Question 1

After becoming aware of control weaknesses indicating that a fraud could have been committed, which of the following actions should an internal auditor take next?

Accepted Answer

A)  Issue a written report identifying the control weaknesses. 
B)  Perform tests directed toward the identification of other fraud indicators. 
C)  Notify external auditors of the suspicion that fraud has been committed. 
D)  Recommend that a fraud investigation be conducted involving internal auditors, lawyers, investigators, security personnel, and other specialists, as appropriate.

Question 2

An internal audit manager is supervising an engagement. A senior auditor deviates from the approved engagement plan but meets all deadlines in the approved time schedule. Which activity is not required for the audit manager to provide proper engagement supervision?

Accepted Answer

A)  Actively participate in audit procedures. 
B)  Ensure that all engagement objectives are met. 
C)  Approve the deviation from the engagement plan. 
D)  Ensure compliance with the time schedule.

Question 3

An organization decides to create an internal audit function and hires a new chief audit executive (CAE). Which of the following should the CAE first consider when developing the internal audit process?

Accepted Answer

A)  Requirements of the external auditors to ensure an efficient coordination of audit effort. 
B)  Sufficient resources to adequately meet the needs of the annual audit plan. 
C)  Alignment of internal audit objectives with the organization's strategic plan. 
D)  An appropriate training plan for audit staff.

Question 4

Questions used to interrogate individuals suspected of fraud should:

Accepted Answer

A)  Adhere to a predetermined order. 
B)  Cover more than one subject or topic. 
C)  Move from general to specific. 
D)  Direct the individual to a desired answer.

Question 5

Which of the following types of contracts would provide the least incentive for a contractor to achieve economy and efficiency?

Accepted Answer

A)  Lump-sum contract. 
B)  Cost-plus contract. 
C)  Unit-price contract. 
D)  Indefinite delivery contract.

Question 6

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?

Accepted Answer

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 7

Senior management of an organization has requested that the internal audit activity provide ongoing internal control training for all managerial personnel. This is best addressed by:

Accepted Answer

A)  A formal consulting engagement. 
B)  An informal consulting engagement. 
C)  A performance assurance engagement. 
D)  An operational assurance engagement.

Question 8

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

Accepted Answer

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

Question 9

When establishing a quality assurance and improvement program, the chief audit executive should ensure the program is designed to accomplish which of the following objectives? 1. Add value. 2. Improve operations. 3. Provide assurance that the internal audit activity conforms with the Standards. 4. Provide assurance that the internal audit activity conforms with the IIA Code of Ethics.

Accepted Answer

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

Question 10

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?

Accepted Answer

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 11

When conducting a performance appraisal of an internal auditor who has been a below-average performer, it is not appropriate to:

Accepted Answer

A)  Notify the internal auditor of the upcoming appraisal several days in advance. 
B)  Use objective, impartial language. 
C)  Use generalizations. 
D)  Document the appraisal.

Question 12

Which of the following is an appropriate role for the internal audit activity with regard to the organization's risk management program?

Accepted Answer

A)  Identify and manage risks in line with the organization's risk appetite. 
B)  Ensure that a proper and effective risk management process exists. 
C)  Attain an adequate understanding of the organization's key risk mitigation strategies. 
D)  Identify and ensure that appropriate controls exist to mitigate risks.

Question 13

Management has asked the internal audit activity to perform an operational audit of a division that recently reported an increase in expenditures in addition to a decrease in profits. However, existing internal audit resources are currently engaged in a legal compliance audit. Which factor would be considered least important in deciding whether resources should be removed from the legal compliance audit to the operational audit?

Accepted Answer

A)  The increase in expenditures at the division over the past year. 
B)  The probability that the legal compliance audit will detect fraud. 
C)  The results of the external auditor's most recent financial audit. 
D)  The potential for regulatory fines associated with the legal compliance audit.

Question 14

Which of the following best describes the primary concern of the audit manager upon review of engagement working papers of an auditor?

Accepted Answer

A)  To ensure adequate control over the custody of working papers is exercised by the auditor. 
B)  To ensure that as part of the documentation the auditor collected original documents that can corroborate the audit findings. 
C)  To ensure that the work papers create background for subsequent reviews. 
D)  To ensure that the audit programs are followed by the auditor.

Question 15

According to IIA guidance, which of the following are benefits to the internal audit activity when conducting an assurance mapping exercise?

Accepted Answer

A)  Identification of gaps in risk coverage, and minimization of duplicate assurance efforts. 
B)  Identification of gaps in risk coverage, and consolidation of risk reporting efforts. 
C)  Resolution of identified testing errors, and minimization of duplicate assurance efforts. 
D)  Resolution of identified testing errors, and consolidation of risk reporting efforts.

Question 16

In addition to the internal auditor, which of the following parties should be present at an exit or closing conference? 1. Audit committee members. 2. The external auditor. 3. The management responsible for the areas covered by the engagement. 4. The chief executive officer.

Accepted Answer

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

Question 17

According to the Standards, which of the following describes the condition attribute when applied to the observations and recommendations contained in the audit report?

Accepted Answer

A)  The standards, measures, or expectations used in making an evaluation or verification. 
B)  The reason for the difference between the expected state and the actual state. 
C)  The factual evidence that the internal auditor found in the course of the examination. 
D)  The risk or exposure the organization encounters because the actual state is not consistent with the criteria.

Question 18

A manufacturing organization is considering a merger with a similar firm, and requests that the chief audit executive (CAE) perform a due diligence audit. During the preliminary survey, the CAE notes that inventory management is a high risk area. In consultation with the external auditors and legal advisors, the CAE learns that they share those concerns. Which of the following is the CAE's best course of action?

Accepted Answer

A)  Perform an independent audit of the merging firm's inventory management practices to verify the concerns and to provide relevant and reliable results to management for their consideration and action. 
B)  Advise management that internal audit, external audit, and legal advisors all have concerns about inventory management and, given the high materiality of inventory, management should not proceed with the merger. 
C)  Coordinate a review of inventory management with external auditors and legal advisors and ensure each group focuses on their area of expertise to ascertain the extent of the problems, if any. 
D)  Coordinate with the merging firm's internal audit department to better understand the inventory management function and whether the concerns are well-founded.

Question 19

Which of the following would be an appropriate improvement to controls over large quantities of consumable material that are charged to expense when placed in bins which are accessible to production workers?

Accepted Answer

A)  Relocate bins to the inventory warehouse. 
B)  Require management to compare the cost of consumable items used to the budget. 
C)  Lock the bins during normal working hours. 
D)  None of the above actions are needed for items of minor cost and size.

Question 20

Which of the following would not be an appropriate step for an internal auditor to perform during an assessment of compliance with an organization's privacy policy?

Accepted Answer

A)  Determine who can access databases containing confidential information. 
B)  Evaluate the organization's privacy policy to determine if appropriate information is covered. 
C)  Analyze access to permanent files and reports containing confidential information. 
D)  Evaluate the government's security measures related to confidential information received from the organization.

Exam 4: Conducting the Internal Audit Engagement