Chapter 2 Independence, Objectivity, Proficiency, Care, and Quality

Question 1

Interpretation Standard 1100 stats that independence is defined as.

Answer 1

The freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.

Question 2

Attribute Standard 1100 states that the internal audit activity must poses which two qualities when performing their work.

Answer 2

Internal audit activity must be independent and objective in performing their work.

Question 3

To achieve organizational independence in order to carryout out the responsibilities of the internal audit activity to who must the CAE have direct and unrestricted access to and how is this achieved?

Answer 3

direct and unrestricted access to senior management and the board.
This can be achieved through dual reporting relationships.

Question 4

To whom must the CAE confirm the organizational independence and how often?

Answer 4

To the board of directors on an annual basis.

Question 5

Organizational independence is achieved when the CAE reports to?
How can the CAE ensure that the internal audit activity to fulfills it’s responsibilities?

Answer 5

Functionally to the BOD
The CAE must report to a level within the organization that allow the internal audit activity to fulfill its responsibilities.

Question 6

Examples of functional reporting by the CAE to the the board involve

Answer 6

• Approving the IA Charter, risk based IA plan, approving IA budget,
• Receiving communications from the CAE on IA performance relative to its plan
• Approving decisions regarding the appointment and removal of the CAE
• Approving remuneration of CAE
• Making appropriate inquiries of management and the CAE to determine if there inappropriate scope and resource limitations

Question 7

A _____ line to the _____ provides the CAE with direct board access for sensitive matters and enables sufficient organizational status.

Answer 7

Functional

Board

Question 8

The CAE also has a __________ line to senior management, which further enables ________.

Answer 8

administrative reporting

the required stature and authority of internal audit to fulfill responsibilities.

Question 9

The IIA recommends that the CAE report administratively to the ____ so that the CAE is in ____.

Answer 9

Chief Executive Officer CEO

a senior position, with authority to perform duties unimpeded.

Question 10

Where can you find the audit committees oversight duties?

Answer 10

In the internal audit charter and the audit committee charter

Question 11

How is it demonstrated that the internal audit activity it independent of the organization and objective in performing work,

Answer 11

• The IA and Audit committe charter describe the AC’s oversight duties
• CAE’s job description and performance evaluation, noting reporting relationships and supervisory oversight
• Internal audit policy addresses independence and board communication requirements or organization chart with reporting responsibilities.

Question 12

For internal audit activity to be independent, what type of interference must the IAA be free from…

Answer 12

1) in determining the scope of internal audit
2) performing work
3) communicating results.
Such interference must be disclosed to the board and discuss implications.

Question 13

True or false - The CAE must have limited access to the board.

Answer 13

False - The CAE must communicate and interact directly with the board and must not be limited.

Question 14

True or False - It is not recommended that the CAE report to controller, accounting manager, or mid-level functional manager

Answer 14

True - Typically would NOT report to a controller, accounting manager, or mid level manager.

Question 15

True or False

Objectivity is an attribute of the internal auditor, while independence is an attribute of the internal audit activity

Answer 15

True

Objectivity is an attribute of the internal auditor, while independence is an attribute of the internal audit activity

Question 16

What is objectivity?

Answer 16

An unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.

Question 17

Objectivity refers to an internal auditor’s___________, which is facilitated by avoiding conflicts of interest.

Answer 17

Impartial and unbiased mindset

Question 18

Typical situations that undermine objectivity include:

Answer 18

• Auditing an area where an internal auditor recently worked (less than 1 year)
• auditing a family or close friend
• assuming without evidence that an area under audit is acceptable based on prior positive experience.

Question 19

How does the CAE establish objectivity of individual auditors?

Answer 19

The CAE must establish policies and procedures such as
1) Periodic reviews of conflict of interest or as needed assessments during staffing requirements phase of the engagement

Question 20

Who is responsible for maintaining objectivity

Answer 20

Responsibility rests on the CAE as well as the Internal auditors themselves

Question 21

What must one do if independence or objectivity is impaired?

Answer 21

The details must be disclosed to the appropriate party and the nature of the disclosure will depend upon the impairement

Question 22

Examples of impairment to independence and objectivity include:

Answer 22

• Personal conflict of interest
• scope limitations
• restrictions on access to records, personnel, and properties
• resource limitations such as funding.

Question 23

Examples of organizational independence impairment include

Answer 23

1) CAE has broader functional responsibility and:
a) Executes audit of functional area also under the CAE
b) Executes an audit within his/her supervisor’s functional responsibility
2) CAE does not have direct communication or interaction with the board
3) Budget for internal audit activity is reduced to the point where internal audit cannot fulfill it’s responsibilities as outline in the charter

Question 24

Examples of objectivity impairment include:

Answer 24

1) Internal auditor audits area in which he/she use to work
2) Internal auditor audits an area where a relative or close friend is employed
3) Internal auditor assumes, without evidence, that an area being audited ha s effectively mitigated risks based solely on prior positive audit or personal experience.
4) Modifies the planned approach or results based on the undue influence or of another person, without appropriate justification.

Question 25

Who should you notify if an impairment is”

1) not real
2) is real
3) comes to light after audit has been executed

Answer 25

1) CAE may discuss in engagement planning meetings with the operating management, document the discussion, and explain why concern is without merit.
2) Discuss with board and senior management and seek their support to resolve situation
3) discuss with operating and senior management, as well as the board.

Question 26

What is a scope limitation

Answer 26

A restriction placed on the internal audit activity that precludes the activity from accomplishing its objectives and plans.

Question 27

Examples of scope limitations include restrictions to

Answer 27

1) Scope defined in the internal audit charter
2) access to records, personnel and physical properties
3) approved engagement work schedule
4) performance of necessary engagement procedures
5) approved plan and financial l budget

Question 28

scope limitations should be communicated to and how:

Answer 28

the board and in writing

Question 29

True/False

Internal auditor’s objectivity can be impaired if they provide recommendation standards.

Answer 29

False. Internal auditors may provide recommendations

Question 30

The appearance of objectivity cannot be maintained when the auditor is has responsibility for any of the following as well as auditing or reviewing

Answer 30

Design, installs, implementation or drafting procedures.

Question 31

True/False

An auditor may audit a department they used to work for.

Answer 31

No Objectivity is presumed to be impaired if the auditor provides assurance services for an activity for which the auditor had responsibility within the previous year

Question 32

If the CAE has or is expected to have roles and or responsibilities that fall outside of internal auditing…

Answer 32

Safeguards must be in place to limit impairment to independence or objectivity

Question 33

What are examples of safeguards to organizational independence or individual objectivity of the internal auditor

Answer 33

Safeguard are those oversight activities, often undertaken by the board, to address these potential impairments, and may include such activities as periodically evaluating reporting lines and responsibilities and developing alternative processes to obtain assurance related to the areas of additional responsibility.

Question 34

Assurance engagements for functions over which the CAE has responsibility must be overseen…

Answer 34

by a party outside the internal audit activity.

Question 35

Under which circumstances may the Internal Audit Activity provide assurance services where it had previously performed consulting services

Answer 35

When the nature of the consulting did not impair objectivity and provided individual objectivity is managed when assigning resources to the engagement

Question 36

True/False

Internal auditor may not provide consulting services related to operations for which thy had previous responsibilities

Answer 36

False

Internal auditor MAY provide consulting services related to operations for which thy had previous responsibilities

Question 37

What must the internal auditor do if he has potential impairments to independence or objectivity relating to proposed consulting services?

Answer 37

Disclosure must be made to the engagement client prior to accepting the engagement.

Question 38

Engagements to not need to be performed with proficiency and due care

Answer 38

False, of course they do, its one of the ethical standards

Question 39

Who is responsible for conformance to proficiency and due professional care standard

Answer 39

The CAE is responsible for ensuring conformance for the Internal Audit Activity, however, the individual internal auditor is responsible at each engagement

Question 40

Internal auditor and the Internal Audit Activity must possess the following to be proficient.

Answer 40

Knowledge, skills and other competencies needed to perform their individual responsibilities. Individually (Internal Auditor) and collectively (Internal Audit Activity)

Question 41

What two specific areas must internal audit possess sufficient knowledge to evaluate

Answer 41

1) Risk of fraud and manner in which the organization manages it
2) key information technology risk and controls and available technology based audit techniques to perform assigned work

However the internal auditor is not expected to have the level of expertise of an internal auditor whose primary responsibility is fraud or information technology.

Question 42

True/False
The CAE may accept a consulting engagement and does not need to obtain competent assistance if the internal auditors lack the knowledge skill and other competencies needed to perform all or part of the engagement.

Answer 42

False.

The CAE must decline the engagement or obtain advice and assistance if the internal auditors lack the knowledge, skills or competencies needed.

Question 43

Competency is defined as…

Answer 43

The ability to perform a task or job properly. Defined set of knowledge, skills and behavior.

Question 44

How does the CAE build proficiency of the internal audit activity.

Answer 44

By developing competency assessment tolls or skills assessments based on the Competency Framework or another benchmark. (e.g. mature internal audit activity)

Question 45

The 10 interdependent core competencies of the Competency Framework include.

Answer 45

1) Professional Ethics
2) Internal Audit Management
3) IPPF
4) Governance, Risk, and control
5) Business Acumen
6) Communications
7) Persuasion and Collaboration
8) Critical Thinking
9) Internal Audit Delivery
10) Improvement and Innovation

Question 46

Business Acumen is

Answer 46

An understanding of the organizational culture, the economy in which it operates, and the global and local conditions that affect its operations.

Question 47

If the internal audit staff is not able to fulfill the audit responsibilities

Answer 47

the use of external service providers must be considered

Question 48

True or False

An organization may outsource none, all or some of it’s internal audit activities

Answer 48

True

Question 49

True or False

Oversight of and responsibility for the internal audit activity may be outsourced.

Answer 49

False.

Oversight of and responsibility for the internal audit activity may NOT be outsourced.