an internal auditing supervisor who is 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. Furthermore, 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 (1) the preliminary survey, (2) the review of the adequacy of control processes, (3) the review for effectiveness of control processes, or (4) the review of results. The second page the supervisor selects documents an interview with a salesperson discussing the overall sales cycle. This page belongs with which activity? - Review for adequacy of control processes. - Review of results. - Preliminary survey. - Review for effectiveness of control processes.

Preliminary survey. (Planning includes performing, if appropriate, a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from stakeholders. Interviews with stakeholders may be performed as part of the survey to obtain an overall understanding of operations.)

The established scope of the engagement must be sufficient to satisfy the objectives of the engagement. When developing the objectives of the engagement, the internal auditor considers the - Resources required. - Results of engagement procedures. - Information included in the engagement work program. - Probability of significant noncompliance.

Probability of significant noncompliance. (Internal auditors must consider the probability of significant errors, fraud, noncompliance, and other exposures when developing assurance engagement objectives (Impl. Std. 2210.A2).)

Which of the following is an appropriate objective in an engagement to review a personnel department? Determining whether - An equitable training program exists that provides all employees with approximately the same amount of training each year. - Hourly employees are being paid only for hours actually worked as indicated by time cards or similar reports. - Recruitment is being delegated to the various departments that have personnel needs. - Reference checks for prospective employees are being performed.

Reference checks of prospective employees are being performed. (An effective personnel function is necessary for hiring, training, and monitoring human resources. One purpose of this function is to recruit, select, hire, train, supervise, and evaluate individuals who are suitable in light of job requirements, job descriptions, and job specifications (the abilities needed for particular jobs). In a review of this function, an appropriate objective is to determine whether the selection process is being properly performed. Thus, a potential employee's references should be checked to determine whether (s)he is truthful and has the desired qualifications.)

Documentation required to plan an internal audit engagement includes information that - Internal audit activity resources are efficiently and effectively employed. - Resources needed to complete the engagement were considered. - Intended engagement observations have been clearly identified. - Planning engagement work will be completed on a timely basis.

Resources needed to complete the engagement were considered. (Internal auditors must develop and document a plan for each engagement, including the engagement's objectives, scope, timing, and resource allocation (Perf. Std. 2200). )

Which planning an engagement, an internal auditor establishes engagement objectives to describe what is to be accomplished. Which of the following is a key issue to consider in developing engagement objectives? - Risks associated with the activities to be reviewed. - The recipients of the final engagement communication. - The qualifications of the internal auditing staff selected for the engagement. - Recommendations of the engagement client's employees.

Risk associated with the activities to be reviewed. (Internal auditors establish engagement objectives to address the risks associated with the activity under review. For planned engagements, the objectives proceed and align to those initially identified during the risk assessment process from which the internal audit plan is derived.)

Which of the following is not an engagement objective related to the purchasing function? - Determine whether receiving reports are independently verified. - Determine whether purchases eligible for competitive bids are properly reviewed and authorized. - Run background checks on unauthorized vendors. - Determine whether goods received are properly reflected in purchasing records.

Run background checks on unauthorized vendors. (Engagement objectives are "broad statements developed by internal auditors that define intended engagement accomplishments" (The IIA Glossary). Thus, engagement objectives may be stated in various ways, but it should be clear what assurance is provided. Running background checks is an engagement procedures, not an engagement objective. The related objective is to determine whether vendors are authorized in accordance with management criteria.)

Which of the following is least likely to be placed on the agenda for discussion at a pre-engagement meeting? - Objectives and scope of the engagement. - Expected starting and completion dates. - Client personnel needed. - Sampling plan and key criteria.

Sampling plan and key criteria. (Possible objectives and scope for the engagement, the client personnel to whom the auditors need access, and the expected start and completion dates for the engagement are all appropriate matters for discussion at a pre-engagement meeting. The sampling plan cannot be drafted until risk is assessed and the engagement objectives are set.)

Internal auditors must make a preliminary assessment of risks when conducting an assurance engagement. This assessment may involve quantitative (objective) and subjective factors. The least subjective factor is - The auditor's assessment of management responses. - The organization's recognized losses on derivatives. - Changes in the auditee's business forecast. - The evaluation of internal control.

The organization's recognized losses on derivatives. (In planning the engagement, internal auditors must consider the significant risks and the means by which the potential impact of risk is kept to an acceptable level (Perf. Std. 2201). Risk factors have differing degrees of objectivity. The most objectives (least subjective) factors are facts. The organization's losses on derivatives are facts and therefore objective to the extent measurable. Objective information is such that it can be supported by facts or numbers. Subjective information is a judgement and may be interpreted differently by different people.)

Which of the following is an appropriate statement of an engagement objective? - To include information about stockouts in the final engagement communication. - To determine whether inventory stocks are sufficient to meet projected sales. - To search for the existence of obsolete inventory by computing inventory turnover by product line. - To observe the physical inventory count.

To determine whether inventory stocks are sufficient to meet projected sales. (An engagement objective is a broad statement developed by internal auditors to define intended engagement accomplishments (The IIA Glossary). Determining whether inventory stocks are sufficient to meet projected sales is an engagement objective because it defines an audit accomplishment, not an engagement procedure. A procedure is designed to gather information that corroborates and documents conclusions about objectives.)

In planning an engagement, the internal auditor establishes objectives to address the risk associated with the activity. Risk is the - Failure to accomplish established objectives and goals for operations or programs. - Failure to adhere to organizational policies, plans, and procedures or to comply with relevant laws and regulations. - Possibility that the balance or class of transactions and related assertions contains misstatements that could be material to the financial statements. - Uncertainty of the occurrence of an event that could affect the achievement of objectives.

Uncertainty of the occurrence of an event that could affect the achievement of objectives. (Risk is the possibility that an event will occur having an impact on the achievement of objectives. Risk is measured in terms of impact and likelihood (The IIA Glossary). )

An internal auditor has been asked to review the treasury department's compliance with corporate policy related to the use of forward trading to manage currency valuation risk. The auditor finds no related policies in the corporate policy manual but does discover that the department is following a policy developed by the company's bank. Which of the following would be the most appropriate response from the auditor? - Perform no further audit work and report the lack of a corporate policy as an audit observation. - Postpone the audit engagement until a corporate policy can be established. - Withdraw from the audit engagement, because there is nothing to audit due to the lack of a corporate policy. - Use the bank's policy as the audit criteria and determine whether formal adoption should be recommended in the engagement final communication

Use the bank's policy as the audit criteria and determine whether formal adoption should be recommended in the engagement final communication. ("Adequate criteria are needed to evaluate governance, risk management, and controls... If adequate, internal auditors must use such criteria in their evaluation. If inadequate, internal auditors must identify appropriate evaluation criteria through discussion with management and/or the board" (Impl. Std. 2210.A3). The facts do not indicate that the bank's policy is inadequate. Thus, the internal auditor should use the bank's policy as the audit criteria for the review of compliance with corporate policy. Furthermore, in accordance with the internal audit activity's responsibility to improve governance, risk management, and control, the internal auditor should determine whether formal adoption of the bank's policy should be recommended in the engagement final communication.)