Section a _ Mandatory Guidance

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Question 1 - CIA 594 I.37 - Charter, Independence & Objectivity

When evaluating the independence of an internal audit activity, a quality assurance review team performing an external assessment considers several factors. Which of the following factors has the least amount of influence when judging an internal audit activity's independence?

A. Criteria used in making internal auditors' assignments. B. Impartial and unbiased judgments.

C. The extent of internal auditor training in communications skills.

D. Relationship between engagement records and engagement communications.

Question 2 - CIA 593 II.7 - Quality Assurance & Improvement Program

Ordinarily, those conducting internal quality program assessments should report to A. The chief audit executive.

B. The internal auditing staff. C. The board.

D. Senior management.

Question 3 - CIA 595 1.36 - Introduction to Internal Auditing

The chief audit executive (CAE) of internal auditing of a mid-sized internal auditing organization was concerned that management might outsource the internal auditing function. Therefore, the CAE adopted a very aggressive program to promote the internal auditing department within the organization. The CAE planned to present the results to

management and the audit committee and recommend modification of the Internal Audit Charter after using the new program. The following lists six actions the CAE took to promote a positive image within the organization:

1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy and efficiency audits was new, but the auditees seemed very happy.

2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were carefully considered when developing the final audit report.

3. The EDP auditor participated as part of a development team to review the control pro-cedures to be incorporated into a major computer application under development.

4. Given limited resources, the CAE performed a risk analysis to determine which locations to audit. This was a marked departure from the previous approach of ensuring that all operations are reviewed on at least a three-year interval.

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

6. When the auditors found that management and the auditee had not developed specific criteria or data to evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria, review the criteria with the auditee, and if acceptable, use it to evaluate the auditee's operations. If the auditee disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed upon. The audit report commented on the auditee's operations in conjunction with the agreed-upon criteria.

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I. The type of audits was changed before modifying the charter and going to the audit committee. II. Negative findings were omitted from the audit reports.

III. Cost savings and recommendations were highlighted in the report. A. I only.

B. I and III. C. II and III. D. I and II.

Question 4 - CIA 1193 I.5 - Proficiency & Due Professional Care

A professional engineer applied for a position in the internal audit activity of a high technology firm. The engineer became interested in the position after observing several internal auditors while they were performing an engagement in the engineering department. The chief audit executive

A. May hire the engineer despite the lack of knowledge of internal auditing standards.

B. Should not hire the engineer because of the lack of knowledge of internal auditing standards. C. May hire the engineer because of the knowledge of internal auditing gained in the previous position. D. Should not hire the engineer because of the lack of knowledge of accounting and taxes.

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. 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 five years, and management is concerned with controlling these costs.

When the engagement was assigned, management asked the internal auditor to evaluate the appropriateness of using self-insurance to minimize risk to the organization. Given the scope of the engagement requested by

management, should the internal auditor engage an actuarial consultant to assist in the engagement if these skills do not exist on staff?

A. No. The internal audit activity is skilled in assessing controls, and the insurance control concepts are not distinctly different from other control concepts.

B. Yes. An actuary is essential to determine whether the health care costs are reasonable.

C. No. It is a normal internal auditor function to assess risk; this engagement is therefore not unique.

D. Yes. The actuary has skills, not usually found among internal auditors, to identify and quantify self-insurance risks.

Question 6 - CIA 580 I.9 - Introduction to Internal Auditing

One of the purposes of the International Standards for the Professional Practice of Internal Auditing as stated in the Introduction to the current version of the Standards is to

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B. Establish the basis for evaluating internal auditing performance. C. Encourage the professionalization of internal auditing.

D. Establish the independence of the internal audit activity and emphasize the objectivity of internal auditing.

Question 7 - CIA 591 II.3 - Purpose, Authority & Responsibility

Which of the following actions is an appropriate response by organizations wishing to improve the public's perception of their financial reporting?

A. Keeping external and internal auditing work separated to maintain independence.

B. Increased adoption of audit committees composed of independent non-executive directors. C. Viewing internal auditing as a transient profession -- a stepping stone to managerial positions.

D. Requiring internal auditors to report all significant observations of illegal activity to the chief executive officer.

Question 8 - CIA 1190 I.49 - Introduction to Internal Auditing

An internal auditor fails to discover an employee fraud during an assurance engagement. The nondiscovery is most likely to suggest a violation of the Standards if it was the result of a

A. Determination that the cost of extending procedures in the area would exceed the potential benefits. B. Failure to perform a detailed review of all transactions in the area.

C. Determination that any possible fraud in the area would not involve a material amount. D. Presumption that the internal controls in the area were adequate and effective.

Internal auditing is unique in that its scope often encompasses all areas of an organization. Thus, it is not possible for each internal auditor to possess detailed competence in all areas that might be the subject of engagements. Which of the following competencies is required of every internal auditor?

A. Proficiency in information technology. B. Proficiency in accounting principles.

C. Understanding of taxation and law as it applies to operation of the organization. D. Understanding of management principles.

Question 10 - CIA 1196 I.16 - Ethics

In analyzing the differences between two recently merged businesses, the chief audit executive (CAE) of Organization A notes that it has a formal code of ethics and Organization B does not. The code of ethics covers such things as purchase agreements, relationships with vendors, and other issues. Its purpose is to guide individual behavior within the firm. Which of the following statements regarding the existence of the code of ethics in A can be logically inferred? I. A exhibits a higher standard of ethical behavior than does B.

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III. The absence of a formal code of ethics in B would prevent a successful review of ethical behavior in that organization. A. II and III. B. III only. C. II only. D. I and II.

An audit committee of the board of directors of an organization is being established. Which of the following is normally a responsibility of the committee with regard to the internal audit activity?

A. Development of the annual engagement work schedule.

B. Determination of engagement observations appropriate for specific engagement communications. C. Approval of the selection and dismissal of the chief audit executive.

D. Approval of engagement work programs.

Question 12 - CIA 591 II.8 - Proficiency & Due Professional Care

Your organization has selected you to develop an internal audit activity. Your approach will most likely be to hire A. Internal auditors each of whom possesses all the skills required to handle all engagements.

B. Inexperienced personnel and train them the way the organization wants them trained.

C. Internal auditors who collectively have the knowledge and skills needed to perform the responsibilities of the internal audit activity.

D. Degreed accountants because most internal audit work is accounting related.

An external quality assessment team was evaluating the independence of an internal audit activity. The internal audit activity performs engagements concerning all of the elements included in its scope. Which of the following reporting responsibilities is most likely to threaten the internal audit activity's independence? Reporting to the

A. Treasurer.

B. Executive vice president. C. Audit committee.

D. President.

Question 14 - CIA 593 II.4 - Charter, Independence & Objectivity Audit committees are most likely to participate in approving A. Staff promotions and salary increases.

B. Engagement work programs.

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D. Engagement communication observations, conclusions, and recommendations.

Question 15 - CIA 1196 III.10 - Charter, Independence & Objectivity

An audit committee should be designed to enhance the independence of both the internal and external auditing functions and to insulate them from undue management pressures. Using this criterion, audit committees should be composed of

A. Only members from the relevant outside regulatory agencies. B. Only external members of the board of directors or its equivalent. C. A rotating subcommittee of the board of directors or its equivalent.

D. Members from all important constituencies, specifically including representatives from banking, labor, regulatory agencies, shareholders, and officers.

Question 16 - CIA QZP1B.10 - Purpose, Authority & Responsibility

Which of the following actions will help an organization improve the public’s perception of their financial reporting? I. Keeping external and internal auditing work separated to maintain independence.

II. Increased adoption of audit committees composed of outside directors.

III. Requiring internal auditors to report all significant observations of illegal activity to the audit committee. A. II and III only.

B. I and II only. C. I and III only. D. I, II and III.

The code of ethics of a professional organization sets forth A. A basis for the measurement of internal audit performance. B. The organizational details of the profession’s governing body. C. Broad standards of conduct for the members of the organization

D. A list of illegal activities that are proscribed to the members of the profession.

Question 18 - CIA QZP1A.2 - Charter, Independence & Objectivity

A charter is one of the more important factors positively affecting the internal audit activity's independence. Which of the following is least likely to be part of the charter?

A. The length of tenure of the chief audit executive. B. The scope of internal audit activities.

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D. Access to personnel within the organization.

Question 19 - CIA 1196 1.16 - Ethics

In analyzing the differences between the two companies, the chief audit executive (CAE) of company A notes that company A has a formal corporate code of ethics while company B does not. The code of ethics covers such things as purchase agreements and relationships with vendors as well as a host of other issues to guide individual behavior within the firm. Which of the following statements regarding the existence of the code of ethics in company A can be logically inferred?

I. Company A exhibits a higher standard of ethical behavior than does company B.

II. Company A has established objective criteria by which an individual's actions can be evaluated.

III. The absence of a formal corporate code of ethics in company B would prevent a successful audit of ethical behavior in that company.

A. III only. B. II only. C. II and III. D. I and II.

Question 20 - CIA QZP1A.6 - Introduction to Internal Auditing The benefits from internal auditing include all of the following except

A. Employees benefit because the internal audit activity can help them effectively perform their jobs. B. Management benefits because the internal audit activity is able to help them identify and minimize risks.

C. The external auditor benefits because the internal audit activity is able to provide an opinion about the accuracy and completeness of the annual financial statements.

D. Society benefits from internal auditing because the internal auditor promotes the efficient and effective use of resources.

Question 21 - CIA 1184 II.21 - Ethics

In complying with The IIA Code of Ethics, an internal auditor should A. Primarily apply the competency principle in establishing trust.

B. Use individual judgment in the application of the principles set forth in the Code.

C. Respect and contribute to the objectives of the organization even if it is engaged in illegal activities. D. Go beyond the limitation of personal technical skills to advance the interest of the organization.

Question 22 - CIA 598 1.62 - Charter, Independence & Objectivity

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I. Recommending standards of control for a new computer application.

II. Drafting procedures for running a new computer application to ensure that proper controls are installed. III. Performing reviews of procedures for a new computer application before it is installed.

A. I only. B. III only. C. II only. D. I and III.

According to the Standards, the independence of the internal auditing activity is achieved through A. Staffing and supervision.

B. Organizational status and objectivity.

C. Continuing professional development and due professional care. D. Human relations and communications.

Question 24 - CIA R98 I.3 - Introduction to Internal Auditing

The function of internal auditing, as related to communicating results, is to

A. Review the expenditure items and match each item with the expenses incurred. B. Identify inadequate controls that increase the likelihood of unauthorized expenditures. C. Ensure compliance with reporting procedures.

D. Determine whether any employees are expending funds without authorization.

Internal auditors who fail to maintain their proficiency through continuing education could be found to be in violation of A. The IIA’s Code of Ethics.

B. Both the International Standards for the Professional Practice of Internal Auditing and The IIA’s Code of Ethics. C. The International Standards for the Professional Practice of Internal Auditing.

D. None of the above.

Which of the following actions by an internal auditor is most likely a violation of The IIA Code of Ethics? A. Allowing use of the Certified Internal Auditor designation in a context not involving his/her employment. B. Accepting payment for teaching auditing at a local university.

C. Having a material ownership interest in a competitor.

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Question 27 - CIA 595 III.16 - Purpose, Authority & Responsibility

In some cultures and organizations, managers insist that an internal audit activity (IAA) is not needed to provide a critical assessment of the organization's operations. This kind of management attitude will most probably have an adverse effect on the internal audit activity's

A. Policies and procedures. B. Operating budget variance. C. Effectiveness.

D. Performance appraisals.

Question 28 - CIA 595 1.24 - Purpose, Authority & Responsibility

The internal auditor of a bank is examining the bank's loan portfolio to determine whether or not it is in accordance with applicable governmental regulations which:

Limit the amount of loans that can be made to the 10 largest customers (as a percentage of total bank loans), Restrict the amount of loans that can be made in certain industries, and

Require additional documentation for all loans over $100,000.

The internal auditor wants to determine whether (a) there are any violations of the applicable regulations; and (b) the system and its control procedures are adequate to prevent violations of the applicable regulations.

During the audit, the internal auditor's preliminary evidence indicates that the first concern (loans to the 10 largest customers) is not violated. However, upon further investigation of related parties and interlocking organizations, the auditor concludes that although there is not a technical violation, there is some likelihood that the bank may be in violation of the regulation because of loans to a number of related entities that in total exceeds the legal limits. The auditor should

A. Immediately issue an informal report to the audit committee because the findings reflect adversely on management. B. Report the findings immediately to management and suggest that legal counsel review the regulations and the audit evidence gathered to date to determine if a violation has taken place.

C. Informally notify management of the finding, but omit any mention of the problem in the formal audit report because the evidence is not persuasive.

D. Report the findings to the regulatory agency and obtain their opinion on whether or not there is a violation. Include their opinion in the final audit report.

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

A. Participating on a task force which recommends standards for control of a new distribution system. B. Reducing the scope of an audit due to budget restrictions.

C. Reviewing a purchasing agent's contract drafts prior to their execution.

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

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Independence permits internal auditors to render impartial and unbiased judgments. The best way to achieve independence is through

A. Individual knowledge and skills. B. Organizational knowledge and skills. C. Organizational status and objectivity. D. Supervision within the organization.

Question 31 - CIA 1192 I.2 - Purpose, Authority & Responsibility

The reporting structure that is most likely to allow the internal audit activity to accomplish its responsibilities is to report administratively to the

A. Board and functionally to the chief executive officer. B. Controller and functionally to the chief financial officer.

C. Chief executive officer and functionally to the external auditor. D. Chief executive officer and functionally to the board of directors.

What is the most appropriate solution to resolve staff communication problems with engagement clients? A. Avoid unnecessary communication with engagement clients.

B. Meet with engagement clients to resolve communication problems. C. Provide staff with sufficient training to enhance communication skills. D. Discuss communication problems with staff auditors.

The internal audit activity is considering hiring a person who has a thorough understanding of internal auditing techniques, accounting, and principles of management but has nonspecialized knowledge of economics and information technology. Hiring the person is most appropriate if

A. The prospective employee could reasonably be expected to gain sufficient knowledge of these competencies in the long run.

B. Other internal auditors possess sufficient knowledge of economics and information technology.

C. A mentor is assigned to ensure completion of an individually designed professional development program. D. A professional development program is agreed to in advance of actual hiring.

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engagement clients except

A. Recommendations that are generated in relationship to a specific engagement client. B. The risk assessment used in selecting the area for investigation.

C. The objectives designed for a specific engagement.

D. The engagement evaluations based on a preliminary survey.

Question 35 - CIA QZP1A.12 - Proficiency & Due Professional Care

Every assurance engagement should be performed with due professional care. In regards to due professional care, the Standards, require internal auditors to

I. Consider the probability of errors, irregularities, and noncompliance. II. Perform detailed tests of all transactions.

III. Weigh the cost of the assurance against its benefit. A. I and III only

B. I and II only. C. II and III only. D. I, II, and III.

Question 36 - CIA 597 1.60 - Introduction to Internal Auditing The purposes of the Standards include all of the following except A. Fostering improved organizational processes and operations.

B. Establishing the basis for the measurement of internal audit performance. C. Guiding the ethical conduct of internal auditors.

D. Delineating basic principles that represent the practice of internal auditing as it should be.

The board of directors of The Institute of Internal Auditors (IIA) has been informed that a CIA was tried and convicted of tax evasion. The probable consequences for this person are

A. Review by the board of directors and forfeiture of the CIA designation. B. Censure by the director of professional practices of the institute.

C. Immediate revocation of the CIA designation by the Internal Auditing Standards Board. D. Nothing; the act was performed outside of the normal line of work.

Question 38 - CIA 596 1.59 - Proficiency & Due Professional Care The Standards would not require the chief audit executive (CAE) to:

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A. Contribute resources for the annual audit of financial statements.

B. Communicate to senior management and the board the results of evaluations of the performance of external auditors.

C. Coordinate audit work with that of the external auditors.

D. Communicate to senior management and the board the results of evaluations of the coordination between internal and external auditors.

Question 39 - HOCK CIA P1A.1 - Quality Assurance & Improvement Program

Of the following statements, which are true concerning the reporting of the internal audit activity's (IAA) quality assurance and improvement program (QAIP).

I. The QAIP report should evaluate compliance with the Definition of Internal Auditing, the Code of Ethics and the Standards.

II. The QAIP report should address compliance with the internal audit activity's charter.

III. The QAIP report should include contribution to the organization's governance, risk management and control processes.

IV. The QAIP report should be addressed to all members of the internal audit activity. A. I and II only.

B. I, II and III only. C. I, III and IV only.

D. All of the above are true.

Question 40 - CIA 1195 III.4 - Charter, Independence & Objectivity

A service organization is currently experiencing a significant downsizing and process reengineering. Its board of directors has redefined the business goals and established initiatives using in-house developed technology to meet these goals. As a result, a more decentralized approach has been adopted to run the business functions by

empowering the business branch managers to make decisions and perform functions traditionally done at a higher level. The internal auditing staff is made up of the chief audit executive (CAE), two managers, and five staff auditors, all with financial background. In the past, the primary focus of successful internal audit activities (IAA) has been the service branches and the six regional division headquarters, which support the branches. These division headquarters are the primary targets for possible elimination. The support functions such as human resources, accounting, and purchasing will be brought into the national headquarters, and technology will be enhanced to enable and augment these operations.

Up to this point, the IAA has reported to the chief operating officer. Due to the significant changes, there has been some discussion as to changing this reporting relationship. What would be the best reporting relationship?

A. Administratively to the president, functionally to the board.

B. Administratively to the chief financial officer and functionally to the president. C. Administratively and functionally to the president.

D. Administratively and functionally to the chief operating officer.

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Which of the following best describes an internal auditor's purpose in reviewing the adequacy of the system of internal control?

A. To determine whether the internal control system provides reasonable assurance that the organization's objectives and goals are met efficiently and economically.

B. To ensure that material weaknesses in the internal control system are corrected.

C. To determine whether the internal control system ensures that the accounting records are correct and that financial statements are fairly stated.

D. To help determine the nature, timing, and extent of tests necessary to achieve audit objectives.

Question 42 - CIA 1196 III.30 - Purpose, Authority & Responsibility The proper organizational role of internal auditing is to

A. Serve as an appraisal function to examine and evaluate activities as a service to the organization. B. Serve as the investigative arm of the board of directors.

C. Perform studies to assist in the attainment of more efficient operations. D. Assist the external auditor in order to reduce external audit fees.

A new staff internal auditor's first assignment is to review the cash management operations of the organization. The staff internal auditor has no background in cash management. Under which of the following conditions would this arrangement be appropriate?

I. The senior internal auditor is skilled in the area and closely supervises the staff internal auditor.

II. The staff internal auditor performs the work and prepares an engagement communication that is reviewed in detail by the chief audit executive.

A. I only.

B. Neither I nor II. C. II only.

D. Both I and II.

Question 44 - CIA 1196 III.23 - Quality Assurance & Improvement Program The most important component of quality control is

A. Satisfying upper management.

B. Determining the appropriate timing of inspections. C. Conforming to ISO-9000 specifications.

D. Ensuring goods and services conform to the design specifications.

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An internal auditor must have the knowledge, skills, and other competencies needed to perform their individual responsibilities. Which of the following properly describes the level of knowledge, skill, or other competency required? Internal auditors must have

A. Proficiency in applying knowledge of accounting and information technology to specific or potential problems. B. A broad appreciation of accounting principles and techniques during engagements involving the financial records and reports of the organization.

C. Proficiency in applying internal auditing standards and procedures without extensive recourse to technical research and assistance.

D. An understanding of broad techniques used in supporting and developing engagement observations and the ability to research the proper procedures to be used in any engagement situation.

Who should have the least influence on the appointment of the chief audit executive (CAE)? A. The controller.

B. The audit committee. C. The chief executive officer. D. The external auditor.

You have been asked to be a member of a peer review team. In assessing the independence of the internal audit department being reviewed, you should consider all of the following factors except:

A. The criteria of education and experience considered necessary when filling vacant positions on the audit staff. B. The degree to which auditors assume operating responsibilities.

C. Access to and frequency of communications with the board of directors or its audit committee. D. The scope and depth of audit objectives for the audits included in the review.

A staff internal auditor performed a portion of an engagement to review an organization's marketing function. In particular, the internal auditor evaluated the function's effective and efficient use of resources to identify

I. Underused facilities

II. Overstaffing or understaffing III. Nonproductive work

IV. Procedures that were not cost justified

To test for underused facilities, the internal auditor performed a complete walk-through of all spaces assigned to the marketing function and evaluated the use of both space and capital equipment. The internal auditor analyzed reports on space usage for the last year and concluded that facilities were neither underused nor used at maximum capacity. To test for overstaffing or understaffing, the internal auditor compared current staffing levels with a staffing analysis recently completed by an independent contractor. Because the staffing analysis used work standards and service demands to provide factual and reliable information on staffing requirements, the internal auditor was able to conclude

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that staffing levels were optimal.

To test for nonproductive work, the internal auditor interviewed an employee from each level, and, based upon their responses, concluded that no significant amount of nonproductive work was being performed. Thus, the internal auditor concluded that additional engagement work to search for procedures that were not cost justified would not be necessary

As the in-charge internal auditor on this engagement, you are to evaluate the internal auditor's exercise of due professional care in performing the engagement.

In reference to requirements I and II, due professional care

A. Was not exercised because the internal auditor failed to apply reasonable care regarding requirement I. B. Was not exercised because the internal auditor failed to apply reasonable care regarding requirements I and II. C. Was exercised because the internal auditor applied reasonable care and competence in both areas.

D. Was not exercised because the internal auditor failed to apply reasonable care regarding requirement II.

Question 49 - CIA 594 3.5 - Quality Assurance & Improvement Program

A quality assurance program of an internal audit department provides reasonable assurance that audit work conforms with applicable standards. Which of the following activities are designed to provide feedback on the effectiveness of an audit department?

I. Proper supervision. II. Proper training. III. Internal assessments. IV. External assessments. A. I, II, III, IV.

B. I, III, IV. C. I, II, III. D. II, III, IV.

Question 50 - CIA 593 II.3 - Charter, Independence & Objectivity The organizational status of the internal audit activity

A. Should be sufficient to permit the accomplishment of its responsibilities. B. Is best when the reporting relationship is direct to the board of directors.

C. Requires the board's annual approval of the engagement work schedule, staffing plan, and financial budget. D. Is guaranteed when the charter specifically defines its independence.

During a year-end planning meeting with senior management, the chief audit executive (CAE) learns that a recent draft audit report on one of the company's inventory costing systems had provoked a discussion in the accounting

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area. The audit report proposed a relatively large adjustment due to an error in the local inventory system. The auditor's conclusion stated that six other production facilities using the same costing system would require similar inventory adjustments. The total required adjustment for all seven locations represented a material adjustment to the financial statements, according to the chief financial officer (CFO). The CFO questioned the method used by the auditor to calculate the amount of the inventory adjustment and asked the CAE to delay processing the audit report until all aspects of the finding had been fully considered. The CAE reports directly to the CFO. The audit committee has not been apprised of this audit because the audit report is still in draft stage awaiting management comment. Assuming that there is a meeting later the same day with the audit committee of the board, which of the following is not a responsibility of the CAE?

A. Highlight significant audit findings and recommendations and report on the approved audit work schedule. B. Inform the audit committee of senior management's decisions on all significant audit findings.

C. Attempt to resolve the inventory issue before reporting the finding to the audit committee.

D. Inform the audit committee of the outcome of earlier meetings with the CFO and the options being considered for recording the inventory adjustment.

Which of the following most seriously compromises the independence of the internal audit activity?

A. The internal audit activity and the organization's external auditors engage in joint planning of total engagement coverage to avoid duplicating each other's work.

B. The internal audit activity is included in the review cycle of the organization's contracts with other organizations before the contracts are executed.

C. The chief audit executive has dual reporting responsibility to the organization's chief executive officer and the board of directors.

D. Internal auditors frequently draft revised procedures for departments whose procedures they have criticized in an engagement communication.

Question 53 - CIA 591 II.4 - Charter, Independence & Objectivity

You transferred from the treasury department to the internal audit activity (IAA) of the same organization last month. The chief financial officer of the organization has suggested that, because you have significant knowledge in this area, it would be a good idea for you to immediately begin an engagement to evaluate the treasury department. In this circumstance, you should

A. Accept the engagement and begin work immediately.

B. Discuss the need for such an engagement with your former superior, the treasurer.

C. Offer to prepare an engagement work program but suggest that interviews with your former co-workers be conducted by other members of the internal audit staff.

D. Suggest that the engagement be performed by another member of the internal audit staff.

During the course of an engagement, an internal auditor makes a preliminary determination that a major division has been inappropriately capitalizing research and development expense. The engagement is not yet completed, and the internal auditor has not documented the problem or determined that it really is a problem.

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However, the internal auditor is informed that the chief audit executive has received the following communication from the president of the organization:

"The controller of Division B informs me that you have discovered a questionable account classification dealing with research and development expense. We are aware of the issue. You are directed to discontinue any further

investigation of this matter until informed by me to proceed. Under the confidentiality standard of your profession, I also direct you not to communicate with the outside auditors regarding this issue."

Which of the following is an appropriate action for the CAE to take regarding the questionable item?

A. Immediately report the communication to The Institute of Internal Auditors and ask for an ethical interpretation and guidance.

B. Inform the president that this scope limitation will need to be reported to the board.

C. Immediately notify the external auditors of the problem to avoid aiding and abetting a potential crime by the organization.

D. Continue to investigate the area until all the facts are determined and document all the relevant facts in the engagement records.

An internal auditing team has made observations and recommendations that should significantly improve a division’s operating efficiency. Out of appreciation of this work, and because it is the holiday season, the division manager presents the in-charge internal auditor with a gift of moderate value. Which of the following best describes the action prescribed by The IIA Code of Ethics?

A. Not accept it if the gift is presumed to impair the internal auditor's judgment. B. Not accept it prior to submission of the final engagement communication. C. Accept it, regardless of other circumstances, because its value is insignificant. D. Not accept it, regardless of other circumstances, because its value is significant.

Question 56 - CIA 589 I.45 - Proficiency & Due Professional Care Due professional care calls for

A. Testing in sufficient detail to give absolute assurance that noncompliance does not exist.

B. Infallibility and extraordinary performance when the system of internal control is known to be weak. C. Consideration of the possibility of material irregularities during every engagement.

D. Detailed reviews of all transactions related to a particular function.

Question 57 - CIA 594 3. 2 - Charter, Independence & Objectivity

An audit committee should be designed to enhance the independence of both the internal and external audit functions and to insulate the audit functions from undue management pressures. Using this criteria, audit committees should be composed of:

A. Only independent members of the board of directors or other similar oversight committees. B. A rotating subcommittee of the board of directors.

C. Only members from the relevant outside regulatory agencies.

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agencies, shareholders, and officers.

A purchasing agent received expensive gifts from a vendor in return for directing a significant amount of business to that vendor. Which of the following organizational policies most effectively prevents such an occurrence?

A. The purchasing function should be decentralized so each department manager or supervisor does his/her own purchasing.

B. Important high-volume materials should regularly be purchased from at least two different sources in order to afford supply protection.

C. Competitive bids should be solicited on purchases to the maximum extent that is practicable.

D. All purchases exceeding specified monetary amounts should be approved by an official who determines compliance with budgetary requirements.

Question 59 - CIA 598 3.28 - Charter, Independence & Objectivity Audit committees are most likely to participate in the approval of A. Audit staff promotions and salary increases.

B. Appointment of the chief audit executive.

C. The internal audit report observations and recommendations. D. Engagement work schedules.

Internal auditors should possess the knowledge, skills, and other competencies essential to the performance of their individual responsibilities. Consequently, all internal auditors should be proficient in applying

A. Internal auditing standards. B. Management principles. C. Structured systems analysis. D. Quantitative methods.

The audit committee strengthens the control processes of an organization by A. Following up on recommendations made by the chief audit executive.

B. Assigning the internal audit activity responsibility for interaction with governmental agencies. C. Using the chief audit executive as a major resource in selecting the external auditors. D. Approving internal audit activity policies.

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Internal auditors are responsible for continuing their education in order to maintain their proficiency. Which of the following is true regarding the continuing education requirements of the practicing internal auditor?

A. CIAs have formal requirements that must be met in order to continue as CIAs.

B. Internal auditors are required to obtain 40 hours of continuing professional education each year and a minimum of 120 hours over a 3-year period.

C. In-house programs meet continuing professional education requirements only if they have been preapproved by The Institute of Internal Auditors.

D. Attendance, as an officer or committee member, at formal Institute of Internal Auditors meetings does not meet the criteria of continuing professional development.

An internal auditor observes that a receivables clerk has physical access to and control of cash receipts. The auditor worked with the clerk several years before and has a high level of trust in the individual. Accordingly, the auditor notes in the engagement working papers that controls over receipts are adequate. Based on this information, has the auditor exercised due professional care?

A. Yes, reasonable care has been taken.

B. Yes, the engagement working papers were annotated. C. No, irregularities were not noted.

D. No, alertness to conditions most likely indicative of irregularities was not shown.

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

A. A former purchasing assistant performs a review of internal controls over purchasing 4 months after being transferred to the internal auditing activity.

B. A payroll accounting employee assists an internal auditor in verifying the physical inventory of small motors. C. An internal auditor recommends standards of control and performance measures for a contract with a service organization for the processing of payroll and employee benefits.

D. An internal auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major customer before it is implemented.

The internal auditors must be able to distinguish carefully between a scope limitation and other limitations. Which of the following is not considered a scope limitation?

A. The audit committee reviews the engagement work schedule for the year and deletes an engagement that the chief audit executive thought was important to conduct.

B. The divisional management of an engagement client has indicated that the division is in the process of converting a major computer system and has indicated that the information systems portion of the planned engagement will have to be postponed until next year.

C. The engagement client has indicated that certain customers cannot be contacted because the organization is in the process of negotiating a long-term contract with the customers and they do not want to upset the customers.

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D. None of the answers are correct.

An appreciation is required of internal auditors with respect to which discipline? A. Internal auditing procedures and techniques.

B. Management principles.

C. Accounting principles and techniques. D. Marketing techniques.

The internal audit activity (IAA) of an organization has been in existence for 10 years, but the board has not yet approved its charter. However, the board is chaired by the chief executive officer (CEO) and includes the controller and one outside board member. The chief audit executive (CAE) reports directly to the controller who approves the IAA's work schedule. Thus, the IAA has never felt the need to push for a formal approval of the charter. The organization is publicly held and has nine major divisions. The previous CAE was recently dismissed following a dispute between the CAE and a major engagement client. A new CAE with significant experience in both public accounting and internal auditing has just been hired. Within the first month, the new CAE encountered substantial resistance from an engagement client regarding the nature of the work and the IAA's access to records. Moreover, the CEO accused the CAE of not operating "in the best interests of the organization."

From the perspective of the internal audit activity, which of the following facts, by themselves, could contribute to a lack of independence?

I. The CEO accused the new director of not operating "in the best interests of the organization." II. The majority of audit committee members come from within the organization.

III. The IAA's charter has not been approved by the board. A. II only.

B. I, II, and III. C. II and III only. D. I only.

Question 68 - CIA 1190 I.6 - Quality Assurance & Improvement Program The interpretation related to quality assurance given by the Standards is that

A. External assessments can provide senior management and the board with independent assurance about the quality of the internal audit activity.

B. Appropriate follow-up to an external assessment is the responsibility of the chief audit executive's immediate supervisor.

C. The internal audit activity is primarily measured against the Institute's Code of Ethics.

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Which of the following actions taken by a chief audit executive (CAE) could be considered professionally ethical under the IIA Code of Ethics?

A. The CAE refuses to provide information about organizational operations to his father, who is a part owner. B. The CAE decides to delay an engagement at a branch so that his nephew, the branch manager, will have time to "clean things up."

C. To save organizational resources, the CAE cancels all staff training for the next 2 years on the basis that all staff are too new to benefit from training.

D. To save organizational resources, the CAE limits procedures at foreign branches to confirmations from branch managers that no major personnel changes have occurred.

Question 70 - CIA 598 2.66 - Proficiency & Due Professional Care

Internal auditors occasionally express opinions as well as state facts in audit reports. Due professional care requires that the auditor’s opinions be

A. Based on experience and free from all bias. B. Limited to the effectiveness of controls.

C. Expressed only when requested by top management or management of the audited function. D. Based on sufficient factual evidence that warrants the expression of the opinions.

Question 71 - CIA 1191 II.4 - Charter, Independence & Objectivity

Which of the following is not an appropriate member of an audit committee? A. The vice president of the local bank used by the organization.

B. An academic specializing in business administration.

C. A retired executive of a firm that had been associated with the organization. D. The organization's vice president of operations.

As used by the internal auditing profession, the Standards refers to all of the following except A. Criteria which dictate the minimum level of ethical actions to be taken by internal auditors. B. Statements intended to represent the practice of internal auditing as it should be.

C. Criteria that are applicable to all types of internal audit activities.

D. Criteria by which the performance of an internal audit activity can be evaluated.

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A. Training its staff to conduct an audit of health care costs in a major division of the organization.

B. Comparing the cost of the organization's health care program with other programs offered in the industry.

C. Evaluating the organization's estimate of its liability for postretirement benefits, which include health care benefits. D. All of the answers are correct.

If a review of the working papers of the last audit of cash operations revealed that a recently discovered fraudulent transaction was not included in a properly designed statistical sample of transactions tested, which of the following is a valid conclusion?

A. Extraordinary care is required in the performance of a cash operations audit and the auditor should be held responsible for the oversight.

B. Since cash operations are a high-risk area, a test of all transactions should have been performed.

C. The audit was performed with due professional care since an appropriate statistical sample of material transactions was tested.

D. Fraud should not have gone undetected in a recently audited area.

Question 75 - CIA QZP1A.11 - Introduction to Internal Auditing

The interpretation related to quality assurance given by the Standards is that

A. Continual supervision is limited to the planning, examination, evaluation, communication, and follow-up process. B. The internal audit activity is primarily measured against the Institute's Code of Ethics.

C. External assessments can provide senior management and the board with independent assurance about the quality of the internal audit activity.

D. Appropriate follow-up to an external assessment is the responsibility of the chief audit executive's immediate supervisor.

An understanding is required of internal auditors with respect to which discipline? A. Internal auditing procedures and techniques.

B. Marketing techniques.

C. Accounting principles and techniques. D. Management principles.

Question 77 - CIA 592 II.5 - Proficiency & Due Professional Care Internal auditors should possess all of the following except A. An understanding of management principles.

B. Proficiency in applying internal auditing standards. C. The ability to maintain good interpersonal relations.

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D. The ability to conduct training sessions in quantitative methods.

With regard to the exercise of due professional care, an internal auditor must:

A. Select procedures that are likely to provide absolute assurance that irregularities do not exist.

B. Consider whether established operating standards are being met and not whether those standards are acceptable. C. Emphasize the potential benefits of an engagement without regard to the cost.

D. Consider the relative materiality or significance of matters to which assurance procedures are applied.

An internal auditor who had been supervisor of the accounts payable section should not perform an assurance review of that section

A. Until a reasonable period of time has elapsed.

B. Until it is clear that the new supervisor has assumed the responsibilities. C. Until after the next annual review by the external auditors.

D. Because there is no way to measure a reasonable period of time in which to establish independence.

A company with a whistleblowing hotline has received an anonymous tip that three senior internal auditors are in violation of the IIA Code of Ethics. The company has adopted the IIA Code as a part of the corporate ethical code. Among the allegations against the auditors were the following:

1. Auditor 1 has a part-time job outside of office hours as a visiting professor at a local community college. 2. Auditor 1 owns stock in the employer company.

3. Auditor 1 told his next-door neighbor to start looking for a new job because an audit of the executive office indicated that the neighbor's division was going to be closed down in about six months.

4. Auditor 2 received an item of value from a local nonprofit organization of purchasing agents for whom he gave a speech.

5. Auditor 2 received an item of value from a customer of the employer. 6. Auditor 2 has a part-time job as president of a local charitable organization.

7. Auditor 2 shared audit techniques with auditors from another company while attending a professional meeting. 8. A buyer accepted a kickback of $500 to give bid amounts to a supplier to enable that supplier to bid the

contract. Auditor 2 omitted this information from the audit report since the contract amount was not material to the financial statements.

9. Auditor 3 received royalties from a publisher for authoring a professional book on internal auditing.

10. Auditor 3 has a part-time job as a real estate broker, and his real estate firm recently received a commission from the employer company.

11. Auditor 3 received an item of value from a fellow employee in the same company whose department has never been audited and whose department is not scheduled to be audited in the foreseeable future.

12. Auditor 3 did not include in an audit report that the bottlenecks in a shipping department were caused by the absence of the supervisor. The supervisor was the auditors friend and neighbor who had a hospitalized child requiring him to miss work off and on for several weeks.

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How many of the allegations about Auditor 1 represent violations of the IIA Code of Ethics? A. None.

B. Two. C. Three. D. One.

Question 81 - CIA 1190 II.3 - Introduction to Internal Auditing

An internal auditor judged an item to be immaterial when planning an assurance engagement. However, the assurance engagement may still include the item if it is subsequently determined that

A. Related information is reliable.

B. Adverse effects related to the item are likely to occur. C. Sufficient staff is available.

D. Miscellaneous income is affected.

Internal auditors should be prudent in their relationships with persons and organizations external to their employers. Which of the following activities will most likely not adversely affect internal auditors’ ethical behavior?

A. Accepting compensation from professional organizations for consulting work. B. Discussing engagement plans or results with external parties.

C. Serving as consultants to suppliers.

D. Serving as consultants to competitor organizations.

A chief audit executive (CAE) for a large manufacturer is considering revising the internal audit activity's charter with respect to the minimum educational and experience qualifications required. The CAE wants to require all staff auditors to possess specialized training in accounting and a professional auditing certification such as the Certified Internal Auditor (CIA) or the Chartered Accountant (CA). One of the disadvantages of imposing this requirement would be A. The policy would not promote the professionalism of the internal audit activity.

B. The policy would prevent the internal audit activity from using outside service providers when it did not have the knowledge, skills, and other competencies required in certain engagements.

C. The policy might negatively affect the internal audit activity's ability to perform quality engagements relating to the organization's financial and accounting systems.

D. The policy could limit the range of services that could be performed due to the internal audit activity's narrow expertise and backgrounds.

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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.

When the audit was assigned, management asked the auditor to evaluate the appropriateness of using self-insurance to minimize risk to the organization. Given the scope of the audit requested by management, should the auditor engage an actuarial consultant to assist in the audit if these skills do not exist on staff?

A. Yes. The actuary has skills, not usually found in auditors, to identify and quantify self-insurance risks.

B. No. The audit department is skilled in assessing controls, and the insurance control concepts are not distinctly different from other control concepts.

C. Yes. An actuary is essential to determine whether the health care costs are reasonable. D. No. It is a normal audit function to assess risk; this audit engagement is therefore not unique.

During an engagement involving the purchasing department, an internal auditor learned that one vendor rewarded buyers in proportion to the size of the orders received from them. What recommendation should the internal auditor make to reduce the likelihood of future acceptance of such rewards by the buyers?

A. Establishing an employee counseling program.

B. A policy of identifying and reducing buyer situational pressures. C. Periodic review of buyer lifestyles.

D. A strong, written statement of management’s commitment to organizational ethics.

An organization is in the process of establishing its new internal audit activity (IAA). The controller has no previous experience with internal auditors. Due to this lack of experience, the controller advised the applicants that the CAE will be reporting to the external auditors. However, the new CAE will have free access to the controller to report anything important. The controller will then convey the CAE's concerns to the board. The IAA will

A. Be independent because the CAE has direct access to the board. B. Not be independent because the CAE reports to the external auditors.

C. Not be independent because the controller has no experience with internal auditors.

D. Not be independent because the organization did not specify that the applicants must be certified internal auditors.

Question 87 - CIA 1186 I.30 - Quality Assurance & Improvement Program

As part of a quality assurance and improvement program (QAIP), internal assessment teams most likely will examine which of the following to evaluate the quality of engagement planning and documentation for individual engagements? A. Weekly status reports.

B. Project assignment documentation.

C. The long-range engagement work schedule does not relate to individual engagements. D. Written engagement work programs.

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A Certified Internal Auditor (CIA), employed by a large department store, performed an audit of the store's cash function. Which of the following actions would be deemed lacking in due professional care?

A. The auditor informed appropriate authorities within the organization about suspected wrongdoing. No report was made to external authorities.

B. Because of a highly developed system of internal controls over the cash function, the audit report assured top management that no irregularities existed.

C. The report included a well-supported recommendation for the reduction in staff although it was known that such a reduction would adversely impact morale.

D. A flowchart of the entire cash function was developed but only a sample of transactions were tested.

The Rules of Conduct set forth in The IIA Code of Ethics:

A. Are guidelines to assist internal auditors in dealing with engagement clients. B. Are interpreted by the Principles.

C. Apply only to particular conduct specifically mentioned. D. Describe behavior norms expected of internal auditors.

The chief audit executive (CAE) of internal auditing of a mid-sized internal auditing organization was concerned that management might outsource the internal auditing function. Therefore, the CAE adopted a very aggressive program to promote the internal auditing department within the organization. The CAE planned to present the results to

management and the audit committee and recommend modification of the Internal Audit Charter after using the new program. The following lists six actions the CAE took to promote a positive image within the organization:

1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy and efficiency audits was new, but the auditees seemed very happy.

2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were carefully considered when developing the final audit report.

3. The EDP auditor participated as part of a development team to review the control procedures to be incorporated into a major computer application under development.

4. Given limited resources, the CAE performed a risk analysis to determine which locations to audit. This was a marked departure from the previous approach of ensuring that all operations are reviewed on at least a three-year interval.

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

6. When the auditors found that management and the auditee had not developed specific criteria or data to evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria, review the

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criteria with the auditee, and if acceptable, use it to evaluate the auditee's operations. If the auditee disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed upon. The audit report commented on the auditee's operations in conjunction with the agreed-upon criteria.Considering Actions 2, 3 and 4 that were taken, which would be considered a violation of the Standards?

A. Action 4 only. B. Action 2 and 3 only. C. Actions 2, 3, and 4. D. None of the Actions.

Question 91 - CIA QZP1A.13 - Charter, Independence & Objectivity

A scope limitation is a restriction placed upon the internal audit activity (IAA) that precludes the audit activity from accomplishing its objectives and plans. Which of the following would be considered scope limitations?

I. An internal auditor is not given free access to records that are relevant to the performance of an engagement. II. An engagement client has asked the internal auditor not to contact certain customers since the client feels that contacting these customers would upset them.

III. The engagement client has requested that the engagement be delayed for two-weeks so it is able to close its books.

A. I, II and III. B. I and II only. C. II and III only. D. I only.

As a staff auditor, which of the following actions would be considered a violation of the Standards or Code of Ethics? A. Discuss the matter with the audit director without further discussion with the audit manager.

B. Resign from the audit department and company if further action is not taken on the matter. C. Disclose the matter to the external auditor without further discussion.

D. Inform the audit manager that you will be including the information in your working papers as an audit finding.

When faced with an imposed scope limitation, the chief audit executive (CAE) should

A. Communicate the potential effects of the scope limitation to the audit committee of the board of directors. B. Delay the audit until the scope limitation is removed.

C. Assign more experienced personnel to the engagement. D. Increase the frequency of auditing the activity in question.

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Assuming that the internal auditing staff possesses the necessary experience and training, which of the following services is most appropriate for a staff internal auditor to undertake?

A. Determine the profitability of alternative investment acquisitions and select the best alternative.

B. Participate in an internal audit of the accounting department shortly after transferring from the accounting department.

C. As part of an evaluation team, review vendor accounting software internal controls and rank according to exposures.

D. Substitute for the accounts payable supervisor while (s)he is on sick leave.

Which of the following statements is true with respect to due professional care?

A. An item should not be mentioned in an engagement communication unless the internal auditor is absolutely certain of the item.

B. An internal auditor should perform detailed tests of all transactions before communicating results. C. An engagement communication should never be viewed as providing an infallible truth about a subject. D. An internal auditor has no responsibility to recommend improvements.

Question 96 - CIA 581 I.5 - Introduction to Internal Auditing A major reason for establishing an internal audit activity (IAA) is to

A. Relieve overburdened management of the responsibility for establishing effective controls. B. Ensure the reliability and integrity of financial and operational information.

C. Safeguard resources entrusted to the organization.

D. Evaluate and improve the effectiveness of control processes.

Question 97 - CIA 1190 I.38 - Introduction to Internal Auditing An appropriate internal auditing role in a feasibility study is to

A. Determine the requirements for preparing a manual of specifications.

B. Participate in the drafting of recommendations for the computer acquisition and implementation. C. Serve on the task force for the preliminary survey.

D. Ascertain if the feasibility study addresses cost-benefit relationships.

Reasonable assurance should be obtained as to each prospective internal auditor's qualifications and proficiency. Which of the following is the least useful application of this principle?

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B. Determining previous job experience. C. Obtaining college transcripts.

D. Determining that all applicants have an accounting degree.