Deck 21: Internal, Operational, and Compliance Auditing

Question 1

The work of internal auditors is primarily for the benefit of management and the board of directors.

Answer 1

True

Question 2

Evaluation of internal control is one of the general sections of the IIA's Standards of the Professional Practice of Internal Auditing.

Answer 2

False

Question 3

Internal auditing is considered to be part of an organization's:

A) Accounting system.
B) Control activities.
C) Monitoring.
D) External controls.

Answer 3

C

Question 4

When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on:
I) Noteworthy accomplishments of the program.
II) The scope of the auditor's testing of internal controls.

A) I only.
B) II only.
C) Both I and II.
D) Neither I nor II.

Question 5

The operational auditors' preliminary conclusions about potential problem areas are summarized as:

A) The definition of purpose.
B) The audit program.
C) The preliminary survey.
D) The audit report.

Question 6

The passage of the Foreign Corrupt Practices Act increased the demand for internal auditing.

Question 7

In operational auditing, the preliminary survey serves as a guide for the development of the audit program.

Question 8

When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on:
I) Recommendations for actions to improve operations.
II) The scope of the auditor's tests of compliance with laws and regulations.

A) I only.
B) II only.
C) Both I and II.
D) Neither I nor II.

Question 9

Compliance procedures are tests of an organization's controls.

Question 10

Which of the following is not required of an individual seeking to become a certified internal auditor?

A) Two years work experience in internal auditing or its equivalent.
B) Successful completion of a two-day examination.
C) A baccalaureate degree from an accredited college.
D) One year of supervisory experience.

Question 11

When no weaknesses in internal control are discovered during an operational audit, the appropriate report will be either standard unqualified or unqualified with explanatory language.

Question 12

Under the Single Audit Act, the auditor must apply procedures to test for compliance and test the effectiveness of controls for: $$\begin{array} { | c | c | c | } \hline & \begin{array} { c } \text { Major } \\\text { Programs }\end{array} & \begin{array} { c } \text { Non- } \\\text { Major } \\\text { Programs }\end{array} \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 13

In an audit in accordance with the Single Audit Act of 1984, the auditors must test compliance with the significant requirements of all major programs.

Question 14

Which of the following is not one of the attribute standards of the IIA's Standards for the Professional Practice of Internal Auditing?

A) Independence and objectivity.
B) Outsourcing.
C) Proficiency and professional care.
D) Purpose, authority, and responsibility.

Question 15

In an audit in accordance with Government Auditing Standards, the auditors are required to perform tests beyond those of an audit in accordance with generally accepted auditing standards relating to internal control over major federal assistance programs.

Question 16

A comprehensive examination of an operating unit or a complete organization to evaluate its systems, controls, and performance, as measured by management's objectives is called a(an):

A) Compilation.
B) Consultation.
C) Operational Audit.
D) "Yellow Book" audit.

Question 17

For the highest degree of independence, the director of internal auditing should report directly to:

A) The controller.
B) The audit committee of the board of directors.
C) The executive vice-president.
D) The chief accountant.

Question 18

Operational audits are primarily concerned with whether an organization follows appropriate laws and regulations.

Question 19

An audit in accordance with the Single Audit Act does not involve reporting upon:

A) Compliance with provisions of laws that may have a direct and material effect on each major federal financial assistance program.
B) Financial statements.
C) Internal control over operations.
D) Schedule of expenditures of federal awards.

Question 20

The first internal auditors were primarily concerned with operational auditing.

Question 21

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for audits in accordance with Government Auditing Standards?

A) A report on the entity's internal control.
B) Material indications of illegal acts should be reported in a document with distribution restricted to senior officials of the entity audited.
C) Instances of abuse, fraud, mismanagement, and waste should be reported to the organization with legal oversight authority over the entity audited.
D) All privileged and confidential information discovered should be reported to the senior officials of the organization that arranged for the audit.

Question 22

In an audit in accordance with Government Auditing Standards, the auditors are required to provide a report on:

A) Compliance applicable to major federal programs.
B) The Schedule of financial assistance received.
C) Compliance with laws and regulations which are required to be tested by generally accepted auditing standards.
D) Internal control systems used in administering federal assistance programs.

Question 23

Management is beginning to take corrective action on personnel department deficiencies reported during the last internal audit. According to the IIA's Standards, the internal auditor should:

A) Oversee the corrective action.
B) Postpone the next audit of the personnel department until the corrective action is completed.
C) Refrain from judging whether the corrective action will remedy the deficiencies.
D) Follow up to see that the corrective action satisfies the audit recommendations.

Question 24

In an audit in accordance with generally accepted auditing standards, the auditors must test compliance with those laws and regulations that:

A) Have a direct and material effect on the financial statements.
B) Have a direct and material effect on major federal programs.
C) Have a material direct or indirect effect on the financial statements.
D) Have a material effect on major or non-major programs.

Question 25

According to the IIA's Standards, an internal auditor's working papers should be reviewed by the:

A) Management of the department being audited.
B) Management of the internal auditing department.
C) Audit committee of the board of directors.
D) Management of the organization's security division.

Question 26

Interviewing operating personnel, identifying the objectives of the auditee, identifying standards used to evaluate performance, and assessing the risk inherent in the auditee's operations are activities typically performed in which phase of an internal audit?

A) The fieldwork phase.
B) The preliminary survey phase.
C) The audit programming phase.
D) The reporting phase.

Question 27

The primary purpose of the internal auditors' evaluation of internal control is to:

A) Determine if management has planned and implemented activities needed to attain goals and objectives.
B) Determine the extent of tests of controls needed during field work.
C) Identify areas for fraud investigation.
D) Determine if employees have incompatible duties that have compromised the control environment.

Question 28

Costs paid with federal assistance that appear to be in violation of a law or regulation are known as:

A) Questioned costs.
B) Noncompliance costs.
C) Improper costs.
D) Illegal costs.

Question 29

Compliance auditing procedures are:

A) Tests of controls.
B) Observation procedures.
C) Substantive procedures.
D) Confirmation procedures.

Question 30

In governmental accounting, emphasis is placed on:

A) Total assets owned by the governmental entity.
B) Generating income from funds employed.
C) Expenditures of funds.
D) The flow of funds through the income statement.

Question 31

In an audit in accordance with Government Auditing Standards, the auditors are required to provide a report on:

A) Compliance with general requirements.
B) The schedule of financial assistance received.
C) The organization's internal control.
D) Findings and questioned costs.

Question 32

Requirements of federal financial assistance programs that involve significant national policy are known as:

A) Specific requirements.
B) Major program requirements.
C) General requirements.
D) Primary requirements.

Question 33

Kent is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Kent detected noncompliance with requirements that have a material effect on that program. Kent's report on compliance should express a(an):

A) Unqualified opinion with a separate explanatory paragraph.
B) Qualified opinion or an adverse opinion.
C) Adverse opinion or a disclaimer of opinion.
D) Limited assurance on the items tested.

Question 34

An operational audit report which deals with the scrap disposal function in a manufacturing company is most likely to address:

A) The efficiency and effectiveness of the scrap disposal function and include any findings requiring corrective action.
B) Whether the scrap material inventory is reported as a current asset.
C) Whether the physical inventory count of the scrap material agrees with the recorded amount.
D) Whether the scrap materials inventory is valued at the lower of cost or market.

Question 35

A primary purpose of operational auditing standards is to provide:

A) A means of assurance that internal control is operating effectively.
B) Aid to the independent auditor in conducting the audit of financial statements.
C) The results of internal examinations of financial and accounting matters to the company's top-level management.
D) A measure of management performance in meeting organizational goals.

Question 36

The scope of an internal audit is initially defined by the:

A) Audit objectives.
B) Scheduling and time estimates.
C) Preliminary survey.
D) Audit program.

Question 37

The internal auditing department provides information about control and quality of performance to:

A) Management and the board of directors.
B) A level in the organization sufficient to ensure acceptance of all recommendations.
C) Outside agencies for regulatory and financial compliance.
D) Any member of the organization upon request.

Question 38

When performing an audit of a city in accordance with the Single Audit Act, an auditor should adhere to:

A) Standards for the Professional Practice of Internal Auditing.
B) Government Auditing Standards.
C) Operational Auditing Standards.
D) Financial Accounting Standards.

Question 39

Which of the following types of audits is designed to determine that an organization has complied with the specific requirements of major financial assistance programs?

A) An audit in accordance with Government Auditing Standards.
B) A single audit.
C) An audit in accordance with generally accepted auditing standards.
D) An operational audit.

Question 40

A legal aid society provides free legal aid to low-income individuals with funds passed-through the state welfare department from the U.S. Department of Health and Human Services. In this situation, which organization is the primary recipient of the funds?

A) The state welfare department.
B) The Department of Health and Human Services.
C) The legal aid society.
D) The individual receiving the aid.

Question 41

Governmental entities and other recipients of governmental financial assistance, depending upon the circumstances, may be subject to an audit in accordance with generally accepted auditing standards (GAAS audit), Government Auditing Standards (GAS audit) and the Federal Single Audit Act (Single Audit Act audit). Place an X by the proper reports issued by auditors for each of these audits on the following:

Question 42

In planning an operational audit, an on-site survey could assist with all of the following, except:

A) Obtaining auditee comments and suggestions on control problems.
B) Obtaining preliminary information on internal control.
C) Identifying areas for audit emphasis.
D) Evaluating the effectiveness of the internal control.

Question 43

Among the Dodd-Frank Wall Street Reform and Consumer Protection Act's requirements is one requiring:

A) CPA examinations of broker-dealer internal control over compliance.
B) Quarterly reporting by all SEC registrants.
C) CPA audit of SEC registrant interim statements.
D) Severe penalties for companies implementing more than one questionable act reporting channel.

Question 44

Many government and nonprofit organizations are required to have an audit in accordance with Government Auditing Standards.
a. Who develops Government Auditing Standards?
b. Describe the requirements of an audit in accordance with Government Auditing Standards.
c. Describe the auditors' responsibilities for testing for compliance with laws and regulations in an audit in accordance with Government Auditing Standards.

Question 45

Operational auditing has grown in importance over the last few decades.
a. Define operational auditing.
b. Who are the major users of operational audit reports.
c. List the phases of an operational audit.

Question 46

The Dodd-Frank Act requires auditors to report on broker-dealer compliance with internal control:

A) Over financial reporting as of year-end.
B) Operational effectiveness as of year-end.
C) Over compliance with various SEC requirements during the most recent fiscal year.
D) In conjunction with the Foreign Corrupt Practices Act.

Question 47

Internal auditors are an important part of the internal control structures of all types of organizations.
a. Describe the objectives of an internal auditing function.
b. Explain two ways that internal auditors may maintain independence with respect to the activities that they audit.

Question 48

Which of the following best describes the scope of internal auditing as it has developed to date?

A) Internal auditing involves appraising the economy and efficiency with which resources are employed.
B) Internal auditing involves evaluating compliance with policies, plans, procedures, laws, and regulations.
C) Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding assets.
D) Internal auditing has evolved to more of an operational orientation from a financial orientation.