Question 1

An internal auditor is planning an assurance engagement. The auditor first reviews the department's business objectives. What is the next step?

Accepted Answer

A)  Review control activities. 
B)  Evaluate potential risks. 
C)  Establish risk management roles. 
D)  Set the scope of the engagement.

Question 2

An internal auditor was assigned to conduct an inventory control and stock room area engagement. During the audit, the auditor observed that there were some items that have a shelf life expiration date requirement based on a certificate of conformance received with the product. The certificates of conformance are kept on file in the inventory area office and the expiration date is verified at the time the item is taken from stock. The auditor reviewed the items in the stock room and also on the production floor for the expiration dates to see if there was any expired product. All items with a shelf life requirement were found to be within the expiration date requirement. Which of the following recommendations would be appropriate?

Accepted Answer

A)  Take no action, because all the items were within the expiration date requirement, and no corrective action is needed. 
B)  Permit production staff the access to files where the certificates of conformity are kept, so they can choose the items with the closest expiration date. 
C)  Determine the cost of inventory for the items that have a shelf life and apply a new policy regarding inventory levels to be maintained (i.e., minimums, maximums, reorder points etc.). 
D)  Add to the product label a "use by date" line, enter the expiration at the time of receipt, and perform periodic inventory checks.

Question 3

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?

Accepted Answer

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 4

An internal auditor noticed that employees with responsibilities for cash collection had recently issued an unusually large number of credit memos, indicating that the original charges had been made to the wrong customer accounts. From a control standpoint, the auditor would be concerned with the possibility that:

Accepted Answer

A)  The organization is selling a large number of defective items. 
B)  Employees in this function are concealing a theft of cash collected from customers. 
C)  Credit memos are not being submitted on a timely basis. 
D)  The credit department has not been properly screening customers and, as a result, a large portion of the accounts receivable may not be collectible.

Question 5

The chief audit executive (CAE) of an organization has established an internal audit activity (IAA) quality assessment program. According to IIA guidance, which of the following would be part of this program?

Accepted Answer

A)  Assessment of the IAA conducted independently of client feedback, and the review of individual audits to determine the quality and timeliness of supervision. 
B)  Assessment of the IAA conducted independently of client feedback, and identified areas of improvement reviewed at the end of the year. 
C)  Compliance with a checklist of required audit procedures, and review of individual audits to determine the quality and timeliness of supervision. 
D)  Compliance with a checklist of required audit procedures, and identified areas of improvement reviewed at the end of the year.

Question 6

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?

Accepted Answer

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 7

After the team member who specialized in fraud investigations left the internal audit team, the chief audit executive decided to outsource fraud investigations to a third party service provider on an as needed basis. Which of the following is most likely to be a disadvantage of this outsourcing decision?

Accepted Answer

A)  Cost. 
B)  Independence. 
C)  Familiarity. 
D)  Flexibility.

Question 8

Due to a recent system upgrade, an audit is planned to test the payroll process. Which of the following audit objectives would be most important to prevent fraud?

Accepted Answer

A)  Verify that amounts are correct. 
B)  Verify that payments are on time. 
C)  Verify that recipients are valid employees. 
D)  Verify that benefits deductions are accurate.

Question 9

When establishing the internal audit activity's annual plan, which of the following would be the best source of potential audit engagement topics?

Accepted Answer

A)  The organization's budget. 
B)  Operations involving cash transactions. 
C)  Recent changes in management objectives. 
D)  Risk factors utilized in the organization's risk models.

Question 10

Which of the following would be a red flag that indicates the possibility of inventory fraud?

Accepted Answer

A)  The controller has assumed responsibility for approving all payments to certain vendors. II. The controller has continuously delayed installation of a new accounts payable system, despite a corporate directive to implement it. III. Sales commissions are not consistent with the organization's increased levels of sales. IV. Payments to certain vendors are supported by copies of receiving memos, rather than originals. 
B)  I and II only 
C)  II and III only 
D)  I, II, and IV only 
E)  I, III, and IV only

Question 11

When creating the internal audit plan, the chief audit executive should prioritize engagements based primarily on which of the following?

Accepted Answer

A)  The last available risk assessment. 
B)  Requests from senior management and the board. 
C)  The longest interval since the last examination of each audit universe item. 
D)  The auditable areas required by regulatory agencies.

Question 12

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

Accepted Answer

A)  It is not the CAE's responsibility to establish a process for a follow-up. 
B)  Lack of resources is not a sufficient reason to forgo a follow-up. 
C)  Follow-up actions should take priority over new engagements in scheduling. 
D)  When resources are scarce, the follow-up can be incorporated into the next engagement.

Question 13

An audit identified a number of weaknesses in the configuration of a critical client/server system. Although some of the weaknesses were corrected prior to the issuance of the audit report, correction of the rest will require between six and 18 months for completion. Consequently, management has developed a detailed action plan, with anticipated completion dates, for addressing the weaknesses. Which of the following is the most appropriate course of action for the chief audit executive to take?

Accepted Answer

A)  Assess the adequacy of the action plan and monitor key dates and deliverables. 
B)  Schedule a follow-up audit engagement to assess the status of corrective action. 
C)  Reassign information systems auditors to assist the information technology department in correcting the weaknesses. 
D)  Evaluate statistics related to unplanned system outages, unauthorized access attempts, and denials of service to assess the effectiveness of corrections.

Question 14

As a result of a recent discovery of false information on employment applications, an internal auditor has reviewed hiring procedures. Which of the following represents a weakness in the control system?

Accepted Answer

A)  Applicants are not required to have their signed applications legally authenticated. II. Applicants' educational information is not validated with the educational institution before employment is offered. III. Information related to applicants' long-term work history is not validated before employment is offered. 
B)  III only 
C)  I and II only 
D)  II and III only 
E)  I, II, and III

Question 15

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?

Accepted Answer

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

Question 16

Which of the following techniques could be used to evaluate the effectiveness of changes to the operation of a computer help line?

Accepted Answer

A)  Benchmarking. 
B)  Baseline measurements. 
C)  Walk-throughs. 
D)  Quality circles.

Question 17

According to IIA guidance, which of the following are the most important objectives for helping to ensure the appropriate completion of an engagement? 1. Coordinate audit team members to ensure the efficient execution of all engagement procedures. 2. Confirm engagement workpapers properly support the observations, recommendations, and conclusions. 3. Provide structured learning opportunities for engagement auditors when possible. 4. Ensure engagement objectives are reviewed for satisfactory achievement and are documented properly.

Accepted Answer

A)  1, 2, and 3 
B)  1, 2, and 4 
C)  1, 3, and 4 
D)  2, 3, and 4

Question 18

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?

Accepted Answer

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 19

Which of the following should be included in the scope of an audit of a third-party contractor? 1. Budgets and financial forecasts for the project. 2. Contractor's information and control systems. 3. Contractor's financial position. 4. Progress of the project and costs incurred.

Accepted Answer

A)  1 and 4 only 
B)  1, 2, and 3 only 
C)  2, 3, and 4 only 
D)  1, 2, 3, and 4

Question 20

A company used simple regression analysis to analyze maintenance costs against machine hours (MH) for a 26-week period when the plant was in full operation. The regression yielded the following estimated cost function: Maintenance Cost = $60 + $0.25/MH The regression analysis also generated a coefficient of determination (R2), or goodness of fit, of 0.85. Which of the following statements regarding this regression analysis is appropriate?

Accepted Answer

A)  This regression can be used to determine the maintenance cost for any period at any activity level by substituting the machine hours in the equation. 
B)  The $60 component represents the best estimate of fixed maintenance costs for the company in a shutdown situation. 
C)  The $0.25 component is the slope coefficient of the cost estimate and represents the average variable maintenance cost per machine hour. 
D)  The coefficient of determination of R2 = 0.85 indicates that the goodness of fit is poor because the value is close to the maximum value of one.

Exam 4: Conducting the Internal Audit Engagement