CIA Part 1: Study Unit 7
"Three of six petty cash funds examined failed to contain either the correct amount of funds or sufficient documentation in lieu of funds, a 50% noncompliance rate." The above statement is an example of a(n) A. Observation. B. Opinion. C. Conclusion. D. Recommendation.
Answer (A) is correct. A finding/observation is an objective statement of fact about the results of audit testwork without interpretation or commentary.
After completing an engagement work program step regarding materials movement between storage and assembly, the internal auditor would most likely prepare a(n) A. Observation. B. Report. C. Conclusion. D. Opinion.
Answer (A) is correct. A finding (observation) is an objective statement of fact about the results of audit testwork without interpretation or commentary.
Which of the following strategies will an auditor most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system? A. Continuous monitoring and analysis of transaction processing with an embedded audit module. B. Increased reliance on internal control activities that emphasize the segregation of duties. C. Verification of encrypted digital certificates used to monitor the authorization of transactions. D. Extensive testing of firewall boundaries that restrict the recording of outside network traffic.
Answer (A) is correct. An audit module embedded in the client's software routinely selects and abstracts certain transactions. They may be tagged and traced through the information system. An alternative is recording in an audit log, that is, in a file accessible only by the auditor.
Engagement working papers include A. Providing a basis for evaluating the internal audit quality program. B. Copies of all source documents examined in the course of the engagement. C. Copies of all procedures that were reviewed during the engagement. D. All working papers prepared during a previous engagement performed in the same area.
Answer (A) is correct. Engagement working papers generally (1) aid in planning, performance, and review of engagements; (2) provide the principal support for engagement results; (3) document whether engagement objectives were achieved; (4) support the accuracy and completeness of the work performed; (5) provide a basis for the internal audit activity's quality assurance and improvement program; and (6) facilitate third-party review (PA 2330-1, para. 2).
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.
Answer (B) is correct. GAS can help an auditor identify erroneous data, but correcting them before performing testwork is inappropriate.
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
Answer (B) is correct. Leadership is most important in the implementation phase of the benchmarking process because the team must be able to justify its recommendations. Also, the process improvement teams must manage the implementation of approved changes.
When performing an engagement to evaluate the computerized purchasing activities of a manufacturing organization, which of the following should be included in the permanent file portion of the engagement working papers? A. Copies of the computer program documentation. B. Printouts using internal auditor-prepared programs and test data. C. Prior year's working papers revised to reflect changes during the current year. D. Information concerning administrative controls over the computer operations at each location.
Answer (D) is correct. The permanent section of the working papers should contain the information necessary for continuing engagements. Administrative controls over the computer operations of each location, which are not likely to change from year to year, are appropriately included in the permanent section of the working papers.
A company's accounts receivable turnover rate decreased from 7.3 to 4.3 over the last 3 years. What is the most likely cause for the decrease? A. An increase in the discount offered for early payment. B. A more liberal credit policy. C. A change in net payment due from 30 to 25 days. D. Increased cash sales.
Answer (B) is correct. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increase. Liberalization of credit policy will increase receivables.
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.
Answer (D) is correct. Continuous monitoring and analysis of transaction processing can be achieved with an embedded audit module. To be successful, the internal auditor may need to be involved in the design of the application. Designing the system may impair independence unless the client makes all management decisions.
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.
Answer (A) is correct. A finding (observation) is an objective statement of fact about the results of audit testwork without interpretation or commentary.
The use of an analytical review to verify the correctness of various operating expenses would not be a preferred approach if A. An auditor notes strong indicators of a specific fraud involving these accounts. B. Operations are relatively stable and have not changed much over the past year. C. An auditor would like to identify large, unusual, or non-recurring transactions during the year. D. Operating expenses vary in relation to other operating expenses, but not in relation to revenue.
Answer (A) is correct. Analytical auditing procedures assist internal auditors in identifying conditions that may require subsequent engagement procedures. Accordingly, if the auditor already suspects fraud involving operating expenses, a more directed audit approach is appropriate.
If a financial institution overstated revenue by charging too much of each loan payment to interest income and too little to repayment of principal, which of the following audit procedures would be least likely to detect the error? A. Performing an analytical review by comparing interest income this period as a percentage of the loan portfolio with the interest income percentage for the prior period. B. Using an integrated test facility (ITF) and submitting interest payments for various loans in the ITF portfolio to determine if they are recorded correctly. C. Using test data and submitting interest payments for various loans in the test portfolio to determine if they are recorded correctly. D. Using generalized audit software to select a random sample of loan payments made during the period, calculating the correct posting amounts, and tracing the postings that were made to the various accounts.
Answer (A) is correct. Analytical review is the least effective procedure. It provides only a comparison with the prior period when the same error may have been made. Moreover, it is a global test that does not isolate the cause of a suspected misstatement.
An organization wants to improve on its performance measures for a new business line. Which type of benchmarking is most likely to provide information useful for this purpose? A. Functional. B. Competitive. C. Generic. D. Internal.
Answer (A) is correct. Benchmarking is one of the primary tools used in the implementation of a TQM approach. It is a means of helping organizations with productivity management and business process review. It is therefore a source of consulting engagements for the internal auditors. Benchmarking is a continuous evaluation of the practices of the best organizations in their class and the adaptation of processes to reflect the best of these practices. It entails analysis and measurement of key outputs against those of the best organizations. This procedure also involves identifying the underlying key actions and causes that contribute to the performance difference. The type of benchmarking most likely to help improve performance measures for a new business line is functional benchmarking. Comparison with organizations that perform related functions within the same technological area provides information about what is being achieved elsewhere in the new business line.
An adequately documented working paper should A. Be concise but complete. B. Follow a unique form and arrangement. C. Contain examples of all forms and procedures used by the engagement client. D. Not contain copies of engagement client records.
Answer (A) is correct. Clarity, conciseness, and accuracy are desirable qualities of working papers, but completeness and support for conclusions are paramount considerations.
Which two terms are often used interchangeably? A. "Conclusion" and "opinion." B. "Finding" and "conclusion." C. "Finding" and "opinion." D. "Opinion" and "observation."
Answer (A) is correct. Conclusions/opinions are the internal auditor's evaluations of the effects of the observations and recommendations on the activities reviewed. They usually put the observations and recommendations in perspective based upon their overall implications. To some extent, the terms are interchangeable.
The primary purpose of an internal auditor's working papers is to A. Provide documentation of the planning and execution of engagement procedures performed. B. Serve as a means with which to prepare the financial statements. C. Document weaknesses in internal control with recommendations to management for improvement. D. Comply with the Standards.
Answer (A) is correct. Engagement working papers, among other things, aid in planning, performing, and reviewing the engagement (PA 2330-1, para. 2).
What computer-assisted audit technique (CAAT) would an auditor use to identify a fictitious or terminated employee? A. Parallel simulation of payroll calculations. B. Exception testing for payroll deductions. C. Recalculations of net pay. D. Tagging and tracing of payroll tax-rate changes.
Answer (B) is correct. Exception testing for payroll deductions is a type of CAAT that can identify employees who have no deductions. This is important because fictitious or terminated employees will generally not have any deductions.
A working paper is complete when it A. Complies with the internal audit activity's format requirements. B. Contains all of the attributes of an observation. C. Is clear, concise, and accurate. D. Satisfies the engagement objective for which it is developed.
Answer (D) is correct. Engagement working papers, among other things, document whether engagement objectives were achieved (PA 2330-1, para. 2).
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.
Answer (D) is correct. The critical steps in the researching and identifying phase are setting up databases, choosing information-gathering methods, formatting questionnaires, and selecting benchmarking partners. Employee training and empowerment is part of total quality management (TQM).
Which of the following actions constitutes a violation of the confidentiality concept regarding working papers? An internal auditor A. Takes working papers to his or her hotel room overnight. B. Shows working papers on occasion to engagement clients. C. Allows the external auditor to copy working papers. D. Misplaces working papers occasionally.
Answer (D) is correct. The internal audit activity controls engagement working papers and provides access to authorized personnel only (PA 2330.A1-1, para. 1). By misplacing working papers occasionally, the internal auditor is thus violating the confidentiality concept.
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.
Answer (A) is correct. Indexing permits cross-referencing. It is important because it simplifies supervisory review either during the engagement or subsequently by creating a trail of related items through the working papers. It thus facilitates preparation of final engagement communications, later engagements for the same engagement client, and internal and external assessments of the internal audit activity.
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.
Answer (A) is correct. Inventory turnover is equal to cost of sales divided by average inventory. If inventory is increasing at a faster rate than sales, the turnover rate decreases and suggests a buildup of unsalable inventory. The ratios of gross profit to sales, inventory to accounts payable, and inventory to accounts receivable do not necessarily change when obsolete merchandise is on hand.
An internal audit activity's policies regarding engagement records should address such matters as their content, retention period, handling of access requests, and responsibility for control and security. Which of the following statements relevant to the development of these policies is true? A. Most records not protected by the attorney-client privilege are accessible in criminal proceedings. B. The work product of the internal auditors is protected from disclosure. C. Records created with an expectation of confidentiality are protected from disclosure. D. Documents revealing attorneys' thought processes will be subject to forced disclosure.
Answer (A) is correct. Most of an organization's records that are not protected by the attorney-client privilege may be accessible in criminal proceedings. In noncriminal proceedings, the issue of access is less clear (PA 2330.A1-2, para. 1).
Employees using personal computers have been reporting occupational injuries and claiming substantial workers' compensation benefits. The working papers of an engagement performed to determine the extent of the organization's exposure to such personal injury liability should include A. Analysis of claims by type of equipment and extent of use by individual employees. B. Confirmations from insurance carriers as to claims paid under workers' compensation policies in force. C. Reviews of documentation supporting purchases of personal computers. D. Listings of all personal computers in use and the employees who use them.
Answer (A) is correct. One potential use of engagement working papers is to provide support in circumstances such as insurance claims, fraud cases, and lawsuits. Claims analysis is appropriately included in the working papers because it permits assessment of the risks associated with the two key factors (equipment in use and time spent by employees at such equipment) leading to claims.
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.
Answer (A) is correct. Performance Standard 2330 states that internal auditors must document relevant information to support the conclusions and engagement results. Thus, working papers should be confined to information that is material and relevant to the engagement and the observations, conclusions, and recommendations. Hence, forms and directives used by the engagement client should be included only to the extent they support the observations, conclusions, and recommendations and are consistent with engagement objectives.
Standardized working papers are often used, chiefly because they allow working papers to be prepared more A. Efficiently. B. Professionally. C. Neatly. D. Accurately.
Answer (A) is correct. Standardized engagement working papers, such as questionnaires and audit programs, may improve the engagement's efficiency and facilitate the delegation of engagement work (PA 2330-1, para. 4).
Workpaper summaries, if prepared, can be used to A. Promote efficient workpaper review by internal audit supervisors. B. Replace the detailed workpaper files for permanent retention. C. Serve as an engagement final communication to senior management. D. Document the full development of engagement observations and recommendations.
Answer (A) is correct. Summaries help coordinate working papers related to a subject by providing concise statements of the most important information. Thus, they provide for an orderly and logical flow of information and facilitate supervisory review.
Which type of working-paper summary is typically used to consolidate numerical data scattered among several schedules? A. Statistical summaries. B. Segment summaries. C. Results summaries. D. Pyramid summaries.
Answer (A) is correct. Summarization of facts in the working papers is a means of emphasizing important information, establishing perspective, providing an overview, aiding memory, training staff, facilitating supervisory review, and controlling engagements. By the use of indexing and cross-referencing, summaries may be used to relate different working papers that concern a given point. A statistical summary condenses the related numerical information from engagement work programs.
The chief audit executive establishes policies for A. Standardized working papers. B. Defining the hours available for individual engagements. C. Defining standardized tick marks and ensuring compliance with them. D. Ensuring the written documentation of all conversations held throughout the engagement.
Answer (A) is correct. The CAE establishes working paper policies for the various types of engagements performed. Standardized engagement working papers, such as questionnaires and audit programs, may improve the engagement's efficiency and facilitate the delegation of engagement work (PA 2330-1, para. 4).
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.
Answer (B) is correct. Engagement working papers, among other things, provide a basis for the internal audit activity's quality assurance and improvement program (PA 2330-1, para. 2).
Which of the following concepts distinguishes the retention of computerized audit documentation from the traditional hard copy form? A. Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures. B. Evidential support for all findings is copied and provided to local management during the closing conference and to each person receiving the final report. C. Computerized data files can be used in computer audit procedures. D. Audit programs can be standardized to eliminate the need for a preliminary survey at each location.
Answer (A) is correct. The only difference between the computerized audit documentation and hard copy form is how the working papers are stored. Electronic audit documentation is saved either on disks or hard drive, whereas hard copy is stored in a file cabinet. Unlike computerized audit documentation, hard copies are not subject to computer controls and security procedures.
The primary objective of maintaining security over working papers is to A. Prohibit unauthorized changes or removal of information. B. Prohibit engagement clients from seeing working papers. C. Facilitate subsequent engagements in the same department. D. Facilitate engagements by external auditors.
Answer (A) is correct. The working papers are essential to the proper functioning of the internal audit activity. Among many other purposes, they document the information obtained, the analyses made, and the support for the conclusions and engagement results. Unauthorized changes or removal of information would seriously compromise the integrity of the internal audit activity's work. For this reason, the chief audit executive must ensure that working papers are kept secure.
Analytical procedures enable the internal auditor to predict the balance or quantity of an item. Information to develop this estimate can be obtained by all of the following except A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparing financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts), and similar data for the industry in which the entity operates. C. Studying the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience. D. Studying the relationships of financial data with relevant nonfinancial data.
Answer (A) is correct. Tracing transactions through the system is a test of controls directed toward the operating effectiveness of internal control, not an analytical procedure.
While testing the effectiveness of inventory controls, the internal auditor makes a note 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 and procedures within the machining department are adequate. B. Do no further work because the concern 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.
Answer (A) is correct. When analytical audit procedures identify unexpected results or relationships, the internal auditor evaluates such results or relationships. The auditor may ask management about the reasons for the difference and would corroborate management's explanation (PA 2320-1, para. 6).
The primary purpose of an engagement working paper prepared in connection with payroll expense is to A. Record payroll data and analyses to support reported recommendations. B. Verify the work done by the internal auditor. C. Record the names of all employees. D. Provide documentation to support payroll taxes due.
Answer (A) is correct. Working papers document the information obtained, the analyses made, and the support for the conclusions and engagement results (PA 2330-1, para. 1).
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 organizational legal department for safekeeping. C. Transferred to the permanent file. D. Transferred to the custody of the engagement client for ease of future records.
Answer (A) is correct. Working papers should be destroyed after they have served their purpose. Any parts having continuing value should be brought forward to current working papers or to the permanent file.
Which of the following represents appropriate evidence of supervisory review of engagement workpapers? 1.A supervisor's initials on each workpaper. 2.An engagement workpaper review checklist. 3.A memorandum specifying the nature, extent, and results of the supervisory review of workpapers. 4.Performance appraisals that assess the quality of workpapers prepared by auditors. A. 2 and 4 only. B. 1, 2, and 3 only. C. 1, 3, and 4 only. D. 1, 2, 3, and 4.
Answer (B) is correct. A supervisor's initials, an engagement workpaper review checklist, and a memorandum describing the review are appropriate. Also, performance appraisals that mention workpaper quality are appropriate in the evaluation of individual auditors, but they do not represent sufficient evidence of review for engagement workpapers.
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.
Answer (B) is correct. Analytical procedures are useful in identifying (1) unexpected differences, (2) the absence of differences when they are expected, (3) potential errors, (4) potential fraud or illegal acts, or (5) other unusual or nonrecurring transactions or events (PA 2320-1, para. 2). Thus, they may include comparison of current-period information with budgets, forecasts, or similar information for prior periods.
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.
Answer (B) is correct. Engagement working papers generally (1) aid in planning, performance, and review of engagements; (2) provide the principal support for engagement results; (3) document whether engagement objectives were achieved; (4) support the accuracy and completeness of the work performed; (5) provide a basis for the internal audit activity's quality assurance and improvement program; and (6) facilitate third-party review (PA 2330-1, para. 2). Hence, they primarily benefit internal auditors.
When an auditor performs tests on a computerized inventory file containing over 20,000 line items, that auditor can maintain independence and perform most efficiently by A. Asking the console operator to print every item that costs more than US $100. B. Using a generalized audit software package. C. Obtaining a printout of the entire file and then selecting each nth item. D. Using the systems department's programmer to write an extraction program.
Answer (B) is correct. Independence can be preserved when the auditor acquires general audit software (GAS) from an external source rather than relying on auditee-developed audit software. Also, efficiency is enhanced to the extent GAS can be used (as compared to manual auditing or writing special audit programs). The leading GAS packages are currently ACL and IDEA.
An internal auditor's working papers should be reviewed by the A. Management of the engagement client. B. Management of the internal audit activity. C. Audit committee of the board. D. Management of the organization's security division.
Answer (B) is correct. Internal auditors prepare working papers. Internal audit management reviews the prepared working papers (PA 2330-1, para. 1).
An organization provides credit cards to selected employees for business use. The credit card company provides a computer file of all transactions by employees of the organization. An auditor plans to use generalized audit software (GAS) to select relevant transactions for testing. Which of the following would not be readily identified using GAS? A. High-monetary-amount transactions. B. Fraudulent transactions. C. Transactions for specific cardholders. D. Suppliers used by each cardholder.
Answer (B) is correct. It is highly unlikely that the accounts payable system contains sufficient evidence of fraudulent transactions. GAS can be used to explore indicators of fraud, but it probably would not identify them.
Insurers may receive hospitalization claims directly from hospitals by computer media; no paper is transmitted from the hospital to the insurer. Which of the following controls is most effective in detecting fraud in such an environment? A. Use integrated test facilities to test the correctness of processing in a manner that is transparent to data processing. B. Develop monitoring programs to identify unusual types of claims or an unusual number of claims by demographic classes for investigation by the claims department. C. Use generalized audit software to match the claimant identification number with a master list of valid policyholders. D. Develop batch controls over all items received from a particular hospital and process those claims in batches.
Answer (B) is correct. Monitoring assesses the quality of internal control over time. Ongoing monitoring occurs as part of routine operations. It includes management and supervisory review, comparisons, reconciliations, and other actions by personnel as part of their regular activities. Thus, monitoring of the number and nature of claims may serve to detect failures of internal control.
A fire destroyed a large portion of an organization's inventory. Management is filing an insurance claim and needs to use the internal auditors' working papers in preparing the claim. Management A. May not use the working papers in preparing the claim. B. May use the working papers in preparing the claim, but such use should be approved by the chief audit executive. C. Should be precluded from preparing the claim, and this function should be performed by the internal audit activity. D. May use the working papers in preparing the claim, but such use should be approved by the organization's external auditors.
Answer (B) is correct. One potential use of engagement working papers is to provide support in the organization's pursuit of insurance claims, fraud cases, and lawsuits. In such cases, management and other members of the organization may request access to engagement working papers. This access may be necessary to substantiate or explain engagement observations and recommendations or to use engagement documentation for other business purposes. The CAE should approve these requests. Accordingly, the insurance claim is an "other business purpose," and management may use the internal auditors' working papers in preparing the claim.
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.
Answer (B) is correct. The CAE must develop retention requirements for engagement records, regardless of the medium in which each record is stored. These retention requirements must be consistent with the organization's guidelines and any pertinent regulatory or other requirements (Impl. Std. 2330.A2). Although working papers pertaining to fraud investigations might be kept apart from others, no working paper will have to be kept indefinitely.
An internal auditor's preliminary analysis of accounts receivable turnover revealed the following rates: Year 1 / 7.3 Year 2 / 6.2 Year 3 / 4.3 Which of the following is the most likely cause of the decrease in accounts receivable turnover? A. Increase in the cash discount offered. B. Liberalization of credit policy. C. Shortening of due date terms. D. Increased cash sales.
Answer (B) is correct. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increase. Liberalization of credit policy will increase receivables.
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.
Answer (B) is correct. The first phase in the benchmarking process is to select and prioritize benchmarking projects. The next phase is to organize benchmarking teams. Researching and identifying best-in-class is the third phase in the benchmarking process. The fourth phase is data analysis, and the final phase is the implementation phase.
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 or her findings to the chief audit executive. B. Prepare a preliminary report on internal controls for presentation to the board. C. Report his or her results to the auditor in charge. D. Prepare a plan for testing internal controls.
Answer (C) is correct. The auditor in charge of the engagement is responsible for coordinating the results of audit work and ensuring that work performed supports conclusions and opinions. For this reason, internal audit staff must report the results of audit work to the auditor in charge.
Productivity statistics are provided quarterly to the board of directors. An internal auditor checked the ratios and other statistics in the four most recent reports. The internal auditor used scratch paper and copies of the reports to verify the accuracy of computations and compared the data used in the computations with supporting documents. The internal auditor wrote a note for the working papers describing these procedures and then discarded the scratch paper and report copies. The note stated, The ratios and other statistics in the quarterly reports to the board were checked for the last 4 quarters and appropriate supporting documents were examined. All amounts appear to be appropriate. In this situation, A. Four quarters do not provide a large enough sample on which to base a conclusion. B. The internal auditor's working papers are not sufficient to facilitate an efficient review of the internal auditor's work. C. The internal auditor should have included the scratch paper in the working papers. D. The internal auditor did not consider whether the information in the report to the board was compiled efficiently.
Answer (B) is correct. The internal auditor's working papers do not support the conclusions and engagement results because they do not document the procedures and the information obtained. A reviewer cannot check the internal auditor's work without obtaining additional copies of the quarterly reports and independently recalculating the statistics. The review would be more efficient if the internal auditor had included the graphs in the working papers and had used tick marks with explanations to show which computations were checked and to describe what the internal auditor did to verify the amounts used in the computations.
Which of the following is not true about audit use of the Internet? A. It is a useful research tool for gathering audit-related information. B. It provides a secure medium to transmit confidential information. C. Electronic communication is the major use of the Internet by internal auditors. D. An electronic record of a user's web browsing activities is created.
Answer (B) is correct. Users transmitting sensitive information across the Internet must understand the threats that arise that could compromise the confidentiality of the data. Security measures, such as encryption technology, need to be taken to ensure that the information is viewed only by those authorized to view it.
A small city managed its own pension fund. According to the city charter, investments could be made only in bonds, money market funds, or high-quality stocks. The internal auditor has already verified the existence of the pension fund's assets. The fund balance was not very large and was managed by the city's CFO. The internal auditor decided to estimate income from investments of the fund by multiplying the average fund balance by a weighted-average rate based on the current portfolio mix. Upon doing so, the internal auditor found that recorded return was substantially less than was expected. The internal auditor's next procedure should be to A. Inquire of the CFO as to the reason that income appears to be less than expected. B. Prepare a more detailed estimate of income by consulting a dividend and reporting service that lists the interest or dividends paid on specific stocks and bonds. C. Inform management and the board that fraud is suspected and suggest that legal counsel be called in to complete the investigation. D. Select a sample of entries to the pension fund income account and trace to the cash journal to determine if cash was received.
Answer (B) is correct. When analytical audit procedures identify unexpected results or relationships, for example, when pension fund assets are suspiciously low, the internal auditor evaluates such results or relationships (PA 2320-1, para. 6). Before inquiring of client management, the auditor should obtain more detailed information about the unexpected results or relationships.
Working papers contain a record of engagement work performed and much confidential information. They are the property of the organization and remain under control of the internal audit activity, which is 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 times 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.
Answer (B) is correct. Working papers should always be properly protected. During the field work, they should be in the internal auditor's physical possession or control or otherwise protected against fire, theft, or other disaster. For example, the internal auditor may use the engagement client's safe or other security facilities. In the internal auditing office, they should be kept in locked files and should be formally signed out when removed from the files. When others (government auditors, the external audit firm, etc.) review the working papers, the reviews should take place in the internal auditing office. Secure files should be provided for long-term storage, and itemized records of their location should be maintained. When electronic working papers are placed online, computer system security measures should be similar to those used for other highly sensitive information of the organization.
"Except for the missing documentation noted above, the system of internal controls over petty cash is functioning as intended." The preceding statement is an example of a(n) A. Observation. B. Objective. C. Conclusion. D. Finding.
Answer (C) is correct. A conclusion/opinion is the auditor's interpretation of the results of testwork. The conclusion/opinion allows the reader to understand the meaning of what the auditor discovered during the course of testwork.
A primary advantage of using generalized audit software (GAS) packages in auditing the financial statements of a client that uses a computer system is that the auditor may A. Substantiate the accuracy of data through self-checking digits and hash totals. B. Reduce the level of required tests of controls to a relatively small amount. C. Access information stored on computer files without a complete understanding of the client's hardware and software features. D. Consider increasing the use of substantive tests of transactions in place of analytical procedures.
Answer (C) is correct. A detailed knowledge of the client's system is unnecessary because a generalized audit software package is designed to process data files from almost any platform. The leading packages are currently ACL (Audit Command Language) and IDEA (Interactive Data Extraction and Analysis).
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.
Answer (C) is correct. An overstatement of year-end inventory results in an increase in the gross margin (sales - cost of sales). Overstating ending inventory understates cost of sales.
The internal auditor of an organization with a recently automated human resources system reviews the retirement benefits plan and determines that the pension and medical benefits have been changed several times in the past 10 years. The internal auditor wishes to determine whether further investigation is justified. The most appropriate engagement procedure is to A. Review the trend of overall retirement expense over the last 10 years. If it has increased, further investigation is needed. B. Use generalized audit software to take a monetary-unit sample of retirement pay and determine whether each retired employee was paid correctly. C. Review reasonableness of retirement pay and medical expenses on a per-person basis stratified by which plan was in effect when the employee retired. D. Use generalized audit software to take an attribute sample of retirement pay and perform detailed testing to determine whether each person chosen was given the proper benefits.
Answer (C) is correct. Analytical procedures often provide the internal auditor with an efficient and effective means of obtaining evidence. The assessment results from comparing information with expectations identified or developed by the internal auditor. Analytical procedures are useful in identifying (1) unexpected differences, (2) the absence of differences when they are expected, (3) potential errors, (4) potential fraud or illegal acts, or (5) other unusual or nonrecurring transactions or events (PA 2320-1, para. 2). Accordingly, significant changes, such as those in pension and medical benefits, require the internal auditor to refine his or her expectations. In these circumstances, the internal auditor must stratify the sample according to the plans in effect when the employees retired and develop a predicted result for each person based on the stratum to which (s)he belongs.
Analytical procedures in which current financial statements are compared with budgets or previous statements are primarily intended to determine the A. Adequacy of financial statement disclosure. B. Existence of specific errors or omissions. C. Overall reasonableness of statement contents. D. Use of an erroneous cutoff date.
Answer (C) is correct. Analytical procedures often provide the internal auditor with an efficient and effective means of obtaining evidence. The assessment results from comparing information with expectations identified or developed by the internal auditor. Analytical procedures are useful in identifying (1) unexpected differences, (2) the absence of differences when they are expected, (3) potential errors, (4) potential fraud or illegal acts, or (5) other unusual or nonrecurring transactions or events (PA 2320-1, para. 2). Thus, a comparison of current-period information with budgets or previous-period information is helpful in planning the engagement. This comparison may identify conditions, such as unreasonable amounts in financial statements, that may require subsequent engagement procedures.
Analytical procedures A. Are considered direct information about the assertion being evaluated. B. Involve such tests as confirmation of receivables. C. May provide the best available information for the completeness assertion. D. Are never sufficient by themselves to support management assertions.
Answer (C) is correct. Analytical procedures usually involve summarizing and comparing data so that trends and other important relationships may be detected. Procedures range from simple comparisons of amounts reported to advanced statistical and modeling techniques. The use of analytical procedures involves judgment and focuses on the overall reasonableness of recorded amounts. Thus, analytical procedures provide information that all transactions and accounts that should be presented are included. In some circumstances, the internal auditor may be able to determine that analytical procedures by themselves provide the desired level of assurance.
When engagement conclusions are challenged, the internal auditor's factual rebuttal is best facilitated by A. Summaries in the engagement work program. B. Pro forma working papers. C. Cross-referencing of the working papers. D. Explicit procedures in the engagement work program.
Answer (C) is correct. Each working paper should have an index or reference number. Indexing permits cross-referencing, which simplifies supervisory review either during the engagement or subsequently by creating an information trail of related items through the working papers. It thus facilitates preparation of the final engagement communication, later engagements involving the same client, internal and external quality assessments, and factual rebuttal of challenges by clearly identifying sources and locations of facts.
The best description of the principal purpose for retaining working papers is to A. Help perform the engagement in an orderly fashion. B. Maintain the engagement work program for reuse in the next engagement. C. Provide support for the final engagement communication. D. Provide a basis for supervisory review.
Answer (C) is correct. Engagement working papers provide the principal support for the engagement results (PA 2330-1, para. 2). They should be retained after the final engagement communication has been issued for a time that is consistent with organizational guidelines and any pertinent regulatory or other requirements.
The internal auditor has gained an understanding of the design of an engagement client's internal controls. 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.
Answer (C) is correct. Internal auditors gain an understanding of the design of the engagement client's internal controls. The auditors then draw conclusions about whether internal controls are designed adequately to achieve management's control objectives.
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.
Answer (C) is correct. The chief audit executive must develop retention requirements for engagement records, regardless of the medium in which each record is stored. These retention requirements must be consistent with the organization's guidelines and any pertinent regulatory or other requirements (Impl. Std. 2330.A2). Thus, approval by the organization's legal counsel is appropriate.
A company with many branch stores has decided to benchmark one of its stores for the purpose of analyzing the accuracy and reliability of branch store financial reporting. Which one of the following is the most likely measure to be included in a financial benchmark? A. High turnover of employees. B. High level of employee participation in setting budgets. C. High amount of bad debt write-offs. D. High number of suppliers.
Answer (C) is correct. The level of bad debts written off as uncollectible is a benchmark stated in financial terms. A level exceeding the benchmark could indicate fraud, which compromises the accuracy and reliability of financial reports. Bad debt write-offs may result from recording fictitious sales.
Which of the following most completely describes the appropriate content of working papers? A. Engagement objectives, procedures, and conclusions. B. Engagement purposes, criteria, techniques, and recommendations. C. Engagement objectives, procedures, observations, conclusions, and recommendations. D. Engagement subject, purposes, sampling information, and analysis.
Answer (C) is correct. The primary purpose of working papers is to support the observations, conclusions, and recommendations to be communicated. Hence, they document the information obtained and the analyses made in arriving at the foregoing results. The working papers also must document whether the engagement objectives were achieved and the performance of engagement procedures. Furthermore, working papers will contain engagement work programs (PA 2330-1, paras. 1 and 2).
An internal auditor prepared a working paper that consisted of a list of employee names and identification numbers as well as the following statement: By matching random numbers with employee identification numbers, 40 employee personnel files were selected to verify that they contain all documents required by the organization's policy 501. No exceptions were noted. The internal auditor did not place any tick marks on this working paper. Which one of the following changes will improve the internal auditor's working paper the most? A. Use of tick marks to show that each file was examined. B. Removal of the employee names to protect their confidentiality. C. Justification for the sample size. D. Listing of the actual documents examined for each employee.
Answer (C) is correct. The working paper should fully document the use of statistical techniques. Thus, it should specify how the sample size for this attribute sampling application was determined (factors such as confidence level, precision, etc.)
Fact Pattern: The internal auditor of a construction enterprise that builds foundations for bridges and large buildings performed a review of the expense accounts for equipment (augers) used to drill holes in rocks to set the foundation for the buildings. During the review, the internal auditor noted that the expenses related to some of the auger accounts had increased dramatically during the year. The internal auditor inquired of the construction manager who offered the explanation that the augers last 2 to 3 years and are expensed when purchased. Thus, the internal auditor should see a decrease in the expense accounts for these augers in the next year but would expect an increase in the expenses of other augers. The internal auditor also found out that the construction manager is responsible for the inventorying and receiving of the augers and is a part owner of a business that supplies augers to the organization. The supplier was approved by the president to improve the quality of equipment. Question: 23 Assume the internal auditor did not find a satisfactory explanation for the results of the analytical procedures performed and has conducted the appropriate follow-up procedures. The engagement in this area is otherwise complete. Which of the following would be the most appropriate action to take? A. Note the actions and follow-up next year. Defer the reporting to management until a satisfactory explanation can be obtained. B. Expand engagement procedures by observing the receipt of all augers during a reasonable period of time and trace the receipts to the appropriate accounts. Determine causes of any discrepancies. C. Report the observations, as they are, to management and recommend an investigation for possible fraud. D. Report the observations to the construction manager and insist that appropriate controls such as independent receiving reports be implemented. Follow up to see if the controls are properly implemented.
Answer (C) is correct. When analytical audit procedures identify unexpected results or relationships, the internal auditor evaluates such results or relationships. Unexplained results or relationships discovered by applying analytical procedures may be an indication of a significant problem (e.g., a potential error, fraud, or illegal act). Results or relationships that are not adequately explained may indicate a situation to be communicated to senior management and the board. Depending on the circumstances, the internal auditor may recommend appropriate action (PA 2320-1, para. 6).
Internal auditors often include summaries within their working papers. Which of the following best describes the purpose of such summaries? A. Summaries are prepared to conform with the Standards. B. Summaries are usually required to complete each section of an engagement work program. C. Summaries distill the most useful information from several working papers into a more usable form. D. Summaries document that the internal auditor has considered all relevant information.
Answer (C) is correct. Working papers document an engagement. They contain the records of planning, the preliminary survey, the engagement work program, the results of field work, and other related matters. Summaries help to coordinate working papers related to a subject by providing concise statements of the most important information. Thus, they provide for an orderly and logical flow of information and facilitate supervisory review. D. Summaries document that the internal auditor has considered all relevant
Which of the following is the most important if working papers are to have the characteristics that will ensure that they achieve their primary purposes? A. Working papers must be of standard format and standard content. B. Working papers must be properly indexed and cross-referenced to the draft final engagement communication. C. Working papers must provide sufficient, reliable, and useful information to support the engagement results. D. Working papers must be arranged in logical order following the engagement work program sequence.
Answer (C) is correct. Working papers document the information obtained, the analyses made, and the support for the conclusions and engagement results (PA 2330-1, para. 1). In turn, internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the engagement's objectives (Perf. Std. 2310).
A rental car organization's fleet maintenance division uses a different code for each type of inventory transaction. A daily summary report lists activity by part number and transaction code. The report is reconciled by the parts room supervisor to the day's material request forms and is then forwarded to the fleet manager for approval. The use of transaction codes provides the fleet manager with information concerning the types of inventory activities. The internal auditor is considering an analytical review of transaction codes and materials used. The objective of this review is to A. Provide information about overstocked inventory items. B. Reveal shortages in perpetual inventory records. C. Determine whether inventory items are properly valued. D. Identify possible material lost due to employee theft.
Answer (D) is correct. Analytical procedures often provide the internal auditor with an efficient and effective means of obtaining evidence. The assessment results from comparing information with expectations identified or developed by the internal auditor. Analytical procedures are useful in identifying (1) unexpected differences, (2) the absence of differences when they are expected, (3) potential errors, (4) potential fraud or illegal acts, or (5) other unusual or nonrecurring transactions or events (PA 2320-1, para. 2). An analysis of materials used and materials issued may reveal a discrepancy. One possible explanation for excessive issuance of materials is employee theft.
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.
Answer (D) is correct. Auditor judgment is the essential element in moving from a finding/observation to a conclusion/opinion. No formula can tell an auditor whether a certain exception rate is indicative of a working or failing control.
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.
Answer (D) is correct. Because total acquisition cost of property, plant, and equipment is irrelevant to maintenance costs, this feature is unnecessary to support the observations, conclusions, and recommendations concerning these costs.
An example of an internal nonfinancial benchmark is A. The labor rate of comparably skilled employees at a major competitor's plant. B. The average actual cost per pound of a specific product at the company's most efficient plant. C. A US $50,000 limit on the cost of employee training programs at each of the company's plants. D. The percentage of customer orders delivered on time at the company's most efficient plant.
Answer (D) is correct. Benchmarking is a continuous evaluation of the practices of the best organizations in their class and the adaptation of processes to reflect the best of these practices. It entails analysis and measurement of key outputs against those of the best organizations. This procedure also involves identifying the underlying key actions and causes that contribute to the performance difference. The percentage of orders delivered on time at the company's most efficient plant is an example of an internal nonfinancial benchmark.
Which of the following statements regarding benchmarking is false? A. Benchmarking involves continuously evaluating the practices of best-in-class organizations and adapting company processes to incorporate the best of these practices. B. Benchmarking, in practice, usually involves a company's formation of benchmarking teams. C. Benchmarking is an ongoing process that entails quantitative and qualitative measurement of the difference between the company's performance of an activity and the performance by the best in the world or the best in the industry. D. The benchmarking organization against which a firm is comparing itself must be a direct competitor.
Answer (D) is correct. Benchmarking is an ongoing process that entails quantitative and qualitative measurement of the difference between the company's performance of an activity and the performance by a best-in-class organization. The benchmarking organization against which a firm is comparing itself need not be a direct competitor. The important consideration is that the benchmarking organization be an outstanding performer in its industry.
Which of the following is true of benchmarking? A. Benchmarking is typically accomplished by comparing an organization's performance with the performance of its closest competitors. B. Benchmarking can be performed by using only qualitative comparisons. C. Benchmarking is normally limited to manufacturing operations and production processes. D. Benchmarking is accomplished by comparing an organization's performance to that of the best-performing organizations.
Answer (D) is correct. Benchmarking is one of the primary tools used in the implementation of a total quality management approach. It is a means of helping organizations with productivity management and business process review. It is therefore a source of consulting engagements for the internal auditors. Benchmarking is a continuous evaluation of the practices of the best organizations in their class and the adaptation of processes to reflect the best of these practices. It entails analysis and measurement of key outputs against those of the best organizations. This procedure also involves identifying the underlying key actions and causes that contribute to the performance difference. Benchmarking is an ongoing process that entails quantitative and qualitative measurement of the difference between the organization's performance of an activity and the performance by the best in the world. The benchmark organization need not be a competitor.
During the working-paper review, an internal auditing supervisor finds that the internal auditor's observations are not adequately cross-referenced to supporting documentation. The supervisor will most likely instruct the internal auditor to A. Prepare a working paper to indicate that the full scope of the engagement was carried out. B. Familiarize himself or herself with the sequence of working papers so that (s)he will be able to answer questions about the conclusions stated in the final engagement communication. C. Eliminate any cross-references to other working papers because the system is unclear. D. Provide a cross-referencing system that shows the relationship among observations, conclusions, recommendations, and the related facts.
Answer (D) is correct. Cross-referencing is important because it simplifies review either during the engagement or subsequently by creating a trail of related items through the working papers. It thus facilitates preparation of the final engagement communication and later engagements for the same engagement client.
Which of the following represents a limitation on the use of generalized audit software (GAS)? A. It requires lengthy detailed instructions in order to accomplish specific tasks. B. It has limited application without significant modification. C. It requires significant programming knowledge to be used effectively. D. It can only be used on hardware with compatible operating systems.
Answer (D) is correct. Diversity of programming languages, computers, systems designs, and differing data structures makes generalized audit software impossible to apply in certain situations.
Each individual working paper should, at a minimum, contain a(n) A. Expression of the internal auditor's overall opinion. B. Tick mark legend. C. Complete flowchart of the system of internal controls for the area being reviewed. D. Descriptive heading.
Answer (D) is correct. Each working paper must, at a minimum, identify the engagement and describe the contents or purpose of the working paper, for example, in the heading. Also, each working paper should be signed (initialed) and dated by the internal auditor and contain an index or reference number. Furthermore, verification symbols (tick marks) are likely to appear on most working papers and should be explained.
Which of the following does not describe one of the functions of engagement working papers? A. Facilitates third-party reviews. B. Aids in the planning, performance, and review of engagements. C. Provides the principal support for engagement communications. D. Aids in the professional development of the operating staff.
Answer (D) is correct. Engagement working papers generally (1) aid in planning, performance, and review of engagements; (2) provide the principal support for engagement results; (3) document whether engagement objectives were achieved; (4) support the accuracy and completeness of the work performed; (5) provide a basis for the internal audit activity's quality assurance and improvement program; and (6) facilitate third-party review (PA 2330-1, para. 2).
An internal auditor decides to perform an inventory turnover analysis for both raw materials inventory and finished goods inventory. The analysis would be potentially useful in A. Identifying products for which management has not been attuned to changes in market demand. B. Identifying potential problems in purchasing activities. C. Identifying obsolete inventory. D. All of the answers are correct.
Answer (D) is correct. Inventory turnover provides analytical information. It equals cost of sales divided by average inventory. A low turnover ratio implies that inventory is excessive, for example, because the goods are obsolete or because the organization has overestimated demand.
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.
Answer (D) is correct. Inventory turnover provides analytical information. It equals cost of sales divided by average inventory. A low turnover ratio implies that inventory is excessive, for example, because the goods are obsolete or because the organization has overestimated demand. Accordingly, such an analytical procedure will provide an indication of the efficiency and effectiveness of the subsidiary's management of the inventory.
Two major retail organizations, both publicly traded and operating in the same geographic area, have recently merged. Both are approximately the same size and have internal audit activities. Organization A has little EDI experience. Organization B has invested heavily in information technology and has EDI connections with its major vendors. The board has asked the internal auditors from both organizations to analyze risk areas that should be addressed after the merger. The chief audit executive of Organization B has suggested that the two internal audit activities have a planning meeting to share work programs, scope of engagement coverage, and copies of engagement communications that were delivered to their boards. Management has also suggested that the internal auditors review the compatibility of the organizations' two computer systems and control philosophy for individual store operations. The two organizations agree to share data on store operations. The data reveal that three stores in Organization A are characterized by significantly lower gross margins, higher-than-average sales volume, and higher levels of employee bonuses. The three stores are part of a set of six that are managed by a relatively new section manager. In addition, the store managers of the three stores are also relatively new. The most likely cause of the observed data is A. The relative inexperience of the store managers. B. Problems with employee training and employee ability to meet customer needs. C. Fraudulent activity whereby goods are taken from the stores, thus resulting in the lower gross margins. D. Promotional activities that offer large discounts coupled with the payment of bonuses to employees who reach targeted sales goals.
Answer (D) is correct. Large discounts stimulate demand (increase unit sales volume) but reduce the gross commissions profit (gross margin). If commissions are pegged to sales volume, the compensation of the sales staff will increase in these circumstances even as gross margins are squeezed.
The following represents accounts receivable information for a corporation for a 3-year period: Year 1 Year 2 Year 3 Net accounts receivable as a percentage of total assets 23.4% 27.3% 30.8% Accounts receivable turnover ratio 6.98 6.05 5.21 All of the following are plausible explanations for these changes except A. Fictitious sales may have been recorded. B. Credit and collection procedures have become ineffective. C. Allowance for bad debts is understated. D. Sales returns for credit have been overstated.
Answer (D) is correct. Overstated sales returns for credit is not a plausible answer. They would understate (not overstate) net accounts receivable. This understatement would result in lower (not higher) net accounts receivable balances as a percentage of total assets and higher (not lower) receivables turnover (sales ÷ average accounts receivable).
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.
Answer (D) is correct. The auditor is required to evaluate the adequacy and effectiveness of the system of internal control and to assess risk to plan the audit. This assessment is a matter of professional judgment that cannot be accomplished with a computer alone.
Assume an internal auditor computes an inventory turnover rate by product line and identifies a number of product lines with a rate of less than 3.5. Which of the following conclusions can be justified by these engagement results?1.The identified product lines contain obsolete inventory. 2.Inventory is valued at more than net realizable value. 3.Inventory costs are too high because the organization is carrying obsolete inventory. A. 1 and 3 only. B. 2 only. C. 1, 2, and 3. D. None of the answers are correct.
Answer (D) is correct. The inventory turnover rate equals cost of sales divided by average inventory. An inventory turnover rate tells the internal auditor how many times the inventory has been sold during the period. However, the rate cannot be interpreted without additional information. Thus, the internal auditor cannot determine whether obsolete items are in inventory, inventory valuation is too high, or inventory costs are too high.
An inexperienced internal auditor notified the senior auditor of a significant variance from the engagement client's budget. The senior told the new internal auditor not to worry because the senior had heard that there had been an unauthorized work stoppage that probably accounted for the difference. Which of the following statements is most appropriate? A. The 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.
Answer (D) is correct. When analytical audit procedures identify unexpected results or relationships, the internal auditor evaluates such results or relationships (PA 2320-1, para. 6). The senior allowed the identified variance to go unevaluated.
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.
Answer (D) is correct. When determining the extent to which analytical procedures should be used, the internal auditor considers (1) the significance of the area being examined, (2) the assessment of risk management in the audited area, (3) the adequacy of the internal control system, (4) the availability and reliability of financial and nonfinancial information, (5) the precision with which the results of analytical audit procedures can be predicted, (6) the availability and comparability of information regarding the industry in which the organization operates, and (7) the extent to which other procedures provide evidence (PA 2320-1, para. 5).
The internal auditor is most likely to make working papers available to the engagement client when A. Fraud is suspected. B. The internal auditors have recorded specific damaging comments. C. The internal auditor considers the content noncontroversial. D. Engagement client comments are needed to evaluate significance and accuracy.
Answer (D) is correct. When the engagement objectives will not be compromised, the internal auditor may show all or part of the working papers to the engagement client. For instance, the results of certain engagement procedures may be shared with the engagement client to encourage corrective action. Thus, working papers as well as drafts of engagement communications may be reviewed with engagement clients to verify their accuracy, completeness, and significance. But complete disclosure may permit circumvention of the internal auditors' procedures, and working papers should never be shared with engagement clients in fraud investigations.
An internal auditor was evaluating the effectiveness and efficiency of the operation of the motor pool. The engagement work program included the use of analytical procedures to observe the trend of expenses for major overhauls of heavy-wheeled vehicles. This trend showed a substantial increase in the last year of the ratios of monetary amounts spent in relation to (1) the number of vehicles being used, (2) the mileage of the vehicles, (3) the age of the equipment, and (4) environmental conditions. The auditor's investigation indicated that two new maintenance firms were being used. The expenditure packages from the maintenance work were complete; however, the billings for the work had an unusual regularity. The identification of the vehicles being serviced did not correspond to the vehicle maintenance reports. Possible engagement procedures include 1.Discussing the matter with the superintendent of maintenance and asking for an explanation 2.Preparing a schedule of the types of maintenance being performed and comparing it with manufacturers' maintenance guides 3.Analyzing vehicles' trip tickets to determine if they contain indications of problems needing attention 4.Reviewing deadline reports to determine that vehicles were not in service on the dates of maintenance work 5.Reviewing dispatch schedules to determine whether vehicles were dispatched for use on days the maintenance work was reported as performed 6.Discussing the matter with plant security Which of the above actions should have the highest priority? A. 1, 6, and 4. B. 4, 5, and 6. C. 6, 5, and 1. D. 2, 3, and 4.
vAnswer (B) is correct. When analytical procedures identify unexpected results or relationships, the internal auditor evaluates such results or relationships. This evaluation includes determining whether the difference from expectations could be a result of fraud, error, or a change in conditions. The auditor may ask management about the reasons for the difference and would corroborate management's explanation, for example, by modifying expectations and recalculating the difference or by applying other audit procedures (PA 2320-1, para. 6). Substantial increases in maintenance cost ratios indicate a need for a more extensive investigation. Items 4 and 5 could provide information regarding the status of vehicles. If discrepancies are found, the appropriate authorities within the organization should be consulted.
