Final Review Flashcards
What is the IIA’s definition of internal auditing?
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations by evaluating and improving risk management, control, and governance processes.
What are the four principles in the Code of Ethics for internal auditors?
Integrity
Objectivity
Confidentiality
Competency
What do Attribute Standards cover in internal auditing?
Attribute Standards address the characteristics of organizations and individuals performing internal audits, such as independence and proficiency.
What are Performance Standards in internal auditing?
Performance Standards describe the nature of internal auditing and provide quality criteria for assessing audit performance, including managing audit activities and engagement planning.
What is the difference between Attribute and Implementation Standards?
Attribute Standards relate to the qualities of the audit and auditors, while Implementation Standards provide specific guidance for assurance and consulting services.
What are the three categories for Internal Audit Standards?
Attribute Standards
Performance Standards
Implementations Standards?
the framework for internal auditing that includes authoritative guidance for internal auditors worldwide, developed by the Institute of Internal Auditors (IIA).
IPPF (International Professional Practices Framework)
What is the primary focus of internal auditing?
The primary focus of internal auditing is to provide assurance and consulting services that improve risk management, control, and governance processes within an organization.
What is the primary focus of external auditing?
The primary focus of external auditing is to provide an independent opinion on the accuracy of financial statements and ensure compliance with applicable accounting standards.
Who do internal auditors primarily report to?
Senior Management
Board of directors: Audit Committee
Who do external auditors primarily report to?
External Stakeholders such as
Shareholders
Creditors
Regulatory Bodies
What is the difference in independence between internal and external auditors?
Internal auditors are employees of the organization but must remain objective, while external auditors are completely independent, often hired from third-party firms.
How often are internal audits conducted?
Internal audits are conducted continuously throughout the year, based on the needs of the organization.
How often are external audits conducted?
External audits are typically conducted annually and are often required by law or regulation, especially for public companies.
What is the primary goal of the planning phase in an internal audit?
The goal is to establish the audit objectives, scope, and approach, as well as to allocate resources
Develop an audit plan(work program)
What activities are typically conducted during the fieldwork (perform) phase of an internal audit?
Activities include testing controls, gathering evidence through interviews and document review, and evaluating risks and control deficiencies.
What is the main objective of the reporting phase in an internal audit?
The objective is to communicate audit findings, conclusions, and recommendations to key stakeholders through an audit report.
During which phase of the audit are management’s corrective actions monitored?
During the follow-up phase, the auditor ensures that management has addressed the audit findings and implemented corrective actions.
What is the purpose of the follow-up phase in an internal audit?
The purpose is to verify that management has taken appropriate corrective actions to address the audit findings.
What does independence in internal auditing refer to?
Independence refers to the freedom from conditions that threaten the ability of internal auditors to carry out their responsibilities in an unbiased manner. It often includes organizational independence, where auditors report to the audit committee or board.
What is objectivity in internal auditing?
Objectivity is the internal auditor’s ability to perform audits with an impartial mindset, free from bias, conflicts of interest, or undue influence.
How does independence differ from objectivity in internal auditing?
Independence is a structural requirement ensuring auditors can perform their duties free from external influence, while objectivity is an attitudinal requirement, meaning auditors remain neutral and unbiased in their work.
What is an example of a threat to an internal auditor’s independence?
A threat to independence could include management limiting the auditor’s access to necessary data or personnel, which could influence the audit’s outcome
What is an example of a threat to an internal auditor’s objectivity?
A threat to objectivity would be an auditor reviewing a department where they were recently employed, which could introduce bias in the audit process.
Why are both independence and objectivity essential for internal auditors?
Both are essential to ensure that internal auditors provide fair, unbiased, and accurate evaluations of controls and processes, which helps maintain trust in the audit function.
What is the main objective of an assurance engagement?
The main objective is to provide an independent opinion or conclusion on the adequacy and effectiveness of the organization’s risk management, control, or governance processes.
What is the main focus of a consulting engagement?
The focus is on providing advisory services to help management improve risk management, control, or governance processes without issuing an independent opinion.
What is the key difference between assurance and consulting engagements?
Assurance engagements provide an independent assessment and opinion, while consulting engagements offer advice and recommendations without an opinion.
Can internal auditors give advice during assurance engagements?
Yes, internal auditors can provide advice, but the primary objective of assurance engagements is to provide an independent evaluation and opinion.
When are consulting engagements typically performed?
Consulting engagements are performed at the request of management or stakeholders, focusing on improving specific processes or controls.
What are examples of consulting engagements?
Examples include providing advice on new controls, risk management training, or process improvement recommendations.
What are examples of assurance engagements?
Examples include financial audits, compliance audits, operational audits, and internal control reviews.
What is the primary role of the board in governance?
The board provides strategic direction, establishes governance frameworks, sets risk appetite, and oversees management’s activities.
What is management’s responsibility in risk management?
Management implements risk management processes, identifies risks, develops risk responses, and ensures controls are operating effectively.
What does internal audit do in relation to governance?
Internal audit evaluates the effectiveness of governance processes, providing independent assurance on the adequacy of governance structures.
What is the purpose of controls in an organization?
Controls are established to mitigate risks, ensure the achievement of organizational objectives, and prevent or detect errors and irregularities.
What are preventive controls
Preventive controls are policies or procedures designed to stop errors or irregularities before they occur (e.g., segregation of duties).
What are detective controls?
Identify errors or irregularities after they occur (e.g., reconciliations).
What are corrective controls?
Actions taken to remedy problems that are identified (e.g., reprocessing failed transactions).
What is internal audit’s role in risk management?
Internal audit provides independent assurance on the effectiveness of risk management processes and recommends improvements where necessary.
Who sets the organization’s risk appetite?
The board is responsible for setting the organization’s risk appetite and ensuring that it aligns with strategic goals.
What is risk?
Impact of risk * likelihood of risk
What is the CAE responsible for in terms of the internal audit plan?
The CAE is responsible for developing a risk-based internal audit plan that aligns with the organization’s objectives and prioritizes audits based on key risks.
How does the CAE ensure the independence of the internal audit function?
The CAE ensures independence by maintaining direct access to the board or audit committee and preventing conflicts of interest in audit activities.
What is the CAE’s role in managing internal audit staff?
The CAE oversees recruitment, training, and professional development, ensuring auditors have the skills and resources needed for effective audit activities.
Who does the CAE regularly report to, and what is typically included in these reports?
The CAE reports to the board and senior management, providing updates on audit findings, areas of risk, and recommendations for improving governance and controls.
What are the CAE’s responsibilities related to compliance with internal audit standards?
The CAE ensures compliance with the IIA Standards, including conducting internal quality assessments and undergoing external quality assessments when required.
What is the primary role of the IIA?
The IIA sets internal auditing standards, offers certifications, provides education, promotes ethical practices, and advocates for the internal audit profession.
What certification does the IIA offer that is globally recognized for internal auditors?
Certified Internal Auditor
How has technology influenced modern internal auditing?
Technology, such as data analytics and continuous auditing, has allowed internal auditors to provide real-time insights and adapt to changing environments.
What is the IIA’s Code of Ethics?
The IIA’s Code of Ethics sets out principles of integrity, objectivity, confidentiality, and competency for internal auditors.
In modern times, what role does internal auditing play in organizations?
Internal auditing is now seen as a strategic partner, providing assurance on governance, risk management, and control, and offering consulting services to add value.
Who is responsible for managing risks on a day-to-day basis in the Three Lines of Defense model?
The first line of defense—operational management—is responsible for day-to-day risk management and internal controls.
What is the primary role of the second line of defense?
The second line of defense (risk management, compliance) monitors risk management efforts and provides guidance to the first line, ensuring policies and procedures are followed
What role does the third line of defense (internal audit) play in the model?
The third line of defense provides independent assurance that the organization’s risk management and internal controls are effective and functioning as intended.
To whom does the third line of defense typically report?
The third line of defense (internal audit) reports to the board of directors or the audit committee to ensure independence and objectivity.
What is the key difference between the first and second lines of defense?
The first line (operational management) directly manages risks, while the second line (risk management and compliance) monitors and provides oversight of risk management practices.
How do the Three Lines of Defense collaborate?
The three lines of defense work together by ensuring clear communication and collaboration to effectively manage risks and maintain strong governance within the organization.
What is the role of the board of directors in the Three Lines of Defense model?
The board of directors has ultimate oversight responsibility, ensuring each line of defense is functioning effectively and contributing to risk management.
What is the purpose of mapping risks to business processes?
Mapping risks ensures alignment between risk management efforts and organizational goals, facilitates resource allocation, and aids informed decision-making.
What are the key steps in the risk assessment process?
Identify risks
Analyze Risks
Prioritize Risks
Map Risk to Business Processes
Develop Mitigation Strategies
Monitor and Review
What does the analysis phase of risk assessment involve?
Evaluating the likelihood and potential impact of identified risks, using qualitative and quantitative assessments.
What is a heat map in risk assessment?
A graphical representation that shows the severity and likelihood of risks, facilitating quick identification of high-priority risks.
How are Key Risk Indicators (KRIs) used in risk assessment?
KRIs are metrics used to measure and monitor risk levels in business processes, helping organizations stay alert to potential issues.
What should be done after developing mitigation strategies in the risk assessment process?
Organizations should establish mechanisms to monitor the effectiveness of these strategies and regularly review and update risk assessments.
What is strategic risk?
Strategic risk is the potential for losses resulting from poor business decisions, the implementation of strategies, or changes in the competitive environment.
Give an example of compliance risk.
Compliance risk includes legal penalties for violating data protection laws or environmental regulations.
What does reporting risk involve?
Reporting risk involves the potential for inaccuracies or inadequacies in financial and operational reporting, leading to misstatements and poor decision-making.
What is operational risk?
Operational risk refers to the risk of loss from inadequate or failed internal processes, people, systems, or external events, affecting day-to-day operations.
Provide an example of reporting risk.
An example of reporting risk is misleading financial disclosures that affect investor confidence.
What is a key concern of strategic risk?
The primary concern of strategic risk is the impact of poor business decisions on an organization’s ability to achieve its objectives.
What is the purpose of documenting business risks?
The purpose is to assess the potential impact and likelihood of risks, providing a foundation for effective risk management strategies.
What is a Risk and Control Matrix (RACM)?
A RACM is a tool used to document risks and their associated controls in a structured manner.
What elements should be included when documenting risks?
Risk description
Potential impact
Likelihood of occurrence
Responsible parties for monitoring the risk
What are the four main types of risk responses?
Avoidance
Mitigation(reduction)
Transfer(sharing)
Acceptance
Define risk avoidance.
Risk avoidance is changing plans to sidestep potential risks altogether, such as not pursuing a risky project.
What does risk mitigation involve?
Risk mitigation involves implementing measures to reduce the likelihood or impact of a risk, such as installing security systems.
Explain risk transfer.
Risk transfer involves shifting the risk to a third party, often through contracts or insurance.
What is the significance of risk appetite in risk response?
Risk appetite is the level of risk an organization is willing to accept, influencing how risks are managed and which response strategies are chosen.
What are the five components of the COSO Integrated Framework?
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring Activities
Define the Control Environment component.
The Control Environment is the foundation for internal control, reflecting an organization’s values, culture, and commitment to ethical behavior.
What does the Risk Assessment component involve?
The Risk Assessment component involves identifying and analyzing risks that could impact the achievement of objectives.
What is the purpose of Control Activities in the COSO Framework?
Control Activities are policies and procedures that help ensure management directives are carried out and risks are mitigated.
What is the primary benefit of implementing the COSO Integrated Framework?
Improved governance and accountability, enhanced risk management processes, greater operational efficiency, and increased confidence in financial reporting and compliance.
What is fraud?
Fraud is wrongful or criminal deception intended to secure an unfair or unlawful gain.
List the three key elements of fraud.
Misrepresentation, Intent, Resulting Harm.
Define “misrepresentation” in the context of fraud.
Misrepresentation is a false statement or misleading conduct that creates a false impression, leading to deception.
What is an example of financial fraud?
An example of financial fraud is a company exaggerating its profits to attract investors.
What are the three elements of the Fraud Triangle?
Opportunity, Pressure, Rationalization.
Define “opportunity” in the context of the Fraud Triangle.
Opportunity refers to the ability for individuals to commit fraud due to weak internal controls or lack of oversight.
What drives the “pressure” element of the Fraud Triangle?
Pressure is the motivation or financial burden that drives an individual to commit fraud, such as debt or performance expectations.
How does rationalization allow fraud to occur?
Rationalization is the mindset that justifies fraudulent behavior, allowing individuals to commit fraud without feeling guilty.
What can organizations do to mitigate the risk of fraud?
Organizations can strengthen internal controls, enhance oversight, and reduce opportunities for fraud.
What are the three key steps in fraud risk assessment?
Identify inherent fraud risks
Assess impact and likelihood of the identified risks
Develop responses to those risks that have a sufficintly high impact and likelihood to result in a potential outcome beyond management’s tolerance
What is the internal auditor’s responsibility regarding fraud?
The internal auditor is responsible for evaluating the effectiveness of fraud controls and management’s fraud risk assessments but is not primarily responsible for preventing fraud.
Who holds primary responsibility for preventing and detecting fraud?
Management is primarily responsible for preventing and detecting fraud within an organization.
What is one of the best ways an organization can prevent fraud according to the Fraud Guide?
Strong organizational awareness serves as a deterrent to fraud
Common types of fraud prevention
Performing background investigations
Providing anti-fraud training
Evaluating performance and compensation prgorams
Conducting exit interviews
Authority limits
Transaction level procedures
Common types of fraud detection
Whistleblower hotlines
Process controls
Proactive fraud detection procedures
Name an activity that internal auditors should avoid to maintain independence.
Internal auditors should avoid managing or designing internal controls, running operations, or authorizing financial transactions.
the process of assuring that an internal audit function adheres to a set of standards defining the specific elements that must be present to ensure that the function operates appropriately
QAIP(Quality assurance and improvement program)
What are analytical procedures in auditing?
Analytical procedures involve comparing financial data with expectations or benchmarks to identify trends or anomalies.
Name one example of observation as an audit procedure.
Observing a process in real time (e.g., inventory management) to ensure it follows established procedures.
What is recalculation in internal auditing?
Recalculation is verifying the mathematical accuracy of financial data by independently performing calculations.
What does confirmation involve in audit procedures?
Confirmation involves obtaining direct verification from third parties, such as banks or customers, to validate balances or transactions.
What is the role of inquiry in audit procedures?
Inquiry involves asking questions of personnel or management to clarify processes, risks, or discrepancies.
entails tracking information forward from one document, reocred, or tangible resource to a subsequently prepared document or record
tracing
What are Computer Assisted Audit Techniques (CAATs)?
CAATs are tools and techniques used by auditors to perform audits more efficiently, typically involving the use of specialized software to analyze large volumes of data.
What is Generalized Audit Software (GAS)?
GAS is a type of CAAT that allows auditors to analyze data from different systems and test transactions, balances, and controls.
What is continuous auditing in the context of CAATs?
Continuous auditing refers to using automated tools to monitor systems and transactions in real time, providing ongoing assurance.
To be persuasive audit evidence must be (3) things?
Relevant: relates to audit objective
Reliable: is it from a credible source
Sufficient: is there enough evidence to support the conclusion
What are the components of the well-designed final communication according to the textbook?
Purpose and scope of engagement
Time frame covered by the engagement
Observations as required by the evaluation and escalation process and recommendations
Engagement conclusions and rating
Management’s action plan to appropriately address reported observations
What are the components of a well written report?
AOTCCCC acronym
Accurate
Objective
Timely
Clear
Concise
Constructed
Complete
What is the purpose of root cause analysis in internal auditing?
To identify and address the underlying causes of a problem, preventing future recurrence.
What are the key steps in root cause analysis?
Identify the problem
Gather data
Analyze the problem
Identify the root cause
Develop recommendations
Follow up
If auditee management chooses not to take action to remediate communicated obervations, the _________ must assess the situation.
CAE, they might take it to senior management and then if still not resolved to the BOD
What must IA do after the final communication.
Follow up with management to determine whether progress is consistent with agree upon time frame and can be expanded to include a follow-up engagement to assess whether controls have been enhanced to a sufficient degree to reduce risks to an acceptable level
Observations and recommendations are based on the following attributes
CCCER
Criteria: what should exist
Condition (Facts): controls as they exist and are funciton at the time of the audit
Cause: explains what factiors allowed the conditions to exist
Effect: consequence of the observations
Recommendation: suggestions regarding how to correct the condition
