Flash Cards V1C1 - V1C1
1
Q
Question: V1C1-0001
According to the IIA Standards, which of the following is not included in the scope of the internal audit function?
Answers
A: Appraising the economy and efficiency with which resources are employed.
B: Reviewing the strategic management process, assessing the quality of management decision.
C: Reviewing the means of safeguarding assets and, as appropriate, verifying the existence of such assets.
D: Reviewing operations or programs to ascertain whether results are consistent with established objectives
and goals and whether the operations or programs are being carried out as planned.
A
Answer Explanations
Answer (a) is incorrect. It is included in the scope of internal auditing as stated in the IIA Standards.
Answer (b) is the correct answer. The scope of the internal audit function does not include an assessment of the company’s strategic management process.
Answer (c) is incorrect. It is included in the scope of internal auditing as stated in the IIA Standards.
Answer (d) is incorrect. It is included in the scope of internal auditing as stated in the IIA Standards.
2
Q
Question: V1C1-0002
An internal auditor is auditing the financial operations of an organization. Which of the following is not specified by
the IIA Standards for inclusion in the scope of the audit?
Answers
A: Reviewing the reliability and integrity of financial information.
B: Reviewing systems established to ensure compliance with appropriate policy, plans, procedures, and other types of authority.
C: Appraising economy, efficiency, and effectiveness of the employment of resources.
D: Reviewing the financial decision-making process.
A
Answer Explanations
Answer (a) is incorrect. Reviewing the reliability and integrity of financial information is the basic element of the audit.
Answer (b) is incorrect. The Statement includes compliance and there are compliance aspects in financial operations.
Choice (c) is incorrect. The auditor would review the economy, efficiency, and effectiveness of the financial functions.
Answer (d) is the correct answer. This element of the audit is not included in the IIA Standards.
3
Q
Question: V1C1-0003
The audit committee of an organization has charged the director of internal auditing with bringing the department into full compliance with the IIA Standards. The director’s first task is to develop a charter. Identify the item that should be included in the statement of objectives.
Answers
A: Report all audit findings to the audit committee every quarter.
B: Notify governmental regulatory agencies of unethical busiess practices by organization management.
C: Determine the adequacy and effectiveness of the organization’s systems of internal controls.
D: Submit departmental budget variance reports to management every month.
A
Answer Explanations
Answer (a) is incorrect. Only significant audit findings should be discussed with the audit committee.
Answer (b) is incorrect. Internal auditors are not required to report deficiencies in regulatory compliance to the appropriate agencies. However, IIA members and Certified Internal Auditors (CIAs) may not knowingly be involved in illegal acts.
Answer (c) is the correct answer. This is a primary function of any internal auditing department.
Answer (d) is incorrect. This is not a primary objective of the internal auditing department. It is a budgetary control that management may require on a periodic basis.
4
Q
Question: V1C1-0004
A charter is being drafted for a newly formed internal auditing department. Which of the following best describes the appropriate organizational status that should be incorporated into the charter?
Answers
A: The director of internal auditing should report to the chief executive officer but have access to the board
of directors.
B: The director of internal auditing should be a member of the audit committee of the board of directors.
C: The director of internal auditing should be a staff officer reporting to the chief financial officer.
D: The director of internal auditing should report to an administrative vice president.
A
Answer Explanations
Answer (a) is the correct answer. This arrangement provides for the most operating flexibility and independence.
Answer (b) is incorrect. That would place the director in a position of operational control.
Answer (c) is incorrect. It is not the best choice; it limits influence and independence.
Answer (d) is incorrect. It is not the best choice; it limits influence and independence.
5
Q
Question: V1C1-0005
If an auditee’s operating standards are vague and thus subject to interpretation, the auditor should
Answers
A: Seek agreement with the auditee as to the standards to be used to measure operating performance.
B: Determine best practices in this area and use them as the standard.
C: Interpret the standards in their strictest sense because standards are otherwise only minimum measures of acceptance.
D: Omit any comments on standards and the auditee’s performance in relationship to those standards, because such an analysis would be meaningless.
A
Answer Explanations
Answer (a) is the correct answer. This is what is required by the IIA’s Standards.
Answer (b) is incorrect. The auditor should seek to understand the operating standards as they are applied to the organization.
Answer (c) is incorrect. Agreement is necessary.
Answer (d) is incorrect. The auditor should first seek to gain an understanding with the auditee on the appropriate standards.
6
Q
Question: V1C1-0006
In which of the following situations does the auditor potentially lack objectivity?
Answers
A: An auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major
customer before it is implemented.
B: A former purchasing assistant performs a review of internal controls over purchasing four months after
being transferred to the internal auditing department.
C: An auditor recommends standards of control and performance measures for a contract with a service
organization for the processing of payroll and employee benefits.
D: A payroll accounting employee assists an auditor in verifying the physical inventory of small motors.
A
Answer Explanations
Answer (a) is incorrect. The IIA Standards says the internal auditor’s objectivity is not adversely affected when the auditor reviews procedures before they are implemented.
Answer (b) is the correct answer. The IIA Standards say that persons transferred to the internal auditing department should not be assigned to audit those activities they previously performed until a reasonable period of time has elapsed.
Answer (c) is incorrect. Standards say the internal auditor’s objectivity is not adversely affected when the auditor recommends standards of control for systems before they are implemented.
Answer (d) is incorrect. Use of staff from other areas to assist the internal auditor does not impair objectivity,
especially when the staff is from outside of the area being audited.
7
Q
Question: V1C1-0007
Which of the following actions would be a violation of auditor independence?
Answers
A: Continuing on an audit assignment at a division for which the auditor will soon be responsible as the result of a promotion.
B: Reducing the scope of an audit due to budget restrictions.
C: Participating on a task force which recommends standards for control of a new distribution system.
D: Reviewing a purchasing agent’s contract drafts prior to their execution.
A
Answer Explanations
Answer (a) is the correct answer. The IIA Standards specifies that an auditor who has been promoted to an operating department should not continue on an audit of the new department.
Answer (b) is incorrect. The Standards state that budget restrictions do not constitute a violation of an auditor’s independence.
Answer (c) is incorrect. The Standards state that an auditor may participate on a task force that recommends new systems. However, designing, installing, or operating such systems might impair objectivity.
Answer (d) is incorrect. The Standards state that an auditor may review contracts prior to their execution.
8
Q
Question: V1C1-0008
Which of the following activities would not be presumed to impair the independence of an internal auditor?
I. Recommending standards of control for a new information system application.
II. Drafting procedures for running a new computer application to ensure that proper controls are installed.
III. Performing reviews of procedures for a new computer application before it is installed.
Answers
A: I only.
B: II only.
C: III only.
D: I and III.
A
Answer Explanations
Answer (a) is incorrect. It is presumed not to impair independence per the IIA Standards.
Answer (b) is incorrect. This is presumed to impair independence per the Standards.
Answer (c) is incorrect. It is presumed not to impair independence per the IIA Standards.
Answer (d) is the correct answer.
9
Q
Question: V1C1-0009
Which of the following is not a true statement about the relationship between internal auditors and external auditors?
Answers
A: Appraising the economy
B: There may be periodic meetings between internal and external auditors to discuss matters of mutual interest.
C: There may be an exchange of audit reports and management letters between internal and external auditors.
D: Internal auditors may provide audit programs and work papers to external auditors.
A
Answer Explanations
Answer (a) is the correct answer. Oversight of external audit work is generally the responsibility of the board.
Answer (b) is incorrect. When internal auditors are assigned to assist in the external audit, they are allowed to share relevant information with the external auditors.
Answer (c) is incorrect. When internal auditors are assigned to assist in the external audit, they are allowed to share relevant information with the external auditors.
Answer (d) is incorrect. If the external auditor plans to rely on the work of an internal auditor, the work must be reviewed and tested. This would require access to both programs and workpapers.
10
Q
Question: V1C1-0010 A quality assurance program of an internal audit department provides reasonable assurance that audit work conforms to applicable standards. Which of the following activities are designed to provide feedback on the effectiveness of an audit department? I. Proper supervision. II. Proper training. III. Internal reviews. IV. External reviews. Answers A: I, II, and III only. B: II, III, and IV only. C: I, III, and IV only. D: I, II, III, and IV.
A
Answer Explanations
Answer (a) is incorrect. Proper training is an important component of maintaining a current staff, but does not provide feedback.
Answer (b) is incorrect. Proper training is an important component of maintaining a current staff, but does not provide feedback.
Answer (c) is the correct answer. The purpose of a quality assurance program is to evaluate the operations of the internal audit department. The IIA Standards note that a program should include supervision, internal reviews, and external reviews.
Answer(d) is incorrect. Proper training is an important component of maintaining a current staff, but does not provide feedback.
11
Q
Question: V1C1-0011
An internal audit team recently completed an audit of the company’s compliance with its lease-versus-purchase policy
concerning company automobiles. The audit report noted that the basis for several decisions to lease rather than
purchase automobiles had not been documented and was not auditable. The report contained a recommendation that
operating management ensure that such lease agreements not be executed without proper documentation of the basis
for the decision to lease rather than buy. The internal auditors are about to perform follow-up work on this audit
report.
The primary purpose for performing a follow-up review is to
Answers
A: Ensure timely consideration of the internal auditors’ recommendations.
B: Ascertain that appropriate action was taken on reported findings.
C: Allow the internal auditors to evaluate the effectiveness of their recommendations.
D: Document what management is doing in response to the audit report and close the audit file in a timely
manner.
A
Answer Explanations
Answer (a) is incorrect. It is not the best answer. It implies that the auditor’s recommendations, not the findings, are
the most important elements of the report.
Answer (b) is the correct answer. This is what the IIA Standards require.
Answer (c) is incorrect. It is not the best choice. This implies that the auditor’s recommendations, not findings, are
primary.
Answer (d) is incorrect. It implies that processes in the internal auditing activity are primary.
12
Q
Question: V1C1-0012
An internal audit team recently completed an audit of the company’s compliance with its lease-versus-purchase policy concerning company automobiles. The audit report noted that the basis for several decisions to lease rather than purchase automobiles had not been documented and was not auditable. The report contained a recommendation that operating management ensure that such lease agreements not be executed without proper documentation of the basis for the decision to lease rather than buy. The internal auditors are about to perform follow-up work on this audit report.
Assume that senior management has decided to accept the risk involved in failure to document the basis for leaseversus-purchase decisions involving company automobiles. In such a case, what would be the auditors’ reporting obligation?
Answers
A: The auditors have no further reporting responsibility.
B: Management’s decision and the auditors’ concern should be reported to the company’s board of directors.
C: The auditors should issue a follow-up report to management clearly stating the rationale for the recommendation that the basis for lease-versus-purchase decisions be properly documented.
D: The auditors should inform the external auditor and any responsible regulatory agency that no action has been taken on the finding in question.
A
Answer Explanations
Answer (a) is the correct answer. When senior management has assumed such risk, reporting to the board is only required for significant findings. There is no indication that the failure to document several decisions is significant enough to report to the board.
This answer is incorrect. Refer to the correct answer explanation.
Answer (c) is incorrect. Senior management has already indicated that it understands and has accepted the related risk.
Answer (d) is incorrect. Reporting to anyone outside the organization is not required or appropriate.
13
Q
Question: V1C1-0013
Auditors realize that at times corrective action is not taken even when agreed to by the appropriate parties. This
should lead an internal auditor to
Answers
A: Decide the extent of necessary followup work.
B: Allow management to decide when to follow-up, since it is management’s ultimate responsibility.
C: Decide to conduct follow-up work only if management requests the auditor’s assistance.
D: Write a follow-up audit report with all findings and their significance to the operations.
A
Answer Explanations
Answer (a) is the correct answer. The IIA Standards state that the nature, timing and extent of follow-up should be determined by the director of internal auditing.
Answer (b) is incorrect. The IIA Standards state that follow-up work is not management’s responsibility.
Answer (c) is incorrect. The IIA Standards state that follow-up work is not management’s responsibility.
Answer (d) is incorrect. The auditor has to provide an opinion as to the decision made with regard to lack of action.
14
Q
Question: V1C1-0014
In publicly held companies, management often requires the internal auditing department’s involvement with quarterly financial statements that are made public and/or used internally. Which one of the following is generally not a reason for such involvement?
Answers
A: Management may be concerned about its reputation in the financial markets.
B: Management may be concerned about potential penalties that could occur if quarterly financial statements that are made public are misstated.
C: The Standards state that internal auditors should be involved with reviewing quarterly financial statements.
D: Management may perceive that having quarterly financial information examined by the internal auditors enhances its value for internal decision making.
A
Answer Explanations
Answer (a) is incorrect. This is a reason that management desires internal audit involvement.
Answer (b) is incorrect. This is a reason that management desires internal audit involvement.
Answer (c) is the correct answer. This material does not exist in the IIA Standards.
Answer (d) is incorrect. This is a reason that management desires internal audit involvement.
15
Q
Question: V1C1-0015
During testing of the effectiveness of inventory controls, the auditor makes a note in the working papers that most of the cycle count adjustments for the facility involved transactions of the machining department. The machining department also had generated an extraordinary number of cycle count adjustments in comparison to other departments last year. The auditor should
Answers
A: Interview management and apply other audit techniques to determine whether transaction controls and
procedures within the machining department are adequate.
B: Do no further work because the concern was not identified by the analytical procedures designed in the
audit program.
C: Notify internal audit management that fraud is suspected.
D: Place a note in the working papers to review this matter in detail during the next review.
A
Answer Explanations
Answer (a) is the correct answer. The Standards call for follow-up when analytical procedures identify unexpected
results.
Answer (b) is incorrect. The audit program is a guide, but it does not restrict the auditor from pursuing information unknown at the time that the program was written.
Answer (c) is incorrect. The facts belie an indication of fraud.
Answer (d) is incorrect. The risk of a material error caused by the machining department’s activity is not addressed by delaying appropriate audit procedures.
16
Q
Question: V1C1-0016
Developing an audit finding involves comparing the condition to the relevant standard or criterion. Which of the following choices best represents an appropriate standard or criterion to support a finding?
Answers
A: A quality standard operating procedure (number and date) for the department.
B: An internal accounting control principle, cited and copied from a public accounting reference.
C: A sound business practice, based on the internal auditor’s knowledge and experience obtained during many audit assignments within the company.
D: All of the above.
A
Answer Explanations
Answer (a) is incorrect. Standard operating procedures are an appropriate source.
Answer (b) is incorrect. Textbook references are appropriate authority for standards and criteria.
Answer (c) is incorrect. Sound business practice is valid as a criterion as long as the auditee agrees.
Answer (d) is the correct answer. Provided that the auditee agrees with the standard or criterion, any of the above choices is appropriate.
17
Q
Question: V1C1-0017
An internal audit director for a large manufacturing company is considering revising the department’s audit charter with respect to the minimum educational and experience qualifications required. The audit director wants to require all staff auditors to possess specialized training in accounting and a professional auditing certification such as the Certified Internal Auditor (CIA) or the Chartered Accountant (CA). One of the disadvantages of imposing this requirement would be
Answers
A: The policy might negatively affect the department’s ability to perform quality examinations of the company’s financial and accounting systems.
B: The policy would not promote the professionalism of the department.
C: The policy would prevent the department from using outside consultants when the department did not have the skills and knowledge required in certain audit situations.
D: The policy could limit the range of activities that could be audited by the department due to the department’s narrow expertise and backgrounds.
A
Answer Explanations
Answer (a) is incorrect. Auditing departments that hired only CIAs or CAs and individuals possessing accounting degrees would be better equipped to audit certain operations, for example, financial and accounting systems, than others that did not have these minimum standards.
Answer (b) is incorrect. A charter which set minimum professional standards, that is, CIA or CA, for its department’s auditors would promote professionalism.
Answer (c) is incorrect. The impact of this requirement would not affect whether consultants were used. Standard states that when auditors do not possesses adequate knowledge and skills in certain required area consultants should be used.
Answer (d) is the correct answer. The mix of audit skills in an audit staff affects the range of activities that can be audited. Auditing departments that comprise only people trained in accounting probably would be better able to examine financial and accounting systems than engineering systems, for example. As a result, departments should strive for an appropriate balance of experience, training, and ability in order to audit a range of activities within their respective organizations.
18
Q
Question: V1C1-0018
An organization was in the process of establishing its new internal audit department. The controller had no previous experience with internal auditors. Due to this lack of experience, the controller advised the applicants that they would be reporting to the external auditors. However, the new director of internal audit would have free access to the controller to report anything important. The controller would convey the director’s concerns to the board of directors.
Which of the following is true?
Answers
A: The internal audit department will be independent because the director has direct access to the board of directors.
B: The internal audit department will not be independent because the director reports to the external auditors.
C: The internal audit department will not be independent because the controller has no experience with internal auditors.
D: The internal audit department will not be independent because the company did not specify that the
applicants must be Certified Internal Auditors.
A
Answer Explanations
Answer (a) is incorrect. The internal audit department will not have direct access to the board of directors. The access is indirect, via the controller. According to the Standards, the “director should have direct communication with the board.”
Answer (b) is the correct answer. According to the IIA’s Standards, “the director of the internal auditing department should be responsible to an individual in the organization with sufficient authority to promote independence.” External auditors are not individuals in the organization.
Answer (c) is incorrect. Whether the controller has experience with internal auditors or not does not affect the audit department’s independence.
Answer (d) is incorrect. Although desirable, the Certified Internal Auditor designation is not mandatory for a person to become an internal auditor. A CIA would, of course, insist on internal audit department independence.
19
Q
Question: V1C1-0019
During a year-end planning meeting with senior management, the director of internal auditing learns that a recent draft audit report on one of the company’s inventory costing systems had provoked a discussion in the accounting area. The audit report proposed a relatively large adjustment due to an error in the local inventory system. The auditor’s conclusion stated that six other production facilities using the same costing system would require similar inventory adjustments. The total required adjustment for all seven locations represented a material adjustment to the financial statements, according to the chief financial officer (CFO). The CFO questioned the method used by the auditor to calculate the amount of the inventory adjustment and asked the director of internal auditing to delay processing the audit report until all aspects of the finding had been fully considered. The director of internal auditing reports directly to the CFO. The audit committee has not been apprised of this audit because the audit report is still in draft stage
awaiting management comment.
Assuming that there is a meeting later the same day with the audit committee of the board, which of the following is not a responsibility of the director of internal auditing?
Answers
A: Inform the audit committee of senior management’s decisions on all significant audit findings.
B: Highlight significant audit findings and recommendations and report on the approved audit work schedule.
C: Inform the audit committee of the outcome of earlier meetings with the CFO and the options being considered for recording the inventory adjustment.
D: Attempt to resolve the inventory issue before reporting the finding to the audit committee.
A
Answer Explanations
Answer (a) is incorrect. The Standards prescribe informing the board of management’s decision on significant audit findings.
Answer (b) is incorrect. The Standards prescribe highlighting significant audit findings and recommendations and reporting on the approved audit work schedule.
Answer (c) is the correct answer. There is no provision for the discussion of the meeting or the related options for handling the necessary transaction in the Standards.
Answer (d) is incorrect. The auditor does not yet know if this is actually a problem that can adversely affect the organization.
20
Q
Question: V1C1-0020
During a year-end planning meeting with senior management, the director of internal auditing learns that a recent draft
audit report on one of the company’s inventory costing systems had provoked a discussion in the accounting area. The
audit report proposed a relatively large adjustment due to an error in the local inventory system. The auditor’s
conclusion stated that six other production facilities using the same costing system would require similar inventory
adjustments. The total required adjustment for all seven locations represented a material adjustment to the financial
statements, according to the chief financial officer (CFO). The CFO questioned the method used by the auditor to
calculate the amount of the inventory adjustment and asked the director of internal auditing to delay processing the
audit report until all aspects of the finding had been fully considered. The director of internal auditing reports directly
to the CFO. The audit committee has not been apprised of this audit because the audit report is still in draft stage
awaiting management comment.
A: Schedule audits to review the inventory costing systems at all locations after year-end.
B: Recall all copies of the draft audit report sent out for management review and response.
C: Tell the representatives of senior management that distorting financial reports is not acceptable.
D: Offer to review the basis for the conclusion about the inventory valuation at all locations.
A
Answer Explanations
Answer (a) is incorrect. Reviews after year-end will not address the current year’s financial reporting integrity.
Answer (b) is incorrect. The director of internal auditing cannot do this and maintain independence.
Answer (c) is incorrect. Reviews after year-end will not address the current year’s financial reporting integrity.
Answer (d) is the correct answer. Because the case indicates that the amount of the inventory adjustment is in question, this would be the appropriate step for the audit director to take.
21
Q
Question: V1C1-0021
An inexperienced internal auditor notified the senior auditor of a significant variance from the auditee’s budget. The senior told the new auditor not to worry as the senior had heard that there had been an unauthorized work stoppage that probably accounted for the difference. Which of the following statements is most appropriate?
Answers
A: The new auditor should have investigated the matter fully and not bothered the senior.
B: The senior used proper judgment in curtailing what could have been a wasteful investigation.
C: The senior should have halted the audit until the variance was fully explained.
D: The senior should have aided the new auditor in formulating a plan for accumulating appropriate evidence.
A
Answer Explanations
Answer (a) is incorrect. The Standards provide that the extent of supervision should vary with the proficiency of the auditor. It is not inappropriate for an inexperienced auditor to refer this to the senior.
Answer (b) is incorrect. The Standards provide that the extent of supervision should vary with the proficiency of the auditor. It is not inappropriate for an inexperienced auditor to refer this to the senior.
Answer (c) is incorrect. The variance does need explanation and the rest of the audit can continue.
Answer (d) is the correct answer. The IIA Standards provide that unexpected results from applying analytical auditing procedures should be investigated since unexplained results could indicates a potential error or irregularity. The variance was not adequately investigated or explained.
22
Q
Question: V1C1-0022
The IIA Standards state that internal auditors are “responsible for continuing their education in order to maintain their proficiency.” Which of the following is correct regarding the continuing education requirements of the practicinginternal auditor?
Answers
A: Internal auditors are required to obtain 40 hours of continuing professional development each year and a
minimum of 120 hours over a three-year period.
B: CIAs have formal requirements that must be met in order to continue as a CIA.
C: Attendance, as an officer or committee member, at formal Institute of Internal Auditors meetings does not
meet the criteria of continuing professional development.
D: In-house programs meet continuing professional development requirements only if they have been
preapproved by the Institute of Internal Auditors.
A
Answer Explanations
Answer (a) is incorrect. There are no formal “hours” requirements for internal auditors contained in the Standards. The
intent of the Standards is to ensure that internal auditors maintain their technical competence.
Answer (b) is the correct answer. In order to maintain the CIA designation, the CIA must commit to a formal program
of continuing professional development (CPD) and report to the Certification Department of the IIA.
Answer (c) is incorrect. Attendance at professional meetings does meet the criteria of continuing education.
Answer (d) is incorrect. Prior approval by the IIA is not necessary for CPD courses.
23
Q
Question: V1C1-0023
A significant part of the auditor’s working papers will be the conclusions reached by the auditor regarding the audit area. In some situations, the supervisor might not agree with the conclusions and will ask the staff auditor to perform more work. Assume that after subsequent work is performed, the staff auditor and the supervisor continue to disagree on the conclusions documented in the working paper developed by the staff auditor. Which of the following audit department responses would not be appropriate?
Answers
A: Both the staff auditor and the supervisor document their reasons for reaching different conclusions. Retain the rationale of both parties in the working papers.
B: Note the disagreement and retain the notice of disagreement and follow-up work in the audit working papers.
C: Present both conclusions to the director of internal auditing for resolution. The director may resolve the matter.
D: Present both conclusions in the audit report and let management and the auditee react to both.
A
Answer Explanations
Answer (a) is incorrect. It would be an appropriate response.
Answer (b) is incorrect. It would be an appropriate response.
Answer (c) is incorrect. This is an appropriate response since the director of internal auditing is ultimately responsiblefor the supervision of the audit staff as well as the quality of the working papers.
Answer (d) is the correct answer. This would not be an appropriate response. The director of internal auditing should determine the most reasonable conclusion and present that to the auditee and management. The issue of disagreements on the working papers should not necessarily affect the reporting to management unless the director of internal auditing believes that both conclusions are equally appropriate and it would enhance management’s understanding to be presented with both.
24
Q
Question: V1C1-0024
The IIA Standards specify that supervision of the work of internal auditors be “carried out continuously.” Which of the following statements regarding supervision is correct?
I. “Continuously” indicates that supervision should be performed throughout the planning, examination, evaluation, report, and follow-up stages of the audit.
II. Supervision should also be extended to training, time reporting, and expense control, as well as similar administrative matters.
III. The extent and nature of supervision needs to be documented, preferably in the appropriate working papers.
Answers
A: I only.
B: I and III only.
C: II only.
D: I, II, and III.
A
Answer Explanations
Answer (a) is incorrect. It is a partial answer.
Answer (b) is incorrect. It is a partial answer.
Answer (c) is incorrect. It is a partial answer.
Answer (d) is the correct answer. All of the statements are correct according to the IIA Standards.
25
Question: V1C1-0025
It would be appropriate for internal auditing departments to use consultants with expertise in health care benefits when
the internal auditing department is
Answers
A: Conducting an audit of the organization's estimate of its liability for postretirement benefits, which
include health care benefits.
B: Comparing the cost of the organization's health care program with other programs offered in the industry.
C: Training its staff to conduct an audit of health care costs in a major division of the organization.
D: All of the above.
Answer Explanations
Answer (a) is incorrect. This would be an appropriate use of such experts according to the Standards. It also describes appropriate uses of consultants
Answer (b) is incorrect. This is an example of an operational audit and would be an appropriate use of such experts according to the Standards. It also describes appropriate uses of consultants.
Answer (c) is incorrect. This would be an appropriate example of training. It also describes appropriate uses of consultants.
Answer (d) is the correct answer. All of the above items are appropriate uses of consultants.
26
Question: V1C1-0026
An auditor has uncovered facts that could be interpreted as indicating unlawful activity on the part of an auditee. The auditor decides not to inform senior management of these facts since he cannot prove that an irregularity occurred. The auditor, however, decides that if questions are raised regarding the omitted facts, they will be answered fully and truthfully. In taking this action, the auditor
Answers
A: Has not violated the Code of Ethics or the Standards because confidentiality takes precedence over all other standards.
B: Has not violated the Code of Ethics or the Standards because the auditor is committed to answering all questions fully and truthfully.
C: Has violated the Code of Ethics because unlawful acts should have been reported to the appropriate regulatory agency to avoid potential "aiding and abetting" by the auditor.
D: Has violated the Standards because the auditor should inform the appropriate authorities in the organization if fraud may be indicated.
Answer Explanations
Answer (a) is incorrect. The action does violate the Code of Ethics.
Answer (b) is incorrect. The action does violate the Code of Ethics.
Answer (c) is incorrect. The action does violate the Code of Ethics, but the auditor should report the unlawful activities to the appropriate personnel within the organization, not to a regulatory agency.
Answer (d) is the correct answer. The IIA Standards indicate that the auditor should inform the appropriate authorities in the organization if there are sufficient indicators of the commission of a fraud.
27
Question: V1C1-0027
A new staff auditor was told to perform an audit in an area with which the auditor was not familiar. Because of time constraints, there was no supervision of the audit. The auditor was given the assignment because it represented a good learning experience, but the area was clearly beyond the auditor’s competence. Nonetheless, the auditor prepared comprehensive working papers and reported the results to management. In this situation
Answers
A: The audit department violated the IIA Standards by hiring an auditor without proficiency in the area.
B: The audit department violated the IIA Standards by not providing adequate supervision.
C: The director of internal auditing has not violated the Code of Ethics since the code does not address supervision.
D: The IIA's Standards and the Code of Ethics were followed by the audit department.
Answer Explanations
Answer (a) is incorrect. The Standards do not require all auditors to be proficient in all areas. The department should have an appropriate mix of skills.
Answer (b) is the correct answer. The IIA Standards require the director to ensure that audit work conforms to the Standards. The Standards require the department to provide adequate supervision depending on the proficiency of the auditor.
Answer (c) is incorrect. Although the Code does not address supervision directly, it does require the director to follow the Standards.
This answer is incorrect. Refer to the correct answer explanation.
28
Question: V1C1-0028
Management has requested the internal auditing department to perform an operational audit of the telephone marketing operations of a major division and to recommend procedures and policies for improving management control over the operation. The auditor should
Answers
A: Not accept the engagement because recommending controls would impair future objectivity of the department regarding this auditee.
B: Not accept the engagement because audit departments are presumed to have expertise on accounting controls, not marketing controls.
C: Accept the engagement, but indicate to management that recommending controls would impair audit independence so management knows that future audits of the area would be impaired.
D: Accept the audit engagement because independence would not be impaired.
Answer Explanations
Answer (a) is incorrect. The auditor should accept the engagement. Recommending controls is not considered a violation of the auditor’s independence or objectivity.
Answer (b) is incorrect. The auditor should accept the engagement. Auditors should have control knowledge that is not limited to accounting controls.
Answer (c) is incorrect. The audit is not impaired by making control recommendations.
Answer (d) is the correct answer. The auditor should accept the engagement, assign staff with sufficient control knowledge, and make recommendations where appropriate. This would not impair objectivity.
29
Question: V1C1-0029
A new staff auditor has been assigned to an audit of the cash management operations of the organization. The staff auditor has no background in cash management, and this is the auditor’s first audit. Under which of the following conditions would the internal auditing department be in compliance with the Standards regarding knowledge and skills?
Answers
A: The senior auditor is skilled in the area and closely supervises the staff auditor.
B: The staff auditor performs the work and prepares a report that is reviewed in detail by the director of audit.
C: Both a. and b.
D: Neither a. nor b.
Answer Explanations
Answer (a) is the correct answer. The internal audit department would, in composite, have the requisite skills to perform the audit. The other key element is that the staff auditor is carefully supervised such that significant deviations from good business practices would be noted.
Answer (b) is incorrect. The audit would not be conducted in accordance with the Standards because the staff auditor might not have noted significant deviations to include in the audit report. The review by the director at the time the report is generated would be too late.
Answer (c) is incorrect. Response (b) would not meet the Standards.
Answer (d) is incorrect. Response (a) would be consistent with the Standards.
30
Question: V1C1-0030
Communication skills are important to internal auditors. According to the Standards, the auditor should be able to effectively convey all of the following to the auditee except:
Answers
A: The audit objectives designed for a specific auditable entity.
B: The audit evaluations based on a preliminary survey of an auditable entity.
C: The risk assessment used in selecting the area for audit investigation.
D: Recommendations that are generated in relationship to a specific auditable entity.
Answer Explanations
Answer (a) is incorrect. Auditors should be proficient in communicating audit objectives.
Answer (b) is incorrect. Auditors should be proficient in communicating audit evaluations.
Answer (c) is the correct answer. The risk assessment process is not normally communicated to the auditee.
Answer (d) is incorrect. Auditors should be proficient in communicating audit recommendations.
31
Question: V1C1-0031
Internal auditing is unique in that its scope often encompasses all areas of an organization. Thus, it is not possible for each internal auditor to possess detailed competence in all areas that might be audited. Which of the following competencies is required by the IIA Standards for every internal auditor?
Answers
A: Taxation and law as it applies to operation of the organization.
B: Proficiency in accounting principles.
C: Understanding of management principles.
D: Proficiency in computer systems and databases.
Answer Explanations
Answer (a) is incorrect. Such skills should be included within the staff, but not required for each auditor.
Answer (b) is incorrect. Detailed knowledge of accounting is required only for those auditors who work extensively with financial records and reports.
Answer (c) is the correct answer. An understanding of management principles is required of all internal auditors.
Answer (d) is incorrect. An appreciation of computerized information systems is required, but this is less expertise than is needed for proficiency.
32
Question: V1C1-0032
The IIA Standards would not require the director of internal auditing to
Answers
A: Contribute resources for the annual audit of financial statements.
B: Coordinate audit work with that of the external auditors.
C: Communicate to senior management and the board the results of evaluations of the coordination between internal and external auditors.
D: Communicate to senior management and the board the results of evaluations of the performance of external auditors.
Answer Explanations
Answer (a) is the correct answer. According to the IIA Standards, “The director may agree to perform work...in connection with (the) annual audit....”
Answer (b) is incorrect. According to the IIA Standards, “Actual coordination [of audit efforts] should be the responsibility of the director of internal auditing.”
Answer (c) is incorrect. According to the IIA Standards, “The director of internal auditing should communicate to senior management and the board the results of evaluations of coordination with external auditors.”
Answer (d) is incorrect. According to the IIA Standards, “The director should communicate to senior management and the board...any relevant comments about the performance of external auditors.”
33
Question: V1C1-0033
Follow-up activity may be required to ensure that corrective action has taken place for certain findings. The internal
audit department’s responsibility to perform follow-up activities as required should be defined in the
Answers
A: Internal auditing department's written charter.
B: Mission statement of the audit committee.
C: Engagement memo issued prior to each audit assignment.
D: Purpose statement within applicable audit reports.
Answer Explanations
Answer (a) is the correct answer. Responsibility for follow-up should be defined in the internal auditing department’s written charter.
Answer (b) is incorrect. Follow-up is not specified in the content of the audit committee’s mission statement.
Answer (c) is incorrect. This memo may contain a statement about responsibility for follow-up, but such a statement should be based on the wording and authority of the departmental charter.
Answer (d) is incorrect. Follow-up authority and responsibility may be cited in applicable audit reports, but the definition should be first contained in the departmental charter.
34
Question: V1C1-0034
As a particular audit is being planned in a high-risk area, the director of internal auditing determines that the available staff does not have the requisite skills to perform the assignment. The best course of action consistent with audit planning standards would be to
Answers
A: Not perform the audit, since the requisite skills are not available.
B: Use the audit as a training opportunity and let the auditors learn as the audit is performed.
C: Consider using external resources to supplement the needed knowledge, skills, and disciplines and complete the assignment.
D: Perform the audit but limit the scope in light of the skill deficiency.
Answer Explanations
Answer (a) is incorrect. The director is responsible for staffing each assignment as needed to meet the audit responsibilities
Answer (b) is incorrect. Training is to be properly supervised, and the department does not have anyone with knowledge in this area to provide supervision.
Answer (c) is the correct answer. Proper planning includes documented determination of resources including consideration of supplementation.
Answer (d) is incorrect because it is not the best course of action. If the requisite skills are not accessible through supplementation, this might be necessary, but the resource constraint should be communicated to management in an interim report.
35
Question: V1C1-0035
According to the IIA Standards, internal auditors must be objective in performing audits. Assume that the internal audit director received an annual bonus as part of that individual’s compensation package. The bonus may impair the audit director’s objectivity if
Answers
A: The bonus is administered by the board of directors or its salary administration committee.
B: The bonus is based on dollar recoveries or recommended future savings as a result of audits.
C: The scope of internal auditing work is reviewing control rather than account balances.
D: All of the above.
Answer Explanations
Answer (a) is incorrect. According to the IIA Standards, objectivity is not impaired if the bonus is administered by the board of directors or its salary administration committee. Use of a board compensation committee would be an environmental factor, which would enhance the director’s independence and objectivity.
Answer (b) is the correct answer. According to the IIA Standards, objectivity may be impaired if the bonus is based on dollar recoveries or recommended future savings as a result of audits. A bonus based on either of these criteria could unduly influence the type of audits performed or the recommendations made.
Answer (c) is incorrect. According to the IIA Standards, objectivity is not impaired if the scope of internal auditing work is reviewing control rather than account balances. Compensation packages are often tied to financial results. If the scope of work was reviewing account balances, the director might be unduly influenced to report results, which would be favorable to his bonus. In contrast, there would be less inducement if the scope of work were limited to reviewing controls.
Answer (d) is incorrect since only one answer is correct.
36
Question: V1C1-0036
A company is planning to develop and implement a new computerized purchase order system in one of its manufacturing subsidiaries. The vice president of manufacturing has requested that internal auditors participate on a team consisting of representatives from finance, manufacturing, purchasing, and marketing. This team will be responsible for the implementation effort. Eager to take on this high-profile project, the Director of Auditing assigns a senior auditor to the project to assist “as needed.” Assuming the senior auditor performed all of the following activities, which one of the following would impair objectivity if asked to review the purchase order system on a postaudit basis?
Answers
A: Helping to identify and define control objectives.
B: Testing for compliance with system development standards.
C: Reviewing the adequacy of systems and programming standards.
D: Drafting operating procedures for the new system.
Answer Explanations
Answer (a) is incorrect. According to the IIA Standards, an internal auditor’s objectivity would not be impaired when performing such tasks as helping to identify and define control objectives. Identifying and defining control objectives are necessary parts of any audit. The auditor’s familiarity with the process of documenting systems and integrating recommendations into systems of control would be helpful to management in developing new systems. As long as the auditor’s involvement did not cross over in operating areas, which are the responsibility of management, the auditor’s objectivity would not be compromised.
Answer (b) is incorrect. According to the IIA Standards, testing for compliance with system development standards would be a standard procedure for any system under development. Participation in this area would not place the auditor in an operating capacity. Consequently, this would not impair the auditor’s objectivity.
Answer (c) is incorrect. According to the IIA Standards, reviewing the adequacy of systems and programming standards would be standard procedures in performing a review of systems under development. Participation in this area would not place the auditor in an operating capacity. Consequently, this would not impair the auditor’s objectivity.
Answer (d) is the correct answer. According to the IIA Standards, “the internal auditor’s objectivity is not impaired when the auditor recommends standards of control for systems or reviews procedures before they are implemented. Designing, installing, and operating systems are not audit functions. Also, the drafting of procedures for systems is not an audit function. Performing such activities is presumed to impair audit objectivity.” Internal auditors are not independent if they cannot do their work objectively.
37
Question: V1C1-0037
An internal audit department is currently undergoing its first external quality assurance review since its formation three years ago. From interviews with a few of the staff auditors, the review team is informed of certain auditor activities that occurred over the past year. Which of the following activities could affect the quality assurance review team’s evaluation of the objectivity of the internal audit department?
Answers
A: One internal auditor told the review team that, during the payroll audit, the payroll manager approached him. The manager indicated he was looking for an accountant to prepare his financial statements for his parttime business. The internal auditor agreed to perform this work for a reduced fee during nonwork hours.
B: During the audit of the company's construction of a building addition to the corporate office, the vicepresident of facilities management gave the auditor a commemorative mug with the company's logo. These mugs were distributed to all employees present at the groundbreaking ceremony.
C: After reviewing the installation of a data processing system, the auditor made recommendations on standards of control. Three months after completing the audit, the auditee requested the auditor's review of certain procedures for adequacy. The auditor agreed and performed this review.
D: An auditor's participation was requested on a task force to reduce the company's inventory losses from theft and shrinkage. This is the first consulting assignment undertaken by the audit department. The auditor's role is to advise the task force on appropriate control techniques.
Answer Explanations
Answer (a) is the correct answer. According to the IIA Standards, internal auditors should be independent of the activities they audit. Accepting a fee or gift from an auditee would impair the auditor’s objectivity. As a result, the auditor might feel obligated to render a more favorable result than would be warranted if the auditor maintained professional objectivity.
Answer (b) is incorrect. According to the IIA Standards, the receipt of promotional items, such as pens, calendars, or samples available to the general public that have minimal value, would not impair the auditor’s objectivity. Under these circumstances, it is unlikely that the receipt of these items would unduly influence the auditor to render a more favorable opinion than warranted under the circumstances.
Answer (c) is incorrect. According to the IIA Standards, reviewing the installation of a data processing system would not impair the auditor’s objectivity. Reviewing and documenting systems are necessary parts of auditing a system under development. As long as the auditor did not assume any operating responsibilities, for example, documenting operating procedures, the auditor’s objectivity would not be compromised.
Answer (d) is incorrect. According to the IIA Standards, participation in a task force and advising on control techniques would not impair the auditor’s objectivity. As long as the auditor refrained from performing operating functions such as designing or installing operating systems or drafting detailed control procedures, the auditor’s objectivity would not be compromised.
38
Question: V1C1-0038
A medium-size publicly owned corporation operating in Country X has grown to a size that the directors of the corporation believe warrants the establishment of an internal auditing department. Country X has legislated internal auditing requirements for government-owned companies. The company changed the corporate bylaws to reflect the establishment of the internal auditing department. The directors decided that the director of internal auditing must be a Certified Internal Auditor and will report directly to the newly established audit committee of the board of directors.
Which of the items discussed above will contribute the most to the new audit director’s independence?
Answers
A: The establishment of the internal auditing department is documented in corporate bylaws.
B: Legislated internal auditing requirements in Country X.
C: The fact that the director will report to the audit committee of the board of directors.
D: The fact that the director is to be a Certified Internal Auditor.
Answer Explanations
Answer (a) is incorrect. The IIA Standards state “It [independence] is achieved through organizational status and objectivity,” which is more directly related to the reporting level of the director.
Answer (b) is incorrect. The IIA Standards state “It [independence] is achieved through organizational status and objectivity.” Independence is not ensured by regulations.
Answer (c) is the correct answer. The IIA Standards state “It [independence] is achieved through organizational status and objectivity.” The auditor is reporting to the highest level possible.
Answer (d) is incorrect. The IIA Standards state “It [independence] is achieved through organizational status and objectivity.” A CIA designation will ensure a better auditor, but does not guarantee independence.
39
Question: V1C1-0039
An internal auditor reports directly to the board of directors. The auditor discovered a material cash shortage. When questioned, the person responsible explained that the cash was used to cover sizable medical expenses for a child and agreed to replace the funds. Because of the corrective action, the internal auditor did not inform management. In this instance, the auditor
Answers
A: Has organizational independence but not objectivity.
B: Has both organizational independence and objectivity.
C: Does not have organizational independence but has objectivity.
D: Does not have either organizational independence or objectivity.
Answer Explanations
Answer (a) is the correct answer. Because the auditor reports directly to the board of directors, he has organizational independence.
Answer (b) is incorrect. Because the auditor reports directly to the board of directors, he has independence and therefore objectivity.
Answer (c) is incorrect. The auditor has objectivity because he reports directly to the board of directors. He is, however, not exercising objectivity because he is trying to avoid conflict.
Answer (d) is incorrect. The auditor has organizational independence because he reports directly to the board of directors (the highest level in the organization). The auditor has not exercised his independence because, although he can render any opinion he wants, he has lost his objectivity by adjusting his opinion.
40
Question: V1C1-0040
During a purchasing audit, the internal auditor finds that the largest blanket purchase order is for tires, which are expensed as vehicle maintenance items. The fleet manager requisitions tires against the blanket order for the company’s 400-vehicle service fleet based on a visual inspection of the cars and trucks in the parking lot each week. Sometimes the fleet manager picks up the tires, but she always signs the receiving report for payment. Vehicle service data are entered into a maintenance database by the mechanic after the tires are installed. Which would be the best course of action for the auditor in these circumstances?
Answers
A: Determine whether the number of tires purchased can be reconciled to maintenance records.
B: Count the number of tires on hand and trace them to the related receiving reports.
C: Select a judgmental sample of requisitions and verify that the fleet manager signs each one.
D: Compare the number of tires purchased under the blanket purchase order with the number of tires purchased in the prior year for reasonableness.
Answer Explanations
Answer (a) is the correct answer. Based on the control weakness and the potential for fraud, the auditor should look for other indicators of fraud or verify that no fraud has occurred.
Answer (b) is incorrect. Tracing the tires on hand to the receiving reports would not reveal a fraud since manager signs the receiving report.
Answer (c) is incorrect. Testing for signed requisitions would not necessarily reveal whether fraud is present. The manager is the signor.
Answer (d) is incorrect. While the comparison may provide useful information, it would be less conclusive than Choice (a). If a fraud existed, it could have occurred last year also. The need for tires may vary.
41
Question: V1C1-0042
Several members of senior management have questioned whether the internal audit department should report to the newly established quality audit function as part of the total quality management process within the company. The director of internal auditing has reviewed the quality standards and the programs that the quality audit manager have proposed. The director’s response to senior management should include
Answers
A: Changing the applicable standards for internal auditing within the company to provide compliance with quality audit standards.
B: Changing the qualification requirements for new staff members to include quality audit experience.
C: Estimating departmental cost savings from eliminating the internal auditing function.
D: Identifying appropriate liaison activities with the quality audit function to ensure coordination of audit schedules and overall audit responsibilities.
Answer Explanations
Answer (a) is incorrect. Adopting the full set of quality auditing standards for the internal auditing function would duplicate functions within the organization.
Answer (b) is incorrect. The issue is the reporting relationship of internal auditing, not the qualifications of audit staff.
Answer (c) is incorrect. Sufficient information in not given to conclude that the internal audit function should be eliminated.
Answer (d) is the correct answer. Coordination of audit efforts and the efficiency of audit activities should be primary responsibilities of the director of internal auditing.
42
Question: V1C1-0041
Auditors need to determine if management has established criteria to determine if goals and objectives have been accomplished. If the auditor determines such criteria are inadequate or nonexistent, which of the following actions would be appropriate?
I. Report the inadequacies to the appropriate level of management and recommend appropriate courses of action.
II. Recommend alternative sources of criteria to management such as acceptable industry standards.
III. Formulate criteria the auditor believes to be adequate and perform the audit and report in relationship to the alternative criteria.
Answers
A: I only.
B: I and II only.
C: I, II, and III.
D: II only.
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Answer (c) is the correct answer. All three responses would be appropriate according to the IIA Standards.
This answer is incorrect. Refer to the correct answer explanation.
43
Question: V1C1-0043
Internal auditors are often called on either to perform or to assist the external auditor in performing a due diligence review. A due diligence review is
Answers
A: A review of interim financial statements as directed by an underwriting firm.
B: An operational audit of a division of a company to determine if divisional management is complying with laws and regulations.
C: A review of operations as requested by the audit committee to determine whether the operations comply with audit committee and organizational policies.
D: A review of financial statements and related disclosures in conjunction with a potential acquisition.
Answer Explanations
Answer (a) is incorrect. Although the underwriter may use the reviews, the underwriter does not direct them.
Answer (b) is incorrect. The due diligence review is not an operational audit.
Answer (c) is incorrect. It is not a review for compliance with company policies.
Answer (d) is the correct answer. This is a broad definition of due diligence reviews per the IIA’s Standards.
44
Question: V1C1-0044
The director of internal auditing of a midsize internal auditing organization was concerned that management might outsource the internal auditing function. Therefore, the manager adopted a very aggressive program to promote the internal auditing department within the organization. The manager planned to present the results to management and the audit committee and recommend modification of the Internal Audit Charter after using the new program. The following lists six actions the audit manager took to promote a positive image within the organization:
1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings, and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy and efficiency audits was new, but the auditees seemed very happy.
2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were carefully considered when developing the final audit report.
3. The information technology auditor participated as part of a development team to review the control procedures to be incorporated into a major computer application under development.
4. Given limited resources, the audit manager performed a risk analysis to determine which locations to audit.
This was a marked departure from the previous approach of ensuring that all operations are reviewed at least every three years.
5. In order to save time, the manager no longer required that a standard internal control questionnaire be completed for each audit.
6. When the auditors found that management and the auditee had not developed specific criteria or data to evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria, review the criteria with the auditee, and, if acceptable, use that criteria to evaluate the auditee’s operations. If the auditee disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed on. The audit report commented on the auditee’s operations in conjunction with the agreed-on criteria. Which of the following elements of Action 1 taken by the audit manager would be considered a violation of the IIA Standards?
I. The type of audits was changed before modifying the charter and going to the audit committee.
II. Negative findings were omitted from the audit reports.
III. Cost savings and recommendations were highlighted in the report.
Answers
A: I and II.
B: I and III.
C: I only.
D: II and III.
Answer Explanations
Answer (a) is the correct answer. The audit manager dramatically changed the nature of the audit function without consulting with the audit committee, management, or the audit department charter. A second violation is the omission of negative findings.
Answer (b) is incorrect. Highlighting potential cost savings is appropriate for an audit report.
Answer (c) is incorrect. Item II is also a violation.
Answer (d) is incorrect. Highlighting cost savings is appropriate.
45
Question: V1C1-0045
The director of internal auditing of a midsize internal auditing organization was concerned that management might outsource the internal auditing function. Therefore, the manager adopted a very aggressive program to promote the internal auditing department within the organization. The manager planned to present the results to management and the audit committee and recommend modification of the Internal Audit Charter after using the new program. The following lists six actions the audit manager took to promote a positive image within the organization:
1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings, and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy and efficiency audits was new, but the auditees seemed very happy.
2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were carefully considered when developing the final audit report.
3. The information technology auditor participated as part of a development team to review the control procedures to be incorporated into a major computer application under development.
4. Given limited resources, the audit manager performed a risk analysis to determine which locations to audit.
This was a marked departure from the previous approach of ensuring that all operations are reviewed at least every three years.
5. In order to save time, the manager no longer required that a standard internal control questionnaire be completed for each audit.
6. When the auditors found that management and the auditee had not developed specific criteria or data to evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria, review the criteria with the auditee, and, if acceptable, use that criteria to evaluate the auditee’s operations. If the auditee disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed on. The audit report commented on the auditee’s operations in conjunction with the agreed-on criteria. Considering Actions 2, 3, and 4 that were taken, which would be considered a violation of the IIA Standards?
Answers
A: Actions 2, 3, and 4.
B: Action 4 only.
C: Action 2 and 3 only.
D: None of the actions.
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Answer (d) is the correct answer. None of the actions constitutes a violation of the Standards. Action 2 is consistent with the IIA’s Standards. Action 3 is consistent with the IIA’s Standards. Action 4 is consistent with the IIA’s Standards on planning the audit. Auditors are not required to review all operations, unless mandated by law, within a specific time frame.
46
Question: V1C1-0046
The director of internal auditing of a midsize internal auditing organization was concerned that management might outsource the internal auditing function. Therefore, the manager adopted a very aggressive program to promote the internal auditing department within the organization. The manager planned to present the results to management and the audit committee and recommend modification of the Internal Audit Charter after using the new program. The following lists six actions the audit manager took to promote a positive image within the organization:
1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings, and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy and efficiency audits was new, but the auditees seemed very happy.
2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were carefully considered when developing the final audit report.
3. The information technology auditor participated as part of a development team to review the control procedures to be incorporated into a major computer application under development.
4. Given limited resources, the audit manager performed a risk analysis to determine which locations to audit.
This was a marked departure from the previous approach of ensuring that all operations are reviewed at least every three years.
5. In order to save time, the manager no longer required that a standard internal control questionnaire be completed for each audit.
6. When the auditors found that management and the auditee had not developed specific criteria or data to evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria, review the criteria with the auditee, and, if acceptable, use that criteria to evaluate the auditee’s operations. If the auditee disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed on. The audit report commented on the auditee’s operations in conjunction with the agreed-on criteria.
Is Action 5 a violation of the IIA Standards?
Answers
A: Yes. Internal control should be evaluated on every audit, but the internal control questionnaire is not the mandated approach to evaluate the controls.
B: No. Auditors may omit necessary procedures if there is a time constraint. It is a matter of audit judgment.
C: Yes. Internal control should be evaluated on every audit engagement, and the internal control questionnaire is the most efficient method to do so.
D: No. Auditors are not required to fill out internal control questionnaires on every audit.
Answer Explanations
Answer (a) is incorrect. Internal control evaluations are not required on every audit.
Answer (b) is incorrect. Auditors cannot omit necessary procedures because of a time constraint.
Answer (c) is incorrect. It is not a violation of the Standards.
Answer (d) is the correct answer. Auditors are not required to perform control evaluations and are certainly not required to fill out standard internal control questionnaires.
47
Question: V1C1-0047
The director of internal auditing of a midsize internal auditing organization was concerned that management might outsource the internal auditing function. Therefore, the manager adopted a very aggressive program to promote the internal auditing department within the organization. The manager planned to present the results to management and the audit committee and recommend modification of the Internal Audit Charter after using the new program. The following lists six actions the audit manager took to promote a positive image within the organization:
1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings, and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy and efficiency audits was new, but the auditees seemed very happy.
2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were carefully considered when developing the final audit report.
3. The information technology auditor participated as part of a development team to review the control procedures to be incorporated into a major computer application under development.
4. Given limited resources, the audit manager performed a risk analysis to determine which locations to audit.
This was a marked departure from the previous approach of ensuring that all operations are reviewed at least every three years.
5. In order to save time, the manager no longer required that a standard internal control questionnaire be completed for each audit.
6. When the auditors found that management and the auditee had not developed specific criteria or data to evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria, review the criteria with the auditee, and, if acceptable, use that criteria to evaluate the auditee’s operations. If the auditee disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed on. The audit report commented on the auditee’s operations in conjunction with the agreed-on criteria.
Regarding Action 6, which of the following elements of the action would be considered a violation of the IIA Standards?
Answers
A: Failing to report the lack of criteria to appropriate level of management.
B: Developing a set of criteria to present to the auditee as a basis for evaluating the auditee's operations.
C: Commenting on the agreed-on criteria.
D: All of the above.
Answer Explanations
Answer (a) is the correct answer. This is a violation of the Standards, which require that the lack of established criteria should be reported to the appropriate levels of management. This would normally be one level above the auditee. The negotiated formulation of the criteria may result in the correct criteria, but it should be discussed with, and communicated to, the appropriate level of management.
Answer (b) is incorrect because, according to the Standards, auditors may formulate criteria they believe is adequate.
Answer (c) is incorrect. Auditors should comment on the quality of operations in comparison with suitable criteria. The problem in this situation was the manner in which the criteria were formulated.
Answer (d) is incorrect because of the responses given for answers (a), (b), and (c).
48
Question: V1C1-0048
Given the acceptance of the cost savings audits and the scarcity of internal audit resources, the audit manager also decided that follow-up action was not needed. The manager reasoned that cost savings should be sufficient to motivate the auditee to implement the auditor’s recommendations. Therefore, follow-up was not scheduled as a regular part of the audit plan. Does the audit manager’s decision violate the Standards?
Answers
A: No. The Standards do not specify whether follow-up is needed.
B: Yes. The Standards require the auditors to determine whether the auditee has appropriately implemented all of the auditor's recommendations.
C: Yes. Scarcity of resources is not a sufficient reason to omit follow-up action.
D: No. When there is evidence of sufficient motivation by the auditee, there is no need for follow-up action.
Answer Explanations
Answer (a) is incorrect. Follow-up is required.
Answer (b) is incorrect. Follow-up is to see that actions are taken, not just that the auditor’s recommendations have been implemented.
Answer (c) is the correct answer. The IIA Standards require follow-up action. Lack of resources is not a sufficient reason.
Answer (d) is incorrect. Follow-up is required.
49
Question: V1C1-0049
Reporting to senior management and the board is an important part of the auditor’s obligation. Which of the following items is not required to be reported to senior management and/or the board?
Answers
A: Subsequent to the completion of an audit, but prior to the issuance of an audit report, the audit senior in charge of the audit was offered a permanent position in the auditee's department.
B: An annual report summary of the department's audit work schedule and financial budget.
C: Significant interim changes to the approved audit work schedule and financial budget.
D: An audit plan was approved by senior management and the board. Subsequent to the approval, senior management informed the audit director not to perform an audit of a division because the division's activities were very sensitive.
Answer Explanations
Answer (a) is the correct answer. This would not have to be communicated. The audit work was done. The director of internal auditing would have to determine that there was no impairment of the independence of the senior’s work. If there was none, the report could be issued without reporting the personnel change.
Answer (b) is incorrect. This is a standard part of the required reporting to senior management and the board.
Answer (c) is incorrect. This is a standard part of the required reporting to senior management and the board.
Answer (d) is incorrect. The audit plan had been approved by both senior management and the board. The change dictated by senior management should be reported to the board.
50
Question: V1C1-0050
It has been established that an internal auditing charter is one of the more important factors positively affecting the internal auditing department’s independence. The IIA Standards help clarify the nature of the charter by providing guidelines as to the contents of the charter. Which of the following is not suggested in the Standards as part of the charter?
Answers
A: The department's access to records within the organization.
B: The scope of internal auditing activities.
C: The length of tenure for the internal auditing director.
D: The department's access to personnel within the organization.
Answer Explanations
Answer (a) is incorrect. It is suggested by the Standards.
Answer (b) is incorrect. It is suggested by the Standards.
Answer (c) is the correct answer. This is not included in the IIA Standards.
Answer (d) is incorrect. It is suggested by the Standards.
51
Question: V1C1-0051
The preliminary survey indicates that severe staff reductions at the audit location have resulted in extensive amounts of overtime among accounting staff. Department members are visibly stressed and very vocal about the effects of the cutbacks. Accounting payrolls are nearly equal to prior years, and many key controls, such as segregation of duties, are no longer in place. The accounting supervisor now performs all operations within the cash receipts and posting process, and has no time to review and approve transactions generated by the remaining members of the department. Journal entries for the last six months since the staff reductions show increasing numbers of prior month adjustments and corrections, including revenues, cost of sales, and accruals that had been misstated or forgotten during month-end closing activity. The auditor should
Answers
A: Discuss these findings with audit management to determine whether further audit work would be an efficient use of audit resources at this time.
B: Proceed with the scheduled audit but add audit personnel based on the expected number of findings and anticipated lack of assistance from local accounting management.
C: Research temporary helps agencies and evaluates the cost and benefit of outsourcing needed services.
D: Suspend further audit work because the findings are obvious and issue the audit report.
Answer Explanations
Answer (a) is the correct answer. Additional planning is necessary to align the audit effort to the circumstances and address the responsibilities of the audit department.
Answer (b) is incorrect. It is not clear at this point what additional audit work will be necessary.
Answer (c) is incorrect. Management has not accepted this plan of action.
Answer (d) is incorrect. This action would not address applicable standards of the auditor or the audit department, including objectivity, due professional care, and performance of audit work standards.
52
Question: V1C1-0052
Auditors realize that at times corrective action is not taken even when agreed to by the appropriate parties. This should lead an internal auditor to
Answers
A: Decide the extent of necessary follow-up work.
B: Allow management to decide when to followup, since it is management's ultimate responsibility.
C: Decide to conduct follow-up work only if management requests the auditor's assistance.
D: Write a follow-up audit report with all findings and their significance to the operations.
Answer Explanations
Answer (a) is the correct answer. The IIA Standards states that the director of internal auditing should determine the nature, timing, and extent of follow-up.
Answer (b) is incorrect. The Standards state that follow-up work is not management’s responsibility.
Answer (c) is incorrect. The Standards state that follow-up work is not management’s responsibility.
Answer (d) is incorrect. The auditor has to provide an opinion as to the decision made with regard to lack of action.
53
Question: V1C1-0053
Which of the following actions would be a violation of independence?
Answers
A: Continuing on an audit assignment at a division for which the auditor will soon be responsible as the result of a promotion.
B: Reducing the scope of an audit due to budget restrictions.
C: Participating on a task force that recommends standards for control of a new distribution system.
D: Reviewing a purchasing agent's contract drafts prior to execution.
Answer Explanations
Answer (a) is the correct answer. The IIA Professional Standard specifies that an auditor who has been promoted to an operating department should not continue on an audit of his or her new department.
Answer (b) is incorrect. The Standard states that budget restrictions do not constitute a violation of an auditor’s independence.
Answer (c) is incorrect. The Standard states that an auditor may participate on a task force that recommends new systems. However, designing, installing, or operating such systems might impair objectivity.
Answer (d) is incorrect. The Standard states that an auditor may review contracts prior to their execution.
54
Question: V1C1-0054
Management has requested the audit department to conduct an audit of the implementation of its recently developed company code of conduct. In preparing for the audit, the auditor reviews the newly developed code, compares it with several others for comparable companies, and concludes that the newly developed code has severe deficiencies. Based= on this conclusion, the auditor should
Answers
A: Plan an audit for the implementation of management's code of conduct and also for compliance with the "best practices" from the other codes since this represents the best available criteria.
B: Report the nature of the deficiencies in a formal report to management.
C: Inform management of the problems with the existing code and report that it would be inappropriate to conduct an audit until the code is revised to incorporate the "best practices" from industry.
D: Conduct the audit as requested by management, reporting only noncompliance with the code.
Answer Explanations
Answer (a) is incorrect. It is not appropriate to conduct an audit for compliance with criteria that have never been communicated to auditees.
Answer (b) is the correct answer. This would be the best solution. The auditor is responsible for reporting deficiencies in criteria to management.
Answer (c) is incorrect. It is okay to inform management and discuss whether now is the best time to conduct the audit. But it is not inappropriate to conduct the audit if management wants feedback on the implementation of its code.
Answer (d) is incorrect. The auditor needs to communicate deficiencies in criteria to management. Just reporting on the implementation of the current code would be deficient.
55
```
Question: V1C1-0055
Internal auditing standards assign the responsibility for providing appropriate audit supervision to the
Answers
A: Audit committee.
B: Director of internal auditing.
C: Audit supervisor.
D: Senior auditor.
```
Answer Explanations
Answer (a) is incorrect. Although the audit committee may determine whether due care is being exercised by the audit director, audit supervision is not the committee’s responsibility.
Answer (b) is the correct answer. Per the IIA Standards, the director of internal auditing is responsible for providing appropriate audit supervision.
Answer (c) is incorrect. Although the audit supervisor may act on behalf of the director, the director is ultimately responsible for audit supervision.
Answer (d) is incorrect. It is the senior or in-charge auditor who is in need of supervision, for which the director is responsible.
56
Question: V1C1-0056
The IIA Standards require that the director of internal auditing seek the approval of management and acceptance by the board of a formal written charter for the internal auditing department. The purpose of this charter is to
Answers
A: Protect the internal auditing department from undue outside influence.
B: Establish the purpose, authority, and responsibility of the internal auditing department.
C: Clearly define the relationship between internal and external auditing.
D: Establish the director's status as a staff executive.
Answer Explanations
Answer (a) is incorrect. While a charter may help to do this, this option is not the best choice.
Answer (b) is the correct answer. This is the purpose established by Standards.
Answer (c) is incorrect. It is not the best choice.
Answer (d) is incorrect. While a charter may help to do this, this option is not the best choice.
57
Question: V1C1-0057
The primary criteria for determining the adequacy of working papers can be found in the
Answers
A: IIA Standards.
B: Institute's Code of Ethics.
C: Statement of Responsibilities of Internal Auditing.
D: Foreign Corrupt Practices Act.
Answer Explanations
Answer (a) is the correct answer. The IIA Standards address this aspect of working paper content.
Answer (b) is incorrect. The Code of Ethics does not address working papers.
Answer (c) is incorrect. The Statement of Responsibilities of Internal Auditing does not address working papers.
Answer (d) is incorrect. The Foreign Corrupt Practices Act does not deal with workpaper content.
58
Question: V1C1-0058
Based on the IIA Standards, an internal auditing department’s staff development program will be deficient if individual employees are
Answers
A: Given a large variety of tasks to perform.
B: Expected to study current events on an independent basis.
C: Assigned to a different supervisor on each job.
D: Formally evaluated once every two years.
Answer Explanations
Answer (a) is incorrect. Diversified tasks enhance an auditor’s experience by allowing him to become familiar with various components of the audit.
Answer (b) is incorrect. Internal auditors must be aware of current events in the field. Independent study is one means of accomplishing this.
Answer (c) is incorrect. Rotating supervisors is desirable because it helps to broaden on-the-job training.
Answer (d) is the correct answer. The IIA Standards states that each auditor must be formally evaluated at least annually.
59
Question: V1C1-0059
The IIA Standards require written policies and procedures to guide the audit staff. Which of the following statements is false with respect to this requirement?
Answers
A: The form and content of written policies and procedures should be appropriate to the size of the department.
B: All internal audit departments should have a detailed policies and procedures manual.
C: Formal administrative and technical audit manuals may not be needed by all internal auditing departments.
D: A small internal auditing department may be managed informally through close supervision and written memos.
Answer Explanations
Answer (a) is incorrect. It is a true statement.
Answer (b) is the correct answer. The form and content of written policies and procedures should be appropriate to the size and structure of the department and the complexity of its work. A small department may be managed informally.
Answer (c) is incorrect. It is a true statement.
Answer (d) is incorrect. It is a true statement.
60
Question: V1C1-0060
Paragraph 1: The production department has the newest production equipment available because of a fire that required the replacement of all equipment.
Paragraph 2: The members of the production department have become completely comfortable with the state of the- art technology over the past year and a half. As a result, the production department has become an industry leader in production efficiency and effectiveness.
Paragraph 3: The production department produces an average of 25 units per worker per shift. The defect rate is 1%.
Paragraph 4: The industry average productivity is 20 units per worker per shift. The industry defect rate is 3%.
Which paragraph would be characterized as the attribute described in the IIA Standards as “Criteria”?
Answers
A: 1
B: 2
C: 3
D: 4
Answer Explanations
Answer (a) is incorrect. Paragraph 1 explains the reason that the firm’s productivity is greater than is the industry average. This is the attribute called “Cause,” and it is the reason for the difference between the expected and actual conditions (“why the difference exists”).
Answer (b) is incorrect. Paragraph 2 describes the result of the firm’s access to state-of-the-art technology. This attribute is called “Effect,” and it is the risk or exposure the auditee organization and/or others encounter because the condition is not the same as the criteria (“the impact of the difference”). In this case the effect is positive, rather than negative.
Answer (c) is incorrect. Paragraph 3 describes the actual productivity extant within the firm. This attribute is called “Condition,” and it is the factual evidence that the internal auditor found in the course of the examination (“what does exist”).
Answer (d) is the correct answer. Paragraph 4 describes the standards by which the production department is measured. These are the “criteria,” and they are the standards, measures, or expectations used in making an evaluation and/or verification (“what should exist”).
61
Question: V1C1-0061
Paragraph 1: The production department has the newest production equipment available because of a fire that required the replacement of all equipment.
Paragraph 2: The members of the production department have become completely comfortable with the state-of the- art technology over the past year and a half. As a result, the production department has become an industry leader in production efficiency and effectiveness.
Paragraph 3: The production department produces an average of 25 units per worker per shift. The defect rate is 1%.
Paragraph 4: The industry average productivity is 20 units per worker per shift. The industry defect rate is 3%.
Which paragraph would be characterized as the attribute described in the IIA Standards as “Condition”?
Answers
A: 1
B: 2
C: 3
D: 4
Answer Explanations
Answer (a) is incorrect. Paragraph 1 is the statement of “Cause.”
Answer (b) is incorrect. Paragraph 2 is the statement of “Effect.”
Answer (c) is the correct answer. Paragraph 3 is the statement of “Condition.”
Answer (d) is incorrect. Paragraph 4 is the statement of “Criteria.”
62
Question: V1C1-0062
A relatively new internal auditor is completing an audit report. The final report should most appropriately be signed by
Answers
A: The auditor because of a greater level of detail knowledge of the report.
B: The auditor and the person in charge of the area being audited to indicate review of the report.
C: The director of internal auditing.
D: The chairman of the audit committee of the board of directors.
Answer Explanations
Answer (a) is incorrect. Although the internal auditor performing the audit has much detail knowledge, the final audit report should be signed by the head of the internal audit department who has performed an objective review of the findings and recommendations.
Answer (b) is incorrect. The person in charge of the area being reviewed will indicate his or her review of the report through a written reply.
Answer (c) is the correct answer. The director of internal auditing has ultimate responsibility for the quality of reports issued by the internal auditing group and should signify formal approval of the report by his or her signature.
Answer (d) is incorrect. The chair of the audit committee is responsible for reviewing the ongoing activities of the internal auditing group and should not be directly involved in the preparation and review of the audit report.
63
Question: V1C1-0063
An auditor often faces special problems when auditing a foreign subsidiary. Which of the following statements is false with respect to the conduct of international audits?
Answers
A: The IIA Standards do not apply outside of the United States.
B: The auditor should determine whether managers are in compliance with local laws.
C: There may be justification for having different company policies in force in foreign branches.
D: It is preferable to have multilingual auditors conduct audits at branches in non-English-speaking nations.
```
Answer Explanations
Answer (a) is the correct answer. The IIA Standards are not limited to U.S. locations.
Answer (b) is incorrect. It is true.
Answer (c) is incorrect. It is true.
Answer (d) is incorrect. It is true.
```
64
Question: V1C1-0064
The interpretation related to quality assurance given by the IIA Standards is that
Answers
A: Quality assurance reviews can provide senior management and the audit committee with an assessment of the internal auditing function.
B: Appropriate follow-up to an external review is the responsibility of the internal auditing director's immediate supervisor.
C: The internal auditing department is primarily measured against the Institute's Code of Ethics.
D: Continual supervision is limited to the planning, examination, evaluation report, and follow-up process.
Answer Explanations
Answer (a) is the correct answer. This is the correct answer based on the IIA Standards.
Answer (b) is incorrect. Standard 560.04.5: Appropriate follow-up is the director’s responsibility.
Answer (c) is incorrect. The key criterion should be an assessment of the department to the Standards.
Answer (d) is incorrect. It also includes training, employee performance evaluations, time and expense control, and similar administrative areas.
65
Question: V1C1-0065
An internal auditor fails to discover an employee fraud during an audit. The nondiscovery is most likely to suggest a violation of the IIA Standards if it was the result of a
Answers
A: Failure to perform a detailed audit of all transactions in the area.
B: Determination that any possible fraud in the area would not involve a material amount.
C: Determination that the cost of extending audit procedures in the area would exceed the potential benefits.
D: Presumption that the internal controls in the area were adequate and effective.
Answer Explanations
Answer (a) is incorrect. The Standards state “Due care . . . does not require detailed audits of all transactions.”
Answer (b) is incorrect. The Standards state: “the relative materiality . . . of matters to which audit procedures are applied” is a legitimate consideration.
Answer (c) is incorrect. The Standards state that “the internal auditor should consider . . . the cost of auditing in relation to potential benefits.”
Answer (d) is the correct answer. Although the IIA Standards state that “the internal auditor should consider . . . the adequacy and effectiveness of internal control,” the Standards make clear that this consideration must be based on an examination and evaluation, not just an assumption.
66
Question: V1C1-0066
Which of the following will best promote the independence of the internal auditing function?
Answers
A: A quality control system within the internal auditing function designed to ensure that departmental objectives are met.
B: Direct lines of communication between the audit committee and the director of internal auditing.
C: A written charter that reflects the concepts contained in the Statement of Responsibilities of Internal Auditing.
D: Direct reporting responsibilities to the company's chief financial officer.
Answer Explanations
Answer (a) is incorrect. While this is important, it is not the best choice.
Answer (b) is the correct answer. The IIA Standards note that access to the board helps assure independence and provides a means for the board and director to keep each other informed on matters of mutual interest.
Answer (c) is incorrect. While this is important, it is not the best choice.
Answer (d) is incorrect. Since much of internal auditing involves evaluating activities directly under the control of this officer, independence might be hampered by such an arrangement.
67
Question: V1C1-0067
The charter of a newly formed internal auditing department contains the following statement: “The organizational status of the internal auditing department will be sufficient to permit the accomplishment of its audit responsibilities.”
From the following relationships, select the best reporting lines that would promote the accomplishment of the intended organizational status. Solid line to
Answers
A: Board of directors, dotted line to vice president of finance.
B: President, dotted line to board of directors.
C: Controller, dotted line to board of directors.
D: Vice president, finance, dotted line to board of directors.
Answer Explanations
Answer (a) is incorrect. Solid line should be to a top executive.
Answer (b) is the correct answer. Direct reporting to top executive, dotted line to board.
Answer (c) is incorrect. Internal auditing department should not be responsible to controller.
Answer (d) is incorrect. Solid line should be to a top executive.
68
Question: V1C1-0068
According to the IIA Standards, the purpose of an internal auditor’s review for effectiveness of the system of internal control is to ascertain if
Answers
A: The system is functioning as intended.
B: The system is functioning efficiently and economically.
C: The organization's goals and objectives have been achieved.
D: Financial and operating data are reliable.
Answer Explanations
Answer (a) is the correct answer. The IIA Standards state that effectiveness of the system of internal control is to ascertain whether the system is functioning as intended.
Answer (b) is incorrect. It defines the purpose of the review for adequacy of the system of internal control.
Answer (c) is incorrect. It defines the purpose of the review of the quality of performance.
Answer (d) is incorrect. It defines one of the objectives of internal control.
69
Question: V1C1-0069
The best description of the purpose of internal auditing is that it
Answers
A: Furnishes members of the organization with information needed to effectively discharge their responsibilities.
B: Reviews the reliability and integrity of financial and operating information.
C: Reviews the means of safeguarding assets and, as appropriate, verifies the existence of such assets.
D: Appraises the economy and efficiency with which resources are employed.
Answer Explanations
Answer (a) is the correct answer. Service to all members of the organization is the pervasive theme of the introduction to the Standards.
Answer (b) is incorrect. It has just one of the specific activities outlined in the Standards.
Answer (c) is incorrect. It has just one of the specific activities outlined in the Standards.
Answer (d) is incorrect. It has just one of the specific activities outlined in the Standards.
70
Question: V1C1-0070
The director of a newly formed internal auditing department is seeking management approval of a charter. What is the authoritative source for seeking such approval?
Answers
A: The IIA Standards, which clearly place that responsibility on the director.
B: The appropriate Practice Advisories, which require the director to take that course of action.
C: The Code of Ethics, which requires internal auditors to document company policy.
D: According to the IIA Standards, no approval is necessary.
Answer Explanations
Answer (a) is the correct answer. This is the correct answer per the IIA Standards.
Answer (b) is incorrect. Professional Standards Bulletins are not authoritative sources.
Answer (c) is incorrect. The Code makes no such requirement.
Answer (d) is incorrect. This is not true.
71
Question: V1C1-0071
According to the IIA Standards, the staff of a newly developed internal auditing department should include
Answers
A: Members with bachelor's degrees in accounting and related fields.
B: Members possessing appropriate professional designations.
C: Members proficient in applying internal auditing standards, procedures, and techniques.
D: Members with prior internal audit experience.
Answer Explanations
Answer (a) is incorrect. The level of formal education will vary according to position requirements or departmental needs.
Answer (b) is incorrect. Some entry-level positions require less than two years’ experience, which is one of the prerequisites for many certification programs.
Answer (c) is the correct answer. This is the correct answer based on the IIA Standards.
Answer (d) is incorrect. Some of the staff positions may not require previous audit experience.
72
Question: V1C1-0072
According to the IIA Standards, which of the following best describes the nature of opinions that are appropriate for internal audit reports?
Answers
A: Opinions are generally the auditor's subjective judgments concerning why deficiencies exist.
B: Opinions are the auditor's evaluations of the effects of the findings on the activities reviewed.
C: Opinions are conclusions that the auditor has reached concerning the appropriateness of the auditee's objectives.
D: Opinions should only involve the fairness of the auditee's financial statements.
Answer Explanations
Answer (a) is incorrect. It is not the best answer. Opinions should be solidly based and involve more than is given here.
Answer (b) is the correct answer. This is the nature of opinions per the IIA Standards.
Answer (c) is incorrect. It is not the best answer. Auditors usually take the auditee’s objectives as given.
Answer (d) is incorrect. Opinions in internal audit reports are not limited to the fairness of financial statements.
73
Question: V1C1-0073
The director of internal auditing is concerned that a recently disclosed fraud was not uncovered during the last audit of cash operations. A review of the work papers indicated that the fraudulent transaction was not included in a properly designed statistical sample of transactions tested. Which of the following applies to this situation?
Answers
A: Because cash operation is a high-risk area, 100% testing of transactions should have been performed.
B: The internal auditor acted with due professional care since an appropriate statistical sample of material transactions was tested.
C: Fraud should not have gone undetected in a recently audited area.
D: Extraordinary care is necessary in the performance of a cash operations audit and the auditor should be held responsible for the oversight.
Answer Explanations
Answer (a) is incorrect. “Due care requires the auditor to conduct examinations and verification to a reasonable extent, but does not require detailed audits of all transactions.”
Answer (b) is the correct answer. This is the correct answer based on the IIA Standards, “The possibility of material irregularities or noncompliance should be considered whenever the internal auditor undertakes an internal auditing assignment.”
Answer (c) is incorrect. “The internal auditor cannot give absolute assurance that noncompliance or irregularities do not exist.”
Answer (d) is incorrect. “Due care implies reasonable care and competence, not infallibility or extraordinary performance.”
74
Question: V1C1-0074
In the course of their work, internal auditors must be alert for fraud and other forms of white-collar crime. The important characteristic that distinguishes fraud from other varieties of white-collar crime is that
Answers
A: Fraud encompasses an array of irregularities and illegal acts that involve intentional deception.
B: Unlike other white-collar crimes, fraud is always perpetrated against an outside party.
C: White-collar crime is usually perpetrated for the benefit of an organization, whereas fraud benefits an individual.
D: White-collar crime is usually perpetrated by outsiders to the detriment of an organization, whereas fraud is perpetrated by insiders to benefit the organization.
Answer Explanations
Answer (a) is the correct answer. This is in accord with the IIA Standards.
Answer (b) is incorrect. Fraud may be perpetrated against the organization.
Answer (c) is incorrect. Fraud may be for the benefit of an organization.
Answer (d) is incorrect. Parts of this statement may or may not be true.
75
Question: V1C1-0075
During an audit of purchasing, internal auditors found several violations of company policy concerning competitive bidding. The same condition had been reported in an audit report last year, and corrective action had not been taken.
Which of the following best describes the appropriate action concerning this repeat finding?
Answers
A: The audit report should note that this same condition had been reported in the prior audit.
B: During the exit interview, management should be made aware that a finding from the prior report had not been corrected.
C: The director of internal auditing should determine whether management or the board has assumed the risk of not taking corrective action.
D: The director of internal auditing should determine whether this condition should be reported to the independent auditor and any regulatory agency.
Answer Explanations
Answer (a) is incorrect. This action is insufficient.
Answer (b) is incorrect. This action is insufficient.
Answer (c) is the correct answer. This action meets the requirements of the Standards.
Answer (d) is incorrect. This action would be inappropriate.
76
Question: V1C1-0076
Internal auditing is responsible for assisting in the prevention of fraud by
Answers
A: Informing the appropriate authorities within the organization and recommending whatever investigation is considered necessary in the circumstances when wrongdoing is suspected.
B: Establishing the systems designed to ensure compliance with the organization's policies, plans, and procedures, as well as applicable laws and regulations.
C: Examining and evaluating the adequacy and the effectiveness of control, commensurate with the extent of the potential exposure/risk in the various segments of the organization's operations.
D: Determining whether operating standards have been established for measuring economy and efficiency, and whether these standards are understood and are being met.
Answer Explanations
Answer (a) is incorrect. This response relates to the internal auditor’s obligation for reporting suspected fraud, not for preventing fraud.
Answer (b) is incorrect. Management, not internal auditing, is responsible for establishing these systems.
Answer (c) is the correct answer. The principal means of preventing fraud is internal control; the internal auditor’s role is related to evaluating the control.
Answer (d) is incorrect. The standards referred to relate to operational efficiency, not to prevention of fraud.
77
Question: V1C1-0077
Which of the following combination of participants would be most appropriate to attend an exit conference?
Answers
A: The responsible internal auditor and representatives from management who are knowledgeable regarding detailed operations and those who can authorize implementation of corrective action.
B: The director of internal audit and the executive in charge of the activity or function audited.
C: Staff auditors who conducted the fieldwork and operating personnel in charge of the daily performance of the activity or function audited.
D: Staff auditors who conducted the fieldwork and the executive in charge of the activity or function audited.
Answer Explanations
Answer (a) is the correct answer. This is the option most in line with what is suggested by the Standards.
Answer (b) is incorrect. These executives may not be knowledgeable enough about details.
Answer (c) is incorrect. These persons might not have the necessary perspectives and/or authority.
Answer (d) is incorrect. The staff auditor might lack the proper perspective and may be “overmatched.”
78
Question: V1C1-0078
An internal audit of sales contracts revealed that a bribe had been paid to secure a major contract. It was considered possible that a senior executive had authorized the bribe. Which of the following best describes the proper distribution of the completed audit report?
Answers
A: The report should be distributed to the chief executive officer and the appropriate regulatory agency.
B: The report should be distributed to the board of directors, the chief executive officer, and the independent auditor.
C: The director of internal auditing should provide the board of directors a copy of the report and decide whether further distribution is appropriate.
D: The report should be distributed to the board of directors, the appropriate law enforcement agency, and the appropriate regulatory agency.
Answer Explanations
Answer (a) is incorrect. Outside distribution is probably not appropriate.
Answer (b) is incorrect. Outside distribution is probably not appropriate.
Answer (c) is the correct answer. This is basically what the Standards require.
Answer (d) is incorrect. Outside distribution is probably not appropriate.
79
Question: V1C1-0079
The IIA Standards define “relevant evidence” as
Answers
A: Factual, adequate, and convincing.
B: Reliable and the best attainable through the use of appropriate audit techniques.
C: Consistent with the audit objectives and supports audit findings and recommendations.
D: Information that helps the organization meets its goals.
Answer Explanations
Answer (a) is incorrect. This defines sufficient information.
Answer (b) is incorrect. This defines competent information.
Answer (c) is the correct answer. This defines relevant information.
Answer (d) is incorrect. This defines useful information.
80
Question: V1C1-0080
Which is the lowest organizational level to which the internal auditing department should address the final report of the operational audit of the production department?
Answers
A: The audit committee of the board of directors.
B: The chief executive officer.
C: The vice president of production.
D: The first-line supervisor.
Answer Explanations
Answer (a) is incorrect. Audit committees usually do not require the full audit report to be submitted to them. Instead, they ordinarily ask for a summary of the audit report. This summary is sometimes nothing more than the summary referred to in the Standards. The audit committee may ask for the full audit report. If it does, however, it is the highest organizational level to receive it. Three lower levels, which may or must receive the full final audit report, are identified in the other responses.
Answer (b) is incorrect. The chief executive officer (CEO) qualifies as one of those “higher-level members in the organization” who “may receive only a summary report.” Like the audit committee, the CEO can request the full audit report. If the CEO does receive the full report, however, this represents a high organizational level. Two of the other three responses identify lower organizational levels that receive the full final audit report.
Answer (c) is incorrect. The vice president of production is the head of the audited unit. As such, he or she should receive the complete final audit report. There are organizational levels lower than the unit head that “are in a position to take corrective action or insure that corrective action is taken.” One such organizational level is identified among the other three responses.
Answer (d) is the correct answer. The stem identifies the first-line position as the lowest-level persons “who are in a position to take corrective action or insure that corrective action is taken.” In any case, the foremen are in a position “to insure that audit results are given due consideration.” As a result, the foremen should each receive a full final audit report. Since the foreman’s position is the lowest report-receiving organizational level, this response is correct.
81
Question: V1C1-0081
Which of the following is not ordinarily an objective of a quality assurance review? To determine compliance with
Answers
A: Applicable laws and regulations.
B: The general standards for the professional practice of internal auditing.
C: The specific standards for the professional practice of internal auditing.
D: The goals of the internal audit function.
Answer Explanations
Answer (a) is the correct answer. This is not an objective of the Standards.
Answer (b) is incorrect. Each one is an objective under the Standards.
Answer (c) is incorrect. Each one is an objective under the Standards.
Answer (d) is incorrect. Each one is an objective under the Standards.
82
Question: V1C1-0082
According to the IIA Standards, the independence of internal auditors is achieved through
Answers
A: Staffing and supervision.
B: Continuing education and due professional care.
C: Human relations and communications.
D: Organizational status and objectivity.
Answer Explanations
Answer (a) is incorrect. Staffing and supervision relate to the professional proficiency of the internal auditing department.
Answer (b) is incorrect. Continuing education and due professional care is related to the professional proficiency of the internal auditor.
Answer (c) is incorrect. Human relations and communications relate to the professional proficiency of the internal auditor.
Answer (d) is the correct answer. Organizational status and objectivity permit internal auditors to render the impartial and unbiased judgments essential to the proper conduct of audits.
83
Question: V1C1-0083
According to the IIA Standards, an internal auditor should possess proficiency in
Answers
A: Management principles.
B: The fundamentals of such subjects as accounting, economics, and finance.
C: Computerized information systems.
D: Applying internal auditing standards, procedures, and techniques.
Answer Explanations
Answer (a) is incorrect. The Standards specify only an understanding of management principles.
Answer (b) is incorrect. The Standards specify only an appreciation of the fundamentals of such subjects as accounting, economics, and finance.
Answer (c) is incorrect. The Standards specify only an appreciation of the fundamentals of computerized information systems.
Answer (d) is the correct answer. The Standards specify, in the area of applying internal auditing standards, procedures, and techniques, that an internal auditor should possess the ability to “apply knowledge to situations likely to be encountered and to deal with them without extensive recourse to technical research and assistance.”
84
Question: V1C1-0084
Which of the following audit committee activities would be of the greatest benefit to the internal auditing department?
Answers
A: Review and approval of audit programs.
B: Assurance that the external auditor will rely on the work of the internal auditing department whenever possible.
C: Review and endorsement of all internal audit reports prior to their release.
D: Support for appropriate follow-up of recommendations made by the internal auditing department.
Answer Explanations
Answer (a) is incorrect. Review and approval of audit programs is the responsibility of internal audit supervision.
Answer (b) is incorrect. External audit’s reliance on the work of internal auditing is the subject of an AICPA pronouncement.
Answer (c) is incorrect. Review and approval of internal audit reports is the responsibility of the director of internal auditing or designee.
Answer (d) is the correct answer. The audit committee can lend considerable weight to the recommendations of internal auditing.
85
Question: V1C1-0085
Which of the following relationships best depicts the appropriate dual reporting responsibility of the internal auditor?
Administratively to the
Answers
A: Board of directors, functionally to the chief executive officer.
B: Controller, functionally to the chief financial officer.
C: Chief executive officer, functionally to the board of directors.
D: Chief executive officer, functionally to the external auditor.
Answer Explanations
Answer (a) is incorrect. Reversed.
Answer (b) is incorrect. This reporting responsibility would not be independent when reporting to controller.
Answer (c) is the correct answer. This is an ideal reporting relation.
Answer (d) is incorrect. Internal auditor does not report to external auditors.
86
Question: V1C1-0086
According to the IIA Standards, the documentation required to plan an internal auditing project should include evidence that the
Answers
A: Expected findings were clearly identified.
B: Internal auditing department's resources are effectively and efficiently employed.
C: Planned audit work will be completed on a timely basis.
D: Resources needed to perform the audit have been considered.
Answer Explanations
Answer (a) is incorrect. The Standards do not require it.
Answer (b) is incorrect. The Standards do not require it.
Answer (c) is incorrect. The Standards do not require it.
Answer (d) is the correct answer. The Standards require that resources needed to perform the audit have been considered.
87
Question: V1C1-0087
The IIA Standards require an internal auditor to exercise due professional care in performing internal audits. This includes
Answers
A: Establishing direct communication between the director of internal auditing and the board of directors.
B: Evaluating established operating standards and determining whether those standards are acceptable and are being met.
C: Accumulating sufficient evidence so that the auditor can give absolute assurance that irregularities do not exist.
D: Establishing suitable criteria of education and experience for filling internal audit positions.
Answer Explanations
Answer (a) is incorrect. Communication between the director of internal auditing and the board of directors is part of the Independence standard, not the Due Professional Care standard.
Answer (b) is the correct answer. Within the definition of due professional care, the Standards include the evaluation of operating standards for acceptability and determining whether they are being met.
Answer (c) is incorrect. The amount of audit time and effort required to give absolute assurance that there are no irregularities would be so great that the audit costs would exceed the benefits.
Answer (d) is incorrect. Criteria for filling internal audit positions relate to the Staffing standard; they do not relate directly to the performance of an audit.
88
Question: V1C1-0088
The director of internal auditing for a large retail organization reports to the controller and is responsible for designing and installing computer applications relating to inventory control. Which of the following is the major limitation of this arrangement?
Answers
A: It prevents the audit organization from devoting full time to auditing.
B: Auditors generally do not have the required expertise to design and implement such systems.
C: It potentially affects the director's independence and thereby lessens the value of audit services.
D: Such arrangements are unlawful because the director participates in incompatible functions.
Answer Explanations
Answer (a) is incorrect. It is not the best choice.
Answer (b) is incorrect. Auditors often have the required expertise.
Answer (c) is the correct answer. Independence would be adversely affected since internal auditors would be expected to review systems for which the director and the director’s immediate superior were responsible.
Answer (d) is incorrect. Such arrangements are not illegal.
89
Question: V1C1-0089
According to the IIA Standards, the internal auditing department’s goals should specify
Answers
A: Audit work schedules and activities to be audited.
B: Policies and procedures to guide the audit staff.
C: Measurement criteria and target dates for completion.
D: Staffing plans and financial budgets.
Answer Explanations
Answer (a) is incorrect. Planning does include specifying audit work schedules and the activities to be audited. However, the goals for the internal auditing department do not ordinarily include this information. The goals tend to be broader in scope.
Answer (b) is incorrect. The department’s goals are separate from its policies and procedures should be based on goals.
Answer (c) is the correct answer. The Standards specify that goals should include measurement criteria and targeted dates of completion.
Answer (d) is incorrect. Staffing plans include the number of auditors required for an engagement, and the knowledge, skills, and disciplines required, as partly determined from audit work schedules. Goals do not include budgets, either. Instead, goals should be achievable within relevant budget constraints.
90
```
Question: V1C1-0090
According to the IIA Standards, internal auditors should possess the knowledge, skills, and disciplines essential to the performance of internal auditing. This means that all internal auditors should be proficient in applying
Answers
A: Internal auditing standards.
B: Quantitative methods.
C: Management principles.
D: Structured systems analysis.
```
Answer Explanations
Answer (a) is the correct answer. Auditors should have a proficiency in applying internal auditing standards.
Answer (b) is incorrect. Only an appreciation is required.
Answer (c) is incorrect. Only an appreciation is required.
Answer (d) is incorrect. Only an appreciation is required.
91
Question: V1C1-0091
Coordination of internal and external auditing can reduce the overall audit costs. According to the IIA Standards, who is responsible for coordinating internal and external audit efforts?
Answers
A: Director of internal auditing.
B: External auditor.
C: Audit committee of the board of directors.
D: Management.
```
Answer Explanations
Answer (a) is the correct answer. The Standards specify that the director of internal auditing is responsible for coordination.
Answer (b) by definition is incorrect.
Answer (c) by definition is incorrect.
Answer (d) by definition is incorrect.
```
92
Question: V1C1-0092
You have been asked to be a member of a peer review team. In assessing the independence of the internal audit department being reviewed, you should consider all of the following factors except:
Answers
A: Access to and frequency of communications with the board of directors or its audit committee.
B: The criteria of education and experience considered necessary when filling vacant positions on the audit staff.
C: The degree to which auditors assume operating responsibilities.
D: The scope and depth of audit objectives for the audits included in the review.
Answer Explanations
Answer (a) is incorrect. Communication is related to independence.
Answer (b) is the correct answer. These criteria are related to skill, not independence.
Answer (c) is incorrect. Assumption of operating duties is related to independence.
Answer (d) is incorrect. The scope and depth of the audit objectives reflect on the department’s independence.
93
```
Question: V1C1-0093
The IIA Standards require that, in most cases, an internal auditing department have documented policies and procedures
to ensure the consistency and quality of audit work. The exception to this requirement is directly related to
Answers
A: Departmentalization.
B: Division of labor.
C: Span of control.
D: Authority.
```
Answer Explanations
Answer (a) is incorrect. Departmentalization can improve communications among team members, but sufficient direct supervision may be lacking if spans of control are large.
Answer (b) is incorrect. Division of labor produces highly specialized individuals, but formalized guidance is necessary for newer employees if the department is large.
Answer (c) is the correct answer. With a small audit department, substantial direct supervision can be provided by the audit director.
Answer (d) is incorrect. The audit director is the ultimate authority for the internal auditing department, but direct supervision by this individual will be lacking in a large department. Formal policies are needed.
94
Question: V1C1-0094
The director of internal auditing routinely provides activity reports to the board as part of the board meeting agenda each quarter. Senior management has asked to review the director’s board presentation before each board meeting so that any issues or questions can be discussed beforehand. The director should
Answers
A: Provide the activity reports to senior management as requested and discuss any issues that may require action to be taken.
B: Not provide activity reports to senior management because such matters are the sole province of the board.
C: Disclose only those matters in the activity reports to the board that pertain to expenditures and financial budgets of the internal auditing department.
D: Provide information to senior management that pertains only to completed audits and findings available in published audit reports.
Answer Explanations
Answer (a) is the correct answer. Activity reports should be submitted periodically to both senior management and the board; no distinction between the contents of the reports is necessary except in extraordinary situations requiring confidentiality.
Answer (b) is incorrect. This is not included in the provisions of the Standards.
Answer (c) is incorrect. Financial budget information is only part of the provisions established in the Standards; there is no need to restrict the information to this subject.
Answer (d) is incorrect. The Standards do not provide for limiting information in this manner.
95
Question: V1C1-0095
An auditor finds a situation where there is some suspicion, but no evidence, of potential misstatement. The standard of due professional care would be violated if the auditor
Answers
A: Identified potential ways in which an error could occur and ranked the items for audit investigation.
B: Informed the audit manager of the suspicions and asked for advice on how to proceed.
C: Did not test for possible misstatement because the audit program had already been approved by audit management.
D: Expanded the audit program, without the auditee's approval, to address the highest-ranked ways in which a misstatement may have occurred.
Answer Explanations
Answer (a) is incorrect. This action would be consistent with the Standards on due professional care.
Answer (b) is incorrect. This action would be consistent with the Standards on due professional care.
Answer (c) is the correct answer. This would violate the IIA Standards because the auditor has not acted on audit evidence that indicated that the audit should be expanded.
Answer (d) is incorrect. The auditor does not need the auditee’s approval to expand the audit test.
96
Question: V1C1-0096
Which of the following combination of participants would be most appropriate to attend an exit conference?
Answers
A: The responsible internal auditor and representatives from management who are knowledgeable of detailed operations and those who can authorize implementation of corrective action.
B: The director of internal auditing and the executive in charge of the activity or function audited.
C: Staff auditors who conducted the fieldwork and operating personnel in charge of the daily performance of the activity or function audited.
D: Staff auditors who conducted the fieldwork and the executive in charge of the activity or function audited.
Answer Explanations
Answer (a) is the correct answer. This is the option most in line with what is suggested by the IIA Standards.
Answer (b) is incorrect. These executives may not be knowledgeable enough about details.
Answer (c) is incorrect. These persons might not have the necessary perspectives and/or authority.
Answer (d) is incorrect. The staff auditor might lack the proper perspective and may be “overmatched.”
97
Question: V1C1-0097
An internal audit director initiated an audit of the corporate code of ethics and the environment for ethical decision making. Which of the following would most likely be considered inappropriate regarding the scope and/or recommendations of the audit?
Answers
A: A review of the corporate code of ethics and a comparison to other corporate codes.
B: A survey of corporate employees, asking general questions regarding the ethical quality of corporate decision making.
C: Administration of an anonymous "ethics test" to determine if employees know of unethical behavior or have acted unethically themselves.
D: A survey of the board of directors to determine members' level of support for a corporate code of ethics.
Answer Explanations
Answer (a) is incorrect. This would be included in the “normal scope” of this type of audit.
Answer (b) is incorrect. Surveys of employees are not prohibited by the Standards.
Answer (c) is incorrect. Ethics Test is not prohibited by the Standards.
Answer (d) is the correct answer. Not much benefit is gained by surveying the board of directors since members’ views will be biased for this audit.
98
Question: V1C1-0098
Which of the following statements is true regarding coordination of internal and external audit efforts?
Answers
A: The director of internal audit should not give information about illegal acts to an external auditor because external auditors may be required to report the matter to the board and/or regulatory agencies.
B: Ownership and the confidentiality of the external auditor's working papers prohibit their review by internal auditors.
C: The director of internal audit should determine that appropriate follow-up and corrective action was taken by management where required on matters discussed in the external auditor's management letter.
D: If internal auditors provide assistance to the external auditors in connection with the annual audit, the audit work is not subject to the Standards for the Professional Practice of Internal Auditing.
Answer Explanations
Answer (a) is incorrect. The Standards state that information on illegal acts should be communicated to the external auditor.
Answer (b) is incorrect. Both internal and external audit standards allow review of each other’s working papers to evaluate scope, quality of work, and so on.
Answer (c) is the correct answer. The Standards place the responsibility for the evaluation of corrective action on the director of internal audit.
Answer (d) is incorrect. All work done by internal auditors should be done in accordance with the Standards.
99
Question: V1C1-0099
An auditor’s objectivity could be compromised in all of the following situations except:
Answers
A: A conflict of interest.
B: Auditee familiarity with auditor due to lack of rotation in assignments.
C: Auditor assumption of operational duties on a temporary basis.
D: Reliance on outside expert opinion when appropriate.
Answer Explanations
Answer (a) is incorrect. A conflict of interest compromises objectivity.
Answer (b) is incorrect. An auditor’s familiarity with the auditee can compromise objectivity.
Answer (c) is incorrect. Assuming operational duties compromises an auditor’s objectivity.
Answer (d) is the correct answer. Auditors sometimes must rely on outside experts; the Standards allow this reliance.
100
Question: V1C1-0100
The IIA Standards require that the internal audit director establish and maintain a quality assurance program to evaluate the operations of the internal audit department. All of the following are considered elements of a quality assurance program except:
Answers
A: Annual appraisals of individual internal auditors' performance.
B: Internal reviews of audits completed.
C: Supervision of audit work.
D: External reviews to assess compliance with standards
Answer Explanations
Answer (a) is the correct answer. Individual appraisal is part of personnel management.
Answer (b) is incorrect. Internal review is part of quality assurance.
Answer (c) is incorrect. Supervision is part of quality assurance.
Answer (d) is incorrect. External review is part of quality assurance.
101
Question: V1C1-0101
Auditing standards state that “reports may include recommendations for potential improvements.” Which of the following would be a valid justification for omitting recommendations in an audit report? The auditor
Answers
A: May not always understand the true cause of the finding being reported.
B: Does not have sufficient time to formulate a recommendation due to audit budget pressures.
C: Can avoid the confrontation by letting management solve its own problems.
D: May lose independence by being perceived as making operational decisions.
Answer Explanations
Answer (a) is the correct answer. The true cause of a finding may require additional expertise and may be determinable only through additional management study.
Answer (b) is incorrect. If the finding is significant enough to report, time must be found to determine what action would solve the deficiency.
Answer (c) is incorrect. Avoiding honest differences of opinion is not an acceptable reason for deleting a recommendation.
Answer (d) is incorrect. Recommendations do not impair an auditor’s independence. Management is responsible for decision making and implementing suggestions or formulating new solutions.
102
Question: V1C1-0102
When evaluating the independence of an internal audit department, a quality review team considers several factors.
Which of the following factors has the least amount of influence when judging an internal audit department’s independence?
Answers
A: Criteria used in making auditors assignments.
B: The extent of auditor training in communications skills.
C: Relationship between audit working papers and audit report.
D: Impartial and unbiased audit judgments.
Answer Explanations
Answer (a) is incorrect. How auditors are assigned is a factor related to independence: does the auditor have personal relationships with operating personnel, work experience with the auditee, and so forth?
Answer (b) is the correct answer. Training is a factor of skill, not independence.
Answer (c) is incorrect. If significant findings found in the working papers are left out of the report, independence is brought into question.
Answer (d) is incorrect. Unbiased judgment is a factor of independence.
103
Question: V1C1-0103
As used in the IIA Standards when discussing audit planning or risk assessment, the term “risk” is best defined as the probability that
Answers
A: An internal auditor will fail to detect a material error or event that causes financial statement or internal reports to be misstated or misleading.
B: An event or action may adversely affect the organization.
C: Management will, either knowing or unknowingly, make decisions that increase the potential liability of the organization.
D: Financial statements and/or internal records will contain material error.
Answer Explanations
Answer (a) is incorrect. This is the definition of audit risk used in external auditing.
Answer (b) is the correct answer. This is the correct answer based on the IIA Standards.
Answer (c) is incorrect. This could be used as a definition of management decision making risk, but the answer has no defined term.
Answer (d) is incorrect. This answer is the definition of financial statement error.
104
Question: V1C1-0104
Which of the following statements is not true regarding risk assessment as the term is used in internal auditing?
Answers
A: Risk assessment is a judgmental process of assigning dollar values to the perceived level of risk found in an auditable activity. These values allow directors to select the auditees most likely to result in identifiable audit savings.
B: The audit director should incorporate information from a variety of sources into the risk assessment process, including discussions with the board, management, external auditors, and review of regulations, and analysis of financial/operating data.
C: Risk assessment is a systematic process of assessing and integrating professional judgments about probable adverse conditions and/or events, providing a means of organizing an internal audit schedule.
D: As a result of an audit or preliminary survey, the audit director may revise the level of assessed risk of an auditee at any time, making appropriate adjustments to the work schedule.
Answer Explanations
Answer (a) is the correct answer. Risk assessment does not necessarily involve the assignment of dollar values and is not intended to identify the audit area with the greatest dollar savings (Standard 520, Planning).
Answer (b) is incorrect. Risk assessment includes information from many sources.
Answer (c) is incorrect. Risk assessment is systematic and provides a means for development of an audit schedule.
Answer (d) is incorrect. Risk assessments may be revised on the basis of new information.
105
```
Question: V1C1-0105
A director of internal auditing has to determine how an organization can be divided into auditable activities. Which of the following is an auditable activity?
Answers
A: A procedure.
B: A system.
C: An account.
D: All of the above.
```
Answer Explanations
Answer (a) is incorrect. Each choice is a part of Answer (d).
Answer (b) is incorrect. Each choice is a part of Answer (d).
Answer (c) is incorrect. Each choice is a part of Answer (d).
Answer (d) is the correct answer. Procedures, systems, and accounts can all be auditable activities according to the Standards.
106
```
Question: V1C1-0106
When determining the number and experience level of the internal audit staff to be assigned to an audit, the director should consider all of the following except the:
Answers
A: Complexity of the audit assignment.
B: Available audit resources.
C: Training needs of internal auditors.
D: Lapsed time since the last audit.
```
Answer Explanations
Answer (a) is incorrect. It is included as a factor in the Standards.
Answer (b) is incorrect. It is included as a factor in the Standards.
Answer (c) is incorrect. It is included as a factor in the Standards.
Answer (d) is the correct answer. It is a part of the audit scheduling, not auditor selection for audit assignment.
107
Question: V1C1-0107
The IIA Standards require an auditor to have the knowledge, skills, and disciplines essential to perform an internal audit. Which of the following correctly describes the level of knowledge or skill required by the Standards? Auditors must have
Answers
A: Proficiency in applying knowledge of auditing standards and procedures to specific situations without extensive recourse to technical research and assistance.
B: Proficiency in applying knowledge of accounting and computerized information systems to specific or potential problems.
C: An understanding of broad techniques used in supporting and developing audit findings and the ability to research the proper audit procedures to be used in any audit situation.
D: A broad appreciation for accounting principles and techniques when auditing the financial records and reports of the organization.
Answer Explanations
Answer (a) is the correct answer. Proficiency in the application of the Standards is required.
Answer (b) is incorrect. An appreciation, not proficiency, in accounting and computerized information systems is required.
Answer (c) is incorrect. Proficiency, not an understanding, of audit techniques is required.
Answer (d) is incorrect. Proficiency, not a broad understanding, of accounting principles is required when auditing financial records.
108
Question: V1C1-0108
An audit manager responsible for the supervision and review of other auditors needs the necessary skills and knowledge. Which of the following does not describe a skill or knowledge necessary to supervise a particular audit assignment?
Answers
A: The ability to review and analyze an audit program to determine if the proposed audit procedures will result in evidence relevant to the audit's objectives.
B: Ensuring that an audit report is supported and accurate relative to the evidence documented in the working papers of the audit.
C: Using risk assessment and other judgmental processes to develop an audit plan and schedule for the department and present the plan to the audit committee.
D: Determining that staff auditors have completed the audit procedures and that audit objectives have been met.
Answer Explanations
Answer (a) is incorrect. It is a list skill of an audit manager.
Answer (b) is incorrect. It is a list skill of an audit manager.
Answer (c) is the correct answer. This is a requirement of the director of auditing, not an audit manager.
Answer (d) is incorrect. It is a list skill of an audit manager.
109
Question: V1C1-0109
You have been asked to be a member of a peer review team. In assessing the independence of the internal audit department being reviewed, you should consider all of the following factors except:
Answers
A: Access to and frequency of communications with the board of directors or its audit committee.
B: The criteria of education and experience considered necessary when filling vacant positions on the audit staff.
C: The degree to which auditors assume operating responsibilities.
D: The scope and depth of audit objectives for the audits included in the review.
Answer Explanations
Answer (a) is incorrect. Communication is related to independence.
Answer (b) is the correct answer. This criterion is related to skill, not independence.
Answer (c) is incorrect. Assumption of operating duties is related to independence.
Answer (d) is incorrect. The scope and depth of the audit objectives reflects on the department’s independence.
110
```
Question: V1C1-0110
A written charter, approved by the board of directors, that outlines the internal audit department’s purpose, authority, and responsibility is primarily meant to enhance the department’s
Answers
A: Due professional care.
B: Stature within the organization.
C: Relationship with management.
D: Independence.
```
Answer Explanations
Answer (a) is incorrect. Due care is a function of audit work, not the charter.
Answer (b) is incorrect. Although stature within the organization may be increased, the main function of the charter is to establish the department’s independence not stature.
Answer (c) is incorrect. The department’s relationship with management is a function of professionalism; the charter establishes independence, not a working relationship.
Answer (d) is the correct answer. A charter establishes the department’s independence from management.
111
Question: V1C1-0111
In the past, the internal auditing department of XYZ Company designed and installed computerized systems for the company. A newly appointed member of the audit committee has questioned the auditing department’s independence due to its performance of that activity. Which of the following actions would best satisfy the committee’s concern regarding independence?
Answers
A: The internal audit department should continue to design and install other computer systems as long as the internal audit staff possesses the expertise to do so.
B: The internal audit department should refrain from designing and installing any computer systems for their organization in the future.
C: The internal audit department should not assign those internal auditors who designed and installed the payroll system to audit the payroll area.
D: The internal audit department should refrain from operating and drafting procedures for any of its organization's systems.
Answer Explanations
Answer (a) is incorrect. According to the IIA Standards, refraining from designing and installing any systems would enhance independence and is therefore an appropriate action.
Answer (b) is the correct answer. The IIA Standards state “Internal auditors are independent when they carry out their work freely and objectively. Independence permits internal auditors to render the impartial and unbiased judgments essential to the proper conduct of audits. It is achieved through organizational status and objectivity.” Furthermore, the Standards state: “Designing, installing, and operating systems are not audit functions. Also, the drafting of procedures for systems is not an audit function. Performing such activities is presumed to impair audit objectivity.” Accordingly, it would be inappropriate for the internal audit department to continue to design and install other computer systems, regardless of the expertise of the audit staff in such areas, because such functions impair independence.
Answer (c) is incorrect. The Standards state that “objectivity is presumed to be impaired when internal auditors audit any activity for which they had authority or responsibility.” Assigning internal auditors other than those who designed and installed the payroll system to audit the payroll system slightly enhances independence. However, this is not the best answer, as it does not address the ongoing independence concern the audit committee has voiced.
Answer (d) is incorrect. This is discussed in the Standards.
112
Question: V1C1-0112
A professional engineer applied for a position in the internal auditing department of a high-technology firm. The engineer became interested in the position after observing several internal auditors while they were auditing the engineering department. The director of internal auditing
Answers
A: Should not hire the engineer because of the lack of knowledge of internal auditing standards.
B: May hire the engineer in spite of the lack of knowledge of internal auditing standards.
C: Should not hire the engineer because of the lack of knowledge of accounting and taxes.
D: May hire the engineer because of the knowledge of internal auditing gained in the previous position.
Answer Explanations
Answer (a) is incorrect. Each new employee of an internal auditing department is not required to have knowledge of internal auditing standards. It is required that the department collectively has this knowledge.
Answer (b) is the correct answer. Internal auditing standards are required to be known by the department collectively. Individual internal auditing staff members may, however, bring special skills to the department instead of specific knowledge of internal auditing standards.
Answer (c) is incorrect. Each individual internal auditor is not required to have knowledge of accounting or taxes.
Answer (d) is incorrect. What knowledge that was acquired by observing is irrelevant to the skills necessary for internal auditing.
113
Question: V1C1-0113
Specific airline ticket information, including fare class, purchase date, and lowest available fare options, as prescribed in the company’s travel policy, is obtained and reported to department management when employees purchase airline tickets from the company’s authorized travel agency. Such a report provides information for
Answers
A: Quality of performance in relation to the company's travel policy.
B: Identifying costs necessary to process employee business expense report data.
C: Departmental budget-to-actual comparisons.
D: Supporting employer's business expense deductions.
Answer Explanations
Answer (a) is the correct answer. Reporting provides feedback on these options as prescribed in the travel policy.
Answer (b) is incorrect. Travel department information is preliminary; employees may change tickets and routings prior to their trip.
Answer (c) is incorrect. In this type of system, airline tickets would normally be charged to employee accounts receivable; departmental charges would be initiated by the expense report transaction.
Answer (d) is incorrect. Documentation for the employer’s business expense deduction would include that filed with the employee business expense report that also establishes the business purpose of such expenditures.
114
Question: V1C1-0114
Audit policy requires that final reports will not be issued without a management response. An audit with significant findings is complete except for management’s response. Evaluate the following courses of action and select the best alternative.
Answers
A: Issue an interim report regarding the important issues noted.
B: Modify audit policy to allow a specific time period for the management response.
C: Wait for management response and issue audit report.
D: Discuss situation with the external auditors.
Answer Explanations
Answer (a) is the correct answer. Interim report should be issued regarding the significant issues noted.
Answer(b) is incorrect. Significant audit findings should be timely communicated.
Answer (c) is incorrect. Significant audit findings should be timely communicated.
Answer (d) is incorrect. Significant audit findings should be timely communicated to audit committee.
115
Question: V1C1-0115
Audit findings often emerge by a process of comparing “what should be” with “what is.” Findings are based on the attributes of criteria, condition, and cause and effect. From the following descriptions, which one most appropriately describes the effect of the audit finding?
Answers
A: Reason for the difference between the expected and actual conditions.
B: Factual evidence found during the course of the examination.
C: Risk or exposure encountered because of the condition.
D: Standards, measures, or expectations used in making the evaluation.
Answer Explanations
Answer (a) is incorrect. The reason for the difference between expected and actual conditions represents the cause of the finding.
Answer (b) is incorrect. Factual evidence represents the condition.
Answer (c) is the correct answer. The risk or exposure encountered represents the effect of the audit finding.
Answer (d) is incorrect. Standards, measures, or expectations represent the criteria for the audit findings.
116
Question: V1C1-0116
Management asserted that the performance standards the auditors used to evaluate operating performance were inappropriate. Written performance standards that had been established by management were vague and had to be interpreted by the auditor. In such cases, auditors may meet their due care responsibility by
Answers
A: Assuring them that their interpretations are reasonable.
B: Assuring themselves that their interpretations are in line with industry practices.
C: Establishing agreement with auditees as to the standards needed to measure performance.
D: Incorporating management's objections in the audit report.
Answer Explanations
Answer (a) is incorrect. This assertion is self-serving.
Answer (b) is incorrect. This assertion is self-serving.
Answer (c) is the correct answer. This is what the Standards require in such cases.
Answer (d) is incorrect. Noting differences in interpretation in the audit report, in and of itself, is not due care. Due care has to do with how the audit is performed and the report written.
117
Question: V1C1-0117
The IIA Standards require the director of internal auditing to establish and maintain a quality assurance program to evaluate the operations of the internal audit department. Which of the following relates most directly to the objective of maintaining high quality in all audits?
Answers
A: Required supervisory review of all audit programs, working papers, and draft audit reports.
B: Required coordination with external auditors.
C: Required compliance with the Code of Ethics of the Institute of Internal Auditors.
D: Required educational standards for all members of the professional audit staff.
Answer Explanations
Answer (a) is the correct answer. The purpose of supervisory review is to assure quality.
Answer (b) is incorrect. This relates to efficiency more than quality.
Answer (c) is incorrect. This relates only indirectly to the quality of audits.
Answer (d) is incorrect. This relates directly to the quality of audits but is not as effective a control as supervisory review.
118
Question: V1C1-0118
An audit supervisor would challenge whether audit evidence is sufficient to support the conclusion that journal entries are properly prepared and approved if the working papers included
Answers
A: A note stating the controller's assurance those journal entries are always looked at by the accounting supervisor before entry into the computer system.
B: A copy of a handwritten schedule of standard and appended nonstandard journal entries for the most recent month showing the initials of the preparer for each entry and the summary approval of the controller at the top.
C: A copy of a computer-generated list of automated and nonstandard journal entries initialed by the controller showing the auditor's references to system reports and monthly reconciliations.
D: A cross-reference to another section of the working papers containing sufficient evidence for this conclusion.
Answer Explanations
Answer (a) is the correct answer. This evidence suggests that the auditor did not confirm this information or follow up with testing.
Answer (b) is incorrect. This evidence shows the source and approval of journal entry information.
Answer (c) is incorrect. This evidence shows testing based on computer-based reports and manual reconciliations.
Answer (d) is incorrect. This evidence demonstrates efficiency by referencing work already done in another section of the working papers.
119
Question: V1C1-0119
The internal auditing department has concluded a fraud investigation that revealed a previously undiscovered materially adverse impact on the financial position and results of operations for two years on which financial statements have already been issued. The director of internal auditing should immediately inform
Answers
A: The external audit firm responsible for the financial statements affected by the discovery.
B: The appropriate governmental or regulatory agency.
C: Appropriate management and the audit committee of the board of directors.
D: The internal accounting function ultimately responsible for making corrective journal entries.
Answer Explanations
Answer (a) is incorrect. The Standards do not require such reporting.
Answer (b) is incorrect. The Standards do not require such reporting.
Answer (c) is the correct answer. The Standards require this path for reporting; it is management’s decision to make further disclosure.
Answer (d) is incorrect. The Standards do not require such reporting.
120
Question: V1C1-0120
According to the IIA Standards, internal auditing has a responsibility for helping to deter fraud. Which of the following best describes how this responsibility is generally met?
Answers
A: By coordinating with security personnel and law enforcement agencies in the investigation of possible frauds.
B: By testing for fraud in every audit and following up as appropriate.
C: By assisting in the design of control systems to prevent fraud.
D: By evaluating the adequacy and effectiveness of controls in light of the potential exposure or risk.
Answer Explanations
Answer (a) is incorrect. This involves detection, not deterrence.
Answer (b) is incorrect. Testing for fraud in every audit is not required.
Answer (c) is incorrect. This is not the primary means as described in the standards.
Answer (d) is the correct answer. This is how the responsibility is met according to the Standards.
121
Question: V1C1-0121
An internal auditor observes that a receivables clerk has physical access to and control of cash receipts. The auditor worked with the clerk several years before and has a high level of trust in the individual. Accordingly, the auditor notes in the working papers that controls over receipts are adequate. Is the auditor in compliance with the Standards?
Answers
A: Yes, reasonable care has been taken.
B: No, irregularities were not noted.
C: No, alertness to conditions where irregularities are most likely was not shown.
D: Yes, the working papers were annotated.
Answer Explanations
Answer (a) is incorrect because the Standards also call for alertness.
Answer (b) is incorrect. There is no indication that irregularities should occur.
Answer (c) is the correct answer. The Standards require alertness for irregularities and knowledge of high-risk areas.
Answer (d) is incorrect. Following instructions by rote is unacceptable. Professional judgment and alertness must be used.
122
Question: V1C1-0122
Which of the following most seriously compromises the independence of the internal auditing department?
Answers
A: Internal auditors frequently draft revised procedures for departments whose procedures they have criticized in an audit report.
B: The director of internal auditing has dual reporting responsibility to the firm's top executive and the board of directors.
C: The internal auditing department and the firm's external auditors engage in joint planning of total audit coverage to avoid duplicating each other's work.
D: The internal auditing department is included in the review cycle of the firm's contracts with other firms before the contracts are executed.
Answer Explanations
Answer (a) is the correct answer. If the auditing department drafts procedures, it will be in the position of auditing its own work during the next audit cycle.
Answer (b) is incorrect. This type of dual reporting enhances the internal auditing department’s independence, since it protects auditors from the potentially disastrous effect of unwarranted displeasure on the part of the chief executive officer.
Answer (c) is incorrect. “Independence” refers to the internal auditing department’s relationship with management, not with the external auditors. While the internal auditing department should not allow its audit plans to be dictated by the external auditors, close cooperation eliminates wasteful duplication and permits an efficient division of labor.
Answer (d) is incorrect. This policy is a good example of “preemptive auditing” and affords an opportunity to evaluate the adequacy of controls and audit trails in the proposed contracts.
123
Question: V1C1-0123
An internal auditor has uncovered illegal acts that were committed by a member of senior management. According to the IIA Standards, such information
Answers
A: Should be excluded from the internal auditor's report and discussed orally with the senior manager.
B: Must be immediately reported to the appropriate government authorities.
C: May be disclosed in a separate report and distributed to all senior management.
D: May be disclosed in a separate report and distributed to the company's audit committee of the board of directors.
Answer Explanations
Answer (a) is incorrect. Although improper or illegal acts may be disclosed in a separate report, the internal auditor should not discuss such information with those individuals who have committed such acts.
Answer (b) is incorrect. In general, internal auditors are responsible to their organization’s management rather than outside agencies. In the case of fraud, statutory filings with regulatory agencies may be required.
Answer (c) is incorrect. Since it is a member of senior management who has committed the illegal acts, it would not be appropriate for the internal auditor to disclose this information to senior management. Instead, such information should be communicated to those individuals in the organization to whom senior management report.
Answer (d) is the correct answer. Improper or illegal acts that are committed by senior management may be disclosed in a separate report and distributed to the audit committee of the board of directors or to a similar high-level entity within the organization.
124
Question: V1C1-0124
The internal auditing department for a chain of retail stores recently concluded an audit of sales adjustments in all stores in the southeast region. The audit revealed that several stores are costing the company an estimated $85,000 per quarter in duplicate credits to customers’ charge accounts. The audit report, published eight weeks after the audit was concluded, included the internal auditors’ recommendations to store management that should prevent duplicate credits to customers’ accounts. Which of the following standards for reporting has been disregarded in the above case?
Answers
A: The follow-up actions were not adequate.
B: The auditors should have implemented appropriate corrective action as soon as the duplicate credits were discovered.
C: Auditor recommendations should not be included in the report.
D: The report was not timely.
Answer Explanations
Answer (a) is incorrect. There is not enough information to evaluate the effectiveness of follow-up.
Answer (b) is incorrect. Auditors may properly make recommendations for potential improvements but should not implement corrective action.
Answer (c) is incorrect. Auditor recommendations are one of the recommended elements of an audit finding.
Answer (d) is the correct answer. The report, which was not published until eight weeks after the audit was concluded, was not issued in a timely fashion, given the significance of the findings and the need for prompt, effective action.
125
Question: V1C1-0125
During an audit of the organization’s accounts payable function, an internal auditor plans to confirm balances with suppliers. What is the source of authority for such contacts with units outside the organization?
Answers
A: Internal auditing department policies and procedures.
B: The IIA Standards.
C: The Statement of Responsibilities of Internal Auditing.
D: The internal auditing department's charter.
Answer Explanations
Answer (a) is incorrect. Departmental policies and procedures guide the audit staff in the consistent compliance with the department’s standards of performance.
Answer (b) is incorrect. The Standards do not contain an element of authority for individual departments.
Answer (c) is incorrect. The Standards recommend a formal charter to outline the authority of individual departments.
Answer (d) is the correct answer. The charter should prescribe internal auditing’s relationships to other units within the organization and to those outside.
126
Question: V1C1-0126
The director of internal auditing is responsible for establishing a program to develop the human resources of the internal auditing department. According to the IIA Standards, this program should include
Answers
A: Continuing education opportunities and performance appraisals.
B: Counseling and an established career path.
C: An established training plan and a charter.
D: Job descriptions and competitive salary increases.
Answer Explanations
Answer (a) is the correct answer. The IIA Standards require that the program include these attributes as well as written job descriptions and counseling.
Answer (b) is incorrect. Counseling is an attribute, but an automatic established career path is not.
Answer (c) is incorrect. Planning is an overall part of the development program, but a charter is not specified.
Answer (d) is incorrect. Written job descriptions are required by the Standards, but salary increases are not mentioned.
127
```
Question: V1C1-0127
The IIA Standards require the performance of periodic internal reviews by members of the internal auditing staff. This function is designed to primarily serve the needs of
Answers
A: The audit committee.
B: The director of internal auditing.
C: Management.
D: The internal auditing staff.
```
Answer Explanations
Answer (a) is incorrect. The audit committee is an indirect beneficiary by knowing the effectiveness of the overall internal auditing function.
Answer (b) is the correct answer. Internal quality assurance reviews primarily serve the needs of the director of internal auditing, but can also provide senior management and the board with an assessment of the internal auditing department. This is specified in the Standards.
Answer (c) is incorrect. Management is an indirect beneficiary, as is the audit committee.
Answer (d) is incorrect. The audit staff also benefits (but not a primary beneficiary) by having deficiencies addressed more promptly.
128
Question: V1C1-0128
According to the IIA Standards, which of the following is the correct listing of information that must be included in a fraud report?
Answers
A: Purpose, scope, results, and, where appropriate, an expression of the auditor's opinion.
B: Criteria, condition, and cause and effect.
C: Background, findings, and recommendations.
D: Findings, conclusions, recommendations, and corrective action.
Answer Explanations
Answer (a) is incorrect. This is the list of information to include in a final written report at the conclusion of an audit examination, which may not include fraud. Since this definition does not include “corrective action,” it is incomplete.
Answer (b) is incorrect. This is a correct listing of the elements comprising “Findings.” A fraud report includes more than findings, so this answer is incomplete.
Answer (c) is incorrect. The inclusion of background is recommended but not required for inclusion in a final audit report. There is no mention of it in a fraud report. This list leaves out “conclusions” and “corrective action,” so it is incomplete.
Answer (d) is the correct answer. A written report should be issued at the conclusion of the investigation phase. It should include all findings, conclusions, recommendations, and corrective action taken. This is the list provided by the Standards.
129
Question: V1C1-0129
An internal auditor reported a suspected fraud to the director of internal auditing. The director turned the entire case over to the security department. Security failed to investigate or report the case to management. The perpetrator continued to defraud the organization until being accidentally discovered by a line manager two years later. Select the most appropriate action for the audit director.
Answers
A: The director's actions were correct.
B: The director should have periodically checked the status of the case with Security.
C: The director should have conducted the investigation.
D: The director should have discharged the perpetrator.
Answer Explanations
Answer (a) is incorrect. According to the IIA Standards, the director should have ensured that the internal auditing department’s responsibilities were met.
Answer (b) is the correct answer. The director should have periodically checked the status of the case with security. Follow-up is specified by the Standards.
Answer (c) is incorrect. A security department would generally have more expertise in the investigation of a fraud.
Answer (d) is incorrect. The fraud was only suspected when reported to the director. Immediate discharge would have violated the suspect’s rights. In addition, the director would not normally have the authority to discharge an employee in an audited area.
130
Question: V1C1-0130
An internal auditor has just completed an audit of a division and is in the process of preparing the audit report.
According to the IIA Standards, the findings in the audit report should include
Answers
A: Statements of opinion about the cause of a finding.
B: Pertinent factual statements concerning the control weaknesses that were uncovered during the course of the audit.
C: Statements of both fact and opinion developed during the course of the audit.
D: Statements dealing with potential future events that may be helpful to the audited division.
Answer Explanations
Answer (a) is incorrect. Audit findings must be statements of fact rather than statements representing an auditor’s opinion. Opinions represent the auditor’s evaluations of the effects of audit findings on the activities reviewed.
Answer (b) is the correct answer. The IIA Standards state “Findings are pertinent statements of fact.” Audit findings must be factual evidence regarding control strengths and weaknesses that the auditor has found during the course of his or her examination.
Answer (c) is incorrect. Audit findings cannot be both facts and opinions. They must only describe facts or conditions that exist.
Answer (d) is incorrect. Audit findings deal with present, not future, factual conditions or events.
131
Question: V1C1-0131
According to the IIA Standards, supervision of an audit assignment should include
Answers
A: Determining that audit working papers adequately support the audit findings.
B: Assigning staff members to the particular engagement.
C: Determining the scope of the audit.
D: Appraising each auditor's performance on at least an annual basis.
Answer Explanations
Answer (a) is the correct answer. The IIA Standards specify that supervision includes determining that working papers adequately support audit findings.
Answer (b) is incorrect. Staffing engagements is not a supervisory function; it is a planning function.
Answer (c) is incorrect. Determining audit scope is not a supervisory function; it is a planning function.
Answer (d) is incorrect. Appraising performance on an annual basis is not a supervisory function of a specific assignment; it is part of the management of the internal auditing department.
132
Question: V1C1-0132
Which of the following reporting structures would best depict the internal audit organizational guidelines contained in the IIA Standards?
Answers
A: Administratively to the board of directors, functionally to the chief executive officer.
B: Administratively to the controller, functionally to the chief financial officer.
C: Administratively to the chief executive officer, functionally to the board of directors.
D: Administratively to the chief executive officer, functionally to the external auditor.
Answer Explanations
Answer (a) is incorrect. It is the reverse of the recommended structure.
Answer (b) is incorrect. This arrangement would not be independent when reporting to controller.
Answer (c) is the correct answer. The chief executive officer has the highest authority to promote independence and to ensure broad audit coverage, adequate consideration of audit reports, and appropriate action on audit recommendations. This is an ideal reporting relation per the Standards.
Answer (d) is incorrect. An internal auditor does not report to an external auditor.
133
Question: V1C1-0133
As the director of internal auditing for your organization, you have developed a plan that includes a detailed schedule of areas to be audited during the coming year, an estimate of the time required for each audit, and the approximate starting date of each audit. The scheduling of specific audits was based on the time elapsed since the last audit in each area. The plan is inadequate because it fails to
Answers
A: Cite authoritative support, such as the IIA Standards, for such a plan.
B: Consider factors such as risk, exposure, and potential loss to the organization.
C: State whether all audit resources had been committed to the plan.
D: Seek management approval of the plan.
Answer Explanations
Answer (a) is incorrect. While the Standards provide authoritative support for work schedules, there is no requirement to cite them.
Answer (b) is the correct answer. The IIA Standards state that audit priorities should be based on financial exposure, potential loss and risk, requests from management, and opportunities to achieve operating benefits as well as the date and results of the last audit.
Answer (c) is incorrect. To the contrary, the Standards suggest keeping the plan flexible in the event of unanticipated needs.
Answer (d) is incorrect. Activity reports should be submitted to management periodically, but there is no requirement for seeking approval of the annual work schedule.
134
Question: V1C1-0134
The audit committee can serve several important purposes, some of which directly benefit internal auditing. The most significant benefit provided by the audit committee to the internal auditor is
Answers
A: Protecting the independence of the internal auditor from undue management influence.
B: Reviewing annual audit plans and monitoring audit results.
C: Approving audit plans, scheduling, staffing, and meeting with the internal auditor as needed.
D: Reviewing copies of the internal control procedures for selected company operations and meeting with company officials to discuss them.
Answer Explanations
Answer (a) is the correct answer. Maintaining independence allows the auditor to perform necessary duties.
Answer (b) is incorrect. It is a benefit, but not most significant.
Answer (c) is incorrect. It is a benefit, but not most significant.
Answer (d) is incorrect. It is a benefit, but not most significant.
135
Question: V1C1-0135
The IIA Standards indicate that independence permits internal auditors to render the impartial and unbiased judgments essential to the proper conduct of audits. Which of the following would best promote independence?
Answers
A: A policy that requires internal auditors to report to the director any situation in which a conflict of interest or bias on the part of the individual auditor is present or may reasonably be inferred.
B: An internal audit department policy that prevents it from recommending standards of controls for systems that it audits.
C: An organizational policy that allows internal audits of sensitive operations to be "contracted out" to other audit providers.
D: An organizational policy that prevents personnel transfers from operating activities to the internal audit department.
Answer Explanations
Answer (a) is the correct answer. Such a policy is called for by the IIA Standards to promote independence.
Answer (b) is incorrect. The Standards specifically indicate that this is a part of internal auditing’s responsibilities and that it would not cause an independence problem.
Answer (c) is incorrect. It is not the best choice.
Answer (d) is incorrect. The Standards specifically provide for such transfers. However, the Standards note that transfers should not be assigned to audit those activities they previously performed until a reasonable period of time has elapsed.
136
Question: V1C1-0136
The IIA Standards require written policies and procedures to guide the audit staff. Which of the following statements is false with respect to this requirement?
Answers
A: The form and content of written policies and procedures should be appropriate to the size of the department.
B: All internal audit departments should have a detailed policies and procedures manual.
C: Formal administrative and technical audit manuals may not be needed by all internal auditing departments.
D: A small internal auditing department may be managed informally through close supervision and written memos.
Answer Explanations
Answer (a) is incorrect. It is a true statement.
Answer (b) is the correct answer. The form and content of written policies and procedures should be appropriate to the size and structure of the department and the complexity of its work. A small department may be managed informally.
Answer (c) is incorrect. It is a true statement.
Answer (d) is incorrect. It is a true statement.
137
```
Question: V1C1-0137
According to the IIA Standards, the director of internal auditing should establish goals that have two basic qualities.
Select the correct traits of internal auditing goals.
Answers
A: Measurable and attainable.
B: Budgeted and approved.
C: Planned and attainable.
D: Requested and approved.
```
Answer Explanations
Answer (a) is the correct answer. The IIA Standards require that goals be capable of accomplishment within given plans and budgets and that they be measurable.
Answer (b) is incorrect. Goals should be attainable within budget constraints. However, approval of goals is not mentioned in this portion of the Standards.
Answer (c) is incorrect. The establishment of goals is part of the overall planning process for the internal auditing department.
Answer (d) is incorrect. Goals are not generally requested, but instead they are established by the director of internal auditing.
138
Question: V1C1-0138
Internal audit reports should contain the purpose, scope, and results. The audit results should contain the criteria, condition, effect, and cause of the finding. The cause can best be described as
Answers
A: Factual evidence which the internal auditor found.
B: Reason for the difference between the expected and actual conditions.
C: The risk or exposure because of the condition found.
D: Resultant evaluations of the effects of the findings.
Answer Explanations
Answer (a) is incorrect. Factual evidence represents the criteria.
Answer (b) is the correct answer. “Cause” is the reason for the difference between the expected and actual conditions.
Answer (c) is incorrect. Risk or exposure is the effect.
Answer (d) is incorrect. Resultant evaluations are the conclusions.
139
```
Question: V1C1-0139
According to the IIA Standards, internal auditing reports should be distributed to those members of the organization who are able to ensure that audit results are given due consideration. For higher-level members of the organization, that requirement can usually be satisfied with
Answers
A: Interim reports.
B: Summary reports.
C: Oral reports.
D: Final written reports only.
```
Answer Explanations
Answer (a) is incorrect. Interim reports are used to communicate urgent information, changes in audit scope, and audit progress.
Answer (b) is the correct answer. Summary reports that highlight audit results are appropriate for higher-level management.
Answer (c) is incorrect. Only interim reports may be oral. The final report must be written.
Answer (d) is incorrect. Higher-level management is often too busy to read an entire report.
140
Question: V1C1-0140
If an internal auditor finds that no corrective action has been taken on a prior audit finding that is still valid, the IIA Standards states that the internal auditor should
Answers
A: Restate the prior finding along with the findings of the current audit.
B: Determine whether management or the board has assumed the risk of not taking corrective action.
C: Seek the board's approval to initiate corrective action.
D: Schedule a future audit of the specific area involved.
```
Answer Explanations
Answer (a) is incorrect by definition.
Answer (b) is the correct answer. This is the correct answer per the IIA Standards.
Answer (c) is incorrect by definition.
Answer (d) is incorrect by definition.
```
141
Question: V1C1-0141
Internal auditing is responsible for reporting fraud to senior management or the board when
Answers
A: The incidence of fraud of a material amount has been established to a reasonable certainty.
B: Suspicious activities have been reported to internal auditing.
C: Irregular transactions have been identified and are under investigation.
D: The review of all suspected fraud-related transactions is complete.
Answer Explanations
Answer (a) is the correct answer. If the incidence of significant fraud has been established with reasonable certainty, the auditor is responsible for reporting such to senior management or the board.
Answer (b) is incorrect. No reporting is required when suspicious acts are reported to the auditor.
Answer (c) is incorrect. Irregular transactions under investigation would not require reporting until the investigation phase is completed.
Answer (d) is incorrect. Reporting should occur sooner. See Answer (a).
142
Question: V1C1-0142
According to the IIA Standards, the role of internal auditing in the investigation of fraud includes all of the following except:
Answers
A: Assessing the probable level and extent of complicity in the fraud within the organization.
B: Designing the procedures to follow in attempting to identify the perpetrators, extent of the fraud, techniques used, and cause of the fraud.
C: Coordinating activities with management personnel, legal counsel, and other appropriate specialists throughout the investigation.
D: Interrogating suspected perpetrators of the fraud.
Answer Explanations
Answer (a) is incorrect. This can be critical to ensuring that internal auditors avoid providing information to or obtaining misleading information from persons who may be involved.
Answer (b) is incorrect. This is a responsibility assigned by the Standards and will be useful when determining what controls to recommend preventing future occurrences of similar fraud.
Answer (c) is incorrect. This is a responsibility assigned by the Standards and will tend to ensure a complete and thorough investigation.
Answer (d) is the correct answer. Internal auditors are not normally trained in the interrogation of suspected perpetrators and therefore should leave such activity to security or law enforcement specialists.
143
Question: V1C1-0143
After completing an investigation, internal auditing has concluded that an employee has stolen a material amount of cash receipts. A draft of the proposed report on this finding should be reviewed by
Answers
A: Legal counsel.
B: The audit committee of the board of directors.
C: The president of the organization.
D: The external auditor.
Answer Explanations
Answer (a) is the correct answer. Review by legal counsel reduces the possibility of inclusion (and dissemination) of a statement for which the accused employee could sue the organization.
Answer (b) is incorrect. The audit committee should receive a final draft of the report only after it has been reviewed and approved by legal counsel.
Answer (c) is incorrect. If appropriate, the president may receive a final draft of the report after it has been reviewed and approved by legal counsel.
Answer (d) is incorrect. If it is customary to send the outside auditors copies of all internal audit reports, it should be a final report that has been reviewed and approved by legal counsel.
144
Question: V1C1-0144
The IIA Standards specify that final audit reports should be reviewed and approved by the
Answers
A: Auditee or the person to whom the auditee reports.
B: Auditor in charge.
C: Internal auditing director or designee.
D: Chief financial officer.
Answer Explanations
Answer (a) is incorrect. The Standards state that final reports should be reviewed by director or designee.
Answer (b) is incorrect. Auditor in charge would not be correct unless designated by director of internal audit.
Answer (c) is the correct answer. The IIA Standards state that audit reports should be reviewed and approved by a director or designee.
Answer (d) is incorrect. Audit reports should be reviewed by director or designee prior to distribution.
145
Question: V1C1-0145
According to the IIA Standards, internal auditors should review the means of physically safeguarding assets from losses arising from
Answers
A: Misapplication of accounting principles.
B: Procedures that are not cost justified.
C: Exposure to the elements.
D: Underutilization of physical facilities.
Answer Explanations
Answer (a) is incorrect. Misapplication of accounting principles relates to the reliability of information and not physical safeguards.
Answer (b) is incorrect. Procedures that are not cost justified relate to efficiency of operations.
Answer (c) is the correct answer. Internal auditors should review the means used to safeguard assets from various types of losses such as those resulting from theft, fire, improper, or illegal activities, and exposure to elements.
Answer (d) is incorrect. Underutilization of facilities relates to efficiency of operation.
146
Question: V1C1-0146
The IIA Standards state that the director of internal auditing should have direct communication with the board. Such communication is often accomplished through the board’s audit committee. Which of the following best describes why the charter for internal auditing should provide for direct access to the audit committee?
Answers
A: Such access is required by law for publicly traded companies.
B: Direct access to the audit committee tends to enhance internal auditing's independence and objectivity.
C: With direct access, the director of internal auditing is in a better position to affect policy decisions.
D: The audit committee must authorize implementation of audit recommendations that involve financial reporting.
Answer Explanations
Answer (a) is incorrect. Access to audit committees by the internal auditor is not required by law for publicly traded companies.
Answer (b) is the correct answer. This is the primary reason why the Standards require direct access to the board.
Answer (c) is incorrect. Internal auditing serves the organization and does not necessarily influence policy decisions.
Answer (d) is incorrect. The board sets policy, management authorizes implementation of audit recommendations.
147
Question: V1C1-0147
According to the IIA Standards, a report issued by an internal auditor should contain an expression of opinion when
Answers
A: The area of the audit is the financial statements.
B: The internal auditors' work is to be used by external auditors.
C: A full-scope audit has been conducted in an area.
D: An opinion will improve communications with the reader of the report.
Answer Explanations
Answer (a) is incorrect. The area of the audit is irrelevant for decisions about whether or not an overall opinion is appropriate.
Answer (b) is incorrect. Whether the internal auditors’ work is to be used by external auditors is irrelevant, particularly since the external auditor cannot depend on an overall opinion but must examine the detail and form his or her own opinion.
Answer (c) is incorrect. An overall opinion is not a mandatory requirement.
Answer (d) is the correct answer. According to the IIA Standards, a report should contain an opinion where appropriate. The criterion of appropriateness is improvement in communications.
148
Question: V1C1-0148
As an internal auditor for a multinational chemical company, you have been assigned to perform an operational audit at a local plant. This plant is similar in age, sizing, and construction to two other company plants that have been cited recently for discharge of hazardous wastes. In addition, you are aware that chemicals manufactured at the plant release toxic by-products.
Assume that you have evidence that the plant is discharging hazardous wastes. As a Certified Internal Auditor, what is the appropriate reporting requirement in this situation?
Answers
A: Send a copy of your audit report to the appropriate regulatory agency.
B: Ignore the issue; the regulatory inspectors are better qualified to assess the danger.
C: Issue an interim report to the appropriate levels of management.
D: Note the issue in your working papers, but do not report it.
Answer Explanations
Answer (a) is incorrect. Internal auditors are not responsible for notifying outside authorities of suspected wrongdoing.
Answer (b) is incorrect. The Standards require internal auditors to determine whether the organization is complying with applicable laws.
Answer (c) is the correct answer. Suspected wrongdoing should be reported to the appropriate levels of management.
Answer (d) is incorrect. The Standards on due professional care require the reporting of violations of laws or regulations, that is, wrongdoing.
149
Question: V1C1-0149
As an internal auditor for a multinational chemical company, you have been assigned to perform an operational audit at a local plant. This plant is similar in age, sizing, and construction to two other company plants that have been cited recently for discharge of hazardous wastes. In addition, you are aware that chemicals manufactured at the plant release toxic by-products.
Identify your responsibility for detection of a hazardous waste discharge problem.
Answers
A: You have no responsibility; it is the concern of the appropriate governmental agency.
B: You are responsible for ensuring compliance with company policies and procedures.
C: Operational audits do not require a determination of compliance with laws and regulations.
D: You are required by the Standards to determine compliance with laws and regulations.
Answer Explanations
Answer (a) is incorrect. This is contrary to the Standards.
Answer (b) is incorrect. The Standards specify compliance with all laws and regulations having a significant impact.
Answer (c) is incorrect. The IIA Standards apply to financial and operational audits.
Answer (d) is the correct answer. Determination of compliance is required by the IIA Standards.
150
Question: V1C1-0150
The IIA Standards define competent information as
Answers
A: Supporting the audit findings and being consistent with the audit objectives.
B: Assisting the organization in meeting prescribed goals.
C: Factual, adequate, and convincing so that a prudent person would reach the same conclusion as auditor.
D: Reliable and the best available through the use of appropriate audit techniques.
Answer Explanations
Answer (a) is incorrect. Relevant information supports audit findings and is consistent with audit objectives.
Answer (b) is incorrect. Useful information assists the organization in meeting goals.
Answer (c) is incorrect. Sufficient information is factual, adequate, and convincing to a prudent person.
Answer (d) is the correct answer. Competent information is reliable and the best available through the use of\ appropriate audit techniques.
151
Question: V1C1-0151
Adequate internal controls are most likely to be present if
Answers
A: Management has planned and organized in a manner that provides reasonable assurance that the organization's objectives and goals will be achieved efficiently and economically.
B: Management has exercised due professional care in the design of operating and functional systems.
C: Operating and functional systems are designed, installed, and implemented in compliance with law.
D: Management has designed, installed, and implemented efficient operating and functional systems.
Answer Explanations
Answer (a) is the correct answer. The purpose of the review for adequacy of the system of internal control is to ascertain whether the system established provides reasonable assurance that the organization’s objectives and goals will benefit efficiently and economically.
Answer (b) is incorrect. Due professional care of the design of a system does not necessarily provide adequate control.
Answer (c) is incorrect. Compliance with law and policy is just one aspect of the scope of activity covered by controls.
Answer (d) is incorrect. This answer does not include the factors needed.
152
Question: V1C1-0152
A company’s management accountants prepared a set of reports for top management. These reports detail the funds expended and the expenses incurred by each department for the current reporting period. The function of internal auditing would be to
Answers
A: Ensure against any and all noncompliance of reporting procedures.
B: Review the expenditure items and match each item with the expenses incurred.
C: Determine if there are any employees expending funds without authorization.
D: Identify inadequate controls that increase the likelihood of unauthorized expenditures.
Answer Explanations
Answer (a) is incorrect. The Standards do not require internal auditors to be omniscient or to be ensurers against any and all noncompliance of reporting procedures.
Answer (b) is incorrect. There is no expected match of funds flows with expense items in a single time period.
Answer (c) is incorrect. This would be a function of the personnel and or finance departments.
Answer (d) is the correct answer. Internal auditors are responsible for identifying inadequate controls, for appraising managerial effectiveness, and for pinpointing common risks.
153
```
Question: V1C1-0153
Independence permits internal auditors to render impartial and unbiased judgments. The best way to achieve independence is through
Answers
A: Individual knowledge and skills
B: Organizational status and objectivity
C: Supervision within the organization
D: Organizational knowledge and skills
```
Answer Explanations
Answer (a) is incorrect. Individual knowledge and skills allow individual auditors to achieve professional proficiency.
Answer (b) is the correct answer. Organizational status and objectivity provides for the achievement of independence.
Answer (c) is incorrect. Supervision allows the internal auditing department to achieve professional proficiency.
Answer (d) is incorrect. Organizational knowledge and skills allow the internal auditing department to achieve professional proficiency.
154
Question: V1C1-0154
When faced with an imposed scope limitation, the director of internal auditing should
Answers
A: Refuse to perform the audit until the scope limitation is removed.
B: Communicate the potential effects of the scope limitation to the audit committee of the board of directors.
C: Increase the frequency of auditing the activity in question.
D: Assign more experienced personnel to the engagement.
Answer Explanations
Answer (a) is incorrect. The audit may be conducted under a scope limitation.
Answer (b) is the correct answer. The scope limitation and its potential effects should be communicated to the audit committee of the board of directors.
Answer (c) is incorrect. A scope limitation would not necessarily cause the need for more frequent audits.
Answer (d) is incorrect. A scope limitation would not necessarily cause the need for more experienced personnel.
155
Question: V1C1-0155
Which of the following is not a requirement of a long-range plan for the internal auditing department?
Answers
A: To be consistent with the department's charter.
B: To be capable of being accomplished.
C: To include a list of auditable activities.
D: To include the basics of the audit program.
Answer Explanations
Answer (a) is incorrect. It is a requirement.
Answer (b) is incorrect. It is a requirement.
Answer (c) is incorrect. It is a requirement.
Answer (d) is the correct answer. This item is an element of the planning of the audit, and not a requirement of the long-term plan.
156
Question: V1C1-0156
To avoid being the apparent cause of conflict between an organization’s top management and the audit committee, the director of internal auditing should
Answers
A: Submit copies of all audit reports to both top management and the audit committee.
B: Strengthen the independence of the department through organizational status.
C: Discuss all reports to top management with the audit committee first.
D: Request board acceptance of policies that include internal auditing relationships with the audit committee.
Answer Explanations
Answer (a) is incorrect. It is impractical because of time constraints of top management and the audit committee.
Answer (b) is incorrect. Organizational stature, by itself, is not enough to avoid seeming to cause conflict.
Answer (c) is incorrect. It is impractical because of time constraints of top management and the audit committee.
Answer (d) is the correct answer. To clearly establish the purpose, authority, and responsibility of the internal auditing department, a formal written charter, which would include department policies, should be approved by the board.
157
Question: V1C1-0157
According to the IIA Standards, internal auditors should possess all of the following except:
Answers
A: Proficiency in applying internal audit standards.
B: An understanding of management principles.
C: The ability to exercise good interpersonal relations.
D: The ability to conduct training sessions in quantitative methods.
Answer Explanations
Answer (a) is incorrect. An internal auditor should possess a sound understanding of the nature of internal auditing, including the Standards.
Answer (b) is incorrect. A sound understanding of the broad aspects of management theory is expected.
Answer (c) is incorrect. Internal auditors must possess the ability to communicate effectively; interpersonal skills are an essential element of that ability.
Answer (d) is the correct answer. Internal auditors need only an appreciation of the broad nature and fundamentals of quantitative methods. That does not suggest sufficient knowledge to teach the methods to others.
158
Question: V1C1-0158
Which of the following aspects of evaluating the performance of staff members would be considered as a violation of good personnel management techniques?
Answers
A: The evaluator should justify very high and very low evaluations because of their impact on the employee.
B: Evaluations should be made annually or more frequently to provide the employee feedback about competence.
C: The first evaluation should be made shortly after commencing work to serve as an early guide to the new employee.
D: Because there are so many employees whose performance is completely satisfactory, it is preferable to use standard evaluation comments.
Answer Explanations
Answer (a) is incorrect. The evaluator should justify giving very high or very low evaluation.
Answer (b) is incorrect. Annual evaluations are a minimum.
Answer (c) is incorrect. This practice serves to advise the employee early as to the acceptability of performed work.
Answer (d) is the correct answer. This impersonal technique degrades the evaluation process and gives it an air of impersonality.
159
Question: V1C1-0159
According to the IIA Standards concerning due professional care, an internal auditor should
Answers
A: Consider the relative materiality or significance of matters to which audit procedures are applied.
B: Emphasize the potential benefits of an audit without regard to the cost.
C: Consider whether established operating standards are being met and not whether those standards are acceptable.
D: Select procedures that are likely to provide absolute assurance those irregularities do not exist.
Answer Explanations
Answer (a) is the correct answer. The exercise of due professional care includes consideration of materiality.
Answer (b) is incorrect. The auditor should consider the cost/benefit ratio before beginning an audit.
Answer (c) is incorrect. The auditor should evaluate the acceptability of standards as well as whether they are being met.
Answer (d) is incorrect. Due care does not require absolute assurance.
160
Question: V1C1-0160
Which of the items below would most likely reflect differences between the policies of a relatively small and relatively large internal auditing operation? The policies for the large operation should
Answers
A: Spell out scope and status of internal auditing.
B: Contain the authority to carry out audits.
C: Be specific as to activities to be followed.
D: Be in considerable detail.
Answer Explanations
Answer (a) is incorrect. The Standards clearly state “in a large internal auditing department more formal and comprehensive policies and procedures are essential.”
Answer (b) is incorrect. This is covered in the department’s charter.
Answer (c) is incorrect. It is the same as Answer (a).
Answer (d) is the correct answer. The larger staff will normally have longer spans of control and/or levels of supervision. Detail policies are necessary for effective communication, coordination, and consistency of operation of larger audit staffs.
161
Question: V1C1-0161
An audit committee of the board of directors of a corporation is being established. Which of the following would normally be a responsibility of the committee?
Answers
A: Approval of the selection and dismissal of the internal auditing director.
B: Development of the annual internal audit schedule.
C: Approval of internal audit programs.
D: Determination of findings appropriate for specific internal audit reports.
Answer Explanations
Answer (a) is the correct answer. This is a recommended responsibility of audit committees.
Answer (b) is incorrect. This activity is an operational function of the audit director and the audit staff. It is submitted to the committee.
Answer (c) is incorrect. This activity is a technical responsibility of the audit staff.
Answer (d) is incorrect. This function is a field operation of the audit staff.
162
Question: V1C1-0162
While performing a construction audit, the auditor suspects that the structural steel used does not conform to contract specifications. The internal auditing department does not have an engineer on the staff. According to the IIA Standards, the appropriate course of action is to
Answers
A: Assign a dollar value to the difference and prepare a deficiency finding.
B: Ask a company or consulting engineer to determine whether the steel conforms to the contract specifications.
C: Ask the construction superintendent to explain why there is a difference.
D: Require suspension of contract payments until the difference is resolved.
Answer Explanations
Answer (a) is incorrect. Dollar impact is only a part of the potential problem. The Standards on due professional care and on sufficient knowledge, skills, and disciplines require further research.
Answer (b) is the correct answer. The Standards require the internal auditing department to possess or acquire the knowledge, skills, and disciplines necessary to carry out its audit responsibilities.
Answer (c) is incorrect. Since the internal auditing department has no engineering expertise, there is no basis from which to judge the accuracy of the superintendent’s statements.
Answer (d) is incorrect. Such an action is not within the authority of internal auditing.
163
Question: V1C1-0163
The charter of the internal auditing department should
Answers
A: Authorize access to records, personnel, and physical properties relevant to the performance of audits.
B: Provide recommended formats to report significant audit findings and recommendations.
C: Describe audit programs to be carried out.
D: Define the audit department's work schedule, staffing plan, and financial budget.
Answer Explanations
Answer (a) is the correct answer. The charter defines the purpose, authority, and responsibility of the internal auditing department.
Answer (b) is incorrect. Specific instructions, such as report format, would be covered by the internal auditing manual or individual policies.
Answer (c) is incorrect. Annual audit work schedules, not a charter, would describe planned audit programs.
Answer (d) is incorrect. The audit department’s work schedule, staffing plan, and financial budget are approved annually and are not a part of the charter.
164
Question: V1C1-0164
According to the IIA Standards, activity reports submitted periodically to management and to the board should
Answers
A: Summarize planned audit activities.
B: Compare performance with audit work schedules.
C: Provide detail on financial budgets.
D: Detail projected staffing needs.
Answer Explanations
Answer (a) is incorrect. Planned audit activities make up the audit work schedule and are used in comparisons to actual performance.
Answer (b) is the correct answer. Comparisons of performance with audit work schedules are a major purpose of activity reports.
Answer (c) is incorrect. Financial budget detail provides only a partial basis for the activity report.
Answer (d) is incorrect. Projected staffing needs provide a basis for financial budgets.
165
Question: V1C1-0165
An internal auditing director is establishing the evaluation criteria for the selection of new internal audit staff members. According to the IIA Standards, which of the following would be an inappropriate item to list?
Answers
A: An appreciation of the fundamentals of accounting.
B: An understanding of management principles.
C: The ability to recognize deviations from good business practice.
D: Proficiency in computerized operations and the use of computers in auditing.
Answer Explanations
Answer (a) is incorrect. The Standards require only an appreciation of accounting unless the auditor is required to work extensively with financial records and reports.
Answer (b) is incorrect. An understanding of management principles is required per the Standards.
Answer (c) is incorrect. The Standards require knowledge beyond the ability to recognize deviations; thus a lesser requirement would be acceptable.
Answer (d) is the correct answer. The IIA Standards state that “an appreciation is required.” Also, many audit staffs have a specialized IT audit operation that handles complex computer-related audits.
166
Question: V1C1-0166
The person responsible for audit report distribution should be
Answers
A: The director of internal auditing or designee.
B: The audit committee of the board of directors.
C: The vice president responsible for the area being audited.
D: The audit supervisor of the audit being performed.
Answer Explanations
Answer (a) is the correct answer. The director of internal auditing is the most appropriate individual to make the decision as to report distribution.
Answer (b) is incorrect. This committee is a recipient of the reports.
Answer (c) is incorrect. This individual would not be knowledgeable of potential recipients.
Answer (d) is incorrect. This individual is an audit technician, engaged in the performance of the audit, not audit administration.
167
Question: V1C1-0167
The IIA Standards require that the internal auditing department provide assurance that internal audits are properly supervised in order to
Answers
A: Produce professional audits of consistently high quality.
B: Assure high productivity of audit reporting.
C: Provide for the efficient training of the audit staff.
D: Determine that the audit program is followed without deviation.
Answer Explanations
Answer (a) is the correct answer. The supervisor is the keystone to this effort.
Answer (b) is incorrect. There must also be an assurance of quality.
Answer (c) is incorrect. Training is a part of the supervision but is not the overall objective.
Answer (d) is incorrect. In some cases, the audit program should be deviated from. This also is only a part of the supervisory responsibility.
168
Question: V1C1-0168
An exit conference helps ensure that
Answers
A: The objectives of the audit and the scope of the audit work are known by the auditee.
B: The auditee understands the audit program.
C: There have been no misunderstandings or misinterpretations of fact.
D: The list of persons who are to receive the final report are identified.
Answer Explanations
Answer (a) is incorrect. Both audit objectives and the scope of audit work are properly covered with the auditee during the preliminary survey.
Answer (b) is incorrect. It is not important that the auditee understand the audit program.
Answer (c) is the correct answer. The clarification of matters of fact is one of the reasons for an exit interview with the auditee.
Answer (d) is incorrect. The identification of persons who are to receive the final report occurs much earlier than the exit conference. With rare exceptions, the list is determined during the preliminary survey.
169
Question: V1C1-0169
You transferred from the treasury department to the internal auditing department of the same company last month. The chief financial officer of the company has suggested that since you have significant knowledge in this area, it would be
a good idea for you to immediately begin an audit of the treasury department. In this circumstance you should
Answers
A: Accept the audit engagement and begin work immediately.
B: Discuss the need for such an audit with your former superior, the treasurer.
C: Suggest that the audit be performed by another member of the internal auditing staff.
D: Offer to prepare an audit program but suggest that interviews with your former coworkers be conducted by other members of the internal auditing staff.
Answer Explanations
Answer (a) is incorrect. The proposed engagement directly violates the Standards on objectivity. Objectivity would be presumed to be impaired in this circumstance.
Answer (b) is incorrect. Subordinating your judgment on audit matters to that of others does not maintain the independent mental attitude defined in the Standards.
Answer (c) is the correct answer. This response would avoid the lack of objectivity inherent in auditing activities, which the auditor so recently performed. This response conforms with the IIA Standards.
Answer (d) is incorrect. This response still violates the Standards since the preparation of the audit program offers significant opportunities for bias to occur.
170
Question: V1C1-0170
Which of the following is the most appropriate method of reporting disagreement between the auditor and the auditee concerning audit findings and recommendations?
Answers
A: State the auditor's position because the report is designed to provide the auditor's independent view.
B: State the auditee's position because management is ultimately responsible for the activities reported.
C: State both positions and identify the reasons for the disagreement.
D: State neither position. If the disagreement is ultimately resolved, there will be no reason to report the previous disagreement. If the disagreement is never resolved, the disagreement should not be reported, because there is no mechanism to resolve it.
Answer Explanations
Answer (a) is incorrect. Both positions in the answer should be reported, and the reasons for the disagreement should be identified.
Answer (b) is incorrect. Both positions in the answer should be reported, and the reasons for the disagreement should be identified.
Answer (c) is the correct answer. Both positions should be reported, and the reasons for the disagreement should be identified.
Answer (d) is incorrect. Both positions in the answer should be reported, and the reasons for the disagreement should be identified.
171
Question: V1C1-0171
Which of the following does not describe one of the functions of audit working papers?
Answers
A: Facilitates third-party reviews.
B: Aids in the planning, performance, and review of audits.
C: Provides the principal evidential support for the auditor's report.
D: Aids in the professional development of the operating staff.
Answer Explanations
Answer (a) is incorrect. It describes primary functions of audit work papers.
Answer (b) is incorrect. It describes primary functions of audit work papers.
Answer (c) is incorrect. It describes primary functions of audit work papers.
Answer (d) is the correct answer. While audit work papers may aid in the professional development of auditor staff, that is not a primary function.
172
Question: V1C1-0172
Which of the following statements most correctly reflects the director of internal auditing’s responsibilities for personnel management and development as reflected in the IIA Standards?
Answers
A: The director is responsible for selecting qualified individuals but has no explicit responsibility for providing ongoing educational opportunities for the internal auditor.
B: The director is responsible for performing an annual review of each internal auditor's performance but has no explicit responsibility for counseling internal auditors on their performance and professional development.
C: The director is responsible for selecting qualified individuals but has no explicit responsibility for the preparation of job descriptions.
D: The director is responsible for developing formal job descriptions for the audit staff but has no explicit responsibility for administering the corporate compensation program.
Answer Explanations
Answer (a) is incorrect. The director’s responsibility for continuing education is clearly defined in the Standards.
Answer (b) is incorrect. The director’s responsibility for providing counsel on performance and professional development is identified in the Standards.
Answer (c) is incorrect. The director’s responsibility for the preparation of written job descriptions is explicitly stated in the Standards.
Answer (d) is the correct answer. Developing job descriptions is the responsibility of the director as presented in the Standards. Responsibility for administering the corporate compensation program is not presented in the Standards since this responsibility normally resides in the human resources (personnel) area.
173
Question: V1C1-0173
During the year-end physical inventory process, the auditor observed over $1.2 million worth of items staged in the shipping area and marked “Sold—Do Not Inventory.” The customer had been on credit hold for three months because of bankruptcy proceedings, but the sales manager had ordered the shipping supervisor to treat the inventory as sold for physical inventory purposes. The auditor noted the terms of sale were “FOB Warehouse.” After confirming no change in corporate policy, the auditor should
Answers
A: Recommend that the inventory staged in the shipping area be counted and included along with the rest of the physical inventory results.
B: Make test counts and trace the results to appropriate records to ensure that the cost is properly relieved from inventory.
C: Follow up with appropriate procedures to ensure that the inventory staged in the shipping area appears on related invoicing documentation.
D: Request copies of the signed bills of lading to include with working papers for this physical inventory.
Answer Explanations
Answer (a) is the correct answer. Given these circumstances, excluding the inventory from the physical count would inflate revenues and profitability for the current period. The physical inventory process is a periodic control to ensure that sales-related controls are effective.
Answer (b) is incorrect. The inventory has not been sold and transacted according to established procedures.
Answer (c) is incorrect. The inventory has not been sold and transacted according to established procedures.
Answer (d) is incorrect. The inventory has not been sold and transacted according to established procedures.
174
Question: V1C1-0174
According to the IIA Standards, the organizational status of the internal auditing department
Answers
A: Should be sufficient to permit the accomplishment of its audit responsibilities.
B: Is best when the reporting relationship is direct to the board of directors.
C: Requires the board's annual approval of the audit schedules, plans, and budgets.
D: Is guaranteed when the charter specifically defines its independence.
Answer Explanations
Answer (a) is the correct answer. It is the definition of the organizational status.
Answer (b) is incorrect. The department still needs day to day support. The department should still report into management.
Answer (c) is incorrect. The board’s concurrence is suggested, not its approval.
Answer (d) is incorrect. Most charters have a statement on independence; however, they need support to accomplish their responsibilities.
175
Question: V1C1-0175
Which of the following best defines an audit opinion?
Answers
A: A summary of the significant audit findings.
B: The auditor's professional judgment of the situation that was reviewed.
C: Conclusions that must be included in the audit report.
D: Recommendations for corrective action.
Answer Explanations
Answer (a) is incorrect. While significant audit findings are summarized in the audit report, this does not constitute an audit opinion. An audit opinion is the auditor’s professional judgment of the situation under review.
Answer (b) is the correct answer. The audit opinion is the auditor’s professional judgment of the situation under review. It is based on the audit findings.
Answer (c) is incorrect. The Standards do not require that audit reports include opinions. However, the opinion is a desirable component of the audit report.
Answer (d) is incorrect. Recommendations for corrective action are separate from the audit opinion, since the opinion is the auditor’s professional judgment of the situation.
176
Question: V1C1-0176
“Due care implies reasonable care and competence, not infallibility or extraordinary performance.” This statement makes which of the following unnecessary?
Answers
A: The conduct of examinations and verifications to a reasonable extent.
B: The conduct of extensive examinations.
C: The reasonable assurance that compliance does exist.
D: The consideration of the possibility of material irregularities.
Answer Explanations
Answer (a) is incorrect. The Standards specifically identify this item.
Answer (b) is the correct answer. The Standards do not require extensive and detailed audits of all transactions.
Answer (c) is incorrect. The Standards specifically identify this item.
Answer (d) is incorrect. The Standards specifically identify this item.
177
Question: V1C1-0177
Management asserted that the performance standards the auditors used to evaluate operating performance were inappropriate. Written performance standards that had been established by management were vague and had to be interpreted by the auditor. In such cases, auditors may meet their due care responsibility by
Answers
A: Assuring them that their interpretations are reasonable.
B: Assuring themselves that their interpretations are in line with industry practices.
C: Establishing agreement with auditees as to the standards needed to measure performance.
D: Incorporating management's objections in the audit report.
Answer Explanations
Answer (a) is incorrect. The Standards do not require such action.
Answer (b) is incorrect. The Standards do not require such action.
Answer (c) is the correct answer. This is what the IIA Standards require in such cases.
Answer (d) is incorrect. Noting differences in interpretation in the audit report, in and of itself, is not due care. Due care has to do with how the audit is performed and the report written.
178
Question: V1C1-0178
Which of the following is not a true statement about the relationship between internal auditors and external auditors?
Answers
A: External auditors must assess the competence and objectivity of internal auditors.
B: There may be periodic meetings between internal and external auditors to discuss matters of mutual interest.
C: There may be an exchange of audit reports and management letters.
D: Internal auditors may provide audit programs and working papers to external auditors.
Answer Explanations
Answer (a) is the correct answer. External auditors are required to assess these traits only when they determine that the work may have a bearing on their audit procedures (i.e., they rely on the work of the internal auditors).
Answer (b) is incorrect. When internal auditors are assigned to assist in the external audit, they are allowed to share relevant information with the external auditors.
Answer (c) is incorrect. When internal auditors are assigned to assist in the external audit, they are allowed to share relevant information with the external auditors.
Answer (d) is incorrect. If the external auditor plans to rely on the work of an internal auditor, the work must be reviewed and tested. This would require access to both programs and working papers.
179
Question: V1C1-0179
In recent years, which two factors have changed the relationship between internal auditors and external auditors so that internal auditors are partners rather than subordinates?
Answers
A: The increasing liability of external auditors and the increasing professionalism of internal auditors.
B: The increasing professionalism of internal auditors and the evolving economics of external auditing.
C: The increased reliance on computerized accounting systems and the evolving economics of external auditing.
D: The globalization of audit entities and the increased reliance on computerized accounting systems.
Answer Explanations
Answer (a) is incorrect. Increased liability of external auditors would probably have the opposite effect. Computerized accounting systems and globalization of audit entities would have no significant on the relative roles of external and internal auditors.
Answer (b) is the correct answer. Includes the two primary factors: (1) taking the CIA exam increases the professionalism of internal auditors, and (2) reducing external audit fees is becoming more critical than ever.
Answer (c) is incorrect. Increased liability of external auditors would probably have the opposite effect. Computerized accounting systems and globalization of audit entities would have no significant on the relative roles of external and internal auditors.
Answer (d) is incorrect. Increased liability of external auditors would probably have the opposite effect. Computerized accounting systems and globalization of audit entities would have no significant on the relative roles of external and internal auditors.
180
Question: V1C1-0180
After using the same public accounting firm for several years, the board of directors retained another public accounting firm to perform the annual financial audit in order to reduce the annual audit fee. The new firm has now proposed a onetime audit of the cost-effectiveness of the various operations of the business. The director of internal auditing has been asked to advise management in making a decision on the proposal.
An argument can be made that the internal auditing department would be better able to perform such an audit because
Answers
A: External auditors may not possess the same depth of understanding of the company as the internal auditors.
B: Internal auditors are required to be objective in performing audits.
C: Audit techniques used by internal auditors are different from those used by external auditors.
D: Internal auditors will not be vitally concerned with fraud and waste.
Answer Explanations
Answer (a) is the correct answer. Internal auditors are more familiar with the organization, including systems, people, and objectives.
Answer (b) is incorrect. Both internal and external auditors are required to be objective.
Answer (c) is incorrect. Internal and external auditors use the same techniques.
Answer (d) is incorrect. Internal auditors will be concerned with fraud and waste.
181
Question: V1C1-0181
After using the same public accounting firm for several years, the board of directors retained another public accounting firm to perform the annual financial audit in order to reduce the annual audit fee. The new firm has now proposed a onetime audit of the cost-effectiveness of the various operations of the business. The director of internal auditing has been asked to advise management in making a decision on the proposal.
Additional criteria that should be considered by management in evaluating the proposal would include all the following except:
Answers
A: Existing expertise of internal auditing staff.
B: Overall cost of the proposed audit.
C: The need to develop in-house expertise.
D: The external auditor's required adherence to the single audit concept.
Answer Explanations
Answer (a) is incorrect. If the expertise exists it might be more economical to use the internal auditing department.
Answer (b) is incorrect. Overall costs must be considered in relation to the potential savings.
Answer (c) is incorrect. Training and the enhanced effectiveness of the internal auditing department are important considerations.
Answer (d) is the correct answer. The single audit concept is not always pertinent.
182
Question: V1C1-0182
To improve audit efficiency, internal auditors can rely on the work of external auditors if it is
Answers
A: Performed after the internal audit.
B: Primarily concerned with operational objectives and activities.
C: Coordinated with the internal audit.
D: Conducted in accordance with the IIA Code of Ethics.
Answer Explanations
Answer (a) is incorrect. This may lead to duplication in audit coverage.
Answer (b) is incorrect. Internal auditing encompasses both financial and operational objectives and activities.
Therefore, internal auditing coverage could also be provided by external audit work, which included primarily
financial objectives and activities.
Answer (c) is the correct answer. Coordinating internal and external audit work helps to prevent duplication in coverage, thereby improving internal audit efficiency.
Answer (d) is incorrect. External auditing work is conducted in accordance with generally accepted auditing standards.
183
Question: V1C1-0183
You are the internal audit director of a parent company that has foreign subsidiaries. Independent external audits performed for the parent company are not conducted by the same firm that conducts the foreign subsidiary audits.
Since your department occasionally provides direct assistance to both external firms, you have copies of audit programs and selected working papers produced by each firm.
The foreign subsidiary’s audit firm would like to rely on some of the work performed by the parent company’s audit firm, but it needs to review the working papers first. The audit firm has asked you for copies of the parent company’s audit firm working papers. Select the most appropriate response to the foreign subsidiary’s auditors.
Answers
A: Provide copies of the working papers without notifying the parent company's audit firm.
B: Notify the parent company's audit firm of the situation and request that either they provide the working papers or authorize you to do so.
C: Provide copies of the working papers and notify the parent company's audit firm that you have done so.
D: Refuse to provide the working papers under any circumstances.
Answer Explanations
Answer (a) is incorrect. The working papers are the property of the parent company’s audit firm, and their confidentiality should be respected.
Answer (b) is the correct answer. It is your responsibility to ensure proper coordination with external auditors and minimize duplication of effort. However, you must also respect the confidentiality of the external auditor’s work.
Answer (c) is incorrect. The working papers are the property of the parent company’s audit firm and their confidentiality should be respected. The external auditors should give prior authorization for the release of their working papers.
Answer (d) is incorrect. It is your responsibility to ensure proper coordination with external auditors and minimize duplication of effort.
184
Question: V1C1-0184
You are the internal audit director of a parent company that has foreign subsidiaries. Independent external audits performed for the parent company are not conducted by the same firm that conducts the foreign subsidiary audits.
Since your department occasionally provides direct assistance to both external firms, you have copies of audit programs and selected working papers produced by each firm.
The foreign subsidiary’s audit firm wants to rely on an audit of a function at the parent company. The audit was conducted by the internal auditing department. To place reliance on the work performed, the foreign subsidiary’s auditors have requested copies of the working papers. Select the most appropriate response to the foreign subsidiary’s auditors.
Answers
A: Provide copies of the working papers.
B: Ask the parent company's audit firm if it is appropriate to release the working papers.
C: Ask the audit committee for permission to release the working papers.
D: Refuse to provide the working papers under any circumstances.
Answer Explanations
Answer (a) is the correct answer. The working papers are the property of your company. It is your responsibility as internal audit director to ensure proper coordination with external auditors and minimize duplication of effort.
Answer (b) is incorrect. The working papers are the property of your company. It is your responsibility as internal audit director to maintain security of the working papers and coordinate efforts with external auditors.
Answer (c) is incorrect. The working papers are the property of your company. It is your responsibility as internal audit director to maintain security of the working papers and coordinate efforts with external auditors.
Answer (d) is incorrect. It is your responsibility as internal audit director to ensure proper coordination with external auditors and minimize duplication of effort.
185
Question: V1C1-0185
The director of internal auditing plans to meet with the independent outside auditor to discuss joint efforts regarding an upcoming audit of the company’s pension plan. The independent outside auditor has performed all audit work in this area in the past. The director’s objective is to
Answers
A: Determine if audit work in this area could not be performed exclusively by internal auditing.
B: Coordinate the pension audit so as to fulfill the scope of work and not duplicate work of the independent outside auditor.
C: Ascertain which account balances have been tested by the independent outside auditor so that internal auditing may test the internal controls to determine the reliability of these balances.
D: Determine whether the independent outside auditor's audit techniques, methods, and terminology should be used by internal auditing in this area to conform with past audit work or if the independent outside auditor should use techniques consistent with other internal auditors.
Answer Explanations
Answer (a) is incorrect. The independent outside auditor is not permitted to delegate certain work to the internal auditors such as the verification of material account balances within a pension plan.
Answer (b) is the correct answer. According to the IIA Standards, the director of internal auditing should coordinate internal and external audit efforts.
Answer (c) is incorrect. Testing internal controls to determine the reliability of tested account balances is an example of duplicate work.
Answer (d) is incorrect. The Standards state that common understanding of audit techniques, methods, and terminology is involved in audit coordination. Therefore, common techniques should be used; it is not a case of either one technique or the other.
186
Question: V1C1-0186
A Certified Internal Auditor (CIA) is working in a noninternal audit position as the director of purchasing. The CIA signs a contract to procure a large order from the supplier with the best price, quality, and performance. Shortly after signing the contract, the supplier presents the CIA with a gift of significant monetary value. Which of the following statements regarding the acceptance of the gift is correct?
Answers
A: Acceptance of the gift would be prohibited only if it were noncustomary.
B: Acceptance of the gift would violate the IIA Code of Ethics and would be prohibited for a CIA.
C: Since the CIA is no longer acting as an internal auditor, acceptance of the gift would be governed only by the organization's code of conduct.
D: Since the contract was signed before the gift was offered, acceptance of the gift would not violate either the IIA Code of Ethics or the organization's code of conduct.
Answer Explanations
Answer (a) is incorrect. Acceptance of the gift could easily be presumed to have impaired independence and thus would not be acceptable.
Answer (b) is the correct answer. As long as an individual is a Certified Internal Auditor, he or she should be guided by the profession’s Code of Ethics in addition to the organization’s code of conduct. Article V of the Code of Ethics would preclude such a gift because it could be presumed to have influenced the individual’s decision.
Answer (c) is incorrect. There is not sufficient information given to judge possible violations of the organization’s code of conduct. However, the action could easily be perceived as a kickback.
Answer (d) is incorrect. There is not sufficient information given to judge possible violations of the organization’s code of conduct. However, the action could easily be perceived as a kickback.
187
Question: V1C1-0187
An auditor who is nearly finished with an audit discovers that the director of marketing has a gambling habit. The gambling issue is not directly related to the existing audit, and there is pressure to complete the current audit. The auditor notes the problem and passes the information on to the director of internal audit but does no further follow-up.
The auditor’s actions would
Answers
A: Be in violation of the IIA Code of Ethics for withholding meaningful information.
B: Be in violation of the Standards because the auditor did not properly follow-up on a red flag that might indicate the existence of fraud.
C: Not be in violation of either the IIA Code of Ethics or Standards.
D: Both a. and b.
Answer Explanations
Answer (a) is incorrect. The auditor is not withholding information because he or she has passed the information along to the director of internal audit. The information may be useful in a subsequent audit in the marketing area.
Answer (b) is incorrect. The auditor has documented a red flag that may be important in a subsequent audit. This does not violate the Standards.
Answer (c) is the correct answer. There is no violation of either the Code of Ethics or the Standards. See responses (a) and (b).
Answer (d) is incorrect. Answer (c) is the only correct answer.
188
Question: V1C1-0188
As used by the internal auditing profession, the IIA Standards refer to all of the following except:
Answers
A: Criteria by which the operations of an internal audit department are evaluated and measured.
B: Criteria that dictate the minimum level of ethical actions to be taken by internal auditors.
C: Statements intended to represent the practice of internal auditing, as it should be.
D: Criteria that are applicable to all types of internal audit departments.
Answer Explanations
Answer (a) is incorrect. This is the definition of the IIA Standards.
Answer (b) is the correct answer. The Code of Ethics defines the minimum ethical standards for the internal auditor.
Answer (c) is incorrect. The Standards define the practice of internal auditing as it should be.
Answer (d) is incorrect. The Standards are applicable across all industries and types of internal audit organizations.
189
Question: V1C1-0189
Which of the following situations would be a violation of the IIA Code of Ethics?
Answers
A: An auditor was subpoenaed in a court case in which a merger partner claimed to have been defrauded by the auditor's company. The auditor divulged confidential audit information to the court.
B: An auditor for a manufacturer of office products recently completed an audit of the corporate marketing function. Based on this experience, the auditor spent several hours one Saturday working as a paid consultant to a hospital in the local area that intended to conduct an audit of its marketing function.
C: An auditor gave a speech at a local IIA chapter meeting outlining the contents of a program the auditor had developed for auditing electronic data interchange (EDI) connections. Several auditors from major competitors were in the audience.
D: During an audit, an auditor learned that the company was about to introduce a new product that would revolutionize the industry. Because of the probable success of the new product, the product manager suggested that the auditor buy additional stock in the company, which the auditor did.
Answer Explanations
Answer (a) is incorrect. Article II prohibits members and CIAs from being party to illegal activities. Failure to comply with a subpoena would be illegal.
Answer (b) is incorrect. A part-time job would not be a problem since it was not with a competitor or supplier.
Answer (c) is incorrect. Giving a speech is not a violation of the Code of Ethics. In fact, the IIA’s motto is “progress through sharing.”
Answer (d) is the correct answer. Article VIII states that members and CIAs shall not use confidential information for any personal gain.
190
Question: V1C1-0190
In applying the standards of conduct set forth in the Code of Ethics, internal auditors are expected to
Answers
A: Exercise their individual judgment.
B: Compare them to standards in other professions.
C: Be guided by the desires of the auditee.
D: Use discretion in deciding whether to use them or not.
Answer Explanations
Answer (a) is the correct answer. The Code of Ethics contains basic principles that require individual judgment to apply.
Answer (b) is incorrect. While the comparison might be interesting, it would not help determine how to apply the code.
Answer (c) is incorrect. Application might not be in the best interest of the auditee.
Answer (d) is incorrect. Judgment may be applied to their use, but not to whether to use them.
191
Question: V1C1-0191
During an audit of a manufacturing division of a defense contractor, the auditor came across a scheme that looked like the company was inappropriately adding costs to a cost-plus governmental contract. The auditor discussed the manner with senior management, which suggested that the auditor seek an opinion from legal counsel. The auditor did so.
Upon review of the government contract, legal counsel indicated that the practice was questionable, but did offer the opinion that the practice was not technically in violation of the government contract. Based on legal counsel’s decision, the auditor decided to omit any discussion of the practice in the formal audit report that went to management and the audit committee, but did informally communicate legal counsel’s decision to management. Did the auditor violate the IIA’s Code of Ethics?
Answers
A: No. The auditor followed up the matter with appropriate personnel within the organization and reached a conclusion that no fraud was involved.
B: No. If a fraud is suspected, it should be resolved at the divisional level where it is taking place.
C: Yes. It is a violation because all important information, even if resolved, should be reported to the audit committee.
D: Yes. Internal legal counsel's opinion is not sufficient. The auditor should have sought advice from outside legal counsel.
Answer Explanations
Answer (a) is the correct answer. Although an argument should be made that it would make common sense to bring the issue to both the audit committee and management, there is no evidence that the auditor is deliberately withholding information. Therefore, there is no violation of the Code of Ethics.
Answer (b) is incorrect. Material fraud, if suspected, should be brought to the attention of management. However, in this case, the auditor did enough work to alleviate the suspicion of fraud.
Answer (c) is incorrect. It is not a violation. The auditor did not deliberately withhold important information.
Answer (d) is incorrect. The auditor has gathered sufficient information. Internal legal counsel opinion would appear to be sufficient.
192
Question: V1C1-0192
An internal auditor recently terminated from a company due to downsizing has found a job with another company in the same industry. Which of the following disclosures made by the internal auditor to the new organization would constitute a violation of the IIA’s Code of Ethics?
Answers
A: The auditor used the audit risk approach that was used by the auditor's former employer in determining audit priorities in the new job.
B: The new audit department does not utilize probability-proportional-to-size (PPS) sampling, and the auditor believes PPS sampling has advantages for many of the types of audits conducted by the new employer. The auditor conducts training sessions and develops forms to implement sampling in the same manner as the previous employer.
C: While at the previous firm, the auditor conducted a great deal of research to identify "best practices" for the management of the treasury function as part of an audit for that firm. Since most of the research was done at home and during nonoffice hours, the auditor retained much of the research and plans to use it in conducting an audit of the treasury function at the new employer.
D: None of the above represents a violation of the Code.
Answer Explanations
Answer (a) is incorrect. This could be viewed as general information about “best practices” and is acceptable to carry to the next employer.
Answer (b) is incorrect. The auditor is applying knowledge of a commonly used, standard audit technique. It is not confidential information.
Answer (c) is incorrect. This information could be viewed as part of continuing education of the auditor. As long as it is general information about “best practices,” it is acceptable to carry it to the next employer.
Answer (d) is the correct answer. All the three choices are not violated.
193
Question: V1C1-0193
Which of the following could be an organization factor that might adversely affect the ethical behavior of the director of internal auditing?
Answers
A: The director reports directly to an independent audit committee of the board of directors.
B: The director of internal auditing is not assigned any operational responsibilities.
C: A director of internal auditing may not be appointed or approved without concurrence of the board of directors.
D: The director's annual bonuses are based on dollar recoveries or recommended future savings as a result of audits.
Answer Explanations
Answer (a) is incorrect. These arrangements should strengthen independence and promote ethical behavior.
Answer (b) is incorrect. These arrangements should strengthen independence and promote ethical behavior.
Answer (c) is incorrect. These arrangements should strengthen independence and promote ethical behavior.
Answer (d) is the correct answer. This could taint the director’s objectivity and promote unethical behavior.
194
Question: V1C1-0194
The code of ethics of a professional organization sets forth
Answers
A: Broad standards of conduct for the members of the organization.
B: The organizational details of the profession's governing body.
C: A list of illegal activities that are proscribed to the members of the profession.
D: The criteria by which the performance of professional activities is to be evaluated and measured.
Answer Explanations
Answer (a) is the correct answer. A profession’s code of ethics summarizes principles or standards of conduct that govern the members of the profession.
Answer (b) is incorrect. This response describes the by-laws of a professional organization.
Answer (c) is incorrect. Certain actions may not be illegal, yet are contrary to an organization’s code of ethics (e.g., a CIA attempting to perform a service for which he or she does not possess the necessary competence).
Answer (d) is incorrect. This response, a paraphrase from the foreword to the Standards for the Professional Practice of Internal Auditing, implies more emphasis on adequacy of procedures than is normally contained within a code of ethics.
195
```
Question: V1C1-0195
The IIA’s Code of Ethics identifies three personal characteristics that form the foundation on which the entire Code rests. Which is not one of these three personal characteristics?
Answers
A: Objectivity.
B: Diligence.
C: Probity.
D: Honesty.
```
Answer Explanations
Answer (a) is incorrect. This characteristic is mentioned in the Code.
Answer (b) is incorrect. This characteristic is mentioned in the Code.
Answer (c) is the correct answer. This is not a personal characteristic mentioned in the Code of Ethics.
Answer (d) is incorrect. This characteristic is mentioned in the Code.
196
Question: V1C1-0196
Under the IIA’s Code of Ethics’ provisions with respect to gifts and fees, which of the following would be acceptable for an internal auditor to receive?
Answers
A: A pen received from the sales manager of a subsidiary with the imprinted name of the company's product and a phone number.
B: A dinner and baseball tickets from the manager of a department being audited. The tickets are usually made available to employees of the audited department.
C: A dinner and baseball tickets from the manager of a department that has never been audited and for which there are no plans for a future audit. The tickets are usually made available to employees of that department.
D: A bottle of whiskey from the corporate treasurer.
Answer Explanations
Answer (a) is the correct answer. Small promotional items, such as pens that are available to the general public and
are of minimal value, are not likely to hinder the auditor’s professional judgment.
Answer (b) is incorrect. Gifts may not be accepted, under Article IV.
Answer (c) is incorrect. The manager may think that a gift will ward off future audits.
Answer (d) is incorrect. Gifts may not be accepted, under Article IV.
197
Question: V1C1-0197
A Certified Internal Auditor is found to have committed a very serious violation of the Code of Ethics of the IIA.
Which of the following describes the disciplinary action most likely to be imposed by the Institute? The CIA will
Answers
A: Be required to take up to 40 hours of appropriate continuing professional education courses.
B: Be required to retake the CIA Examination.
C: Forfeit his or her membership in the Institute.
D: Be assessed a fine not to exceed $1,000.
Answer Explanations
Answer (a) is incorrect. The IIA board of directors is not authorized to require continuing professional education as a sanction for misconduct.
Answer (b) is incorrect. The board is not authorized to require retaking of the CIA Examination as a sanction for misconduct.
Answer (c) is the correct answer. The Code of Ethics specifically mentions forfeiture of IIA membership as a possible penalty for violation of its provisions.
Answer (d) is incorrect. The board has no authority to assess a monetary fine.
198
Question: V1C1-0198
Which of the following actions by an internal auditor would violate the IIA’s Code of Ethics?
Answers
A: Attendance at an educational program offered by an auditee to all employees.
B: Acceptance of airline tickets from an auditee.
C: Disclosure, in an audit opinion, of all material facts relevant to the audit area.
D: Disposal of stock in the company prior to learning of a business downturn.
Answer Explanations
Answer (a) is incorrect. Because continuing education is encouraged and because the program is open to all employees, there is no violation.
Answer (b) is the correct answer. Without consent by appropriate senior management, acceptance of any gift is prohibited (Article II of the Code of Ethics).
Answer (c) is incorrect. The auditor is required to reveal all material facts in his or her opinion.
Answer (d) is incorrect. A violation would occur only if confidential information were used for personal gain. In this case, no information was known.
199
Question: V1C1-0199
An internal auditor for XYZ company is auditing the revenues and operating expenses of a shopping mall managed by ABC company. ABC is the operating partner of this joint venture with XYZ. The internal auditor discovers numerous audit exceptions where some credits will be due to each party. Which of the following should the auditor report in this situation?
Answers
A: Only those audit exceptions where credit is due to XYZ.
B: If requested by ABC, detailed information on credits due ABC.
C: Only those audit exceptions where credit is due ABC.
D: All material audit exceptions and provide ABC with a net amount due.
Answer Explanations
Answer (a) is incorrect. To report only those audit exceptions in favor of XYZ would inflate the amount due XYZ by the credits due ABC (Code of Ethics, Article II).
Answer (b) is incorrect. It is not necessary to perform audit work on behalf of ABC. However, detailed information on the credits due XYZ plus any amounts due ABC would probably expedite the audit claim.
Answer (c) is incorrect. To report only that audit exceptions in favor of ABC would not give benefits to the auditor’s company, XYZ (Code, Article II).
Answer (d) is the correct answer. To neither overstate nor understate the audit exceptions, all material claims should be presented with a net amount owing either party. Either an overstatement or understatement of audit claims would violate the Code of Ethics, Article II.
200
Question: V1C1-0200
Which of the following actions by an auditor would violate the IIA’s Code of Ethics?
Answers
A: An audit of an activity managed by the auditor's spouse.
B: A material financial investment in the company.
C: Use of a company car.
D: A significant ownership interest in a nonrelated business.
Answer Explanations
Answer (a) is the correct answer. Auditing a spouse may create a conflict of interest and would prejudice the ability to carry out an assignment objectively (Code of Ethics, Article II).
Answer (b) is incorrect. An investment in the employer creates no conflict.
Answer (c) is incorrect. Use of a company car is accepted business practice.
Answer (d) is incorrect. An ownership interest in a nonrelated business does not create a conflict of interest.
201
Question: V1C1-0201
Through an audit of the credit department, the director of internal auditing became aware of a material misstatement of
the year-end accounts receivable balance. The external auditor has completed the audit without detecting the misstatement.
What should the director do in this situation?
Answers
A: Inform the external auditor of the misstatement.
B: Report the misstatement to management when the external auditor presents his report.
C: Exclude the misstatement from the internal audit report since the external auditor is responsible for expressing an opinion on the financial statements.
D: Perform additional audit work on account receivable balances to benefit the external auditor.
Answer Explanations
Answer (a) is the correct answer. Per the Code of Ethics, Article VI, “Certified Internal Auditors shall reveal such material facts known to them which, if not revealed, could either distort the report of the results of operations under review or conceal unlawful practice.”
Answer (b) is incorrect. The internal auditor should cooperate with the external auditor and coordinate audit efforts with professional conduct.
Answer (c) is incorrect. Although an internal auditor’s main focus may be on internal controls and operating efficiencies, a material misstatement must be reported as per the Code, Article VI.
Answer (d) is incorrect. The external auditor should determine what work the internal auditor should perform in order that the external auditor may express an opinion per the Statement on Auditing Standards (SAS No. 9).
202
Question: V1C1-0202
A Certified Internal Auditor who is judged by the board of directors of the IIA to be in violation of the provisions of the IIA’s Code of Ethics shall be subject to
Answers
A: Suspension as a Certified Internal Auditor for a minimum of one year.
B: Completion of additional continuing professional development hours to retain the Certified Internal Auditor designation.
C: Suspension as a Certified Internal Auditor indefinitely until reinstatement by the board.
D: Forfeiture of the Certified Internal Auditor designation.
Answer Explanations
Answer (a) is incorrect. There are no provisions for suspensions in the Code.
Answer (b) is incorrect. There are no provisions in the Code for continuing professional development (CPD) hours to be completed for ethics violations.
Answer (c) is incorrect. There are no provisions for suspension in the Code.
Answer (d) is the correct answer, as per the last sentence in the “Applicability” section of the Code.
203
Question: V1C1-0203
In a review of warranty programs for new products introduced by a company with low and declining profits, an auditor has determined, and management has acknowledged, that the company will be unable to fulfill promised warranty coverage. The auditor should
Answers
A: Inform appropriate regulatory authorities.
B: Inform customers.
C: Inform the audit committee.
D: Resign from the employer.
Answer Explanations
Answer (a) is incorrect. Reporting findings outside the organization violates Article II of the Code of Ethics.
Answer (b) is incorrect. Reporting findings outside the organization violates Article II of the Code of Ethics.
Answer (c) is the correct answer. Article II of the Code of Ethics requires loyalty to the employer, which in this case requires reporting to the employer.
Answer (d) is incorrect. Resignation is not required. Loyalty to the employer is required by Article II.
204
Question: V1C1-0204
A Certified Internal Auditor is found to have committed a violation of the Code of Ethics of the IIA. The violation is not serious enough to warrant the maximum disciplinary action. The most likely result is that the CIA will
Answers
A: Be required to take up to 24 hours of appropriate continuing professional education courses.
B: Lose his or her CIA designation permanently unless subsequent reinstatement is approved by the board of directors of the IIA.
C: Be prohibited from engaging in the practice of internal auditing for a period not to exceed 60 days.
D: Receive from the Institute's board of directors a written censure, which outlines the consequences of repeated similar actions.
Answer Explanations
Answer (a) is incorrect. The IIA board of directors is not authorized to require continuing professional education as a sanction for misconduct.
Answer (b) is incorrect. Forfeiture of the CIA designation is imposed only for the most serious misconduct cases.
Answer (c) is incorrect. The board has no authority to prohibit a person from practicing internal auditing.
Answer (d) is the correct answer. Censure is the disciplinary action prescribed by Professional Standards for the least serious misconduct cases.
205
Question: V1C1-0205
Internal auditors should be prudent in their relationships with persons and organizations external to their employers.
Which of the following activities would most likely not adversely affect internal auditors’ ethical behavior?
Answers
A: Accepting compensation from professional organizations for consulting work.
B: Serving as consultants to competitor organizations.
C: Serving as consultants to suppliers.
D: Discussing audit plans or results with external parties.
Answer Explanations
Answer (a) is the correct answer. Professional organizations usually do not deal with auditors’ employees and are not in competition with them. They also normally do not reveal or use confidential information to the detriment of employers.
Answer (b) is incorrect. There could be a conflict of interest and could involve misuse of confidential information.
Answer (c) is incorrect. There could be a conflict of interest and could involve misuse of confidential information.
Answer (d) is incorrect. This could result in misuse of confidential information.
206
Question: V1C1-0206
A primary purpose for establishing a code of conduct within a professional organization is to
Answers
A: Reduce the likelihood that members of the profession will be sued for substandard work.
B: Ensure that all members of the profession perform at approximately the same level of competence.
C: Demonstrate acceptance of responsibility to the interests of those served by the profession.
D: Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.
Answer Explanations
Answer (a) is incorrect. Although this may be a result of establishing a code of conduct, it is not the primary purpose. To consider it so would be self-serving.
Answer (b) is incorrect. A code of conduct may help to establish minimum standards of competence, but it would be impossible to legislate equality of competence by all members of a profession.
Answer (c) is the correct answer. This is a distinguishing mark of a profession.
Answer (d) is incorrect. There are situations where responsibility to the public at large may conflict with, and be more important than, loyalty to one’s organization.
207
Question: V1C1-0207
An auditor discovers some material inefficiency in a purchasing function. The purchasing manager happens to be the auditor’s next-door neighbor and best friend. In accordance with the Code of Ethics, the auditor should
Answers
A: Objectively include the facts of the case in the audit report.
B: Not report the incident because of loyalty to the friend.
C: Include the facts of the case in a special report submitted only to the friend.
D: Not report the friend unless the activity is illegal.
```
Answer Explanations
Answer (a) is the correct answer. Article II requires the auditor to be loyal to his or her employer.
Answer (b) is incorrect by definition.
Answer (c) is incorrect by definition.
Answer (d) is incorrect by definition.
```
208
Question: V1C1-0208
Which of the following actions could be construed as a violation of the IIA’s Code of Ethics?
Answers
A: Failing to report to management information that would be material to management's judgment.
B: Rendering an opinion on internal financial statements.
C: Turning a case over to the security department when an auditor suspects fraud, but has no proof.
D: Including an internal control problem in a report, when it has been corrected prior to completion of the audit.
Answer Explanations
Answer (a) is the correct answer. Article VI requires auditors to report any information that is material to management.
Answer (b) is incorrect. This is acceptable for internal use only.
Answer (c) is incorrect. This is acceptable as long as the auditor is careful not to state any final conclusions that are not supported by factual evidence.
Answer (d) is incorrect. This is typically done.
209
Question: V1C1-0209
Which of the following would constitute a violation of the IIA’s Code of Ethics?
Answers
A: Janice has accepted an assignment to audit the electronics manufacturing division. Janice has recently joined the internal auditing department. But she was senior auditor for the external audit of that division and has audited many electronics companies during the past two years.
B: George has been assigned to do an audit of the warehousing function six months from now. George has no expertise in that area but accepted the assignment anyway. He has signed up for continuing professional education courses in warehousing, which will be completed before his assignment begins.
C: Jane is content with her career as an internal auditor and has come to look at it as a regular 9-to-5 job. She has not engaged in continuing professional education or other activities to improve her effectiveness during the last three years. However, she feels she is performing the same quality work she always has.
D: John discovered an internal financial fraud during the year. The books were adjusted to properly reflect the loss associated with the fraud. John discussed the fraud with the external auditor when the external auditor reviewed working papers detailing the incident.
Answer Explanations
Answer (a) is incorrect. There is no professional conflict of interest per se. However, the auditor should be aware of potential conflicts.
Answer (b) is incorrect. George has committed to obtaining the needed expertise before conducting the audit.
Answer (c) is the correct answer. This would be a violation of Article X of the Code, which requires auditors to continually strive for improvement in their proficiency and the effectiveness of their audits.
Answer (d) is incorrect. The information was disclosed as part of the normal process of cooperation between the internal and external auditor. Since the books were adjusted, it would be expected that the external auditor would inquire as to the nature of the adjustment.
210
Question: V1C1-0210
Which of the following would be permissible under the IIA’s Code of Ethics?
Answers
A: Disclosing confidential, audit-related information that is potentially damaging to the organization in a court of law in response to a subpoena.
B: Using audit-related information in a decision to buy stock issued by the employer corporation.
C: Accepting an unexpected gift from an employee whom you have praised in a recent audit report.
D: Not reporting significant findings about illegal activity to the audit committee because management has indicated it will handle the issue.
Answer Explanations
Answer (a) is the correct answer. Auditors must exhibit loyalty to the organization, but not be a party to any illegal activity. Thus, auditors must comply with legal subpoenas.
Answer (b) is incorrect. Article VIII prohibits auditors from using audit information for personal gain.
Answer (c) is incorrect. Article V prohibits auditors form accepting gifts from other employees that might be presumed to impair the auditor’s professional judgment.
Answer (d) is incorrect. Article II prohibits auditors from knowingly being a party to any illegal or improper activity. The Standards specifies that significant findings of illegal account should be reported to the audit committee.
211
Question: V1C1-0211
During an audit, an employee with whom you have developed a good working relationship informs you that she has some information about top management that would be damaging to the organization and may concern illegal activities.
The employee does not want her name associated with the release of the information. Which of the following actions would be considered inconsistent with the IIA’s Code of Ethics and Standards?
Answers
A: Assure the employee that you can maintain her anonymity and listen to the information.
B: Suggest the person consider talking to legal counsel.
C: Inform the individual that you will attempt to keep the source of the information confidential and will look into the matter further.
D: Inform the employee of other methods of communicating this type of information.
Answer Explanations
Answer (a) is the correct answer. The Code of Ethics and Standards do not provide for strict confidentiality of information.
Answer (b) is incorrect. This option is allowable, and an attorney can provide legal confidentiality.
Answer (c) is incorrect. This option is allowable, but is not a guarantee of confidentiality.
Answer (d) is incorrect. To maintain confidentiality, the employee can be directed to other options to provide the information.
212
Question: V1C1-0212
An internal auditor for a large regional bank holding company was asked to serve on the board of directors of a local bank. The bank competes in many of the same markets as the bank holding company, but focuses more on consumer financing than on business financing. In accepting this position, the auditor
I. Violates the IIA Code of Ethics because serving on the board may be in conflict with the best interests of the auditor’s employer.
II. Violates the IIA Code of Ethics because the information gained while serving on the board of directors of the local bank may influence recommendations regarding potential acquisitions.
Answers
A: I only.
B: II only.
C: I and II.
D: Neither I nor II.
Answer Explanations
Answer (a) is incorrect. It clearly violates the IIA’s Code, Article IV, but statement II is also correct.
Answer (b) is incorrect. It could cause a conflict of the type described and would be considered a discreditable act (Article III). However, statement I is also correct.
Answer (c) is the correct answer. The action may represent a violation of the Code of Ethics for both of the reasons given.
Answer (d) is incorrect. It is a violation of the Code.
213
Question: V1C1-0213
The director of internal auditing has been appointed to a committee to evaluate the appointment of the external auditors.
The engagement partner for the external accounting firm wants the director to join him for a week of hunting at his private lodge. The director should
Answers
A: Accept, assuming both their schedules allow it.
B: Refuse on the grounds of conflict of interest.
C: Accept as long as it is not charged to company time.
D: Ask the comptroller if this would be a violation of the company's code of ethics.
Answer Explanations
Answer (a) is incorrect per the Code of Ethics.
Answer (b) is the correct answer. The director has to avoid conflict of interest or activities that might prejudice his or her ability to carry out assigned duties. The director may not accept anything of value that might impair professional judgment. Reference to Code of Ethics, sections IV and V.
Answer (c) is incorrect per the Code of Ethics.
Answer (d) is incorrect per the Code of Ethics.
214
Question: V1C1-0214
In a review of travel and entertainment expenses, a Certified Internal Auditor questioned the business purposes of an officer’s reimbursed travel expenses. The officer promised to compensate for the questioned amounts by not claiming legitimate expenses in the future. If the officer makes good on the promise, the internal auditor
Answers
A: Can ignore the original charging of the nonbusiness expenses.
B: Should inform the tax authorities in any event.
C: Should still include the finding in the audit report.
D: Should recommend that the officer forfeit any frequent flyer miles received as part of the questionable travel.
Answer Explanations
Answer (a) is incorrect. The auditor cannot ignore the matter since it is an ethical issue.
Answer (b) is incorrect. The Standards require the director of internal auditing to distribute audit reports to those members of the organization who can take appropriate action.
Answer (c) is the correct answer. The IIA’s Code of Ethics, Article IX, requires CIAs to reveal all material facts that could conceal unlawful practices.
Answer (d) is incorrect because management should determine what constitutes just compensation.
215
Question: V1C1-0215
The standards of conduct set forth in the IIA’s Code of Ethics
Answers
A: Provide basic principles in the practice of internal auditing.
B: Are guidelines to assist internal auditors in dealing with auditees.
C: Are rules that must be obeyed in all circumstances.
D: Provide a general understanding of the responsibility of internal auditing.
Answer Explanations
Answer (a) is the correct answer. This is part of the introduction to the IIA Code of Ethics.
Answer (b) is incorrect. They are part of internal auditing standards.
Answer (c) is incorrect. They are part of internal auditing standards.
Answer (d) is incorrect. This is the purpose of the Statement of Responsibilities.
216
Question: V1C1-0216
Today’s internal auditor will often encounter a wide range of potential ethical dilemmas, not all of which are explicitly addressed by the Institute of Internal Auditors’ Code of Ethics. If the auditor encounters such a dilemma, the auditor should always
Answers
A: Seek counsel from an independent attorney to determine the personal consequences of potential actions.
B: Consider all parties affected and the potential consequences of actions, and take an action consistent with the objectives of internal auditing and the concepts embodied in the Institute of Internal Auditors' Code of Ethics.
C: Seek the counsel of the audit committee before deciding on an action.
D: Act consistently with the code of ethics adopted by the organization even if such action would not be consistent with the IIA's Code of Ethics.
Answer Explanations
Answer (a) is incorrect. The auditor must act consistently with the spirit embodied in the IIA Code of Ethics. It would not be practical to seek the advice of legal counsel for all ethical decisions. Ethics is a moral and professional concept, not just a legal concept.
Answer (b) is the correct answer. This is consistent with the concepts embodied in the IIA Code of Ethics. The last sentence of the Code clearly indicates that the auditor needs to uphold the objectives of the IIA.
Answer (c) is incorrect. It would not be practicable to seek management advice for all potential dilemmas. Further, the advice might not be consistent with the profession’s standards.
Answer (d) is incorrect. If the company’s standards are not consistent with, or as high as, the profession’s standards, the professional internal auditor is held to the standards of the profession.
217
Question: V1C1-0217
An internal auditor has been assigned to audit a foreign subsidiary. The auditor is aware that the social climate of the country is such that “facilitating payments” (bribes) are often used to make things happen and are an accepted part of that society. The auditor has completed an audit of the division and has found significant weaknesses relating to important controls. The division manager offers the auditor a substantial “facilitating payment” to omit the audit findings from the audit report with a provision that the auditor could revisit the division in six months so the auditor could verify that the problem areas had been properly addressed. The auditor should
Answers
A: Not accept the payment since such acceptance would be in conflict with the Code of Ethics.
B: Not accept the payment, but omit the findings as long as there is a verification visit in six months.
C: Accept the offer since it is consistent with the ethical concepts of the country in which the division is doing business.
D: Accept the payment because it has the effect of doing the greatest good for the greatest number; the auditor is better off, the division is better off, and the organization is better off because there is strong motivation to correct the deficiencies found by the auditor.
Answer Explanations
Answer (a) is the correct answer. This is consistent with the IIA’s Code of Ethics. See Article V of the Code.
Answer (b) is incorrect. This would be inconsistent with the Standards adopted by the profession.
Answer (c) is incorrect. The internal auditor is guided by the profession’s standards, not the customs of individual countries or regions.
Answer (d) is incorrect. The action is explicitly prohibited by the Code of Ethics.
218
Question: V1C1-0218
A certified internal auditor (CIA), who performs financial, operational, and information systems audits, is now facing an ethical dilemma. During an audit, he discovered several illegal activities conducted by senior management of his firm. What should the auditor do now?
Answers
A: Comply with the Institute of Management Accountant's (IMA's) Code of Ethics and Standards
B: Comply with the American Institute of Certified Public Accountant's (AICPA's) Code of Ethics and Standards
C: Comply with the Institute of Internal Auditor's (IIA's) Code of Ethics and Standards
D: Comply with the Information Systems and Audit Control Association's (ISACA's) Code of Ethics and Standards
Answer Explanations
Answer (a) is incorrect because certified management accountants (CMAs) will follow and comply with the IMA’s Code of Ethics and Standards.
Answer (b) is incorrect because certified public accountants (CPAs) will follow and comply with the AICPA’s Code of Ethics and Standards.
Answer (c) is the correct answer. A CIA, whether he is performing financial, operational, and information systems audits, should follow and comply with the IIA’s Code of Ethics and Standards since he is certified with that institute and being a professional with that organization.
Answer (d) is incorrect because certified information systems auditors (CISAs) will follow and comply with the ISACA’s Code of Ethics and Standards.
219
Question: V1C1-0219
A staff auditor has been assigned to the treasury audit for the second consecutive year. The auditor confirmed investment securities held by a brokerage house and realized that several large securities were improperly used as collateral for personal loans a few years ago by the current treasurer. Last year the staff auditor had mistakenly signed off on the audit steps involving the confirmations and verification of the securities without completing all of the steps. The audit manager also mistakenly signed off on the review last year. When the error was detected this year, the audit manager commented that “it was an error, but the loan has been repaid, and the securities returned. We have corrected the control weakness, and I’m positive it will not happen again. Pursuit of this issue will be an embarrassment to everyone involved. Leave it as it is.”
Which of the following should be considered by the staff auditor when deciding whether to report the situation or not?
Answers
A: Securities were used improperly as collateral.
B: The mistake in signing off work that was not done.
C: The repayment of loans and return of the securities.
D: The correction of the control weakness.
Answer Explanations
Answer (a) is the correct answer. Securities were improperly used; the fact that they are not now should not prevent the internal reporting of the situation.
Answer (b) is incorrect. This choice is a fact, but not relevant to the decision as to what to whether to report the improper use of the securities. An auditor may want to include the information in the report, but whether to report should not be based on this information.
Answer (c) is incorrect. This choice is a fact, but not relevant to the decision as to what to whether to report the improper use of the securities. An auditor may want to include the information in the report, but whether to report should not be based on this information.
Answer (d) is incorrect. This choice is a fact, but not relevant to the decision as to what to whether to report the improper use of the securities. An auditor may want to include the information in the report, but whether to report should not be based on this information.
220
Question: V1C1-0220
A staff auditor has been assigned to the treasury audit for the second consecutive year. The auditor confirmed investment securities held by a brokerage house and realized that several large securities were improperly used as collateral for personal loans a few years ago by the current treasurer. Last year the staff auditor had mistakenly signed off on the audit steps involving the confirmations and verification of the securities without completing all of the steps. The audit manager also mistakenly signed off on the review last year. When the error was detected this year, the audit manager commented that “it was an error, but the loan has been repaid, and the securities returned. We have corrected the control weakness, and I’m positive it will not happen again. Pursuit of this issue will be an embarrassment to everyone involved. Leave it as it is.”
As a staff auditor, which of the following actions would be considered a violation of the IIA Standards or Code of Ethics?
Answers
A: Inform the audit manager that you will be including the information in your working papers as an audit finding.
B: Discuss the matter with the audit director without further discussion with the audit manager.
C: Disclose the matter to the external auditor without further discussion.
D: Resign from the audit department and company if further action is not taken on the matter.
Answer Explanations
Answer (a) is incorrect. Including facts in the working papers is not a violation of the Code of Ethics.
Answer (b) is incorrect. Additional discussion with the audit manager is not necessary before discussion with the director of internal audit.
Answer (c) is the correct answer. It is the director of internal auditing who is responsible to communicate with the external auditor.
Answer (d) is incorrect. Resigning is an option always available to the auditor without a Code of Ethics violation.
221
Question: V1C1-0221
Which of the following situations would most likely be considered a violation of the IIA’s Code of Ethics and thus the Standards?
Answers
A: As director of internal auditing you have become perplexed as to how to resolve a particular disagreement between you and auditee management regarding the finding and recommendation in a very sensitive audit area. Unsure as to what to do, you discuss the detail of the finding and your proposed recommendation with a fellow audit director you know from your work in the IIA's local chapter.
B: After researching and developing the proposed yearly audit plan, your company audit charter requires that, as director, you present the plan to the audit committee for its approval and suggestions.
C: Your audit manager has just removed your most significant finding and recommendation from your audit report. Being the in-charge auditor, you have voiced your opposition to the removal and have explained that you know the reported condition exists. Although you agree that, technically, the audit lacks sufficient evidence to support the finding, management cannot explain the condition and your audit finding is the only reasonable conclusion.
D: Because your department lacks skill and knowledge in a specialty area, your audit director has engaged the services of an expert consultant. As audit manager, you have been asked to review the expert's approach to the assignment. You are knowledgeable regarding the area under review but are hesitant to accept the assignment because you lack the expertise to judge the validity of the expert's conclusion.
Answer Explanations
Answer (a) is the correct answer. The Code of Ethics requires confidentiality.
Answer (b) is incorrect. Approval of audit committee or management is required by the Standards.
Answer (c) is incorrect. The Standards require sufficient evidence to support findings.
Answer (d) is incorrect. The Standards allow use of “experts” when needed.
222
Question: V1C1-0222
Internal auditors sometimes express opinions in audit reports in addition to stating facts. Due professional care requires that the auditor’s opinions be
Answers
A: Based on sufficient factual evidence that warrants the expression of the opinions.
B: Based on experience and not biased in any manner.
C: Expressed only when requested by the auditee or executive management.
D: Limited to the effectiveness of controls and the appropriateness of accounting treatments.
Answer Explanations
Answer (a) is the correct answer. This is what is required by the Code of Ethics of the IIA.
Answer (b) is incorrect. There is no specific requirement for this.
Answer (c) is incorrect. It is too constraining.
Answer (d) is incorrect. It is too constraining.
223
Question: V1C1-0223
An accounting association established a code of ethics for all members. Identify the association’s primary purpose for establishing the code of ethics.
Answers
A: To outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.
B: To establish standards to follow for effective accounting practice.
C: To provide a framework within which accounting policies could be effectively developed and executed.
D: To outline criteria that can be utilized in conducting interviews of potential new accountants.
Answer Explanations
Answer (a) is the correct answer. This is the primary purpose of the Code of Ethics.
Answer (b) is incorrect. The Code of Ethics was not designed to serve as standards for effective accounting.
Answer (c) is incorrect. The Code does not provide the framework within which accounting policies are developed.
Answer (d) is incorrect. The primary purpose of the Code of Ethics is not for interviewing new accountants.
224
Question: V1C1-0224
During an audit, a Certified Internal Auditor (CIA) learned that certain individuals in the organization were involved in industrial espionage for the benefit of the organization. According to the IIA’s Code of Ethics, identify the auditor’s course of action.
Answers
A: Report the facts to the appropriate individuals within the organization.
B: No action is required since this condition is not detrimental to the organization.
C: Note the condition in the working papers but refrain from reporting it because it benefits the organization.
D: Report the condition to the appropriate government regulatory agency.
Answer Explanations
Answer (a) is the correct answer. CIAs must not knowingly be a party to any illegal or improper act. Also, reporting within the organization is the proper action.
Answer (b) is incorrect. CIAs must not knowingly be a party to any illegal or improper act. The fact that this activity is improper and, probably, illegal requires the CIA to report it.
Answer (c) is incorrect. CIAs must not knowingly be a party to any illegal or improper act. The fact that this activity is improper and, probably, illegal requires the CIA to report it. Merely noting the condition in the audit working papers does not constitute “reporting” it.
Answer (d) is incorrect. CIAs are not required to voluntarily reveal illegal or improper acts to outside individuals or organizations. They should try to work within their organizations.
225
Question: V1C1-0225
An organization has recently placed a former operating manager in the position of director of internal auditing. The new director is not a member of the IIA and is not a CIA. Henceforth, the internal auditing department will be run strictly by the director’s standards, not the IIA’s. All four staff auditors are members of the IIA, but they are not CIAs.
According to the Code of Ethics, what is the best course of action for the staff auditors?
Answers
A: The Code does not apply because the auditors are not CIAs.
B: The auditors should adopt suitable means to comply with the IIA Standards.
C: The auditors must exhibit loyalty to the organization and ignore the IIA Standards.
D: The auditors must resign their jobs to avoid improper activities.
Answer Explanations
Answer (a) is incorrect. The Code of Ethics applies to IIA members and CIAs.
Answer (b) is the correct answer. The IIA‘s Code of Ethics, Standard of Conduct VII, requires members and CIAs to adopt suitable means to comply with the Standards.
Answer (c) is incorrect. Loyalty to the organization must be exhibited, but a member or CIA must follow the Standards.
Answer (d) is incorrect. The Code of Ethics says nothing about resignation to avoid improper activities.
226
Question: V1C1-0226
A primary purpose for establishing a code of conduct within a professional organization is to
Answers
A: Reduce the likelihood that members of the profession will be sued for substandard work.
B: Ensure that all members of the profession perform at approximately the same level of competence.
C: Demonstrate acceptance of responsibility to the interests of those served by the profession.
D: Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.
Answer Explanations
Answer (a) is incorrect. Although this may be a result of establishing a code of conduct, it is not the primary purpose. To consider it so would be self-serving.
Answer (b) is incorrect. A code of conduct may help to establish minimum standards of competence, but it would be impossible to legislate equality of competence by all members of a profession.
Answer (c) is the correct answer. This is a distinguishing mark of a profession.
Answer (d) is incorrect. There are situations where responsibility to the public at large may conflict with, and be more important than, loyalty to one’s organization.
227
Question: V1C1-0227
While performing an operational audit of the firm’s production cycle, an internal auditor discovers that, in the absence of specific guidelines, some engineers and buyers routinely accept vacation trips paid for by certain of the firm’s vendors. Other engineers and buyers will not accept even a working lunch paid for by a vendor. Which of the following actions should the internal auditor take?
Answers
A: None. The engineers and buyers are professionals. It is inappropriate for an internal auditor to interfere in what is essentially a personal decision.
B: Informally counsel the engineers and buyers who accept the vacation trips. This helps prevent the possibility of kickbacks, while preserving good auditor/auditee relations.
C: Formally recommend that the organization establish a corporate code of ethics. Guidelines of acceptable conduct within which individual decisions may be made should be provided.
D: Issue a formal deficiency report naming the personnel who accept vacations but make no recommendations. Corrective action is the responsibility of management.
Answer Explanations
Answer (a) is incorrect. Internal auditors are charged with the responsibility of evaluating that which they examine and of making recommendations, where appropriate.
Answer (b) is incorrect. Management is charged with the responsibility of making any corrections necessary within their department.
Answer (c) is the correct answer. Any discipline or organization aspiring to professionalism or unity of direction needs an organizational code of ethical conduct.
Answer (d) is incorrect. Internal auditors should make recommendations whenever practicable.
228
Question: V1C1-0228
You work for an organization that has adopted a conflict-of-interest policy that prohibits any activity contrary to the best interests and well-being of the organization. Which of the following statements should be included in the policy to illustrate unacceptable behavior?
Answers
A: Serving as a member of the board of directors of nonprofit organization dedicated to preservation of the environment.
B: Serving as an elected official (part-time) of a local government.
C: Providing a mailing list of company employees to a relative who is offering training that might benefit the organization.
D: Teaching (part-time) at a local university.
Answer Explanations
Answer (a) is incorrect. Serving on a nonprofit organization is unlikely to cause a conflict of interest.
Answer (b) is incorrect. Although a conflict might arise, it is not inevitable.
Answer (c) is the correct answer. Even though the training could benefit the organization, the relative (and you, albeit indirectly) stands to benefit from company information.
Answer (d) is incorrect. Teaching is not considered in conflict with the interests of most organizations.
229
```
Question: V1C1-0229
The Code of Ethics requires IIA members to exercise three particular qualities in the performance of their duties.
These qualities are
Answers
A: Honesty, objectivity, and diligence.
B: Timeliness, sobriety, and clarity.
C: Knowledge, skill, and discipline.
D: Punctuality, loyalty, and dignity.
```
Answer Explanations
Answer (a) is the correct answer. The first Standard of Conduct states these qualities.
Answer (b) is incorrect. Timeliness and sobriety are not mentioned.
Answer (c) is incorrect. They are not mentioned in the Code of Ethics.
Answer (d) is incorrect. Punctuality is not mentioned in the Code of Ethics.
230
Question: V1C1-0230
According to the Code of Ethics, the IIA board of directors may take action against a CIA whose work is dishonest by
Answers
A: Requesting that the CIA be fired by the employing company.
B: Reporting the dishonest act to legal authorities.
C: Having the CIA's employer issue a reprimand.
D: Revoking the auditor's CIA designation.
Answer Explanations
Answer (a) is incorrect. This would be at the discretion of his employer.
Answer (b) is incorrect. The Code of Ethics contains no provision for reporting him to legal authorities. Further, it has not been established that he broke a law.
Answer (c) is incorrect. The Code of Ethics contains no provision to require the employer to issue a reprimand.
Answer (d) is the correct answer. The IIA board of directors may revoke his CIA designation if it is established that he violated the Code of Ethics.
231
Question: V1C1-0231
Which of the following involves a violation of the Institute of Internal Auditors’ Code of Ethics?
Answers
A: An auditor informed a friend in an operating department of the expected closing of that department.
B: Unlike other employees, the auditors always fly first-class to maintain the appearance of independence.
C: With the consent of senior management, an auditor accepted a gift from an auditee department that was given as a reward for finding a major inefficiency.
D: An auditor accepted a promotional calendar from the sales manager.
Answer Explanations
Answer (a) is the correct answer. This is a violation of Article VIII.
Answer (b) is incorrect. Article II emphasizes loyalty to the organization. Fraternization might be discouraged.
Answer (c) is incorrect. Article IV permits the acceptance of a gift with the consent of senior management.
Answer (d) is incorrect. Under Article IV, gifts of minimal value that are available to the general public are not likely to hinder professional judgment.
232
Question: V1C1-0232
The board of directors of the IIA has been informed that a CIA was tried and convicted of tax evasion. The probable consequences for this person are
Answers
A: Immediate revocation of the CIA designation by the Internal Auditing Standards Board.
B: Nothing; the act was performed outside of the normal line of work.
C: Censure by the director of professional practices of the Institute.
D: Review by the board of directors and forfeiture of the CIA designation.
Answer Explanations
Answer (a) is incorrect. Sanctions against CIAs must be imposed by the board of directors.
Answer (b) is incorrect. The CIA violated the law and performed an act discreditable to the profession.
Answer (c) is incorrect. Sanctions against CIAs must be imposed by the board of directors.
Answer (d) is the correct answer. The sanction must be imposed by the board. This act is probably severe enough to warrant forfeiture of the CIA designation.
233
Question: V1C1-0233
An internal auditing director learns that a staff auditor has provided confidential information to a relative. Both the director and staff auditor are Certified Internal Auditors (CIAs). Although the auditor did not benefit from the transaction, the relative used the information to make a significant profit. The most appropriate way for the director to deal with this problem is to
Answers
A: Verbally reprimand the auditor.
B: Summarily discharge the auditor and notify the IIA.
C: Take no action since the auditor did not benefit from the transaction.
D: Inform the IIA's board of directors and take the personnel action required by company policy.
Answer Explanations
Answer (a) is incorrect. The auditor has violated the Code of Ethics standard regarding use of confidential information. The IIA should be notified.
Answer (b) is incorrect. Summary discharge may not be in accordance with company personnel policies.
Answer (c) is incorrect. The auditor was negligent in the use of confidential information and violated the Code of Ethics. Some action is warranted.
Answer (d) is the correct answer. Since the IIA Code of Ethics (Article VIII) was violated, the IIA should be notified. In addition, company policy must be followed.
234
```
Question: V1C1-0234
During the course of an audit, an auditor discovers that a clerk is embezzling company funds. Although this is the first embezzlement ever encountered and the organization has a security department, the auditor decides to personally interrogate the suspect. If the auditor is violating the IIA’s Code of Ethics, the rule violated is most likely
Answers
A: Failing to show due diligence.
B: Lack of loyalty to the organization.
C: Lack of competence in this area.
D: Failing to comply with the law.
```
Answer Explanations
Answer (a) is incorrect. Diligence does not override professional competence or use of good judgment.
Answer (b) is incorrect. Loyalty would be better exhibited by consulting professionals in interrogation and knowing your limits of competence.
Answer (c) is the correct answer. The Code of Ethics requires members and CIAs to refrain from undertaking services that cannot be reasonably completed with professional competence.
This answer is incorrect. Refer to the correct answer explanation.
235
Question: V1C1-0235
The director of internal auditing of a company is aware of a material inventory shortage caused by internal control deficiencies at one manufacturing plant. The shortage and related causes are of sufficient magnitude to impact the external auditor’s report. Based on the IIA’s Code of Ethics, identify the director’s most appropriate course of action
Answers
A: Say nothing; guard against interfering with the independence of the external auditors.
B: Discuss the issue with management and take appropriate action to ensure that the external auditors are informed.
C: Inform the external auditors of the possibility of a shortage but allow them to make an independent assessment of the amount.
D: Report the shortages to the board of directors and allow the board to report it to the external auditor.
Answer Explanations
Answer (a) is incorrect. This is a material fact that could distort a report of operations if not revealed.
Answer (b) is the correct answer. The Code of Ethics calls for compliance with the Standards, which charge the director with coordination with external auditors and exchanging information. In addition, the Code requires that all material facts known be revealed. Since this impacts the external auditor’s work, in which the internal auditors are participating, the situation must be divulged.
Answer (c) is incorrect. The shortage is known and the external auditors should be told more than that there is a possibility.
Answer (d) is incorrect. The audit director should discuss the issue with management first and later with the board of directors. The audit director can report these issues directly with the external auditors.
236
Question: V1C1-0236
Which of the following statements is not appropriate to include in a manufacturer’s conflict-of-interest policy? An employee shall not
Answers
A: Accept money, gifts, or services from a customer.
B: Participate (directly or indirectly) in the management of a public agency.
C: Borrow from or lend money to vendors.
D: Use company information for private purposes.
Answer Explanations
Answer (a) is incorrect. It is a classic part of most conflict-of-interest policies.
Answer (b) is the correct answer. Generally, there should be no prohibition from public service. This is a right, if not a duty, of all citizens.
Answer (c) is incorrect. It is a classic part of most conflict-of-interest policies.
Answer (d) is incorrect. It is a classic part of most conflict-of-interest policies.
237
Question: V1C1-0237
A firm’s code of ethics contains the following statement: “Employees shall not accept gifts or gratuities over $50 in value from persons or firms with whom our organization does business.” This provision is designed to prevent
Answers
A: Diversion of the firm's securities by an employee.
B: Excessive sales allowances granted by an employee.
C: Failure by an employee to record cash collections.
D: Participation by an employee in a working lunch funded by one of the firm's suppliers.
Answer Explanations
Answer (a) is incorrect. The first person benefited by a diversion of the firm’s securities is the thieving employee. The stated provision of the Code of Ethics is designed to prevent a vendor from an inordinate benefit.
Answer (b) is the correct answer. The direct beneficiary of excessive sales allowances is the buyer.
Answer (c) is incorrect. Employees who operate cash registers are in a position to keep cash from sales and to fail to record the transaction. Since this action first benefits the thief, the stated provision of the Code of Ethics is not designed to prevent this.
Answer (d) is incorrect. Participation in a working lunch funded by a vendor is an acceptable practice.
238
Question: V1C1-0238
A code of conduct was developed several years ago and distributed by a large financial institution to all its officers and employees. Identify the best audit approach to provide the audit committee with the highest level of comfort about the code of conduct.
Answers
A: Fully evaluate the comprehensiveness of the code and compliance therewith, and report the results to the audit committee.
B: Fully evaluate company practices for compliance with the code, and report to the audit committee.
C: Review employee activities for compliance with provisions of the code, and report to the audit committee.
D: Perform tests on various employee transactions to detect potential violations of the code of conduct.
Answer Explanations
Answer (a) is the correct answer. Evaluating the code for appropriate provisions, compliance therewith, and reporting the results would provide the audit committee with the greatest level of comfort.
Answer (b) is incorrect. Comprehensiveness of the code should also be evaluated.
Answer (c) is incorrect. Comprehensiveness of the code should also be evaluated.
Answer (d) is incorrect. Comprehensiveness of the code should also be evaluated.
239
Question: V1C1-0239
A review of an organization’s code of conduct revealed that it contained comprehensive guidelines designed to inspire high levels of ethical behavior. The review also revealed that employees were knowledgeable of its provisions.
However, some employees still did not comply with the code. What element should a code of conduct contain to enhance its effectiveness?
Answers
A: Periodic review and acknowledgment by all employees.
B: Employee involvement in its development.
C: Public knowledge of its contents and purpose.
D: Provisions for disciplinary action in the event of violations.
Answer Explanations
Answer (a) is incorrect. That would ensure employee knowledge of the code; that is not the issue here.
Answer (b) is incorrect. That would ensure employee acceptance of the code; that is not an issue here.
Answer (c) is incorrect. Public knowledge might impact the behavior of professionals, but it is not likely to help in the case of general employees.
Answer (d) is the correct answer. Compliance is more likely if employees know they will be taken to task for violations.
240
Question: V1C1-0240
The best reason for establishing a code of conduct within an organization is that such codes
Answers
A: Are required by the Foreign Corrupt Practices Act.
B: Express standards of individual behavior for members of the organization.
C: Provide a quantifiable basis for personnel evaluations.
D: Have tremendous public relations potential.
Answer Explanations
Answer (a) is incorrect. Codes of conduct are not required by the Foreign Corrupt Practices Act.
Answer (b) is the correct answer. In addressing ethical conduct, codes of conduct provide a model of conduct for individuals within an organization.
Answer (c) is incorrect. Codes of conduct do not provide a quantifiable basis for personnel evaluations.
Answer (d) is incorrect. Public relations value may accrue, but it is not the best reason for establishing a code of conduct.
241
Question: V1C1-0241
A company with a whistle-blowing hotline has received an anonymous tip that three senior internal auditors are in violation of the IIA Code of Ethics. The company has adopted the IIA Code as a part of its corporate ethical code.
Among the allegations against the auditors were the following:
1. Auditor 1 has a part-time job outside of office hours as a visiting professor at a local community college.
2. Auditor 1 owns stock in the employer company.
3. Auditor 1 told his next-door neighbor to start looking for a new job because an audit of the executive office indicated that the neighbor’s division was going to be closed down in about six months.
4. Auditor 2 received an item of value from a local nonprofit organization of purchasing agents for whom he gave a speech.
5. Auditor 2 received an item of value from a customer of the employer.
6. Auditor 2 has a part-time job as president of a local charitable organization.
7. Auditor 2 shared audit techniques with auditors from another company while attending a professional meeting.
8. A buyer accepted a kickback of $500 to give bid amounts to a supplier to enable that supplier to bid the contract. Auditor 2 omitted this information from the audit report since the contract amount was not material to the financial statements.
9. Auditor 3 received royalties from a publisher for authoring a professional book on internal auditing.
10. Auditor 3 has a part-time job as a real estate broker, and his real estate firm recently received a commission from the employer company.
11. Auditor 3 received an item of value from a fellow employee in the same company whose department has never been audited and whose department is not scheduled to be audited in the foreseeable future.
12. Auditor 3 did not include in an audit report that the bottlenecks in a shipping department were caused by the absence of the supervisor. The supervisor was the auditor’s friend and neighbor who had a hospitalized child requiring him to miss work off and on for several weeks.
How many of the allegations about Auditor 1 represent violations of the IIA’s Code of Ethics?
Answers
A: None.
B: One.
C: Two.
D: Three.
Answer Explanations
Answer (a) is incorrect. It is not a violation of the Code.
Answer (b) is the correct answer. According to the IIA Code of Ethics (Articles II, IV, V, VIII, and X), telling the neighbor about a plant closing (item 3) is the only violation.
Answer (c) is incorrect. It is not a violation of the Code.
Answer (d) is incorrect. It is not a violation of the Code.
242
Question: V1C1-0242
A company with a whistle-blowing hotline has received an anonymous tip that three senior internal auditors are in violation of the IIA Code of Ethics. The company has adopted the IIA Code as a part of its corporate ethical code.
Among the allegations against the auditors were the following:
1. Auditor 1 has a part-time job outside of office hours as a visiting professor at a local community college.
2. Auditor 1 owns stock in the employer company.
3. Auditor 1 told his next-door neighbor to start looking for a new job because an audit of the executive office indicated that the neighbor’s division was going to be closed down in about six months.
4. Auditor 2 received an item of value from a local nonprofit organization of purchasing agents for whom he gave a speech.
5. Auditor 2 received an item of value from a customer of the employer.
6. Auditor 2 has a part-time job as president of a local charitable organization.
7. Auditor 2 shared audit techniques with auditors from another company while attending a professional meeting.
8. A buyer accepted a kickback of $500 to give bid amounts to a supplier to enable that supplier to bid the contract. Auditor 2 omitted this information from the audit report since the contract amount was not material to the financial statements.
9. Auditor 3 received royalties from a publisher for authoring a professional book on internal auditing.
10. Auditor 3 has a part-time job as a real estate broker, and his real estate firm recently received a commission from the employer company.
11. Auditor 3 received an item of value from a fellow employee in the same company whose department has never been audited and whose department is not scheduled to be audited in the foreseeable future.
12. Auditor 3 did not include in an audit report that the bottlenecks in a shipping department were caused by the absence of the supervisor. The supervisor was the auditor’s friend and neighbor who had a hospitalized child requiring him to miss work off and on for several weeks.
How many of the allegations about Auditor 2 represent violations of the IIA’s Code of Ethics?
Answers
A: One.
B: Two.
C: Three.
D: Four.
Answer Explanations
Answer (a) is incorrect. It does not violate the IIA’s Code of Ethics.
Answer (b) is correct. According to the IIA Code of Ethics (Articles II, IV, V, VIII, and X), receiving an item of value from a customer of the employer (item 5) and failure to disclose a kickback (item 8) are the only violations.
Answer (c) is incorrect. It does not violate the IIA’s Code of Ethics.
Answer (d) is incorrect. It does not violate the IIA’s Code of Ethics.
243
Question: V1C1-0243
A company with a whistle-blowing hotline has received an anonymous tip that three senior internal auditors are in violation of the IIA Code of Ethics. The company has adopted the IIA Code as a part of its corporate ethical code.
Among the allegations against the auditors were the following:
1. Auditor 1 has a part-time job outside of office hours as a visiting professor at a local community college.
2. Auditor 1 owns stock in the employer company.
3. Auditor 1 told his next-door neighbor to start looking for a new job because an audit of the executive office indicated that the neighbor’s division was going to be closed down in about six months.
4. Auditor 2 received an item of value from a local nonprofit organization of purchasing agents for whom he gave a speech.
5. Auditor 2 received an item of value from a customer of the employer.
6. Auditor 2 has a part-time job as president of a local charitable organization.
7. Auditor 2 shared audit techniques with auditors from another company while attending a professional meeting.
8. A buyer accepted a kickback of $500 to give bid amounts to a supplier to enable that supplier to bid the contract. Auditor 2 omitted this information from the audit report since the contract amount was not material to the financial statements.
9. Auditor 3 received royalties from a publisher for authoring a professional book on internal auditing.
10. Auditor 3 has a part-time job as a real estate broker, and his real estate firm recently received a commission from the employer company.
11. Auditor 3 received an item of value from a fellow employee in the same company whose department has never been audited and whose department is not scheduled to be audited in the foreseeable future.
12. Auditor 3 did not include in an audit report that the bottlenecks in a shipping department were caused by the absence of the supervisor. The supervisor was the auditor’s friend and neighbor who had a hospitalized child requiring him to miss work off and on for several weeks.
How many of the allegations about Auditor 3 represent violations of the IIA’s Code of Ethics?
Answers
A: One.
B: Two.
C: Three.
D: Four.
Answer Explanations
Answer (a) is incorrect. It does not violate the IIA’s Code of Ethics.
Answer (b) is incorrect. It doe not violate the IIA’s Code of Ethics.
Answer (c) is correct. According to the IIA Code of Ethics (Articles II, IV, V, VI, VIII, and X), receiving royalties from a book publisher (item 9) is the only action that is not a violation, and the other three (items 10, 11, and 12) are clear violations.
Answer (d) is incorrect. It does not violate the IIA’s Code of Ethics.
