Internal Audit EX 2 SU 6

When counting cash on hand, the internal auditor must exercise control over all cash and other negotiable assets to prevent A. Theft. B. Irregular endorsement. C. Substitution. D. Deposits in transit.

Correct C. Substitution.

A manufacturer uses a materials requirements planning (MRP) system to track inventory, orders, and raw material requirements. A preliminary audit assessment indicates that the organization's inventory is understated. Using audit software, what conditions should the auditor search for in the MRP database to support this hypothesis? 1. Item cost set at zero 2. Negative quantities on hand 3. Order quantity exceeding requirements 4. Inventory lead times exceeding delivery schedule A. 1 and 2 only. B. 1 and 4 only. C. 2 and 4 only. D. 3 and 4 only.

Correct A. 1 and 2 only.

An employee of an insurer processed a fraudulent policy loan application for an amount less than the established level requiring supervisory review. The employee then obtained the check and cashed it by forging the endorsement. To prevent the loan's appearance on a subsequent policyholder statement, the loan amount was transferred to a "suspense" account. Which of the following should expose this situation at the earliest date? A. A computer report identifying unusual entries to the suspense account. B. The use of prenumbered checks that are periodically accounted for. C. An annual engagement performed by the internal audit activity. D. Regular reconciliation of the "suspense" account performed by an independent employee.

Correct A. A computer report identifying unusual entries to the suspense account.

According to the Standards, internal auditors determine appropriate and sufficient resources to achieve engagement objectives based on an evaluation of all of the following except A. Budgetary control of the engagement. B. Complexity of each engagement. C. Time constraints for each engagement. D. Available resources for each engagement.

Correct A. Budgetary control of the engagement.

To identify the amount of obsolete inventory that may exist in an organization, an internal auditor probably should collect information using all of the following procedures except A. Confirmation. B. Scanning. C. Recomputation. D. Analytical review.

Correct A. Confirmation.

An investment portfolio manager has the authority to use financial derivatives to hedge transactions but is not supposed to take speculative positions. However, the manager launches a scheme that includes (1) taking a position larger than required by the hedge, (2) putting the speculative gains in a suspense account, and (3) transferring the funds to a nonexistent broker and from there to a personal account. Which of the following engagement procedures is least effective in detecting this fraud? A. Examine individual trades to determine whether the trades violate the authorization limit for the manager. B. Sample individual trades and determine the exact matching of a hedge. Schedule and investigate all differences. C. Sample all debits to the suspense account and examine their disposition. D. Sample fund transfers to brokers and determine if the brokers are on the organization's authorized list for transactions.

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

An internal auditor has set an engagement objective of ascertaining compliance with a city ordinance forbidding city purchasing from vendors affiliated with elected city officials. Which of the following engagement techniques will best meet this objective? A. Inspection of documents. B. Observation. C. Inquiry. D. Analytical review.

Correct A. Inspection of documents.

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the A. Sales journal to the shipping documents. B. Shipping documents to the cash receipts journal. C. Cash receipts journal to the customer's purchase orders. D. Customer's purchase orders to the sales journal.

Correct A. Sales journal to the shipping documents.

When assigning individual staff members to actual engagements, internal auditing managers are faced with a number of important considerations related to needs, abilities, and skills. Which of the following is the least appropriate criterion for assigning a staff internal auditor to a specific engagement? A. The staff internal auditor's desire for training in the area. B. The complexity of the engagement. C. The experience level of the internal auditor. D. Special skills possessed by the staff internal auditor.

Correct A. The staff internal auditor's desire for training in the area.

A standard engagement work program is not appropriate for which situation? A. A stable operating environment undergoing only minimal changes. B. A complex or changing operating environment. C. Multiple locations with similar operations. D. Subsequent engagements to provide assurance about inventory performed at same location.

Correct B. A complex or changing operating environment.

An internal auditor is considering whether the amount of cash is accurately recorded on the financial statements. All of the following are appropriate engagement procedures for the objective except A. Examining bank reconciliations and confirming bank balances. B. Comparing cash receipt lists with the receipts journal and bank deposit slips. C. Verifying cutoff of receipts and disbursements. D. Adding totals of reconciliations and comparing with cash account balances.

Correct B. Comparing cash receipt lists with the receipts journal and bank deposit slips.

An internal auditor has just completed a survey to become familiar with the organization's payroll operations as part of an unplanned engagement. Which of the following most likely is performed next? A. Assign internal audit personnel. B. Establish initial engagement objectives. C. Write the engagement work program. D. Conduct field work.

Correct B. Establish initial engagement objectives.

The budget for an engagement performed by internal auditors A. Should be approximated using the previous audit of the same activity. B. Is adjusted only after approval at a level higher than the engagement supervisor. C. May be increased or decreased by senior management or the board. D. Includes time budgets monitored by the engagement supervisor to control the project.

Correct B. Is adjusted only after approval at a level higher than the engagement supervisor.

When performing procedures to test assertions about purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which relevant assertion would this procedure most likely support? A. Completeness. B. Occurrence. C. Valuation and allocation. D. Classification.

Correct B. Occurrence.

Fact pattern: A purchasing agent acquired items for personal use with the organization's funds. The organization allowed designated employees to purchase a specified amount per day in merchandise under open-ended contracts. Supervisory approval of the purchases was required, but that information was not communicated to the vendor. Instead of reviewing and authorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the month without reviewing any of the supporting documentation. Because purchases of this nature were not subject to normal receiving policies, the dishonest employee picked up the supplies at the vendor's warehouse. All purchases were for items routinely ordered by the organization. During the past year, the employee amassed enough merchandise to start a printing and photography business. Which of the following engagement procedures, performed by the internal auditor, is most likely to detect this fraud? A. Tracing selected canceled checks to the cash payments journal and to the related vendors' invoices. B. Performing a trend analysis of printing supplies expenses for a 2-year period. C. Tracing prices and quantities on selected vendors' invoices to the related purchase orders. D. Recomputing the clerical accuracy of selected vendors' invoices, including discounts and sales taxes.

Correct B. Performing a trend analysis of printing supplies expenses for a 2-year period.

During an engagement to evaluate travel expenses, the accounting supervisor tells the internal auditor that each expense report is reviewed and approved before costs are reimbursed to the traveler. Which of the following is the best course of action for the internal auditor to take? A. Request the supervisor to put the statement in writing. B. Review a sample of expense reports for proper approval. C. Conserve engagement resources by accepting the statement and redirect work into another area. D. Corroborate this information with the controller.

Correct B. Review a sample of expense reports for proper approval.

Which of the following procedures would provide the best evidence of the effectiveness of a credit-granting function? A. Observe the process. B. Review the trend in receivables write-offs. C. Ask the credit manager about the effectiveness of the function. D. Check for evidence of credit approval on a sample of customer orders.

Correct B. Review the trend in receivables write-offs.

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of relevant financial statement assertions about existence or occurrence and A. Valuation and allocation. B. Rights and obligations. C. Completeness. D. Classification and understandability.

Correct B. Rights and obligations.

Fact pattern: An internal auditor is performing an operational engagement at a division and observes that an unusually large quantity of goods is on hand in the shipping and materials rework areas. The items are labeled as re-ship items. Upon inquiry the internal auditor is told that these are goods that have been returned by customers and have either been repaired and shipped back to the original customer or repaired and shipped out as new products because they are fully warranted. The internal auditor has not yet performed any detailed engagement work. Based on the information given, the most appropriate action for the internal auditor to take is to A. Report the items to divisional management and ask for management's explanation before determining whether to include the observations in an engagement communication. B. Take a sample of the items on hand and compare the sample items with the underlying documents, such as receiving reports and sales orders, to determine how the goods were handled. C. Report the observations but do not perform any additional work without the approval of the chief audit executive because such work is clearly a scope expansion. D. Take an inventory of the goods on hand so the monetary amount can be included in the engagement communications along with the explanation of the problem.

Correct B. Take a sample of the items on hand and compare the sample items with the underlying documents, such as receiving reports and sales orders, to determine how the goods were handled.

An internal auditor performs a test to determine whether all merchandise for which the organization was billed was received. The population for this test consists of all A. Merchandise received. B. Vendors' invoices. C. Canceled checks. D. Receiving reports.

Correct B. Vendors' invoices.

Which of the following engagement objectives will be accomplished by tracing a sample of accounts receivable debit entries to customer invoices and related shipping documents? A. Sales are properly recorded. B. Sales are billed at the correct prices. C. Accounts receivable represent valid sales. D. Customer credit is approved.

Correct C. Accounts receivable represent valid sales.

The manager of a production line has the authority to order and receive replacement parts for all machinery that requires periodic maintenance. The internal auditor received an anonymous tip that the manager ordered substantially more parts than were necessary from a family member in the parts supply business. The unneeded parts were never delivered. Instead, the manager processed receiving documents and charged the parts to machinery maintenance accounts. The payments for the undelivered parts were sent to the supplier, and the money was divided between the manager and the family member. Which of the following tests would best assist the auditor in deciding whether to investigate this anonymous tip further? A. Comparison of the current quarter's maintenance expense with prior-period activity. B. Physical inventory testing of replacement parts for existence and valuation. C. Analysis of repair parts charged to maintenance to review the reasonableness of the number of items replaced. D. Review of a test sample of parts invoices for proper authorization and receipt.

Correct C. Analysis of repair parts charged to maintenance to review the reasonableness of the number of items replaced.

As a particular engagement is being planned in a high-risk area, the chief audit executive determines that the available staff does not have the requisite skills to perform the assignment. The best course of action consistent with engagement planning principles is to A. Not perform the engagement because the requisite skills are not available. B. Use the engagement as a training opportunity and let the internal auditors learn as the engagement is performed. C. Consider using external resources to supplement the needed knowledge, skills, and other competencies and complete the assignment. D. Perform the engagement but limit the scope in light of the skill deficiency.

Correct C. Consider using external resources to supplement the needed knowledge, skills, and other competencies and complete the assignment.

An internal auditing supervisor reviewed the system of controls and the organizational objective of the purchasing department. What facet of engagement planning was the supervisor developing? A. Internal auditing policy manual. B. Engagement work schedule. C. Engagement work program. D. Internal auditing budget.

Correct C. Engagement work program.

For review of an accounting department's bank reconciliation unit, which of the following is an appropriate engagement work program step for the review of canceled checks for authorized signatures? A. Comparing the check date with the first cancellation date. B. Determining that all checks are to be signed by individuals authorized by the board. C. Examining a representative sample of signed checks and determining that the signatures are authorized in the organizational signature book. D. Completing the tests of controls over check signatures in 4 hours.

Correct C. Examining a representative sample of signed checks and determining that the signatures are authorized in the organizational signature book.

An internal auditor's observation of physical inventories at the main plant at year end provides direct evidence to support which of the following objectives? A. Accuracy of the priced-out inventory. B. Evaluation of lower of cost or market test. C. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for obsolescence. D. Determination of goods on consignment at another location.

Correct C. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for obsolescence.

A work program for a comprehensive assurance engagement to evaluate a purchasing function should include A. Procedures arranged by relative priority based upon perceived risk. B. A statement of the engagement objectives for the operation under review with agreement by the engagement client. C. Procedures to accomplish engagement objectives. D. A focus on risks affecting the financial statements as opposed to controls.

Correct C. Procedures to accomplish engagement objectives.

An audit found that the cost of some material installed on capital projects had been transferred to the inventory account because the capital budget had been exceeded. Which of the following would be an appropriate technique for the internal audit activity to use to monitor this situation? A. Identify variances between amounts capitalized each month and the capital budget. B. Analyze a sample of capital transactions each quarter to detect instances in which installed material was transferred to inventory. C. Review all journal entries that transferred costs from capital projects accounts to inventory accounts. D. Compare inventory receipts with debits to the inventory account and investigate discrepancies.

Correct C. Review all journal entries that transferred costs from capital projects accounts to inventory accounts.

An engagement objective is to determine if a company's accounts payable contain all outstanding liabilities. Which of the following audit procedures would not be relevant for this objective? A. Examine supporting documentation of subsequent (after-period) cash disbursements and verify period of liability. B. Send confirmations, including zero-balance accounts, to vendors with whom the company normally does business. C. Select a sample of accounts payable from the accounts payable listing and verify the supporting receiving reports, purchase orders, and invoices. D. Trace receiving reports issued before the period end to the related vendor invoices and accounts payable listing.

Correct C. Select a sample of accounts payable from the accounts payable listing and verify the supporting receiving reports, purchase orders, and invoices.

Which technique is most appropriate for testing the quality of the preliminary survey of payment vouchers described in an internal control questionnaire? A. Analysis. B. Evaluation. C. Verification. D. Observation.

Correct C. Verification.

Internal audit engagements require budgeting and staff scheduling. Which of the following is true? A. Budgets are developed for the most important engagements. B. Use of actual engagements as training opportunities is discouraged. C. Time budgets ordinarily are prepared based on supervision requirements. D. All engagements should be under budgetary control.

Correct D. All engagements should be under budgetary control.

In confirming accounts receivable, an internal auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the organization confirmation letter? A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct. B. An organization-prepared letter reminding the customer that a nonresponse will cause a second request to be sent. C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the client. D. An organization-prepared statement of account showing the details of the customer's account balance.

Correct D. An organization-prepared statement of account showing the details of the customer's account balance.

In violation of a company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The internal auditor examining Lowell's financial statements would most likely detect this error when A. Discussing capitalization policies with Lowell's controller. B. Examining maintenance expense accounts. C. Observing, during the physical inventory observation, that the warehouse had been painted. D. Examining the construction work orders supporting items capitalized during the year.

Correct D. Examining the construction work orders supporting items capitalized during the year.

An internal auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the classification assertion that all A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. B. Expenditures for property and equipment have been recorded in the proper period. C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. D. Expenditures for property and equipment have not been charged to expense.

Correct D. Expenditures for property and equipment have not been charged to expense.

An engagement to review payroll is least likely to include A. Tests of computations for gross and net wages. B. Comparison of payroll costs to budget. C. Tracing a sample of employee names to employment records in the personnel department. D. Observing the physical distribution of paychecks.

Correct D. Observing the physical distribution of paychecks.

The internal auditor wishes to test the assertion that all claims paid by a medical insurer contain proper authorization and documentation, including but not limited to the validity of the claim from an approved physician and an indication that the claim complies with the claimant's policy. The most appropriate engagement procedure is to select a sample of A. All policyholders and examine all claims for the sampled items during the year to determine whether the claims were handled properly. B. Claims filed and trace to documentary information about authorization and other supporting documentation. C. Claims denied and determine that all claims denied were appropriate. The claims denied file is much smaller and the internal auditor can obtain greater coverage with the sample size. D. Paid claims from the claims (cash) disbursement file and vouch to documentary information about authorization and other supporting documentation.

Correct D. Paid claims from the claims (cash) disbursement file and vouch to documentary information about authorization and other supporting documentation.

A subsidiary president terminated a controller and hired a replacement without the required organizational approvals. Sales, cash flow, and profit statistics were then manipulated by the new controller and president via accelerated depreciation and sale of capital assets to obtain larger performance bonuses for the controller and the subsidiary president. An approach that might detect this fraudulent activity is A. Analysis of overall management control for segregation of duties. B. Required exit interviews for all terminated employees. C. Periodic changes of outside public accountants. D. Regular analytical review of operating divisions.

Correct D. Regular analytical review of operating divisions.

An internal auditor is more likely to detect duplicate vendor payments in a high exposure environment with certain internal control weaknesses by using which of the following procedures? A. Trend analysis. B. Monetary validity. C. Proportional analysis. D. Substantive testing.

Correct D. Substantive testing.

Which of the following statements is true with respect to a time budget for an internal audit engagement? A. Requests for time budget adjustments should be approved by the audit committee. B. Time budgets should be strictly adhered to, regardless of circumstances. C. Time budgets should be used for financial audits, but not for operational audits. D. Time budgets should normally be prepared in terms of hours or days.

Correct D. Time budgets should normally be prepared in terms of hours or days.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The internal auditor would most likely A. Determine whether any changes in the account occurred between January 1 and January 9, Year 2. B. Determine whether a customary trade discount was taken by the customer. C. Reconfirm the zero balance as of January 10, Year 2. D. Verify that the amount was received.

Correct D. Verify that the amount was received.