Quiz 2

The internal auditors must be able to distinguish carefully between a scope limitation and other limitations. Which of the following is not considered a scope limitation? A. The board reviews the engagement work schedule for the year and deletes an engagement that the chief audit executive thought was important to conduct. B. The engagement client has indicated that certain customers cannot be contacted because the organization is in the process of negotiating a long-term contract with the customers and they do not want to upset the customers. C. None of the answers are correct. D. The divisional management of an engagement client has indicated that the division is in the process of converting a major computer system and has indicated that the information systems portion of the planned engagement will have to be postponed until next year.

A. The board reviews the engagement work schedule for the year and deletes an engagement that the chief audit executive thought was important to conduct.

Communication skills are important to internal auditors. They should be able to convey effectively all of the following to engagement clients except A. The risk assessment used in selecting the area for investigation. B. The engagement evaluations based on a survey. C. The objectives designed for a specific engagement. D. Recommendations that are generated in relationship to a specific engagement client.

A. The risk assessment used in selecting the area for investigation.

Internal auditing is unique in that its scope often encompasses all areas of an organization. Thus, it is not possible for each internal auditor to possess detailed competence in all areas that might be the subject of engagements. Which of the following competencies must the internal audit activity possess collectively? A. Understanding of management principles. B. Proficiency in information technology. C. Proficiency in accounting principles. D. Understanding of taxation and law as it applies to operation of the organization.

A. Understanding of management principles.

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 engagement communication should never be viewed as providing an infallible truth about a subject. C. An internal auditor has no responsibility to recommend improvements. D. An item should not be mentioned in an engagement communication unless the internal auditor is absolutely certain of the item.

B. An engagement communication should never be viewed as providing an infallible truth about a subject.

A certified internal auditor performed an assurance engagement to review a department store's cash function. Which of the following actions will be deemed lacking in due professional care? A. The final engagement communication included a well-supported recommendation for the reduction in staff, although it was known that such a reduction would adversely affect morale. B. Because of a highly developed system of internal control over the cash function, the final engagement communication assured senior management that no irregularities existed. C. A flowchart of the entire cash function was developed, but only a sample of transactions was tested. D. Organizational records were reviewed to determine whether all employees who handle cash receipts and disbursements were bonded.

B. Because of a highly developed system of internal control over the cash function, the final engagement communication assured senior management that no irregularities existed.

As part of the process to improve internal auditor-engagement client relations, it is very important to deal with how the internal audit activity is perceived. Certain types of attitudes in the work performed will help create these perceptions. From a management perspective, which attitude is likely to be the most conducive to a positive perception? A. Interrogatory. B. Consultative. C. Objective. D. Investigative.

B. Consultative.

The major reason for the internal auditor's involvement in information systems development is for the internal auditor to A. Help minimize the cost and development time for new systems. B. Help assure that systems have adequate control procedures. C. Propose enhancements for subsequent development and implementation. D. Gain familiarity with systems for use in subsequent reviews.

B. Help assure that systems have adequate control procedures.

A formal document (charter) approved by the board that defines the internal audit activity's purpose, authority, and responsibility enhances its A. Relationship with management. B. Independence. C. Proficiency. D. Exercise of due professional care.

B. Independence.

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

B. Internal auditors who collectively have the knowledge and skills needed to perform the responsibilities of the internal audit activity.

According to the International Professional Practices Framework, the independence of the internal audit activity is achieved through A. Human relations and communications. B. Organizational status and objectivity. C. Continuing professional development and due professional care. D. Staffing and supervision.

B. Organizational status and objectivity.

Which of the following activities undertaken by the internal auditor might be in conflict with the standard of independence? A. External audit liaison. B. Product development team leader. C. Ethics advocate. D. Risk management consultant.

B. Product development team leader.

Internal auditors should be objective. Objectivity A. Prohibits internal auditors from providing consulting services relating to operations for which they had previous responsibility. B. Requires internal auditors not to subordinate their judgment on audit matters to that of others. C. Is required only in assurance engagements. D. Is freedom from threats to the ability to perform audit work without bias.

B. Requires internal auditors not to subordinate their judgment on audit matters to that of others.

In exercising due professional care, internal auditors must consider which of the following? 1. The relative complexity, materiality, or significance of matters to which assurance procedures are applied 2. The extent of assurance procedures necessary to ensure that all significant risks will be identified 3. The probability of significant errors, irregularities, or noncompliance A. 2 and 3 only. B. 1 and 2 only. C. 1 and 3 only. D. 1, 2, and 3.

C. 1 and 3 only.

During a consulting engagement, an internal auditor should exercise due professional care by considering which of the following? 1. Needs and expectations of engagement clients 2. Relative complexity and extent of work needed 3. Cost of the consulting engagement A. 2 and 3. B. 1 and 3. C. 1, 2, and 3. D. 1 and 2.

C. 1, 2, and 3.

A quality assurance and improvement program of an internal audit activity provides reasonable assurance that internal auditing work is performed in accordance with its charter. Which of the following are designed to provide feedback on the effectiveness of an internal audit activity? 1. Proper supervision 2. Proper training 3. Internal reviews 4. External reviews A. 2, 3, and 4 only. B. 1, 2, 3, and 4. C. 1, 3, and 4 only. D. 1, 2, and 3 only.

C. 1, 3, and 4 only.

George is the new internal auditor for XYZ Corporation. George was in charge of payroll for XYZ just 10 months ago. Performing what services in regard to payroll is considered an impairment of independence or objectivity if performed by George? A. Neither assurance nor consulting services. B. Assurance or consulting services. C. Assurance services. D. Consulting services.

C. Assurance services.

The reporting structure that is most likely to allow the internal audit activity to accomplish its responsibilities is to report administratively to the A. Controller and functionally to the chief financial officer. B. Board and functionally to the chief executive officer. C. Chief executive officer and functionally to the board of directors. D. Chief executive officer and functionally to the external auditor.

C. Chief executive officer and functionally to the board of directors.

During the performance of an engagement to evaluate a division's controls over purchasing, the chief purchasing agent asked why the internal auditor had requested documents pertaining to transactions with a particular supplier. The internal auditor's proper response is to A. Treat the inquiry as a scope limitation. B. Explain the reasons for the information request to promote cooperation with the engagement client. C. Consider the specific circumstances before deciding whether to disclose the reasons for the information request. D. Refuse to explain the information request to preserve the integrity of the engagement process.

C. Consider the specific circumstances before deciding whether to disclose the reasons for the information request.

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

C. It is supported by the results of the quality program.

An internal auditor must exercise due professional care in performing engagements. Due professional care includes A. Establishing direct communication between the chief audit executive and the board. B. Establishing suitable criteria of education and experience for filling internal auditing positions. C. Accumulating sufficient information so that the internal auditor can give absolute assurance that irregularities do not exist. D. Evaluating established operating standards and determining whether those standards are adequate.

D. Evaluating established operating standards and determining whether those standards are adequate.

Which of the following statements is an appropriate reason for the internal audit activity not to participate in the systems development process? A. Participation will delay implementation of the project. B. Participation will cause the internal auditors to be labeled as partial owners of the application, and they will then have to share the blame for any problems that remain in the system. C. Recommendations prior to implementation will affect independence, and the internal auditors will not be able to perform an objective evaluation after the system is implemented. D. None of the answers are correct.

D. None of the answers are correct.

A treasury department employee transferred to the internal audit activity of the same organization last month. The chief financial officer of the organization has suggested that, because of the employee's significant knowledge in this area, it would be a good idea for the employee to immediately begin an engagement to evaluate the treasury department. In this circumstance, the employee should A. Offer to prepare an engagement work program but suggest that interviews with the employee's former co-workers be conducted by other members of the internal audit staff. B. Accept the engagement and begin work immediately. C. Discuss the need for such an engagement with the employee's former superior, the CFO. D. Suggest that the engagement be performed by another member of the internal audit staff.

D. Suggest that the engagement be performed by another member of the internal audit staff.

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

D. The chief audit executive.

Which of the following facts, by themselves, could contribute to a lack of independence of the internal audit activity? The CEO accused the new auditor of not operating "in the best interests of the organization." The majority of audit committee members come from within the organization. The internal audit activity's charter has not been approved by the board. A. 1, 2, and 3. B. 1 only. C. 2 only. D. 2 and 3 only.

A. 1, 2, and 3.

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

A. A former purchasing assistant performs a review of internal controls over purchasing 4 months after being transferred to the internal auditing department.

When hiring entry-level internal auditing staff, which of the following will most likely predict the applicant's success as an internal auditor? A. Ability to organize and express thoughts well. B. Ability to fit well socially into a group. C. Level of detailed knowledge of the organization. D. Grade point average on college accounting courses.

A. Ability to organize and express thoughts well.

Prior to implementation, management has requested the internal audit activity to perform an engagement to recommend procedures and policies for improving management control over the telephone marketing operations of a major division. The chief audit executive should A. Accept the engagement because objectivity will not be impaired. B. Accept the engagement, but indicate to management that, because recommending controls impairs independence, future engagements in the area will be impaired. C. Not accept the engagement because recommending controls would impair future objectivity regarding this operation. D. Not accept the engagement because internal audit activities are presumed to have expertise regarding accounting controls, not marketing controls.

A. Accept the engagement because objectivity will not be impaired.

The reporting relationship within the organization's management structure that facilitates the day-to-day operations of the internal audit activity is A. Administrative reporting. B. Management reporting. C. Financial reporting. D. Functional reporting.

A. Administrative reporting.

Which of the following is responsible for developing and maintaining a quality assurance and improvement program that covers all aspects of the internal audit activity and continuously monitors its effectiveness? A. Chief audit executive. B. Senior management. C. The board of directors. D. Audit committee.

A. Chief audit executive.

With regard to the exercise of due professional care, an internal auditor should A. Consider the relative materiality or significance of matters to which assurance procedures are applied. B. Consider whether criteria have been established to determine whether goals are achieved, not whether those criteria are adequate. C. Emphasize the potential benefits of an engagement without regard to the cost. D. Select procedures that are likely to provide absolute assurance that irregularities do not exist.

A. Consider the relative materiality or significance of matters to which assurance procedures are applied.

Reengineering is the thorough analysis, fundamental rethinking, and complete redesign of essential business processes. The intended result is a dramatic improvement in service, quality, speed, and cost. An internal auditor's involvement in reengineering should include all of the following except A. Directing the implementation of the redesigned process. B. Determining whether the process has senior management's support. C. Developing audit plans for the new system. D. Recommending areas for consideration.

A. Directing the implementation of the redesigned process.

An organization is planning to develop and implement a new computerized purchase order system in one of its manufacturing subsidiaries. The vice president of manufacturing has requested that internal auditors participate on a team consisting of representatives from finance, manufacturing, purchasing, and marketing. This team will be responsible for the implementation effort. Eager to take on this high profile project, the chief audit executive assigns a senior internal auditor to the project to assist "as needed." Assuming the senior internal auditor performed all of the following activities, which one will impair objectivity if the internal auditor is asked to review the purchase order system on a post-engagement basis? A. Drafting operating procedures for the new system. B. Evaluate risk exposures of systems and programming standards. C. Testing for compliance with system development standards. D. Helping to identify and define control objectives.

A. Drafting operating procedures for the new system.

An internal auditor observes that a receivables clerk has physical access to and control of cash receipts. The auditor worked with the clerk several years before and has a high level of trust in the individual. Accordingly, the auditor notes in the engagement working papers that controls over receipts are adequate. Has the auditor exercised due professional care? A. No, alertness to conditions most likely indicative of irregularities was not shown. B. No, irregularities were not noted. C. Yes, the engagement working papers were annotated. D. Yes, reasonable care has been taken.

A. No, alertness to conditions most likely indicative of irregularities was not shown.