CIA Exam Part 1: Study Unit 5

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Fact Pattern: An internal auditing team has been assigned to review "the customer satisfaction measurement system" that the Industrial Products Division implemented 2 years ago. This system consists of an annual mail survey conducted by the division's customer service office. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The survey is three pages long, and its 30 questions use a mixture of response modes (e.g., some questions are open-ended, some are multiple-choice, and others use a response scale). The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up is conducted. When the survey was last conducted, 45 of the questionnaires were not returned. Question: 101 Several of the internal auditing team members are concerned about the low response rate, the poor quality of the questionnaire design, and the potentially biased wording of some of the questions. They suggest that the customer service office might want to supplement the survey with some unobtrusive data collection such as observing customer interactions in the office or collecting audiotapes of phone conversations with customers. Which of the following is not a potential advantage of unobtrusive data collection compared to surveys or interviews? A. Interactions with customers can be observed as they occur in their natural setting. B. It is easier to make precise measurements of the variables under study. C. Unexpected or unusual events are more likely to be observed. D. People are less likely to alter their behavior because they are being studied.

Answer (B) is correct. Lack of experimental control and measurement precision are weaknesses of observational research. Another is that some things, such as private behavior, attitudes, feelings, and motives, cannot be observed.

Which of the following procedures is the least effective in gathering information about the nature of the processing and potential problems? A. Interview supervisors in the claims department to find out more about the procedures used, and the rationale for the procedures, and obtain their observations about the nature and efficiency of processing. B. Send an email message to all clerical personnel detailing the alleged problems and request them to respond. C. Interview selected clerical employees in the claims department to find out more about the procedures used, and the rationale for the procedures, and obtain their observations about the nature and efficiency of processing. D. Distribute a questionnaire to gain a greater understanding of the responsibilities for claims processing and the control procedures utilized.

Answer (B) is correct. Sending an email message to clerical staff is the least effective communication and information-gathering technique. It is impersonal and alleges inefficiencies before evidence has indicated that the problems are caused by inefficiencies in processing. This impersonal method might have been useful if the auditor wished to solicit open responses, but not enough guidance is given to encourage that kind of response.

An internal auditing team developed a preliminary questionnaire with the following response choices: 1.Probably not a problem 2.Possibly a problem 3.Probably a problem The questionnaire illustrates the use of A. Trend analysis. B. Ratio analysis. C. Unobtrusive measures or observations. D. Rating scales.

Answer (D) is correct. A rating scale may be used when a range of opinions is expected. The scale represents a continuum of responses. In this case, it reflects probability statements.

An internal auditor arrived at the conclusion that the segregation of duties in the counting and recording of cash receipts was adequate. What type of information is this? A. Analytical. B. Documentary. C. Physical. D. Testimonial.

Answer (A) is correct. Analytical information is drawn from the consideration of the interrelationships among data or, in the case of the control, the particular policies and procedures of which it is composed. Analysis produces circumstantial information in the form of inferences or conclusions based on examining the components as a whole for consistencies, inconsistencies, cause-and-effect relationships, relevant and irrelevant items, etc.

The most persuasive information about the existence of newly acquired computers for the sales department is A. Inquiry of management. B. Observation of engagement client's procedures. C. Physical examination. D. Documentation prepared externally.

Answer (C) is correct. Information is considered more or less persuasive depending on the engagement client's degree of control. The following is a hierarchy from most persuasive to least persuasive: internal auditor's examination and observation, externally developed information, internally developed information, and oral information from the client. Thus, the most persuasive information about the existence assertion for a new asset is physical examination.

Fact Pattern: Management answered "yes" to every question when filling out an internal control questionnaire and stated that all listed requirements and control activities were part of their procedures. An internal auditor retrieved this questionnaire from management during the preliminary survey visit but did not review the responses with management while on site. Question: 77 The auditor's supervisor is writing the performance assessment for the auditor on this preliminary survey assignment. The supervisor cites the need to review management's responses on the control questionnaire. The auditor should have interviewed management for additional information because the interview technique A. Provides the opportunity to insert questions to probe promising areas. B. Is the most efficient way to upgrade the information to the level of objective evidence. C. Is the least costly audit technique when a large amount of information is involved. D. Is the only audit procedure that does not require confirmation and walk-through of the information obtained.

Answer (A) is correct. During face-to-face contact, a skilled interviewer can react to potential problems and expand questioning of more relevant subjects. Thus, the interview allows for cross-examination. Moreover, the interview provides an opportunity to observe body language.

What characteristic of information is satisfied by an original signed document? A. Sufficiency. B. Reliability. C. Relevance. D. Usefulness.

Answer (B) is correct. Reliable information is the best information attainable through the use of appropriate engagement techniques (Inter. Std. 2310). An original document is the prime example of such information.

Which of the following represents the general order of persuasiveness, from most to least, for the types of information listed below? 1.Inquiry of management 2.Observation of engagement client's procedures 3.Physical examination 4.Documentation prepared externally A. 3, 2, 4, 1. B. 4, 1, 2, 3. C. 2, 4, 1, 3. D. 4, 3, 1, 2.

Answer (A) is correct. An auditor's physical examination provides the most persuasive form of evidence. First-hand observation by the auditor of client personnel performing procedures is the next most persuasive. Information originating from a third party is less persuasive than information personally gathered by the auditor but more persuasive than information originating with the client. Oral information from the client is the least convincing.

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.

Answer (A) is correct. A preliminary survey allows the internal auditor to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3). In this case, additional planning is necessary to modify the engagement for the difficult circumstances discovered during the preliminary survey and to address the responsibilities of the internal audit activity.

An internal auditing manager is conducting the annual meeting with manufacturing division management to discuss proposed engagement plans and activities for the next year. After some discussion about the past year's activity at 12 plants in the division, the divisional vice president agrees that all significant recommendations made by the internal auditing staff refer to key controls and related operating activities that are correctly described for local management within the volume of standard operating procedures for the division. The vice president proposes to transcribe key control activities from the division's extensive written procedures to a self-assessment standard operating procedure (SOP) questionnaire. What significance should the internal auditing manager attach to such SOP questionnaires in relation to the proposed engagement schedule for the next year? A. The SOP questionnaires should improve control adequacy, but the internal auditors need to verify that controls are working as documented in the SOP. B. Adding this control should eliminate significant engagement recommendations in the coming year, so the scope of engagement activities can be reduced accordingly. C. Engagement activity can be reduced if the vice president agrees to require the internal audit activity's approval of all divisional standard operating procedures. D. SOP questionnaires must be mailed and controlled by the internal audit activity to be considered in relation to the proposed engagement schedule.

Answer (A) is correct. A specific advantage of an SOP questionnaire is that it may be used by local management to periodically ensure that employee practices remain current with relevant, valid, and up-to-date standard operating procedures. The overall level of control and the control environment improve when follow-up activities are performed to determine that controls are being implemented as intended.

An internal auditor takes a photograph of the engagement client's workplace. The photograph is a form of what kind of information? A. Physical. B. Testimonial. C. Documentary. D. Analytical.

Answer (A) is correct. Physical information results from the verification of the actual existence of things, activities, or individuals by observation, inspection, or count. It may take the form of photographs, maps, charts, or other depictions.

Listening effectiveness is best increased by A. Resisting both internal and external distractions. B. Waiting to review key concepts until the speaker is through talking. C. Tuning out messages that do not seem to fit the meeting purpose. D. Factoring in biases to evaluate the information being given.

Answer (A) is correct. Concentrating on what the speaker is saying is critical to effective listening. This result is best achieved by resisting internal and external distractions. Physical distractions such as noise, a tendency to be overly aware of the speaker's physical and other differences from the listener, focusing on interesting details at the expense of major points, or emotional reactions to a statement with which the listener disagrees should be avoided.

The internal auditor for a construction contractor finds materials costs increasing as a percentage of billings and suspects that materials billed to the organization are being delivered to another contractor. What type of information will best enable the internal auditor to determine whether erroneous billings occurred? A. Documentary. B. Physical examination. C. Confirmation. D. Analytical.

Answer (A) is correct. Documentary information exists in some permanent form, such as checks, invoices, shipping records, receiving reports, and purchase orders. It includes both external information, e.g., shipping documents provided by carriers, and documents originating within the engagement client's organization. By matching invoices received from vendors with receiving documents prepared by organizational personnel, the nonreceipt of items billed to the organization can be detected. Also, the invoices received may well indicate that delivery was made to an address other than the organization's storage area or a construction site.

Ordinarily, what source of information should most affect the internal auditor's conclusions? A. External. B. Inquiry. C. Oral. D. Informal.

Answer (A) is correct. External information is ordinarily more reliable than the other types of information listed because it is generated from sources independent of the engagement client. The internal auditor should select the strongest information available to support engagement observations, conclusions, and recommendations.

Which of the following techniques is most likely to result in sufficient information with regard to an engagement to review the quantity of fixed assets on hand in a particular department? A. Physical observation. B. Analytical review of purchase requests and subsequent invoices. C. Interviews with department management. D. Examination of the account balances contained in general and subsidiary ledgers.

Answer (A) is correct. First-hand observation by the auditor is more persuasive than analytical reviews performed, client-prepared records examined by the auditor, or interviews with client personnel.

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.

Answer (A) is correct. If appropriate, internal auditors conduct a survey to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3).

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.

Answer (A) is correct. In planning the engagement, internal auditors must consider the significant risks and the means by which the potential impact of risk is kept to an acceptable level (Perf. Std. 2201). Risk factors have differing degrees of objectivity. The most objective (least subjective) factors are facts. The organization's losses on derivatives are facts and therefore objective to the extent measurable. Objective information is such that it can be supported by facts or numbers. Subjective information is a judgment and may be interpreted differently by different people.

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.

Answer (A) is correct. Internal auditors conduct a survey to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3). An analysis of quality control documents is a part of field work, which follows the survey.

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.

Answer (A) is correct. One reason for conducting a preliminary survey is to become familiar with the activities, risks, and controls to identify areas for engagement emphasis (PA 2210.A1-1, para. 3). Accordingly, this preliminary survey information should prompt the auditor to identify the magnitude of duplicate payments.

Which of the following statements indicates the wrong way to use an internal control questionnaire? A. Clarifying all answers with written remarks and explanations. B. Filling out the questionnaire during an interview with the person who has responsibility for the area that is being reviewed. C. Constructing the questionnaire so that a "no" response requires attention. D. Supplementing the completed questionnaire with a narrative description or flowchart.

Answer (A) is correct. Only those answers that appear inappropriate should be pursued by asking for clarification or explanation. In this way, problem areas may be pinpointed and either compensating controls identified or extensions to the engagement procedures planned.

The chief audit executive is reviewing the working papers produced by an internal auditor during a fraud investigation. Among the items contained in the working papers is a description of an item of physical information. Which of the following is the most probable source of this item of information? A. Observing conditions. B. Interviewing people. C. Examining records. D. Computing variances.

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. Question: 63 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.

Answer (A) is correct. Planning includes performing, if appropriate, a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3). Interviews with the engagement client may be conducted as part of the survey to obtain an overall understanding of operations.

Which of the following examples of audit evidence is the most persuasive? A. Real estate deeds that were properly recorded with a government agency. B. Canceled checks written by the chief financial officer and returned from a bank. C. Time cards for employees that are stored by a manager. D. Vendor invoices filed by the accounting department.

Answer (A) is correct. Real estate deeds recorded in public records are documentary information generated by external parties. They are not processed by the engagement client. Accordingly, this purely external evidence is more persuasive than information originating with, or processed by, the engagement client.

Reliable evidence is best defined as evidence that A. Is the best attainable. B. Is obtained by observing people, property, and events. C. Is supplementary to other evidence already gathered and tends to strengthen or confirm it. D. Proves an intermediate fact, or group of facts, from which still other facts can be inferred.

Answer (A) is correct. Reliable information is the best information attainable through the use of appropriate engagement techniques (Inter. Std. 2310). Information is reliable when the auditor's results can be verified by others. Reliable information is also valid. It accurately represents the observed phenomena. Information must be collected using reasonable efforts subject to such inherent limitations as the cost-benefit constraint. Accordingly, internal auditors employ efficient methods, e.g., statistical sampling and analytical auditing procedures.

Fact Pattern: Management answered "yes" to every question when filling out an internal control questionnaire and stated that all listed requirements and control activities were part of their procedures. An internal auditor retrieved this questionnaire from management during the preliminary survey visit but did not review the responses with management while on site. Question: 76 The internal auditor's supervisor should be critical of the above procedure because A. Engagement information must be corroborated in some way. B. Internal control questionnaires cannot be relied upon. C. The internal auditors were not present while the questionnaire was being filled out. D. The questionnaire was not designed to address accounting operations and controls.

Answer (A) is correct. Self-assessment questionnaires provide indirect information. Because this information is provided by engagement client personnel and not by independent sources, it must be confirmed.

While testing a division's compliance with company affirmative-action policies, an auditor found that 1. 5% of the employees are from minority groups. 2.No one from a minority group has been hired in the past year. The most appropriate conclusion for the auditor to reach is that A. Insufficient evidence exists of compliance with affirmative-action policies. B. The division is violating the company's policies. C. The company's policies cannot be audited and hence cannot be enforced. D. With 5% of its employees from minority groups, the division is effectively complying.

Answer (A) is correct. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor (Inter. Std. 2310). Without knowledge of guidelines for compliance, the auditor cannot draw a reasonable conclusion given the insufficiency of the facts. Thus, the auditor must determine whether management has established adequate criteria or should work with management to develop such criteria.

Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back to line positions. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and clearing comments. The CAE asks the team to indicate the informational criteria that are violated. Question: 49 The organization is required to comply with certain specific standards related to environmental issues. One of these standards requires that certain hazardous chemicals be placed in certified containers for shipment to a governmental disposal site. The container must bear an inspection seal signed within the last 90 days by a governmental inspector. Based on the following tests, the internal auditor concluded that the organization was in compliance for the engagement period: 1.Determine from each chemical loading supervisor that compliance requirements are understood. 2.Inspect sealed containers for evidence of leakage. 3.Ask chemical loading personnel about procedures performed. Which of the following informational criteria, if any, is violated? A. Sufficiency. B. Reliability. C. Relevance. D. No criteria are violated.

Answer (A) is correct. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the internal auditor (Inter. Std. 2310). These tests are insufficient because the internal auditor did not determine that each container had an inspection seal signed within the last 90 days.

Answer (A) is correct. The conclusion violates the criteria of sufficiency and relevance. The sufficiency criterion is violated because information about cost allocation is missing. The relevance criterion is violated because the information identified does not pertain to the objective.

The auditor used a questionnaire during interviews to gather information about the nature of claims processing. Unfortunately, the questionnaire did not cover a number of pieces of information offered by the person being interviewed. Consequently, the auditor did not document the potential problems for further audit investigation. The primary deficiency with the process is that A. The auditor failed to consider the importance of the information offered. B. A questionnaire was used in a situation in which a structured interview should have been used. C. Questionnaires do not allow for opportunities to document other information. D. All of the answers are correct.

Answer (A) is correct. The major problem is that the auditor was too oriented to the questionnaire and failed to give appropriate consideration to the other information offered. Questionnaires are limited, and the auditor needs to be flexible enough to gather other information when it is offered.

Which of the following is a false statement about the reliability of audit evidence? A. The more effective the organization's internal control, the more assurance it provides about the accounting data. B. A copy of a document is as reliable as the original. C. Evidence obtained from independent sources outside the organization is more reliable than evidence obtained from internal sources. D. The auditor's direct personal knowledge is more reliable than information obtained indirectly.

Answer (B) is correct. Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the engagement's objectives. Reliable information is best attainable through the use of appropriate engagement (interpretation). Several factors increase the reliability of audit evidence. Evidence is more reliable if it is (1) obtained from sources independent of the engagement client, (2) corroborated by other information, and (3) direct, such as the internal auditor's personal observation. Also, an original document is more reliable than a copy.

Documents provide information with differing degrees of persuasiveness. If the engagement objective is to obtain information that payment has actually been made for a specific invoice from a vendor, which of the following documents ordinarily is the most persuasive? A. An entry in the engagement client's cash disbursements journal supported by a voucher package containing the vendor's invoice. B. A canceled check, made out to the vendor and referenced to the invoice, included in a cutoff bank statement that the internal auditor received directly from the bank. C. An accounts payable subsidiary ledger that shows payment of the invoice. D. A vendor's original invoice stamped "PAID" and referenced to a check number.

Answer (B) is correct. A canceled check included in a cutoff bank statement received directly from the bank provides external as well as internal documentary information. The information was generated internally but passed through outsiders who confirmed it (honored the check) before sending it directly to the internal auditor. Such information is very persuasive.

When evaluating the propriety of a payment to a consultant, the most appropriate information for the internal auditor to obtain and review is A. Oral information in the form of opinions of operating management. B. Documentary information in the form of a contract. C. Analytical information in the form of comparisons with prior years' expenditures on consultants. D. Physical information in the form of the consultant's report.

Answer (B) is correct. A contract is a document that formalizes an agreement between the parties. It provides persuasive information that the payment was properly authorized.

Internal auditors should be active listeners to gain the most information in an internal audit interview. Which of the following best describes how an active listener behaves in an interview? The listener A. Judges and evaluates the information as it is presented. B. Listens with acceptance, empathy, and intensity. C. Avoids looking directly at the speaker and interrupting his or her train of thought. D. Formulates arguments and conclusions as pieces of the speaker's information fit together.

Answer (B) is correct. Active listening involves acceptance of the speaker's ideas, that is, deferring judgment until the speaker has finished. Empathy is a sensitive awareness of the speaker's feelings, thoughts, and experience. An empathic listener understands what the speaker wants to communicate rather than what the listener wants to understand. Listening with intensity involves concentrating on the speaker's message and disregarding distractions. An active listener also is responsible for completeness. (S)he considers nonverbal and emotional content and asks questions to clarify the communication.

During an engagement to review the personnel function, an internal auditor notes that there are several employee benefit programs and that participation in some of the programs is optional. Which of the following is the best information for assessing the acceptability of various benefit programs to employees? A. Discuss satisfaction levels with program participants. B. Evaluate program participation ratios and their trends. C. Discuss satisfaction levels with the director of personnel. D. Evaluate methods used to make employees aware of available program options.

Answer (B) is correct. Analytical information obtained by determining employee participation in optional programs is the most persuasive. Actual participation requires an affirmative act that strongly suggests a positive employee evaluation of a program.

The most conclusive information to support supplier account balances is obtained by A. Reviewing the vendor statements obtained from the accounts payable clerk. B. Obtaining confirmations of balances from the suppliers. C. Performing analytical account analysis. D. Interviewing the accounts payable manager to determine the internal controls maintained over accounts payable processing.

Answer (B) is correct. Confirmation has the advantage of obtaining information from sources external to the entity. Information from external sources provides greater assurances of reliability than information from sources within the entity.

As part of a payroll engagement, an internal auditor used an internal control questionnaire. Positive responses were given to each of the following questions by the payroll department manager: 1.Is authorization by the personnel department required to make additions to the payroll and to change pay rates? 2.Are check totals reconciled to payroll register data before checks are distributed to employees? 3.Are the functions of preparing the payroll and distributing paychecks performed by different persons? In which phase of the engagement will the internal auditor confirm these responses? A. Planning. B. Identifying, analyzing, evaluating, and recording. C. The survey. D. Preliminary preparation.

Answer (B) is correct. During the performance of the engagement, "internal auditors must identify, analyze, evaluate, and document sufficient information to achieve the engagement's objectives" (Perf. Std. 2300). This process includes confirming compliance with internal controls. An example is validating the responses to the internal control questionnaire.

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.

Answer (B) is correct. Engagement planning should include performing, as appropriate, a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite client comments and suggestions from engagement clients (PA 2210.A1-1, para. 3). Among other things, the survey should include discussions with the engagement client (e.g., interviews with operating personnel) and documenting key control activities (including identifying performance standards).

A letter to the internal auditor in response to an inquiry is an example of which type of information? A. Physical. B. Testimonial. C. Documentary. D. Analytical.

Answer (B) is correct. Information may consist of authoritative documentation, calculations by the internal auditor, internal control, interrelationships among the data, physical existence, subsequent events, subsidiary records, and testimony by the engagement client and third parties. Oral or written statements (e.g., letters to the internal auditor) derived from inquiries or interviews are testimonial information.

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.

Answer (B) is correct. Internal auditors must conduct a preliminary assessment of the risks relevant to the activity under review. Engagement objectives must reflect the results of this assessment (Impl. Std. 2210.A1). If appropriate, internal auditors conduct a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3). The survey is appropriate as a means to conduct a preliminary assessment because the examined areas are relevant. The auditors should keep in mind the potential need to corroborate the information before making any final assessment, but this does not prevent use of the survey.

Tolerating silence, asking open-ended questions, and paraphrasing are three aids to more effective A. Meetings. B. Listening. C. Interviews. D. Feedback.

Answer (B) is correct. Listening entails decoding and understanding the first message sent. The sender then becomes a listener with respect to the feedback. Hence, listening is necessary at both ends of the communication channel. Other aids to effective listening are using body language to encourage the speaker, showing appropriate emotion to signify empathy, understanding and correcting for one's biases, avoiding making premature judgments, and briefly summarizing what has been said.

When evaluating communication, the internal auditor should be aware that nonverbal communication A. Is independent of a person's cultural background. B. Is often imprecise. C. Always conveys a more truthful response than verbal communication. D. Always conveys less information than verbal communication.

Answer (B) is correct. Nonverbal communication (body language) consists of facial expressions, vocal intonations, posture, gestures, appearance, and physical distance. Thus, by its nature, nonverbal communication is much less precise than verbal communication.

Management is investigating the acquisition of an upgraded version of the existing client-server system to increase the system's capacity. Management has requested that the internal auditor perform an operational engagement to determine the efficiency of the existing computer processing resource. What is the most relevant source of information to meet the engagement objective? A. A survey of current user satisfaction. B. A review of computer job log records, listings of scheduled jobs, and computer down-time. C. A comparison of server capacity with desktop computer capacity. D. A detailed analysis of hard drive growth over the last 3 years.

Answer (B) is correct. Reviewing job logs, job schedules, and documentation of computer down-time provides an objective record of actual hardware usage. The internal auditor may also wish to consider such matters as percentage usage of the CPU by time of day, the number of online transactions per hour by time of day, average and peak response times by time of day, and average and peak batch job turnaround time by time of day.

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.

Answer (B) is correct. Risk is the possibility that an event will occur having an impact on the achievement of objectives. Risk is measured in terms of impact and likelihood (The IIA Glossary).

In advance of a preliminary survey, a chief audit executive sends a memorandum and questionnaire to the supervisors of the department to be evaluated. What is the most likely result of that procedure? A. It creates apprehension about the engagement. B. It involves the engagement client's supervisory personnel in the engagement. C. It is an uneconomical approach to obtaining information. D. It is only useful for engagements of distant locations.

Answer (B) is correct. Sending a memorandum and questionnaire to the engagement client is part of a participative approach. It helps involve the supervisors of the engagement client's department and thereby encourages a more collegial approach to the engagement. Obtaining the assistance of the engagement client in data gathering, evaluating operations, and solving problems should result in improved relations and in more effective and efficient engagements.

The most likely source of information indicating employee theft of inventory is A. Physical inspection of the condition of inventory items on hand. B. A warehouse employee's verbal charge of theft. C. Differences between an inventory count and perpetual inventory records. D. Accounts payable transactions vouched to inventory receiving reports.

Answer (B) is correct. Testimonial information may not be conclusive and should be supported by other forms of information whenever possible. However, it may provide a lead not indicated by other procedures.

While performing an engagement relating to an organization's cash controls, the internal auditor observed that cash deposits are not deposited intact daily. A comparison of a sample of cash receipts lists revealed that each cash receipt list equaled cash journal entry amounts but not daily bank deposits amounts, and cash receipts list totals equaled bank deposit totals in the long run. This information as support for the internal auditor's observations is A. Sufficient but not reliable or relevant. B. Sufficient, reliable, and relevant. C. Not sufficient, reliable, or relevant. D. Relevant but not sufficient or reliable

Answer (B) is correct. The bank deposits can be verified by examining bank statements obtained directly from the bank. Information obtained from an independent source is usually more reliable than information secured solely within the entity. Moreover, it is obviously relevant to the issue of whether cash receipts are deposited intact. A reasonable internal auditor should judge that the comparison of the organization's records with independently obtained bank statements is persuasive of the proposition that cash receipts are not deposited intact. Thus, the information is also sufficient.

Which of the following activities represents the greatest risk to a post-merger manufacturing organization and is therefore most likely to be the subject of an internal audit engagement? A. Combining imprest funds. B. Combining purchasing functions. C. Combining legal functions. D. Combining marketing functions.

Answer (B) is correct. The financial exposure in the purchasing function is ordinarily greater than in, for example, the legal and marketing functions. Also, purchasing functions ordinarily represent the greatest exposure to loss of the items listed and are therefore most likely to be evaluated. After a merger, risk is heightened because of the difficulty of combining the systems of the two organizations. Thus, the likelihood of an engagement is increased.

The internal auditor wants to understand the actual flow of data regarding cash processing. The most convincing information is obtained by A. Reviewing the systems flowchart. B. Performing a walk-through of the processing and obtaining copies of all documents used. C. Reviewing the programming flowchart for information about control procedures placed into the computer programs. D. Interviewing the chief financial officer.

Answer (B) is correct. The physical inspection of an engagement client's facilities, records, and processing steps is the most persuasive information. The internal auditor reviews actual documents and determines what personnel actually do with them.

Fact Pattern: An internal auditing team has been assigned to review "the customer satisfaction measurement system" that the Industrial Products Division implemented 2 years ago. This system consists of an annual mail survey conducted by the division's customer service office. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The survey is three pages long, and its 30 questions use a mixture of response modes (e.g., some questions are open-ended, some are multiple-choice, and others use a response scale). The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up is conducted. When the survey was last conducted, 45 of the questionnaires were not returned. Question: 98 Nonresponse bias is often a concern in conducting mail surveys. The main reason that nonresponse bias can cause difficulties in a sample such as the one taken by the customer service office is that A. The sample means and standard errors are harder to compute. B. Those who did not respond may be systematically different from those who did. C. The questionnaire is too short. D. Confidence intervals are narrower.

Answer (B) is correct. The sample will not be truly random if respondents as a group differ from nonrespondents. Thus, people may choose not to respond for reasons related to the purpose of the questionnaire.

Which of the following types of tests is the most persuasive if an internal auditor wants assurance of the existence of inventory stored in a warehouse? A. Examining the shipping documents that support recorded transfers to and from the warehouse. B. Obtaining written confirmation from management. C. Physically observing the inventory in the warehouse. D. Examining warehouse receipts contained in the engagement client's records.

Answer (C) is correct. Direct knowledge obtained through the internal auditor's physical observation is the most reliable information about the existence of the inventory.

Fact Pattern: An internal auditing team has been assigned to review "the customer satisfaction measurement system" that the Industrial Products Division implemented 2 years ago. This system consists of an annual mail survey conducted by the division's customer service office. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The survey is three pages long, and its 30 questions use a mixture of response modes (e.g., some questions are open-ended, some are multiple-choice, and others use a response scale). The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up is conducted. When the survey was last conducted, 45 of the questionnaires were not returned. Question: 100 Many questionnaires are made up of a series of different questions that use the same response categories (e.g., strongly agree, agree, neither, disagree, strongly disagree). Some designs will have different groups of respondents answer alternative versions of the questionnaire that present the questions in different orders and reverse the orientation of the endpoints of the scale (e.g., agree on the right and disagree on the left or vice versa). The purpose of such questionnaire variations is to A. Eliminate intentional misrepresentations. B. Reduce the effects of pattern response tendencies. C. Test whether respondents are reading the questionnaire. D. Make it possible to get information about more than one population parameter using the same questions.

Answer (B) is correct. The sequence and format of questions have many known effects. For example, questions should be in a logical order, and personal questions should be asked last because of the emotions they may evoke. One method for reducing these effects is to use questionnaire variations that cause these biases to average out across the sample.

When conducting interviews during the early stages of an internal auditing engagement, it is more effective to A. Ask for specific answers that can be quantified. B. Ask people about their jobs. C. Ask surprise questions about daily procedures. D. Take advantage of the fact that fear is an important part of the engagement.

Answer (B) is correct. To improve internal auditor-client cooperation, the internal auditor should, to the extent feasible, humanize the engagement process. For example, individuals feel more important being asked people-type questions, such as asking people about their jobs, rather than control-type questions.

A supportive behavior that a listener, such as an auditor or a supervisor, can use to encourage a speaker is to A. Look away from the speaker to avoid any intimidation. B. Interject a similar incident or experience. C. Stop other activity or work while the person is talking. D. Not respond verbally until the speaker stops talking.

Answer (C) is correct. An effective listener enhances the communication process by sending appropriate nonverbal signals to the speaker. Thus, even though a person can probably listen and do some routine work, a listener who wishes to convey a positive and encouraging message should stop other activities and focus complete attention on the speaker.

Which of the following constitutes sufficient audit evidence for verifying air travel reimbursement? A. Either a pre-printed ticket or a boarding pass. B. Either a printout of an electronic ticket or a boarding pass. C. Both a printout of an electronic ticket and a boarding pass. D. Either a pre-printed ticket or a printout of an electronic ticket.

Answer (C) is correct. An electronic ticket verifies payment, and a boarding pass verifies that the employee actually took the flight instead of cashing in the ticket and using a cheaper form of transportation.

A well-designed internal control questionnaire should A. Elicit "yes" or "no" responses rather than narrative responses and be organized by department. B. Be a sufficient source of data for assessment of control risk. C. Help evaluate the effectiveness of internal control. D. Be independent of the objectives of the internal auditing engagement.

Answer (C) is correct. An internal control questionnaire consists of a series of questions about the organization's controls designed to prevent or detect errors or fraud. Answers to the questions help the internal auditor to identify specific controls relevant to specific assertions and to design tests of controls to evaluate the effectiveness of their design and operation.

Checklists used to assess risk have been criticized for all of the following reasons except A. Providing a false sense of security that all relevant factors are addressed. B. Inappropriately implying equal weight to each item on the checklist. C. Decreasing the uniformity of data acquisition. D. Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist.

Answer (C) is correct. Checklists increase the uniformity of data acquisition. They ensure that a standard approach to assessing risk is taken and minimize the possibility of omitting consideration of factors that can be anticipated.

In engagement planning, internal auditors should review all relevant information. Which of the following sources of information would most likely help identify suspected violations of environmental regulations? A. Discussions with operating executives. B. Review of trade publications. C. Review of correspondence the entity has conducted with governmental agencies. D. Discussions conducted with the external auditors in coordinating engagement efforts.

Answer (C) is correct. Correspondence from regulators is likely to be a valid and relevant source of information about environmental violations. This externally generated documentation and the engagement client's responses thereto may indicate a significant loss exposure for the engagement client.

During interviews with the inventory management personnel, an internal auditor learned that salespersons often order inventory for stock without receiving the approval of the vice president of sales. Also, detail testing showed that there are no written approvals on purchase orders for replacement parts. The results of detail testing are a good example of A. Indirect information. B. Circumstantial information. C. Corroborative information. D. Subjective information.

Answer (C) is correct. Corroborative information is evidence from a different source that supplements and confirms other information. For example, oral testimony that a certain procedure was not performed may be corroborated by the absence of documentation.

The audit committee has raised a few issues that the internal audit activity will examine during an operational audit for the current year. When performing the preliminary survey, which of the following is not an appropriate technique? A. Performing interviews. B. Developing questionnaires. C. Determining the largest risk of financial statement misstatement. D. All of the answers are appropriate techniques.

Answer (C) is correct. Determining potential misstatements is not the objective of an operational audit. Additionally, a final risk analysis is developed at a later time in the audit, not during the preliminary survey. A preliminary risk assessment is appropriate during this stage.

Which of the following is an example of documentary information? A. A photograph of an engagement client's workplace. B. A letter from a former employee alleging a fraud. C. A page of the general ledger containing irregularities placed there by the perpetrator of a fraud. D. A page of the internal auditor's working papers containing the computations that demonstrate the existence of an error or irregularity.

Answer (C) is correct. Documentary information exists in some permanent form, such as checks, invoices, shipping records, receiving reports, and purchase orders. It includes both external information, e.g., shipping documents provided by carriers, and documents originating within the engagement client's organization.

In an engagement to review travel expenses, the internal auditor calculates average expenses per day traveled for all sales personnel and then examines detailed receipts for those with high averages. These procedures represent the identification of which types of information? A. Documentary and physical. B. Analytical and physical. C. Documentary and analytical. D. Physical and testimonial.

Answer (C) is correct. Documentary information includes accounting records, outgoing correspondence, receiving reports, etc. Analytical information results from analysis and verification and includes computations and comparisons. The travel expense receipts are documentary information. The calculations of average travel expenses are analytical information.

To elicit views on broad organizational risks and objectives from the board and senior management, an internal auditor should A. List specific risk factors for consideration. B. Develop spreadsheets with quantitative data relevant to the industry. C. Use a nondirective approach to initiating discussion of mitigating risks. D. Ask each member of management about specific risks listed in an industry reference.

Answer (C) is correct. Effective interview planning includes formulating basic questions. An internal auditor may use a directive approach by asking narrowly focused questions. A preferable alternative given the interviewees and the subject matter is a nondirective approach using broad questions that are more likely to provide clarification and yield unexpected observations.

A set of engagement working papers contained a copy of a document providing information that an expensive item that had been special-ordered was actually on hand on a particular date. The most likely source of this information is a printout from a computerized A. Purchases journal. B. Cash payments journal. C. Perpetual inventory file. D. Receiving report file.

Answer (C) is correct. In a perpetual inventory system, purchases are directly recorded in the inventory account, and cost of goods sold is determined as the goods are sold. A computerized perpetual inventory file has a record of each debit or credit transaction with its date, amount, etc., and the inventory balance for any given date could therefore be determined.

The most reliable information an internal auditor can assess when determining an organization's legal title to inventories is A. Monthly gross profit and inventory levels. B. Purchase orders. C. Paid vendor invoices. D. Records of inventories stored at off-site locations.

Answer (C) is correct. Mere possession of inventory does not signify that another party does not have a claim to it. For example, the inventory may be held on consignment. Payment of vendor invoices is the culmination of the purchases-payables cycle. The paid invoice evidences the purchaser's ownership of the inventory.

An internal auditor must weigh the cost of an engagement procedure against the persuasiveness of the evidence to be gathered. Observation is one engagement procedure that involves cost-benefit trade-offs. Which of the following statements regarding observation as an engagement technique is (are) true? 1.Observation is limited because individuals may react differently when being observed. 2.When testing financial statement balances, observation is more persuasive for the completeness assertion than it is for the existence assertion. 3.Observation is effective in providing information about how the organization's processes differ from those specified by written policies. A. 1 only. B. 2 only. C. 1 and 3 only. D. 1, 2, and 3.

Answer (C) is correct. Observation consists of watching the physical activities of the employees in the organization to see how they perform their duties. The internal auditor can determine whether written policies have been put into practice. Observation is limited because employees who know they are being observed may behave differently while being observed. Moreover, observation is more persuasive for the existence or occurrence assertion (whether assets or liabilities exist and whether transactions have occurred) than for the completeness assertion (whether all transactions that should be reported are reported).

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.

Answer (C) is correct. Payment vouchers for merchandise should be supported by (1) a properly authorized purchase requisition, (2) a purchase order executing the transaction, (3) a receiving report indicating all goods ordered have been received in good condition, and (4) a vendor invoice confirming the amount owed. Lack of such support for cash payments suggests a high risk of fraud.

A questionnaire consists of a series of questions relating to controls normally required to prevent or detect errors and fraud that may occur for each type of transaction. Which of the following is not an advantage of a questionnaire? A. A questionnaire provides a framework that minimizes the possibility of overlooking aspects of internal control. B. A questionnaire can be easily completed. C. A questionnaire is flexible in design and application. D. The completed questionnaire provides documentation that the internal auditor became familiar with internal control.

Answer (C) is correct. Questionnaires are designed to be inflexible in that the responses to certain questions are expected. Questionnaires are not easily adapted to unique situations. The approach that offers the most flexibility is a narrative memorandum describing internal control. The next most flexible approach is a flowchart.

Auditors must be effective listeners, especially when asking complex questions. To improve their listening, auditors should take care to do all the following except A. Stop talking. It is very difficult to listen and talk at the same time. B. Be patient. Allow the speaker ample time to respond. C. Avoid all questions until the speaker has concluded. D. Put the speaker at ease. A nervous speaker will be difficult to understand.

Answer (C) is correct. Questions asked at appropriate times during the interview can indicate that the interviewer is listening attentively. When done correctly, this also allows the interviewer to probe deeper when additional clarification is needed.

An internal auditor at a savings and loan association concludes that a secured real estate loan is collectible. Which of the following engagement procedures provides the most persuasive information about the loan's collectibility? A. Confirming the loan balance with the borrower. B. Reviewing the loan file for proper authorization by the credit committee. C. Examining documentation of a recent, independent appraisal of the real estate. D. Examining the loan application for appropriate borrowers' signatures.

Answer (C) is correct. Real estate appraisals are based on estimated resale value or future cash flows. A recent, independent appraisal provides information about the borrower's ability to repay the loan. Such an appraisal tends to be reasonably reliable because it is timely and derives from an expert source independent of the engagement client.

In an operational audit, the internal auditors discovered an increase in absenteeism. Accordingly, the chief audit executive decided to identify information about workforce morale. To achieve this engagement objective, the internal auditors must understand that A. Morale cannot be reliably analyzed. B. Only outcomes that are directly quantifiable can be reliably analyzed. C. Reliable information may be obtained about morale factors such as job satisfaction. D. Morale is always proportional to compensation.

Answer (C) is correct. Reliable information is the best information attainable through the use of appropriate engagement techniques (Inter. Std. 2310). Such information need not consist only of quantifiable outcomes, such as rates of workforce turnover and absenteeism. Reliable information may be identified about such difficult-to-measure things as attitudes toward supervisors, other workers, and compensation. For example, surveys may produce statistically valid information about job satisfaction.

The internal auditor is concerned with the overall valuation of inventory. Rank the following sources of engagement information from most persuasive to least persuasive in addressing the assertion as to the valuation of inventory.1.Calculate inventory turnover by individual product. 2.Assess the net realizability of all inventory items with a turnover ratio of 2.0 or less by interviewing the marketing manager as to the marketability of the product. 3.Calculate the net realizable value (NRV) of all inventory products (using software to calculate NRV based on the last selling price) and compare NRV with cost. 4.Take a statistical sample of inventory and examine the latest purchase documents (invoices and receiving slips) to calculate inventory cost. A. 1, 2, 3, 4. B. 1, 4, 2, 3. C. 4, 1, 3, 2. D. 2, 3, 4, 1.

Answer (C) is correct. Sampling inventory and examining purchase documents are procedures that provide the most persuasive information in establishing cost, which is the basis of determining the valuation of inventory. They rely on the internal auditor's own observations and on inspection of documents from external sources. The next most persuasive information is derived from the internal auditor's analytical procedures. A change in inventory turnover or a very low level of inventory turnover indicates potential obsolescence of inventory and the need for the internal auditor to perform additional procedures, e.g., examining subsequent sales to determine whether inventory should be written down. Calculation of net realizable value may indicate a valuation problem. The difficulty with this procedure is that the last sales price may not be appropriate. The marketing manager's opinion about marketability is the least persuasive information. It is a form of testimonial information from an individual who may have a vested interest in persuading the internal auditor that the goods will be sold at their normal prices in the normal course of business. In addition, the arbitrary cutoff value of 2.0 may not be justified. The cutoff should be based on the nature of the client's inventory.

To determine the sufficiency of information regarding interpretation of a contract, an internal auditor uses A. The best obtainable information. B. Subjective judgments. C. Objective evaluations. D. Logical relationships between information and issues.

Answer (C) is correct. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor (Inter. Std. 2310). Because the internal auditor must avoid distortion by personal feelings, prejudices, or interpretations, this judgment must be objective.

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.

Answer (C) is correct. The apparently constructive action by the engagement client may be a delaying tactic intended to conceal more serious problems after the internal auditor has identified significant engagement issues. Moreover, no basis is given for not pursuing the engagement. The internal auditor always considers the risk associated with the potential observations as a basis for determining the need for more immediate attention.

In testing the write-off of a deteriorated piece of equipment, the best information about the condition of the equipment is A. The equipment manager's statement regarding condition. B. Accounting records showing maintenance and repair costs. C. A physical inspection of the actual piece of equipment. D. The production department's equipment downtime report.

Answer (C) is correct. The most reliable form of engagement information is that obtained through the internal auditor's direct experience. Thus, a physical inspection provides the best information about the current condition of equipment.

During an investigation of unexplained inventory shrinkage, an internal auditor is testing inventory additions as recorded in the perpetual inventory records. Because of internal control weaknesses, the information recorded on receiving reports may not be reliable. Under these circumstances, which of the following documents provides the best information about additions to inventory? A. Purchase orders. B. Purchase requisitions. C. Vendors' invoices. D. Vendors' statements.

Answer (C) is correct. The vendors' invoice confirms that the proper amount due has been recorded. A vendor's invoices provide the best source of information about additions to inventory. Vendors' invoices provide an external source of information regarding shipments to the engagement client. These amounts should be equal to quantities added to inventory (after possible adjustment for items returned to the vendor because of damage, etc.).

To verify the proper value of costs charged to real property records for improvements to the property, the best source of information is A. Inspection by the internal auditor of real property improvements. B. A letter signed by the real property manager asserting the propriety of costs incurred. C. Original invoices supporting entries into the accounting records. D. Comparison of billed amounts with contract estimates.

Answer (C) is correct. To verify real property costs, the best method of obtaining engagement information is to examine records. Records originating outside the engagement client, such as original invoices, are much more reliable than internal documents or engagement client testimony. Also, these invoices support actual accounting record entries.

One objective of an internal auditing engagement involving the receiving function is to determine whether receiving clerks independently count incoming supplies before completing the quantity received section of the receiving report. Which of the following is the most persuasive information supporting the assertion that the counts are made? A. The receiving section supervisor's assurance, based on personal observation, that the counts are made. B. A receiving clerk's initials on all receiving reports attesting that the count was made. C. Assurance, from the warehouse supervisor, that the accuracy of the perpetual inventory is the result of the reliability of the entries in the quantity received section. D. Periodic observations by the internal auditor over the course of the engagement.

Answer (D) is correct. An internal auditor's presumption about the validity of information is that the internal auditor's direct personal knowledge, obtained through physical examination, observation, computation, and inspection is more persuasive than information obtained indirectly.

Which of the following statements describes an internal control questionnaire? It A. Provides detailed evidence regarding the substance of the control system. B. Takes less of the engagement client's time to complete than other control evaluation devices. C. Requires that the internal auditor be in attendance to properly administer it. D. Provides indirect evidence that might need corroboration.

Answer (D) is correct. An internal control questionnaire consists of a series of questions about the controls designed to prevent or detect errors or irregularities. Answers to the questions help the internal auditor to identify specific internal control policies and procedures relevant to specific assertions and to design tests of controls to evaluate the effectiveness of their design and operation. The questionnaire provides a framework to assure that specific concerns are not overlooked, but it is not a sufficient means of understanding the entire system. Thus, the evidence obtained is indirect and requires corroboration by means of observation, interviews, flowcharting, examination of documents, etc.

Which of the following is not an advantage of sending an internal control questionnaire prior to an audit engagement? A. The engagement client can use the questionnaire for self-evaluation prior to the auditor's visit. B. The questionnaire will help the engagement client understand the scope of the engagement. C. Preparing the questionnaire will help the auditor plan the scope of the engagement and organize the information to be gathered. D. The engagement client will respond only to the questions asked, without volunteering additional information.

Answer (D) is correct. An internal control questionnaire consists of a series of questions about the organization's controls designed to prevent or detect errors or fraud. Answers to the questions help the internal auditor to identify specific controls relevant to specific assertions and to design tests of controls to evaluate the effectiveness of their design and operation. However, the information obtained is limited to that elicited by the questions asked.

During an operational engagement, an internal auditor compares the inventory turnover rate of a subsidiary with established industry standards to A. Evaluate the accuracy of the subsidiary's internal financial reports. B. Test the subsidiary's controls designed to safeguard assets. C. Determine if the subsidiary is complying with organizational procedures regarding inventory levels. D. Assess the performance of the subsidiary and indicate where additional engagement work may be needed.

Answer (D) is correct. Analytical procedures are often used during the preliminary survey to identify potential areas for additional engagement work.

As part of an engagement to evaluate safety management programs, an internal auditor interviews the individual responsible for writing, issuing, and maintaining safety procedures. While the internal auditor's primary interest is to identify the controls ensuring that procedures are kept current, the individual has a tremendous amount of information and seems intent on telling the internal auditor most of it. What might the internal auditor do to guard against missing what is important? A. Write down everything the individual says. If the internal auditor gets behind, ask for a pause and catch up. After the interview, the internal auditor can sift through the notes and be confident of finding the key information. B. Tape record the interview and later extract the relevant information. C. Do not sort through extraneous information. Revisit the topic with the individual's supervisor and obtain any needed information at that time. D. During the conversation, make an effort to anticipate the approach of a point of critical interest.

Answer (D) is correct. Anticipation is one approach the internal auditor can use to maintain focus during a far-ranging discussion. It assumes that the internal auditor has done some homework and is prepared to listen intelligently. Active listening permits anticipation because the mind can process information more rapidly than most people speak. Thus, the listener has time to analyze the information and determine what is most important.

Which of the following evidence is the most reliable? A. Evidence corroborated by engagement client management. B. Hearsay from an independent source. C. Expert appraisal by audit client engineer. D. Original, signed contract corroborated by a bank's copies of checks.

Answer (D) is correct. Evidence is more reliable if it is (1) obtained from sources independent of the engagement client, such as confirmations of receivables or expert appraisals that are timely and made by a source with no connection to the auditee; (2) corroborated by other information; (3) direct, such as the internal auditor's personal observation, rather than indirect, such as hearsay; and (4) an original document, not a copy. The original copy of the contract with the contracted price, corroborated by a bank's (independent party's) copy of the payment checks, is more reliable than the other choices.

The most reliable forms of documentary evidence are those documents that are A. Prenumbered. B. Internally generated. C. Easily duplicated. D. Authorized by a responsible official.

Answer (D) is correct. Externally generated documents are deemed to be more reliable than those produced by the auditee. However, the evidentiary value of the latter is enhanced if they are subject to effective control. Accordingly, authorization by an appropriate party lends credibility to a document because it increases the probability that the underlying transaction is valid.

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.

Answer (D) is correct. If appropriate, internal auditors conduct a survey to (1) become familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3).

The most persuasive information regarding the asset value of newly acquired computers is A. Inquiry of management. B. Observation of engagement client's procedures. C. Physical examination. D. Documentation prepared externally.

Answer (D) is correct. Information is considered more or less persuasive depending on how much control the engagement client has over it. The most persuasive information relevant to the valuation assertion is documentation that is prepared externally.

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.

Answer (D) is correct. Internal auditors conduct a survey to (1) become familiar with activities, risks, and controls to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients (PA 2210.A1-1, para. 3). A survey is not sufficient for evaluating the adequacy and effectiveness of controls. Evaluation requires testing.

An internal auditor has set an engagement objective of determining whether all cash receipts are deposited intact daily. To satisfy this objective, the internal auditor interviewed the controller who gave assurances that all cash receipts are deposited as soon as is reasonably possible. As information that can be used to satisfy the stated engagement objective, the controller's assurances are A. Sufficient but not reliable or relevant. B. Sufficient, reliable, and relevant. C. Not sufficient, reliable, or relevant. D. Relevant but not sufficient or reliable.

Answer (D) is correct. Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve engagement objectives (Perf. Std. 2310). Relevant information supports engagement observations and recommendations and is consistent with the objectives for the engagement. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor. Reliable information is the best information attainable through the use of appropriate procedures (Inter. Std. 2310). The controller's assurance is relevant because it pertains to the cash receipts. However, it lacks reliability because it was not obtained from an independent source. Furthermore, the information is not sufficient because, by itself, it does not provide a reasonable basis for a conclusion.

An auditor is considering developing a questionnaire to research employee attitudes toward control procedures. Which of the following is a criterion that should not be considered in designing the questionnaire? A. Questions must be worded to ensure a valid interpretation by the respondents. B. Questions must be reliably worded so that they measure what was intended to be measured. C. The questionnaire should be short to increase the response rate. D. Questions should be worded such that a "No" answer indicates a problem.

Answer (D) is correct. Many types of questions can be used. Questions can be multiple-choice, checklists, fill-in-the-blank, essay, Likert scales, items (options indicating degrees of agreement or disagreement), etc.

Fact Pattern: An internal auditing team has been assigned to review "the customer satisfaction measurement system" that the Industrial Products Division implemented 2 years ago. This system consists of an annual mail survey conducted by the division's customer service office. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The survey is three pages long, and its 30 questions use a mixture of response modes (e.g., some questions are open-ended, some are multiple-choice, and others use a response scale). The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up is conducted. When the survey was last conducted, 45 of the questionnaires were not returned. Question: 99 Which of the following is not an advantage of face-to-face interviews over mail surveys? A. The response rate is typically higher. B. Interviewers can increase a respondent's comprehension of questions. C. Survey designers can use a wider variety of types of questions. D. They are less expensive because mailing costs are avoided.

Answer (D) is correct. One of the principal advantages of mail surveys is their cost efficiency. Mailing costs are lower than the costs of telephone interviews and still lower than the costs of face-to-face interviews.

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.

Answer (D) is correct. One purpose of the risk assessment is to highlight areas that should be addressed during the engagement. A potentially major control deficiency is a significant area warranting special emphasis and should be noted to ensure the needed coverage in the engagement work program.

When an internal auditor is interviewing to gain information, (s)he will not be able to remember everything that was said in the interview. The most effective way to record interview information for later use is to A. Write notes quickly, trying to write down everything in detail as it is said; then highlight important points after the meeting. B. Electronically record the interview to capture everything that everyone says; then type everything said into a computer for documentation. C. Hire a professional secretary to take notes, allowing complete concentration on the interview; then delete unimportant points after the meeting. D. Organize notes around topics on the interview plan and note responses in the appropriate area, reviewing the notes after the meeting to make additions.

Answer (D) is correct. Preparing for the interview is crucial. The internal auditor should have learned as much as possible about the engagement client, determined the engagement objectives, and prepared questions. During the interview, the internal auditor should record notes on a split page, which lists the questions on one side and contains space for responses on the other. After the interview, the internal auditor should expand on the notes while the material is still fresh.

Engagement information is usually considered relevant when it is A. Derived through valid statistical sampling. B. Objective and unbiased. C. Factual, adequate, and convincing. D. Consistent with the engagement objectives.

Answer (D) is correct. Relevant information supports engagement observations and recommendations and is consistent with the objectives for the engagement (Inter. Std. 2310).

Reliable information is A. Supportive of the engagement observations and consistent with the engagement objectives. B. Helpful in assisting the organization in meeting prescribed goals. C. Factual, adequate, and convincing so that a prudent person would reach the same conclusion as the internal auditor. D. Competent and the best attainable through the use of appropriate engagement techniques.

Answer (D) is correct. Reliable information is the best attainable information through the use of appropriate engagement techniques (Inter. Std. 2310). An original document is the prime example of such information.

In deciding whether recorded sales are valid, which of the following items of information is most reliable? A. A copy of the customer's purchase order. B. A memorandum from the director of the shipping department stating that another employee verified the personal delivery of the merchandise to the customer. C. Accounts receivable records showing cash collections from the customer. D. The shipping document, independent bill of lading, and the invoice for the merchandise.

Answer (D) is correct. Reliable information is the best information attainable through the use of appropriate engagement techniques (Inter. Std. 2310). Information is ordinarily more reliable if it is obtained from a source independent of the client. The shipping document and invoice provide direct information that the sale was made, and the bill of lading is externally generated documentation that the merchandise was shipped.

Which of the following is an essential factor in evaluating the sufficiency of information? The information must A. Be well documented and cross-referenced in the working papers. B. Be based on references that are considered competent. C. Bear a direct relationship to the observation and include all of the elements of an observation. D. Be convincing enough for a prudent person to reach the same decision.

Answer (D) is correct. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor (Inter. Std. 2310).

An internal auditor is evaluating the advertising function. The organization has engaged a medium-sized local advertising agency to place advertising in magazine publications. As part of the review of the engagement working papers, the internal auditing supervisor is evaluating the information collected. The internal auditor reviewed the language in the advertising for its legality and compliance with fair trade regulations by interviewing the organization's advertising manager, the product marketing director (who may not have been objective), and five of the organization's largest customers (who may not have been knowledgeable). The supervisor can justifiably conclude that the information is A. Reliable. B. Irrelevant. C. Conclusive. D. Insufficient.

Answer (D) is correct. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor (Inter. Std. 2310). Sufficiency is based on the internal auditor's professional judgment as to the amounts, kinds, and persuasiveness of information required. Testimony from individuals who may be neither objective nor knowledgeable is unlikely to be sufficient.

The internal auditors of a financial institution are performing an engagement to evaluate the institution's investing and lending activities. During the last year, the institution has adopted new policies and procedures for monitoring investments and the loan portfolio. The internal auditors know that the organization has invested in new types of financial instruments during the year and is heavily involved in the use of financial derivatives to appropriately hedge risks. If the internal auditors were to conduct a preliminary review, which of the following procedures should be performed? A. Review reports of engagements performed by regulatory and external auditors since the last internal audit engagement. B. Interview management to identify changes made in policies regarding investments or loans. C. Review minutes of board meetings to identify changes in policies affecting investments and loans. D. All of the answers are correct.

Answer (D) is correct. Typical components of a preliminary survey include, among other things, interviews and reviews of prior audit reports and other relevant documentation.

Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back to line positions. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and clearing comments. The CAE asks the team to indicate the informational criteria that are violated. Question: 48 The organization's inventories are under the administration of three production managers. The internal auditors perform a standard limited test of finished goods inventory balances every year. During this year's engagement concerning inventories, the internal auditors noted finished goods inventories were abnormally high, sales were consistent with prior years, and returns and allowances appeared normal. The internal auditors performed the usual random sample recount of several finished goods inventory cards without discrepancy and then extended the testing to include 10 raw materials and 10 work-in-process cards, noting no exceptions. The following statement was included in the engagement working papers: "Our standard test of finished goods inventories revealed no exceptions to the inventory count. We extended our tests this year to include both raw materials and work-in-process without exception. At the time of our engagement, the supervising inventory managers were not available; however, the division secretary indicated that performance standards were on file. It appears that there is adequate awareness and understanding of the performance standards." Which of the following informational criteria is not violated? A. Sufficiency. B. Reliability. C. Relevance. D. All criteria are violated.

Answer (D) is correct. The conclusion violates the criteria of sufficiency, reliability, and relevance. The sufficiency criterion is violated because recounting several inventory items is insufficient given the abnormally high inventory. The reliability criterion is violated because the performance standard information is not the best attainable. The internal auditors should interview inventory managers to determine their awareness and understanding of the performance standards. The relevance criterion is violated because the information related to raw materials and work-in-process does not pertain to the finished goods inventory.

Answer (D) is correct. The identified information is sufficient (factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions), reliable (the best attainable through the use of appropriate engagement techniques), and relevant (supports engagement observations and recommendations and is consistent with the objectives for the engagement) (Inter. Std. 2310).

An internal auditor is interviewing an employee. While listening to the interviewee, the internal auditor should A. Prepare a response to the interviewee. B. Take mental notes on the speaker's nonverbal communication because it is more important than what is being said. C. Make sure all details, as well as the main ideas of the interviewee, are remembered. D. Integrate the incoming information from the interviewee with information that is already known.

Answer (D) is correct. The mind can process information more rapidly than most people speak. Thus, the listener has time to analyze the information and determine what is most important and how it relates to known information. This process of active listening helps the interviewer maintain focus.

Answer (D) is correct. The observations made about the vehicle maintenance department contain sufficient information (factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions) that is reliable (the best attainable through the use of appropriate engagement techniques) and relevant (supports engagement observations and recommendations and is consistent with the objectives for the engagement) (Inter. Std. 2310).

An internal auditor's objective is to determine the cause of inventory shortages shown by the physical inventories taken by an independent service organization that used some engagement client personnel. The internal auditor addresses this objective by reviewing the count sheets, inventory printouts, and memos from the last inventory. The source of information and the sufficiency of this information are A. Internal and not sufficient. B. External and sufficient. C. Both external and internal and sufficient. D. Both external and internal and not sufficient.

Answer (D) is correct. The organization employs an external inventory service and internal personnel for data entry and balancing, so the sources of information are both external and internal. However, the information is not sufficient to determine the cause of the shortages. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the internal auditor (Inter. Std. 2310). The documents reviewed will not reveal the cause of the shortages.

Which of the following are least valuable in predicting the amount of uncollectible accounts for an organization? A. Published economic indices indicating a general business downturn. B. Dollar amounts of accounts actually written off by the organization for each of the past 6 months. C. Total monthly sales for each of the past 6 months. D. Written forecasts from the credit manager regarding expected future cash collections.

Answer (D) is correct. Written forecasts from the credit manager may be relevant and useful, but they cannot be considered sufficient or reliable. Opinion evidence does not have as much reliability as factual evidence. In addition, the source of the evidence may have a bias, which should be considered by the internal auditor when evaluating the reliability of this data.

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