Exam 2- Quizzes

C Affects the level of detection risk that the auditor may accept. Inherent risk and control risk exist independently of the engagement and must be assessed by the auditor, who then sets detection risk in response.

An auditor assesses control risk because it A Provides assurance that the auditor's materiality levels are appropriate. B Indicates to the auditor where inherent risk may be the greatest. C Affects the level of detection risk that the auditor may accept. D Is relevant to the auditor's understanding of the control environment.

A Ask the questions in a slightly different format and in a different sequence. An auditor cannot be an effective interviewer unless (s)he is an effective listener. However, effective listening requires remaining attentive. Attentiveness is promoted by use of active listening techniques. For example, changing the wording of the questions and the sequence in which they are asked may eliminate some of the tedium associated with a series of interviews. The auditor may also be able to refine the technique during the process.

As part of the test of the effectiveness of a disaster recovery plan, the auditor plans to interview five employees from each of five different departments (25 employees in all). After the first few interviews, what would be the best way for the auditor to remain attentive during the remaining interviews? A Ask the questions in a slightly different format and in a different sequence. B Make up completely different questions to stay interested. C Interview the remaining employees in groups of four or five. D Have the rest of the employees write down their responses.

C Extent of engagement procedures performed. Detection risk is the only one of the three components of audit risk that is subject to the auditor's direct control. The greater the assessed levels of control risk and/or inherent risk, the lower the acceptable level of detection risk. Hence, the relationship between performing engagement procedures and detection risk is inverse.

The acceptable level of detection risk is inversely related to the A Preliminary judgment about materiality levels. B Risk of failing to discover material misstatements. C Extent of engagement procedures performed. D Risk of misapplying auditing procedures.

A Chief audit executive or designee. The chief audit executive must communicate results to the appropriate parties (Perf. Std. 2440).

The person responsible for engagement communication distribution should be the A Chief audit executive or designee. B Board. C Supervisor of the engagement being performed. D Vice president responsible for the activity under review.

B Preliminary survey. Planning includes performing, if appropriate, a survey to (1) become familiar with the activities, risks, and controls to be reviewed to identify areas for engagement emphasis and (2) invite comments and suggestions from engagement clients. Writing the work program is the next step.

To determine the extent of testing to be performed during field work, preparing the engagement work program should be the next step after completing the A Survey of company policies. B Preliminary survey. C Time budgets for specific audit tasks. D Assignment of audit staff.

B Confirmation. Confirmation is used to verify the physical existence of an item. Obsolescence is a question of value, not physical existence.

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

A The proficiency of the internal auditors and the complexity of the engagement. The CAE is responsible for providing appropriate engagement supervision. The extent of supervision required will depend on the proficiency and experience of the internal auditors and the complexity of the engagement (Inter. Std. 2340).

Which of the following best describes what determines the extent of supervision required for a particular internal audit engagement? A The proficiency of the internal auditors and the complexity of the engagement. B Whether the engagement involves possible fraud on the part of management. C Whether the engagement involves possible violations of laws or governmental regulations. D The internal audit activity's prior experience in dealing with the particular engagement client.

A 3 only. When ranking potential engagements that are competing for limited internal audit resources, a decision criterion based on the degree of adverse exposure to the organization is preferable.

Which of the following comments is (are) true regarding the assessment of risk associated with two projects that are competing for limited internal audit resources? 1. Activities that are requested by the board always should be considered higher risk than those requested by management. 2. Activities with higher financial budgets always should be considered higher risk than those with lower financial budgets. 3. Risk always should be measured by the potential monetary or other adverse exposure to the organization. A 3 only. B 2 only. C 1 and 3 only. D 1 only.

D Test the payroll account bank reconciliation by tracing outstanding checks to the payroll register. A payroll account proof tests the completeness assertion. However, it is irrelevant to the validity of the transactions.

Which of the following engagement procedures will provide the least relevant information for determining that payroll payments were made to bona fide employees? A Test for segregation of the authorization for payment from the hire/fire authorization. B Reconcile time cards in use to employees on the job. C Examine canceled checks for proper endorsement and compare to personnel records. D Test the payroll account bank reconciliation by tracing outstanding checks to the payroll register.

C Meet with both auditors after the meeting to resolve the conflict and the inappropriate behavior. Effective interpersonal relationships and organizational change are closely tied to conflict management. Meeting with both auditors allows them to discuss and resolve their differences under the supervision of the audit manager. Moreover, part of the CAE's responsibility for supervision is to adopt suitable policies and procedures for resolving professional differences.

During a meeting of an internal audit project team, two members of the team disagree, and one accuses the other of trying to advance personal interests over the interests of the audit. The audit manager should A Discipline both auditors after the meeting for their lack of professional conduct. B Stop the meeting and refer the matter to the entire team for discussion. C Meet with both auditors after the meeting to resolve the conflict and the inappropriate behavior. D Continue the meeting but speak to the accusing auditor later regarding the inappropriate conduct.

B Review a sample of expense reports for proper approval. The supervisor has described a control intended to prevent payment of unauthorized travel expenses. The internal auditor's best course of action is to test the control to determine whether it is actually in place and operating effectively. The most reliable information for this purpose is to inspect a sample of the relevant documents. Engagement information is obtained through observation, inquiry, and examination of records. When an internal auditor becomes aware of a policy or procedure through inquiry of employees or reading a written plan, it is best for the internal auditor then to examine records to determine whether the policy or procedure is actually followed in practice.

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

B Seek agreement with management as to the criteria to be used to measure operating performance. Adequate criteria are needed to evaluate controls. Internal auditors must ascertain the extent to which management has established adequate criteria to determine whether objectives and goals have been accomplished. If adequate, internal auditors must use such criteria in their evaluation. If inadequate, internal auditors must identify appropriate evaluation criteria through discussion with management and/or the board (Impl. Std. 2210.A3).

If an engagement client's operating standards are vague and thus subject to interpretation, the internal auditor must A Interpret the standards in their strictest sense because standards are otherwise only minimum measures of acceptance. B Seek agreement with management as to the criteria to be used to measure operating performance. C Omit any comments on standards and the engagement client's performance in relationship to those standards because such an analysis would be meaningless. D Determine best practices in this area and use them as the standard.

C Complied with existing fund requirements and performed specified activities. A fund is a fiscal and accounting organization with a self-balancing set of accounts recording cash and other financial resources. It also records all related liabilities and residual equities and balances and changes in them. These items are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. Thus, the primary engagement objective is to determine whether the organization complied with the existing fund requirements and performed the specified activities.

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

B 1, 2, and 3. The knowledge, skills, and other competencies of the internal audit staff must be considered when selecting internal auditors for the engagement. Thus, in an engagement to be performed in a foreign country, the language skills of the internal auditor and knowledge of local customs must be considered. For example, gender and ethnic issues may be important in some countries because of religious restrictions and incompatibilities. As always, experience levels are relevant in making staff assignments.

The chief audit executive of a multinational organization must form an engagement team to examine a newly acquired subsidiary in another country. Consideration should be given to which of the following factors? 1. Local customs 2. Language skills of the internal auditor 3. Experience of the internal auditor 4. Monetary exchange rate A 1 and 3. B 1, 2, and 3. C 2, 3, and 4. D 1 and 2

D Should follow up to ascertain that appropriate action is taken on engagement recommendations. In an assurance engagement, the CAE must establish a follow-up process to monitor and ensure that management actions have been effectively implemented or that senior management has accepted the risk of not taking action (Impl. Std. 2500.A1).

Recommendations in engagement communications may or may not actually be implemented. Which of the following best describes internal auditing's role in follow-up on engagement recommendations? Internal auditing A Should be charged with the responsibility for implementing engagement recommendations. B Has no role; follow-up is management's responsibility. C Should request that independent auditors follow up on engagement recommendations. D Should follow up to ascertain that appropriate action is taken on engagement recommendations.

A 1, 2, and 3. Supervision is a process that begins with planning and continues throughout the engagement. It includes providing opportunities for developing internal auditors' knowledge, skills, and other competencies. Appropriate evidence of supervision should be documented and retained. The extent of supervision required depends on the proficiency and experience of internal auditors and the complexity of the engagement (Inter. Std. 2340).

Supervision of the work of internal auditors should be carried out continually. Which of the following statements regarding supervision is (are) true? 1. "Continually" indicates that supervision should be performed throughout the engagement. 2. Supervision also should be extended to development of the competencies of internal auditors. 3. The extent of supervision needs to be documented. A 1, 2, and 3. B 1 and 3 only. C 2 only. D 1 only.

D Consider factors such as risk and effectiveness of risk management processes. The internal audit activity's plan of engagements must be based on a documented risk assessment, undertaken at least annually (Impl. Std. 2010.A1).

The chief audit executive of an organization has developed a plan that includes a detailed schedule of engagements to be performed during the coming year, an estimate of the time required for each engagement, and the approximate starting date of each engagement. The scheduling of specific engagements was based upon the time elapsed since the last engagement in each area. The plan is inadequate because it fails to A State whether all internal audit activity resources had been committed to the plan. B Cite authoritative support for such a plan. C Seek senior management approval of the plan. D Consider factors such as risk and effectiveness of risk management processes.

D All of the answers represent an appropriate standard or criterion to support engagement observations, conclusions, and recommendations. Acceptable industry standards, standards developed by professions or associations, standards in law and government regulations, and other sound business practices are usually deemed to be appropriate criteria.

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

C Conditions that demand immediate action. interim reports are oral or written and are used to communicate information that requires immediate attention. Therefore, the most appropriate use of an oral engagement communication would be in an interim report to communicate conditions that demand immediate action. The use of interim reports does not diminish or eliminate the need for a final report.

The most appropriate use of an oral engagement communication is to communicate A Matters that are not material. B Sensitive matters to management when the chief audit executive does not want to commit them to writing. C Conditions that demand immediate action. D Complex matters to operating management when the possibility exists that misunderstanding would result from reducing them to writing.

B Any limitations imposed. Because limitations set the boundaries of the engagement, they must be identified in the scope section.

The scope section of an internal auditor's final engagement communication should identify A Any unresolved differences with engagement clients. B Any limitations imposed. C The engagement techniques used. D The sampling methodology employed.

D A systematic process for assessing and integrating professional judgment about probable adverse conditions. The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity consistent with the organization's goals (Perf. Std. 2010).

A chief audit executive most likely uses risk assessment for audit planning because it provides A A list of auditable activities in the organization. B The probability that an event or action may adversely affect the organization. C A listing of potentially adverse effects on the organization. D A systematic process for assessing and integrating professional judgment about probable adverse conditions.

B An opinion will improve communications with the readers of the communication. Final communication of an assurance engagement's results should, if appropriate, contain the internal auditor's opinion (Impl. Std. 2410.A1). Improving communications with the reader satisfies the appropriateness criterion.

A final communication issued by an internal auditor following an assurance engagement should contain an expression of opinion when A The area of the engagement is the financial statements. B An opinion will improve communications with the readers of the communication. C The internal auditors' work is to be used by external auditors. D A full-scope engagement has been conducted in an area.

B Assess the reasons that senior management decided to accept the risk and inform the board of senior management's decision. When the chief audit executive believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the chief audit executive must discuss the matter with senior management. If the decision regarding residual risk is not resolved, the chief audit executive must report the matter to the board for resolution (Perf. Std. 2600).

A follow-up review found that a significant internal control weakness had not been corrected. The chief audit executive (CAE) discussed this matter with senior management and was informed of management's willingness to accept the risk. The CAE should A Inform senior management that the weakness must be corrected and schedule another follow-up review. B Assess the reasons that senior management decided to accept the risk and inform the board of senior management's decision. C Do nothing further because management is responsible for deciding the appropriate action to be taken in response to reported engagement observations and recommendations. D Initiate a fraud investigation to determine if employees had taken advantage of the internal control weakness.

D Match the quantity of gasoline disbursed according to disbursement forms with an independent reading of quantity disbursed at the pump. Physical information is best obtained through direct observation or inspection by the internal auditor. Because the gasoline disbursement forms are prenumbered, the internal auditor is able to match them with the independent reading of quantity disbursed at the pump to test the completeness of disbursement records.

A large manufacturer has a transportation division that supplies gasoline for the organization's vehicles. Gasoline is dispensed by an attendant who records the amount issued on a serially prenumbered gasoline disbursement form, which is then given to the accounting department for proper recording. When the quantity of gasoline falls to a certain level, the service station attendant prepares a purchase requisition and sends it to the purchasing department where a purchase order is prepared and recorded in a gasoline purchases journal. Which of the following engagement procedures best determines whether gasoline disbursements are fully recorded? A Perform analytical procedures comparing this period's gasoline consumption with prior periods. B Compare the gasoline purchase requisitions with the gasoline disbursement records. C Select a number of gasoline purchases from the gasoline purchases journal and compare them with their corresponding purchase orders. Ascertain that the purchases are serially prenumbered, are matched with purchase requisitions, and are authorized by someone independent of employees of the service station. D Match the quantity of gasoline disbursed according to disbursement forms with an independent reading of quantity disbursed at the pump.

D 1 and 2 only Both the presence of item costs set at zero and negative quantities on hand would provide evidence that inventory is understated.

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

C 1 only. Supervision includes ensuring that designated auditors collectively possess the necessary knowledge, skills, and other competencies to perform the engagement. The extent of supervision depends on the proficiency and experience of the internal auditors and the complexity of the engagement (Inter. Std. 2340). Thus, the skill of the senior auditor and the closeness of the supervision compensate for the new auditor's inexperience regarding cash management.

A new staff internal auditor's first assignment is to review the cash management operations of the organization. The staff internal auditor has no background in cash management. Under which of the following conditions would this arrangement be appropriate? The senior internal auditor is skilled in the area and closely supervises the staff internal auditor. The staff internal auditor performs the work and prepares an engagement communication that is reviewed in detail by the chief audit executive. A Both 1 and 2. B 2 only. C 1 only. D Neither 1 nor 2.

C Generate commitment for appropriate managerial action. Discussion of conclusions and recommendations with the engagement client not only provides a quality control review but is also a courtesy that enhances the internal auditor-client relationship. In addition, the exit meeting is an important aspect of the participative approach to internal auditing because it involves the client in the engagement process as well as in any recommended changes arising from the engagement. People are more likely to accept changes if they have participated in the decisions and in the methods used to implement changes.

A purpose of the internal auditors' exit meeting with appropriate levels of management is to A Present the final engagement communication to the chief executive officer. B Obtain information to evaluate internal control. C Generate commitment for appropriate managerial action. D Inform members of the board of engagement results.

D Increase engagement time in functions being centralized. A major change in organizational structure is a significant risk factor. Of the choices provided, devoting internal audit resources to this engagement best serves the organization.

A service company is currently experiencing a significant downsizing and process reengineering. Its board of directors has redefined the business goals and established initiatives using in-house developed technology to meet these goals. As a result, a more decentralized approach has been adopted to run the business functions by empowering the business branch managers to make decisions and perform functions traditionally done at a higher level. The internal auditing staff is made up of the director, two managers, and five staff auditors, all with financial background. In the past, the primary focus of successful audit activities has been the service branches and the six regional division headquarters that support the branches. These division headquarters are the primary targets for possible elimination. The support functions, such as human resources, accounting, and purchasing, will be brought into the national headquarters, and technology will be enhanced to enable and augment these operations. Assuming that total available resources remain the same, what activities should the internal audit activity perform to best serve the organization? A Decrease engagement time in systems development. B Increase engagement time in service branches. C Continue the allocation of engagement time as before. D Increase engagement time in functions being centralized.

B Analytical review. By comparing the rate of return achieved with the budget for international operations for the last several time periods, the internal auditor can determine the variances from budget and determine the adequacy of the return on the investment.

An internal auditor has set an engagement objective of determining whether the planned rate of return on investment in international operations has been achieved. Which of the following engagement procedures will best meet this objective? A Observation. B Analytical review. C Inquiry. D Inspection of documents.

A Production A. An operational engagement includes reviewing the activities, systems, and controls within an organization to reach efficiency, effectiveness, economic, or other goals. A department that is causing bottlenecks needs an operational audit to aid in determining the cause of the bottlenecks and correcting the problem.

All of these departments, except two, are on the potential list of engagement clients because of a risk analysis performed by the chief audit executive. Production department A is on the list because the president thinks too many bottlenecks occur in that department. The marketing department is on the list because the chief of security received an anonymous phone call accusing a marketing manager of accepting substantial financial kickbacks from a media outlet. Internal controls seem adequate in all departments, with the possible exception of marketing. Which department most likely needs a pure operational (nonfinancial) engagement? A Production A. B Purchasing. C Production C. D Marketing.

C Describe the extent to which the internal audit activity has completed its approved audit plan. According to Perf. Std. 2060, the CAE must report the internal audit activity's performance relative to its plan. An annual summary report ordinarily includes such performance results.

An annual summary report of completed engagement work submitted to senior management and the board by the chief audit executive should A Discuss the administrative condition of the internal audit activity. B Emphasize the number of deficiency observations discovered by the internal auditors. C Describe the extent to which the internal audit activity has completed its approved audit plan. D Inform management of the scope of proposed work for the following year.

B Planning for the internal audit activity. The audit plan should include the activities to be performed, when they will be performed, and the estimated time required, considering the scope of the engagement work planned and the nature and extent of related work performed by others. This plan permits determination of staffing plans and financial budgets and is a basis for the presentation of reports.

An approved audit plan for the internal audit activity is an essential part of A Scheduling support for the external audit. B Planning for the internal audit activity. C Establishing standards for employee performance. D Providing senior management with information about the quality of the internal audit activity's performance.

A Yes. Supervisory decisions must be made during all phases of the internal audit, regardless of the experience level of the team members. All engagements must be supervised properly to ensure objectives are achieved, quality is assured, and staff is developed. These responsibilities require attention throughout the engagement. Thus, supervisory decisions must be made during all phases of the internal audit.

An internal auditing manager is leading a three-person auditing team assigned to an assurance engagement at airport rental locations for a car rental company. All team members are experienced. In planning her own work schedule, the manager believes that it will be necessary to allow time to supervise the team during the execution phase, the planning process, and the drafting of the internal audit report. Is the manager taking the correct approach? Why? A Yes. Supervisory decisions must be made during all phases of the internal audit, regardless of the experience level of the team members. B No. When a team is experienced, supervision throughout the engagement is an unnecessary expense for the function. C No. Once planning is completed, the most critical supervisory task is review of working papers. D Yes. All engagements should be closely supervised in the same manner.

D 2 and 3. One step in planning the engagement is to define engagement objectives (intended engagement accomplishments) and procedures (means of achieving the objectives). Taken together, the objectives and procedures define the scope of the internal auditor's work. Objectives and procedures are documented in the engagement work program. Before the work program can be drafted, however, a preliminary assessment of the risks relevant to the activity under review is conducted. This survey includes, among other steps, discussions with the engagement client to increase the internal auditor's familiarity with the activities to be reviewed. Furthermore, if the internal auditing staff does not have the requisite knowledge, skills, and other competencies to perform all or part of the engagement, the CAE must obtain competent advice and assistance (Impl. Std. 1210.A1). However, the outside claims processing function is an integral part of the organization's internal control. Thus, the scope of the internal auditor's work should extend to the adequacy and effectiveness of internal control over claims processing.

An internal auditor is assigned to perform an engagement to evaluate the organization's insurance program, including the appropriateness of the approach to minimizing risks. The organization self-insures against large casualty losses and health benefits provided for all its employees. It is a large national entity with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The organization's medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling these costs. The internal auditor needs to determine the scope of the proposed evaluation of insurance coverage. Which of the following statements are true regarding the potential scope of the engagement? The internal audit activity should concentrate on processing that occurs within the organization and not on evaluating the correctness of transactions processing by the health care processor. The internal auditor should interview management prior to beginning the engagement to understand (1) its concerns and (2) the underlying assumptions made and rationale used when making the self-insurance decision. The internal auditor should consider engaging an actuarial consultant to better understand the risks involved in order to help determine the scope of the engagement. A 2 only. B 1 and 2. C 1 only. D 2 and 3.

D All cash sales are recorded. The written receipt fixes responsibility for the cash. The employee who collected it and issued the receipt is accountable and therefore less likely to commit irregularities. Moreover, the customer's expectation of a receipt increases the likelihood that transactions will be recorded.

An internal auditor is observing cash sales to determine whether customers are given written receipts. The objective of this test is to ensure that A Cash balances are correct. B Customers are charged authorized prices. C Cash received equals the total of the receipts. D All cash sales are recorded.

C Recommend that a physical inventory count be scheduled. Observation of a physical inventory is ordinarily the most effective engagement procedure. The internal auditor's direct personal knowledge obtained through observation is more persuasive than information obtained indirectly.

An internal auditor observes that controls over the perpetual inventory system are weak. An appropriate engagement response is to A Apply gross profit analyses by product lines and compare the results with prior-years' information for reasonableness. B Perform turnover ratio tests. C Recommend that a physical inventory count be scheduled. D Increase the testing of the inventory controls.

D Sales that are billed were also shipped. The process described is tracing. It begins with a triggering event and determines whether the result was proper. If the invoices in the sample can be correctly matched with shipping documents, some assurance is given that items billed to customers are actually shipped.

An internal auditor traces copies of sales invoices to shipping documents to determine that A The subsidiary accounts receivable ledger was updated. B Customer shipments were billed. C Shipments to customers were also recorded as receivables. D Sales that are billed were also shipped.

A Evaluating communications from the sales department to the production department. The specially ordered goods may be made to customers' specifications, which must be communicated clearly by the sales department to the production department. Moreover, the sales department must provide timely information about any other customer complaints, such as excessive defects, so that production management can take prompt corrective action.

An organization manufacturing special-order products is experiencing excessive rates of rejection of finished products. An engagement procedure to identify the source of the problem is A Evaluating communications from the sales department to the production department. B Evaluating communications from the production department to the sales department. C Analyzing customer demand for the product. D Testing whether supply of the product is sufficient to meet customer demand.

D Use generalized audit software to select a sample of payments and match purchase orders, invoices, and receiving reports stored on the computer using a common reference. This procedure provides the auditor with evidence about whether ordered goods were received, whether they were received in the right quantities, whether they were billed at the correct price, and whether the correct amount was paid.

An organization uses electronic data interchange and online systems rather than paper-based documents for purchase orders, receiving reports, and invoices. Which of the following audit procedures would an auditor use to determine if invoices are paid only for goods received and at approved prices? A Select a statistical sample of major vendors and trace the amounts paid to specific invoices. B Select a monetary-unit sample of accounts payable and confirm the amounts directly with the vendors. C Use generalized audit software to identify all receipts for a particular day and trace the receiving reports to checks issued. D Use generalized audit software to select a sample of payments and match purchase orders, invoices, and receiving reports stored on the computer using a common reference.

B Issue an interim engagement communication to the appropriate levels of management. Interim reports are oral or written and may be transmitted formally or informally. Interim reports are used to communicate information that requires immediate attention, to communicate a change in engagement scope for the activity under review, or to keep management informed of engagement progress when engagements extend over a long period.

As an internal auditor for a multinational chemical producer, you have been assigned to an engagement at a local plant. This plant is similar in age, siting, and construction to two other plants owned by the same organization that have been recently cited for discharge of hazardous wastes. In addition, you are aware that chemicals manufactured at the plant release toxic by-products. Assume that you have evidence that the plant is discharging hazardous wastes. As a certified internal auditor, what is the appropriate communication requirement in this situation? A Note the issue in your working papers but do not report it. B Issue an interim engagement communication to the appropriate levels of management. C Send a copy of your engagement communication to the appropriate regulatory agency. D Ignore the issue because the regulatory inspectors are better qualified to assess the danger.

C Continue the interview and discuss other elements of the employee's duties, returning periodically to the samples and analytical results. The internal auditor may wish to return to the issue of controls over the samples after the employee has been put at ease. Nonjudgmental questioning, good listening habits, and a cooperative approach may lower the employee's defenses and elicit the desired information.

During an interview to identify controls over the quality of wastewater discharge, the responsible employee refers only to a department procedure when asked about controls to ensure that samples are collected and analyzed. In the internal auditor's experience, such operations should maintain a log to record all samples, the types of analyses performed, and whether results should be reported to management or regulatory agencies. For some reason, this employee is reluctant to discuss detailed responsibilities in this area. The best thing for the internal auditor to do in this case is A Relate what the internal auditor has seen at other facilities and tell the employee that the log is necessary. B Accept the information as given and record an observation finding that adequate controls are in place. C Continue the interview and discuss other elements of the employee's duties, returning periodically to the samples and analytical results. D Interview the supervisor of the employee and discuss the auditee's duties in detail.

D A monthly budgeting process will be implemented. mplementing a monthly budgeting process is an operating decision, not a strategic decision. (It does, however, involve a major change in operations.)

During discussions with senior management, the chief audit executive identified several strategic business issues to consider in preparing the annual audit work schedule. Which of the following does not represent a strategic issue for this purpose? A A human resources database will be established to ensure consistent administration of policies and to improve data retention. B Joint-venture candidates will be sought to provide manufacturing and sourcing capabilities in European and Asian markets. C An international marketing campaign will be started to develop product recognition and also to leverage the new organization-based advertising department. D A monthly budgeting process will be implemented.

C 3 Condition is defined as the factual evidence that the internal auditor found in the course of the examination (the current state). Paragraph 3 describes the actual productivity of the firm.

Fact Pattern: Paragraph 1: The production department has the newest production equipment available because of a fire that required the replacement of all equipment. Paragraph 2: The members of the production department have become completely comfortable with the state-of-the-art technology over the past year and a half. As a result, the production department has become an industry leader in production efficiency and effectiveness. Paragraph 3: The production department produces an average of 25 units per worker per shift. The defect rate is 1%. Paragraph 4: The industry average productivity is 20 units per worker per shift. The industry defect rate is 3%. Which paragraph should be characterized as the attribute described in the Standards as "condition"? A 1 B 4 C 3 D 2

D Written interim report to operating management. Interim reports are oral or written and may be transmitted formally or informally. Interim reports are used to communicate information that requires immediate attention, to communicate a change in engagement scope for the activity under review, or to keep management informed of engagement progress when engagements extend over a long period. An observation of this degree of importance should be in written format.

Fact Pattern: During an early phase of an extensive engagement to evaluate a manufacturer's inventory management system, an internal auditor reviewed inventory levels. During this review, the internal auditor discovered that there had been recurring stockouts for some high demand items and that this had led to expensive expediting and work stoppages. Further investigation revealed that the purchasing department had regularly ordered these items based upon purchase orders produced automatically by the computerized inventory system. The quantity orders had been based on an economic order quantity (EOQ) model included in the computerized inventory system. The internal auditor determined that the EOQ model was properly designed and that the problem had resulted from failure to update data in the model concerning the time required for delivery. If the internal auditor decides that the situation warrants management's immediate attention and the entire engagement will not be completed for several weeks, communication with management will probably take the form of a(n) A Summary written report to operating management. B Regular written report to operating management. C Oral report to senior management. D Written interim report to operating management.

C 3 and 4 only. Criteria are the standards, measures, or expectations used in making an evaluation and/or verification (the correct state). Only statements 3 and 4 describe a situation as it ought to be.

Fact Pattern: This information is to be included in a final communication made following an inventory control engagement for a tent and awning manufacturer. The issue relates to overstocked rope. 1. The quantity on hand at the time of the engagement represented a 10-year supply based on normal usage. 2. The organization had held an open house of its new factory 2 months prior to the engagement and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order. 3. Rope is reordered when the inventory level reaches a 1-month supply and is based on usage during the previous 12 months. 4. The quantity to be ordered should be adequate to cover expected usage for the next 6 months. 5. The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order. 6. A public warehouse was required to store the rope. 7. The purchasing agent receives an annual salary of US $59,000. Which of these statements should be in the criteria section of the communication? A 3 only. B 2 only. C 3 and 4 only. D 5 only.

D Revising the actual engagement hours to reflect only budgeted hours. he engagement budget should be analyzed to determine and report the variance between actual and budgeted hours. Actual hours should never be hidden.

Feedback allows the chief audit executive to monitor the internal audit activity's efficiency and effectiveness. Actions resulting from feedback include all of the following except A Identifying areas for future engagements. B Performing periodic follow-up procedures for outstanding recommendations. C Revising risk assessments made during the planning phase of an engagement. D Revising the actual engagement hours to reflect only budgeted hours.

B Developing a written engagement work program The engagement work program is the culmination of the planning process.

Field work is a systematic process of objectively gathering information about an entity's operations, evaluating it, and determining whether those operations meet acceptable standards. Which of the following is not part of the work performed during field work? A Applying the engagement work program to accomplish engagement objectives. B Developing a written engagement work program. C Creating working papers that document the engagement. D Expanding or altering engagement procedures if circumstances warrant.

D The internal auditor believes that the problem will not be properly investigated by management. In most cases of whistleblowing, whistleblowers will disclose sensitive information internally, even if not within the normal chain of command, if they trust the policies and mechanisms of the organization to investigate the problem. If the whistleblower doubts the problem will be properly investigated by the corporation, (s)he may consider disclosing the problem to an outside party.

For which situation should the internal auditor consider communicating sensitive information outside the organization's governance structure? A The internal auditor believes the corporation does not have the resources to address the problem efficiently. B An outside agency may be able to help the corporation correct the problem faster than the corporation could on its own. C Action by management may take longer than the internal auditor believes is necessary to correct the problem. D The internal auditor believes that the problem will not be properly investigated by management.

A Information is gathered from those most familiar with it. Internal auditors must develop and document a plan for each engagement, including the engagement's objectives, scope, timing, and resource allocations. The auditor also prepares an engagement program prior to the beginning of the engagement. This program describes items such as the objectives, what is being examined, and procedures to be performed. Questionnaires provide an efficient method of planning the engagement program. They may be sent to the client prior to the auditor's visit. The questionnaire may result in a more economical engagement because the information it generates is prepared by those most familiar with it. The auditor still must ask clarifying questions and verify responses. However, only those answers that appear inappropriate should be pursued by asking for clarification or other information.

How does the use of an internal control questionnaire assist an internal auditor in planning an engagement? A Information is gathered from those most familiar with it. B Increases apprehension for the client's employees. C Decreases the uniformity of data acquisition. D Provides a complete understanding of unfamiliar and complex operations.

A No written quality-assurance procedure exists for a high-volume production line item with low unit cost that has a 15% scrap experience. Certain transactions (e.g., cash) are subject to a greater risk of fraud, and engagement procedures for them may need to be carried out in a more conclusive manner. Materiality is concerned with the qualitative or quantitative significance of an item. Thus, in planning the engagement, internal auditors consider, among other things, significant risks and opportunities for significant improvements (Perf. Std. 2201). A 15% scrap experience for a high-volume item with a low unit cost may not be material, but the absence of a quality assurance program suggests a high probability of errors or fraud (relative risk).

In developing an engagement work program and communicating engagement results, the internal auditor should be alert for a condition that might reflect low materiality of an observation but high relative risk to the overall operation of the organization. Which of the following conditions would reflect such a situation? A No written quality-assurance procedure exists for a high-volume production line item with low unit cost that has a 15% scrap experience. B Many random clerical errors arise from the desire of employees to meet production quotas. C The cashier is commingling personal funds with a US $1,000 imprest cash fund. D Levels of approval authority for purchasing personnel are not set forth in the manual of purchasing procedures.

D The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. Control risk is the risk that internal control will not prevent or detect on a timely basis a material misstatement that could occur in a relevant assertion.

In the AICPA's audit risk model, which of the following is a definition of control risk? A The risk that the auditor's assessment of internal controls will be at less than the maximum level. B The risk that the auditor will not detect a material misstatement. C The susceptibility of material misstatement assuming there are no related internal control policies or procedures. D The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.

B Functions of the client and its environment, whereas detection risk is not. Detection risk is a function of the effectiveness of an engagement procedure and of its application by an auditor and can be changed at his or her discretion. Inherent risk and control risk differ from detection risk in that they exist independently of the engagement. They are functions of the client's line of business and system of internal control.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are A Considered only for entity as a whole, not for each engagement. B Functions of the client and its environment, whereas detection risk is not. C Changed at the auditor's discretion, whereas detection risk is not. D Elements of audit risk, whereas detection risk is not.

C Issue an interim engagement communication regarding the important issues noted. interim reports are used to communicate information that requires immediate attention, to communicate a change in engagement scope for the activity under review, or to keep management informed of engagement progress when engagements extend over a long period. The use of interim reports does not diminish or eliminate the need for a final report.

Internal audit activity policy requires that final engagement communications not be issued without a management response. An engagement with significant observations is complete except for management's response. Evaluate the following courses of action and select the best alternative. A Wait for management's response and then issue the engagement communication. B Discuss the situation with the external auditors. C Issue an interim engagement communication regarding the important issues noted. D Modify the policy to allow a specific time period for management's response.

C Identifying sufficient information to achieve engagement objectives. Internal auditors must develop and document a plan for each engagement, including the engagement's objectives, scope, timing, and resource allocations (Perf. Std. 2200). Identifying sufficient information to achieve engagement objectives is done during field work, not planning.

Internal auditors must develop and document a plan for each engagement. The planning process should include all the following except A Establishing engagement objectives and scope of work. B Determining how, when, and to whom the engagement results will be communicated. C Identifying sufficient information to achieve engagement objectives. D Obtaining background information about the activities to be reviewed.

D Decide the extent of necessary follow-up work. The chief audit executive determines the nature, timing, and extent of follow-up.

Internal auditors realize that at times corrective action is not taken even when agreed to by the appropriate parties. Thus, in an assurance engagement, internal auditors should A Allow management to decide when to follow up because follow-up is management's ultimate responsibility. B Write a follow-up engagement communication with all observations and recommendations and their significance to the operations. C Decide to conduct follow-up work only if management requests the internal auditor's assistance. D Decide the extent of necessary follow-up work.

C Computation of selected sales commissions. Sales commission is based on the application of a ratio to the amount of the sale. The best information about the accuracy of sales commission expense for specific individuals is to recompute the amounts derived from a sample of transactions (i.e., reperformance). These tests should be done at the same time as procedures testing accrued liabilities.

Management believes that some specific sales commissions for the year were too large. The accuracy of the recorded commission expense for specific salespersons is best determined by A Use of analytical procedures. B Calculating commission ratios. C Computation of selected sales commissions. D Tests of overall reasonableness.

B The results from the prior financial audits. When determining resource allocation under time constraints, the auditor must consider all relevant factors. Relevant factors include (1) information about both the ongoing and new engagement; (2) the consequences of not completing either engagement in a timely manner; and (3) the knowledge, skills, and competencies of the internal audit staff. Information about other unrelated engagements, such as prior financial audits, is irrelevant.

Numerous environmental laws and regulations have recently changed. Senior management has asked the chief audit executive to perform an environmental audit to be completed as soon as possible. The internal audit activity currently is performing an operational audit. As a result, the chief audit executive must make difficult decisions about resource allocation. Which of the following is the least significant issue in determining whether to reallocate audit resources? A The knowledge, skills, and competencies of the internal audit staff. B The results from the prior financial audits. C The potential fraud discovered during the operational audit. D Potential cost to the organization for noncompliance with the new environmental laws and regulations.

A It is rarely sufficient to satisfy any assertion other than existence. Observation is effective for verifying whether particular assets such as inventory or equipment exist at a given date. However, it is of limited use in addressing other assertions. Thus, it provides less persuasive information about the assertions of completeness, rights, valuation, and presentation and disclosure. For example, merely observing inventory does not determine whether the engagement client has rights in it.

Observation is considered a reliable engagement procedure, but one that is limited in usefulness. However, it is used in a number of different engagement situations. Which of the following statements is true regarding observation as an engagement technique? A It is rarely sufficient to satisfy any assertion other than existence. B It is the most persuasive technique for determining if fraud has occurred. C It is the most persuasive methodology to learn how transactions are really processed during the period under review. D It is the most effective engagement methodology to use in filling out internal control questionnaires.

D 2 only. The loans were not timely approved prior to funding according to organizational policies and procedures. Thus, the condition attribute differs from the criteria attribute of the observation, and the loans should be reported as deviations. But the internal auditor should note that the loans were subsequently reviewed and approved by the loan committee.

Of the 85 loans granted, the auditors noted that 4 loans should have been reviewed and approved by the loan committee but were not. Organizational policy states that all loans must be approved by the committee prior to funding. Each of the 4 loans, however, was approved by the vice president. The matter was discussed with the vice president, who indicated it was a competitive loan situation to a new customer and in the best interests of the financial institution to expedite the loan and establish a firm relationship with a growing customer. All of the other loans were formally approved by the loan committee. Assume with regard to item B, the vice president asks the loan committee to review the loans on an after-the-fact basis. Assume further, upon this subsequent review, the loan committee approves the loans on the after-the-fact basis. Which of the following conclusions is true regarding the communication of the engagement observations? 1. The sample deviation rate would drop to 0%. 2. The item should still be reported in the audit report because it was not approved in a timely manner in accordance with organizational policies. 3. The item should be reported as a nondeviation because subsequent action validated the vice president's approach. A 1 only. B 1, 2, and 3. C 3 only. D 2 only.

B The information documented by the internal auditor and obtained through observing conditions, interviewing people, and examining records. The three activities that constitute information-gathering by an internal auditor are observing conditions, interviewing people, and examining records.

Of the following, the information collected by the internal auditor during an engagement is best described as A Detailed documentation for systems that do not achieve desired objectives, actions that were taken improperly, and actions that should have been taken but were not. B The information documented by the internal auditor and obtained through observing conditions, interviewing people, and examining records. C The records of preliminary planning and surveys, the engagement work program, and the results of field work. D An intermediate fact, or group of facts, from which the internal auditor can infer the fairness of an assertion being reviewed.

B Decrease detection risk. Audit risk is a function of inherent risk, control risk, and detection risk. The only risk the auditor directly controls is detection risk. Thus, the auditor achieves the desired level of overall audit risk by adjusting detection risk in response to the assessed levels of inherent risk and control risk. Detection risk has an inverse relationship with control risk. If the auditor chooses to increase the assessment of control risk, detection risk should be decreased.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would A Increase materiality levels. B Decrease detection risk. C Increase inherent risk. D Decrease inherent risk.

Risk is the possibility of an event's occurrence that could have an impact on the achievement of objectives. Risk is measured in terms of impact (exposures) and likelihood (probability). Prioritizing is needed to make decisions for applying resources to engagements based on the relative significance of their risk and exposure estimates. The best order of priority listed (highest to lowest) is (1) Risk D (likely-major), (2) Risk B (possible-critical), (3) Risk C (possible-minor), and (4) Risk A (remote-critical). However, it is not entirely clear that Risk D and Risk C should have higher priorities than Risks B and A, respectively. For example, depending on the values assigned to the variables, a possible-critical impact (B) might have a higher priority than a likely-major impact (D).

Prioritization of risk

D Align auditor skills and knowledge with area needs before making assignments. Engagements must be properly supervised to ensure objectives are achieved, quality is assured, and staff is developed. In this case, the knowledge and skills of audit team members should have been considered before making assignments. The auditor in question might have been assigned to a different country or teamed with an auditor more familiar with the country's practices and technology.

The auditor-in-charge of a financial audit for a global organization has assigned specific tasks to team members and reserved for herself the responsibility of maintaining contact with the managers of financial departments in eight countries. In reviewing the work papers of one auditor, the auditor-in-chief notes that some of the work is incomplete. The auditor explains that she is unfamiliar with the accounting practices and software systems used in this country. How could the auditor-in-charge have managed this situation in a more efficient, effective manner? A Allow more time in the schedule for the auditor to become more familiar with local practices and technology. B Build enough slack into the schedule to deal with delays due to an auditor's lack of knowledge. C Work more closely with the audit client to secure more support for the assigned auditor. D Align auditor skills and knowledge with area needs before making assignments.

D Supervisory review of all engagement work. The engagement must be properly supervised to ensure objectives are achieved, quality is ensured, and staff is developed (Perf. Std. 2340). Supervision includes (1) ensuring the auditors possess the requisite knowledge, skills, and other competencies; (2) providing appropriate instructions during planning and approving the engagement program; (3) ensuring the approved engagement program is complete unless changes are justified and authorized; (4) determining working papers adequately support observations, conclusions, and recommendations; (5) ensuring communications are accurate, objective, clear, concise, constructive, and timely; (6) ensuring objectives are met; and (7) providing opportunities for developing internal auditors' knowledge, skills, and other competencies. Thus, supervision is a control that applies to all aspects of engagements.

The best control over the work on which internal auditors' opinions are based is A Preparation of engagement working papers. B Staffing of internal audit activities. C Preparation of time budgets for internal audit activities. D Supervisory review of all engagement work.

D 1, 2, and 4 only. The CAE is responsible for ensuring that engagements are adequately supervised. The engagement supervisor is responsible for (1) assembling and training the team; (2) making assignments; (3) reviewing working papers; and (4) establishing a process to ensure regular, thorough, and timely communication of necessary information among team members.

The chief audit executive (CAE) is trying to explain the range of responsibilities a senior internal auditor will be assuming as supervisor of an upcoming engagement that will employ a team of internal auditors. Which of the following are examples that the CAE might mention? Assigning team members to specific roles and procedures. Establishing a process to ensure regular, thorough, and timely communication of necessary information among team members. Assuming responsibility for adequate supervision during the engagement. Training less experienced team members in appropriate audit procedures. A 2, 3, and 4 only. B 1 and 2 only. C 1 and 3 only. D 1, 2, and 4 only.

A The minutes from the last board of directors meeting. In developing the internal audit activity's audit plan, many chief audit executives (CAEs) find it useful to first develop or update the audit universe. The audit universe is a list of all the possible audits that could be performed. The CAE may obtain input on the audit universe from senior management and the board.

The chief audit executive develops a risk-based plan after updating the audit universe. The item least likely to be part of the audit universe is A The minutes from the last board of directors meeting. B Cost, profit, and investment centers. C Major programs. D A component of the organization's strategic plan.

D Cash management and credit policy. Of the areas listed, cash management and credit policy in a retail merchandise sales organization would likely rank the highest in financial exposure and risk of potential loss.

The chief audit executive for a retail merchandise sales organization is considering engagement assignments for inclusion in the work schedule for the upcoming year. The following areas have not been evaluated recently, and there are no known reasons that they should be given immediate attention. If resources are scarce, which project should be given priority? A Corporate code of ethics and conflict of interest policy. B Employee time reporting system. C Budget preparation and forecasts. D Cash management and credit policy.

D 3 only. Any assessment of risk priority and exposure necessarily implies the exercise of professional judgment. Thus, although risk factors may be weighted to determine their relative significance, a ranking based solely on such specific criteria as monetary exposure or control deficiencies is not always indicated.

The chief audit executive for an organization has just completed a risk assessment process, identified the areas with the highest risks, and assigned an engagement priority to each. Which of the following conclusions most logically follow(s) from such a risk assessment? Items should be quantified as to risk in the rank order of quantifiable monetary exposure to the organization. The risk priorities should be in order of major control deficiencies. The risk assessment process, though quantified, is the result of professional judgments about both exposures and probability of occurrences. A 1 only. B 1, 2, and 3. C 2 and 3 only. D 3 only.

D The internal audit staff has recently added an individual with expertise in one of the areas. The CAE's responsibility is to assign competent internal auditors to the appropriate engagements, not to adjust the workplan to the abilities of the staff.

The chief audit executive is preparing the audit work schedule for the next budget year and has limited resources. In deciding whether to schedule the purchasing or the personnel department for an engagement, which of the following is the least important factor? A Updated assessed risk is significantly greater in one department than the other. B More opportunities to achieve operating benefits are available in one of the departments than in the other. C Major changes in operations have occurred in one of the departments. D The internal audit staff has recently added an individual with expertise in one of the areas.

D Provide the report to senior management as requested and discuss any issues that may require action to be taken. The frequency and content of reporting are determined in discussion with senior management and the board and depend on the importance of the information to be communicated and the urgency of the related actions to be taken by senior management or the board (Inter. Std. 2060).

The chief audit executive routinely reports to the board as part of the board meeting agenda each quarter. Senior management has asked to review this presentation before each board meeting so that any issues or questions can be discussed beforehand. The CAE needs to A Provide information to senior management that pertains only to completed engagements and observations available in published engagement communications. B Disclose to the board only those matters in the report that pertain to expenditures and financial budgets of the internal audit activity. C Withhold disclosure of the report to senior management because such matters are the sole province of the board. D Provide the report to senior management as requested and discuss any issues that may require action to be taken.

The condition attribute is the factual evidence that the internal auditor found in the course of the examination (the current state). Items 2, 10, and 11 state information gathered by the internal auditor as a result of engagement procedures.

The condition attribute is best illustrated by items numbered 2. Engagement procedures showed that sales personnel regularly disregard credit guidelines when dealing with established customers. 10. To reduce costs, the use of outside credit reports was suspended on several occasions. 11. Because several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review.

D More information is needed before the success of the training program can be assessed. No evidence is given that the auditor has determined the goals of the training program. Without a standard for measuring progress, the auditor cannot determine whether the program is effective.

The consumer products division of a large corporation has recently adopted a training program for its sales staff. The internal auditor has determined that one-half of the sales force has received the training. In the 6-month period following introduction of the training program, productivity increased 4% on a per-salesperson basis for those who had received the training. The soundest conclusion the auditor can reach based on these findings is that A The training program is a success so far. B The time spent on training has not been justified by the increase in productivity. C The remaining members of the sales force should receive training as soon as feasible. D More information is needed before the success of the training program can be assessed.

D A pro forma program developed and tested by the internal audit activity. A pro forma work program is designed to be used for repeated engagements related to similar operations. It is ordinarily modified over a period of years in response to problems encountered in the field. This type of program assures at least minimum coverage, provides comparability, and saves resources when operations at different locations have similar activities, risks, and controls.

The internal audit activity is planning a 3-year effort to perform engagements at all branches of a large international car rental agency. Management is especially concerned with standardized operation of the accounting, car rental, and inventory functions. What type of work program is most appropriate for this project? A An industry-developed engagement guide. B Individual programs developed by the internal auditor-in-charge after a preliminary survey of each branch. C A checklist of branch standard operating procedures. D A pro forma program developed and tested by the internal audit activity.

D The extent to which management judgments are required in an area could serve as a risk factor in assisting the internal auditor in making a comparative risk analysis. Among the common factors used in risk models for establishing the priority of engagements is management competence. Hence, the internal auditor could appropriately consider the extent of management competence, which includes judgment, as a risk factor.

The internal auditor is considering making a risk analysis as a basis for determining the areas of the organization where engagements should be performed. Which one of the following statements is true regarding risk analysis? A Risk analysis must be reduced to quantitative terms in order to provide meaningful comparisons across an organization. B The highest risk assessment should always be assigned to the area with highest probability of occurrence. C The highest risk assessment should always be assigned to the area with the largest potential loss. D The extent to which management judgments are required in an area could serve as a risk factor in assisting the internal auditor in making a comparative risk analysis.

A Evaluate whether completion of the engagement as planned will be adequate. Work programs are necessarily tentative because the internal auditors are likely to encounter unexpected situations while carrying out the detailed work. If they learn that an area is not covered, they must determine whether they can achieve the engagement objectives and satisfy their professional responsibilities without modification of the work program. Modification will necessitate consultation with supervisors to obtain authorization to adjust time and financial budgets.

What action should an internal auditor take upon discovering that an area was omitted from the engagement work program? A Evaluate whether completion of the engagement as planned will be adequate. B Perform the additional work needed without regard to the added time required to complete the engagement. C Continue the engagement as planned and include the unforeseen problem in a subsequent engagement. D Document the problem in the engagement working papers and take no further action until instructed to do so.

C The staff internal auditor's desire for training in the area. A staff internal auditor's desire for specific training is necessarily secondary to carrying out the responsibilities of the internal audit activity with regard to proper staffing.

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

C The chief audit executive may discuss his or her concerns with someone outside the organization. If the internal auditor has credible evidence of exposure to an unnecessary risk, the auditor should normally communicate the information to those in management who can act on it. If the chief audit executive is not satisfied with the result, other options are available. The chief auditor could discuss his or her concerns with senior management, which often includes members of the board of directors. The chief audit executive should only consider discussion with outside parties if (s)he believes that management will not investigate the issue properly and other people may be adversely affected.

Which of the following actions should not be taken initially when credible evidence exists that the corporation is unnecessarily exposing itself to risk? A The chief audit executive may discuss his or her concerns about the risk exposure with senior management within his or her normal chain of command. B The chief audit executive may discuss his or her concerns with the parties responsible for the risk exposure. C The chief audit executive may discuss his or her concerns with someone outside the organization. D The chief audit executive may discuss his or her concerns about the risk of exposure with the board of directors.

C A financial audit of the division performed by the external auditor a year ago. Prioritizing is needed to make decisions about applying relative resources based on the significance of risk and exposure. Most risk models use risk factors to establish engagement priorities. One such factor is the potential for fraud. Internal auditors traditionally regard fraud as significant even if the immediate exposure is not significant. Increased expenditures also constitute a significant risk factor because they represent an increase in potential loss. For the same reason, potential regulatory fines may also create an exposure sufficiently great to affect the determination of priorities. Thus, the result of an external financial audit performed a year ago is the least likely to affect the current allocation of internal audit resources. Any adverse engagement observations most probably have been acted upon and, in any case, may not be germane to the ongoing compliance engagement or the proposed divisional-level engagement.

Which of the following factors is considered the least important in deciding whether existing internal audit resources should be moved from an ongoing compliance engagement to a divisional-level engagement requested by management? A The potential for fraud associated with the ongoing engagement. B The potential for significant regulatory fines associated with the ongoing engagement. C A financial audit of the division performed by the external auditor a year ago. D An increase in the level of expenditures experienced by the division for the past year.

C The methods used to identify defective units produced are observed. An engagement work program is a document that lists the procedures to be followed during an engagement. These procedures are designed to achieve the engagement objectives. Thus, observing the engagement client's execution of methods for identifying defects is an action performed to achieve the engagement objectives and should be included in the work program.

Which of the following is a step in an engagement work program? A Internal auditors may not reveal engagement observations to nonsupervisory, operational personnel during the course of this engagement. B The engagement will commence in 6 weeks and include tests of compliance with laws, regulations, and contracts. C The methods used to identify defective units produced are observed. D A determination is made concerning whether the manufacturing operations are effective and efficient.

D Reference checks of prospective employees are being performed. An effective personnel function is necessary for hiring, training, and monitoring human resources. One purpose of this function is to recruit, select, hire, train, supervise, and evaluate individuals who are suitable in light of job requirements, job descriptions, and job specifications (the abilities needed for particular jobs). In a review of this function, an appropriate objective is to determine whether the selection process is being properly performed. Thus, a potential employee's references should be checked to determine whether (s)he is truthful and has the desired qualifications.

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

D To determine whether inventory stocks are sufficient to meet projected sales. An engagement objective is a broad statement developed by internal auditors to define intended engagement accomplishments (The IIA Glossary). Determining whether inventory stocks are sufficient to meet projected sales is an engagement objective because it defines an audit accomplishment, not an engagement procedure. A procedure is designed to gather information that corroborates and documents conclusions about objectives.

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

D Engagement objectives. Scope statements identify the audited activities and may include supportive information such as time period reviewed and related activities not reviewed to delineate the boundaries of the engagement. They may describe the nature and extent of engagement work performed. Engagement objectives are included in the purpose paragraph.

Which of the following is not included in the statement of scope in an engagement final communication? A Activities not reviewed. B Nature and extent of the work performed. C Period covered by the engagement. D Engagement objectives.

D Specificity as to the methodology to be used for the engagement procedures. Work programs are a necessary part of engagement planning. They consist of the specific work steps required for the engagement, but they must allow for some flexibility. Thus, they may be modified, provided that adjustments are approved promptly.

Which of the following is not ordinarily considered an essential criterion for developing engagement work programs? A Specificity as to the controls to be tested. B Description of the objectives of the engagement client operation to be evaluated. C Specificity as to procedures to be followed. D Specificity as to the methodology to be used for the engagement procedures.

D All circumstances may be addressed. One of the disadvantages of sending a questionnaire to the engagement client is that all circumstances cannot be addressed. It is important for auditors to follow-up with an interview to clarify information and to address matters not covered by the questionnaire.

Which of the following is not true about formal questionnaires properly prepared and transmitted in advance? A They are an opportunity for engagement client self-evaluation. B They are less effective than interviewing. C They involve the questionnaire recipient in the audit. D All circumstances may be addressed.

B Risks associated with the activities to be reviewed. Internal auditors establish engagement objectives to address the risks associated with the activity under review. For planned engagements, the objectives proceed and align to those initially identified during the risk assessment process from which the internal audit plan is derived.

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

B Provide questionnaires to engagement clients at the beginning of each engagement and request that the clients complete and return them after the engagements. The client satisfaction survey should be provided to the client at the beginning of the engagement. This allows the client to gauge the internal audit activity's performance on specific measures during the engagement.

Which of the following is the best approach for obtaining feedback from engagement clients on the quality of internal audit work? A Call engagement clients after the exit interviews and send copies of the documented responses to the clients. B Provide questionnaires to engagement clients at the beginning of each engagement and request that the clients complete and return them after the engagements. C Distribute questionnaires to selected engagement clients shortly before preparing the internal audit annual activity report. D Ask questions during the exit interviews and send copies of the documented responses to the clients.

B To ensure that the internal audit plan supports the overall business objectives. The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity consistent with the organization's goals (Perf. Std. 2010). Including the strategic plan in the audit universe ensures that it reflects the overall business objectives stated in the strategic plan.

Which of the following is the best reason for the chief audit executive to consider the strategic plan in developing the annual audit plan? A To make recommendations to improve the strategic plan. B To ensure that the internal audit plan supports the overall business objectives. C To ensure that the internal audit plan will be approved by senior management. D To emphasize the importance of the internal audit function.

D Analyze a sample of interbank transfers throughout the period including period-end reconciliations. If the engagement objective is to test compliance with processing procedures, the appropriate procedure is to examine a sample of transfers and trace them to the accounting records, including the period-end bank reconciliation for each account.

Which of the following is the most appropriate engagement procedure to test the processing of interbank transfers? A Trace all bank deposits recorded in accounting records near the end of the fiscal period to supporting documentation and to bank statements. B Obtain cutoff bank statements for each bank account and reconcile them to accounting records. C Send bank confirmation requests to each bank in which accounts are maintained and reconcile the completed forms to accounting records. D Analyze a sample of interbank transfers throughout the period including period-end reconciliations.

C A senior internal auditor continuously deviates from the approved engagement work program, but consistently completes the engagement within the approved time budget. The time budget is approved by the internal audit manager, and compliance with the time budget is reviewed by the internal audit manager. Supervision includes ensuring the approved engagement program is carried out unless changes are justified and authorized. Accordingly, the deviations from the planned engagement work program by the senior internal auditor should be approved by a supervisor.

Which of the following items does not constitute evidence of proper supervision of an internal auditing engagement? A The internal audit manager carefully reviews all analytical procedures performed by internal audit seniors during the preliminary planning for an engagement to determine if the conclusions are justified. B An internal audit manager approves the engagement work program and gives instructions to subordinates at the outset of the engagement, and is available for consultation, but does not actively participate in the performance of procedures. C A senior internal auditor continuously deviates from the approved engagement work program, but consistently completes the engagement within the approved time budget. The time budget is approved by the internal audit manager, and compliance with the time budget is reviewed by the internal audit manager. D An internal audit manager is not intimately involved in an engagement, but does review the results to ensure that all engagement objectives are being met.

A To determine that employees are assigned to work situations equivalent to their training and skill level. Internal auditors should appraise the economy and efficiency with which resources are employed. Assignment of employees to tasks not commensurate with their skills may result in excess labor costs (when more skilled and more highly paid workers perform jobs for which they are overqualified) or in poor performance (when underqualified labor is used).

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

D 1 and 2 only. Once a cost has already been billed to the original contract, it should not be subject to a change order. Work that has been canceled should also not be billed.

Which of the following procedures would be appropriate for testing whether cost overruns on a construction project were caused by the contractor improperly accounting for costs related to contract change orders? Verify that the contractor has not charged change orders with costs that have already been billed to the original contract. Determine if the contractor has billed for original contract work that was canceled as a result of change orders. Verify that the change orders were properly approved by management. A 1 and 3 only. B 3 only. C 1 only. D 1 and 2 only.

A 2 only. The high-risk areas should be integrated into an audit work schedule along with the high-priority requests of senior management and the audit committee.

Which of the following represent(s) appropriate internal audit action in response to the risk assessment process? 1. The low-risk areas may be delegated to the external auditor, but the high-risk areas should be performed by the internal audit activity. 2. The high-risk areas should be integrated into an audit work schedule along with the high-priority requests of senior management and the audit committee. 3. The risk analysis should be used in determining an annual audit work schedule. Thus, the risk analysis should be performed only on an annual basis. A 2 only. B 3 only. C 1 only. D 1 and 3 only.

C Assessment of the risk levels of current and future events, their effect on achievement of the organization's objectives, and their underlying causes. When determining the best risk assessment technique, internal auditors should choose the most comprehensive. Of the options given, assessing risks, their effects, and their causes is the technique meeting that criterion.

Which of the following represents the best risk assessment technique? A Assessment of the risk levels for future events based on the extent of uncertainty of those events and their impact on achievement of long-term organizational goals. B Assessment of the risk levels of current and future events, their impact on the organization's mission, and the potential for elimination of existing or possible risk factors. C Assessment of the risk levels of current and future events, their effect on achievement of the organization's objectives, and their underlying causes. D Assessment of inherent and control risks and their impact on the extent of financial misstatements.

B Open burning at a subsidiary plant poses a prospective violation of pollution regulations. Interim reports are oral or written and may be transmitted formally or informally. Interim reports are used to communicate information that requires immediate attention, to communicate a change in engagement scope for the activity under review, or to keep management informed of engagement progress when engagements extend over a long period. A possible violation of pollution regulations requires immediate attention.

Which of the following situations is most likely to be the subject of a written interim report to the engagement client? A The engagement program has been expanded because of indications of possible fraud. B Open burning at a subsidiary plant poses a prospective violation of pollution regulations. C Seventy percent of the planned audit work has been completed with no significant adverse observations. D The auditors have decided to substitute survey procedures for some of the planned detailed review of certain records.

A A copy of a source document has less evidential value than the original. Evidence is more reliable if it is an original document, not a copy.

Which of the following statements about audit evidence is true? A A copy of a source document has less evidential value than the original. B A purchase order marked "paid" is persuasive evidence for the receipt of goods. C Physical observation of accounts payable is the most convincing form of evidence to support the assertion of completeness. D To be representative of a population, a sample must contain at least 10% of the items in the population.

C Except for the unauthorized purchases from the imprest fund, the system of internal controls over branch operations appears to be working well. Conclusions and opinions are the internal auditor's evaluations of the effects of the observations and recommendations on the activities reviewed. They usually put the observations and recommendations in perspective based upon their overall implications.

Which of the following statements is appropriate as a conclusion (opinion) in an internal auditing final communication of the results of an engagement to evaluate the organization's branch operations? A The vice-president of branch operations should require the timely review of the daily transaction report as a means of monitoring purchases from the imprest fund. B Statistical sampling was used to determine the extent of unauthorized purchases from the imprest fund. C Except for the unauthorized purchases from the imprest fund, the system of internal controls over branch operations appears to be working well. D The engagement to review branch operations was conducted in accordance with the Standards.

B Risk assessment is a judgmental process of assigning monetary amounts to the perceived level of risk found in an activity being evaluated. These amounts allow a chief audit executive to select the engagement clients most likely to result in identifiable savings. Risk assessment is a complex process that cannot be reduced to simple monetary terms.

Which of the following statements is false regarding risk assessment as the term is used in internal auditing? A The chief audit executive should incorporate information from a variety of sources into the risk assessment process, including discussions with the board, management, external auditors, review of regulations, and analysis of financial/operating data. B Risk assessment is a judgmental process of assigning monetary amounts to the perceived level of risk found in an activity being evaluated. These amounts allow a chief audit executive to select the engagement clients most likely to result in identifiable savings. C Risk assessment is a systematic process of assessing and integrating professional judgments about events that could affect the achievement of organizational objectives. It provides a means of organizing an engagement work schedule. D As a result of an engagement or preliminary survey, the chief audit executive may revise the level of assessed risk of an engagement client at any time, making appropriate adjustments to the work schedule.

A Time budgets should normally be prepared in terms of hours or days. A budget is a plan that contains a quantitative statement of expected results. It may be defined as a quantified program. All engagement projects and other assignments must be kept under budgetary control. Time budgets for engagement projects are usually prepared in employee-hours or employee-days.

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

B Tracing a sample of authorized inventory slips from inventory through billing to the sales journal. Tracing a sample of inventory removal slips is least likely to provide evidence of fraudulent sales because it applies to transactions that have apparently been properly authorized and documented.

Which of the tests provides the least significant information when testing for suspected fraudulent sales? A Performing analytical tests of sales by comparing sales and gross margins over time. B Tracing a sample of authorized inventory slips from inventory through billing to the sales journal. C Performing analysis of write-offs and sales returns and comparing the amounts over the past several years. D Confirming sales transactions with customers and investigating nonresponses.

B It does not contain criteria by which the concept of "excessive inventory" is judged. Observations and recommendations are based on the attributes of criteria, conditions, cause, and effect. Paragraph #5 is silent on the criteria the internal auditor used in determining that the division had excessive levels of inventory.

[#5] We performed extensive tests of inventory recordkeeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this is due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this engagement communication, the excess inventory has led to a higher-than-average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels. A major deficiency in paragraph #5 related to the completeness of the engagement communication is that A It does not adequately describe the potential effect of the conditions noted. B It does not contain criteria by which the concept of "excessive inventory" is judged. C The recommendations are not required and are not appropriate given the nature of the problem identified. D There is no indication of the potential cause of the problem.