Section 3 Flashcards by Dedumo, Cyril Grace

When relatively few items of high dollar-value constitute a large proportion of an account balance, stratified sampling techniques and complete testing of the high dollar-value items will generally result in a

A. Reduction in sample size
B. Simplified evaluation of sample results
C. Larger estimale of population variability
D. Smaller non-sampling error

A. Reduction in sample size

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Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account.
The collection of a current accounts receivable of 29.000 would

A. Increase the current rabo
B. Not affect the current or quick rabios
C.Increase the quick ratio
D. Decrease the current rabo and the quick rabo

A. Increase the current rabo

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Management of a telephone and cable television enterprise has requested an engagement to evaluate its service department. The department is responsible for handling all customer inquiries regarding telephone or cable performance and assigning staff personnel to fix the problem, installing now cable lines and hooking them up to the customer's home, selling complementary products such as designer telephones, selling complementary services such as premium cable television services, and additional telephone services such as call-waiting, three-line hookup, etc.
Management is very customer oriented and has a policy that 95% of customer complaints or inquiries must be fully addressed to the customer's satisfaction within 24 hours of receiving the call. All customer service inquiries that require a service technician must be logged in by the responding service agent Although the department exists to handle customer needs, it is also viewed by management as a profit center. All revenue is generated from the sale of complementary services or equipment and from service revenue. The department has been in existence for only three years and management has not developed a mechanism to evaluate the department's performance. However, management is concerned that the department might not be meeting management's goals.
During the preliminary planning, the following information is gathered.
Current Year
Prov. Year
Prior Year
Preliminary Information
(2010)
(2009)
(2008)
Number of complaints logged
37.500
35,000
34,000
Seenon C - Performing the Engagemon
DA Por 2 - Practior of Internal Auditing - 2020
Number of service calls al customer locations
10,080
10.000
8.640
Number of customers.
1,250.000
1.100.000
1.000,000
Service call revenue
$510.000
$500.000
$432,000
Sales of complementary services of equipment
$6.250.000
$4.400.000
$3.750.000
No of Staff
Supp Staff-7
Supp Staff-7
Supp Staff-5
Technicians
Technicians 7
Technicians-7
Technicians-6
Total Service Department Costs
$1.344.000
$1.275.000
$1.056.000
The best engagement procedure to determine whether the organization is meeting its objective of satisfying 95% of customer inquiries within 24 hours is lo
A. Select a mean-per-unit statistical sample from the total population base and trace the sample to the customer complaint log to determine whether or not 95% of the sample had their complaints addressed within 24 hours
B. Develop a customer satisfaction survey and send it to all customers, and include a question about the timeliness of service.
C. Develop a customer satisfaction survey and send it to a stalistically selected sample of customers based on mean-per-unit sampling and ask them to identify the time it took for the service department to satisfactorily address their problem. Calculate a mean and standard deviation
D. Select an attribute sample from the population of logged-in customer complaints and trace lo records indicating its disposition, noting time and nature of disposition

D. Select an attribute sample from the population of logged-in customer complaints and trace lo records indicating its disposition, noting time and nature of disposition

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An example of an internal nonfinancial benchmark is

A. The percentage of customer orders delivered on time al the company’s most efficient plant.
B. A $50,000 limit on the cost of employee training programs at each of the company’s plants
C. The average actual cost per pound of a specific product al the company’s most efficient plant.
D. The labor rate of comparably skilled employees al a major competitor’s plant

A. The percentage of customer orders delivered on time al the company’s most efficient plant.

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The population from which it is drawn, the internal auditor

A. Will usually use random sampling with replacement.
B. Cannot use random sampling procedures unless the items to be sampled are available in machine-readable form.
C. Should use judgmental quantify and concentrate on high-risk items.
D. Can statistically quantify the sample results only if the sample was selected in such a way that each population item has an equal or known probability of selection.

D. Can statistically quantify the sample results only if the sample was selected in such a way that each population item has an equal or known probability of selection.

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In testing the write-off of a degenerated piece of equipment the best information about the condition of the equipment is
A. A physical inspection of the actual piece of equipment
B. The equipment manager’s statement regarding condition
C. The production department’s equipment downtime report
D. Accounting records showing maintenance and repair costs

A. A physical inspection of the actual piece of equipment

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Which of the following states an Inappropriate policy relating to the retention of engagement working papers?
A. Working papers should be disposed of when they have no further use,
B. Working papers retention schedules should be approved by legal counsel.
C. Working papers prepared for fraud, investigators should be retained indefinitely.
D. Working papers retention schedules should consider legal and contractual requirements.

C. Working papers prepared for fraud, investigators should be retained indefinitely.

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An operational engagement relating to the production function includes a procedure to compare actual costs with standard costs. The purpose of this engagement procedure is to
A. Determine the accuracy of the system used to record actual costs.
B. Assess the reasonableness of standard costs
C. Measure the effectiveness of the standard cost system.
D. Assist management in its evaluation of effectiveness and efficiency

D. Assist management in its evaluation of effectiveness and efficiency

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Windham Company has current assets of 400.000 and current liabilities of 500.000. Windham Company’s current ratio would be increased by
A. Refinancing a 100,000 long-term loan with short-term debt.
B. The purchase of 100.000 of inventory on account.
C. The payment of 100.000 of accounts payable
D. The collection of 100.000 of accounts receivable

B. The purchase of 100.000 of inventory on account.

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An important difference between a statistical and a judgmental sample is that with a statistical sample.
A. More accurate results are obtained
B. Population estimates with measurable reliability can be made
C. A smaller sample can be used.
D. No judgment is required because everything is computed according to a formula.

B. Population estimates with measurable reliability can be made

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Norton, Inc. has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
A. a previously declared stock dividend was distributed
B. the company purchased inventory on open account
C. the company wrote off an uncollectible receivable
D. the company sold merchandise on open account that earned a normal gross margin.

D. the company sold merchandise on open account that earned a normal gross margin.

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With regards to sample size, which of the following statements are true?
I. There is a direct relationship between population size and sample size
Il. The lower the acceptable risk of error, the larger the sample size will need to be.
III. The lower the tolerable error, the larger the sample will need to be
A. I only
B. Il and Ill
C. Il and Ill only
D. I and Il only

C. Il and Ill only

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The chief audit executive (CAE) of inter internal auditing of a mid-sized internal auditing organization was concerned that management might outsource the internal auditing function. There the CAE adopted a very aggressive program to promote the internal auditing department within the organization. The CAE planned to present the result to management and the audit committee and recommend modification of the Internal Audit Charter after using the the new program.

In order to save time, the CAE no longer required that a standard internal control questionnaire be completed for each audit.

Is this a violation of the Standards?

A. No. Auditors are not required to fill out internal control questionnaires on every audit.
B. No. Auditors may moit necessary procedures if there is a time constraint. It is a matter of audit judgement.
C. Yes. Internal Control should be evaluated on every audit engagement and the internal control questionnaire is the most efficient method to so.
D. Yes. Internal control should be evaluated on every audit, but the internal control questionnaire is not the mandated approach to evaluate the controls.

A. No. Auditors are not required to fill out internal control questionnaires on every audit.

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As part of the test of the effectiveness of a disaster recovery plan, the internal auditor plans to interview five employees from each of five different departments (25 employees in all). After the first few interviews, what is the best way for the internal auditor to remain attentive during the remaining interviews?
A. Ask the questions in a slightly different format and in a different sequence
B. Make up completely different questions to stay interested
C. Have the rest of the employees write down their responses
D. Interview the remaining employees in groups of four or five.

A. Ask the questions in a slightly different format and in a different sequence

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The chef audit executive (CAE) of a mid-sized internal audit activity (IAA) was concerned that management might outsource the internal auditing function Thus, the CAE adopted a very aggressive program to promote the LAA within the organization. The CAE planned to present the results lo senior management and the board and recommend modification of the IAA’s charter after using the new program. One of the recommendations was that to save time the CAE no longer required that a standard internal control questionnaire be completed for each engagement
Is this inappropriate?
A. No Internal auditors may omit necessary procedures if there is a time constraint It is a matter of professional judgment
B. Yes, Internal control should be evaluated on every engagement but the internal control questionnaire is not the mandated approach to evaluate the controls
C. No Internal auditors are not required to fill out internal control questionnaires on every engagement
D. Yes Internal control should be evaluated on every engagement and the infernal control questionnaire is the most efficient method to do so

C. No Internal auditors are not required to fill out internal control questionnaires on every engagement

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When reviewing engagement working papers, the primary responsibility of an engagement supervisor is to determine that
A. Working papers are properly referenced and kept in logical groupings.
B. Each worksheet is properly identified with a descriptive heading
C. Working papers adequately support the engagement observations, conclusions, and recommendations
D. Standard internal audit activity procedures are adhered to with regard lo working paper preparation and technique

C. Working papers adequately support the engagement observations, conclusions, and recommendations

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An adequately documented working paper should
A. Be concise but complete.
B. Contain examples of all forms and procedures used by the engagement client.
C. Not contain copies of engagement client records.
D. Follow a unique form and arrangement.

B. Contain examples of all forms and procedures used by the engagement client.

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An internal auditor’s working papers should be reviewed by the

A. Audit committee of the board
B. Management of the organization’s security division.
C. Management of the engagement client
D. Chief audit executive

D. Chief audit executive

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An internal auditor becomes concerned that fraud, in the form of payments to bogus entities, may exist Buyers, who are responsible for all purchases for specific product lines, are able to approve expenditures up to $50.000 without any other approval. Which of the following procedures would be most effective in addressing the internal auditor’s concerns?

A. Use generalized audit software to list all major vendors by product line, select a sample of paid invoices lo new vendors and examine information indicating that services or goods were received
B. Use generalized audit software to lake a random sample of all expenditures under $50.000 to determine whether they were properly approved.
C. Develop a “snapshot” technique to trace all transactions by suspected buyers
D. Use generalized audit software lo list all purchases over $50,000 to determine whether they were properly approved

A. Use generalized audit software to list all major vendors by product line, select a sample of paid invoices lo new vendors and examine information indicating that services or goods were received

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In evaluating the quality of housekeeping services performed in a large hospital. the most reliable source of evidence would be

A. Interviews with a sample of medical personnel
B. A review of housekeeping records maintained by the medical records department of the hospital
C. A review of survey forms returned by medical personnel directly to the manager of housekeeping services
D. Interviews with top hospital officials

A. Interviews with a sample of medical personnel

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An internal auditor is planning to use attribute sampling to test the effectiveness of a specific internal control related to approvals for cash disbursements. In attribute sampling, decreasing the estimated occurrence rate from 5% to 4% while keeping all other sample size planning factors exactly the same would result in a revised sample size that would be 
A. Smaller
B. Indeterminate.
C. Unchanged.
D. Larger.

A. Smaller

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In a set of audit working papers, an internal auditor notes the following statement
“The company has 80 remote warehouses and each warehouse contains from 100 to 500 products.”
From this note, the internal auditor can conclude
A. The average number of products in the warehouses is 300.
B. There are at least two warehouses with the same number of products
C. The majority of the warehouses have more than 250 products
D. The total number of products contained in all the warehouses is at least 8,400

D. The total number of products contained in all the warehouses is at least 8,400

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Engagement working papers should include
A. All working papers prepared during a previous engagement performed in the same area.
B. Documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal control
C. Copies of all procedures that were reviewed during the engagement
D. Copies of all source documents examined in the course of the engagement

B. Documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal control

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An internal auditor is assigned to perform an engagement to evaluate the organization’s insurance program, including the appropriateness of the approach to minimizing risks. The organization self-insures against large casualty losses and health benefits provided for all its employees. It is a large national entity with over 15.000 employees located in various parts of the country Il uses an outside claims processor to administer its health care program. The
organization’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling these costs
Which of the following analytical review procedures would provide the most insight into the reasonableness of the increase in health care costs?
A. Obtain a bid from another health care administrator to provide the same administrative services as the current health care administrator
B. Develop a comparison of the costs incurred with similar costs incurred by other companies
C. Obtain the government index of health care costs for the comparable period of time and compare the rate of increase with that of the cost per employee incurred by the company
D. Develop a comparison of overall health insurance costs incurred by the company

C. Obtain the government index of health care costs for the comparable period of time and compare the rate of increase with that of the cost per employee incurred by the company

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An internal auditor is considering the use of Probability-Proportional-to-Size (PPS) sampling This technique is likely to be especially beneficial if A. auditor is interested in testing the proper valuation of accounts payable B. The error rate in the population is believed to be quite large C. The auditor believes that the items to be tested are just as likely to be overstated as understated D. The auditor is interested in testing the accuracy and valuation of accounts receivable

D. The auditor is interested in testing the accuracy and valuation of accounts receivable

A. No criteria are violated

Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit A company's ROI is increased if A. Net profit margin on sales increases by the same percentage as total assets B. Sales decrease by the same dollar amount that expenses increase C. Sales increase by the same dollar amount as expenses and total assets D. Sales remain the same and expenses are reduced by the same dollar amount in a total assets increase

D. Sales remain the same and expenses are reduced by the same dollar amount in a total assets increase

The use of probability-proportional-to-size (PPS) sampling is inefficient if A. Bank accounts are being examined B. The number of sampling units is large C. Each account is of equal importance D. Statistical inferences are to be made

C. Each account is of equal importance

Which one of the following statements is false regarding surveys? A. Surveys are relatively low in cost, but the answers may not be indicative of the larger population B. Surveys are useful for collecting data for marketing purposes C. In the use of surveys, internal auditors are not concerned with a problem called non-response bias D. Surveys are a type of questionnaire that are sent to people outside the organization

C. In the use of surveys, internal auditors are not concerned with a problem called non-response bias

An auditor is performing an operational audit of the shipping der from the shipping department files On is of the days on Is that the auditor concluded that the shipping A This conclusion would negate any need to perform any need to perform tests of efficiency B. The shipping department is effective in meeting its responsibilities C. None of the above D. The number of items selected for testing is inadequate to justify the conclusion

C. None of the above

An internal auditor decides to perform an inventory turnover analysis for both raw materials inventory and finished goods inventory. The analysis would be potentially useful in A. Identifying potential problems in purchasing activities B. All of the answers are correct. C. Identifying products for which management has not been turned to changes in market demand D. Identifying obsolete inventory.

B. All of the answers are correct.

A manager responsible for the supervision and review of other Internal auditors needs the necessary skills, knowledge, and other competencies Which of the following does not describe a skill, knowledge or other competency necessary to supervise a particular engagement? A. Assuring that an engagement communication is supported and accurate relative to the information documented in the engagement working papers B. Determine that staff auditors have completed the engagement procedures and that engagement objectives have been met C. The ability to review and analyze an engagement work program to determine whether the proposed engagement procedures will result in information relevant to the engagement's objectives D. Use risk assessment and other judgmental processes to develop an engagement work schedule for the internal audit activity and present the schedule to the board

D. Use risk assessment and other judgmental processes to develop an engagement work schedule for the internal audit activity and present the schedule to the board

The best evidence to determine if excess levels of inventory are accumulating is A. Reviewing purchase orders B. Counting inventory and comparing quantity to perpetual records C. Analyzing last quarter's excess inventory reports D. Comparing current production requirements with the total of inventory on hand and on order

D. Comparing current production requirements with the total of inventory on hand and on order

Which of the following represents appropriate evidence of supervisory review of engagement working papers? I. A supervisor's initials on each working paper II. An engagement working paper review checklist III. A memorandum specifying the nature, extent, and results of the supervisory review of working papers IV. Performance appraisals that assess the quality of working papers prepared by auditors A. I. I. Ill, and IV B. I. Ill. and IV only C. Il and IV only D. I. Il. and Ill only.

D. I. Il. and Ill only.

An internal auditor's working papers should support the observations, conclusions, and recommendations to be communicated. One of the purposes of Mills requirement is to A. Provide control over working papers. B. Provide support for the internal audit activity's financial budget. C. Facilitate quality assurance reviews D. Permit the audit committee to review observations, conclusions, and recommendations

C. Facilitate quality assurance reviews

Working paper summaries, if prepared, can be used to A. Serve as an engagement communication to senior management B. Promote efficient working paper review by internal auditing supervisors C. Replace the detailed working paper files for permanent retention. D. Document the full development of engagement observations

B. Promote efficient working paper review by internal auditing supervisors

An inexperienced internal auditor notified the senior auditor of a significant variance from the engagement client's budget. The senior told the new internal auditor not to worry because 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? A. The new internal auditor should have investigated the matter fully and not bothered the senior. B. The senior used proper judgment in curtalang what could have been a wasteful investigation. C. The senior should have aided the new internal auditor in formulating a plan for accumulating appropriate information D. The senior should have halted the engagement until the variance was fully explained

C. The senior should have aided the new internal auditor in formulating a plan for accumulating appropriate information

The auditor wants to determine that the program is approving items for payment only when the purchase order, receiving report, and vendor invoice match within the tolerable 0.5%. Assume all the following suggested audit procedures would have been implemented to function over the proper time period. Which of the following computerized audit procedures would provide the most persuasive evidence as to the proper operation of the program? A. Using generalized audit software to take a random sample of purchase orders and tracing the selected items to the vendor invoice and receiving document. B. Using a test data approach al year-end by submitting mock purchase orders, vendor invoices, and receiving quantities C. Implementing an integrated test facility with auditor-submitted test items throughout the period under analysis D. Implementing a Systems Control and Audit Review File (SCARF) audit technique, which will automatically select all transactions when the purchase order exceeds a specific dollar limit

C. Implementing an integrated test facility with auditor-submitted test items throughout the period under analysis

A bank's policies require that a lending officer review all loan requests and forward those deemed appropriate for funding to the lending committee for approval. The most efficient audit procedure to determine if loans that were not funded were rejected using criteria consistent with that contained in bank policies would be to select an attributes sample of A. All loan applications, review the applications, and trace them to either a funded or rejected loan to determine if all actions taken were consistent with bank policies B. Loans not funded and review the loan applications and the reasons for rejecting them C. Loans presented to the lending committee for approval and determine if actions taken by the committee were consistent with bank policies D. Loans that were funded, review the loan applications, and determine if the funded loans complied with bank policies

B. Loans not funded and review the loan applications and the reasons for rejecting them

Internal auditors should review the means of physically safeguarding assets from losses arising from A. Misapplication of accounting principles B. Procedures that are not cost justified C. Under usage of physical facilities D. Exposure to the elements

D. Exposure to the elements

To test compliance with a policy regarding sales returns recorded during the most recent year an auditor systemically selected five percent of the actual return's recorded in March and April Returns during these two busiest months of the year represented about 25 percent of total annual returns Error projections from this sample have limited usefulness because A. The systemic selection of returns during the two months is not sufficiently random B. The small size of the sample relative to the population makes sampling risk unacceptable C. The failure to stratify the population according to sales volume results in his D. The error rates during the two busiest months may not be representative of the whole year

D. The error rates during the two busiest months may not be representative of the whole year

``` A company is simulating the actions of a government agency in which 50% of the time a recall of a product is required, 40% of the time only notification of the buyer about a potential defect is required, and 10% of the time no action on its part is required Random numbers of 1 to 100 are being used An appropriate assignment of random numbers for the recall category would be A. 11:60 B. 1.40 C. 61-100 D. 40-90 ```

A. 11:60

To be sufficient, audit evidence should be A. Directly related to the finding and include all of the elements of a finding B. Well-documented and cross-referenced in the workpapers C. Based on references that are considered reusable D. Convincing enough for a prudent person to reach the same conclusion as the and for

D. Convincing enough for a prudent person to reach the same conclusion as the and for

The internal auditor prepares working papers primarily for the benefit of A. Senior management. B. The engagement client C. The external auditor. D. The internal audit activity

D. The internal audit activity

An internal auditor has the following information available to write a memorandum on the progress of developing new engagement software for accounts receivable The programmers, who were to start on the sampling software last week, will not be able to start until next week The programmers want to purchase a commercially available software package The funds for the software are not in the budget. By using the software, the programmers expect to complete their work on schedule The purchased software will reduce programming costs by substantially more than the cost of the software The programming of the sampling techniques is expected to be completed one week early The overall project is expected to be completed on time Except for the software package and the programming costs. the project is on budget The most important message for the internal auditor to convey lo senior management is A. The programmers want to buy new software B. The project is expected to be completed on time and within budget C. The programming of the sampling techniques will be completed one week early D. The development of the new software is behind schedule

B. The project is expected to be completed on time and within budget

An assurance engagement in the quality control department is being planned. Which of the following is least likely to be used in the preparation of a preliminary survey questionnaire? A. The permanent engagement file B. Management's charter for the quality control department C. The prior engagement communications D. An analysis of quality control documents

D. An analysis of quality control documents

A. No criteria are violated

Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account The purchase of raw materials for 85.000 on open account would A. Increase net working capital B. Increase the current ratio. C. Decrease the current ratio. D. Decrease net working capital

C. Decrease the current ratio.

Which one of the following best reflects the basic elements of a data flow diagram? A. Data flows, data storage, and program flowchart B. Data source, data destination, data flows, transformation processes, and data storage C. Data flows, program flowchart, and data destination. D. Data sources, data flows, computer configurations, flowchart, and data storage

B. Data source, data destination, data flows, transformation processes, and data storage

During a review of a division's operations, an internal auditor notes that - Sales revenue has remained the same. - Inventory has increased significantly. - Gross margin has increased significantly. Which of the following statements, if true, could explain the change noted in gross margin? I. The company has developed a new manufacturing process that is much more efficient Il. Sales price per unit has increased Ill. Inventory is overstated A. I. Il and Ill only B. I and Il only C. I only D. Ill only

A. I. Il and Ill only

Working papers provide the documentary support for the internal auditor’s report. Which of the following is not a good practice for working papers? A. Working papers should be organized chronologically, i.e., with the papers prepared earliest at the front of the file. B. Working papers should be kept secure at all times to prevent accidental loss or unauthorized access. C. Internal auditors within a given organization should develop standardized methods for organization and documentation. D. Working papers should be sufficient to support the internal auditors report without additional verbal elaboration by the internal auditor.

A. Working papers should be organized chronologically, i.e., with the papers prepared earliest at the front of the file.

If an auditor’s preliminary evaluation of internal controls results in a finding that controls may be inadequate, the next step would be to A. Expand audit work prior to the preparation of an audit report. B. Implement the desired controls, C. Prepare a flowchart depicting the internal control system. D. Note an exception in the audit report if losses have occurred.

A. Expand audit work prior to the preparation of an audit report.

Which of the following best describes what should determine the extent of supervision required for a particular internal auditing engagement? A. Whether the engagement involves possible fraud on the part of management. B. The Internal audit activity’s prior experience in dealing with the particular engagement client. C. The proficiency of the internal auditors and the complexity of the engagement. D. Whether the engagement involves possible violations of laws or governmental regulations.

C. The proficiency of the internal auditors and the complexity of the engagement.

A working paper is complete when it A. Is dear, concise, and accurate. B. Complies with the internal audit activity’s format requirements. C. Satisfies the engagement objective for which it is developed. D. Contains all of the attributes of an observation.

C. Satisfies the engagement objective for which it is developed.

As used in the verification of an accounts payable schedule, which of the following ¡s best described as an analytical test? A. Comparing confirmations received from selected creditors with the accounts payable ledger. B. Comparing the balance on the schedule with the balances of prior years. C. Examining vendors’ invoices in support of selected items on the schedule D. Comparing the items on the schedule with the accounts payable ledger or unpaid voucher file.

B. Comparing the balance on the schedule with the balances of prior years.

Which of the following best describes engagement supervision? A. Supervision is most important in the planning phase of the engagement to ensure appropriate coverage. B. Supervision is a continuing process beginning with planning and ending with the conclusion of the engagement. C. Supervision is primarily exercised at the final review stage of an engagement to ensure the accuracy of the engagement communications, D. The manager of each engagement has the ultimate responsibility for supervision

B. Supervision is a continuing process beginning with planning and ending with the conclusion of the engagement.

Which of the following concepts distinguishes the retention of computerized engagement working papers from that of the traditional hardcopy form? A. Computerized flies can be used in engagement procedures, B. Work programs can be standardized to eliminate the need for a survey at each location. C. Informational support for all observations is copied and provided to local management during the closing conference and to each person receivin9 the final engagement communication. D. Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures.

D. Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures.

The primary objective of maintaining security over working papers is to A. Facilitate engagements by external auditors. B. Prohibit engagement clients from seeing working papers. C. Facilitate subsequent engagements in the same department. D. Prohibit unauthorized changes or removal of information.

D. Prohibit unauthorized changes or removal of information.

Sampling is most useful when the internal auditor A. Is concerned with overstatements. B. Expects to find several material misstatements in the sample. C. Is testing the accounts payable balance. D Cannot cumulatively arrange the population items

A. Is concerned with overstatements.

Which of the following procedures should be performed as part of a preliminary review in an audit of a banks investing and lending activities? A. Review reports of audits performed by regulatory and outside auditors since the last internal audit, B. Review minutes of the board of director& meetings to identify changes in policies affecting investments and loans. C. interview management to identify changes made in policies regarding investments or loans. D. All of the above.

D. All of the above.

A chain retailer has outlets in forty non-overlapping through similar local markets. Recently, the retailer conducted its largest promotional campaign ever. Each outlet was unrestricted in allocating its promotional budget between local print, radio, or television advertising or in underspending the budget. The internal auditor wishes to evaluate the effectiveness of these tactics. In this case A. Time series analysis should be used since the promotion occurred over time. B. Multiple regression analysis may be an effective tool for modeling the relationship between sales and promotional tactics. C. Since the relationship between promotional expenditures and sales is probably non-linear, regression analysis should not be used. D. Discriminant analysis would be the best tool for discriminating between effective and ineffective promotional tactics

B. Multiple regression analysis may be an effective tool for modeling the relationship between sales and promotional tactics.

An organization uses electronic data interchange and on-line-systems rather than paper-based documents for purchase order, receiving reports, and invoices. Which of the following audit procedure would be an auditor use to determine if invoices are paid only for goods received and approved prices? A. Select a monetary-unit sample of accounts payable and confirm the amounts directly with the vendor. B. Select a statistical sample of major vendors and trace the amounts paid to specific invoices. C. Use generalized audit software to select a sample of payments and match purchase orders, invoices, and receiving reports stored on the computer using a common reference. D. Use generalized audit software to identify all receipts for a particular day and trace the receiving reports to checks issued.

C. Use generalized audit software to select a sample of payments and match purchase orders, invoices, and receiving reports stored on the computer using a common reference.

Which of the following ¡s the primary advantage of using an internal control questionnaire? A. It reduces the risk of overlooking important aspects of the system. B. It forces an internal auditor to acquire a full understanding of the system. C. The negative responses indicate the only areas needing further engagement work. D. It provides a clear picture of the interrelationships that exist between the various controls.

A. It reduces the risk of overlooking important aspects of the system.

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be convincing enough for a prudent person to reach the same decision. B. Be based on references that are considered reliable. C. Bear a direct relationship to the finding and Include all of the elements of a finding. D. Be well documented and cross-referenced in the working papers.

A. Be convincing enough for a prudent person to reach the same decision.

When testing the year end balance for trade accounts payable, the use of a software package to identify unauthorized vendors in a vendor database is most valuable in developing tests to determine A. Accuracy of the receiving cutoff used. B. Existence of valid recorded liabilities. C. Valuation of recorded transactions. D. Ownership of the recorded payables.

B. Existence of valid recorded liabilities.

In deciding whether recorded sales are valid, which of the following items of information is most reliable? A. A copy of the customer’s purchase order. B. The shipping document, independent bill of lading, and the invoice for the merchandise. C. A memorandum from the director of the shipping department stating that another employee verified the personal delivery of the merchandise to the customer. D. Accounts receivable records showing cash collections from the customer.

B. The shipping document, independent bill of lading, and the invoice for the merchandise.

An auditor suspects that a human resources computer system contains erroneous data, such as Invalid job classifications, ages in excess of retirement age, and invalid ethnic classifications. The best approach to determine the extent of the potential problem would be to A. Review and test access controls to ensure that access is limited to authorized individuals. B. Submit test data to test the effectiveness of edit controls over the input of data C. Use generalized audit software to identify all data that is not within specified parameters, D. Use generalized audit software to select a sample of employee records. Use the sample to determine the validity of data Items and project the result to the entire system

C. Use generalized audit software to identify all data that is not within specified parameters,

In which of the following situations would probability-proportional-to-size (PPS) sampling be more effective and efficient than ratio estimation? A. The population has a low degree of variability in dollar amount. B The population has a high degree of variability in dollar amount, C. The population is expected to contain few differences between the recorded amount and the actual amount. D. The population contains a large number of differences between the recorded amount and the actual amount.

C. The population is expected to contain few differences between the recorded amount and the actual amount.

Working papers often contain information of potential future value. A retention policy for working papers should be devised after consultation with A. The bonding organization. B. Engagement clients. C. Legal counsel, D. The board,

C. Legal counsel,

An organization uses electronic data interchange (EDI) and online systems rather than paper-based documents for purchase orders, receiving reports, and invoices. Which of the following audit procedures would an auditor use to determine if invoices are paid only for goods received and at approved prices? A Take a monetary-unit sample of accounts payable and confirm the amounts directly with the vendors. B. Use generalized audit software to identify all receipts for a particular day and trace the receiving reports to checks issued. C. Using a statistical sample of major vendors, trace the amounts paid to specific invoices. D. Use generalized audit software to select a sample of payments and match purchase order, invoice, and receiving reports stored on the computer using a common reference.

D. Use generalized audit software to select a sample of payments and match purchase order, invoice, and receiving reports stored on the computer using a common reference.

Which of the following should be identified as a deficiency by an engagement supervisor who is reviewing working papers? A. A memorandum recorded in the working papers explained why an engagement work program step was omitted. B. A letter to the engagement client outlining the scope of the enga9ement was recorded in the working papers. C. A draft communication concerning an engagement observation recorded in the working papers omitted the criteria used for evaluation, D. A memorandum recorded In the working papers explained why the time budget for a part of the engagement was exceeded.

C. A draft communication concerning an engagement observation recorded in the working papers omitted the criteria used for evaluation,

On an audit of the purchasing department, an internal auditor receives information from an employee alleging that a buyer for the company favors a particular supplier. The best source of evidence to evaluate this allegation is A. Analyzing supplier ratings. B. Reviewing the file of open purchase orders. C. Discussing purchases from the supplier with the buyer. D. Reviewing purchase files for all recent awards to supplier.

D. Reviewing purchase files for all recent awards to supplier.

Which of the substantive fieldwork procedures presented below provides the best information about completeness of recorded revenues? A. Reconciling the sales journal to the general ledger control account. B. Vouching shipping records to the customer order file. C. Reconciling shipping records to recorded sales. D. Vouching charges made to the accounts receivable subsidiary ledger to supporting shipping records.

C. Reconciling shipping records to recorded sales.

The chief audit executive (CAE) is reviewing some of the basic concepts inherent In the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months In the internal audit activity (IAA), they will move back to line positions. Each of them has fairly extensive organizational experience and Is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and clearing comments, The CAE asks them to indicate the informational criteria that are violated. The organization is required to comply with certain specific standards related to environmental issues. One of these standards requires that certain hazardous chemicals be placed in certified containers for shipment to a governmental disposal site. The container must bear an Inspection seal signed within the last 90 days by a governmental Inspector. Based on the following tests, the internal auditor concluded that the organization was in compliance for the engagement period: I. Determine from each chemical loading supervisor that compliance requirements are understood Il. inspect sealed containers for evidence of leakage. lii. Ask chemical loading personnel about procedures performed. Which of the following informational criteria, if any, is violated? A. Sufficiency. B. No criteria are violated. C. Relevance. D. Reliability.

A. Sufficiency.

The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months In the Internal audit activity (1M). they will move back to line positions. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers. holding back the review notes and clearing comments. The CAE asks them to indicate the informational criteria that are violated. The organization’s inventories are under the administration of three production managers. The internal auditors perform a standard limited test of finished goods inventory balances every year. During this year’s engagement concerning inventories, the internal auditors noted finished goods inventories were abnormally high, sales were consistent with prior years, and returns and allowances appeared normal, The internal auditors performed the usual random sample recount of several finished goods Inventory cards without discrepancy and then extended the testing to include 10 raw materials and 10 work-in-process cards, noting no exceptions. The following statement was included in the engagement working papers: “Our standard test of finished goods Inventories revealed no exceptions to the inventory count. We extended our tests this year to include both raw materials and work-in-process without exception. At the time of our engagement, the supervising Inventory managers were not available: however, the division secretary indicated that performance standards were on rile. It appears that there Is adequate awareness and understanding of the performance standards.” ``` Which of the following informational criteria is not violated? A. Reliability. B. All criteria are violated. C. Relevance. D Sufficiency. ```

B. All criteria are violated.

The preliminary survey phase of an engagement to evaluate recruiting activity shows that hotel and airfare expenses are approximately equal. Both hotel and airline arrangements are made by the recruiting group secretary. Based on this information, the scope of fieldwork should include A. Obtaining assurance that candidates’ legal rights are protected during the course of the Interview experience. B. Considering competitive factors involved in the selection of hotel accommodations. C. Recommending that someone outside the recruiting group make hotel and airline reservations. D. Comparing the detail of hotel charges per candidate’s expense reports to copies of hotel bills obtained directly from hotel sources.

B. Considering competitive factors involved in the selection of hotel accommodations.

The chief audit executive (CAE) is responsible for engagement supervision. The most important form of supervision during the fieldwork phase of engagement involves A. Making sure that communications are accurate, objective, clear, concise, constructive, and timely. B. Appraising each internal auditor’s performance at least annually. C Providing suitable instructions to subordinates at the outset of the engagement and approving the engagement program D. Seeing that the approved engagement work program is carried out unless changes are both justified and authorized.

D. Seeing that the approved engagement work program is carried out unless changes are both justified and authorized.

The primary purpose of an engagement working paper prepared in connection with payroll expense is to A. Provide documentation to support payroll taxes due. B. Verify the work done by the internal auditor. C. Record the names of all employees. D. Record payroll data and analyses to support reported recommendations.

D. Record payroll data and analyses to support reported recommendations.

``` The degree to which the auditor Is justified in believing that the estimate based on a random sample will fall within a specified range Is called A. Precision. B. Sampling risk. C. Non-sampling risk. D. Confidence level. ```

D. Confidence level.

In developing an engagement work program and communicating engagement results, the internal auditor should be alert for a condition that might reflect low materiality of an observation but high relative risk to the overall operation of the organization. Which of the following conditions would reflect such a situation? A. No written quality-assurance procedure exists for a high-volume production line Item with low unit cost that has a 15% scrap experience. B. The cashier is commingling personal funds with a $1.000 imprest cash fund. C. Levels of approval authority for purchasing personnel are not set forth in the manual of purchasing procedures. D. Many random clerical errors arise from the desire of employees to meet production quotas.

A. No written quality-assurance procedure exists for a high-volume production line Item with low unit cost that has a 15% scrap experience.

Which of the following activities does not constitute engagement supervision? A. Preparing a preliminary engagement work program. B. Ensuring that engagement communications meet appropriate criteria, C. Providing appropriate instructions to the internal auditors. D. Reviewing engagement working papers.

A. Preparing a preliminary engagement work program.

If an internal auditor is sampling to test compliance with a particular company policy, which of the following factors should not affect the allowable level of sampling risk? A. The acceptable level of risk of making an incorrect audit conclusion. B. The cost of performing auditing procedures on sample selections. C. The adverse consequences of noncompliance. D. The experience and knowledge of the auditor.

D. The experience and knowledge of the auditor.

Which of the following most completely describes the appropriate content of working papers? A. Purpose, criteria, techniques, and conclusions B. Audit subject, purpose. sampling information, and analysis. C. Engagement objectives, procedures, and conclusions. D. Engagement objectives, procedures, facts, conclusions, and recommendations.

D. Engagement objectives, procedures, facts, conclusions, and recommendations.

Competent evidence is best defined as evidence which A. Proves an intermediate fact, or group of facts, from which still other facts can be interred. B. Is reasonably tree from error and bias and faithfully represents that which it purports to represent. C. Is supplementary to other evidence already gathered and which tends to strengthen or confirm it. D. Is obtained by observing people. property, and events.

B. Is reasonably tree from error and bias and faithfully represents that which it purports to represent.

Which of the tests provides the least significant information when testing for suspected fraudulent sales? A. Confirming sales transactions with customers and investigating nonresponses. B. Performing analysis of write-offs and sales returns, and comparing the amounts over the past several years. C. Performing analytical tests of sales by comparing sales and gross margins over time, D. Tracing a sample of Inventory removal slips from inventory through billing to the sales journal.

D. Tracing a sample of Inventory removal slips from inventory through billing to the sales journal.

While interviewing a data input clerk, an auditor identifies a potentially significant weakness in a system The auditor should A. Avoid any further mention of the weakness. B. Ask the clerk about the weakness and determine immediately ¡f the finding should be reported. C. Schedule a second interview and use other means to determine if the weakness actually exists. D. Ask indirect questions that will help elicit more factual information relating to the potential weakness.

D. Ask indirect questions that will help elicit more factual information relating to the potential weakness.

Which of the following are least valuable in predicting the amount of uncollectible accounts for an organization? A Published economic indices indicating a general business downturn. B. Total monthly sales for each of the past six months. C. Dollar amounts of accounts actually written of? by the organization for each of the past six months. D. Written forecasts (rom the credit manager regarding expected future cash collections.

D. Written forecasts (rom the credit manager regarding expected future cash collections.

The number-of-days-receivables-held ratio may be understated if the company A. Does not use average receivables In the ratio calculation. B. Uses average receivables in the ratio calculation. C. Uses a natural business year for its accounting period. D. Uses a calendar year for its accounting period.

D. Uses a calendar year for its accounting period.

An Internal auditor is planning to use PPS (Probability-Proportional-Size) sampling for testing the dollar value of a large accounts receivable population. The advantages of using PPS sampling include all of the following except A. It is an efficient model for establishing that a low error rate population is not materially misstated. B. It does not require the normal distribution approximation required by variables sampling. C. It can be applied to a group of accounts because the sampling units are homogenous. D. it results in a smaller sample size than classical variables sampling for larger numbers of misstatements.

D. it results in a smaller sample size than classical variables sampling for larger numbers of misstatements.

The chief audit executive (CAE) is reviewing the working papers produced by an internal auditor during a fraud investigation. Among the items contained in the working papers is a description of an item of physical information. Which of the following is the most probable source of this item of information? A. Computing variances. B. Interviewing people. C. Observing conditions. D. Examining records,

C. Observing conditions.

Which one of the following statements about sampling is hue? A. For a given sample size, a simple random sample always produces the most representative sample B. For very large populations, the absolute size of the sample has more Impact on the precision of its results than does its size relative to its population. C. A larger sample Is always more representative of the underlying population than a smaller sample D. The limitations of an incomplete sample frame can almost always be overcome by careful sampling techniques

B. For very large populations, the absolute size of the sample has more Impact on the precision of its results than does its size relative to its population.

A supportive behavior that a listener, such as an auditor or a supervisor, can use to encourage a speaker would be to A. Look away from the speaker to avoid any intimidation. B. Stop other activity or work while the person is talking. C. Interject a similar incident or experience. D. Not respond verbally until the speaker stops talking.

B. Stop other activity or work while the person is talking.

During an audit of a defense contract, the auditor becomes concerned with the possibility of inappropriate charges to overhead. However, when examining the underlying documentation of expenses, the auditor finds that all expenditures are properly supported. All billings show total cost and the application of a percentage overhead rate that appears consistent with previous years. Assume that the contract also states that the contractor must comply with all applicable environmental regulations because the government is responsible for fines for such regulations. The governmental auditor finds that the environmental protection agency has recently performed an environmental audit of the contractor and found numerous, but minor, deviations from current environmental law. However, there was one major item: the company was not meeting the standard for emissions into the atmosphere. The auditor contacts the environmental regulators and finds the company has acted responsibly. It has fixed all the minor findings and has approved a large capital expenditure to reduce the emission of toxic wastes into the air. Which of the following statements regarding these findings are correct? I. Materiality of the findings should be based on the potential amount of fines that could be imposed, not on the fact that most of the deviations were minor in nature, lI. The auditor should report the problem with toxic emissions but should not report the other Items because they were of a minor nature. Ill. Because the report will have a significant effect on the government, the auditor should report the toxic waste emissions only If the nature and type can be substantiated. A. Il only. B. I only. C. I, Il, and lii. D. I and Ill only.

B. I only.

``` An auditor performed in audit of an account balance. At the end of the review the auditor concluded that the sample results supported the conclusion that the recorded balance was correct. But, in fact, the balance was materially misstated. This illustrates the risk of A. Assessing control risk too high. B. Incorrect rejection. C. Assessing control risk too low. D. Incorrect acceptance. ```

D. Incorrect acceptance.

Supervision of an internal audit engagement should include A. Appraising each internal auditor’s performance on at least an annual basis B. Assigning staff members to the particular engagement. C. Determining the scope of the engagement. D. Determining that engagement working papers adequately support the engagement observations.

D. Determining that engagement working papers adequately support the engagement observations.

The primary purpose of an internal auditor’s working papers is to A. Serve as a means with which to prepare the financial statements, B. Provide documentation of the planning and execution of engagement procedures performed. C. Document weaknesses in internal control with recommendations to management for improvement. D. Comply with the Standards.

B. Provide documentation of the planning and execution of engagement procedures performed.

During an audit of a defense contract, the auditor becomes concerned with the possibility of inappropriate charges to overhead However, when examining the underlying documentation of expenses, the auditor finds that all expenditures are properly supported, All billings show total cost and the application of a percentage overhead rate that appears consistent with previous years. Assume the contract with the defense contractor states that the government will not pay for costs associated with waste or inefficiency on the part of the contractor. Which of the following sources of evidence would be least persuasive regarding potential waste and inefficiency on the part of the contractor? A. Management certification that ¡t has not incurred waste or inefficiencies that are not allowed in the contract. B. A walk-through of the contractor’s manufacturing and development facilities. C. A comparison of contract expense with that of similar projects in the past or similar projects with other companies. D. An examination of the nature of expenses incurred to determine their intent and relationship to the contract.

A. Management certification that ¡t has not incurred waste or inefficiencies that are not allowed in the contract.

A. Management certification that it has not incurred waste or inefficiencies that are not allowed in the contract.

Governmental auditors have been increasingly called upon to perform audits to determine whether or not individuals are getting extra social welfare payments. One common type of welfare fraud is individuals receiving more than one social welfare payment. This is often accomplished by filing multiple claims under multiple names, but using the same address. Which Of the following computer audit tools and techniques would be most helpful in identifying the existence of this type of fraud? A. Integrated test facility B. Tagging and tracing, C. Generalized audit software. D. Spreadsheet analysis

C. Generalized audit software.

One criticism of the banking industry is that loan committees were not properly carrying out their function of examining proposed loans, determining that proper collateral exists. and assessing the associated risk before approving the loan. In gathering evidence to determine if the loan committee is operating effectively. the auditor should A. Examine individual bans for signatures of the committee members and determine the amount of loans made during each meeting and an approximation of time spent in approving the loans. B. Reconcile the total amount of loans made plus those rejected with the total amount of loans submitted to the committee for approval. C. Interview loan officers to see if their individual loan recommendations were followed. D. All Of the above,

A. Examine individual bans for signatures of the committee members and determine the amount of loans made during each meeting and an approximation of time spent in approving the loans.

All Of the following are examples Of benchmarking standards except A. A comparison with a similar unit within the same company that has been successful in implementing the process or processes being studied, B. The best performance Of the unit in comparable past periods, C. The performance of the unit during the previous year. D. The best performance Of a competitor with a similar operation

C. The performance of the unit during the previous year.

The preliminary survey indicates that severe staff reduction at the engagement 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 6 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 internal auditor should A. Suspend further engagement work since the observations are obvious and communicate the final results. B. Discuss these observations with management of the internal audit activity (IAA) to determine whether further work would be an efficient use of internal auditing resources at this time. C. Proceed with the scheduled engagement but add personnel based on the expected number of observations and anticipated lack of assistance from local accounting management. D. Research temporary help agencies and evaluate the cost and benefit of outsourcing needed services.

B. Discuss these observations with management of the internal audit activity (IAA) to determine whether further work would be an efficient use of internal auditing resources at this time.

Which one of the following statements is true regarding two random samples drawn in the same way from the same population, one of size 30 and one of size 300? A. The smaller sample will have a smaller 95% confidence interval for the mean. B. The smaller sample will, on the average, produce a lower estimate Of the variance Of the population. C. The two samples would have the same expected value. D. The larger sample is more likely to produce a large sample mean.

C. The two samples would have the same expected value.

Retail Partners Inc., which operates eight discount store chains, is seeking to reduce the costs of its purchasing activities through reengineering and a heavier use of electronic data interchange (EDI). Which of the following benchmarking techniques would be appropriate in this situation? I. A comparison of the purchasing costs and practices of each of Retail Partners' store chains to identify their internal "best in class.' II. A comparison of the practices Of Retail Partners to those Of Discount City, another retailer, whose practices are Often considered "best in class," III. A comparison of the practices of Retail Partners to those of Capital Airways, an international airline, whose practices are often considered "best in class.' IV. An in-depth review of a retail trade association publication on successful electronic data interchange applications. A, Il and IV only, B. I, II, Ill, and IV. C. I and IV only. D. I and Il only.

B. I, II, Ill, and IV.

Studies have shown that the typical manager spends about 9% of a working day reading, 16% writing, 30% talking. and 45% listening. Listening effectiveness is best increased by A. Waiting to review key concepts until the speaker is through talking. B. Tuning out messages that do not seem to fit the meeting purpose. C. Factoring in biases to evaluate the information being given. D. Resisting both internal and external distractions.

D. Resisting both internal and external distractions.

Which Of the following is a disadvantage of using an integrated test facility (ITF) when auditing a computer application? A. The ITF technique cannot be used with simulated master file records. during application testing. B. The ITF may be useful in verifying the correctness of account balances, but not in determining the presence Of processing controls. C. The test transactions could enter the live data environment. D. The test data must be processed by information technology staff with substantial technical skills,

C. The test transactions could enter the live data environment.

Which of the following documents would provide the best evidence that a purchase transaction has actually occurred? A. Ordering department's original requisition for the goods. B. Suppliers invoice for the procured goods. C. Cancelled check issued in payment of the procured goods. D. Receiving memorandum documenting the receipt of the goods.

D. Receiving memorandum documenting the receipt of the goods.

The preliminary survey should accomplish a number of things, and it allows the internal auditor to A. Provide a means of evaluating the internal auditor's competence, B. Become familiar with the clients overall activities. C. Provide a means of controlling and evaluating the progress of the engagement. D. Establish the engagement objectives.

B. Become familiar with the clients overall activities.

The internal auditor is most likely to make working papers available to the engagement client when A. Fraud is suspected. B. The internal auditor considers the content noncontroversial. C. Engagement client comments are needed to evaluate significance and accuracy. D. The internal auditors have recorded specific damaging comments.

C. Engagement client comments are needed to evaluate significance and accuracy.

When current file working papers are no longer of use to the internal audit activity (IAA), they should be A. Transferred to the custody of the engagement client for ease of future records, B. Placed in the custody of the organizational legal department for safekeeping. C. Transferred to the permanent file. D. Destroyed.

D. Destroyed.

A chain retailer has outlets in forty non-overlapping though similar local markets. Recently. the retailer conducted its largest promotional campaign ever. Each outlet was unrestricted in allocating its promotional budget between local print, radio. or television advertising or in underspending the budget. The internal auditor wishes to evaluate the effectiveness of these tactics. In this case A. Discriminant analysis would be the best tool for discriminating between effective and promotional tactics. B. Multiple regression analysis may be an effective tool for modeling the relationship between sales and promotional tactics. C. Time series analysis should be used since the promotion occurred over time. D. Since the relationships between promotional expenditures and sales is probably non-linear, regression analysis should not be used.

B. Multiple regression analysis may be an effective tool for modeling the relationship between sales and promotional tactics.

A company makes a practice of investing excess short-term cash in marketable securities. A reliable test of the valuation of those securities would be a A. Calculation of the premium or discount amortization B. Comparison Of cost data with current market quotations. C. Recalculation Of investment carrying value using the equity method. D. Confirmation of securities held by the broker.

B. Comparison Of cost data with current market quotations.

Which type of working paper summary is typically used to consolidate numerical data scattered among several schedules? A, Results summaries. B. Segment summaries. C. Statistical summaries. D. Pyramid summaries.

C. Statistical summaries.

An internal auditor is assigned to perform an engagement involving the organization's insurance program, including the appropriateness of the approach to risk management. The organization self-insures against large casualty losses and health benefits provided for all its employees. The organization is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The organization's medical costs have been rising by approximately 8% per year for the past 5 years and management is concerned with controlling these costs. Assume that the auditor wishes to test whether the health care processor is meeting contract requirements regarding the proper payment or denial of employee claims, the best audit approach would be to take a sample of A. Employees and interview them regarding their health Care experiences with proper and timely payment by the health care processor. B. Claims filed with the health care processor and determine whether they were either appropriately paid or denied. C. Claims paid by the health care processor and engage an outside expert to analyze whether the claims were appropriately processed, D. Claims paid by the health care processor and determine whether all the payments were proper.

B. Claims filed with the health care processor and determine whether they were either appropriately paid or denied.

When engagements are performed for the internal audit activity (IAA) by non-staff members, the chief audit executive (CAE) is responsible for A. Providing appropriate supervision from the beginning to the conclusion of the engagement. B, None of the work performed by those outside the internal audit activity. C. Ensuring that the engagement communications are accurate, objective, clear, concise, constructive, and timely. D. Reviewing the engagement work programs for approval.

A. Providing appropriate supervision from the beginning to the conclusion of the engagement.

Which Of the following examples of audit evidence is the most persuasive? A. Canceled checks written by the treasurer and returned from a bank. B. Real estate deeds, which were properly recorded with a government agency. C. Vendor invoices filed by the accounting department, D. Time cards for employees that are stored by a manager.

B. Real estate deeds, which were properly recorded with a government agency.

``` The correlation coefficient that indicates the weakest linear association between two variables is A. -0.73 B. -0.11 c. 0.35 D. 0.12 ```

B. -0.11

When an internal auditor uses PPS (Probability-proportional-to-Size) statistical sampling to examine the total value of invoices, each invoice A. Can be represented by no more than one dollar unit. B. Has an equal probability of being selected. C. Has an unknown probability of being selected. D. Has a probability proportional to its dollar value Of being selected.

D. Has a probability proportional to its dollar value Of being selected.

When evaluating the propriety of a payment to a consultant, the most appropriate information for the internal auditor to obtain and review is A. Analytical information in the form Of comparisons with prior years' expenditures on consultants. B. Oral information in the form Of opinions Of operating management. C. Documentary Information in the form of a contract. D. Physical information in the form Of the consultant's report,

C. Documentary Information in the form of a contract.

When determining the retention period for the working papers of a contract engagement, it is best to A. Check with the accounting department because accounting records are involved. B, Review the organization's policy manual developed by the records management area for the section regarding business records. C. Follow the contractor's own record retention policies. D. Seek the assistance of the legal department to assure compliance with contract provisions.

D. Seek the assistance of the legal department to assure compliance with contract provisions.

``` Of the following techniques could be used to estimate the standard deviation for a sampling plan? A. Pilot sample. B. Difference estimation. C. Discovery sampling. D. Regression. ```

A. Pilot sample.

Working papers contain a record of engagement work performed and much confidential information. They are the property of the internal audit activity (IAA), which is responsible for their security. Which of the following is the most important control requirement for working papers? A. Purge working papers periodically of materials that are considered confidential. B. Allow access to working papers only to internal audit activity personnel. C. Make the administrative section Of the internal audit activity responsible for the security of working papers. D. Provide for the protection of working papers at all times and to the extent appropriate.

D. Provide for the protection of working papers at all times and to the extent appropriate.

During an engagement involving the production cycle, you noted a control procedure requiring the accounting clerk to 100k up the materials invoice and match the materials unit costs with the unit cost of materials shown on the job cost sheet for all government contract work. This procedure is designed to meet the control objective of A. Authorization. B. Classification. C. Valuation D. Validity.

C. Valuation

``` An auditor for the state highway and safety department needs to estimate the average highway weight of tractor-trailer trucks using the state's highway system. Which estimation method must be used? A. Ratio. B. Probability proportional to size. C. Mean-per-unit. D. Difference, ```

C. Mean-per-unit.

An auditor, experienced in air-quality issues. discovered a significant lack of knowledge about legal requirements for controlling air emissions while interviewing the manager of the environmental, safety, and health (ESH) department. The auditor should A. Take note of the weakness and direct additional questions to determine the potential effect of the lack of knowledge. B. Share extensive personal knowledge with the ESH manager. C. Report potential violations in this area to the appropriate regulatory agency. D. Alter the scope of the audit to focus on activities associated with air emissions.

A. Take note of the weakness and direct additional questions to determine the potential effect of the lack of knowledge.

The function of working papers include of the following except A. To aid in the professional development of the operating staff or teach skills to non-auditors. B, To explain all audit verification symbols properly. CIA Part 2 - Practice of Internal Auditing - 2020 C. To facilitate third-party reviews, D. To provide the principal evidential support for the auditor's report.

A. To aid in the professional development of the operating staff or teach skills to non-auditors.

A good working paper for a bank reconciliation should include (either directly or through cross reference) all of the following except A. A legend explaining all tick marks employed B. A list of all deposits made during the period in question. C. A list of outstanding checks. D. The cash balance per the general ledger as of the reconciliation date.

B. A list of all deposits made during the period in question.

A new staff internal auditor was told to perform an engagement in an area with which the internal auditor was not familiar. Because of time constraints, no supervision was provided. The assignment represented a good learning experience. but the area was clearly beyond the internal auditor's competence. Nonetheless, the internal auditor prepared comprehensive working papers and communicated the results to management. In this situation, A. The chief audit executive has not violated The IIA Code Of Ethics because it does not address supervision, B. The internal audit activity violated the Standards by not providing adequate supervision. C. The Standards and The IIA Code of Ethics were followed by the internal audit activity. D. The internal audit activity violated the Standards by hiring an internal auditor without proficiency in the area.

B. The internal audit activity violated the Standards by not providing adequate supervision.

An internal auditing manager is reviewing the engagement working papers prepared by the staff. Which Of the following review comments is true? A. Including copies of all the forms and directives of the engagement client constitutes over documentation. B, Each working paper should include a statement regarding the engagement clients cooperation, C. Conclusions need not be documented in the working papers when the engagement objectives are achieved. D. Each working paper should include the actual and the budgeted times related to such engagement work.

A. Including copies of all the forms and directives of the engagement client constitutes over documentation.

The internal auditor is concerned with the overall valuation of inventory. Rank the following sources of engagement information from most persuasive to least persuasive in addressing the assertion as to the valuation of inventory. 1. Calculate inventory turnover by individual product. 2. Assess the net realizability of all inventory items with a turnover ratio of 2.0 or less by interviewing the marketing manager as to the marketability Of the product. 3. Calculate the net realizable value (NRV) Of all inventory products (using software to calculate NRV based on the last selling price) and compare NRV with cost. 4. Take a statistical sample of inventory and examine the latest purchase documents (invoices and receiving slips) to calculate inventory cost. A. Il, Ill, IV, l. B. l, Il, Ill, IV. C. l, IV, Ill. D. IV, l, Ill, ll.

D. IV, l, Ill, ll.

Generalized Audit Software (GAS) is designed to allow auditors to A. Insert special audit routines into regular application programs. B. Select sample data from files and check computations. C. process test data against master files that contain real and fictitious entities, D. Monitor the execution of application programs.

B. Select sample data from files and check computations.

Which of the following is the most important if working papers are to have the characteristics that will ensure that they achieve their primary purposes? A. Working papers must be properly indexed and cross-referenced to the draft final engagement communication. B. Working papers must be arranged in logical order following the engagement work program sequence. C. Working papers must be of standard format and standard content. D. Working papers must provide sufficient, reliable, and useful information to support the final engagement communication.

D. Working papers must provide sufficient, reliable, and useful information to support the final engagement communication.

An internal auditor is evaluating the advertising function. The organization has engaged a medium-sized local advertising agency to place advertising in magazine publications. As part of the review of the engagement working papers, the internal auditing supervisor is evaluating the information collected. The internal auditor reviewed the language in the advertising for its legality and compliance with fair trade regulations by interviewing the organization's advertising manager, the product-marketing director (who may not have been objective), and five of the organization's largest customers (who may not have been knowledgeable). The supervisor can justifiably conclude that the information is A, Reliable. B. Conclusive. C. Insufficient. D. Irrelevant,

C. Insufficient.

The engagement team leader is least likely to have a primary role in A. Reviewing the working papers. B. preparing the critique sheet for the engagement. C. Updating the permanent files. D. Allocating budgeted engagement hours among assigned staff,

C. Updating the permanent files.

The best control over the work on which internal auditors' opinions are based is A. Staffing of internal audit activities. B. Supervisory review of all engagement work. C. Preparation of time budgets for internal auditing activities. D. Preparation of engagement working papers,

B. Supervisory review of all engagement work.

The best description of the principal purpose for retaining working papers is to A. Provide a basis for supervisory review. B. Maintain the engagement work program for reuse in the next engagement. C. Help perform the engagement in an orderly fashion. D. Provide support for the final engagement communication.

D. Provide support for the final engagement communication.

``` Statistical sampling is appropriate to estimate the value of an auto dealer's 3000 line-item inventory because statistical sampling is A. Thorough and accurate. B. Complete and precise. C. Reliable and objective. D. Thorough and complete. ```

C. Reliable and objective.

Which of the following must be known to evaluate the results of an attribute sample? A. Estimated dollar value of the population. B. Actual size of the sample selected. C. Standard deviation of the sample values. D. Finite population correction factor.

B. Actual size of the sample selected.

Which Of the following is one purpose of an embedded audit module? A. Review the contents of a specific portion of computer memory. B. Verify the correctness of account balances on a master file. C. Enable continuous monitoring of transaction processing. D. Identify program code that may have been inserted for unauthorized purposes.

C. Enable continuous monitoring of transaction processing.

Identification Of an appropriate population to sample is dependent upon audit Objectives. A population of entries in an asset repairs expense file would be an appropriate population if the audit objective is to determine whether A, Expenditures for fixed assets have been recorded in the proper period. B. Expenditures for fixed assets have been improperly expensed. C. Non-capital repair expenditures have been properly charged to expense. D. Non-capital repair expenditures have been recorded in the proper period.

B. Expenditures for fixed assets have been improperly expensed.

In preparing a sampling plan for an inventory pricing test, which of the following describes an advantage of statistical sampling over nonstatistical sampling? A. Minimizes nonsampling risk. B. Requires nonquantitative expression of sample results. C. Provides a quantitative measure of sampling risk. D. Reduces the level of tolerable error.

C. Provides a quantitative measure of sampling risk.

Which Of the following is an appropriate audit procedure that may be used to test the adequacy of application controls over computer-based accounts payable? A. Manually comparing vendor invoice numbers with those listed on computer generated lists Of accounts payable to assess the effectiveness of computer-based sequence checks. B, Observing computer library and operations area to Obtain evidence to support an opinion about the security Of accounts payable data files, C. Using a computer-generated questionnaire to obtain reliable information about the accuracy and completeness of input and update of accounts payable data from the organization's computer management personnel. D. Testing purchase transactions using a test data approach.

D. Testing purchase transactions using a test data approach.

Which of the following explanations suggests the least amount of relative risk stemming from a failure to compare a purchase order with an approved price list? A. The vendor is one used often by the organization. B. A temporary employee processed the purchase order. C. The comparison is not required by organizational policy. D. The director of the purchasing department approved the purchase order.

B. A temporary employee processed the purchase order.

In the standard regression equation y = a b(x), the letter b is best described as a(n) A, Independent variable. B. Constant coefficient. C. Variable coefficient. D. Dependent variable.

C. Variable coefficient.

The auditor wishes to test controls over computer program changes. The specific objective to be addressed in the following audit step is that only authorized changes have been made to computer programs (i.e., there are no unauthorized program changes). The organization uses an automated program library system. and the auditor obtains copies of the table of contents of the program library system at various periods of time. The table of contents indicates the date a change was last made to the program, the version number of the program, and the length of the program. Which of the following audit procedures would best address the stated objective? A. Obtain a list of programming projects implemented by the data processing manager during the last six months. Take a sample from the list and trace to program change authorization forms. B. Use generalized audit software to compare the table of contents of the program library currently with an auditor copy made previously. Compare and identify differences. Select a sample Of the differences for further investigation. C. Take a sample of all program change requests. Trace the requests to proper authorization and to changes in the program library. D. Use generalized audit software to randomly select a sample of current applications. Trace those selected to program change authorization forms.

B. Use generalized audit software to compare the table of contents of the program library currently with an auditor copy made previously. Compare and identify differences. Select a sample Of the differences for further investigation.

``` If all other factors in a sampling plan are held Constant, changing the measure of tolerable misstatement to a smaller value will cause the sample size to be A. Smaller. B. Indeterminate. C. Larger. D. Unchanged, ```

C. Larger.

A review of a division's operations revealed that both sales revenue and customer base remained the same while inventory and gross margin increased significantly. Which Of the following statements, if true, could explain the increase in gross margin? l. The company has developed a new manufacturing process, which is much more efficient. ll. Sales price per unit has increased. Ill. Ending inventory balance is overstated. A, I Il and Ill, B. I and Il only. C. Ill only. D. I only,

A, I Il and Ill,

``` All Of the following financial indicators are measures of either liquidity or activity except the A. Merchandise inventory turnover. B. Average collection period in days. C. Accounts receivable turnover. D. Times-interest-earned ratio. ```

D. Times-interest-earned ratio.

A 90% confidence interval for the mean of a population based on the information in a sample always implies that there is a 90% chance that the A. True population mean is no larger than the largest endpoint of the interval. B. Estimate is equal to the true population mean. C. Standard deviation will not be any greater than 10% Of the population mean. D. True population mean lies within the specified confidence interval.

D. True population mean lies within the specified confidence interval.

The accountant who prepared a spreadsheet model for workload forecasting left the company, and the accountant’s successor was unable to understand how to use the spreadsheet. The best control for preventing such situations from occurring is to ensure that A. Adequate backups are made for spreadsheet models, B. End-user computing efforts are consistent with strategic plans. C. Use Of end-user computing resources is monitored D. Documentation standards exist and are followed.

D. Documentation standards exist and are followed.

In order to project the frequency of shipments to wrong addresses, an internal auditor chose a random sample from the busiest month of each of the four quarters of the most recent year. What underlying concept of statistical sampling did the auditor violate? A. Failing to give each item in the population an equal chance of selection. B. Using multistage sampling in conjunction with attributes C. Attempting to project a rate of occurrence rather than an error rate. D. Failing to adequately describe the population.

A. Failing to give each item in the population an equal chance of selection.

``` An internal auditor used regression analysis to evaluate the relationship between utility costs and machine hours. The following information was developed using a computer software program: Constant coefficient- 2,050 Variable coefficient -0.825 Correlation coefficient- 0.800 Standard error of the estimate – 200 Number of observations - 36 What is the expected utility cost if the company’s 10 machines will be used 2,400 hours next month? A. $4,030 B. $3,970 C. $4,050 D. $3,930 ```

A. $4,030

An internal auditor would compare a departments staffing level with industry standards in order to reach a conclusion about the A. Degree of compliance with human resources policies B. Adequacy of controls over payroll processing. C. Current level of performance of the department. D. Adequacy of controls over hiring

C. Current level of performance of the department.

Determining that audit objectives have been met is part of the overall supervision of an audit assignment and is the ultimate responsibility of the A. Staff internal auditor. B. Chief Audit Executive C. Internal auditing supervisor. D. Audit committee

B. Chief Audit Executive

``` In sampling applications, the standard deviation represents a measure of the A. Extent of precision achieved. B Expected error rate, C. Level of confidence desired. D. Degree of data variability. ```

D. Degree of data variability.

Auditors have learned that increased computerization has created more opportunities for computer fraud, but has also led to the development of computer audit techniques to detect frauds A type of fraud that has occurred in the banking industry is a programming fraud where the programmer designs a program to calculate daily interest on savings accounts to four decimal points. The programmer then truncates the last two digits and adds it to his or her account balance, Which of the followln9 computer audit techniques would be most effective in detecting this type of fraud? A. SCARF (Systems Control and Audit Review File) B. Snapshot. C. Parallel Simulation D. Generalized audit software which selects account balances for confirmation with the depositor.

C. Parallel Simulation

When reviewing working papers, an internal auditing supervisor will be primarily concerned with determining whether the A. Auditing department’s standard formats and tick marks have been used consistently. B. Engagement work pro9ran,s have been carried out without deviation. C. Working papers reflect adherence to budget constraints. D. Working papers adequately support the engagement observations, conclusions, and recommendations.

D. Working papers adequately support the engagement observations, conclusions, and recommendations.

``` Which technique is most appropriate for testing the quality of the preliminary survey of payment vouchers described in an internal control questionnaire? A. Analysts. B. Evaluation. C. Observation. D. Verification. ```

D. Verification.

``` An unexpected decrease m which of the following ratios could indicate that fictitious inventory has been recorded? A. Average collection period. B. Total asset turnover ratio. C. Current ratio. D. Price earnings ratio ```

B. Total asset turnover ratio

An auditor randomly selects 100 items of finished 900ds perpetual inventory, physically counts them, and computes an “audited value” for each (calculated as quantity times unit cost per production reports). The internal auditor then compares the audited value with the “book value” (inventory cost per perpetual inventory records) end uses difference estimation to estimate the correct total for the finished goods inventory. Results of the 100- item sample: Total audited value: $605,000 Total book value (of these 100 items): $630,000 Number of items incorrectly stated (out of 100): 17 The total book value of the entire finished goods inventory (1,100 items) is $6.988.000. On the basis of difference estimation, the auditor’s best guess (“point estimate”) as to the correct total is A. $6,963,000 B. $6,655,000 C. $7,263,000 D. $6,713,000

D. $6,713,000

Which of the following involves managerial functions as a control device? A. Maintenance of a quality control department. B Use of a corporate policy manual. C. Supervision of employees D. Internal auditing.

C. Supervision of employees

A review of industry trade journals indicates that the average gross margin of the industry is approximately 16% and the company’s gross margin in previous years has not exceeded 16%. The auditor is not aware of any changes in product or customer mix. The company uses a perpetual inventory system A physical count of inventory was not taken at year-end Which of the following would explain all the changes in the analyses presented above? A. There was a cut-off problem with January sales being recorded as November and December sales B. The company adopted a policy of extending credit to less credit-worthy customers during the last quarter of the year, but did not change sales prices. C. The company re-billed items to customers as part of an extended terms program, but failed to issue the corresponding credit memo, the re-billed invoice. Including cost of goods sold, was properly recorded. D. The company recorded fictitious sales during November and December, but did not credit inventory

D. The company recorded fictitious sales during November and December, but did not credit inventory

Developing engagement observations, conclusions, are recommendations involves comparing with the relevant standard or criterion. Which of the following choices best represents an appropriate standard or criterion to support engagement observations, conclusions, and recommendations? A. an Internal accounting control principle cited and copied from a public accounting reference. B. All of the answers represent an appropriate standard or criterion to support engagement observations, conclusions, and recommendations. C. A sound Industry practice, based on the internal auditor’s knowledge and experience obtained during many engagement assignments within the organization. D. A quality standard operating procedure (number and date) for the department.

B. All of the answers represent an appropriate standard or criterion to support engagement observations, conclusions, and recommendations.

What characteristic of information is satisfied by an original signed document? A. Reliability. B. Usefulness. C. Relevance. D. Sufficiency.

A. Reliability.

Engagement information is usually considered relevant when it is A. Consistent with the engagement objectives. B. Derived through valid statistical sampling. C Factual, adequate, and convincing. D. Objective and unbiased.

A. Consistent with the engagement objectives.

In determining the sample size for variables sampling, the internal auditor requires some knowledge of the variability of the population. In obtaining this preliminary information the internal auditor A. Frequently takes a convenience pilot sample of 30 to 50 items and uses this to estimate the variability of the population. B. Frequently takes a random pilot sample of 30 to 50 items, applies audit tests to these items, and uses the variability in these items to estimate the variability in the population of audit values. The pilot sample is then discarded and the real sample is taken from the remaining population. C. Can seldom rely on the results of prior years’ sample results since they pertain only to the prior years’ populations. D. Will frequently take a random pilot sample of 30 to 50 items, compute the range in this sample, and use this range as an estimate of the population variability for purposes of computing sample size.

A. Frequently takes a convenience pilot sample of 30 to 50 items and uses this to estimate the variability of the population.

``` In regression analysis which of the following correlation coefficients represents the strongest relationship between the independent and dependent variables? A. -.02 B. 1.03 C. .75 D. -.89 ```

D. -.89

An auditor wants to determine the extent to which invalid data could be contained in a human-resources computer system. Examples would be an Invalid job classification, age In excess of retirement age, or an invalid ethnic classification. The best approach to determine the extent of the potential problem would be to A. Review and test access controls to ensure that access is limited to authorized individuals. B. Use generalized audit software to select a sample of employees. Use the sample to determine the validity of data items and project the result to the population as a whole. C. Submit test data to test the effectiveness of edit controls over the Input of data. D. Use generalized audit software to develop a detailed report of all data outside specified parameters.

D. Use generalized audit software to develop a detailed report of all data outside specified parameters.

Which of the following is an unnecessary feature of a working paper prepared in connection with maintenance costs? A. the Internal auditor has initiated and dated the working paper as of the date completed even though the working paper was prepared over the preceding 4 working days. B. Total acquisition cost of property, plant, and equipment for the preceding month is shown. C. Total repair expense for the month preceding the engagement is shown. D. The chief audit executive has initiated the working paper as reviewer although the working paper was prepared by another person.

B. Total acquisition cost of property, plant, and equipment for the preceding month is shown.

Two major retail organizations both publicly traded and operating in the same geographic area have recently merged. Both are approximately the same size and have internal audit activities. Organization A has little EDI experience. Organization B has invested heavily in information technology and has EDI connections with its major vendors. The board has asked the internal auditors from both organizations to analyze risk areas that should be addressed after the merger. The chief audit executive (CAE) of Organization B has suggested that the two IAAs have a planning meeting to share work programs, scope of engagement coverage, and copies of engagement communications that were delivered to their boards. Management has also suggested that the internal auditors review the compatibility of the organizations’ two computer systems and control philosophy for individual store operations. The two organizations agree to share data on store operations. The data reveal that three stores in Organization A are characterized by significantly lower gross margins, higher-than-average sales volume, and higher levels of employee bonuses. The three stores are part of a set of six that are managed by a relatively new section manager. In addition, the store managers of the three stores are also relatively new. The most likely cause of the observed data is A. The relative inexperience of the store managers. B. Promotional activities that offer large discounts coupled with the payment of bonuses to employees who reach targeted sales goals. C. Fraudulent activity whereby goods are taken from the stores, thus resulting in the lower gross margins D. Problems with employee training and employee ability to meet customer needs.

B. Promotional activities that offer large discounts coupled with the payment of bonuses to employees who reach targeted sales goals.

``` Using the data presented below, calculate the cost of sales for the Beta Corporation for the past year. Current ratio 3.5 Acid test ratio 3.0 Current liabilities at year end 600.000 Beginning inventory 500.000 Inventory turnover 8.0 A. $6,400,000 B. 1,600,000 C. 2,400,000 D. 3,200,000 ```

D. 3,200,000

``` When an internal auditor’s sampling objective is to obtain a measurable assurance that a sample will contain at least one occurrence of a specific critical exception existing In a population, the sampling approach to use Is A. Discovery. B. Variables. C. Probability-proportional-to-size D. Random. ```

A. Discovery.

The primary reason that internal auditors cross-index their working papers Is to A. Give the working papers a professional appearance. B. Provide explanation of the engagement procedures performed. C. Provide a trail for the internal auditor and the reviewer. D. Explain the use of tick marks.

C. Provide a trail for the internal auditor and the reviewer.

To determine the operating cycle for a wholesaler, which one of the following pairs of Items Is needed? A. Cash turnover and net sales. B. Asset turnover and return on sales, C. Number of day’s receivables is held and average merchandise inventory. D. Accounts receivable turnover and inventory turnover.

D. Accounts receivable turnover and inventory turnover.

Working papers should be disposed of when they are of no further use Retention policies should A. Be prepared by the audit committee. B. Be approved by the external auditor. C. Be approved by legal counsel. D. Specify a minimum retention period of 3 years.

C. Be approved by legal counsel.

The internal auditing activity (1M) of an organization has been asked to evaluate the effectiveness of a performance incentive system. The system was implemented with much fanfare two years ago and had the full support of all levels of management. Realistic goals were set in a collaborative manner with employees participating in decisions affecting them. Timely and meaningful feedback was provided on the attainment of goals. The internal auditors found that actual performance decreased over the two-year period while Incentive payments dramatically Increased, The most probable reason for this apparent paradox would be that the performance incentive system A. Has not been in place long enough: at least five years are required for It to evolve. B. Would only be practical when used for a small population. C. Had goals which were only set by management. D. Did not have a clear link between rewards and actual performance.

D. Did not have a clear link between rewards and actual performance.

An auditor would most likely judge an error in an account balance to be material if the error involves A. An unverified routine transaction B. A clerical mistake which is unlikely to occur again. C. A large percentage of net income. D. An unusual transaction for the organization.

C. A large percentage of net income.

When engagement conclusions are challenged, the internal auditor’s factual rebuttal is best facilitated by A. Pro forma working papers. B. Cross-referencing of the working papers. C. Explicit procedures in the engagement work program. D. Summaries in the engagement work program.

B. Cross-referencing of the working papers.

Which of the following procedures would provide the best evidence of the effectiveness of a credit-granting function? A. Observe the process. B. Review the trend in receivables write-offs. C. Ask the credit manager about the effectiveness of the function. D Check for evidence of credit approval on a sample of customer orders.

B. Review the trend in receivables write-offs.

Random numbers can be used to select a sample only when each item in the population A. Is expected to be within plus or minus three standard deviations of the population mean. B. Is independent of outside influence. C. Can be identified with a unique number, D. Can be assigned to a specific stratum.

C. Can be identified with a unique number,

In evaluating the validity of different types of audit evidence, which of the following conclusions is not correct? A. The validity of documentary evidence is Independent of the effectiveness of the control system In which it was created. B. Internally created documentary evidence is considered less valid than externally created documentary evidence. C. Re-computation, though valid, is restricted in its usefulness due to its limited scope. D. The validity of confirmations varies directly with the independence of the party receiving the confirmation.

A. The validity of documentary evidence is Independent of the effectiveness of the control system In which it was created.

During an audit of cash controls, an auditor compared a sample of cash receipts lists with (1) the total of daily cash receipts journal entries, and (2) daily bank deposit slip amounts. The comparison revealed that: Each cash receipts list equaled cash journal entry totals but not daily bank deposit amounts. Totals for cash receipts lists equaled bank deposit totals in the long run. To support a finding that “Cash receipts are not deposited intact daily,” the above evidence is A. Sufficient, competent, and relevant. B. Relevant, but not sufficient or competent. C. Not sufficient, competent, or relevant. D. Sufficient, but not competent or relevant.

A. Sufficient, competent, and relevant.

What evidence is appropriate to determine if completed purchase transactions were valid and at the best price? A. Purchase requisitions, journal voucher entries, and bid quotes. B, Purchase requisitions, purchase orders, and bid quotes. C. Purchase Orders, receiving reports, and bid quotes. D. Receiving reports, purchase orders, and purchase requisitions

C. Purchase Orders, receiving reports, and bid quotes.

Checklists used to assess audit risk have been criticized for all of the following reasons except A. Providing a false sense of security that all relevant factors are addressed. B. Decreasing the uniformity of data acquisition. C. Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist. D. Inappropriately implying equal weight to each item on the checklist.

B. Decreasing the uniformity of data acquisition.

Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the coefficient of correlation, r. The best explanation of the value r is that it A. Is always positive. B. Is a measure of the relative relationship between two variables C. interprets variances in terms of the independent variable. D. Ranges in size from negative infinity to positive infinity.

B. Is a measure of the relative relationship between two variables

Which of the following statements is true about benchmarking? A. Benchmarking team members should be made up only of senior managers responsible for the strategic planning and management of the company. B. Companies undertake best practice analysis to cut costs, boost output, and achieve their strategic business goals and objectives. C. After best practice analysis. a company must then identify the critical success factors for its business. D. Benchmarking is the process of measuring the organization against the products, practices and services of ail of its most efficient global competitors.

A. Benchmarking team members should be made up only of senior managers responsible for the strategic planning and management of the company.

A new staff auditor, who has an undergraduate degree in psychology, suggested that a questionnaire be developed to examine bus driver attitudes toward departmental operations, overtime, number of hours/kilometres driven. etc. The Internal audit activity (1M) has never used such questionnaires before. Should the chief audit executive (CAE) approve the development and use of such a questionnaire? A. No, the audit department does not have sufficient expertise In developing such questionnaires. B. No, audit work should be confined to objective data so that audit independence is not compromised C. Yes, the data are relevant to understanding the causes of the accidents and breakdowns. D. Yes, the questionnaires are a more objective form of evidence gathering than is observation and interviews

C. Yes, the data are relevant to understanding the causes of the accidents and breakdowns.

``` The appropriate sampling plan to use to identify at least one irregularity, assuming some number of such Irregularities exist in a population, and then to discontinue sampling when one irregularity is observed is A. Discovery sampling. B. Attribute sampling. C. Stop-or-go sampling. D. Variables sampling. ```

A. Discovery sampling.

Which of the followin9 techniques is most likely to result in sufficient information with regard to an engagement to review the quantity of fixed assets on hand in a particular department? A. Physical observation. B. Interviews with department management. C. Analytical review of purchase requests and subsequent invoices. D. Examination of the account balances contained in general and subsidiary ledgers.

A. Physical observation.

The internal auditors of a financial institution are performing an engagement to evaluate the institution’s investing and lending activities. During the last year, the institution has adopted new policies and procedures for monitoring investments and the loan portfolio. The internal auditors know that the organization has invested in new types of financial instruments during the year and is heavily involved in the use of financial derivatives to appropriately hedge risks. If the internal auditors were to conduct a preliminary review, which of the following procedures should be performed? A. All of the answers are correct. B. Interview management to identify changes made in policies regarding investments or loans. C. Review minutes of board meetings to identify changes in policies affecting investments and loans, D. Review reports of engagements performed by regulatory and external auditors since the last

A. All of the answers are correct.

``` Ordinarily, what source of Information should most affect the internal auditor’s conclusions? A. External. B. Oral. C. Inquiry. D. Informal. ```

A. External.

An auditor is performing an operational audit of the shipping department as a part of the audit, the auditor selected a sample of 45 daily shipping logs from the shipping department files. On 44 of the days, the log contained a sufficient number of shipments to meet its daily quota. Based on this test, the auditor concluded that the shipping department was effective at meeting its quotas. In order to come to this conclusion, the internal auditor had to make which of the following assumptions? I. The shipping department shipped all of the items listed on the shipping logs. Il. The quotas are set at the appropriate levels. Ill. The items listed on a daily shipping log were shipped on that day. IV. The shipping department’s file of daily shipping logs is complete. A. I, Ill and IV only B. I, II, Ill and IV. C. I, Il and III only D. I and Il only.

A. I, Ill and IV only

``` Many public utility companies operate complex customer service systems (CSS) to manage their customer service function. CSS operate in an on-line, real-time environment, which allows customer service data to be directly entered on-line from customer telephone calls. Which of the following EDP auditing techniques provides the auditor with the capability to continuously monitor customer service data which are collected from telephone calls in a CSS? A. Generalized audit software. B. Integrated test facility (ITF), C. Embedded audit data collection. D. Control flowcharting. ```

C. Embedded audit data collection.

When performing an engagement to evaluate the computerized purchasing activities of a manufacturing or9anization, which of the following should be included in the permanent file portion of the engagement working papers? A. Printouts using internal auditor prepared programs and test data. B. Information concerning administrative controls over the computer operations at each location. C. Prior year’s working papers revised to reflect changes during the current year. D. Copies of the computer program documentation.

B. Information concerning administrative controls over the computer operations at each location.

A bank internal auditor wishes to determine whether all loans are backed by sufficient collateral, properly aged as to current payments, and properly categorized as current or non-current. The best audit procedure to accomplish this objective would be to A. Take a discovery sample of all loan applications to determine whether each application contains a statement of collateral B. Take a sample of payments made on the loan portfolio and trace them to loans to see that the payments are properly applied. For each loan identified, examine the loan application (o determine that the loan has proper collateralization. C. Take a block sample of ail loans in excess of a specified dollar limit and determine If they are current and properly categorized For each loan approved, verify aging and categorization. D. Use generalized audit software to read the total loan file, age the file by last payment due, and take a statistical sample stratified by the current and aged population. Examine each loan selected for proper collateralization and aging.

D. Use generalized audit software to read the total loan file, age the file by last payment due, and take a statistical sample stratified by the current and aged population. Examine each loan selected for proper collateralization and aging.

How does stop-or-go attribute sampling differ from fixed-sample-size attribute sampling? A. Non-sampling error is smaller. B. Desired reliability does not have to be specified in advance. C. It cannot be used to determine the assessed level of control risk. D. Total expected sample size will always be smaller.

D. Total expected sample size will always be smaller.

In computing inventory turnover, the base to use is the A. Sales base because ¡t provides turnover rates that are considerably higher. B. Sales base because it is more likely to reflect a change in trend. C. Sales base because it more dearly represents operational activity. D. Cost of sales base because it eliminates any changes due solely to sales price changes.

D. Cost of sales base because it eliminates any changes due solely to sales price changes.

A feasibility study is being completed to determine whether an internal auditing activity (1M) should convert to electronic working papers. The decision to convert will be based primarily on the requirements of the 1M and the experience of the audit department. Which of the following is true if contemplating a conversion from paper to electronic medium? A. The media selected should determine working papers design and content. B Conversion from paper should occur no later than the time of final review, C. Consideration should be given to generating backup copies of working papers. D. Working papers retention should be solely a function of the media used.

C. Consideration should be given to generating backup copies of working papers.

An internal auditor prepared a working paper that consisted of a list of employee names and Identification numbers as well as the following statement: “By matching random numbers with employee identification numbers, 40 employee personnel files were selected to verify that they contain all documents required by the organization’s pobcy 501. No exceptions were noted,” The internal auditor did not place any tick marks on this working paper. Which one of the following changes will improve the internal auditor’s working paper the most? A. Justification for the sample size. B. Use of tick marks to show that each file was examined C. Removal of the employee names to protect their confidentiality. D. Listing of the actual documents examined for each employee.

A. Justification for the sample size.

A fire destroyed a large portion of an organization’s inventory. Management is tiling an insurance claim and needs to use the internal auditors working papers in preparing the claim. Management A. May use the working papers in preparing the claim, but such use should be approved by the chief audit executive. B. May not use the working papers in preparing the claim. C. Should be precluded from preparing the claim, and this function should be performed by the Internal audit activity. D. May use the working papers in preparing the claim, but such use should be approved by the organization’s external auditors.

A. May use the working papers in preparing the claim, but such use should be approved by the chief audit executive.

``` Which of the following represents the most competent evidence that trade receivables actually exist? A. Sales invoices, B. Receiving reports. C. Positive confirmations. D. Bills of lading. ```

C. Positive confirmations.

In selecting a sample of Items for variables testing, an auditor must consider the desired precision, the standard deviation, and the: A. Recorded dollar value of the population. B. Acceptable risk level. C. Expected occurrence rate. D. Sampling interval.

B. Acceptable risk level.

You are an internal auditing supervisor, reviewing the working papers of a staff Internal auditor’s overall examination of the firm’s sales function. The pages are not numbered or cross-referenced. Further, the working papers were dropped and reassembled at random before they were brought to you. You decide to put the working papers in the proper order according to the Standards. The first stage of this activity is to identify each page as a part of: (A) the preliminary survey, (B) the review of the adequacy of control processes, (C) the review for effectiveness of control processes, or (D) the review of results. The second page you select documents an interview with a salesperson discussing the overall sales cycle, This page belongs with which activity? A. Review of results B. Preliminary survey. C. Review for adequacy of control processes. D. Review for effectiveness of control processes.

B. Preliminary survey.

While performing an engagement relating to an organization’s cash controls, the Internal auditor observed that cash deposits are not deposited intact daily. A comparison of a sample of cash receipts lisis revealed that each cash receipt list equaled cash journal entry amounts but not daily bank deposits amounts, and cash receipts list totals equaled bank deposit totals in the long run. This information as support for the internal auditor’s observations is A. Relevant but not sufficient or reliable. B, Not sufficient, reliable, or relevant C. Sufficient, reliable, and relevant. D. Sufficient but not reliable or relevant.

C. Sufficient, reliable, and relevant.

The letter x in the standard regression equation is best described as a(n) A. Constant coefficient. B. Dependent variable. C. Independent variable. D. Coefficient of determination.

C. Independent variable.

Which of the following Is a true statement comparing a horizontal flowchart with a vertical flowchart? A. It provides more room for written descriptions that parallel the symbols. B. It is usually longer. C. It does not provide as broad a picture at a glance. D. It brings into sharper focus the assignment of duties and independent checks on performance.

D. It brings into sharper focus the assignment of duties and independent checks on performance.

A contract dispute has arisen between an organization and a major supplier. To resolve the dispute. the most competent evidence Is A. oral testimony of contracting parties. B. actions by parties to the contract. C. the original contract. D. a letter from the supplier’s attorney.

C. the original contract.

A significant part of the auditors 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? A. Note the disagreement and retain the notice of disagreement and follow-up work in the audit working papers. B. Present both conclusions to the chief audit executive (CAE) for resolution. The CAE may resolve the matter. C. Present both conclusions In the audit report and let management and the auditee react to both. D. Both the staff auditor and the supervisor document their reasons for reaching different conclusions. Retain the rationale of both parties in the working papers.

C. Present both conclusions In the audit report and let management and the auditee react to both.

``` To identity the amount of obsolete inventory that may exist in an organization, an internal auditor probably should collect information using all of the following procedures except A. Confirmatory. B. Recomputation, C. Scanning. D. Analytical review. ```

A. Confirmatory.

``` Tolerating silence, asking open ended questions, and paraphrasing are three aids to more effective A. Meetings. B. Listening C. Feedback. D. Interviews. ```

B. Listening

C. Sufficiency and relevance.

During an interview to identify controls over the quality employee refers only to a department procedure when asked about controls to ensure that samples are collected and analyzed. In the internal auditor’s expenence. such operations should maintain a log to record all samples, the types of analyses performed, and whether results should be reported to management or regulatory agencies. For some reason, this employee is reluctant to discuss detailed responsibilities in this area. The best thing for the internal auditor to do in this case is: A. Accept the information as given and record an observation finding that adequate controls are in place. B. Relate what the internal auditor has seen at other facilities and tell the employee that the log is necessary. C. Continue the interview and discuss other elements of the employee’s duties, returning periodically to the samples and analytical results, D. Interview the supervisor of the employee and discuss the auditee’s duties in detail,

C. Continue the interview and discuss other elements of the employee’s duties, returning periodically to the samples and analytical results,

Which of the following analytical review procedures should an auditor use to determine if a change in investment income during the current year was due to changes in investment strategy, changes In portfolio mix. or other factors? A. Trend analysis of changes in investment income as a percentage of total assets and of investment assets over the past five years. B. Simple linear regression of investment income changes over the past five years to determine the nature of the changes. C. Rabo analysis of changes in the investment D. Multiple regression analysis using Independent variables related to the nature of the investment portfolio and market conditions.

D. Multiple regression analysis using Independent variables related to the nature of the investment portfolio and market conditions.

An internal auditor is performing a test to determine whether a gas and electric appliance manufacturer should move its service center from one location to another. The service center houses the service trucks that are used to drive to the customers locations to service their appliances. The internal auditor wants to determine the reduction in average miles driven as a result of moving to the other location. Which of the following statistical sampling methods would be most appropriate for this test? A. Discovery sampling. B. Mean-per-unit sampling. C. Probability-proportional-to-size (dollar-unit) sampling. D. Attribute sampling.

B. Mean-per-unit sampling.

Productivity statistics are provided quarterly to the board of directors. An internal auditor checked the ratios and other statistics in the four most recent reports. The internal auditor used scratch paper and copies of the reports to verify the accuracy of computations and compared the data used in the computations with supporting documents. The internal auditor wrote a note for the working papers describing these procedures and then discarded the scratch paper and report copies. The note stated, “The ratios and other statistics in the quarterly reports to the board were checked for the last 4 quarters and appropriate supporting documents were examined. All amounts appear to be appropriate.” In this situation, A. The internal auditor did not consider whether the information in the report to the board was compiled efficiently. B. The internal auditor’s working papers are not sufficient to facilitate an efficient review of the internal auditor’s work. C. Four quarters do not provide a large enough sample on which to base a conclusion. D. The internal auditor should have included the scratch paper in the working papers.

B. The internal auditor’s working papers are not sufficient to facilitate an efficient review of the internal auditor’s work.

``` Which of the following represents the most reliable information that a receivable actually exists? A. A receiving report. B. A sales invoice. C. A bill of lading. D. A positive confirmation. ```

D. A positive confirmation.

Which of the following Is an example of documentary Information? A. A page of the general ledger containing irregulates placed there by the perpetrator of a fraud. B. A letter from a former employee alleging a fraud, C. A photograph of an engagement client’s workplace. D. A page of the Internal auditor’s working papers containing the computations that demonstrate the existence of an error or irregularity.

A. A page of the general ledger containing irregulates placed there by the perpetrator of a fraud.

The internal auditors for a large manufacturing company have been requested to conduct a review of the company’s production planning system. Production data, collected on personal computers (PC’s) connected by a local area network (LAN), are used for generating automatic purchases via electronic data interchange. Purchases are made from authorized vendors based on production plans for the next month and on an authorized materials requirement plan (MRP) which identifies the parts needed per unit of production. The production line has experienced shutdowns because management wants to know the cause of this problem. Which of the following audit procedures best addresses this objective? A. Determine If access controls are sufficient to restrict the Input of incorrect data into the production database. B. Use generalized audit software to develop a complete list of the parts shortages that caused each of the production shutdowns, and analyze this data. C Take a random sample of production information for selected days and trace input into the production database maintained on the LAN. D. Take a random sample of parts on hand per the personal computer databases and compare with actual parts on hand.

B. Use generalized audit software to develop a complete list of the parts shortages that caused each of the production shutdowns, and analyze this data.

Which type of evidence would be most convincing when evaluating the collectability of accounts receivable? A. Shipping documents. B. Negative accounts receivable confirmations. C. Aged accounts receivable listings, D. Positive accounts receivable confirmations.

C. Aged accounts receivable listings,

Reliable information is A. Helpful in assisting the organization in meeting prescribed goals. B. Competent and the best attainable through the use of appropriate engagement techniques C. Factual, adequate, and convincing so that a prudent person would reach the same conclusion as the internal auditor. D. Supportive of the engagement observations and consistent with the engagement objectives

B. Competent and the best attainable through the use of appropriate engagement techniques

Which of the following Is generally not true when evaluating the persuasiveness of evidence? The evidence is considered more persuasive If A. Known by an auditor’s personal knowledge, rather than from a third party confirmation. B. Obtained from an external source, rather than from an Internal source. C. Obtained under conditions of strong controls, rather than weak controls. D. Verified by internally maintained documents, rather than by written Inquiry of third party.

D. Verified by internally maintained documents, rather than by written Inquiry of third party.

Which of the following audit procedures would provide the least relevant evidence that the company had included all of its outstanding debt on a recent disclosure statement that was made public? A. Compare the notes listed in last year’s audited disclosure statement with the notes listed this year and reconcile the differences. B. Prepare a schedule of outstanding notes using the company’s list of notes payable, and trace them to the general ledger and disclosure statement. C. Analyze the interest expense and notes payable accounts to determine if interest has been recorded for notes that are not on the disclosure statement D. Send bank confirmations to all banks that have done business with the company, asking for information on outstanding notes.

B. Prepare a schedule of outstanding notes using the company’s list of notes payable, and trace them to the general ledger and disclosure statement.

``` Which of the following information systems auditing techniques processes real transaction data (or a copy of the real data) through auditor developed test programs? A. Parallel simulation. B, Tracing. C. Integrated test facility. D. Mapping. ```

A. Parallel simulation.

The variability of a population, as measured by the standard deviation, is the A. Tendency of the means of large samples (at least 30 items) to be normally distributed, B. Extent to which the individual values of the items in the population are spread about the mean. C. Degree of asymmetry of a distribution. D. Measure of the closeness of a sample estimate to a corresponding population characteristic.

B. Extent to which the individual values of the items in the population are spread about the mean.

Interviewing techniques are used frequently by internal auditors. When considering the potential use of interviewing techniques to gather audit evidence, auditors should be aware that interviews A. Provide a systematic format to ensure audit coverage B. Are more objective than questionnaires in gathering data. C. Are best suited to reaching audit conclusions. D. Should be corroborated by gathering objective data.

D. Should be corroborated by gathering objective data.

The size of a given sample is jointly a result of characteristics of the population of interest and decisions made by the internal auditor. Everything else being equal, sample size will: A. Increase as sampling risk increases. B. Decrease if the internal auditor increases the tolerable rate of deviation. C. Double lithe Internal auditor finds that the variance of the population Is twice as large as was Indicated In the pilot sample. D. Increase if the internal auditor decides to accept more risk of incorrectly concluding that controls are effective when they are in fact ineffective,

B. Decrease if the internal auditor increases the tolerable rate of deviation.

A bank internal auditor wants to determine if loans that consistent with bank policies. All loan requests are initially processed by a lending officer, those that the officer deems appropriate to be funded are forwarded to the lending committee for its approval. The most efficient audit procedure to address this objective would be to A. Take a sample of all loan applications, review the applications, and trace them to either a funded or rejected loan to determine If all actions taken were consistent with bank policies. B. Take a sample of loans presented to the lending committee for approval and determine If committee actions taken were consistent with bank policies. C. Select an attribute sample of loans not funded and review the loan applications and the reasons for rejecting them. D. Select an attribute sample of loans that were funded, review the loan applications, and determine if the funded loans complied with bank policies,

C. Select an attribute sample of loans not funded and review the loan applications and the reasons for rejecting them.

You are an internal auditing supervisor reviewing the working papers of a staff internal auditor’s overall examination of the firm’s sales function. The pages are not numbered or cross referenced. Further, the working papers were dropped and reassembled at random before they were brought to you. You decide to put the working papers in the proper order according to the Standards. The first stage of this activity is to identify each page as a part of: (A) the preliminary survey, (B) the review of the adequacy of control processes, (C) the review for effectiveness of control processes, or (D) the review of results. The first page you select documents a test of controls performed during the course of the engagement. This page belongs with which activity? A. Preliminary survey. B. Review for adequacy of control processes. C. Review for effectiveness of control processes. D. Review of results.

C. Review for effectiveness of control processes

Section 3 Flashcards

(228 cards)