Question 1

An internal auditor is conducting an assessment of the organization's fraud controls. Which of the following would not be considered a preventive control? 1. Daily report that identifies unsuccessful system log-in attempts. 2. Weekly management communication with tips on identifying possible fraud. 3. E-mail alert sent to management for checks issued over $100,000.00. 4. New hire training to explain fraud and employee misconduct.

Accepted Answer

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

Question 2

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

Accepted Answer

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 3

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?

Accepted Answer

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 4

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?

Accepted Answer

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 5

An internal auditor has been asked to participate in an advisory capacity to assist a committee in redesigning the organization's current financial reports to provide better information to management and the board. Which of the following actions on the part of the auditor would provide the greatest value to this project?

Accepted Answer

A)  The internal auditor has a set of generic report templates from a former project and presents them to the group because they worked so well for the previous employer. 
B)  The internal auditor interviews each stakeholder and documents the requirements and preferences of each and creates a report template that meets as many of the requirements and preferences as possible. 
C)  The internal auditor gathers the stakeholder group and holds a brainstorming session where they generate report requirements and preferences and then rank them in order of importance. 
D)  The internal auditor undertakes a project to gather report templates and formats from other organizations in the same line of business and presents them all to the group for review.

Question 6

The chief audit executive (CAE) of a new organization is in the process of determining the manner in which audit reports will be distributed and to whom. According to the Standards, which of the following is the most appropriate course of action for the CAE to take to develop this distribution process?

Accepted Answer

A)  The process should be determined in meetings with the external auditor and senior management to ensure alignment with external reporting. 
B)  The CAE should meet with senior management for their input, but finalize the distribution of all reports with the board. 
C)  The CAE should independently implement the report distribution, using best judgment to ensure that all relevant stakeholders are informed. 
D)  The CAE should request that senior management and the board meet to determine the most appropriate reporting method.

Question 7

Which of the following is the best approach for obtaining feedback from engagement clients regarding the quality of internal audit work?

Accepted Answer

A)  Ask questions during the exit interviews and send copies of the documented responses to the clients. 
B)  Call engagement clients after the exit interviews and send copies of the documented responses to the clients. 
C)  Distribute questionnaires to selected engagement clients shortly before preparing the internal audit annual activity report. 
D)  Provide questionnaires to engagement clients at the beginning of each engagement and request that the clients complete and return them after the engagements.

Question 8

Persuasive evidence indicates that a member of senior management has been involved in insider trading that would be considered fraudulent. However, the evidence was encountered during an operational audit and is not considered relevant to the audit. Which of the following is the most appropriate action for the chief audit executive to take?

Accepted Answer

A)  Report the evidence to external legal counsel for investigation. Report the legal counsel findings to management. 
B)  Report the evidence to the chairperson of the audit committee and recommend an investigation. 
C)  Conduct sufficient audit work to conclude whether fraudulent activity has taken place, then report the findings to the chairperson of the audit committee and to government officials if appropriate action is not taken. 
D)  Discontinue audit work associated with the insider trading since it is not relevant to the existing audit.

Question 9

Which of the following situations might allow an employee to steal checks sent to an organization and subsequently cash them?

Accepted Answer

A)  Checks are not restrictively endorsed when received. 
B)  Only one signature is required on the organization's checks. 
C)  One employee handles both accounts receivable and purchase orders. 
D)  One employee handles both cash deposits and accounts payable.

Question 10

An internal auditor recommended that an organization implement computerized controls in its sales system in order to prevent sales representatives from executing contracts in excess of their delegated authority levels. A follow-up review found that the sales system had not been modified, but a process had been implemented to obtain written approval by the vice president of sales for all contracts in excess of $1 million. The chief audit executive (CAE) would be justified in reporting this situation to the organization's board if:

Accepted Answer

A)  In the opinion of the CAE, the level of residual risk assumed by senior management is too high. II. Testing of compliance with the new process finds that all new contracts in excess of $1 million have been approved by the vice president of sales. III. The cost of modifying the sales system to include a preventive control is less than $100,000. 
B)  I only 
C)  III only 
D)  I and III only 
E)  I, II, and III

Question 11

The internal auditor's opinion in terms of due professional care should be:

Accepted Answer

A)  Limited to the effectiveness of internal controls. 
B)  Expressed only when consensus with top management has been achieved. 
C)  Based on experience and free of all bias. 
D)  Based on sufficient factual evidence.

Question 12

Which of the following is a red flag associated with improper asset valuation?

Accepted Answer

A)  Unusual increase in gross margin. 
B)  Unusual decrease in the number of days' purchases in inventory. 
C)  Recurring positive cash flows from operations. 
D)  Allowance for bad debts that is increasing in percentage terms.

Question 13

During a fraud interview, it was discovered that unquestioned authority enabled a vice president to steal funds from the organization. Which of the following best describes this condition?

Accepted Answer

A)  Scheme. 
B)  Opportunity. 
C)  Rationalization. 
D)  Pressure.

Question 14

According to IIA guidance, which of the following strategies would add the least value to the achievement of the internal audit activity's (IAA's) objectives?

Accepted Answer

A)  Align organizational activities to internal audit activities and measure according to the approved IAA performance measures. 
B)  Establish a periodic review of monitoring and reporting processes to help ensure relevant IAA reporting. 
C)  Use the results of IAA engagement and advisory reporting to guide current and future internal audit activities. 
D)  Establish a format and frequency for IAA reporting that is appropriate and aligns with the organization's governance structure.

Question 15

During an audit of a major contract, an auditor finds that actual hours and dollars billed are consistently at or near budgeted amounts. This condition is a red flag for which of the following procurement fraud schemes?

Accepted Answer

A)  Defective pricing. 
B)  Cost mischarging. 
C)  Fictitious vendor. 
D)  Bid rotation.

Question 16

Which of the following examples of audit evidence is the most persuasive?

Accepted Answer

A)  Real estate deeds, which were properly recorded with a government agency. 
B)  Canceled checks written by the treasurer and returned from a bank. 
C)  Time cards for employees, which are stored by a manager. 
D)  Vendor invoices filed by the accounting department.

Question 17

What is the primary factor that determines the depth and breadth of audit follow-up?

Accepted Answer

A)  The engagement client's written response to the audit findings. 
B)  The auditor's assessment of risk associated with the audit findings. 
C)  The auditor's assessment of personnel responsible for correcting audit findings. 
D)  The availability of audit personnel and financial resources.

Question 18

A company owns a machine that will produce 100 light switches in four hours. Due to increased demand, a second machine capable of producing 100 light switches in three hours has been added. Approximately how many hours will it take to produce 100 light switches using both machines working together?

Accepted Answer

A)  7.0 
B)  3.5 
C)  1.7 
D)  0.58

Question 19

A major insurance company provides a discount on automobile insurance if the vehicle meets certain safety criteria. Which of the following audit tests would provide an internal auditor with the best evidence that all qualifying insured automobiles are receiving the discount?

Accepted Answer

A)  Compare the percentage of automobiles receiving discounts this year to that of last year. 
B)  Ask managers whether they are aware of the discount criteria and whether they are providing the discount to all qualifying automobiles. 
C)  Select a sample of automobiles that are not receiving the discount and determine if they have been properly excluded. 
D)  Select a sample of automobiles receiving the discount and determine that the required discount criteria are being met.

Question 20

An organization has an opening for an entry-level internal audit position. When interviewing for the position, which of the following is the least important skill for an entry-level internal auditor?

Accepted Answer

A)  Conflict resolution skills. 
B)  Communication skills. 
C)  Time management skills. 
D)  Interpersonal skills.

Exam 4: Conducting the Internal Audit Engagement