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WorksheetsSession IAP 13
Total questions: 25
Worksheet time: 13mins
Fact Pattern: An internal auditor has submitted a first draft of an engagement communication to an engagement client in preparation for an exit meeting. An excerpt is below.
The engagement was performed to accomplish several objectives:
- Verify the existence of unused machinery being stored in the warehouse.
- Determine whether machinery had been damaged during storage.
- Review the handling procedures being performed by personnel at the warehouse.
- Determine whether proper accounting procedures are being followed for machinery kept in the warehouse.
- Calculate the current fair value of warehouse inventories.
- Compare the total value of the machinery with accounting records.
It was confirmed that, of the 30 machines selected from purchasing records for the sample, 13 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. 12 others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but 1 was in good condition. It was confirmed by the internal auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
At a minimum, the following elements should be included in final engagement communications: purpose, scope, and results. Results include observations, conclusions (opinions), recommendations, and action plans. Which of the following describes all of the elements missing from the engagement communication?
Scope, conclusion, recommendation.
Observations, conclusion, recommendation.
Purpose, result, recommendation.
Purpose, scope, recommendation.
Fact Pattern: During an early phase of an extensive engagement to evaluate a manufacturer’s inventory management system, an internal auditor reviewed inventory levels. During this review, the internal auditor discovered that there had been recurring stockouts for some high demand items and that this had led to expensive expediting and work stoppages. Further investigation revealed that the purchasing department had regularly ordered these items based upon purchase orders produced automatically by the computerized inventory system. The quantity orders had been based on an economic order quantity (EOQ) model included in the computerized inventory system. The internal auditor determined that the EOQ model was properly designed and that the problem had resulted from failure to update data in the model concerning the time required for delivery.
If the internal auditor decides that the situation warrants management’s immediate attention and the entire engagement will not be completed for several weeks, communication with management will probably take the form of a(n)
Oral report to senior management.
Summary written report to operating management.
Written interim report to operating management.
Regular written report to operating management.
Internal auditors discuss results with engagement clients and certain other parties before issuing the final communication. At this exit conference,
Managers with knowledge relevant to the engagement should be present.
A disinterested party should lead the discussion.
The primary purpose is to improve relations with the client(s).
The primary purpose is to identify management’s actions and responses.
The director of sales asks for a count of customers grouped in descending numerical rank by
(1) the number of orders they place during a single year and
(2) the dollar amounts of the average order.
The visual format of these two pieces of information is most likely to be a
Pareto diagram.
Cost of quality report.
Kaizen diagram.
Fishbone (Ishikawa) diagram.
A manufacturer mass produces nuts and bolts on its assembly line. The line supervisors sample every nth unit for conformance with specifications. Once a nonconforming part is detected, the machinery is shut down and adjusted. The most appropriate tool for this process is a
ISO 9000 audit.
Fishbone (Ishikawa) diagram.
Cost of quality report.
Statistical quality control chart.
The internal auditors have completed an engagement in the purchasing department and are preparing their final report. Throughout the engagement, the auditors have shared results with the purchasing manager. Which of the following is not a goal of the final audit report?
Describe the technical aspects of the methods used during the engagement.
Assure agreement with the observations and recommendations.
Resolve conflicts.
Improve relations between the internal audit activity and the purchasing department.
An internal auditor plans to test the accuracy of recorded quantities-on-hand in an inventory file against the actual quantities-on-hand. Under which of the following conditions is the auditor least likely to use a stop-or-go sampling plan?
The auditor plans to determine an upper precision limit for the estimated percentage of deviations contained in the population.
The auditor plans to draw a relatively small sample size.
The auditor expects the population to contain a high rate of deviations.
The population to be sampled is very large.
You are conducting an engagement to evaluate the organization’s marketing effort. You agreed to keep the marketing vice president informed of your progress on a regular basis. What method should be used for those progress reports?
Briefing by the appropriate marketing first-line supervisor.
Written reports signed by the chief audit executive.
Copies of working paper summaries.
Oral or written interim reports.
Management is legally required to prepare a shipping document for all movement of hazardous materials. The document must be filed with bills of lading. Management expects 100% compliance with the procedure. Which of the following sampling approaches is most appropriate?
Attribute sampling.
Variables sampling.
Discovery sampling.
Targeted sampling.
Fact Pattern: An internal auditor has submitted a first draft of an engagement communication to an engagement client in preparation for an exit meeting. An excerpt is below.
The engagement was performed to accomplish several objectives:
- Verify the existence of unused machinery being stored in the warehouse.
- Determine whether machinery had been damaged during storage.
- Review the handling procedures being performed by personnel at the warehouse.
- Determine whether proper accounting procedures are being followed for machinery kept in the warehouse.
- Calculate the current fair value of warehouse inventories.
- Compare the total value of the machinery with accounting records.
It was confirmed that, of the 30 machines selected from purchasing records for the sample, 13 were present on the warehouse floor and another five were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the internal auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When an internal auditor is communicating with engagement clients, both situational factors and message characteristics can damage the communication process. An internal auditor has only limited control over situational factors but has substantial control over message characteristics. Which of the following is a message characteristic that the internal auditor who prepared the engagement communication overlooked?
Prior encounters with the engagement client.
Noise.
Nature of the audience.
Sequence of message.
An internal auditor forms conclusions about engagement objectives primarily based on
Criteria.
Observations.
Recommendations.
Causes.
Which of the following combinations of participants is most appropriate to attend an exit meeting?
The responsible internal auditor and representatives from management who are knowledgeable about detailed operations and who can authorize implementation of corrective action.
Staff internal auditors who conducted the field work and operating personnel in charge of the daily performance of the activity or function reviewed.
The chief audit executive and the executive in charge of the activity or function reviewed.
Staff auditors who conducted the field work and the executive in charge of the activity or function reviewed.
Fact Pattern: 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.
Regarding the unbudgeted funds for the purchase of a software package, the internal auditor should
Disclose it with the expected reduction in programming costs to provide full disclosure.
Leave it out of the engagement communication to avoid criticism.
Emphasize it because it is outside the budget.
Leave it out of the engagement communication because it is irrelevant.
To enhance communications with top management, some internal audit activities include a summary report with each written engagement communication. What information should be included in such a summary report?
Only that information needed to resolve the disagreements between the engagement clients and the internal auditors.
The internal auditor’s assessment of the adequacy of internal controls.
Highlights of the engagement results.
The same information as the written report but in diagram form.
A car insurance company is considering opening branches in a foreign country. The country’s population has been growing rapidly for the last 5 years. The company wants to know whether the number of car accidents are correlated with the recent population growth. Which of the following charts prepared by an analyst would be most helpful to the company?
A pie chart showing the number of car accidents in each city for the last 5 years.
A scatter plot showing the number of car accidents on the y-axis and the population size on the x-axis.
A table showing the number of car accidents in rows and the population size in columns.
A line chart showing each month on the x-axis and the number of car accidents on the y-axis.
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
Eliminate the risk of nonsampling errors.
Minimize the failure to detect errors and fraud.
Reduce the level of audit risk and materiality to a relatively low amount.
Measure the sufficiency of the evidence obtained.
Fact Pattern: An excerpt from an engagement observation indicates that travel advances exceeded prescribed maximum amounts. Organizational policy provides travel funds to authorized employees for travel. Advances are not to exceed 45 days of anticipated expenses. Organizational procedures do not require justification for large travel advances. Employees can and do accumulate large, unneeded advances.
The cause of the engagement observation is that
Organizational policy is to provide travel funds to authorized employees.
Employees accumulate large travel advances.
Advance procedures do not require specific justification.
Travel advances have not been cleared in timely manner.
An internal auditor found that employees in the maintenance department were not signing their time cards. This situation also existed during the last engagement. The internal auditor should
Withhold conclusions about payroll internal control in the maintenance department.
Include this observation in the current engagement communication.
Instruct the employees to sign their time cards.
Ask the manager of the maintenance department to assume the resulting risk.
Which of the following is(are) true when using cluster sampling?
1. Sampling units are groups of items.
2. Sample items within clusters need not be assigned random numbers.
3. The auditor selects every nth item after a random start.
4. The auditor uses cluster sampling when random sampling is not cost-effective.
1, 2, 3, and 4.
1 only.
1 and 2 only.
1, 2, and 4 only.
In an attribute sampling application, holding other factors constant, sample size will increase as which of the following becomes smaller?
Planned precision.
Confidence coefficient.
Expected rate of occurrence.
Population.
Fact Pattern: Using mean-per-unit sampling to estimate the value of inventory, an internal auditor had the following results:
Projected inventory value US $3,000,000
Confidence level 95%
Confidence interval US $2,800,000 to US $3,200,000
Standard error US $100,000
Z-value (approximate) 2.0
Precision US $200,000
The recorded value of inventory was US $3,075,000.
If the internal auditor had used nonstatistical sampling instead of statistical sampling, which of the following would be true?
The confidence level could not be quantified.
The risk of incorrect acceptance would be higher.
The precision would be larger.
The projected value of inventory would be less reliable.
Using random numbers to select a sample
Results in a representative sample.
Allows auditors to use smaller samples.
Is required for a variables sampling plan.
Is likely to result in an unbiased sample.
An internal auditor has just completed an engagement and is in the process of preparing the final engagement communication. The observations in the final engagement communication should include
Statements concerning potential future events that may be helpful to the engagement client.
Statements of both fact and opinion developed during the course of the engagement.
Pertinent factual statements concerning the control weaknesses uncovered during the course of the engagement.
Statements of opinion about the cause of an observation.
An auditor is using the mean-per-unit method of variables sampling to estimate the correct total value of a group of inventory items. Based on the sample, the auditor estimates, with precision of ±4% and confidence of 90%, that the correct total is US $800,000. Accordingly,
The chance that the actual correct total is less than US $768,000 or more than US $832,000 is 10%.
The probability that the inventory is not significantly overstated is between 6% and 14%.
The inventory is not likely to be overstated by more than 4.4% (US $35,200) or understated by more than 3.6% (US $28,800).
There is a 4% chance that the actual correct total is less than US $720,000 or more than US $880,000.
When an internal auditor uses monetary-unit statistical sampling to examine the total value of invoices, each invoice
Can be represented by no more than one monetary unit.
Has an unknown probability of being selected.
Has an equal probability of being selected.
Has a probability proportional to its monetary value of being selected.
