Internal Audit Ex 2 SU 5

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

Correct A. 1 and 3 only.

During a preliminary survey, an auditor found that several accounts payable vouchers for major suppliers required adjustments for duplicate payment of prior invoices. This would indicate A. A need for additional testing to determine related controls and the current exposure to duplicate payments made to suppliers. B. The possibility of unrecorded liabilities for the amount of the overpayments. C. Insufficient controls in the receiving area to ensure timely notice to the accounts payable area that goods have been received and inspected. D. The existence of a sophisticated accounts payable system that correlates overpayments to open invoices and therefore requires no further audit concern.

Correct A. A need for additional testing to determine related controls and the current exposure to duplicate payments made to suppliers.

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

Correct A. Advertising agency billings.

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

Correct A. An analysis of quality control documents.

In an engagement to review a not-for-profit organization's special revenue fund, the primary engagement objective is to determine whether the organization A. Complied with existing fund requirements and performed specified activities. B. Managed its resources economically and efficiently. C. Prepared its financial statements in accordance with accounting principles generally accepted in its country. D. Applies the funds in a way that would benefit the greatest number of people.

Correct A. Complied with existing fund requirements and performed specified activities.

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

Correct A. Determine customer satisfaction with shareholder communications.

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

Correct A. Determining the extent to which adequate operating criteria have been established.

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

Correct A. Discuss these observations with management of the internal audit activity to determine whether further work would be an efficient use of internal auditing resources at this time.

In the planning phase, the scope of an internal audit engagement is defined by the A. Engagement objectives. B. Scheduling and time estimates. C. Preliminary survey. D. Engagement work program.

Correct A. Engagement objectives.

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

Correct A. Expand audit work prior to the preparation of an engagement final communication.

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

Correct A. Preliminary survey.

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

Correct A. Preliminary survey.

Fact pattern: You are an internal auditing supervisor who is reviewing the working papers of a staff internal auditor's overall examination of the firm's sales function. The pages are not numbered or cross-referenced. Furthermore, the working papers were dropped and reassembled at random before they were brought to you. You decide to put the working papers in the proper order according to the Standards. The first stage of this activity is to identify each page as a part of (1) the preliminary survey, (2) the review of the adequacy of control processes, (3) the review for effectiveness of control processes, or (4) the review of results. The second page the supervisor selects documents an interview with a salesperson discussing the overall sales cycle. This page belongs with which activity? A. Preliminary survey. B. Review for adequacy of control processes. C. Review for effectiveness of control processes. D. Review of results.

Correct A. Preliminary survey.

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

Correct A. Probability of significant noncompliance.

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

Correct A. Resources needed to complete the engagement were considered.

Fact pattern: The chief audit executive (CAE) of a mid-sized internal audit activity was concerned that management might outsource the internal auditing function. Thus, the CAE adopted a very aggressive program to promote the internal audit activity within the organization. The CAE planned to present the results to senior management and the board and recommend modification of the internal audit activity's charter after using the new program. The following lists six actions the CAE took to promote a positive image within the organization: 1. Engagement assignments concentrated on efficiency. The engagements focused solely on cost savings, and each engagement communication highlighted potential costs to be saved. Negative observations were omitted. The focus on efficiency was new, but the engagement clients seemed very happy. 2. Drafts of all engagement communications were carefully reviewed with the engagement clients to get their input. Their comments were carefully considered when developing the final engagement communication. 3. The information technology internal auditor participated as part of a development team to review the control procedures to be incorporated into a major computer application under development. 4. Given limited resources, the engagement manager performed a risk assessment to establish engagement work schedule priorities. This was a marked departure from the previous approach of ensuring that all operations are evaluated on at least a 3-year interval. 5. To save time, the CAE no longer required that a standard internal control questionnaire be completed for each engagement. 6. When the internal auditors found that the engagement client had not developed specific criteria or data to evaluate operations, the internal auditors were instructed to perform research, develop specific criteria, review the criteria with the engagement client, and, if acceptable, use them to evaluate the engagement client's operations. If the engagement client disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed upon. The engagement communication commented on the engagement client's operations in conjunction with the agreed-upon criteria. Regarding Action 6, which of the following elements of the action most likely would have rendered it inappropriate if omitted? A. Seek agreement with the client about the criteria. B. Developing a set of criteria to present to the engagement client as a basis for evaluating the engagement client's operations. C. Commenting on the agreed-upon criteria. D. All of the answers are correct.

Correct A. Seek agreement with the client about the criteria.

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

Correct A. The organization's recognized losses on derivatives.

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

Correct B. 1 and 3 only.

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

Correct B. Best practices for another industry.

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

Correct B. Preliminary survey.

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

Correct B. Risks associated with the activities to be reviewed.

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

Correct B. Run background checks on unauthorized vendors.

Which of the following possible engagement objectives would lead to a test of the efficiency of an organization's use of labor resources? A. To determine that all employees are paid in accordance with union wages. B. To determine that employees are assigned to work situations equivalent to their training and skill level. C. To determine that the quality of performance by labor meets organizational standards. D. To determine that only authorized employees are paid.

Correct B. To determine that employees are assigned to work situations equivalent to their training and skill level.

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

Correct B. To determine whether inventory stocks are sufficient to meet projected sales.

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

Correct B. Uncertainty of the occurrence of an event that could affect the achievement of objectives.

Levels of production stoppages over the past year at a large laminating business were abnormally high due to machine malfunctions. Would it be appropriate for the internal auditing function to develop a survey examining attitudes toward line operations, rotation of work zones, training, maintenance schedule, etc., for the machine operators to complete? A. Yes, the survey is reliable without corroboration. B. Yes, the examined areas are relevant to the malfunctions. C. No, the examined areas are irrelevant to the malfunctions. D. No, the survey is inappropriate without corroboration.

Correct B. Yes, the examined areas are relevant to the malfunctions.

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

Correct C. Consider the engagement to be terminated with no communication of results needed because the engagement client has already agreed to take constructive action.

An external consultant is developing methods for the management of a city's capital facilities. An appropriate scope of an engagement to evaluate the consultant's product is to A. Review the consultant's contract to determine its propriety. B. Establish the parameters of the value of the items being managed and controlled. C. Determine the adequacy of the risk management and control systems for the management of capital facilities. D. Review the handling of idle equipment.

Correct C. Determine the adequacy of the risk management and control systems for the management of capital facilities.

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.

Correct C. Draw preliminary conclusions about internal control.

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

Correct C. Payment had been made for routine inventory items without a purchase order or receiving report.

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

Correct C. Reference checks of prospective employees are being performed.

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

Correct C. Sampling plan and key criteria.

Which of the following factors should an internal auditor consider when planning an audit of an activity? A. The objectives of the activity, the number of employees involved, and the control system. B. The qualifications of management, the significant risks, and the control system. C. The objectives of the activity, the significant risks, and the control system. D. The number of employees involved, the control system, and the recommendations of external auditors.

Correct C. The objectives of the activity, the significant risks, and the control system.

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

Correct D. A process used to become familiar with activities and risks to identify areas for engagement emphasis.

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

Correct D. All of the answers represent an appropriate standard or criterion to support engagement observations, conclusions, and recommendations.

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

Correct D. Determine to whom engagement results will be communicated.

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

Correct D. Evaluating the adequacy and effectiveness of controls.

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

Correct D. Highlight the weakness to ensure that procedures to test it are included in the engagement work program.

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

Correct D. Management cooperation with audit activities.

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

Correct D. Use the bank's policy as the audit criteria and determine whether formal adoption should be recommended in the engagement final communication.