Question 1

An internal auditor is checking the accuracy of a computer-printed inventory listing to determine whether the total dollar value of inventory is significantly overstated. Because there is no time or resources to check all items in the warehouse, a sample of inventory items must be used. If the sample size is fixed, which of the following would be the most accurate sampling approach?

Accepted Answer

A)  Select those items that are most easily inspected. 
B)  Employ simple random sampling. 
C)  Sample so that the probability of a given inventory item being selected is proportional to the number of units sold for that item. 
D)  Sample so that the probability of a given inventory item being selected is proportional to its book value.

Question 2

An auditor plans to analyze customer satisfaction, including. (1) customer complaints recorded by the customer service department during the last three months; (2) merchandise returned in the last three months; and (3) responses to a survey of customers who made purchases in the last three months. Which of the following statements regarding this audit approach is correct?

Accepted Answer

A)  Although useful, such an analysis does not address any risk factors. 
B)  The survey would not consider customers who did not make purchases in the last three months. 
C)  Steps 1 and 2 of the analysis are not necessary or cost-effective if the customer survey is comprehensive. 
D)  Analysis of three months' activity would not evaluate customer satisfaction.

Question 3

It would be appropriate for an internal audit activity to use consultants with expertise in health-care benefits when the internal audit activity is:

Accepted Answer

A)  Conducting an audit of the organization's estimate of its liability for post retirement benefits, which include health care benefits. II. Comparing the cost of the organization's health care program with that of other programs offered in the industry. III. Training its staff to conduct an audit of health care costs in a major division of the organization. 
B)  I only 
C)  I and III only 
D)  II and III only 
E)  I, II, and III.

Question 4

An internal auditor is reviewing employee travel data to identify opportunities to cut costs while ensuring adequate participation at conferences to support the organization's mission. Which of the following pieces of evidence would be sufficient for completing this task?

Accepted Answer

A)  A log from the last year that includes dates of travel, conference titles, and conference objectives, all of which correspond with employee names and costs per trip. 
B)  A log that includes titles of conferences that all employees were invited to attend in the last year, along with the dates of those conferences and average costs per traveler. 
C)  A log of conferences titles, dates of travel for each employee, and a detailed summary of conference objectives and how they relate to the organization's mission needs. 
D)  A log of employee travel requests, which include the title of each conference, the conference objectives, anticipated dates of travel, and estimated costs.

Question 5

An internal audit manager of a furniture manufacturing organization is planning an audit of the procurement process for kiln-dried wood. The procurement department maintains six procurement officers to manage 24 different suppliers used by the organization. Which of the following controls would best mitigate the risk of employees receiving kickbacks from suppliers?

Accepted Answer

A)  The periodic rotation of procurement officers' assignments to supplier accounts. 
B)  A pre-award financial capacity analysis of suppliers. 
C)  An automated computer report, organized by supplier, of any invoices for the same amount. 
D)  Periodic inventories of kiln-dried wood at the organization's warehouse.

Question 6

Which of the following would be the best source of information for a chief audit executive to use in planning future audit staff requirements?

Accepted Answer

A)  Discussions of audit needs with executive management and the audit committee. 
B)  Review of audit staff education and training records. 
C)  Review of audit staff size and composition of similar-sized companies in the same industry. 
D)  Interviews with existing audit staff.

Question 7

A quantitative risk assessment model has all of the following advantages except:

Accepted Answer

A)  Accommodating a large number of risk factors in the assessment. 
B)  Providing documentation for the chief audit executive, who must defend the long-range audit plan. 
C)  Providing a systematic method of applying weightings to risks and priorities. 
D)  Removing the need for judgment on the part of the chief audit executive.

Question 8

What is audit risk?

Accepted Answer

A)  Internal and external risk factors that exist when there are no controls implemented. 
B)  The amount of risk that is reduced through risk management operations. 
C)  An incorrect conclusion based on evidence uncovered during an audit. 
D)  The risk that remains after management has executed risk management activities.

Question 9

If earnings on financial statements for internal use only have been manipulated in the past, an internal auditor is likely to focus on which of the following?

Accepted Answer

A)  The proper accrual of payables at the end of the interim period. 
B)  The timing of revenue recognition and the valuation of inventories. 
C)  Whether accounting estimates are reasonable given past actual results. 
D)  Whether there have been changes in accounting principles that materially affect the financial statements.

Question 10

What role, if any, should the internal audit activity have in the process of following up on observations and recommendations made by the external auditors?

Accepted Answer

A)  The internal audit activity should have no role in this process in order to ensure independence. 
B)  The internal audit activity should become involved only if the chief audit executive has sufficient evidence that the follow-up is not occurring. 
C)  The internal audit activity should review the adequacy and effectiveness of management's follow-up actions. 
D)  The internal audit activity should become involved only if specifically requested by management or the board of directors.

Question 11

Which of the following activities most significantly increases the risk that a bank will make poor-quality loans to its customers?

Accepted Answer

A)  Borrowers may not sign all required mortgage loan documentation. 
B)  Fees paid by the borrower at the time of the loan may not be deposited in a timely manner. 
C)  The bank's loan documentation may not meet the government's disclosure requirements. 
D)  Loan officers may override the lending criteria established by senior management.

Question 12

An internal auditor is performing analytical reviews as part of an audit of a supermarket's merchandising department. Because the economy has declined since midyear, the auditor can expect to encounter which of the following?

Accepted Answer

A)  Higher inventory turnover. 
B)  Higher operating margin. 
C)  Lower obsolete stock disposal. 
D)  Lower sales volume.

Question 13

Which of the following is a common type of payroll fraud?

Accepted Answer

A)  Unauthorized overtime. 
B)  Fictitious employees. 
C)  Unearned bonuses or commissions. 
D)  Skimming.

Question 14

Which of the following is correct regarding the implementation of a quality assurance and improvement program for the internal audit function?

Accepted Answer

A)  The board has the primary responsibility for implementation of a robust quality assurance and improvement program for internal audit. 
B)  An internal audit function that is fully complying with internal assessment of quality can confidently claim it is performing in conformity with the International Professional Practices Framework. 
C)  The chief audit executive can establish a formal quality assurance and improvement program that is led by an audit manager. 
D)  A quality assurance and improvement program is applicable depending on the size and complexity of the audit function.

Question 15

Which of the following statements describes a control weakness?

Accepted Answer

A)  Purchasing procedures are well designed and are followed even when the purchasing supervisor wishes to direct otherwise. 
B)  Pre-numbered blank purchase orders are secured within the purchasing department. 
C)  Normal operational purchases fall in the range from $500 to $1, 000, with a single signature required for purchases over $1, 000. 
D)  The purchasing agent in a personal capacity invests in a publicly-traded mutual fund that lists the stock of one of the company's suppliers in its portfolio.

Question 16

Which type of control is designed to directly mitigate internal and external risks at the organization wide level, furthering the achievement of many overall organizational objectives?

Accepted Answer

A)  Process-level control. 
B)  Entity-level control. 
C)  Transaction-level control. 
D)  Complementary control.

Question 17

Which of the following would provide the best evidence of compliance with an airline's standard of having aircraft refueled and cleaned within a specified time of arrival at an airport?

Accepted Answer

A)  Vendor fuel invoices that have been reconciled to inventory records. 
B)  Time cards completed by aircraft cleaning and fueling crews. 
C)  Observation of selected aircraft while they are being refueled and cleaned. 
D)  Comparison of the standard hourly labor costs for cleaning and fueling personnel with actual labor charges.

Question 18

Which of the following best describes the trait that an internal auditor exercises when considering the extent of work needed to achieve the engagement's objectives?

Accepted Answer

A)  Independence. 
B)  Due professional care. 
C)  Objectivity. 
D)  Proficiency.

Question 19

During the planning phase of an audit of suspected overbilling on contracts for security services, an auditor should perform all of the following except:

Accepted Answer

A)  Interviewing an official of the security services company to determine the cause of recent increases in billings for services. 
B)  Interviewing the manager who requested the audit engagement. 
C)  Obtaining a copy of the contract between the two organizations. 
D)  Preparing an engagement program.

Question 20

An accounts receivable clerk receives cash payments, posts the payments to customer accounts, and prepares the daily cash deposit. The clerk has been stealing some cash and manipulating the customer payments to hide the theft. This fraud could be detected with which of the following controls?

Accepted Answer

A)  Monthly bank reconciliations are performed by the clerk on a timely basis. 
B)  Total cash deposits for the month are reconciled to the cash receipts journal. 
C)  Names, amounts, and dates on remittance advices are reconciled with the names, amounts, and dates recorded in the cash receipts journal. 
D)  Total cash deposits are compared with the bank reconciliation.

Exam 3: The Internal Audit Activity Role in Governance, Risk, and Control