Essentials: Independence & Objectivity

Question 1

Which activity would be presumed to impair the objectivity of an internal auditor if done within the past year?

A) Drafting procedures for running a new computer application to ensure that proper controls are installed
B) Recommending standards of control for a new information system application
C) Performing reviews of procedures for a new computer application before it is installed
D) Noting that the chief audit executive has multiple direct interactions with the board related to a new information system

Answer 1

Drafting procedures for running a new computer application to ensure that proper controls are installed

Rationale
Standard 1130.A1 says in part, “Objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for which the internal auditor had responsibility within the previous year.” The other answer choices are not presumed to impair objectivity per Standard 1130.

Question 2

Management has requested the internal auditing department to perform an operational audit of the telephone marketing operations of a major division and to recommend procedures and policies for improving management control over the operation. The auditor should

A) not accept the engagement, because recommending controls would impair the future objectivity of the department regarding this auditee.
B) not accept the engagement, because audit departments are presumed to have expertise in accounting controls, not marketing controls.
C) accept the audit engagement, because objectivity would not be impaired.
D) accept the engagement, but indicate to management that recommending controls would impair audit independence so management knows that near-future audits of the area by the same auditor would be impaired.

Answer 2

accept the audit engagement, because objectivity would not be impaired.

Rationale
The auditor should accept the engagement, assign staff with sufficient control knowledge, and make recommendations where appropriate. This would not impair objectivity.

Question 3

An internal auditor has been assigned to an assurance audit of the organization’s training department. Which condition would constitute a threat to the internal auditor’s objectivity, as defined by The IIA’s Code of Ethics?

A) The auditor has a very unfavorable opinion of the department based on experience with its internal seminars.
B) The auditor has a background in developing training materials from a previous job with another organization.
C) The auditor has a very favorable opinion of the organization overall based on its national reputation.
D) The auditor is unfamiliar with the basic principles of training.

Answer 3

The auditor has a very unfavorable opinion of the department based on experience with its internal seminars.

Rationale
The internal auditor’s objectivity may be compromised by either a positive or negative predisposition in regard to the audit client. However, the overall organization is not the current audit client, and, in assessing objectivity, it is important to consider what would be “reasonable” versus what could be perceived as a conflict of interest. Experience with another organization’s approach to training is not necessarily a problem for objectivity.

Question 4

To manage internal audit objectivity effectively, the chief audit executive (CAE) should establish expectations and requirements for an unbiased mindset for every internal auditor. Such expectations would be most evident in the internal auditor’s review of

A) going-concern assessments.
B) laws and regulations.
C) industry best-practices guides.
D) inventory estimates.

Answer 4

inventory estimates.

Rationale
A review of inventory estimates would require an auditor to maintain a high level of individual objectivity due to the subjectivity potential of estimates. There is little room for subjectivity in industry best-practice guides or laws and regulations. Going-concern assessments may involve some subjectivity, but much of the data will be objective financial data.

Question 5

The chief audit executive (CAE) of an internal audit activity has a strong financial background but takes on a consulting engagement with the human resources department. In this engagement, the CAE develops an interview guide and supervises the process of hiring an investment professional to design and administer a new retirement plan. Which of the following constitutes the major problem with this arrangement?

A) The arrangement subtracts from the availability of audit activity resources for assurance engagements.
B) Helping select a key person in the human resources department potentially compromises the independence and objectivity of the CAE and the value of the audit activity.
C) The engagement risks reducing the organizational status of the internal audit activity if the new person proves inadequate to the job.
D) The CAE’s experience in finance is not relevant to hiring.

Answer 5

Helping select a key person in the human resources department potentially compromises the independence and objectivity of the CAE and the value of the audit activity.

Rationale
When an internal auditor participates directly in the functioning of other areas in the organization, he or she may compromise the ability to assess those areas objectively in future audits. The CAE may or may not have expertise in hiring as well as finance. Every engagement to some degree removes resources available for other engagements, and every engagement is an opportunity for the internal audit activity either to raise or reduce its reputation in the organization.

Question 6

Which of the following activities undertaken by the internal auditor might be in conflict with the standard of independence?

A) Acting as external audit liaison
B) Acting as an ethics advocate
C) Acting as a product development temporary project manager
D) Acting as a risk management consultant

Answer 6

Acting as a product development temporary project manager

Rationale
Some activities, such as acting as the leader of a project, may conflict with the independence attribute of the internal audit activity. The auditor can be a consultant to the project but should not participate as project manager. The other options do not conflict with the independence of the internal audit activity.

Question 7

An organization is in the process of establishing its new internal audit department. The controller has had no previous experience with internal auditors. Due to this lack of experience, the controller advises applicants that they will be reporting to the external auditors. However, the new chief audit executive (CAE) will have free access to the controller to report anything important. The controller will convey the CAE’s concerns to the board of directors. Which of the following is true?

A) The internal audit department will not be independent because the company has not specified that the applicants be Certified Internal Auditors.
B) The internal audit department will not be independent because the controller has no experience with internal auditors.
C) The internal audit department will not be independent because the CAE reports to the external auditors.
D) The internal audit department will be independent because the CAE has direct access to the board of directors.

Answer 7

The internal audit department will not be independent because the CAE reports to the external auditors.

Rationale
The internal audit department will not be independent because the reporting structure has the CAE reporting to the external auditors. According to Standard 1110, “The chief audit executive must report to a level within the organization that allows the internal audit activity to fulfill its responsibilities.” External auditors are not individuals in the organization. Organizational independence is effectively achieved when the CAE has direct and unrestricted access to the board. The access in this case is indirect, via the controller. Whether the controller has experience with internal auditors does not affect the audit department’s independence. Although desirable, the Certified Internal Auditor designation is not mandatory for a person to become an internal auditor. A CIA would, of course, insist on internal audit department independence.

Question 8

An internal auditor believes that the accounts receivable account balances may not be accurate. Which procedure listed would best demonstrate his/her professional skepticism?

A) Interviewing the company’s salespeople responsible for generating the sales
B) Tracing the fund balance to the general ledger
C) Performing a statistical sample of the accounts and tracing them to the source documentation
D) Issuing third-party confirmations to the customers owing the money

Answer 8

Issuing third-party confirmations to the customers owing the money

Rationale
Maintaining professional skepticism ensures that internal auditors do not make undue assumptions about the validity of support such as verbal explanations from management or other information received without an appropriate level of objective verification of such support. Issuing third-party confirmations to the customers owing the money would be an independent source to verify the accounts. The information would be from outside of the company and so demonstrates an attitude of professional skepticism.

Question 9

A CAE reports directly to the CEO. An auditor discovers a material cash shortage. When questioned, the person responsible explains that the cash was used to cover sizable medical expenses for a child and agrees to replace the funds. Despite the corrective action, the CAE decides to inform management. In this instance, the CAE

A) has organizational independence but not objectivity.
B) has both organizational independence and objectivity.
C) has objectivity but not organizational independence.
D) has neither organizational independence nor objectivity.

Answer 9

has objectivity but not organizational independence.

Rationale
Because the CAE reports directly to the CEO, the IA activity lacks organizational independence. However, by keeping an unbiased mental attitude and reporting the serious offense despite the potentially mitigating circumstances, the CAE is exercising objectivity.

Question 10

Which is the best example of an internal auditor’s professional skepticism?

A) Noting conditions that indicate compliance with policies and procedures
B) Noting that policies and procedures were revised after the audit was announced
C) Placing emphasis on audit evidence that contradicts other evidence obtained
D) Reviewing the external auditor’s management letter

Answer 10

Placing emphasis on audit evidence that contradicts other evidence obtained

Rationale
Maintaining professional skepticism ensures that internal auditors do not make undue assumptions about the validity of support, such as verbal explanations from management or other information received, without an appropriate level of objective verification of such support. Audit evidence that contradicts other evidence obtained would be the best example of professional skepticism.

Question 11

When reviewing and evaluating the organizational status of the internal audit activity to increase and improve independence, the governing body should consider which of the following factors?

A) Internal political impact of the reporting lines of the chief audit executive
B) Individual preferences of executive management and the chief audit executive
C) Previous organizational statuses implemented throughout the life of the organization and the relevant purposes for change
D) Governing board’s involvement in decisions to hire or remove the chief audit executive and in drafting and approving an internal audit charter

Answer 11

Governing board’s involvement in decisions to hire or remove the chief audit executive and in drafting and approving an internal audit charter

Rationale
The Practice Guide “Independence and Objectivity” lists five factors to consider in this case:
- Reporting level of the chief audit executive (CAE) within the organization
CAE’s unrestricted access to information throughout the organization and the governing board
- Governing board’s involvement in decisions to hire or remove the CAE and in drafting and approving an internal audit charter
- Role of the governing board in influencing the budget for, and the scope of, internal audit activities and remuneration and retention of the CAE
- Active involvement, oversight, review, and follow-up by the governing board with the internal audit activity

Question 12

Standard 1100 states, “The internal audit activity must be independent, and internal auditors must be objective in performing their work.” How does The Institute of Internal Auditors interpret independence?

A) As the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities
B) As the adherence to a socially accepted ethical standard of conduct that establishes trust and thus provides the basis for reliance on the internal auditor’s judgment
C) As an internal control designed to prevent error and fraud by ensuring that at least two individuals are responsible for the separate parts of any task
D) As an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made

Answer 12

As the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities

Rationale
The interpretation of Standard 1100 defines independence as “the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.”

Question 13

The best rationale for rotating internal auditors so that different individuals are assigned to consecutive audits of a given auditee is to

A) promote rapid professional development on the part of internal auditors by exposing them to the full range of organizational activities.
B) increase the diligence exercised by internal auditors who know that the quality of their work will be apparent to the next set of internal auditors.
C) avoid the development of bias toward a given auditee.
D) prevent burnout on the part of the internal auditor, which may lead to excessive turnover in the internal audit department.

Answer 13

avoid the development of bias toward a given auditee.

Rationale
Avoiding the development of bias is the primary reason. The alternatives may be desirable, but they are not the basis for the rotation preference.

Question 14

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

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

Answer 14

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

Rationale
An auditor who has been promoted to an operating department should not continue on an audit of that department. If the chief audit executive determines that impairment exists or may be inferred, he or she needs to reassign the auditor.

Question 15

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 which factor?

A) Access to and frequency of communications with the board of directors or the audit committee
B) Scope and depth of organizational objectives for the audit areas under review
C) Education and experience considered necessary when filling vacant audit staff positions
D) Degree to which auditors assume consulting responsibilities

Answer 15

Access to and frequency of communications with the board of directors or the audit committee

Rationale
Education and experience are related to skill, not independence. Communication and assumption of operating duties (not consulting duties) are related to independence. The scope and depth of the audit objectives also reflect on the department’s independence (not the objectives of the audit areas under review).

Question 16

As part of a company-sponsored award program, an internal auditor is offered an award of significant monetary value by a division in recognition of cost savings that resulted from the auditor’s recommendations. According to the International Professional Practices Framework, what is the most appropriate action for the auditor to take?

A) Inform audit management and ask for direction on whether to accept the gift.
B) Decline the gift and advise the division manager’s superior.
C) Accept the award under the condition that it goes to charity.
D) Accept the gift, since the engagement is already concluded and the report is issued.

Answer 16

Inform audit management and ask for direction on whether to accept the gift.

Rationale
Audit management should always be informed of offers of gifts and consulted for guidance.

Question 17

An auditor makes a preliminary determination that a major division has been inappropriately capitalizing research and development expense. The audit is not yet completed, and the auditor has not documented the problem or determined that it really is a problem. However, the auditor is informed that the director of internal auditing has received the following communication from the president of the company:
“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 would be an appropriate action for the director to take regarding the questionable item?

A) Immediately notify the external auditors of the problem to avoid aiding and abetting a potential crime by the organization.
B) Inform the president that this scope limitation will need to be reported to the chairperson of the audit committee.
C) Immediately report the communication to The Institute of Internal Auditors and ask for an ethical interpretation and guidance.
D) Continue to investigate the area until all the facts are determined, and document all the relevant facts in the audit workpapers.

Answer 17

Inform the president that this scope limitation will need to be reported to the chairperson of the audit committee.

Rationale
The chief audit executive should communicate the scope limitation to the board. However, it would be appropriate to ensure that the president is aware of this.

Question 18

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

A) A payroll accounting employee assists an internal auditor in verifying the physical inventory of small motors.
B) An internal auditor recommends standards of control and performance measures for contracting with a service organization.
C) Four months after being transferred to the internal audit activity, a former purchasing assistant performs a review of internal controls over purchasing.
D) An internal auditor reviews the procedures for a new electronic data interchange connection for a customer before it is implemented.

Answer 18

Four months after being transferred to the internal audit activity, a former purchasing assistant performs a review of internal controls over purchasing.

Rationale
Per Standard 1120, a conflict of interest is “a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession.” In this scenario, the purchasing assistant has a conflict of interest because he or she worked in the purchasing department within the last year. Standard 1130.A1 states that “Objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for which the internal auditor had responsibility within the previous year.” This presumption of lack of objectivity exists because the auditor may not be wholly objective in auditing his or her previous department and colleagues’ work.

Question 19

Well-intended policies and training cannot provide total assurance of objectivity. Which is the best way listed for the chief audit executive (CAE) or another individual in a supervisory capacity for the internal audit activity to increase such assurance?

A) Review the results of the internal audit work.
B) Revise the charter to require consulting engagements.
C) Send internal audit customer service surveys to managers who were subject to audits during the year.
D) Use a risk control matrix.

Answer 19

Review the results of the internal audit work.

Rationale
Ongoing assessment can help to ensure that objectivity has not been compromised during an engagement. A best practice is for the CAE, or another individual in a supervisory capacity for the internal audit activity, to review the results of the internal audit work before the related engagement communications are released. A competent review by the CAE may note instances where the auditor may not be objective.

Question 20

Which would impact an internal auditor’s objectivity?

A) Following up on the recommendations made by internal audit in an audit that concluded nine months ago
B) Providing advice to the new CFO (who started nine months ago) on best practices in an accounts payable department
C) Relying on the work of an external subject matter expert who used to work for the organization as recently as nine months ago
D) Using five years of job experience in a department (transfer from the department was nine months ago) to recommend eliminating several poor procedures

Answer 20

Using five years of job experience in a department (transfer from the department was nine months ago) to recommend eliminating several poor procedures

Rationale
Standard 1130.A1 states that “internal auditors must refrain from assessing specific operations for which they were previously responsible. Objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for which the internal auditor had responsibility within the previous year.”

Question 21

The purchasing manager asks the chief audit executive (CAE) to provide a member of the internal audit staff to assist in designing new procedures for evaluating vendor bids. Which of the following responses would be most appropriate in light of the view of auditor objectivity in the International Professional Practices Framework?

A) The CAE may assign a competent internal auditor as requested, but that auditor may never again participate in assurance or consulting engagements with the purchasing department.
B) The CAE may assign a competent internal auditor as requested, but only if the auditor is temporarily placed on leave from the audit activity and paid through the purchasing department.
C) The CAE may assign a competent internal auditor as requested, but only with full disclosure and after careful consideration of the effects of the work on auditor objectivity.
D) The CAE should refuse the request as inappropriate and make a full report to the audit committee and senior management.

Answer 21

The CAE may assign a competent internal auditor as requested, but only with full disclosure and after careful consideration of the effects of the work on auditor objectivity.

Rationale
Performing operational functions potentially impairs an internal auditor’s objectivity in regard to future assurance engagements but may be done on occasion with full disclosure and careful consideration by management and the auditor. After sufficient time has elapsed (at least one year), the auditor may be considered for participation in assurance engagements in the area in which he or she exercised operational responsibilities (Implementation Guide 1130).

Question 22

An auditor should assume that management is honest and truthful, but the possibility of dishonesty must be considered. What is this an example of?

A) Professional judgment
B) General business ethics
C) The IIA’s Code of Ethics
D) Professional skepticism

Answer 22

Professional skepticism

Rationale
Maintaining professional skepticism ensures that internal auditors do not make undue assumptions about the validity of support, such as verbal explanations from management or other information received, without an appropriate level of objective verification of such support.

Question 23

Audit committees have been identified as a major factor in promoting the independence of both internal and external auditors. Which of the following is the most important limitation on the effectiveness of audit committees?

A) Audit committees may be composed of independent directors. However, those directors may have close personal and professional friendships with management.
B) Audit committee members do not normally have degrees in the accounting or auditing fields.
C) Audit committees devote most of their efforts to external audit concerns and do not pay much attention to internal auditing and the overall control environment.
D) Audit committee members are compensated by the organization and thus favor a stockholder’s view.

Answer 23

Audit committees may be composed of independent directors. However, those directors may have close personal and professional friendships with management.

Rationale
Having close relationships with management is a major limitation that has hampered the effective operation of audit committees. Audit committee members are usually outside directors. Many of these directors have a broad viewpoint and are not limited to a stockholder’s view. Audit committees devote considerable time to the external audit function, but the evidence is that they are increasingly devoting time to internal audit reports. A committee member need not have an accounting degree to understand most reporting and control issues.

Question 24

An internal auditor is assigned to an operations audit to assess the efficiency of recently introduced just-in-time manufacturing procedures. The auditor finds out that he knows the external consultant who is on site managing the implementation of the new system; this person was the adviser on the auditor’s thesis and was instrumental in getting him his first job. Which of the following responses by the auditor would be most consistent with The IIA’s International Professional Practices Framework?

A) The internal auditor should disclose the relationship to the chief audit executive (CAE), and the CAE may choose to assign a different internal auditor.
B) The potential conflict should be disclosed to the engagement client before accepting the engagement.
C) The internal auditor need not disclose the relationship but should be certain that he has no contact, such as an audit interview, with the consultant during the course of the audit.
D) The internal auditor should disclose the potential conflict of interest to the board or audit committee, preferably in writing.

Answer 24

The internal auditor should disclose the relationship to the chief audit executive (CAE), and the CAE may choose to assign a different internal auditor.

Rationale
Potential impairments to objectivity or independence should be disclosed to the CAE before accepting the engagement. In a consulting engagement such as this one, the CAE would be likely to remove the internal auditor only if the CAE were concerned about conformance to the Code of Ethics and the auditor’s ability to perform and maintain objectivity.

Question 25

The internal auditing department encounters a scope limitation from senior management that will affect its ability to meet its goals and objectives for a potential auditee. The nature of the scope limitation should be

A) communicated to management, stating that the limitation will not be accepted because it would impair the audit department’s independence.
B) communicated to the board, preferably in writing.
C) communicated to the external auditors so they can investigate the area in more detail.
D) noted in the audit working papers, but the audit should be carried out as scheduled and the scope limitation worked around, if possible.

Answer 25

communicated to the board, preferably in writing.

Rationale
A scope limitation, along with its potential effect, needs to be communicated to the board, preferably in writing.

Question 26

Internal audit is nearing completion of fraud awareness training for the department. As an expression of gratitude, management offers tickets of significant value to the internal auditors who facilitated the training. Which of the following best describes what the internal auditors should do?

A) Decline the offer of the tickets and make a report to the chief audit executive (CAE).
B) Accept the tickets if the CAE approves and there is no internal audit in progress.
C) Decline the offer. No report is needed since the offer was declined.
D) Decline the tickets and report the offer to the board.

Answer 26

Decline the offer of the tickets and make a report to the chief audit executive (CAE).

Rationale
It is unethical for internal audit to accept a fee or gift from an employee, a client, a customer, a supplier, or a business associate, as doing so may create an appearance that objectivity has been impaired. This principle applies to current and future engagements conducted by the auditor. Promotional items (pens, calendars, calculators, and the like) that are generally available to the public and have minimal value should not hinder internal auditors’ professional judgments. Internal auditors are to report offers of material fees or gifts to the CAE.

Question 27

Internal audit is facilitating an objective-based control self-assessment workshop. Participant comments about a process are unclear, and the facilitator needs to get more specifics about what is being done. Which of the following is an example of an appropriate tactic?

A) Paraphrase and restate any comments that seem weak or unclear.
B) Probe into general participant statements.
C) Override the group’s input if it is not optimal (in the facilitator’s opinion).
D) Offer suggestions when the group is struggling.

Answer 27

Probe into general participant statements.

Rationale
The key is for the internal auditor to be honest and open, just as he or she would be in evaluating controls. However, facilitators should not put words in someone’s mouth or impose their opinions or knowledge on the group. The ownership and accountability for the information gathered must remain with the group. Internal auditors should be alert to anything that will affect their objectivity. Standard 1120 notes that internal auditors must have an impartial unbiased attitude and avoid any conflict of interest.”

Question 28

A company is in the process of restructuring to enhance future growth. The chief audit executive (CAE) currently reports both functionally and administratively to the compliance director, who reports both functionally and administratively to the chief legal officer (CLO). In order to maximize the independence of the audit function, what changes should be made to the CAE’s reporting structure?

A) The audit function is positioned appropriately and does not require any reporting changes.
B) The CAE should report functionally to the board or a similar governing body and should report administratively to the CEO.
C) The CAE should report functionally to the board or a similar governing body, but no changes to the administrative reporting line are needed.
D) The CAE should report both functionally and administratively to the CLO.

Answer 28

The CAE should report functionally to the board or a similar governing body and should report administratively to the CEO.

Rationale
The Implementation Guide for Standard 1110 states:
“To ensure effective organizational independence, the CAE has a direct functional reporting line to the board. Generally, the CAE also has an administrative, or ‘dotted,’ reporting line to a member of senior management.”
“To enhance stature and credibility, The IIA recommends that the CAE report administratively to the chief executive officer (CEO) so that the CAE is clearly in a senior position, with the authority to perform duties unimpeded.”

Question 29

Which would be a good policy to promote objectivity?

A) Avoiding auditing any area for which the internal auditor was ever responsible for at that organization
B) Avoiding situations that would subordinate the auditor’s judgment on audit matters to that of others
C) Allowing potential conflicts of interest to exist if staff assignments require it so long as there is no actual conflict of interest
D) Avoiding situations in which the auditor is asked to make objective professional judgments on a regular basis

Answer 29

Avoiding situations that would subordinate the auditor’s judgment on audit matters to that of others

Rationale
Internal auditors should not subordinate their judgment on audit matters to that of others. This policy can promote objectivity. Actual and potential conflicts of interest should be avoided. Internal auditors can have objectivity after one year has passed after being previously responsible for an audit area according to Standard 1130.A1. Internal auditors should not be placed in situations in which they feel unable to make objective professional judgments.

Question 30

The chief audit executive (CAE) is informed by a client just before a scheduled assurance engagement is about to begin that the agreed-upon schedule will have to be significantly shortened to accommodate an unexpected crisis that has tied up most of the client’s resources. The internal auditors will have less time for interviews and observations because of the difficulties the unit is experiencing. Which of the following actions should the CAE take?

A) The CAE should change the schedule according to the client’s needs and document the change in the final report.
B) The CAE should consider the situation a red flag and schedule a fraud audit.
C) Since schedules are not specified in the audit charter, the situation is not a limitation of scope, and the CAE can use his or her judgment about informing the board.
D) Inform the board of the situation, preferably in writing, because it is a limitation of scope.

Answer 30

Inform the board of the situation, preferably in writing, because it is a limitation of scope.

Rationale
Restrictions of an approved schedule are a limitation of scope and should therefore be reported to the board, preferably in writing (Implementation Guide 1130). Difficulties arise in the normal course of business and do not, of themselves, constitute sufficient evidence to warrant a fraud audit.

Question 31

Which is an example of professional skepticism?

A) Flowcharting key controls to form the basis of an audit program
B) Verifying that vendors paid in the first quarter were listed in the vendor history file
C) Interviewing staff on a process within the business function being reviewed
D) Identifying best practices within the industry

Answer 31

Verifying that vendors paid in the first quarter were listed in the vendor history file

Rationale
Maintaining professional skepticism ensures that internal auditors don’t make undue assumptions about the validity of support, such as information received, without an appropriate level of objective verification of such support.

Question 32

The chief audit executive (CAE) of an organization’s internal audit activity should have the authority to do which of the following without seeking specific approval from senior management?

A) Assign an internal auditor to an assurance engagement in an area where the auditor was employed within the preceding year without disclosing the action.
B) Implement the audit plan, including consulting audits.
C) Take on expected roles and responsibilities that fall outside of internal auditing, without limits.
D) Alter the approved audit plan in response to scope limitations.

Answer 32

Implement the audit plan, including consulting audits.

Rationale
Senior management cannot interfere with the delivery of the audit plan. Standard 2020 requires that an audit plan be approved by the audit committee, not senior management. The approved plan cannot be altered without senior management and board approval, however. According to Attribute Standard 1112, if the CAE “has or is expected to have roles and/or responsibilities that fall outside of internal auditing, safeguards must be in place to limit impairments to independence or objectivity.”

Question 33

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

A) A former employee of the accounting department is assigned to audit that department in the third year of a three-year audit rotation that he has been involved with since the start of the current rotation.
B) An auditor discloses to the chief audit executive that she has children on the same school sports team as a senior manager and occasionally sees the manager at events.
C) An auditor recently finished a consulting engagement in the disbursement area and uses knowledge of the good controls in this area to reduce the scope of audit tests, helping keep the audit area on budget.
D) A chief audit executive reports administratively to senior management and must review internal controls over financial reporting for senior management.

Answer 33

An auditor recently finished a consulting engagement in the disbursement area and uses knowledge of the good controls in this area to reduce the scope of audit tests, helping keep the audit area on budget.

Rationale
Implementation Guide 1130, “Impairment to Independence or Objectivity,” provides examples of objectivity impairments, including the situation in which an internal auditor assumes, without evidence, that an area being audited has effectively mitigated risks based solely on a prior positive audit or personal experience. Since the employee of the accounting department has been an internal auditor for three years now, by inference, he has not worked for the accounting department within the last year, so this is not a conflict of interest.

Question 34

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

A) Reducing the scope of an audit due to budget restrictions
B) Reviewing a purchasing agent’s contract drafts prior to their execution
C) Participating on a task force that recommends standards for control of a new distribution system
D) Continuing on an audit assignment in a division for which the auditor will soon be responsible as the result of a promotion

Answer 34

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

Rationale
An auditor who has been promoted to an operating department should not continue on an audit of the new department, as this would be an impairment situation.

Question 35

Reengineering is the thorough analysis, fundamental rethinking, and complete redesign of essential business processes. The intended result is a dramatic improvement in service, quality, speed, and cost. Which is an important part of an internal auditor’s involvement in reengineering?

A) Directing the implementation of the redesigned process
B) Getting experts to recommend areas for audit consideration
C) Determining whether the process has senior management’s support
D) Developing operational plans for the new system

Answer 35

Determining whether the process has senior management’s support

Rationale
Determining whether a reengineering effort has senior management support is an important part of assurance for a reengineering effort. However, internal auditors should not become directly involved in the implementation of the redesign process and should not subordinate their judgment to that of others. This would impair their independence and objectivity. Auditors will need to help the organization maintain effective controls by evaluating their effectiveness and efficiency and by promoting continuous improvement to enhance reengineering efforts.

Question 36

An internal auditor assigned to audit a vendor’s compliance with product quality standards is the brother of the vendor’s controller. The auditor should

A) notify the chief audit executive of the potential conflict of interest.
B) notify the vendor of the potential conflict of interest.
C) accept the assignment but avoid contact with the controller during fieldwork.
D) accept the assignment but disclose the relationship in the final engagement communication.

Answer 36

notify the chief audit executive of the potential conflict of interest.

Rationale
Implementation Guide 1130 states that internal auditors are to report to the chief audit executive any situation in which an actual or potential impairment to independence or objectivity may reasonably be inferred or if they have questions about whether a situation constitutes an impairment to objectivity or independence.

Question 37

The chief audit executive (CAE) has been appointed to a committee to evaluate the appointment of the external auditors. The engagement partner for the external accounting firm wants the director to join him for a week of hunting at his private lodge. The CAE should

A) refuse on the grounds of conflict of interest.
B) accept, assuming that both their schedules allow it.
C) ask the comptroller if this would be a violation of the company’s code of ethics.
D) accept, as long as it is not charged to company time.

Answer 37

refuse on the grounds of conflict of interest.

Rationale
The CAE has to avoid conflict of interest or activities that might prejudice his/her ability to carry out assigned duties. The CAE may not accept anything of value that might impair his/her professional judgment.

Question 38

A chief audit executive (CAE) receives a telephone call from an executive vice president (EVP) who is currently undergoing an audit in one of his business functions. The EVP states that a potential finding would be very damaging to one of his direct reports. He would like to have the issue not included in the audit report but handled outside of it. What should the CAE do first?

A) Contact the chair of the audit committee and review the issue.
B) Inform the EVP that he understands the sensitivity of the issue but the item has to be included in the audit report.
C) Comply with the EVP’s request due to its sensitivity.
D) Remove the item from the scope of the audit and refer it to an investigative body.

Answer 38

Inform the EVP that he understands the sensitivity of the issue but the item has to be included in the audit report.

Rationale
To manage internal audit objectivity effectively, the CAE should establish expectations and requirements for an unbiased mindset for every internal auditor, including typical situations that could undermine objectivity. The EVP request is not reasonable and should not be complied with.

Question 39

Which of the following describes the optimal reporting line for the chief audit executive (CAE) to enhance the independence of the internal audit activity?

A) Administrative reporting to the chief financial officer
B) Functional and administrative reporting to the president of the organization
C) Administrative reporting to the board
D) Functional reporting to the audit committee

Answer 39

Functional reporting to the audit committee

Rationale
Functional reporting to the audit committee provides the ultimate source of independence and authority and allows CAEs to carry out their work freely and objectively and to render objective judgments. Administrative reporting relates more to the day-to-day operations of the internal audit function.

Question 40

Which action below could endanger individual objectivity?

A) The same internal auditor performs the same specific audit in consecutive years.
B) Two years after an internal auditor transfers from an operating department, he is given an audit engagement in that area.
C) A guest auditor from a subsidiary is added to the audit team for a specific period for her technical expertise.
D) The internal audit staff is required to submit conflict-of-interest statements.

Answer 40

The same internal auditor performs the same specific audit in consecutive years.

Rationale
Policies and ongoing assessment of individual objectivity set the stage for an internal auditor to perform his or her duties objectively. Additional best practices for perpetuating individual objectivity include rotating internal auditor staff assignments periodically whenever it is practical to do so.

Question 41

A medium-sized publicly owned corporation operating in country X has grown to a size that the directors of the corporation believe warrants the establishment of an internal auditing department. Country X has legislated internal auditing requirements for government-owned companies. The company has changed the corporate bylaws to reflect the establishment of the internal auditing department. The directors decide that the chief audit executive (CAE) must be a Certified Internal Auditor who will report directly to the newly established audit committee of the board of directors. Which of these items will contribute the most to the new CAE’s independence?

A) Fact that the CAE will report to the audit committee of the board of directors
B) Documentation of the establishment of the internal auditing department in corporate bylaws
C) Fact that the CAE is to be a Certified Internal Auditor
D) Legislated internal auditing requirements in country X

Answer 41

Fact that the CAE will report to the audit committee of the board of directors

Rationale
Standard 1100 states, “To achieve the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive has direct and unrestricted access to senior management and the board. The auditor is reporting to the highest level possible.”

Question 42

Which of the following management requests would be within the normal audit scope?

A) Analyze financing alternatives and present the alternatives to the audit committee.
B) Do a make-or-buy decision analysis to determine whether the company should subcontract for part of its manufacturing versus adding capacity; report the recommendation to management for approval.
C) Talk with banks to identify financing alternatives, and negotiate contract alternatives that would be presented to management for evaluation.
D) Perform an independent evaluation of management’s planning process as a basis for making recommendations.

Answer 42

Perform an independent evaluation of management’s planning process as a basis for making recommendations.

Rationale
The planning process is part of the management control system, and its evaluation is part of the normal scope of the auditor’s activities. Talking with banks and make-or-buy decisions are management, not audit, functions. They have the potential to impair the auditor’s independence. The auditor should concentrate on management’s planning and evaluation process and report on that process to the audit committee.

Question 43

An internal auditor is reviewing the construction of a bridge that is being built by his company. The auditor is not an engineer, but upon reviewing the bridge specifications, he notices that certain materials are being substituted with other products. What would the next step be?

A) Call the vendor that sent the material and inquire if the substituted products are within specifications.
B) Review the issue with an independent engineer obtained through a trade association or on retainer.
C) Review the issue with the project manager of the bridge construction project.
D) Do nothing, as the substituted products were approved by the project manager, who is experienced in many bridge construction projects.

Answer 43

Review the issue with an independent engineer obtained through a trade association or on retainer.

Rationale
Internal auditors should have no personal or professional involvement with or allegiance to the area being audited and should maintain an unbiased and impartial mindset in regard to all engagements. Internal auditors should not subordinate their judgment on audit matters to that of others.

Question 44

Standard 1100 states, “The internal audit activity must be independent, and the internal auditors must be objective in performing their work.” How does The Institute of Internal Auditors interpret objectivity?

A) As the knowledge, skills, and experience needed in the performance of internal audit services
B) As a reporting structure in which the chief audit executive has a direct functional reporting relationship with the board
C) As an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made
D) As the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner

Answer 44

As an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made

Rationale
The interpretation of Standard 1100 defines objectivity as “an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.”

Question 45

Audit committees are most likely to participate in the approval of

A) the appointment of the chief audit executive.
B) audit work schedules.
C) internal audit report observations and recommendations.
D) audit staff promotions and salary increases.

Answer 45

the appointment of the chief audit executive.

Rationale
The independence of the internal audit activity is enhanced when the audit committee participates in naming the chief audit executive.

Question 46

An internal auditor reports directly to the board of directors. The auditor discovers a material cash shortage. When questioned, the person responsible explains that the cash was used to cover sizable medical expenses for a child and agrees to replace the funds. Because of the corrective action, the internal auditor does not inform management. In this instance, the auditor

A) has both organizational independence and objectivity.
B) has organizational independence but not objectivity.
C) has objectivity but not organizational independence.
D) has neither organizational independence nor objectivity.

Answer 46

has organizational independence but not objectivity.

Rationale
Because the auditor reports directly to the board of directors, the individual has organizational independence. However, by trying to avoid conflict, the individual is not exercising objectivity.

Question 47

Which is an example of a situation in which an auditor’s objectivity could be compromised?

A) The auditee is familiar with the auditor due to lack of rotation in assignments.
B) The auditor has experience that an area has effectively mitigated risks in the past but audits as if this were no longer the case.
C) The auditor refuses to temporarily assume operational duties when there is a missed deadline due to the need to audit the area later that year.
D) The auditor relies on outside expert opinion when appropriate.

Answer 47

The auditee is familiar with the auditor due to lack of rotation in assignments.

Rationale
Internal auditor staff assignments should be rotated periodically whenever it is practical to do so. Failure to do this can impair individual objectivity. Auditors sometimes must rely on outside experts; the Standards allow this. Internal auditors should not assume, without evidence, that an area being audited has effectively mitigated risks based solely on a prior positive audit or personal experience.

Question 48

Which of the following is a safeguard implemented to protect the independence of the internal audit function?

A) The CEO may determine the scope of audit activities without the input of the board or other governing body.
B) The chief audit executive has a direct functional reporting relationship with the chairperson of the audit committee of the board or other governing body.
C) Internal auditors are awarded annual bonuses commensurate with the number of audit issues they document.
D) The chief audit executive is assigned to manage the quality control department as an extension of his or her duties.

Answer 48

The chief audit executive has a direct functional reporting relationship with the chairperson of the audit committee of the board or other governing body.

Rationale
The Practice Guide “Independence and Objectivity” states, “An internal audit activity with a broad assurance and consulting role ideally should report directly to the governing board of the organization, and more specifically, to the audit committee of the board or other similar body.”

Question 49

Which fact, by itself, could contribute to a lack of independence in an internal auditing department?

A) The internal audit charter has not been approved by the board or the audit committee.
B) The majority of audit committee members, but not all, come from within the organization.
C) The chief executive officer (CEO) accused the previous director of not operating “in the best interests of the organization.”
D) The budget for the internal audit activity is reduced to the point where internal audit will fulfill only the minimum responsibilities outlined in the charter.

Answer 49

The internal audit charter has not been approved by the board or the audit committee.

Rationale
The charter enhances the auditor’s independence because it clearly specifies, in advance, the authority, scope, and responsibility of the internal auditing function. Having outside directors on an audit committee enhances the independence of the internal auditing department. The statement that the CEO accused the previous director of not operating “in the best interests of the company” does not necessarily indicate a lack of independence, although it might be corroborating evidence if there are other factors present. If the budget is reduced to the point where internal audit cannot fulfill its responsibilities as outlined in the charter, this would impair organizational independence, but this is not the case in this scenario.

Question 50

What is being most promoted when the board or audit committee spends time checking whether the internal audit activity has inappropriate scope or resource limitations?

A) Objectivity
B) Interdependence
C) Independence
D) Management

Answer 50

Independence

Rationale
This relates to the dual reporting structure of the chief audit executive and the audit activity—administratively to senior management and functionally to the audit committee. This aspect exists primarily to support internal audit activity independence.