Exam 4: Conducting the Internal Audit Engagement

Question 1

Which of the following is an example of the verification of internal documentary evidence?

A) Reviewing a carrier's bill of lading.
B) Reconciling a vendor's month-end statement.
C) Vouching a copy of a sales invoice to receivables.
D) Recalculating a customer's purchase order.

Answer 1

Vouching a copy of a sales invoice to receivables.

Question 2

Productivity statistics are provided quarterly to a company's board of directors. An auditor checked the ratios and other statistics in the four most recent reports. The auditor used scratch paper and copies of the board reports to verify the accuracy of computations and compared the data used in the computations with supporting documents. The auditor wrote a note describing this work for the workpapers and then discarded the scratch paper and report copies. The auditor's note stated. "The ratios and other statistics in the quarterly board reports were checked for the last four quarters, and appropriate supporting documents were examined. All amounts appear to be appropriate." In this situation:

A) Four quarters is not a large enough sample on which to base a conclusion.
B) The auditor's workpapers are not sufficient to facilitate an efficient review of the auditor's work.
C) The auditor should have included the scratch paper in the workpapers.
D) The auditor should have considered whether the information in the board report was compiled efficiently.

Answer 2

The auditor's workpapers are not sufficient to facilitate an efficient review of the auditor's work.

Question 3

If an organization's chief audit executive wants to implement continuous auditing, what is the appropriate order in which key steps should be undertaken?

A) Identify business applications that require access. II. Implement steps to continuously assess risks and controls. III. Define objectives of continuous auditing. IV. Manage and report results.
B) III, I, IV, II.
C) II, I, III, IV.
D) III, I, II, IV.
E) II, III, I, IV.

Answer 3

II, I, III, IV.

Question 4

In order to effectively elicit sensitive information from an employee during an audit engagement, an auditor should:

A) Tell the employee a piece of information obtained from a coworker in a previous interview.
B) Put sensitive questions at the beginning of a questionnaire to ensure that they are answered.
C) Explain that the auditor's reputation for integrity, which is vital to the auditor's business success, would be seriously damaged if confidentiality were breached.
D) Point out that management has given the auditor full authority to conduct this interview.

Question 5

Company A has a formal comprehensive corporate code of ethics while company B does not. Which of the following statements regarding the existence of the code of ethics in company A can be logically inferred?

A) l.Company A exhibits a higher standard of ethical behavior than does company B
II. Company A has established objective criteria by which an employee's actions can be evaluated.
III. The absence of a formal corporate code of ethics in company B would prevent a successful audit of ethical behavior in that company.
B) II only
C) III only
D) I and II only
E) II and III only

Question 6

Which of the following is the best problem-solving technique to use when analyzing performance and cost?

A) Value analysis.
B) Attribute listing.
C) Brainstorming.
D) Component analysis.

Question 7

In which of the following situations would it be most appropriate to employ the services of a forensic specialist?

A) Detection of unauthorized changes to source documents.
B) Review for misapplication of general computer controls over accounts receivable.
C) Investigation of ghost employees in a large business.
D) Verification of fixed assets in a manufacturing company.

Question 8

Which of the following data collection strategies systematically tests the effects of various factors on an outcome?

A) Content analysis.
B) Sampling.
C) Evaluation synthesis.
D) Modeling.

Question 9

Direct staff as a percentage of total staff is an example of which of the following types of efficiency measures?

A) Productivity ratio.
B) Productivity index.
C) Operating ratio.
D) Resource utilization rate.

Question 10

Which of the following would be an appropriate and effective control self-assessment approach in an organization with an authoritative culture?

A) Facilitated meeting II. Survey III. Management-produced analysis
B) I only
C) I and III only
D) II and III only
E) I, II, and III

Question 11

Which of the following situations would best support the decision of a chief audit executive (CAE) to defer follow-up activity at a branch office until the next audit engagement?

A) An audit of the branch office is routinely scheduled every three years.
B) On-site follow-up of a remote branch may not be feasible due to travel costs.
C) Branch office management states that correction of the audit issue may take longer than expected.
D) The CAE and management agree that the corrective action taken to date is sufficient.

Question 12

The following is an excerpt from an audit engagement workpaper: A Company Accounts Receivable Date Objective. To determine if the computer system is correctly recording all accounts receivable transactions. Procedures: Judgmental selection of a sample of all accounts receivable balances greater than $50,000 for positive confirmation of balances. Conclusion: Based on the results of testing wherein all but three confirmations were returned, the accounts receivable balance is fairly presented in all material respects. Which of the following is true regarding the workpaper?

A) It is not appropriate to judgmentally select a sample when testing accounts receivable.
B) A conclusion should be reached only for the results of overall testing, not for individual procedures.
C) The audit procedures used are not consistent with the audit objective.
D) The format of the workpaper does not conform to the standard format for workpapers.

Question 13

When conducting research, which of the following is most important?

A) Using computer databases or the Internet to find all relevant sources.
B) Providing documentation of the reference sources.
C) Presenting only those facts that support the conclusion.
D) Presenting all contrary views to balance the opinion.

Question 14

A company's policy requires that all customers be treated in a fair and consistent manner. Which of the following audit procedures would provide the most persuasive evidence that the policy was followed?

A) Compare the aging of outstanding receivables due from each customer.
B) Compare credit reports with annual sales for a sample of customers.
C) Compare the ratio of outstanding receivables to the authorized credit limit for each customer.
D) Compare the sales discounts offered to each customer.

Question 15

The balanced scorecard approach differs from traditional performance measurement approaches because it adds which of the following measures?

A) Financial measures. II. Internal business process measures. III. Client satisfaction measures. IV. Innovation and learning measures.
B) I only
C) II and IV only
D) III and IV only
E) II, III, and IV only

Question 16

Which of the following files, when compared with billing records, would provide the best source of information for determining if all goods shipped are billed to customers?

A) Pre-numbered customer invoices.
B) Accounts receivable transactions.
C) Pre-numbered shipping documents.
D) Customer purchase orders.

Question 17

What does the following scatter gram suggest?

A) Sales revenue is related to training costs.
B) The training program is not effective.
C) Increases in training costs consistently increase sales revenue.
D) One data point is incorrectly plotted.

Question 18

Which of the following audit procedures is most suitable for verifying that all sales transactions have been recorded?

A) Observation.
B) Tracing.
C) Re-computation.
D) Vouching.

Question 19

Which of the following trends found on financial reports would most likely indicate a possible problem?

A) A material decrease in the receivables turnover.
B) A material increase in inventory turnover.
C) A material increase in daily sales compared to total outstanding receivables.
D) A material increase in the acid-test ratio.

Question 20

During a routine audit of a customer service hotline, an internal auditor noticed that an unusually high number of customer complaints pertained to payments not being applied to the customers' accounts. Which of the following would most likely be the reason for the high volume of complaints?

A) An ineffective customer service department.
B) Poor controls in the invoice approval processes.
C) Check tampering by an employee.
D) Submission of fraudulent expense reports.

Question 21

A governmental auditor was assigned to determine reasons why the students in one region scored significantly higher on education evaluation tests than did the students in another region. Previous research showed that there is a direct correlation between public financial support and student results. Which of the following is most likely to explain the difference in the regional results?

A) The more successful region spends 30 percent more money on education than does the other region.
B) A higher percentage of the general tax fund is spent on education in the more successful region than in the other region.
C) The more successful region spends more money per student on education than does the other region.
D) The more successful region has increased educational spending by an average of 10 percent each year for the last three years, whereas the other region's increase averaged only three percent.

Question 22

The chief audit executive (CAE) determined that based on management's oral response, the action taken regarding an audit observation was sufficient when weighted against the relative importance of the audit recommendation. Which of the following is the most appropriate step for the internal auditor to take next?

A) Initiate a follow-up audit to ensure that action has really been taken.
B) Follow-up with management until a written response is obtained.
C) Escalate the issue to the board and get their position on the issue.
D) Note in the permanent file that follow-up needs to be performed as part of the next engagement.

Question 23

In forming a team to investigate an organization's potential adoption of an activity-based costing system, the best reason to include an internal auditor on the team would be the auditor's knowledge of:

A) Activities and cost drivers.
B) Information processing procedures.
C) Current product cost structures.
D) Internal control alternatives.

Question 24

During the development of a purchasing system, an auditor reviewed the payment authorization program. Which of the following actions should the auditor recommend for a situation in which the quantity invoiced is greater than the quantity received?

A) Issue an exception report.
B) Pay the amount billed and adjust the inventory account for the difference.
C) Return the invoice to the vendor for correction.
D) Authorize payment of the full invoice, but maintain an open purchase order record for the missing goods.

Question 25

Which of the following would constitute a violation of the IIA Code of Ethics?

A) An internal auditor, who has recently joined the organization, has accepted an assignment to audit the electronics manufacturing division. The auditor previously served as senior auditor for the external audit of that division and has audited many electronics companies during the past two years.
B) An internal auditor has accepted an assignment to audit the warehousing function six months from now. The auditor has no expertise in that area but has signed up for courses in warehousing that will be completed before the assignment begins.
C) An internal auditor has no ambitions for promotion and has not engaged in training or other professional development activities during the last three years. The auditor's performance assessments indicate consistent quality of work.
D) An internal auditor discovered an internal financial fraud during the year, and the financial statements were adjusted to properly reflect the loss associated with the fraud. The auditor discussed the fraud with the external auditor during the external auditor's review of the working papers detailing the incident.

Question 26

Given the scarcity of internal audit resources, a chief audit executive (CAE) decided not to schedule a follow-up of audit recommendations when developing engagement work schedules. Does the CAE's decision violate the Standards?

A) No, because the Standards do not specify whether follow-up is needed.
B) No, because when there is evidence of sufficient motivation by the client, there is no need for follow-up action.
C) Yes, because scarcity of resources is not a sufficient reason to omit follow-up action.
D) Yes, because the Standards require the auditors to determine whether the client has appropriately implemented all of the auditor's recommendations.

Question 27

An auditor is scheduled to audit payroll controls for a company which has recently outsourced its processing to an information service bureau. What action should the auditor take, considering the outsourcing decision?

A) Review the controls over payroll in both the company and the service bureau.
B) Review only the company's controls over data sent to and received from the service bureau.
C) Review only the controls over payments to the service bureau based on the contract.
D) Cancel the engagement because the processing is being performed outside of the organization.

Question 28

According to the International Professional Practices Framework, which of the following statements is correct regarding the communication of audit results?

A) Summary reports may be issued separately from or in conjunction with the final report. II. Interim reports may be written or oral. III. Detailed reports should always be issued to the audit committee. IV. Interim reports should be used to communicate information which requires immediate attention.
B) I and III only
C) II and IV only
D) I, II, and IV only
E) I, II, III, and IV.

Question 29

An internal auditor provided the following statement about division A's performance during the month: "Because supplies of raw material X were scarce, division A's profits declined by 15 percent." Which of the following can be validly concluded from the auditor's statement?

A) Division A's production level declined by 15 percent. II. Division A could have sold more products than it produced. III. Division A usually sells all of the products that it produces.
B) I only
C) II only
D) III only
E) I and II only

Question 30

Which of the following performance criteria would be most useful when measuring the performance of a customer service desk?

A) The number of customer inquiries recorded per day.
B) The percentage of customer issues resolved within 24 hours.
C) The number of customer complaints recorded per day.
D) The percentage of total customers served per day.

Question 31

A code of ethics within the internal auditing profession is necessary in order to:

A) Reduce the likelihood that members of the profession will be sued for substandard work.
B) Ensure that all members of the profession perform at approximately the same level of competence.
C) Provide guidance to internal auditors in their service to others.
D) Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.

Question 32

As part of an operational audit of the shipping department, an auditor selected a sample of 45 daily shipping logs from the department's files. On 44 of the days, the log contained a sufficient number of shipments to meet the department's daily quota. Based on this test, the auditor concluded that the shipping department was effective at meeting its quotas. Which of the following is true about the auditor's conclusion?

A) The number of items selected for testing is inadequate to justify the conclusion.
B) The shipping department is effective in meeting its responsibilities.
C) This conclusion would negate any need to perform tests of efficiency.
D) None of the above.

Question 33

During an interview with a manager in a company's claims department, an auditor noted that the manager became nervous and changed the subject whenever the auditor raised questions about certain types of claims. The manager's answers were consistent with company policies and procedures. When documenting the interview, the auditor should:

A) Document the manager's answers, noting the nature of the nonverbal communication.
B) Document the manager's answers but not the nonverbal communication because it is subjective and is not corroborated.
C) Conclude that the nonverbal communication is persuasive and that sufficient evidence exists to begin a fraud investigation.
D) Disregard the interview entirely because the verbal and nonverbal communications were contradictory.

Question 34

An auditor prepared a workpaper that consisted of a list of employee names and identification numbers as well as the following statement: "A statistical sample of 40 employee personnel files was selected to verify that they contain all documents required by company policy 501 (copy attached). No exceptions were noted." The auditor did not place any audit verification symbols on this workpaper. Which of the following changes would most improve the auditor's workpaper?

A) Use of audit verification symbols to show that each file was examined.
B) Removal of the employee names to protect their confidentiality.
C) Justification for the sample size.
D) Listing of the actual documents examined for each employee.

Question 35

An internal auditor is reviewing a new automated human resources system. The system contains a table of pay rates which are matched to the employee job classifications. The best control to ensure that the table is updated correctly for only valid pay changes would be to:

A) Limit access to the data table to management and line supervisors who have the authority to determine pay rates.
B) Require a supervisor in the department, who does not have the ability to change the table, to compare the changes to a signed management authorization.
C) Ensure that adequate edit and reasonableness checks are built into the automated system.
D) Require that all pay changes be signed by the employee to verify that the change goes to a bona fide employee.

Question 36

Which of the following will be an appropriate course of action when an auditor disagrees with a client about a well-documented audit finding?

A) Include both the audit finding and the client's position in the audit report.
B) Defer reporting the item and plan to perform more detailed work during the next audit.
C) Change the finding so that it is acceptable to the client.
D) Address the issue with senior management and the board for resolution prior to issuing the final report.

Question 37

Which of the following is true of engagement recommendations?

A) Specific suggestions for implementation must be included. II. The internal auditor's observations and conclusions may serve as the basis. III. Actions to correct existing conditions or improve operations may be included. IV. Approaches to correcting or enhancing performance may be suggested.
B) I only
C) III only
D) I, III, and IV only
E) II, III, and IV only

Question 38

An auditor analyzed a payroll system's data files for unusual activity, such as excessive overtime hours, unusual fluctuations in pay rates, and excessive vacation time. The application controls being verified by this analysis are:

A) Edit and validation controls.
B) Rejected and suspense item controls.
C) Controls over update access to the database.
D) Programmed balancing controls.

Question 39

Which of the following is used to identify and prioritize critical business applications to determine those that must be restored and the order of restoration in the event that a disaster impairs information systems processing?

A) Contingent facility contract analysis.
B) System backup analysis.
C) Vendor supply agreement analysis.
D) Risk analysis.

Question 40

During an audit of a branch bank, an internal auditor learned that a series of system failures had resulted in a four-day delay in processing customers' scheduled payroll direct deposits. The first failure was that of a disk drive, followed by software and other minor failures. Which of the following controls should the auditor recommend to avoid similar delays in processing?

A) Contingency planning.
B) Redundancy checks.
C) Process monitoring.
D) Preventive maintenance.

Question 41

An auditor receives anonymous information that fraud is occurring in the operation being audited, but no details are given as to the type of fraud or the individuals involved. There are several areas in which fraud could occur. The auditor should:

A) Identify the area that has the greatest volume of transactions and design a sampling plan for substantive testing.
B) Apply analytical procedures to areas that might be impacted by possible fraudulent activities.
C) Interview employees to identify areas where the fraud could be occurring.
D) Plan detailed tests of the areas that have the highest dollar amount of transactions.

Question 42

Which of the following does not represent a difficulty in using red flags as fraud indicators?

A) Many common red flags are also associated with situations where no fraud exists.
B) Some red flags are difficult to quantify or to evaluate.
C) Red flag information is only gathered in extraordinary circumstances.
D) The red flags literature is not well enough established to have a positive impact on auditing.

Question 43

Access control software on an organization's mainframe computer records detailed information concerning both successful and unsuccessful log-on attempts to applications. Which of the following audit tools would be best suited to review the access information that has been recorded?

A) Generalized audit software.
B) Flowcharting.
C) Integrated test facility.
D) Test data.

Question 44

Which of the following might alert an auditor to the possibility of fraud in a division?

A) The division is not scheduled for an external audit this year. II. Sales have increased by 10 percent. III. A significant portion of management's compensation is directly tied to reported net income of the division.
B) I only
C) III only
D) I and II only
E) I, II, and III

Question 45

Insurance companies often receive electronic hospitalization claims directly from hospitals. Which of the following control procedures would be most effective in detecting fraud in such an environment?

A) Use integrated test facilities to test the accuracy of processing in a manner that is transparent to data processing.
B) Develop monitoring programs to identify unusual types of claims or an unusual number of claims by demographic class for investigation by the claims department.
C) Use generalized audit software to match the claimant identification number with a master list of valid policyholders.
D) Develop batch controls over all items received from a particular hospital and process those claims in batches.

Question 46

Which of the following would provide the best audit evidence regarding the effectiveness of an applied research department?

A) Develop a cost-per-product analysis for products developed over the past five years.
B) Develop a report on revenue generated by or cost savings directly attributable to newly developed products.
C) Compare research as a percentage of revenue between this company and all major competitors in the same industry.
D) Compare the number of this year's new product developments to the number of new product developments for the past five years.

Question 47

A retail company uses a computer program that matches electronic vendor invoices with the applicable purchase orders and receiving information, which are also maintained electronically. If an invoice does not match the other items within predefined ranges, a report is generated and sent to the accounts payable department for further investigation. All of the applicable documents are electronically marked, cross-referenced, and retained in open files. Both an integrated test facility and a systems control audit review file (SCARF) have been included in the system. An auditor wants to determine the extent to which items are not matched at year end and to investigate the potential causes of the unmatched items. Which of the following audit procedures would be most effective in determining the items to investigate?

A) Use generalized audit software to read the electronically marked unmatched items.
B) Use generalized audit software to read the purchase orders and trace to applicable receiving and vendor invoice files.
C) Use the SCARF to identify unusual items. Select an attributes sample and trace to the underlying documentation.
D) Submit test data to identify attributes of unmatched items. Follow up by investigating the identified attributes.

Question 48

Which of the following audit steps would be most effective to review proper recording of and accountability over physical assets?

A) Physically inspect all assets on the organization's property. II. Select a sample department and physically inspect assets in the department. III. Select a sample from the organization's records of physical assets and physically locate each asset. IV. Identify assets at a sample of locations and trace to the organization's records.
B) I only
C) I and IV only
D) II and III only
E) III and IV only

Question 49

A company has recently incurred significant cost overruns on one of its construction projects. Management suspects that these overruns were caused by the contractor improperly accounting for costs related to contract change orders. Which of the following procedures would be appropriate for testing this suspicion?

A) Verify that the contractor has not charged change orders with costs that have already been billed to the original contract. II. Determine if the contractor has billed for original contract work that was canceled as a result of change orders. III. Verify that the change orders were properly approved by management.
B) I only
C) III only
D) I and II only
E) I and III only

Question 50

The most common motivation for management fraud is the existence of:

A) Vices, such as a gambling habit.
B) Job dissatisfaction.
C) Financial pressures on the organization.
D) The challenge of committing the perfect crime.

Question 51

During an audit of executive travel, an auditor noted that the president's travel expense reimbursements were approved by an executive secretary who reported to the president. The organization's reimbursement policy requires all travel expense reimbursements to be approved by the traveler's supervisor, but it does not address the president's reimbursements. Which of the following represents the auditor's best recommendation in this situation?

A) The organization's reimbursement policy should be amended to grant the president's executive secretary the authority to approve the president's travel expense reimbursements.
B) The approval policy for executive travel should be considered at the next meeting of the audit committee of the board of directors.
C) The president's travel expense reimbursements should be reviewed and approved by the chief financial officer.
D) The president's noncompliance should be considered immaterial.

Question 52

An auditor for a major retail company suspects that inventory fraud is occurring at three stores which have high costs of goods sold. Which of the following audit activities would provide the most persuasive evidence that fraud is occurring?

A) Use an integrated test facility (ITF) to compare individual sales transactions with test transactions submitted through the ITF and investigate all differences.
B) Interview the three individual store managers to determine if their explanations about the observed differences are the same, and then compare their explanations to that of the section manager.
C) Schedule a surprise inventory audit to include a physical inventory and investigate areas of inventory shrinkage.
D) Select a sample of individual store prices and compare them with the sales entered on the cash register for the same items.

Question 53

An internal audit activity is participating in the due diligence work for an acquisition that a company is considering. One engagement objective is to determine if the acquisition's accounts payable contain all outstanding liabilities. Which of the following audit procedures would not be relevant for this objective?

A) Examine supporting documentation of subsequent (after-period) cash disbursements and verify period of liability.
B) Send confirmations, including zero-balance accounts, to vendors with whom the company normally does business.
C) Select a sample of accounts payable from the accounts payable list and verify the supporting receiving reports, purchase orders, and invoices.
D) Trace receiving reports issued before the period end to the related vendor invoices and accounts payable list.

Question 54

Which of the following conditions is the strongest indicator of possible fraud?

A) An assistant treasurer who refuses to take vacations.
B) Independent reconciliations of subsidiary to general ledgers that are not always completed on a timely basis.
C) A condition of excess manufacturing waste material.
D) A manager who is often over budget at the end of a reporting period.

Question 55

Which of the following procedures would be most helpful in providing additional evidence when an auditor suspects that an unidentified employee is submitting and approving invoices for payment?

A) Use generalized audit software to identify invoices from vendors with post office box numbers or other unusual features. Select a sample of those invoices and trace to supporting documents such as receiving reports.
B) Select a sample of payments made during the year and investigate each one for approval.
C) Select a sample of receiving reports representative of the period under investigation and trace to approved payment. Note any items not properly processed.
D) Select a sample of invoices paid during the past month and trace them to appropriate vendor accounts.

Question 56

Which of the following would provide the greatest assurance of the accuracy of a computer program's computation of freight charges for catalog sales?

A) Use discovery sampling, selecting transactions from invoices which should have freight charges added to them.
B) Use either test data or parallel simulation to test the computer application.
C) Use difference estimation, selecting transactions from invoices which should have freight charges added to them.
D) Use generalized audit software to select a monetary-unit sample of invoices that have been billed to customers.

Question 57

Which of the following audit techniques provides for continuous monitoring and analysis of computer transactions for detailed auditing?

A) Integrated test facility.
B) Parallel simulation.
C) Test data.
D) Embedded audit routines.

Question 58

After partially completing an internal control review of the accounts payable department, an auditor suspects that some type of fraud has occurred. To ascertain whether the fraud is present, the best sampling approach would be to use.

A) Simple random sampling to select a sample of vouchers processed by the department during the past year.
B) Probability-proportional-to-size sampling to select a sample of vouchers processed by the department during the past year.
C) Discovery sampling to select a sample of vouchers processed by the department during the past year.
D) Judgmental sampling to select a sample of vouchers processed by clerks who were identified by the department manager as acting suspiciously.

Question 59

Which sampling plan requires no additional sampling once the first error is found?

A) Stratified sampling.
B) Attributes sampling.
C) Stop-or-go sampling.
D) Discovery sampling.

Question 60

Which of the following processes real-transaction data through auditor-developed test programs?

A) Generalized audit software.
B) Tracing.
C) Parallel simulation.
D) Mapping.

Question 61

The use of standard operating procedure questionnaires in audit fieldwork can be beneficial because.

A) These questionnaires can both identify discrepancies and educate clients.
B) Standard operating procedures are essential to the effectiveness and efficiency of operations.
C) These questionnaires are more comprehensive than are other types of techniques for gathering data during fieldwork.
D) These questionnaires do not normally require prior clearance with management of the audited area.

Question 62

An auditor is using an internal control questionnaire as part of a preliminary survey. Which of the following is the best reason for the auditor to interview management regarding the questionnaire responses?

A) Interviews provide the opportunity to insert questions to probe promising areas.
B) Interviews are the most efficient way to upgrade the information to the level of objective evidence.
C) Interviewing is the least costly audit technique when a large amount of information is involved.
D) Interviewing is the only audit procedure which does not require confirmation of the information that is obtained.

Question 63

In a sampling application, the group of items about which the auditor wants to estimate some characteristic is called the:

A) Population.
B) Attribute of interest.
C) Sample.
D) Sampling unit.

Question 64

An internal auditor is discussing an audit problem with an engagement client. While listening to the client, the internal auditor should:

A) Prepare a response to the client.
B) Take mental notes on the speaker's nonverbal communication, as it is more important than what is being said.
C) Make sure that all details, as well as the main ideas of the client, are remembered.
D) Integrate the incoming information from the client with information that is already known.

Question 65

Which of the following would cause a company's accounts receivable turnover ratio to decrease steadily over a three-year period?

A) An increase in the discount offered for early payment.
B) A more liberal credit policy.
C) Invoices provided on a weekly rather than a monthly basis.
D) Increased cash sales.

Question 66

A limitation of using ratio analysis in an audit engagement is that it:

A) Often uses financial information provided by management which has not been reviewed for reliability and validity.
B) Is an expensive method of testing.
C) Requires computer software in order to develop meaningful interpretations of data.
D) Is useful only when comparisons can be made across other industries.

Question 67

During an audit of a retail organization, an internal auditor found a scheme in which the warehouse director and the purchasing agent diverted approximately $500,000 of goods to their own warehouse, then sold the goods to third parties. The fraud was not found earlier since the warehouse director updated the perpetual inventory records and then forwarded receiving reports to the accounts payable department for processing. Which of the following procedures would have most likely led to the discovery of the missing materials and the fraud?

A) Select a random sample of receiving reports and trace to the recording in the perpetual inventory records. Note differences and investigate by type of product.
B) Select a random sample of purchase orders and trace to receiving reports and to the records in the accounts payable department.
C) Take an annual physical inventory, reconciling amounts with the perpetual inventory records. Note the pattern of differences and investigate.
D) Select a random sample of sales invoices and trace to the perpetual inventory records to see if inventory was on hand. Investigate any differences.

Question 68

An audit department has received anonymous information that an employee has allegedly been able to steal and cash checks sent to the organization by customers. What is the most efficient way for an auditor to determine how this type of fraud could occur and who might be the perpetrator?

A) Confirm accounts receivable.
B) Confirm accounts payable.
C) Review the endorsements and banks of deposit on customers' canceled checks.
D) Flowchart and analyze key controls in the cash receipts process.

Question 69

An auditor used a questionnaire during an interview to gather information about the nature of credit sales processing. The questionnaire did not cover some pertinent information offered by the person being interviewed, and the auditor did not document the potential problems for further investigation. The primary deficiency with the above process is that:

A) The auditor failed to consider the importance of the information offered.
B) A questionnaire was used in a situation where a structured interview should have been used.
C) Using a questionnaire precludes the auditor from documenting other information.
D) The engagement program was incomplete.

Question 70

An appliance repair company is considering relocating the center that houses its service vehicles. An internal auditor wants to determine the potential reduction in average miles driven by the service vehicles if the center is relocated. Which of the following statistical sampling methods would be most appropriate for this test?

A) Attributes sampling.
B) Discovery sampling.
C) Probability-proportional-to-size sampling.
D) Mean-per-unit sampling.

Question 71

If an auditor used nonstatistical sampling instead of statistical sampling to estimate the value of inventory, which of the following would be true?

A) The confidence level could not be quantified.
B) The precision would be larger.
C) The projected value of inventory would be less reliable.
D) The risk of incorrect acceptance would be higher.

Question 72

Many questionnaires are made up of a series of different questions that use the same response categories (for example: strongly agree, agree, neither, disagree, strongly disagree). Some designs will have different groups of respondents answer alternate versions of the questionnaire that present the questions in different orders and reverse the orientation of the endpoints of the scale (for example: agree on the right and disagree on the left). The purpose of such questionnaire variations is to:

A) Eliminate intentional misrepresentations.
B) Reduce the effects of pattern response tendencies.
C) Test whether respondents are reading the questionnaire.
D) Make it possible to get information about more than one population parameter using the same questions.

Question 73

If management expects 100 percent compliance with a procedure, which of the following sampling approaches would be most appropriate?

A) Attributes sampling.
B) Discovery sampling.
C) Targeted sampling.
D) Variables sampling.

Question 74

Monetary-unit sampling is most useful when the internal auditor:

A) Is testing the accounts payable balance.
B) Cannot cumulatively arrange the population items.
C) Expects to find several material errors in the sample.
D) Is concerned with overstatements.

Question 75

Which of the following describes an internal auditor's responsibilities to include audit procedures to detect fraud in audits of a multinational organization?

A) International Accounting Standards require the internal auditor to include audit procedures which would detect fraud if it would cause a material misrepresentation of the financial statements.
B) Internal auditors do not have any specific responsibilities with respect to including fraud-related audit procedures.
C) Proper audit procedures, when carried out with due professional care, will guarantee that fraud, if present, will be detected.
D) If significant control weaknesses are detected, additional tests should be directed toward other indicators of fraud.

Question 76

Which of the following factors would increase the confidence level in a variables sampling plan?

A) A larger sample size. II. A stratified sample. III. A larger standard deviation.
B) I and II only
C) I and III only
D) II and III only
E) I, II, and III

Question 77

If an auditor is sampling to test compliance with a particular company policy, which of the following factors should not affect the allowable level of sampling risk?

A) The experience and knowledge of the auditor.
B) The adverse consequences of noncompliance.
C) The acceptable level of risk of making an incorrect audit conclusion.
D) The cost of performing auditing procedures on sample selections.

Question 78

Checklists used to assess audit risk have been criticized for all of the following reasons except:

A) Providing a false sense of security that all relevant factors are addressed.
B) Inappropriately implying equal weight to each item on the checklist.
C) Decreasing the uniformity of data acquisition.
D) Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist.

Question 79

If an auditor expects to find numerous discrepancies between recorded values and audited values of sample selections, which sampling technique would be most appropriate?

A) Attributes sampling.
B) Probability-proportional-to-size sampling.
C) Difference estimation sampling.
D) Discovery sampling.

Question 80

An internal auditor would most likely use attributes sampling when testing which of the following?

A) Accounts receivable balances.
B) Correct coding of accounts payable disbursement vouchers.
C) Year-end inventory value.
D) Fixed asset book value.