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CIA Part 1 Multiple Choice

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Red flags are conditions that indicate a higher likelihood of fraud. Which of the following is not considered a red flag? A. Management has delegated the authority to make purchases under a certain value to subordinates. B. An individual has held the same cash-handling job for an extended period without any rotation of duties. C. An individual handling marketable securities is responsible for making the purchases, recording the purchases, and reporting any discrepancies and gains/losses to senior management. D. The assignment of responsibility and accountability in the accounts receivable department is not clear.

The IIA's Code of Ethics requires internal auditors to perform their work with A. Honesty, diligence, and responsibility. B. Timeliness, sobriety, and clarity. C. Knowledge, skills, and competencies. D. Punctuality, objectivity, and responsibility.

Which result of an analytical procedure suggests the existence of obsolete merchandise? A. Decrease in the inventory turnover rate. B. Decrease in the ratio of gross profit to sales. C. Decrease in the ratio of inventory to accounts payable. D. Decrease in the ratio of inventory to accounts receivable.

While testing the effectiveness of inventory controls, the internal auditor makes a not in the working papers that most of the cycle count adjustments for the facility involved transactions of the machining department. The machining department also had generated an extraordinary number of cycle count adjustments in comparison with other departments last year. The internal auditor should A. Interview management and apply other engagement procedures to determine whether transaction controls procedures within the machining department are adequate. B. Do no further work because the consent was not identified by the analytical procedures included in the engagement work program. C. Notify internal auditing management that fraud is suspected. D. Place a note in the working papers to review this matter in detail during the next engagement.

An organization's policies and procedures are part of its overall system of internal controls. The control function performed by policies and procedures is A. Feedforward control. B. Implementation control. C. Feedback control. D. Application control.

In complying with The IIA's Code of Ethics, an internal auditor should A. Use individual judgment in the application of the principles set forth in the Code. B. Respect and contribute to the objectives of the organization even if it is engaged in illegal activities. C. Go beyond the limitation of personal technical skills to advance the interest of the organization. D. Primarily apply the competency principle in establishing trust.

Internal auditors may report that their activities conform with the Standards. They may use this statement only if A. It is supported by the results of the quality program. B. An independent external assessment of the internal audit activity is conducted annually. C. Senior management or the board is accountable for implementing a quality program. D. External assessments of the internal audit activity are made by external auditors.

Objectivity is most likely impaired by an internal auditor's A. Continuation on an engagement at a division for which (s)he will soon be responsible as the result of a promotion. B. Reduction of the scope of an engagement due to budget restrictions. C. Participation on a task force that recommends standards for control of a new distribution system. D. Review of a purchasing agent's contract drafts prior to their execution.

The requirement that purchases be made from suppliers on an approved vendor list is an example of a A. Preventive control. B. Defective control. C. Corrective control. D. Monitoring control.

Which of the following activities performed by a payroll clerk is a control weakness rather than a control strength? A. Has custody of the check signature stamp machine. B. Prepares the payroll register. C. Forwards the payroll register to the chief accountant for approval. D. Draws the paychecks on a separate payroll checking account.

Which of the following control procedures does an internal auditor expect to find during an engagement to evaluate risk management and insurance? A. Periodic internal review of the in-force list to evaluate the adequacy of insurance coverage. B. Required approval of all new insurance policies by the organization's CEO. C. Policy of repetitive standard journal entries to record insurance expense. D. Cutoff procedures with regard to insurance expense reporting.

Which of the following controls would help prevent overpaying a vendor? A. Reviewing and canceling supporting documents when a check is issued. B. Requiring the check signer to mail the check directly to the vendor. C. Reviewing the accounting distribution for the expenditure. D. Approving the purchase before ordering from the vendor.

Which of the following is permissible under The IIA's Code of Ethics? A. In response to a subpoena, an auditor appeared in a court of law and disclosed confidential, audit-related information that could potentially damage the auditor's organization. B. An auditor used audit-related information in a decision to buy stock issued by the employer corporations. C. After praising an employee in a recent audit engagement communication, an auditor accepted a gift from the employee. D. An auditor did not report significant observations about illegal activity to the board because management indicated that it would resolve the issue.

Which of the following statements is correct regarding corporate compensation systems and related bonuses? I. A bonus system should be considered part of the control environment of an organization and should be considered in formulating a report on internal control. II. Compensation systems are not part of an organization's control system and should not be reported as such. III. An audit of an organization's compensation system should be performed independently of an audit of the control system over other functions that impact corporate bonuses. A. I only. B. II only. C. III only. D. II and III only.

Management considers risk appetite for all of the following reasons except A. Evaluating strategic options. B. Setting objectives. C. Developing risk management techniques. D. Increasing the net present value of investments.

Managerial control can be divided into feedforward, concurrent, and feedback controls. Which of the following is an example of a feedback control? A. Quality control training. B. Budgeting. C. Forecasting inventory needs. D. Variance analysis.

Many organizations use electronic funds transfer to pay their suppliers instead of issuing checks. Regarding the risks associated with issuing checks, which of the following risk management techniques does this represent? A. Controlling. B. Accepting. C. Transferring. D. Avoiding.

One payroll engagement objective is to determine whether segregation of duties is proper. Which of the following activities is incompatible? A. Hiring employees and authorizing changes in pay rates. B. Preparing the payroll and filing payroll tax forms. C. Signing and distributing payroll checks. D. Preparing attendance data and preparing the payroll.

Quality program assessments may be performed internally or externally. A distinguishing feature of an external assessment is its objective to A. Identify tasks that can be performed better. B. Determine whether internal audit services meet professional standards. C. Set forth the recommendations for improvement. D. Provide independent assurance.

The CAE bears the responsibility to do which of the following? A. Encourage the objectivity of the board. B. Encourage the objectivity of the CEO. C. Foster an attitude of professional skepticism among members of the board. D. Maintain individual objectivity.

The function of the chief risk officer (CRO) is most effective when the CRO A. Manages risk as a member of senior management. B. Shares the management of risk with line management of risk with line management. C. Shares the management of risk with the chief audit executive. D. Monitors risk as part of the enterprise risk management team.

The internal audit activity of an organization is an integral part of the organization's risk management, control, and governance processes because it evaluates and contributes to the improvement of those processes. Select the type of control provided when the internal audit activity conducts a systems development analysis. A. Feedback control. B Strategic plans. C. Policies and procedures. D. Feedforward control.

To avoid being the apparent cause of conflict between an organization's senior management and the board, the CAE should A. Communicate all engagement results to both senior management and the board. B. Strengthen the independence of the internal Audit activity through organizational position. C. Discuss all reports to senior management with the board first. D. Request board approval of policies that include internal audit activity relationships with the board.

Use of external service providers with expertise in healthcare benefits is appropriate when the internal audit activity is A. Evaluating the organization's estimate of its liability for postretirement benefits, which include healthcare benefits. B. Comparing the cost of the organization's healthcare program with other programs offered in the industry. C. Training its staff to conduct an audit of healthcare costs in a major division of the organization. D. All of the answers are correct.

Which of the following actions is required of the CAE in regard to objectivity of internal auditors? A. Maximize. B. Prioritize. C. Manage. D. Assess

Which of the following is an operating control for a research and development department? A. Research and development personnel are hired by the payroll department. B. Research and development expenditures are reviewed by an independent person. C. All research and development costs are charged to expense in accordance with the applicable accounting principles. D. The research and development budget is properly allocated between new products, product maintenance, and cost reduction programs.

Which of the following is part of an internal audit activity's quality assurance program, rather than being included as part of other responsibilities of the chief audit executive (CAE)? A. The CAE provides information about and access to internal audit working papers to the external auditors to enable them to understand and determine the degree to which they may rely on the internal auditors' work. B. Management approves a formal charter establishing the purpose, authority, and responsibility of the internal audit activity. C. Each individual internal auditor's performance is appraised at least annually. D. Supervision of an internal auditor's work is performed throughout each audit engagement.

Which of the following statements best describes the relationship between planning and controlling? A. Planning looks to the future; controlling is concerned with the past. B. Planning and controlling are completely independent of each other. C. Planning prevents problems; controlling is initiated by problems that have occurred. D. Controlling cannot operate effectively without the tools provided by planning.

Your organization has selected you to develop an internal audit activity. Your approach will most likely be to hire A. Internal auditors, each of whom possesses all the skill required to handle all engagements. B. Inexperienced personnel and train them the way the organization wants them trained. C. Degreed accounts because most internal audit work is accounting related. D. Internal auditors who collectively have the knowledge and skills needed to perform the responsibilities of the internal audit activity.

In which of the following situations does an internal auditor potentially lack objectivity? A. An internal auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major customer before it is implemented. B. A former purchasing assistant performs a review of internal controls over purchasing 4 months after being transferred to the internal auditing department. C. An internal auditor recommends standards of control and performance measures for a contract with a service organization for the processing of payroll and employee benefits. D. A payroll accounting employee assists an internal auditor in verifying the physical inventory of small motors.

Independence permits internal auditors to render impartial and unbiased judgments. The best way to achieve independence is through A. Individual knowledge and skills. B. A dual-reporting relationship. C. Supervision within the organization. D. Organizational knowledge and skills.

Internal auditors regularly evaluate controls. Which of the following best describes the concept of control as recognized by internal auditors? A. Management regularly discharges personnel who do not perform up to expectations. B. Management takes action to enhance the likelihood that established goals and objectives will be achieved. C. Control represents specific procedures that accountants and internal auditors design to ensure the correctness of processing. D. Control procedures should be designed from the "bottom up" to ensure attention to detail.

Obsolete or scrap materials are charged to a predefined project number. The materials are segregated into specified bin locations and eventually transported to a public auction for sale. To reduce the risks associated with this process, an organization should employ which of the following procedures? I. Require managerial approval for materials to be declared scrap or obsolete. II. Permit employees to purchase obsolete or scrap materials prior to auction. III. Limit obsolete or scrap materials sales to a pre-approved buyer. IV. Specify that a fixed fee, rather than a commission, be paid to the auction firm. A. II and III. B. I only. C. II and IV. D. I, III, and IV.

Ordinarily those conducting internal quality program assessments report to A. The board. B. The chief audit executive. C. Senior management. D. The internal audit staff.

The chief audit executive (CAE) has been appointed to a committee to evaluate the appointment of the external auditors. The engagement partner for the external accounting firm wants the CAE to join her for a week of hunting at her private lodge. The CAE should A. Accept, assuming both their schedule allow it. B. Refuse on the grounds of conflict of interest C. Accept as long as it is not charged to employer time. D. Ask the comptroller whether accepting the invitation is a violation of the organization's code of ethics.

Today's internal auditor will often encounter a wide range of potential ethical dilemmas, not all of which are explicitly addressed by The IIA's Code of Ethics. If the internal auditor encounters such a dilemma, the internal auditor should always A. Seek counsel from an independent attorney to determine the personal consequences of potential actions. B. Apply and uphold the principles embodied in The IIA's Code of Ethics. C. Seek the counsel of the board before deciding on an action. D. Act consistently with the code of ethics adopted by the organization even if such action is not consistent with The IIA's Code of Ethics.

When assessing the risk associated with an activity, an internal auditor should A. Determine how the risk should best be managed. B. Provide assurance on the management of the risk. C. Update the risk management process based on risk exposures. D. Design controls to mitigate the identified risks.

When faced with an imposed scope limitation, the chief audit executive needs to A. Refuse to perform the engagement until the scope limitation is removed. B. Communicate the potential effects of the cope limitation to the board. C. Increase the frequency of engagements concerning the activity in question. D. Assign more experienced personnel to the engagement.

Which of the following concurrent occupations could appear to subvert the ethical behavior of an internal auditor? A. Internal auditor and a well-known charitable organization's local in-house chairperson. B. Internal auditor and part-time business insurance broker. C. Internal auditor and adjunct faculty member of a local business college that educated potential employees. D. Internal auditor and landlord of multiple housing that publicly advertises for tenants in a local community newspaper listing monthly rental fees.

Which of the following describes the most effective preventive control to ensure proper handling of cash receipt transactions? A. Have bank reconciliations prepared by an employee not involved with cash collections and then have them reviewed by a supervisor. B. One employee issues a prenumbered receipt for all cash collections; another employee reconciles the daily total of prenumbered receipts to the bank deposits. C. Use predeteremined totals (hash totals) of cash receipts to control posting routines. D. The employee who receives customer mail receipts prepares the daily bank deposit, which is then deposited by another employee.

Which of the following operating controls relate to the organizing function? A. Formal procedures for selecting potential suppliers. B. Procedures providing for clear levels of purchase order approvals based on the value of the requisition. C. Written objectives and goals for the department. D. Timely materials reporting to buyers.

Which of the following would minimize defects in finished goods caused by poor quality raw materials? A. Documented procedures for the proper handling of work-in-process inventory. B. Required material specifications for all purchases. C. Timely follow-up on all unfavorable usage variances. D. Determination of the amount of spoilage at the end of the manufacturing process.

Which one of the following is responsible for determining the appropriate levels of education and experience needed for the internal audit staff? A. Human resource manager. B. Chief audit executive. C. Chief executive officer. D. Treasurer.

In analyzing the differences between two recently merged businesses, the chief audit executive of Organization A notes that it has a formal code of ethic and Organization B does not. The code of ethics covers such things as purchase agreements, relationships with vendors, and other issues. Its purpose is to guide individual behavior within the firm. Which of the following statements regarding the existence of the code of ethics in A can be logically inferred? I. A exhibits a higher standard of ethical behavior than does B. II. A has established objective criteria by which an individual's actions can be evaluated. III. The absence of a formal code of ethics in B would prevent a successful review of ethical behavior in that organization. A. I and II. B. II only. C. III only. D. II and III.

The purposes of the Standards include all of the following except A. Establishing the basis for the measurement of internal audit performance. B. Guiding the ethical conduct of internal auditors. C. Stating basic principles that represent the practice of internal auditing. D. Fostering improved organizational processes and operations.

B. Guiding the ethical conduct of internal auditors. This is not standard.

The authority of the internal audit activity is limited to that granted by A. The board and the controller. B. Senior management and the Standards. C. Management and the board. D. The board and the chief financial officer.

The board of an organization has charged the CAE with upgrading the internal audit activity. The CAE's first task is to develop a charter. What item should be included in the statement of objectives? A. Report all engagement results to the board every quarter. B. Notify governmental regulatory agencies of unethical business practices by organization management. C. Evaluate the adequacy and effectiveness of the organization's controls. D. Submit budget variance reports to management every month.

The internal audit activity is considering hiring a person who has a thorough understanding of internal auditing techniques, accounting, and principles of management but has nonspecialized knowledge of economics and information technology. Hiring the person is most appropriate if A. A professional development program is agreed to in advance of actual hiring. B. A mentor is assigned to ensure completion of an individually designed professional development program. C. Other internal auditors possess sufficient knowledge of economics and information technology. D. The prospective employee could reasonably be expected to gain sufficient knowledge of these competencies in the long run.

The policies and procedures helping to ensure that management directives are executed and actions are taken to address risks to achievement of objectives describes A. Risk assessments. B. Control environments. C. Control activities. D. Monitoring.

To ensure that due professional care has been taken at all times during an engagement, the internal auditor should always A. Ensure that all financial information related to the audit is included in the audit plan and examined for nonconformance or irregularities. B. Ensure that all audit tests are fully documented. C. Consider the possibility of nonconformance or irregularities at all times during an engagement. D. Communicate any noncompliance or irregularity discovered during an engagement promptly to the audit committee.

Upon receipt of purchased goods, receiving department personnel match the quantity received with the packing slip quantity and mark the retail price on the goods based on a master price list. The annotated packing slip is then forwarded to inventory control and goods are automatically moved to the retail sales area. The most significant strength of this activity is A. Immediately pricing goods for retail sale. B. Matching quantity received with the packing slip. C. Using a master price list for marking the sale price. D. Automatically moving goods to the retail sales area.

Which of the following is not implied by the definition of control? A. Measurement of progress towards goals. B. Uncovering of deviations from plans. C. Assignment of responsibility for deviations. D. Indication of the need for corrective action.

Which of the following observations made during the preliminary survey of a local department store's disbursement cycle reflects a control strength? A. Individual department managers use prenumbered forms to order merchandise from vendors. B. The receiving department is given a copy of the purchase order complete with a description of goods, quantity ordered, and extended price for all merchandise ordered. C. The treasurer's office prepares checks for suppliers based on vouchers prepared by the account payable department. D. Individual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales area as appropriate.

Which of the following statements is true with respect to due professional care? A. An internal auditor should perform detailed tests of all transactions before communicating results. B. An item should not be mentioned in an engagement communication unless the internal auditor is absolutely certain of the item. C. An engagement communication should never be viewed as providing an infallible truth about a subject. D. An internal auditor has no responsibility to recommend improvements.

Of the following, which is the most efficient source for an auditor to use to evaluate a company's overall control system? A. Control flowcharts. B. Copies of standard operating procedures. C. A narrative describing departmental history, activities, and forms usage. D. Copies of industry operating standards.

Which of the following tools would best give a graphical representation of a sequence of activities and decisions? A. Flowchart B. Control chart. C. Histogram. D. Run Chart.

An auditor for the state highway and safety department needs to estimate the average highway weight of tractor-trailer trucks using the state's highway system. Which estimation method must be used? A. Mean-per-unit. B. Difference. C. Ratio. D. Probability-proportional-to-size.

An internal auditor interviewed client personnel and obtained an understanding of the auditee department's operations. The auditor then performed testwork. The auditor's presentation of the results of the testwork will usually take the form of a A. Finding. B. conclusion. C. Recommendation. D. Meeting with senior management.

An internal auditor should be concerned about the possibility of fraud if A. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bank daily. B. The monthly bank statement reconciliation is performed by the same employee who maintains the perpetual inventory records. C. The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are maintained by the same person. D. One person, acting alone, has sole access to the petty cash fund (except for a provision for occasional surprise counts by a supervisor or auditor).

An internal auditor takes a photograph of the engagement client's workplace. The photograph is a form of what kind of information? A. Physical. B. Testimonial. C. Documentary. D. Analytical.

Engagement working papers are indexed by means of reference numbers. The primary purpose of indexing is to A. Permit cross-referencing and simplify supervisory review. B. Support the final engagement communication C. Eliminate the need for follow-up reviews. D. Determine that working papers adequately support observations, conclusions, and recommendations.

In a sampling application, the group of items about which the auditor wants to estimate some characteristic is called the A. Population. B. Attribute of interest. C. Sample. D. Sampling unit.

In an organization with separate division that is primarily responsible for the prevention of fraud, the internal audit activity is responsible for A. Examining and evaluating the adequacy and effectiveness of that division's actions taken to prevent fraud. B. Establishing and maintain that division's system of internal control. C. Planning that division's fraud prevention activities. D. Controlling that division's fraud prevention activities.

In the course of their work, internal auditors must be alert for fraud and other forms of white-collar crime. The important characteristic that distinguishes fraud from other varieties of white-collar crime is that A. Fraud is characterized by deceit, concealment, or violation of trust. B. Unlike other white-collar crimes, fraud is always perpetrated against an outside party. C. White-collar crime is usually perpetrated fro the benefit of an organization, but fraud benefits an individual. D. White-collar crime is usually perpetrated by outsiders to the detriment of an organization, but fraud is perpetrated by insiders to benefit the organization.

Internal auditors are more likely to detect fraud by developing/strengthening their ability to A. Recognize and question changes that occur in organizations. B. Interrogate fraud perpetrators to discover why the fraud was committed. C. Develop internal controls to prevent the occurrence of fraud. D. Document computerized operating system programs.

The chief audit executive is reviewing the working papers produced by an internal auditor during a fraud investigation. Among the items contained in the working papers is a description of an item of physical information. Which of the following is the most probable source of this item of information? A. Observing conditions. B. Interviewing people. C. Examining records. D. Computing variances.

The chief audit executive should develop and maintain a quality assurance and improvement program that covers all aspects of the internal audit activity and continuously monitors its effectiveness. All of the following are included in a quality program except A. Annual appraisals of individual internal auditor's performance. B. Periodic internal assessment. C. Supervision. D. Periodic external assessments.

The primary reason that a bank would maintain a separate compliance function is to A. Better manage perceived high risks. B. Strengthen controls over the bank's investments. C. Ensure the independence of line and senior management. D. Better respond to shareholder expectations.

The variability of a population, as measured by the standard deviation, is the A. Extent to which the individual values of the items in the population are spread about the mean. B. Degree of asymmetry of a distribution. C. Tendency of the means of large samples (at least 30 items) to be normally distributed. D. Measure of the closeness of a sample estimate to a corresponding population characteristic.

When current-file working papers are no longer of use to the internal audit activity, they should be A. Destroyed. B. Placed in the custody of the organization legal department for safekeeping. C. Transferred to the permanent file. D. Transferred to the custody of the engagement client for ease of future records.

When planning an attribute sampling application, the difference between the expected error rate and the maximum tolerable error rate is the planned A. Precision. B. Reliability. C. Dispersion. D. Skewness.

Which of the following conditions constitutes inappropriate working-paper preparation? A. All forms and directives used by the engagement client are included in the working papers. B. Flowcharts are included in the working papers. C. Engagement observations are cross-referenced to supporting documentation. D. Tick marks are explained in notes.

Which of the following statements indicates the wrong way to use an internal control questionnaire? A. Clarifying all answers with written remarks and explanations. B. Filling out the questionnaire during an interview with the person who has responsibility for the are that is being reviewed. C. Constructing the questionnaire so that a "no" response requires attention. D. Supplementing the complete questionnaire with a narrative description or flowchart.

Which of the following techniques is most likely to result in sufficient information with regard to an engagement to review the quantity of fixed assets on hand in a particular department? A. Physical observation. B. Analytical review of purchase requests and subsequent invoices. C. Interviews with department management. D. Examination of the account balances contained in general and subsidiary ledgers.

The IIA Rules of Conduct set forth in The IIA's Code of Ethics A. Describe behavior norms expected of internal auditor. B. Are guidelines to assist internal auditors in dealing with engagement clients. C. Are interpreted by the Principles. D. Apply only to particular conduct specifically mentioned.

The purpose of the internal audit activity can be best described as A. Adding value to the organization. B. Providing additional assurance regarding fir presentation of financial statements. C. Expressing an opinion on the adequate design and functioning of the system of internal control. D. Assuring the absence of any fraud that would materially affect the financial statements

Accounts payable schedule verification may include the use of analytical information. Which of the following is analytical information? A. Comparing the schedule with the accounts payable ledger or unpaid voucher file. B. Comparing the balance on the schedule with the balances of prior years. C. Comparing confirmations received from selected creditors with the accounts payable ledger. D. Examining vendors' invoices in support of selected items on the schedule.

An Internal auditor is planning to use attribute sampling to test the effectiveness of a specific internal control related to approvals for cash disbursements. In attribute sampling, decreasing the estimated occurrence rate from 5% to 4% while keeping all other sample size planning factors exactly the same would result in a revised sample size that would be A. Larger. B. Smaller. C. Unchanged. D. Indeterminate.

An adequate system of internal controls is most likely to detect a fraud perpetrated by a A. Group of employees in collusion. B. Single employee. C. Group of managers in collusion. D. Single manager.

An auditor is using the mean-per-unit method of variables sampling to estimate the correct total value of a group of inventory items. Based on the sample, the auditor estimates, with precision of +-4% and confidence of 90%, that the correct total is US $800,000. Accordingly, A. There is 4% chance that the actual correct total is less than US 720,000 or more than US $880,000. B. The chance that the actual correct total is less than US $768,000 or more than US $832,000 is 10%. C. The probability that the inventory is not significantly overstated is between 6% and 14%. D. The inventory is not likely to be overstated by more than 4.4% (US $35,200) or understated by more than 3.6% (Us $28,800).

An internal auditor's working papers should support the observations, conclusions, and recommendations to be communicated. One of the purposes of this requirement is to A. Provide support for the internal audit activity's financial budget. B. Facilitate quality assurance reviews. C. Provide control over working papers. D. Permit the audit committee to review observations, conclusions, and recommendations.

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? A. Field work. B. Preliminary survey. C. Engagement program development D. Examination and evaluation of evidence.

If all other sample size planning factors were exactly the same in attribute sampling, changing the confidence level from 95% to 90% and changing the desired precision from 2% to 5% would result in a revised sample size that would be A. Larger. B. Smaller. C. Unchanged. D. Indeterminate.

In advance of a preliminary survey, a chief audit executive send a memorandum and questionnaire to the supervisors of the department to be evaluated. What is the most likely result of that procedure? A. It creates apprehension about the engagement. B. It involves the engagement client's supervisory personnel in the engagement. C. It is an uneconomical approach to obtaining information. D. It is only useful for engagements of distant locations.

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

In preparing a sampling plan for an inventory pricing test, which of the following describes an advantage of statistical sampling over nonstatistical sampling? A. Requires nonquantitative expression of sample results. B. Provides a quantitative measure of sampling risk. C. Minimizes nonsampling risk. D. Reduces the level of tolerable error.

Systematic selection can be expected to produce a representative sample when A. Random number tables are used to determine the items included in the sample. B. The population is arranged randomly with respect to the audit objective. C. The sample is determined using multiple random starts and includes more items than required. D. Judgmental sampling is used by the auditor to offset any sampling bias.

The auditor wishes to sample the perpetual inventory records to develop an estimate of the monetary amount of misstatement, if any, in the account balance. The account balance is made up of a large number of small-value items and a small number of large-value items. The auditor has decided to audit all items over US $50,000 plus a random selection of other. This audit decision is made because the auditor expects to find a large amount of errors in the perpetual inventory records but is not sure that it will be enough to justify taking a complete physical inventory. The auditor expects the errors to vary directly with the value recorded in the perpetual records. The most efficient sampling procedure to accomplish the auditor's objectives is A. Monetary-unit sampling. B. Ratio estimation. C. Attribute sampling. D. Stratified mean-per-unit sampling.

The internal auditor prepares working papers primarily for the benefit of A. The external auditor. B. The internal audit activity. C. The engagement client. D. Senior management.

The most conclusive information to support supplier account balances is obtained by A. Reviewing the vendor statements obtained from the accounts payable clerk. B. Obtaining confirmations of balances from the suppliers. C. Performing analytical account analysis. D. Interviewing the accounts payable manager to determine the internal controls maintained over accounts payable processing.

The phase of the benchmarking process in which the team must be able to justify its recommendations is the A. Prioritize benchmarking projects phase. B. Implementation phase. C. Data analysis phase. D. Researching and identifying best in class performance phase.

To project the frequency of shipments to wrong addresses, an internal auditor chose a random sample from the busiest month of each of the four quarters of the most recent year. What underlying concept of statistical sampling did the auditor violate?

Tolerating silence, asking open-ended questions, and paraphrasing are three aids to more effective A. Meetings. B. Listening. C. Interviews. D. Feedback.

What characteristic of information is satisfied by an original signed document? A. Sufficiency. B. Reliability. C. Relevance. D. Usefulness.

What is the chief advantage of stop-or-go sampling? A. The error rate in the population can be projected to within certain precision limits. B. Stop-or-go sampling may reduce the size of the sample that needs to be taken from a population, thus reducing sampling costs. C. Stop-or-go sampling allows sampling analysis to be performed on populations that are not homogeneous. D. Stop-or-go sampling allows the sampler to increase the confidence limits of the analysis without sacrificing precision.

What is the first phase in the benchmarking process? A. Organize benchmarking teams. B. Select and prioritize benchmarking projects. C. Researching and identifying best-in-class performance. D. Data analysis.

When conducting interviews during the early stages of an internal auditing engagement, it is more effective to A. Ask for specific answers that can be quantified. B. Ask people about their jobs. C. Ask surprise questions about daily procedures. D. Take advantage of the fact that fear is an important part of the engagement.

Which of the following activities is outside the scope of internal auditing? A. Evaluating risk exposures regarding compliance with policies, procedures, and contracts. B. Safeguarding of assets. C. Evaluating risk exposures regarding compliance with laws and regulations. D. Ascertaining the extent to which management has established criteria to determine whether objectives have been accomplished.

Which of the following cannot be performed by an auditor using generalized audit software (GAS)? A. Identifying missing check numbers. B. Correcting erroneous data elements, making them suitable for audit testwork. C. Matching identical product information in separate data files. D. Aging accounts receivable.

Which of the following policies is most likely to result in an environment conducive to the occurrence of fraud? A. Budget preparation input by the employees who are responsible for meeting the budget. B. Unreasonable sales and production goals. C. The division's hiring process frequently results in the rejection of adequately trained applicants. D. The application of some accounting controls on a sample basis.

Which of the following procedures is the least effective in gathering information about the nature of the processing and potential problems? A. Interview supervisors in the claims department to find out more about the procedures used, and the rationale for the procedures, and obtain their observations about the nature and efficiency of processing. B. Send an email message to all clerical personnel detailing the alleged problems and request them to respond. C. Interview selected clerical employees in the claims department to find out more about the procedures used, and the rationale for the procedures, and obtain their observations about the nature and efficiency of processing. D. Distribute a questionnaire to gain a greater understanding of the responsibilities for claims processing and the control procedures utilized.

Which of the following states an inappropriate policy relating to the retention of engagement working papers? A. Working papers should be disposed of when they have no further use. B. Working papers prepared for fraud investigators should be retained indefinitely. C. Working-paper retention schedules should be approved by legal counsel. D. Working-paper retention schedules should consider legal and contractual requirements.

Which one of the following statements about sampling is true? A. A larger sample is always more representative of the underlying population than a smaller sample. B. For very large populations, the absolute size of the sample has more impact on the precision of its results than does its size relative to its population. C. For a given sample size, a simple random sample always produces the most representative sample. D. The limitations of an incomplete sample frame can almost always be overcome by careful sampling techniques.

Working papers contain a record of engagement work performed and much confidential information. They are the property of the internal audit activity, which if responsible for their security. Which of the following is the most important control requirement for working papers? A. Allow access to working papers only to internal audit activity personnel. B. Provide for the protection of working papers at all time and to the extent appropriate. C. Make the administrative section of the internal audit activity responsible for the security of working papers. D. Purge working papers periodically of materials that are considered confidential.

"Except for the missing documentation noted above, the system of internal controls over petty cash is functioning as intended." The above statement is an example of a(n) A. Observation. B. Objective. C. Conclusion. D. Finding.

A set of engagement working papers contained a copy of a document providing information that an expensive item that had been special-ordered was actually on hand on a particular date. The most likely source of this information is a printout from a computerized A. Purchases journal. B. Cash payments journal. C. Perpetual inventory file. D. Receiving report file.

A well-designed internal control questionnaire should A. Elicit "yes" or "no" responses rather than narrative responses and be organized by department. B. Be a sufficient source of data for assessment of control risk. C. Help evaluate the effectiveness of internal control. D. Be independent of the objectives of the internal auditing engagement.

An internal audit staffer has just completed an assessment of the engagement client's operating and financial controls. The auditor's preliminary conclusion is that controls are adequately designed to achieve management's operating and financial objectives. The auditor's next step is to A. Present his/her findings to the chief audit executive. B. Prepare a preliminary report on internal controls for presentation to the board. C. Report his/her results to the auditor in charge. D. Prepare a plan for testing internal controls.

An internal auditor at a savings and loan association concludes that a secured real estate loan is collectible. Which of the following engagement procedures provides the most persuasive information about the loan's collectability? A. Confirming the loan balance with the borrower. B. Reviewing the loan file for proper authorization by the credit committee. C. Examining documentation of a recent, independent appraisal of the real estate. D. Examining the loan application for appropriate borrowers' signatures.

An internal auditor performs an analytical review by comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The internal auditor notes a significant increase in the gross margin at one division. The internal auditor does some preliminary investigation and also notes that no changes occurred in products, production methods, or divisional management during the year. The most likely cause of the increase in gross margin is a(n) A. Increase in the number of competitors selling similar products. B. Decrease in the number of suppliers of the material used in manufacturing the product. C. Overstatement of year-end inventory. D. Understatement of year-end accounts receivable.

At what minimal required frequency does the chief audit executive report the results of internal assessments in the form of ongoing monitoring to senior management and the board? A. Monthly B. Quarterly. C. Annually. D. Biennially.

Checklists used to assess risk have been criticized for all of the following reasons except A. Providing a false sense of security that all relevant factors are addressed. B. Inappropriately implying equal weight to each item on the checklist. C. Decreasing the uniformity of data acquisition. D. Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist.

Difference estimation sampling would be appropriate to use to project the monetary error in a population if A. Subsidiary ledger book balances for some individual inventory items are unknown. B. Virtually no differences between the individual carrying amounts and the audited amounts exist. C. A number of nonproportional differences between carrying amounts and audited amounts exist. D. Observed differences between carrying amounts and audited amounts are proportional to carrying amounts.

In a variables sampling application, which of the following will result when confidence level is changed from 90% to 95%? A. Stand error of the mean will not be affected. B. Nonsampling error will decrease. C. Sample size will increase. D. Point estimate of the arithmetic mean will increase.

In an operational audit, the internal auditors discovered an increase in absenteeism. Accordingly, the chief audit executive decided to identify information about workforce morale. To achieve this engagement objective, the internal auditors must understand that A. Morale cannot be reliably analyzed. B. Only outcomes that are directly quantifiable can be reliably analyzed. C. Reliable information may be obtained about morale factors such as job satisfaction. D. Morale is always proportional to compensation.

Internal auditors should review the means of physically safeguarding assets from losses arising from A. Misapplication of accounting principles. B. Procedures that are not cost justified. C. Exposure to the elements. D. Underusage of physical facilities.

Random numbers can be used to select a sample only when each item in the population A. Can be assigned to a specific stratum. B. Is independent of outside influence. C. Can be identified with a unique number. D. Is expected to be within plus or minus three standard deviations of the population mean.

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? A. Three prenumbered receiving reports were missing. B. There were several purchase orders issued without purchase requisitions. C. Payment had been made for routine inventory items without a purchase order or receiving report. D. Several times cash receipts had been help over an extra day before depositing.

The diamond-shaped symbol is commonly used in flowcharting to show or represent a A. Process or a single step in a procedure or program. B. Terminal output display. C. Decision point, conditional testing, or branching. D. Predefined process.

The internal auditor has concluded that an engagement client's system of internal controls is inadequate to achieve management's objectives. The most appropriate next step is to A. Test controls to determine whether they are functioning as designed. B. Halt the engagement and issue a report about inadequate controls. C. Draw preliminary conclusions about internal control. D. Contact the engagement client's direct supervisor to recommend that the head of the department or function under audit is transferred or terminated.

The size of a given sample is jointly a result of characteristics of the population of interests and decisions made by the internal auditor. Everything else being equal sample size will A. Increase if the internal auditor decides to accept more risk of incorrectly concluding that controls are effective when they are in fact ineffective. B. Double if the internal auditor finds that the variance of the population is twice as large as was indicated in the pilot sample. C. Decrease if the internal auditor increases the tolerable rate of deviation. D. Increase as sampling risk increases.

To elicit views on broad organizational risks and objectives from the board and senior management, an internal auditor should A. List specific risk factors for consideration. B. Develop spreadsheets with quantitative data relevant to the industry. C. Use a nondirective approach to initiating discussion of mitigating risks. D. Ask each member of management about specific risks listed in an industry reference.

To verify the proper value of costs charged to real property records for improvements to the property, the best source of information is A. Inspection by the internal auditor of real property improvements. B. A letter signed by the real property manager asserting the propriety of costs incurred. C. Original invoices supporting entries into the accounting records. D. Comparison of billed amounts with contract estimates.

Working papers should be disposed of when they are of no further use. Retention policies must A. Specify a minimum retention period of 3 years. B. Be prepared by the audit committee. C. Be approved by legal counsel. D. Be approved by the external auditor.

A primary purpose of establishing a code of conduct within a professional organization is to A. Reduce the likelihood that members of the profession will be sued for substandard work. B. Ensure that all members of the profession perform at approximately the same level of competence. C. Promote an ethical culture among professionals who service others. D. Require members of the profession to exhibit loyalty in all matter pertaining to the affairs of their organization.

A 90% confidence interval for the mean of a population based on the information in a sample always implies that there is a 90% chance that the A. Estimate is equal to the true population mean. B. True population mean is no larger than the largest endpoint of the interval. C. Standard deviation will not be any greater than 10% of the population mean. D. True population mean lies within the specified confidence interval.

Researching and identifying best-in-class performance is often the most difficult phase. Which of the following is not a critical step? A. Setting up databases. B. Choosing information-gathering methods. C. Formatting questionnaires. D. Employee training and empowerment.

A utility with a large investment in repair vehicles would most likely implement which internal control to reduce the risk of vehicle theft or loss? A. Review insurance coverage for adequacy. B. Systematically account for all repair work orders. C. Physically inventory vehicles and reconcile the results with the accounting records. D. Maintain vehicles in a secured location with release and return subject to approval by a custodian.

A working paper is complete when it A. Complies with the internal audit activity's format requirements. B. Contain all of the attributes of an observation. C. Is clear, concise, and accurate. D. Satisfies the engagement objective for which it is developed.

An auditor is checking the accuracy of a computer-printed inventory listing to determine whether the total monetary value of inventory is significantly overstated. Because there is not adequate time or resources to check all items in the warehouse, a sample of inventory items must be used. If the sample size is fixed, which one of the following would be the most accurate sampling approach in this case? A. Select those items that are most easily inspected. B. Employ simple random sampling. C. Sample so that the probability of a given inventory item being selected is proportional to the number of units sold for that item. D. Sample so that the probability of a given inventory item being selected is proportional to its book value.

An auditor is least likely to use computer software to A. Construct parallel simulations. B. Access client data files. C. Prepare spreadsheets. D. Assess computer control risk.

An inexperience 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 new internal auditor should have investigated the matter fully and not bothered the senior. B. The senior used proper judgment in curtailing what could have been a wasteful investigation. C. The senior should have halted the engagement until the variance was fully explained. D. The senior should have aided the new internal auditor in formulating a plan for accumulating appropriate information.

An internal auditor is evaluating the advertising function. The organization has engaged a medium-sized local advertising agency to place advertising in magazine publications. As part of the review of the engagement working papers, the internal auditing supervisor is evaluating the information collected. The internal auditor reviewed the language in the advertising for its legality and compliance with fair trade regulations by interviewing the organization's advertising manager, the product marketing director (who may not have been objective), and five of the organization's largest customers (who may not have been knowledgeable). The supervisor can justifiably conclude that the information is A. Reliable B. Irrelevant. C. Conclusive. D. Insufficient.

An internal auditor who suspects fraud should A. Determine that a loss has been incurred. B. Interview those who have been involved in the control of assets. C. Identify the employees who could be implicated in the case. D. Recommend an investigation if appropriate.

Assessing individual objectivity of internal auditors is the responsibility of A. The chief executive officer. B. The board. C. The audit committee. D. The chief audit executive.

During an engagement, the internal auditor should consider the following factor(s) in determining the extent to which analytical procedures should be used during the engagement: A. Adequacy of the system of internal control. B. Significance of the area being examined. C. Precision with which the results of analytical audit procedures can be predicted. D. All of the answers are correct.

During an operational audit engagement, an auditor compared the inventory turnover rate of a subsidiary with established industry standards in order to A. Evaluate the accuracy of internal financial reports. B. Test controls designed to safeguard assets. C. Determine compliance with corporate procedures regarding inventory levels. D. Assess performance and indicate where additional audit work may be needed.

Engagement information is usually considered relevant when it is A. Derived through valid statistical sampling. B. Objective and unbiased. C. Factual, adequate, and convincing. D. Consistent with the engagement objectives.

In deciding whether recorded sales are valid, which of the following items of information is most reliable? A. A copy of the customer's purchase order. B. A memorandum from the director of shipping department stating that another employee verified the personal delivery of the merchandise to the customer. C. Accounts receivable records showing cash collections from the customer. D. The shipping document, independent bill of lading, and the invoice for the merchandise.

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

Inherent risk is A. A potential event that will adversely affect the organization. B. Risk response risk. C. The risk after management takes action to reduce the impact of likelihood of an adverse event. D. The risk when management has not taken action to reduce the impact or likelihood of an adverse event.

Internal auditors have a responsibility for helping to deter fraud. Which of the following best describes how this responsibility is usually met? A. By coordinating with security personnel and law enforcement agencies in the investigation of possible frauds. B. By testing for fraud in every engagement and following up as appropriate. C. By assisting in the design of control systems to prevent fraud. D. By evaluating the adequacy and effectiveness of controls in light of the potential exposure or risk.

Internal auditors have been advised to consider red flag to determine whether management is involved in a fraud. Which of the following does not represent a difficulty in using the red flags as fraud indicators? A. Many common red flags are also associated with situations in which no fraud exists. B. Some red flags are difficult to quantify or to evaluate. C. Red flag information is not gathered as a normal part of an engagement. D. The red flags literature is not well enough established to have a positive impact on internal auditing.

Maintaining individual objectivity of internal auditors is the responsibility of A. The chairperson of the board of directors. B. The chairperson of the audit committee. C. The external assessment team. D. The chief audit executive.

Reliable information is A. Supportive of the engagement observations and consistent with the engagement objectives. B. Helpful in assisting the organization in meeting prescribed goals. C. Factual, adequate, and convincing so that a prudent person would reach the same conclusion as the internal auditor. D. Competent and the best attainable through the use of appropriate engagement techniques.

The most likely source of information indicating employee theft of inventory is A. Physical inspection of the condition of inventory items on hand. B. A warehouse employee's verbal charge of theft. C. Differences between an inventory count and perpetual inventory records. D. Accounts payable transactions vouched to inventory receiving reports.

The single most important factor in drawing a useful conclusion or stating a useful opinion in an engagement report is A. Use of statistical sampling techniques. B. Senior management interest in the engagement outcome. C. Auditee management assurances. D. Auditor judgment.

When an internal auditor uses monetary-unit statistical sampling to examine the total value of invoices, each invoice A. Has an equal probability of being selected. B. Can be represented by no more than one monetary unit. C. Has an unknown probability of being selected. D. Has a probability proportional to it monetary value of being selected.

When relatively few items of high monetary value constitute a large proportion of an account balance, stratified sampling techniques and complete testing of the high monetary-value items will generally result in a A. Simplified evaluation of sample results. B. Smaller nonsampling error. C. Larger estimate of population variability. D. Reduction in sample size.

Which of the following actions constitutes a violation of the confidentiality concept regarding working papers? An internal auditor A. Takes working papers to his/her hotel room overnight. B. Shows working paper on occasion to engagement clients. C. Allows the external auditor to copy working papers. D. Misplaces working papers occasionally.

Which of the following are least valuable in predicting the amount of uncollectible accounts for an organization? A. Published economic indices indicating a general business downturn. B. Dollar amounts of accounts actually written off by the organization for each of the past 6 months. C. Total monthly sales for each of the past 6 months. D. Written forecasts from the credit manager regarding expected future cash collections.

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

Which of the following facts, by themselves, could contribute to a lack of independence of the internal audit activity? I. the CEO accused the new auditor of not operating "in the bests interest of the organization." II. the majority of audit committee members come from within the organization. III. the internal audit activity's charter has not been approved by the board. A. I only. B. II only. C. II and III only. D. I, II, and III.

Which of the following goals sets risk management strategies at the optimum level? A. Minimize costs. B. Maximize market share. C. Minimize losses. D. Maximize shareholder value.

Which of the following is an unnecessary feature of a working paper prepared in connection with maintenance costs? A. The internal auditor has initialed and dated the working paper as of the date completed even though the working paper was prepared over the preceding 4 working days. B. Total repair expense for the month preceding the engagement is shown. C. The chief audit executive has initialed the working paper as reviewer although the working paper was prepared by another person. D. Total acquisition cost of property, plant, and equipment for the preceding month is shown.

Which of the following is not an advantage of sending an internal control questionnaire prior to an audit engagements? A. The engagement client can use the questionnaire for self-evaluation prior to the auditor's visit. B. The questionnaire will help the engagement client understand the scope of the engagement. C. Preparing the questionnaire will help the auditor plan the scope of the engagement and organize the information to be gathered. D. The engagement client will respond only to the questions asked, without volunteering additional information.

Which of the following is the primary reason that many auditors hesitate to use embedded audit modules? A. Embedded audit modules cannot be protected from computer viruses. B. Auditors are required to monitor embedded audit modules continuously to obtain valid results. C. Embedded audit modules can easily be modified through management tampering. D. Auditors are required to be involved in the system design of the application to be monitored.

Which of the following statements is (are) true regarding the prevention of fraud? I. The primary means of preventing fraud is through internal control established and maintained by management. II. Internal auditors are responsible for assisting in the prevention of fraud by examining and evaluating the adequacy of the internal control system. III. Internal auditors should assess the operating effectiveness of fraud-related communication systems. A. I only. B. I and II only. C. II only. D. I, II, and III.

During an engagement to evaluate the organization's accounts payable function, an internal auditor plans to confirm balances with suppliers. What is the source of authority for such contacts with units outside the organization? A. Internal audit activity policies and procedures. B. The Standards. C. The Code of Ethics. D. The internal audit activity's charter.

Which of the following most likely constitutes a violation of The IIA's Code of Ethics by an internal auditor? A. Discussing at a trade convention the organization's controls over its computer networks. B. Deleting sensitive information from a final engagement communication at the request of senior management. C. Investigating executive expense reports based completely on rumors of padding. D. Purchasing stock in a target organization after overhearing an executive discussion of possible acquisition.

D. Violation of Rules of Conduct 3.2

An accounting association established a code of ethics for all members. What is one of the association's primary purposes of establishing the code of ethics? A. The outline criteria for professional behavior to maintain standards of integrity and objectivity B. To establish standards to follow for effective accounting practice. C. To provide a framework within which accounting policies could be effectively developed and executed. D. The outline criteria that can be used in conducting interviews of potential new accountants

An organization's directors, management, external auditors, and internal auditors all play important roles in creating a proper control environment. Senior management is primarily responsible for A. Establishing a proper organizational culture and specifying a system of internal control. B. Designing and operating a control system that provides reasonable assurance that established objectives and goals will be achieved. C. Ensuring that external and internal auditors adequately monitor the control environment. D. Implementing and monitoring controls designed by the board of directors.

At a minimum, how often should the skills of the internal audit staff be assessed? A. Annually. B. Every 5 years. C. Quarterly. D. Semi-annually.

Controls provide assurance to management that desired actions will be accomplished when objectives are established in writing and A. Standards are adopted, results are compared with the standards, and corrective actions are undertaken. B. Are communicated to employees in writing and are updated by operating personnel as conditions change. C. Policies and procedures for activities are set out in manuals for use by properly trained personnel. D. Internal reviews as to the propriety and effectiveness of the objectives are undertaken on a periodic basis by the internal audit activity.

Internal auditing has planned an engagement to evaluate the effectiveness of the quality assurance function as it affects the receipt of goods, the transfer of the goods into production, and the scrap costs related to defective items. The engagement client argues that such an engagement is not within the scope of the internal audit activity and should come under the purview of the quality assurance department only. What is the most appropriate response? A. Refer to the internal audit activity's charter and the approved engagement plan that includes the area designated for evaluation in the current time period. B. Because quality assurance is a new function, seek the approval of management as a mediator to set the scope of the engagement. C. Indicate that the engagement will evaluate the function only in accordance with the standards set by, and approved by, the quality assurance function before beginning the engagement. D. Terminate the engagement because it will not be productive without the client's cooperation.

Which of the following is permissible under The IIA's Code of Ethics? A. Disclosing confidential, engagement-related information that is potentially damaging to the organization in response to a court order. B. Using engagement-related information in a decision to buy an ownership interest in the employer organization. C. Accepting an unexpected gift from an employee whom the internal auditor has praised in a recent engagement communication. D. Not reporting significant observations and recommendations about illegal activity to the board because management has indicated it will address the issue.

Which situation most likely violates The IIA's Code of Ethics and the Standards? A. The CAE disagrees with the engagement client about the observations and recommendations in a sensitive area. The CAE discusses the detail in observations and the proposed recommendations with a fellow CAE from another organization. B. An organization's charter for the internal audit activity requires the chief audit executive to present the yearly engagement work schedule to the board for its approval and suggestions. C. The engagement manager has removed the most significant observations and recommendations from the final engagement communication. The in-charge internal auditor opposed the removal, explaining that she knows the reported conditions exist. The in-charge internal auditor agrees that, technically, information is not sufficient to support the observations are the only reasonable conclusions. D. Because the internal audit activity lacks skill and knowledge in a specialty area, the CAE has hired an expert. The engagement manager has been asked to review the expert's approach to the assignment. Although knowledgeable about the area under review, the manager is hesitant to accept the assignment because off lack of expertise.

A CIA is working in a noninternal-auditing position as the director of purchasing. The CIA signed a contract to procure a large order from the supplier with the best price, quality, and performance. Shortly after signing the contract, the supplier presented the CIA with a gift of significant monetary value. Which of the following statements regarding the acceptance of the gift is true? A. Acceptance of the gift is prohibited only if it is not customary. B. Acceptance of the gift violates The IIA's Code of Ethics and is prohibited for a CIA. C. Because the CIA is no longer acting as an internal auditor, acceptance of the gift is governed only by the organization's code of conduct. D. Because the contract was signed before the gift was offered, acceptance of the gift does not violate either, The IIA's Code of Ethics or the organization's code of conduct.

A new staff internal auditor was told to perform an engagement in an area with which the internal auditor was not familiar. Because of time constraints, no supervision was provided. The assignment represented a good learning experience, but the area was clearly beyond the internal auditor's competence. Nonetheless, the internal auditor prepared comprehensive working papers and communicated the results to management. In this situation, A. The internal audit activity violated the Standards by hiring an internal auditor without proficiency in the area. B. The internal audit activity violated the Standards by not providing adequate supervision. C. The CAE has not violated The IIA's Code of Ethics because it does not address supervision. D. The Standards and The IIA's Code of Ethics were followed by the internal audit activity.

An individual became head of the internal audit activity of an organization 1 week ago. An engagement client has come to the person complaining vigorously that one of the internal auditors is taking up an excessive amount of client time on an engagement that seems to be lacking a clear purpose. In handling this conflict with a client, the person should consider A. Discounting what is said, but documenting the complaint. B. Whether existing procedures within the internal audit activity provide for proper planning and quality assurance. C. Presenting an immediate defense of the internal auditor based upon currently known facts. D. Promising the client that the internal auditor will finish the work within 1 week.

An internal auditor is examining inventory control in a merchandising division with annual sales of US $3,000,000 and a 40% gross profit rate. Tests show that 2% of the monetary amount of purchases do not reach inventory because of breakage and employee theft. Adding certain controls costing US $35,000 annually could reduce these losses to .5% of purchases. Should the controls be recommended? A. Yes, because the projected saving exceeds the cost of the added controls. B. No, because the cost of the added controls exceeds the projected savings. C. Yes, because the ideal system of internal control is the most extensive one. D. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.

An internal auditor judged an item to be immaterial when planning an assurance engagement. However, the assurance engagement may still include the item if it is subsequently determined that A. Sufficient staff is available. B. Adverse effects related to the item are likely to occur. C. Related information is reliable. D. Miscellaneous income is affected.

An internal auditor who encounters an ethical dilemma not explicitly addressed by The IIA's Code of Ethics should always A. Seek counsel from an independent attorney to determine the personal consequences of potential actions. B. Take action consistent with the principles embodied in The IIA's Code of Ethics. C. Seek the counsel of the audit committee before deciding on an action. D. Act consistently with the employing organization's code of ethics even if such action would not be consistent with The IIA's Code of Ethics.

An internal auditor who had been supervisor of the accounts payable section should not perform an assurance review of that section A. Because a reasonable period of time in which to establish independence cannot be determined. B. Until at least 1 year has elapsed. C. Until after the next annual review by the external auditors. D. Until it is clear that the new supervisor has assumed the responsibilities.

An organization is in the process of establishing its new internal audit activity. The controller has no previous experience with internal auditors. Due to this lack of experience, the controller advised the applicants that the CAE will be reporting to the external auditors. However, the new chief audit executive will have free access to the controller to report anything important. The controller will then convey the CAE's concerns to the board of directors. The internal audit activity will A. Be independent because the CAE has direct access to the board. B. Not be independent because the CAE reports to the external auditors. C. Not be independent because the controller has no experience with internal auditors. D. Not be independent because the organization did not specify that the applicants must be certified internal auditors.

Due professional care implies reasonable care and competence, not infallibility or extraordinary performance. Thus, which of the following is unnecessary? A. The conduct of examinations and verifications to a reasonable extent. B. The conduct of extensive examinations. C. The reasonable assurance that compliance does exist. D. The consideration of the possibility of material irregularities.

In a review of travel and entertainment expenses, a certified internal auditor questioned the business purposes of an officer's reimbursed travel expenses. The officer promised to compensate for the questioned amounts by not claiming legitimate expenses in the future. If the officer makes good on the promise, the internal auditor A. Can ignore the original charging of the nonbusiness expenses. B. Should inform the tax authorities in any event. C. Should still include the finding in the final engagement communication. D. Should recommend that the officer forfeit any frequent flyer miles received as part of the questionable travel.

A chief audit executive (CAE) for a very small internal audit department has just received a request from management to perform an audit of an extremely complex area in with the CAE and the department have no expertise. The nature of the audit engagement is within the scope of internal audit activities. Management has expressed a desire to have the engagement conducted in the very near future because of the high level of risk involved. Which of the following responses by the CAE would be in violation of the Standards? A. Discuss with management the possibility of outsourcing the audit of this complex area. B. Add an outside consultant to the audit staff to assist in the performance of the audit engagement. C. Accept the audit engagement and begin immediately, since it is a high-risk area. D. Discuss the timeline of the audit engagement with management to determine if sufficient time exists in which to develop appropriate expertise.

A receiving department receives copies of purchase orders for use in identifying and recording inventory receipts. The purchase orders list the name of the vendor and the quantities of the materials ordered. A possible error that this system could allow is A. Payment to unauthorized vendors. B. Payment for unauthorized purchases. C. Overpayment for partial deliveries. D. Delay in recording purchases.

An internal auditor for a large regional bank was asked to serve on the board of directors of a local bank. The bank competes in many of the same markets as the regional bank but focuses more on consumer financing than on business financing. In accepting this position, the internal auditor I. Violated The IIA's Code of Ethics because serving on the board may be in conflict with the best interests of the internal auditor's employer II. Violated The IIA's Code of Ethics because the information gained while serving on the board of directors of the local bank may influence recommendations regarding potential acquisitions A. I only. B. II only. C. I and II. D. Neither I nor II.

During the course of an engagement, an internal auditor discovers that a clerk is embezzling funds from the organization. Although this is the first embezzlement ever encountered and the organization has a security department, the internal auditor decides to interrogate the suspect. If the internal auditor is violating The IIA's Code of Ethics, the rule violated is most likely A. Failing to exercise due diligence. B. Lack of loyalty to the organization. C. Lack of competence in this area. D. Failing to comply with the law.

Enterprise risk management A. Guarantees achievement of organizational objectives. B. Requires establishment of risk and control activities by internal auditors. C. Involves the identification of events with negative impacts on organizational objectives. D. Includes selection of the best risk response for the organization.

Following an external assessment of the internal audit activity, who is (are) responsible for communication the results to the board? A. Internal auditors. B. Audit committee. C. Chief audit executive D. External auditors.

Internal auditors who fail to maintain their proficiency through continuing education could be found to be in violation of A. The International Standards for the Professional Practice of Internal Auditing. B. The IIA's Code of Ethics. C. Both the International Standards for the Professional Practice of Internal Auditing and The IIA's Code of Ethics. D. None of the answers are correct.

The Standards consist of three types of Standards. Which standards apply to the characteristics of providers of internal auditing services? A. Implementation Standards. B. Performance Standards C. Attribute Standards D. Independence Standards

Which Standards expand upon the other categories of Standards? A. Performance Standards B. Attribute Standards C. Implementation Standards. D. All of the choices are correct.

An internal auditor working for a chemical manufacturer believed that toxic waste was being dumped in violation of the law. Out of loyalty to the organization, no information regarding the dumping was collected. The internal auditor A. Did not violate the Code of Ethics. Loyalty to the employer in all matters in required. B. Did not violate the Code of Ethics. Conclusive information about wrongdoing was not gathered. C. Violated the Code of Ethics by knowingly becoming a party to an illegal act. D. Violated the Code of Ethics by failing to protect thee well-being of the general public.

C. A person with a duty to act who doess not act violated an ethical, if not a legal, obligation.

An internal auditing team has made observations and recommendations that should significantly improve a division's operating efficiency. Out of appreciation of this work, and because it is the holiday season, the division manager present to in-charge internal auditor with a gift of moderate value. Which of the following best describes the action prescribed by The IIA's Code of Ethics? A. Accept it, regardless of other circumstances, because its value is insignificant. B. Not accept it prior to submission of the final engagement communication. C. Not accept it if he is presumed to impair the internal auditor's judgment. D. Not accept it, regardless of other circumstances, because its value is significant.

C. According to Rule of Conduct 2.2, the decision whether to accept a gift should be based on the potentional impairment of the auditor's judgement.

A charter is one of the more important factors positively affecting the internal audit activity's independence. Which of the following is least likely to be part of the charter? A. Access to records within the organization. B. The scope of internal audit activities. C. The length of tenure of the chief audit executive. D. Access to personnel within the organization.

C. This is a meter of ongoing judgment for the board and should not be codified in the charter.

A review of an organization's code of conduct revealed that it contained comprehensive guidelines designed to aspire high levels of ethical behavior. The review also revealed that employees were knowledgeable of it provisions. However, some employees still did not comply with the code. What element should a code of conduct contain to enhance its effectiveness? A. Periodic review and acknowledgment by all employees. B. Employee involvement in its development. C. Public knowledge of its contents and purpose. D. Provisions for disciplinary action in the event of violations.

Controls may be classified according to the function they are intended to perform, for example, as detective, preventive, or directive. Which of the following is a directive control? A. Monthly bank statement reconciliations. B. Dual signatures on all disbursements over a specific amount. C. Recording every transaction on the day it occurs. D. Requiring all members of the internal audit activity to be CIAs

Which of the following actions taken by a CAE could be considered professionally ethical under The IIA's Code of Ethics? A. The CAE decides to delay an engagement at a branch so that his nephew, the branch manager, will have time to "clean things up." B. To save organizational resources, the CAE cancels all staff training for the next 2 years on the basis that all staff are too new to benefit from training. C. To save organizational resources, the CAE limits procedures at foreign branches to confirmations from branch manager that no major personnel changes have occurred. D. The CAE refuses to provide information about organizational operations to his father, who is a part owner.

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