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Question 1

The IIA’s definition of internal auditing emphasizes the effectiveness of which of the following?

a. Value, cost, and benefit propositions.
b. Inherent risk, residual risk, and total risk.
c. Risk management, control, and governance processes.
d. Purpose, nature, and scope of work.

Answer 1

c. Risk management, control, and governance processes.

Question 2

Which of the following adds value to the others?

a. Governance processes.
b. Risk management processes.
c. Internal audit activities.
d. Control processes.

Answer 2

c. Internal audit activities.

Question 2

All of the following are examples of consulting services except:

a. Legal counsel engagement.
b. System security engagement.
c. Advice engagement.
d. Facilitation engagement.

Answer 2

b. System security engagement.

Question 2

All of the following are examples of assurance services except:

a. Financial engagement.
b. Compliance engagement.
c. Due diligence engagement.
d. Training engagement.

Answer 2

d. Training engagement.

Question 2

The IIA’s Practice Advisories do not contain which of the following?

a. Approaches.
b. Considerations.
c. Processes or procedures.
d. Methodologies.

Answer 2

c. Processes or procedures.

Question 2

According to the IIA’s Organizational Independence Standard, which of the following is not a part of functional reporting to the board?

a. Audit charter.
b. Audit risk assessment.
c. Audit budgets.
d. Audit plan.

Answer 2

c. Audit budgets.

Question 3

The IIA’s Practice Guides do not contain which of the following?

a. Good practices.
b. Tools and techniques.
c. Programs.
d. Deliverables.

Answer 3

a. Good practices.

Question 3

Which of the following differs between assurance services and consulting services when exercising due professional care?

a. Costs and benefits.
b. Complexity of work.
c. Extent of work.
d. Materiality.

Answer 3

d. Materiality.

Question 3

Which of the following is driving the need for assurance maps?

a. Risk managers.
b. Board members.
c. Internal auditors.
d. Compliance practitioners.

Answer 3

b. Board members.

Question 4

The chief audit executive establishes a method for prioritizing all of the following except:

a. Business units with low risk levels.
b. Branch or field office with low risk levels.
c. Outstanding risk areas.
d. Low inherent risk areas.

Answer 4

d. Low inherent risk areas.

Question 5

Risk registers describe direct links between which of the following?

a. Risk acceptance and risk avoidance.
b. Risk categories and risk aspects.
c. Risk assignment and risk sharing.
d. Risk limitation and risk spreading.

Answer 5

b. Risk categories and risk aspects.

Question 6

All of the following provide effective relationship in the organization’s governance framework except:

a. Organizational processes.
b. Governance.
c. Risk management.
d. Internal controls.

Answer 6

a. Organizational processes.

Question 7

Which of the following internal audit assessments belong to specific governance processes?

a. Whistleblower process.
b. Risk management audit process.
c. Internal control over financial reporting.
d. Fraud risks.

Answer 7

a. Whistleblower process.

Question 8

Ensuring internal audit teams have the right competencies with right level of work experience and designing effective internal audit procedures can reduce the risk of which of the following?

a. Business risk.
b. Audit failures.
c. Audit false assurance.
d. Audit reputation risk.

Answer 8

b. Audit failures.

Question 9

Consulting engagement objectives must be consistent with all of the following except:

a. Organization’s goals.
b. Organization’s values.
c. Organization’s strategies.
d. Organization’s objectives.

Answer 9

a. Organization’s goals.

Question 10

Which of the following is the major purpose of performing analytical procedures in internal audits?

a. To perform additional audit procedures.
b. To plan the audit engagement.
c. To obtain audit evidence.
d. To study relationships among elements of information.

Answer 10

c. To obtain audit evidence.

Question 11

According to the IIA Standards, which of the following is not included in the scope of the internal audit function?

a. Appraising the effectiveness and efficiency of operations and programs.
b. Reviewing the strategic management process, assessing the quality of management decision making both quantitatively and qualitatively and reporting the results to the audit committee.
c. Reviewing the means of safeguarding assets.
d. Complying with the laws, regulations, policies, procedures, and contracts.

Answer 11

b. Reviewing the strategic management process, assessing the quality of management decision making both quantitatively and qualitatively and reporting the results to the audit committee.

Question 12

An internal auditor is auditing the financial operations of an organization. Which of the following is not specified by the IIA Standards for inclusion in the scope of the audit?

a. Reviewing the reliability and integrity of financial and operational information.
b. Reviewing the compliance with laws, regulations, policies, procedures, and contracts.
c. Appraising the effectiveness and efficiency of operations and programs.
d. Reviewing the financial decision-making process.

Answer 12

d. Reviewing the financial decision-making process.

Question 13

The audit committee of an organization has charged the chief audit executive (CAE) with bringing the department into full compliance with the IIA Standards. The CAE’s first task is to develop a charter. Identify the item that should be included in the statement of objectives:

a. Report all audit findings to the audit committee every quarter.
b. Notify governmental regulatory agencies of unethical business practices by organization management.
c. Determine the adequacy and effectiveness of the organization’s systems of internal controls.
d. Submit departmental budget variance reports to management every month.

Answer 13

c. Determine the adequacy and effectiveness of the organization’s systems of internal controls.

Question 14

If an auditee’s operating standards are vague and thus subject to interpretation, the auditor should:

a. Seek agreement with the auditee as to the standards to be used to measure operating performance.
b. Determine best practices in this area and use them as the standard.
c. Interpret the standards in their strictest sense because standards are otherwise only minimum measures of acceptance.
d. Omit any comments on standards and the auditee’s performance in relationship to those standards, because such an analysis would be meaningless.

Answer 14

a. Seek agreement with the auditee as to the standards to be used to measure operating performance.

Question 15

In which of the following situations does the auditor potentially lack objectivity?

a. An auditor reviews the procedures for a new electronic data interchange connection to a major customer before it is implemented.
b. A former purchasing assistant performs a review of internal controls over purchasing four months after being transferred to the internal auditing department.
c. An auditor recommends standards of control and performance measures for a contract with a service organization for the processing of payroll and employee benefits.
d. A payroll accounting employee assists an auditor in verifying the physical inventory of small motors.

Answer 15

b. A former purchasing assistant performs a review of internal controls over purchasing four months after being transferred to the internal auditing department.

Question 16

. Which of the following actions would be a violation of auditor independence?

a. Continuing on an audit assignment at a division for which the auditor will soon be responsible as the result of a promotion.
b. Reducing the scope of an audit due to budget restrictions.
c. Participating on a task force which recommends standards for control of a new distribution system.
d. Reviewing a purchasing agent’s contract drafts prior to their execution.

Answer 16

a. Continuing on an audit assignment at a division for which the auditor will soon be responsible as the result of a promotion.

Question 17

The IIA’s Code of Ethics includes which of the following two essential components?

a. Definition of internal auditing and administrative directives.
b. Principles and Rules of Conduct.
c. Integrity and objectivity.
d. Confidentiality and competency.

Answer 17

b. Principles and Rules of Conduct.

Question 18

A Certified Internal Auditor (CIA) is working in a non–internal audit position as the director of purchasing. The CIA signs a contract to procure a large order from the supplier with the best price, quality, and performance. Shortly after signing the contract, the supplier presents the CIA with a gift of significant monetary value. Which of the following statements regarding the acceptance of the gift is correct?

a. Acceptance of the gift would be prohibited only if it were noncustomary.
b. Acceptance of the gift would violate the IIA Code of Ethics and would be prohibited for a CIA.
c. Since the CIA is no longer acting as an internal auditor, acceptance of the gift would be governed only by the organization’s code of conduct.
d. Since the contract was signed before the gift was offered, acceptance of the gift would not violate either the IIA Code of Ethics or the organization’s code of conduct.

Answer 18

b. Acceptance of the gift would violate the IIA Code of Ethics and would be prohibited for a CIA.

Question 19

An auditor, nearly finished with an audit, discovers that the director of marketing has a gambling habit. The gambling issue is not directly related to the existing audit, and there is pressure to complete the current audit. The auditor notes the problem and passes the information on to the chief audit executive but does no further follow-up. The auditor’s actions would: a. Be in violation of the IIA Code of Ethics for withholding meaningful information. b. Be in violation of the Standards because the auditor did not properly follow-up on a red flag that might indicate the existence of fraud. c. Not be in violation of either the IIA Code of Ethics or the Standards. d. Both a and b.

Answer 19

c. Not be in violation of either the IIA Code of Ethics or the Standards.

Question 20

As used by the internal auditing profession, the IIA Standards refer to all of the following except: a. Criteria by which the operations of an internal audit department are evaluated and measured. b. Criteria which dictate the minimum level of ethical actions to be taken by internal auditors. c. Statements intended to represent the practice of internal auditing, as it should be. d. Criteria that is applicable to all types of internal audit departments.

Answer 20

b. Criteria which dictate the minimum level of ethical actions to be taken by internal auditors.

Question 21

Which of the following situations would be a violation of the IIA Code of Ethics? a. An auditor was subpoenaed in a court case in which a merger partner claimed to have been defrauded by the auditor’s company. The auditor divulged confidential audit information to the court. b. An auditor for a manufacturer of office products recently completed an audit of the corporate marketing function. Based on this experience, the auditor spent several hours one Saturday working as a paid consultant to a hospital in the local area, which intended to conduct an audit of its marketing function. c. An auditor gave a speech at a local IIA chapter meeting outlining the contents of a program the auditor had developed for auditing electronic data interchange connections. Several auditors from major competitors were in the audience. d. During an audit, an auditor learned that the company was about to introduce a new product that would revolutionize the industry. Because of the probable success of the new product, the product manager suggested that the auditor buy additional stock in the company, which the auditor did.

Answer 21

d. During an audit, an auditor learned that the company was about to introduce a new product that would revolutionize the industry. Because of the probable success of the new product, the product manager suggested that the auditor buy additional stock in the company, which the auditor did.

Question 22

In applying the standards of conduct set forth in the Code of Ethics, internal auditors are expected to: a. Exercise their individual judgment. b. Compare them to standards in other professions. c. Be guided by the desires of the auditee. d. Use discretion in deciding whether to use them or not.

Answer 22

a. Exercise their individual judgment.

Question 23

Reinforcing the Code of Conduct and ethical behavior standards for all internal auditors can protect which of the following? a. Business risk. b. Audit failures. c. Audit false assurance. d. Audit reputation risk.

Answer 23

d. Audit reputation risk.

Question 24

An exception report for management is an example of which of the following? a. Preventive control. b. Detective control. c. Corrective control. d. Directive control.

Answer 24

c. Corrective control.

Question 25

Organizational procedures allow employees to anticipate problems. This type of control is known as: a. Feedback control. b. Strategic control. c. Feed-forward control. d. Performance appraisal.

Answer 25

c. Feed-forward control.

Question 25

As part of a total quality control program, a firm not only inspects finished goods but also monitors product returns and customer complaints. Which type of control best describes these efforts? a. Feedback control. b. Feed-forward control. c. Production control. d. Inventory control.

Answer 25

a. Feedback control.

Question 25

To be successful, large companies must develop means to keep the organization focused in the proper direction. Organization control systems help keep companies focused. These control systems consist of which of the following components? a. Budgeting, financial ratio analysis, and cash management. b. Objectives, standards, and an evaluation-reward system. c. Role analysis, team building, and survey feedback. d. Coaching, protection, and challenging assignments.

Answer 25

b. Objectives, standards, and an evaluation-reward system.

Question 26

Control has been described as a closed system consisting of six elements. Identify one of the six elements. a. Setting performance standards. b. Adequately securing data files. c. Approval of audit charter. d. Establishment of independent audit function.

Answer 26

a. Setting performance standards.

Question 26

The three basic components of all organizational control systems are: a. Objectives, standards, and an evaluation-reward system. b. Plans, budgets, and organizational policies and procedures. c. Statistical reports, audits, and financial controls. d. Inputs, objectives, and an appraisal system.

Answer 26

a. Objectives, standards, and an evaluation-reward system.

Question 26

Which of the following management control systems measures performance in terms of operating profits minus the cost of capital invested in tangible assets? a. Open-book management system. b. Economic value added system. c. Activity-based costing system. d. Market value added system.

Answer 26

b. Economic value added system.

Question 27

A comprehensive management control system that considers both financial and nonfinancial measures relating to a company’s critical success factors is called a(n): a. Balanced scorecard system. b. Economic value added system. c. Activity-based costing system. d. Market value added system.

Answer 27

a. Balanced scorecard system.

Question 27

According to the IIA Planning Standard, residual risk is also known as which of the following? a. Audit risk. b. Pure risk. c. Current risk. d. Inherent risk.

Answer 27

c. Current risk.

Question 27

According to the IIA Planning Standard, the term “risk appetite” means which of the following? a. Risk avoidance. b. Risk limitation. c. Risk acceptance. d. Risk spreading.

Answer 27

c. Risk acceptance.

Question 27

Residual risk is calculated as which of the following? a. Known risks minus unknown risks. b. Actual risks minus probable risks. c. Probable risks minus possible risks. d. Potential risks minus covered risks.

Answer 27

d. Potential risks minus covered risks.

Question 28

Which of the following is closely linked to risk acceptance? a. Risk detection. b. Risk prevention. c. Risk tolerance. d. Risk correction.

Answer 28

c. Risk tolerance.

Question 28

The internal audit charter normally requires the internal audit activity to focus on areas consisting of which of the following? a. High inherent risk and high residual risk. b. High audit risk and high current risk. c. Low inherent risk and low audit risk. d. Low inherent risk and high outstanding risk.

Answer 28

a. High inherent risk and high residual risk.

Question 28

Which of the following risk concepts can be assumed to have no mitigating controls? a. Business risk. b. Residual risk. c. Inherent risk. d. Current risk.

Answer 28

c. Inherent risk.

Question 29

Internal auditors would be more likely to detect fraud if they developed/strengthened their ability to: a. Recognize and question changes which occur in organizations. b. Interrogate fraud perpetrators to discover why the fraud was committed. c. Develop internal controls to prevent the occurrence of fraud. d. Document computerized operating system programs.

Answer 29

a. Recognize and question changes which occur in organizations.

Question 29

According to the IIA Standards, which of the following best describes the two general categories or types of fraud that concern most internal auditors? a. Improper payments (i.e., bribes and kickbacks) and tax fraud. b. Fraud designed to benefit the organization and fraud perpetrated to the detriment of the organization. c. Acceptance of bribes or kickbacks and improper related-party transactions. d. Acceptance of kickbacks or embezzlement and misappropriation of assets.

Answer 29

b. Fraud designed to benefit the organization and fraud perpetrated to the detriment of the organization.

Question 30

A company hired a highly qualified accounts payable manager who had been terminated from another company for alleged wrongdoing. Six months later, the manager diverted $12,000 by sending duplicate payments of invoices to a relative. A control that might have prevented this situation would be to: a. Adequately check prior employment backgrounds for all new employees. b. Not hire individuals who appear overqualified for a job. c. Verify educational background for all new employees. d. Check to see if close relatives work for vendors.

Answer 30

a. Adequately check prior employment backgrounds for all new employees.

Question 30

Internal auditors and management have become increasingly concerned about computer fraud. Which of the following control procedures would be least important in preventing computer fraud? a. Program change control that requires a distinction between production programs and test programs. b. Testing of new applications by users during the systems development process. c. Segregation of duties between the applications programmer and the program librarian function. d. Segregation of duties between the programmer and systems analyst.

Answer 30

d. Segregation of duties between the programmer and systems analyst.

Question 31

Red flags are conditions that indicate a higher likelihood of fraud. Which of the following would not be considered a red flag? a. Management has delegated the authority to make purchases under a certain dollar limit to subordinates. b. An individual has held the same cash-handling job for an extended period without any rotation of duties. c. An individual handling marketable securities is responsible for making the purchases, recording the purchases, and reporting any discrepancies and gains/losses to senior management. d. The assignment of responsibility and accountability in the accounts receivable department is not clear.

Answer 31

a. Management has delegated the authority to make purchases under a certain dollar limit to subordinates.

Question 33

An audit team developed a preliminary questionnaire with the following response choices: - Probably not a problem. - Possibly a problem. - Probably a problem. The questionnaire illustrates the use of: a. Trend analysis. b. Ratio analysis. c. Unobtrusive measures or observations. d. Rating scales.

Answer 33

d. Rating scales.

Question 33

Which of the following statements describes an internal control questionnaire? It: a. Provides detailed evidence regarding the substance of the control system. b. Takes less of the auditee’s time to complete than other control evaluation devices. c. Requires that the auditor be in attendance to properly administer it. d. Provides indirect audit evidence that might need corroboration.

Answer 33

d. Provides indirect audit evidence that might need corroboration.

Question 34

Which of the following is the primary advantage of using an internal control questionnaire? a. It provides a clear picture of the interrelationships that exist between the various controls. b. It reduces the risk of overlooking important aspects of the system. c. It forces an auditor to acquire a full understanding of the system. d. Negative responses indicate the only areas needing further audit work.

Answer 34

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

Question 34

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. Inappropriately implying equal weight to each item on the checklist. c. Decreasing the uniformity of data acquisition. d. Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist.

Answer 34

c. Decreasing the uniformity of data acquisition.

Question 35

When an internal auditor is interviewing to gain information, the auditor will not be able to remember everything that was said in the interview. The most effective way to record interview information for later use is to: a. Write notes quickly, trying to write down everything in detail, as it is said; then highlight important points after the meeting. b. Tape-record the interview to capture everything that everyone says; then type everything said into a computer for documentation. c. Hire a professional secretary to take notes, allowing complete concentration on the interview; then delete unimportant points after the meeting. d. Organize notes around topics on the interview plan and note responses in the appropriate area, reviewing the notes after the meeting to make additions.

Answer 35

d. Organize notes around topics on the interview plan and note responses in the appropriate area, reviewing the notes after the meeting to make additions.

Question 36

When conducting interviews during the early stages of an internal audit, it is more effective to: a. Ask for specific answers that can be quantified. b. Ask people about their jobs. c. Ask surprise questions about daily procedures. d. Take advantage of the fact that fear is an important part of the audit.

Answer 36

b. Ask people about their jobs.

Question 37

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

Answer 37

c. Justification for the sample size.

Question 38

The standard deviation of a sample will usually decrease with: a. A decrease in sample size. b. The use of stratification. c. An increase in desired precision. d. An increase in confidence level.

Answer 38

b. The use of stratification.

Question 39

Statistical sampling would be appropriate to estimate the value of an auto dealer’s 3,000 line-item inventory because statistical sampling is: a. Reliable and objective. b. Thorough and complete. c. Thorough and accurate. d. Complete and precise.

Answer 39

a. Reliable and objective.

Question 40

An important difference between a statistical sample and a judgmental sample is that with a statistical sample: a. No judgment is required, everything is by formula. b. A smaller sample size can be used. c. More accurate results are obtained. d. Population estimates with measurable reliability can be made.

Answer 40

d. Population estimates with measurable reliability can be made.

Question 41

Sample size: a. Increases with the use of higher confidence levels. b. Decreases with the use of higher confidence levels. c. Remains unchanged with changes in confidence levels. d. Increases with the use of lower confidence levels.

Answer 41

a. Increases with the use of higher confidence levels.

Question 42

An auditor becomes concerned that fraud in the form of payments to bogus companies 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 audit procedures would be most effective in addressing the auditor’s concerns? a. Use generalized audit software to list all purchases over $50,000 to determine whether they were properly approved. b. Develop a snapshot technique to trace all transactions by suspected buyers. c. Use generalized audit software to take a random sample of all expenditures under $50,000 to determine whether they were properly approved. d. Use generalized audit software to list all major vendors by product line; select a sample of paid invoices to new vendors and examine evidence which shows that services or goods were received.

Answer 42

d. Use generalized audit software to list all major vendors by product line; select a sample of paid invoices to new vendors and examine evidence which shows that services or goods were received.

Question 43

An auditor wishes 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. Submit test data to test the effectiveness of edit controls over the input of data. b. Review and test access controls to ensure that access is limited to authorized individuals. c. Use generalized audit software to develop a detailed report of all data outside specified parameters. d. 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.

Answer 43

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

Question 44

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 noncurrent. The best audit procedure to accomplish this objective would be to: a. 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. b. Take a block sample of all 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. c. Take a discovery sample of all loan applications to determine whether each application contains a statement of collateral. d. 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 to determine that the loan has proper collateralization.

Answer 44

a. 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.

Question 45

Governmental auditors have been increasingly called on to perform audits to determine whether 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. Tagging and tracing. b. Generalized audit software. c. Integrated test facility. d. Spreadsheet analysis.

Answer 45

b. Generalized audit software.

Question 46

Management has requested an audit of promotional expenses. The sales department has been giving away expensive items in conjunction with new product sales to stimulate demand. The promotion seems successful, but management believes the cost may be too high. Which of the following audit procedures would be the least useful to determine the effectiveness of the promotion? a. A comparison of product sales during the promotion period with sales during a similar nonpromotion period. b. A comparison of the unit cost of the products sold before and during the promotion period. c. An analysis of marginal revenue and marginal cost for the promotion period, compared to the period before the promotion. d. A review of the sales department’s reasons for believing that the promotion has been successful.

Answer 46

b. A comparison of the unit cost of the products sold before and during the promotion period.

Question 47

An internal auditor plans to use an analytical review to verify the correctness of various operating expenses in a division. The use of an analytical review as a verification technique would not be a preferred approach if: a. The auditor notes strong indicators of a specific fraud involving this account. b. The company has relatively stable operations that have not changed much over the past year. c. The auditor would like to identify large, unusual, or nonrecurring transactions during the year. d. The operating expenses vary in relation to other operating expenses but not in relation to revenue.

Answer 47

a. The auditor notes strong indicators of a specific fraud involving this account.

Question 48

During an audit, the internal auditor should consider the following factor(s) in determining the extent to which analytical procedures should be used: a. Adequacy of the system of internal control. b. Significance of the area being examined. c. Precision with which the results of analytical audit procedures can be predicted. d. All of the above.

Answer 48

d. All of the above.

Question 49

An auditor performs an analytical review by comparing the gross margins of various divisional operations with those of other divisions and with the individual division’s performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on this information, the most likely cause of the increase in gross margin would be: a. An increase in the number of competitors selling similar products. b. A decrease in the number of suppliers of the material used in manufacturing the product. c. An overstatement of year-end inventory. d. An understatement of year-end accounts receivable.

Answer 49

c. An overstatement of year-end inventory.

Question 50

During an operational audit, an auditor compares the inventory turnover rate of a subsidiary with established industry standards in order to: a. Evaluate the accuracy of the subsidiary’s internal financial reports. b. Test the subsidiary’s controls designed to safeguard assets. c. Determine if the subsidiary is complying with corporate procedures regarding inventory levels. d. Assess the performance of the subsidiary and indicate where additional audit work may be needed.

Answer 50

d. Assess the performance of the subsidiary and indicate where additional audit work may be needed.

Question 51

Of the following, which is the most efficient source for an auditor to use to evaluate a company’s overall control system? a. Control flowcharts. b. Copies of standard operating procedures. c. A narrative describing departmental history, activities, and forms usage. d. Copies of industry operating standards.

Answer 51

a. Control flowcharts.

Question 51

Which of the following is true of a horizontal flowchart as compared to a vertical flowchart? a. It provides more room for written descriptions that parallel the symbols. b. It brings into sharper focus the assignment of duties and independent checks on performance. c. It is usually longer. d. It does not provide as broad a picture at a glance.

Answer 51

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

Question 53

Which of the following tools would best give a graphical representation of a sequence of activities and decisions? a. Flowchart. b. Control chart. c. Histogram. d. Run chart.

Answer 53

a. Flowchart.

Question 54

In documenting the procedures used by several interacting departments, the internal auditor will most likely use: a. A horizontal flowchart. b. A vertical flowchart. c. A Gantt chart. d. An internal control questionnaire.

Answer 54

a. A horizontal flowchart.

Question 55

Which method of evaluating internal controls during the preliminary review provides the auditor with the best visual grasp of a system and a means for analyzing complex operations? a. A flowcharting approach. b. A questionnaire approach. c. A matrix approach. d. A detailed narrative approach.

Answer 55

a. A flowcharting approach.

Question 56

The auditor wishes to test the assertion that all claims paid by a medical insurance company contain proper authorization and documentation, including but not limited to the validity of the claim from an approved physician and an indication that the claim complies with the claimant’s policy. The most appropriate audit procedure would be to: a. Select a random statistical sample of all policyholders and examine all claims for the sampled items during the year to determine if they were handled properly. b. Select a sample of claims filed and trace to documentary evidence of authorization and other supporting documentation. c. Select a sample of claims denied and determine that all claims denied were appropriate. The claims denied file is much smaller, and the auditor can obtain greater coverage with the sample size. d. Select a sample of paid claims from the claims (cash) disbursement file and trace to documentary evidence of authorization and other supporting documentation.

Answer 56

d. Select a sample of paid claims from the claims (cash) disbursement file and trace to documentary evidence of authorization and other supporting documentation.

Question 56

In evaluating the validity of different types of audit evidence, which one of the following conclusions is incorrect? a. Recomputation, although highly valid, is limited in usefulness due to its limited scope. b. The validity of documentary evidence is independent of the effectiveness of the control system in which it was created. c. Internally created documentary evidence is considered less valid than externally created documentary evidence. d. The validity of confirmations varies directly with the independence of the party receiving the confirmation.

Answer 56

b. The validity of documentary evidence is independent of the effectiveness of the control system in which it was created.

Question 56

Which of the following is generally not true when evaluating the persuasiveness of evidence? The evidence is considered more persuasive if it is: a. Verified by internally maintained documents rather than by written inquiry of third party. b. Obtained under conditions of strong controls rather than weak controls. c. Known by an auditor’s personal knowledge rather than from a third-party confirmation. d. Obtained from an external source rather than from an internal source.

Answer 56

a. Verified by internally maintained documents rather than by written inquiry of third party.

Question 57

In testing the write-off of a deteriorated piece of equipment, the best evidence of the condition of the equipment would be: a. The equipment manager’s statement regarding condition. b. Accounting records showing maintenance and repair costs. c. A physical inspection of the actual piece of equipment. d. The production department’s equipment downtime report.

Answer 57

c. A physical inspection of the actual piece of equipment.

Question 58

Which of the following audit procedures provides the best evidence about the collectibility of notes receivable? a. Confirmation of note receivable balances with the debtors. b. Examination of notes for appropriate debtors’ signatures. c. Reconciliation of the detail of notes receivable and the provision for uncollectible amounts to the general ledger control. d. Examination of cash receipts records to determine promptness of interest and principal payments.

Answer 58

d. Examination of cash receipts records to determine promptness of interest and principal payments.

Question 59

What standard of evidence is satisfied by an original signed document? a. Sufficiency. b. Competence. c. Relevance. d. Usefulness.

Answer 59

b. Competence.

Question 60

When sampling methods are used, the concept of sufficiency of evidence means that the samples selected provide: a. Reasonable assurance that they are representative of the sampled population. b. The best evidence that is reasonably obtainable. c. Reasonable assurance that the evidence has a logical relationship to the audit objective. d. Absolute assurance that a sample is representative of the population.

Answer 60

a. Reasonable assurance that they are representative of the sampled population.

Question 61

An internal auditor takes a photograph of the auditee’s workplace. The photograph is a form of what kind of evidence? a. Physical. b. Testimonial. c. Documentary. d. Analytical.

Answer 61

a. Physical.