Internal Part 2 SU3

Fact Pattern: The legislative auditing bureau of a country is required to perform compliance engagements involving organizations that are issued defense contracts on a cost-plus basis. Contracts are clearly written to define acceptable costs, including developmental research cost and appropriate overhead rates. During the past year, the government has engaged in extensive outsourcing of its activities. The outsourcing included contracts to run cafeterias, provide janitorial services, manage computer operations and systems development, and provide engineering of construction projects. The contracts were modeled after those used for years in the defense industry. The legislative internal auditors are being called upon to expand their efforts to include compliance engagements involving these contracts. Upon initial investigation of these outsourced areas, the internal auditor found many areas in which the outsourced management has apparently expanded its authority and responsibility. For example, the contractor that manages computer operations has developed a highly sophisticated security program that may represent the most advanced information security in the industry. The internal auditor reviews the contract and sees reference only to providing appropriate levels of computing security. The internal auditor suspects that the governmental agency may be incurring developmental costs that the outsourcer may use for competitive advantage in marketing services to other organizations. Assuming that a high degree of security is needed, which of the following potential sources of information will also be relevant to the internal auditor's assessment of whether the governmental unit is being charged for computer security that exceeds the entity's needs?Comparison of the security system with best practices implemented for similar systemsComparison of the security system with recent publications on state-of-the-art systemsTests of the functionality of the security system

1 and 2 only.

A specific objective of an audit of a company's expenditure cycle is to determine whether all goods paid for have been received and charged to the correct account. This objective addresses which of the following primary objectives identified in the Standards? 1. Reliability and integrity of financial and operational information. 2. Compliance with laws, regulations, policies, procedures, and contracts. 3. Effectiveness and efficiency of operations and programs. 4. Safeguarding of assets.

1 and 4 only.

Which of the following types of engagements, if any, involve an internal auditor conducting performance audits to measure how well an organization is achieving its targets for its key performance indicators? 1. An assurance engagement 2. A consulting engagement

1 only.

A manufacturer uses hazardous materials in production. An audit of these materials may include 1. Evaluating whether the organization complies with new environmental regulations. 2. Recommending an environmental management system as a part of policies and procedures. 3. Verifying the existence of tracking records for these materials from their creation to destruction. 4. Examining the likelihood and magnitude of any contingent liabilities related to compliance with environmental law.

1, 2, 3, and 4.

A manufacturing organization uses hazardous materials in production of its products. An audit of these hazardous materials may include: 1. Recommending an environmental management system as a part of policies and procedures. 2. Verifying the existence of "cradle to grave" (creation to destruction) tracking records for these materials. 3. Using consultants to avoid self-incrimination of the firm in the event illegalities were detected in an environmental audit. 4. Evaluating the cost provided for in an environmental liability accrual account.

1, 2, and 4 only.

Which of the following is the proper way for an internal auditor to resolve conflict? 1. By the guidelines set out in the organization's code of conduct 2. By the guidelines set out in The IIA's Code of Ethics 3. The procedures designated by the CAE

2 only.

Before internal auditors begin to offer consulting services to an organization, a number of things need to happen within the organization. What is the order in which the following items should be performed? 1. The internal audit charter is amended to include authority and responsibilities for consulting activities. 2. The CAE confirms that the board understands and approves the concept of providing consulting services. 3. The internal audit activity develops appropriate policies and procedures for conducting such engagements.

2, 1, 3.

An internal auditor concludes that the results of a consulting engagement should be communicated beyond those who received or requested the services. The auditor follows a series of steps until satisfied with the resolution. In what order will the auditor perform the following steps? 1. Attempt to convince those receiving or requesting the service to expand voluntarily the communication to the appropriate parties. 2. Determine what guidance is provided in the organization's code of conduct, code of ethics, and other relevant policies, administrative directives, or procedures. 3. Determine what direction is provided in the agreement concerning the consulting engagement and related communications.

3, 1, 2.

Management is exploring different ways of reducing or preventing pollution in manufacturing operations. The objective of a pollution prevention audit is to identify opportunities to minimize waste and eliminate pollution at the source. In what order should the following opportunities to reduce waste be considered? 1. Recycling and reuse 2. Elimination at the source 3. Energy conservation 4. Recovery as a usable product 5. Treatment

4, 2, 1, 3, and 5.

When internal auditors perform a consulting engagement, what is the best statement of their responsibility regarding risk?

Address risk consistent with engagement objectives and be alert to certain other risks.

As part of a manufacturing company's environmental, health, and safety (EHS) self-inspection program, inspections are conducted by a member of the EHS staff and the operational manager for a given work area or building. If a deficiency cannot be immediately corrected, the EHS staff member enters it into a tracking database that is accessible to all departments via a local area network. The EHS manager uses the database to provide senior management with quarterly activity reports regarding corrective action. During review of the self-inspection program, an auditor notes that the operational manager enters the closure information and affirms that corrective action is complete. What change in the control system would compensate for this potential conflict of interest?

After closure is entered into the system, review by the EHS staff member of the original inspection team should be required in order to verify closure.

An internal auditor has been requested to perform a review of an organization's process for developing accruals for its liability to clean up toxic waste sites. The audit should determine whether

All of the answers are correct.

During consulting engagements, internal auditors

All of the answers are correct.

In any organization-wide risk management assessment, the CAE should include risks associated with which of the following activities?

All of the answers are correct.

Substantial risk exposures or material control weaknesses discovered during a formal consulting engagement are brought to the attention of management. In some situations, the internal auditor's concerns also are communicated to

All of the answers are correct.

In many countries, the organization generating hazardous waste is responsible for the waste from "cradle to grave" (creation to destruction). A potential risk to the organization is the use of an external service provider to process hazardous waste. Which of the following steps are performed during a review of the waste vendor?

All of these steps are performed during a review of the waste vendor.

The internal auditors are part of the team performing a due diligence review for the purchase of a waste disposal business. The scope of their work will most likely not include

An appraisal of the value of investments owned by the acquiree.

An organization is considering purchasing a small toxic waste disposal business. The internal auditors are part of the team doing a due diligence review for the acquisition. The scope of the internal auditors' work will most likely not include

An evaluation of the merit of lawsuits currently filed against the acquiree.

Consulting services

Are a natural extension of assurance and investigative services and may represent informal or formal advice, analysis, or assessments.

Which of the following best describes an internal auditor's initial responsibility regarding errors uncovered during a financial statement audit?

Assess the risk of misrepresentation.

Which of the following statements is false?

Assurance and consulting are mutually exclusive and do preclude other auditing services such as investigations and nonauditing roles.

George is the new internal auditor for XYZ Corporation. George was in charge of payroll for XYZ just 10 months ago. Performing what services in regard to payroll is considered an impairment of independence or objectivity if performed by George?

Assurance services.

Which of the following suggestions for the CAE related to EHS auditing is false?

At least once every three years, the CAE should schedule a quality assurance review of the environmental audit function if it is organizationally independent of the internal audit function.

The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?

Benchmark.

Which of the following is true of benchmarking?

Benchmarking is accomplished by comparing an organization's performance to that of the best-performing organizations.

A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using?

Benchmarking.

What is the process by which products and services of a business entity are measured and evaluated relative to the best possible levels of performance?

Benchmarking.

Which of the following methods involves comparing a company's internal processes that need to be improved to those of external companies identified as being best in class?

Benchmarking.

Which of the following is true about the principle of value proposition to an organization?

Both the assurance and consulting activities add value to the organization.

The chief audit executive's (CAE) responsibility for assessing and reporting on control processes includes

Communicating to senior management and the board an annual judgment about internal control.

The treasury function of an entity has hired outside consultants to help prepare the organization's bond offering. The internal auditor then performs an engagement to determine whether the consultants followed governmental regulations. The auditor has performed which type of engagement?

Compliance.

Management is evaluating the need for an environmental audit program. Which one of the following should not be included as an overall program objective?

Conduct site assessments at all waste-producing facilities.

Advisory and related client service activities, the nature and scope of which are agreed upon with the client, are best described as

Consulting services.

The financial reporting process encompasses the steps to

Create information to help prepare the financial statements and related notes.

A company has computerized sales and cash receipts journals. The computer programs for these journals have been properly debugged. The auditor discovered that the total of the accounts receivable subsidiary accounts differs materially from the accounts receivable control account. This discrepancy could indicate

Credit memoranda being improperly recorded.

Benchmarking compares the current performance of operations to which of the following factors related to competing organizations?

Current performance measures.

Monitoring is an important component of internal control. Which of the following items would not be an example of monitoring?

Data processing management regularly reconciles batch control totals for items processed with batch controls for items submitted.

Internal auditors are increasingly called on to perform audits related to an organization's environmental stewardship. Which of the following does not describe the objectives of a type of environmental audit?

Determine whether environmental issues are considered as part of economic decisions.

An internal auditor's role with respect to operating objectives and goals includes

Determining that they conform with those of the organization.

Which of the following best describes due diligence auditing?

Determining whether the business justification for a major transaction is valid.

`Reengineering is the thorough analysis, fundamental rethinking, and complete redesign of essential business processes. The intended result is a dramatic improvement in service, quality, speed, and cost. An internal auditor's involvement in reengineering should include all of the following except

Directing the implementation of the redesigned process.

If impairments of independence or objectivity exist prior to commencement of a consulting engagement or develop during the engagement, what action should be taken?

Disclosure should be made immediately to engagement client.

The Standards of The IIA apply to assurance services and consulting services performed by the internal audit activity (IAA). Which of the following is addressed only in a performance standard?

Engagement supervision.

The internal auditor should decline to perform which of the following types of consulting engagements?

Engagements in which the internal audit staff lacks the knowledge needed to perform part of the engagement.

Which of the following is an example of a soft control?

Ethical culture.

Senior management of an entity has requested that the internal audit activity provide ongoing internal control training for all managerial personnel. This is best addressed by a(n)

Formal consulting engagement agreement.

An organization wants to improve its performance measures for a new business line. Which type of benchmarking is most likely to provide information useful for this purpose?

Functional.

A manufacturer compares its accounts payable practices with those of an investment bank. This comparison is an example of

Generic benchmarking.

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?

High amount of bad debt write-offs.

An organization has decided to benchmark one of its stores for the purpose of analyzing the reliability of branch store financial reporting. All of the following are financial benchmarks except

High level of customer satisfaction.

The function of internal auditing, as related to communicating results, is to

Identify inadequate controls that increase the likelihood of unauthorized expenditures.

The phase of the benchmarking process in which the team must be able to justify its recommendations is the

Implementation phase.

Internal audit consulting services

Include training.

An advantage of conducting environmental audits under the direction of the internal audit activity is that

Independence and authority are already in place.

Internal auditors should design the scope of work in a consulting engagement to ensure that all of the following will be maintained except

Independence.

Which statement about consulting engagements is true?

Internal auditors keep senior management and the board informed about how audit resources are being deployed.

An internal auditor performed a formal consulting engagement for XYZ Corporation on June 1, Year 1. When is the earliest time the auditor can perform assurance services for XYZ Corporation and be considered independent and objective?

June 1, Year 2.

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: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.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.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.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.To save time, the CAE no longer required that a standard internal control questionnaire be completed for each engagement.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. Is Action 5 inappropriate?

No. Internal auditors are not required to fill out internal control questionnaires on every engagement.

An internal auditor discovers during an engagement involving the entity's environmental, health, and safety (EHS) department that department personnel are poorly informed about legal issues resulting from discharging waste into municipal water sources. The EHS function is small. Which of the following is the best course of action for the auditor to take?

Note the control weakness and perform additional procedures to help determine its potential effects.

Controls should be designed to ensure that

Operations are performed efficiently.

Which of the following is not an objective of an environmental audit program?

Perform walkthroughs of all processes that contain identified environmental risks.

All of the following would be part of a factory's control system to prevent release of wastewater that does not meet discharge standards except

Periodically flushing sinks and floor drains with a large volume of clean water to ensure pollutants are sufficiently diluted.

An internal auditor fails to discover an employee fraud during an assurance engagement. The nondiscovery is most likely to suggest a violation of the International Professional Practices Framework if it was the result of a

Presumption that the internal controls in the area were adequate and effective.

The internal audit activity has undertaken an audit of the shipping and receiving department of a department store chain. The best engagement tool for this purpose most likely is

Process benchmarking.

Fact Pattern: An organization has two manufacturing facilities. Each facility has two manufacturing processes and a separate packaging process. The processes are similar at both facilities. Raw materials used include aluminum, materials to make plastic, various chemicals, and solvents. Pollution occurs at several operational stages, including raw materials handling and storage, process chemical use, finished goods handling, and disposal. Waste products produced during the manufacturing processes include several that are considered hazardous. The nonhazardous waste is transported to the local landfill. An outside waste vendor is used for the treatment, storage, and disposal of all hazardous waste. Management is aware of the need for compliance with environmental laws. The organization recently developed an environmental policy including a statement that each employee is responsible for compliance with environmental laws. If the internal audit activity is assigned the responsibility of conducting an environmental audit, which of the following actions should be performed first?

Provide the assigned staff with technical training.

Which of the following is an example of business process reengineering?

Redesigning the production line to speed up production.

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 the preliminary survey, the review of the adequacy of control processes, the review for effectiveness of control processes, or the review of results. The third page the supervisor selects is a blank copy of the sales contract form now in use by the organization. Annotated on the form in several places are the words "key control" followed by a brief explanation. The supervisor recognizes the writing as that of the staff internal auditor who performed the engagement. This document belongs with which activity?

Review for adequacy of control processes.

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 the preliminary survey, the review of the adequacy of control processes, the review for effectiveness of control processes, or the review of results. The first page the supervisor selects documents a test of controls performed during the course of the engagement. This page belongs with which activity?

Review for effectiveness of control processes.

Internal auditors are often called upon to either perform or assist the external auditor in performing a due diligence review. A due diligence review may be a(n)

Review of financial statements and related disclosures in conjunction with a potential acquisition.

A due diligence review may be a(n)

Review of the internal controls in place at an organization targeted for acquisition by a larger entity.

Internal auditors may provide consulting services that add value and improve an organization's operations. The performance of these services

Should be consistent with the internal audit activity's empowerment reflected in the charter.

Senior management of an entity has requested that the internal audit activity assist the purchasing function's switch from a manual entry inventory system to a fully automated inventory system. This service is best performed in a(n)

Special consulting engagement agreement.

Which of the following best describes process (function) benchmarking?

Studying operations of organizations with similar processes regardless of industry.

Which of the following is true about the interaction of the internal audit function and the environmental audit function?

The CAE should evaluate whether the environmental auditors are conforming to recognized professional auditing standards and a recognized code of ethics.

Which of the following statements regarding benchmarking is false?

The benchmarking organization against which a firm is comparing itself must be a direct competitor.

Which of the following is a characteristic of business process reengineering?

The bottom-up revision of the way the organization carries out a particular business process.

Who is responsible for determining the methodology to use for classifying engagements within the organization?

The chief audit executive.

After the chief audit executive receives approval from the board to offer consulting services, what should be done?

The internal audit charter should be amended.

When an internal auditor has a potential impairment of independence or objectivity relating to a proposed consulting engagement, what action must be taken?

The internal auditor must disclose the potential impairment to the engagement client prior to accepting the engagement.

An example of a competitive financial benchmark is

The labor rate of comparably skilled employees at a major competitor's plant.

An example of an internal nonfinancial benchmark is

The percentage of customer orders delivered on time at the company's most efficient plant.

An organization is considering purchasing a commercial property. Because of the location of the property and the known recent history of activities on the property, management has asked the internal audit activity, in cooperation with legal counsel, to provide a preliminary identification of any environmental liability. The strongest reason supporting management's decision to request such an investigation is

The potential for future liability may outweigh any advantages achieved by obtaining the property.

To better monitor the performance of operating management, executive management has requested that the internal auditors examine interim financial statements that are prepared for internal use only. Although interim financial statements have been prepared for several years, this will be the first time that the internal auditors have been involved. The primary reason for this request was that executive management was surprised at the lower-than-anticipated net profit eventually reflected in last year's audited financial statements. Earnings had been artificially manipulated on quarterly financial statements. In their work on this year's interim financial statements, internal auditors are likely to focus on which of the following?

The timing of revenue recognition and the valuation of inventories.

Consulting services performed by internal auditors most likely benefit the organization because

They are intended to improve the organization's controls.

An internal audit team is performing a due diligence audit to assess plans for a potential merger/acquisition. Which of the following would be the least valid reason for a company to merge with or acquire another company?

To increase stock prices.

What type of audit assesses the environmental risks and liabilities of land or facilities prior to a property transaction?

Transactional audit.

The internal auditor for ABC Corporation has received a special request from management. The internal auditor believes that the objectives that should be pursued go beyond those requested by management. What should the internal auditor do?

Try to persuade management to include the additional objectives in the consulting engagement.

The personnel department receives an edit listing of payroll changes processed at every payroll cycle. If it does not verify the changes processed, the result could be

Undetected errors in payroll rates for new employees.

The previous year's audited financial statements had higher debt-to-equity than was expected. In their work on this year's interim financial statements, internal auditors are most likely to emphasize

Whether payables were accrued properly at the end of the interim period.