Developing engagement observations, conclusions, and recommendations involves comparing the condition 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?

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

A sound industry practice, based on the internal auditor’s knowledge and experience obtained during many engagement assignments within the organization

A quality standard operating procedure (number and date) for the department

An internal accounting control principle, cited and copied from a public accounting reference

If an engagement client’s operating standards are vague and thus subject to interpretation, the internal auditor must

Seek agreement with management as to the criteria to be used to measure operating performance

Determine best practices in this area and use them as the standard

Interpret the standards in their strictest sense because standards are otherwise only minimum measures of acceptance

Omit any comments on standards and the engagement client’s performance in relationship to those standards because such an analysis would be meaningless

In evaluating the effectiveness and efficiency with which resources are employed, an internal auditor is responsible for

Determining the extent to which adequate operating criteria have been established

Verifying the existence of assets

Reviewing the reliability of operating information

Verifying the accuracy of asset valuation

Which of the following statements is true with respect to a time budget for an internal audit engagement?

Time budgets should normally be prepared in terms of hours or days

Time budgets should be used for financial audits, but not for operational audits

Requests for time budget adjustments should be approved by the audit committee

Time budgets should be strictly adhered to, regardless of circumstances

According to the International Professional Practices Framework, to achieve engagement objectives, which of the following is not the responsibility of the internal auditors?

Confirm organizational independence

Determine appropriate and sufficient resources

Evaluate the nature and complexity of each engagement

The auditor-in-charge for a financial audit is planning an engagement. Auditors will travel to a remote location to learn about the industry and business. The auditors will need to be able to work independently. Prior to allocating engagement resources, the auditor-in-charge should

Evaluate the experience and competencies of the audit staff

Request a budget increase for the operation activities

Tour the plant facilities and warehouse

Verify compliance with the applicable regulations for the industry

To determine whether credit controls are inconsistently applied, preventing valid sales to creditworthy customers, the internal auditor should

Compare credit histories for those receiving credit and for those denied credit

Confirm current accounts receivable

Trace postings on the accounts receivable ledger

Analyze collection rates and credit histories

Which of the following documents should the internal auditor examine to determine whether only authorized purchases are being accepted by the receiving department?

Policies and procedures for the receiving function

An organization uses electronic data interchange 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?

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

Select a statistical sample of major vendors and trace the amounts paid to specific invoices

Select a monetary-unit sample of accounts payable and confirm the amounts directly with the vendors

Use generalized audit software to identify all receipts for a particular day and trace the receiving reports to checks issued

Contributions to a nonprofit organization have been constant for the past 3 years. The audit committee has become concerned that the president may have embarked on a scheme in which some of the contributions from many sustaining members have been redirected to other organizations. The audit committee suspects that the scheme may involve taking major contributions and depositing them in alternative accounts or soliciting contributions to be made in the name of another organization. Which of the following procedures should be most effective in detecting the existence of such a fraud?

Take a sample that includes all large donors for the past 3 years and a statistical sample of others and request a confirmation of total contributions made to the organization or to affiliated organizations

Use analytical review procedures to compare contributions generated with those of other comparable institutions over the same period of time. If the amount is significantly less, take a detailed sample of cash receipts and trace to the bank statements

Use generalized audit software to take a sample of pledged receipts not yet collected and confirm the amounts due with the donors

Take a discovery sample of cash receipts and confirm the amounts of the receipts with the donors. Investigate any differences

The manager of a production line has the authority to order and receive replacement parts for all machinery that requires periodic maintenance. The internal auditor received an anonymous tip that the manager ordered substantially more parts than were necessary from a family member in the parts supply business. The unneeded parts were never delivered. Instead, the manager processed receiving documents and charged the parts to machinery maintenance accounts. The payments for the undelivered parts were sent to the supplier, and the money was divided between the manager and the family member. Which of the following tests would best assist the auditor in deciding whether to investigate this anonymous tip further?

Analysis of repair parts charged to maintenance to review the reasonableness of the number of items replaced.

Comparison of the current quarter’s maintenance expense with prior-period activity

Review of a test sample of parts invoices for proper authorization and receipt

Physical inventory testing of replacement parts for existence and valuation

An investment portfolio manager has the authority to use financial derivatives to hedge transactions but is not supposed to take speculative positions. However, the manager launches a scheme that includes (1) taking a position larger than required by the hedge, (2) putting the speculative gains in a suspense account, and (3) transferring the funds to a nonexistent broker and from there to a personal account. Which of the following engagement procedures is least effective in detecting this fraud?

Examine individual trades to determine whether the trades violate the authorization limit for the manager

Sample fund transfers to brokers and determine if the brokers are on the organization’s authorized list for transactions

Sample individual trades and determine the exact matching of a hedge. Schedule and investigate all differences

Sample all debits to the suspense account and examine their disposition

An internal auditor traces individual time tickets to the payroll cost distribution and also traces totals from the payroll cost distribution to the various work-in-process accounts. If no exceptions are found, this procedure constitutes information indicating that

Payroll costs have been accurately distributed to work-in-process accounts

Employees have been paid only for time actually worked

Individual time tickets have been properly authorized

The work-in-process accounts have not been padded by the inclusion of unsupported payroll costs

A subsidiary president terminated a controller and hired a replacement without the required organizational approvals. Sales, cash flow, and profit statistics were then manipulated by the new controller and president via accelerated depreciation and sale of capital assets to obtain larger performance bonuses for the controller and the subsidiary president. An approach that might detect this fraudulent activity is

Regular analytical review of operating divisions

Required exit interviews for all terminated employees

Periodic changes of outside public accountants

Analysis of overall management control for segregation of duties

The purpose of including a time budget in an engagement work program is to

Provide a means of controlling and evaluating the progress of the engagement

Restrict the scope of the engagement

Provide an objective means of evaluating the internal auditor’s competence.

Ensure timely completion of the engagement

Writing an engagement work program most likely occurs at which stage of the engagement?

Subsequent to evaluating risk management and control systems

At the end of each engagement when the standard work program should be revised for the next engagement to ensure coverage of noted problem areas

To determine the sufficiency of information regarding interpretation of a contract, an internal auditor uses

The best obtainable information

Logical relationships between information and issues

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 lists 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

Sufficient, reliable, and relevant

Sufficient but not reliable or relevant

Relevant but not sufficient or reliable

Not sufficient, reliable, or relevant

An internal auditor has set an engagement objective of determining whether all cash receipts are deposited intact daily. To satisfy this objective, the internal auditor interviewed the controller who gave assurances that all cash receipts are deposited as soon as is reasonably possible. As information that can be used to satisfy the stated engagement objective, the controller’s assurances are

Relevant but not sufficient or reliable

Not sufficient, reliable, or relevant

Sufficient, reliable, and relevant

Sufficient but not reliable or relevant

Which of the following is an essential factor in evaluating the sufficiency of information? The information must

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

Be based on references that are considered competent

Be well documented and cross-referenced in the workpapers

Bear a direct relationship to the observation and include all of the elements of an observation

An internal auditor’s objective is to determine the cause of inventory shortages shown by the physical inventories taken by an independent service organization that used some engagement client personnel. The internal auditor addresses this objective by reviewing the count sheets, inventory printouts, and memos from the last inventory. The source of information and the sufficiency of this information are

Both external and internal and not sufficient

Both external and internal and sufficient

When evaluating the propriety of a payment to a consultant, the most appropriate information for the internal auditor to obtain and review is

Documentary information in the form of a contract

Oral information in the form of opinions of operating management

Analytical information in the form of comparisons with prior years’ expenditures on consultants

Physical information in the form of the consultant’s report

An internal auditing manager is conducting the annual meeting with manufacturing division management to discuss proposed engagement plans and activities for the next year. After some discussion about the past year’s activity at 12 plants in the division, the divisional vice president agrees that all significant recommendations made by the internal auditing staff refer to key controls and related operating activities that are correctly described for local management within the volume of standard operating procedures for the division. The vice president proposes to transcribe key control activities from the division’s extensive written procedures to a self-assessment standard operating procedure (SOP) questionnaire. What significance should the internal auditing manager attach to such SOP questionnaires in relation to the proposed engagement schedule for the next year?

The SOP questionnaires should improve control adequacy, but the internal auditors need to verify that controls are working as documented in the SOP

Adding this control should eliminate significant engagement recommendations in the coming year, so the scope of engagement activities can be reduced accordingly

Engagement activity can be reduced if the vice president agrees to require the internal audit activity’s approval of all divisional standard operating procedures

SOP questionnaires must be mailed and controlled by the internal audit activity to be considered in relation to the proposed engagement schedule

The current internal auditing engagement to evaluate disbursements activities shows a significant number of errors made during the accounts payable vouchering process that have resulted in lost discounts and an extraordinary number of adjustments and credit memos. Engagement hours are already over budget in this section because of the number of exceptions to be analyzed. Internal auditing staff has had time to observe the operations performed by each of the voucher clerks; sample and analyze transaction documents in the accounts payable, purchasing, and receiving departments; and obtain system statistics on transaction volume, error-correction transactions, and lost-discount summaries. To date, the causes for all types of errors noted during detail testing, observation, and analysis of exceptions have not been fully identified in any of the three departments. The most appropriate course of action for the lead internal auditor to determine the causes of these errors is to

Question and get the opinions of the accounts payable clerks and those involved in processing these transactions

Concentrate on engagement work program requirements for cash disbursements testing to discover any related information from those tests

Expand sample sizes for attributes already tested in transactions entered by accounts payable, purchasing, and receiving

Describe the transaction-related problems identified to date in a special engagement communication to management without expressing a cause or an internal auditor’s conclusion about the situation

As part of the test of the effectiveness of a disaster recovery plan, the auditor plans to interview five employees from each of five different departments (25 employees in all). After the first few interviews, what would be the best way for the auditor to remain attentive during the remaining interviews?

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

Interview the remaining employees in groups of four or five

Make up completely different questions to stay interested

Have the rest of the employees write down their responses

During an interview with a data input clerk to discuss a computerized system used to track employee training requirements and compliance, an internal auditor identifies a potentially significant weakness in the system. The internal auditor should

Ask indirect questions that will help get more factual information relating to the potential weakness

Conduct a second interview after determining whether the weakness actually exists

Ask the clerk about the weakness and determine immediately whether the observation should be communicated

Not mention the weakness, directly or indirectly, to avoid making the clerk uncomfortable

The auditor conducted an interview with the supervisor. The auditor noted that the supervisor became uncomfortable and nervous, and changed the subject whenever the auditor raised questions about certain types of claims. The supervisor’s answers were consistent with company policies and procedures. When documenting the interview, the auditor should

Document the supervisor’s answers noting the nature of the nonverbal communications

Ignore the specific answers given in the interview, because they are self-serving

Conclude that the nonverbal communication is persuasive and that sufficient evidence exists to charge fraud against the group

Not document the nonverbal communication because it is subjective and is not corroborated

When an internal auditor is interviewing to gain information, (s)he 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

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

Write notes quickly, trying to write down everything in detail as it is said; then highlight important points after the meeting

Electronically record the interview to capture everything that everyone says; then type everything said into a computer for documentation

Hire a professional secretary to take notes, allowing complete concentration on the interview; then delete unimportant points after the meeting

Internal auditors should be active listeners to gain the most information in an internal audit interview. Which of the following best describes how an active listener behaves in an interview? The listener

Listens with acceptance, empathy, and intensity

Judges and evaluates the information as it is presented

Avoids looking directly at the speaker and interrupting his or her train of thought

Formulates arguments and conclusions as pieces of the speaker’s information fit together

Internal auditors often flowchart a control system and reference the flowchart to narrative descriptions of certain activities. This is an appropriate procedure to

Gain the understanding necessary to test the effectiveness of the system

Document that the system meets international auditing requirements

Determine whether the system can be relied upon to produce accurate information

Determine whether the system meets established management objectives

During an engagement, the internal auditor should consider the following factor(s) in determining the extent to which analytical procedures should be used during the engagement

Adequacy of the system of internal control

Precision with which the results of analytical audit procedures can be predicted

Significance of the area being examined

The internal auditor wishes to assess the impact of advertising expense on sales of fall merchandise. Which of the following is the most appropriate procedure?

Comparison of same-store sales for the most recent fall quarter and previous fall quarters

Examination of customer surveys for comments in relation to the new ad campaign

Trend analysis of sales for the previous year

Regression analysis of the advertising budget in relation to sales for the most recent fall quarter

Which of the following is an unnecessary feature of a workpaper prepared in connection with maintenance costs?

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

The internal auditor has initialed and dated the workpaper as of the date completed even though the workpaper was prepared over the preceding 4 working days

The chief audit executive has initialed the workpaper as reviewer although the workpaper was prepared by another person

Total repair expense for the month preceding the engagement is shown

An internal auditor’s workpapers should support the observations, conclusions, and recommendations to be communicated. One of the purposes of this requirement is to

Facilitate quality assurance reviews

Provide control over workpapers

Permit the audit committee to review observations, conclusions, and recommendations

Provide support for the internal audit activity’s financial budget

The consumer products division of a large corporation has recently adopted a training program for its sales staff. The internal auditor has determined that one-half of the sales force has received the training. In the 6-month period following introduction of the training program, productivity increased 4% on a per-salesperson basis for those who had received the training. The soundest conclusion the auditor can reach based on these findings is that

More information is needed before the success of the training program can be assessed

The time spent on training has not been justified by the increase in productivity

The training program is a success so far

The remaining members of the sales force should receive training as soon as feasible

After an engagement report with adverse observations has been communicated to appropriate engagement client personnel, internal auditing’s proper action is to

Schedule a follow-up engagement

Implement corrective action indicated by the observations

Assemble new data to support the observations

Examine further the data supporting the observations

Upon reviewing the final communication of engagement results, senior management decided to assume the risk of not implementing corrective action on certain engagement observations. Evaluate the following and select the best alternative for the chief audit executive:

Discuss the matter with senior management and possibly the board if the residual risk accepted is excessive

Perform additional engagement procedures to further identify the policy violations

Notify regulatory authorities of management’s decision

Conduct a follow-up engagement to determine whether corrective action was taken

Final Test Seminar IAP

Authored by Nur Mokhlas

Professional Development

University

Used 26+ times

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50 questions

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MULTIPLE CHOICE QUESTION

2 mins • 1 pt

The chief audit executive (CAE) performs a risk assessment before developing the annual audit plan. Which of the following is most likely to increase the assessment of an identified risk?

A request from senior management to review the strategic plan

An immaterial, anticipated drop in cash flow after plant closings

A critical activity had not been subject to a compliance audit during the past year

An unexpected, significant increase in receivables not related to an increase in sales

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

An auditor assesses control risk because it

Affects the level of detection risk that the auditor may accept

Is relevant to the auditor’s understanding of the control environment

Provides assurance that the auditor’s materiality levels are appropriate

Indicates to the auditor where inherent risk may be the greatest

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

What should the CAE do if the scope of the internal audit plan is insufficient to permit expression of an opinion about risk management and control?

Hire more internal auditors to increase the scope of the engagement

Make the decision to outsource the internal audit function so the scope of the audit plan can be sufficient

Design more procedures to ensure the audit plan becomes sufficient

The CAE should inform senior management and the board about gaps in audit coverage

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Which of the following factors should an internal auditor consider when planning an audit of an activity?

The objectives of the activity, the significant risks, and the control system

The objectives of the activity, the number of employees involved, and the control system

The number of employees involved, the control system, and the recommendations of external auditors

The qualifications of management, the significant risks, and the control system

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

In planning an assurance engagement, a survey could assist with all of the following except

Identifying areas for engagement emphasis.

Evaluating the adequacy and effectiveness of controls

Obtaining engagement client comments and suggestions on control problems

Obtaining preliminary information on controls

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Checklists used to assess risk have been criticized for all of the following reasons except

Decreasing the uniformity of data acquisition

Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist

Providing a false sense of security that all relevant factors are addressed

Inappropriately implying equal weight to each item on the checklist

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

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?

An analysis of quality control documents

The permanent engagement file

Management’s charter for the quality control department

The prior engagement communications

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