Flash Cards V1C3 - V1C3

Question 1

Question: V1C3-0001
Following a negative performance evaluation by a supervisor, a staff auditor went to the audit director to seek a change in the evaluation. The director was familiar with the auditor’s performance and agreed with the evaluation. The director agreed to meet and discuss the situation. Which of the following is the best course of action for the director to take?
Answers
A: Have the supervisor participate in the meeting, so that there is no misunderstanding about the facts.
B: Have a human resources administrator present to ensure that improper statements are not made.
C: Meet privately with the employee. Tell the employee of the director’s agreement with the performance evaluation and express interest in any additional facts the employee may wish to present.
D: Meet privately with the employee. Encourage discussion by asking for the employee’s side of the issue and disclaiming any agreement with the supervisor.

Answer 1

Answer Explanations
Answer (a) is incorrect. The supervisor, as author of a critical performance review, will only add to the element of management intimidation.
Answer (b) is incorrect. Again, the presence of a third party would inhibit the director’s listening effectiveness. Unless the director thinks the auditor’s concerns are so serious that the human resources department must be informed, it is preferable to meet with the employee privately.
Answer (c) is correct. A private conversation signals to the employee that the director is interested in what he or she has to say and will not be measuring his or her words against those of another. However, the director must establish a position and show support for the supervisor. There may be more than one valid viewpoint, but that does not necessarily mean that the employee’s is valid.
Answer (d) is incorrect. It is never appropriate to mislead an employee in order to obtain information or to determine the employee’s view on a matter.

Question 2

Question: V1C3-0002
The requirements for staffing level, education and training, and audit research should be included in
Answers
A: The internal auditing department’s charter.
B: The internal auditing department’s policies and procedures manual.
C: The annual plan for the internal auditing department.
D: Job descriptions for the various staff positions.

Answer 2

Answer Explanations
Answer (a) is incorrect. The charter outlines the purpose, authority, and responsibilities of the department, not the details related to staffing and such.
Answer (b) is incorrect. The policies and procedures manual spells out how audits should be conducted. It does not cover areas such as staffing levels.
Answer (c) is correct. The annual plan should be comprised of both an audit schedule and a budget and, as such, should include all of these issues.
Answer (d) is incorrect. Job descriptions do not reflect staffing level requirements.

Question 3

Question: V1C3-0003
Which of the following activities is not included in determining the audit schedule?
Answers
A: Developing audit programs.
B: Assessing risk factors.
C: Planning workload requirements.
D: Identifying auditable locations.

Answer 3

Answer Explanations
Answer (a) is correct. The development of audit programs occurs during the planning phase of an individual audit. It is not included within the scope of developing the audit schedule.
Answer (b) is incorrect. This activity is considered to determine the audit schedule.
Answer (c) is incorrect. This activity is considered to determine the audit schedule.
Answer (d) is incorrect. This activity is considered to determine the audit schedule.

Question 4

Question: V1C3-0004
The internal audit director of a multinational company must form an audit team to examine a newly acquired subsidiary in another country. Consideration should be given to which of the following factors?
I. Local customs.
II. Language skills of the auditor.
III. Experience of the auditor.
IV. Monetary exchange rate.
Answers
A: I, II, and III.
B: II, III, and IV.
C: I and III.
D: I and II.

Answer 4

Answer Explanations
Answer (a) is correct. In addition to language skills, local customs must be considered. For example, gender and ethnic compatibility may be important in some Middle Eastern countries because religious restrictions and incompatibilities are relevant. As always, experience levels are relevant in making audit assignments.
Answer (b) is incorrect. The Monetary Exchange Rate would not be a factor in determining the needed traits of the team members.
Answer (c) is incorrect. Includes appropriate factors, but does not identify all the acceptable answers.
Answer (d) is incorrect. It includes an incomplete answer. See answer (c).

Question 5

Question: V1C3-0005
A quality assurance program of an internal audit department provides reasonable assurance that audit work conforms to 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 reviews.
IV. External reviews.
Answers
A: I, II, and III.
B: II, III, and IV.
C: I, III, and IV.
D: I, II, III, and IV.

Answer 5

Answer Explanations
Answer (a) is incorrect. Proper training is an important component of maintaining a current staff, but does not provide feedback.
Answer (b) is incorrect. Proper training is an important component of maintaining a current staff, but does not provide feedback.
Answer (c) is correct. The purpose of a quality assurance program is to evaluate the operations of the internal audit department. The IIA Standards note that a program should include supervision, internal reviews, and external reviews.
Answer (d) is incorrect. Proper training is an important component of maintaining a current staff, but does not provide feedback.

Question 6

Question: V1C3-0006
If the internal audit staff does not have the skills to perform a particular task, a specialist could be brought in from
I. The organization’s external audit firm.
II. An outside consulting firm.
III. The department currently being audited.
IV. A college or university.
Answers
A: I and II.
B: II and IV.
C: I, II, and III.
D: I, II, and IV.

Answer 6

Answer Explanations
Answers (a) is incorrect. It includes acceptable consultants, but does not identify all the acceptable answers.
Answers (b) is incorrect. It includes acceptable consultants, but does not identify all the acceptable answers.
Answer (c) is incorrect. A specialist from the same department is unacceptable since the person would not be either independent or objective.
Answer (d) is correct. The key point is independence and objectivity. A specialist from the department currently being audited would not be independent due to his or her natural bias toward that department.

Question 7

Question: V1C3-0007
The best rationale for rotating internal auditors so that different individuals are assigned to consecutive audits of a given auditee is to
Answers
A: Prevent burnout on the part of the internal auditor, which may lead to excessive turnover in the internal audit department.
B: Promote rapid professional development on the part of internal auditors by exposing them to the full range of organizational activities.
C: 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.
D: Avoid the development of bias toward a given auditee.

Answer 7

Answer Explanations
Answer (a) is incorrect. It is a secondary reason. For example, auditor burnout can be reduced with less travel.
Answer (b) is incorrect. It is a secondary reason. Professional development can be obtained in other ways, such as attending conferences, seminars, and taking the CIA exam.
Answer (c) is incorrect. It is a secondary reason. This approach establishes a precedent or standard for others to follow.
Answer (d) is the primary reason. The alternatives may be desirable, but they are not the basis for the rotation preference.

Question 8

Question: V1C3-0008
Which of the following activities does not constitute audit supervision?
Answers
A: Preparing a preliminary audit program.
B: Providing appropriate instructions to the auditors.
C: Reviewing audit work papers.
D: Seeing that audit objectives are achieved.

Answer 8

Answer Explanations
Answer (a) is correct. It is a planning task.
Answer (b) is incorrect. This activity is a supervisory task.
Answer (c) is incorrect. This activity is a supervisory task.
Answer (d) is incorrect. This activity is a supervisory task.

Question 9

Question: V1C3-0009
The audit team leader is least likely to have a primary role in
Answers
A: Allocating budget audit hours among assigned staff.
B: Updating the permanent files.
C: Reviewing the working papers.
D: Preparing the critique sheet for the audit.

Answer 9

Answer Explanations
Answer (a) is incorrect. This is a common team leader task.
Answer (b) is correct. This is a task most likely performed by the audit staff.
Answer (c) is incorrect. This is a common team leader task.
Answer (d) is incorrect. This is a common team leader task.

Question 10

Question: V1C3-0010
In which of the following duties would the audit director least likely have a primary role?
Answers
A: Determine the need for expanded testing.
B: Review the summary findings sheet.
C: Select or approve team members.
D: Organize and draft the audit report.

Answer 10

Answer Explanations
Answer (a) is incorrect. This is a common audit director task.
Answer (b) is incorrect. This is a common audit director task.
Answer (c) is incorrect. This is a common audit director task.
Answer (d) is correct. It is a task most likely performed by the team leader.

Question 11

Question: V1C3-0011
An element of authority that should be included in the charter of the internal auditing department is
Answers
A: Identification of the operational departments which the audit department must audit.
B: Identification of the types of disclosures which should be made to the audit committee.
C: Access to records, personnel, and physical properties relevant to the performance of audits.
D: Access to the external auditor’s working papers.

Answer 11

Answer Explanations
Answer (a) is incorrect. The internal audit department should not specifically identify what activities will be audited.
Answer (b) is incorrect. The auditor is obligated to make all needed disclosures to the audit committee.
Answer (c) is correct. The auditor must have access to all audit evidence in order to fulfill his or her obligations and responsibilities.
Answer (d) is incorrect. Access to the external auditor’s working papers cannot be guaranteed in the charter.

Question 12

Question: V1C3-0012
Having been given the task of developing a performance appraisal system for evaluating the audit performance of a large internal auditing staff, you should
Answers
A: Provide for an explanation of the appraisal criteria methods at the time the appraisal results are discussed with the internal auditor.
B: Provide general information concerning the frequency of evaluations and the way evaluations will be performed without specifying their timing and uses.
C: Provide primarily for the evaluation of criteria such as diligence, initiative, and tact.
D: Provide primarily for the evaluation of specific accomplishments directly related to the performance of the audit program.

Answer 12

Answer Explanations
Answer (a) is incorrect. The persons whose performance is being appraised should be made aware of the criteria and methods at the time they begin the employment, not at the time of the performance review.
Answer (b) is incorrect. The frequency and use of the evaluation are important criteria that should be clearly communicated.
Answer (c) is incorrect. The criteria named are traits, not accomplishments. Although traits are important, a performance evaluation system for evaluating audit performance should primarily focus on specific accomplishments not traits.
Answer (d) is correct. The appraisal of audit performance should deal primarily with specific accomplishments related to audits. This provides a more objective appraisal than focusing on traits, which are largely subjective.

Question 13

Question: V1C3-0013
The key factor to the success of an audit organization’s human resources program is
Answers
A: An informal program for developing and counseling staff.
B: A compensation plan based on years of experience.
C: A well-developed set of selection criteria.
D: A program for recognizing the special interests of individual staff members.

Answer 13

Answer Explanations
Answer (a) is incorrect. The success of any training program will be heavily dependent on the attributes of those being trained.
Answer (b) is incorrect. While compensation is an important factor in attracting and retaining staff, it is probably not the most important in staff development.
Answer (c) is correct. Selection of individuals with the attributes and education needed for internal auditing is essential if the staff is to develop properly. In any organization, whether it is audit or nonaudit function, a well developed set of selection criteria is important.
Answer (d) is incorrect. It is not the best answer because such a program should be fair and equitable to all staff members.

Question 14

Question: V1C3-0014
Which of the following would be the best source of an internal audit director’s information for planning staffing requirements?
Answers
A: Discussions of audit needs with executive management and the audit committee.
B: Review of audit staff education and training records.
C: Review audit staff size and composition of similar-size companies in the same industry.
D: Interviews with existing audit staff.

Answer 14

Answer Explanations
Answer (a) is correct. It is a good source of information concerning staff size or skill requirements.
Answer (b) is incorrect. It is not the best answer since there is no obvious link with scheduled work.
Answer (c) is incorrect. That would not account for the unique needs of a particular organization.
Answer (d) is incorrect. It is not the best answer since there is no obvious link with scheduled work.

Question 15

Question: V1C3-0015
Which of the following is most essential for guiding the audit staff in maintaining daily compliance with the department’s standards of performance?
Answers
A: Quality control reviews.
B: Position descriptions.
C: Performance appraisals.
D: Policies and procedures.

Answer 15

Answer Explanations
Answer (a) is incorrect. Quality control reviews would evaluate compliance and not serve as a daily guide to the audit staff.
Answer (b) is incorrect. Position descriptions provide the purpose description and responsibilities of individual positions but are not effective in the day-to-day management of the function.
Answer (c) is incorrect. Performance evaluations are a periodic function and will not be effective on a day-to-day basis.
Answer (d) is correct. Comprehensive policies and procedures provided by the director of internal audit guide the audit staff on a daily basis to ensure compliance with department’s standards of performance.

Question 16

Question: V1C3-0016
You have been selected to develop an internal auditing department for your company. Your approach would most likely be to hire
Answers
A: Internal auditors each of whom possesses all the skills required to handle all audit assignments.
B: Inexperienced personnel and train them the way the company wants them trained.
C: Degreed accountants since most audit work is accounting related.
D: Internal auditors who collectively have the knowledge and skills needed to complete all internal audit assignments.

Answer 16

Answer Explanations
Answer (a) is incorrect. The scope of internal auditing is so broad it is not possible for one individual to have the requisite expertise in all areas.
Answer (b) is incorrect. It is desirable to have various skill levels to match auditors appropriately with varying assignment complexities. It is also necessary to have experienced auditors available to train and supervise less experienced staff members.
Answer (c) is incorrect. Many skills are needed in internal auditing. Computer skills are widely needed in companies that perform IT audits. Many industries find it necessary to have the skills of engineers and other disciplines available on a regular basis.
Answer (d) is correct. Having a collective mix of knowledge and skills is an integral part of the IIA’s Standards. No internal audit department can have a credible program without this mix.

Question 17

Question: V1C3-0017
The director of a newly formed internal auditing department is in the process of drafting a formal written charter for the department. Which one of the following items, related to the operational effectiveness of the internal audit department, should be included in the charter?
Answers
A: The frequency of the audits to be performed.
B: The manner by which audit findings will be reported.
C: The procedures which the internal auditors will employ in investigating and reporting fraud.
D: The internal auditors’ unlimited access to those records, personnel, and physical properties that are relevant to the performance of the audits.

Answer 17

Answer Explanations
Answer (a) is incorrect. The Standards state that “the charter should (a) establish the department’s position within the organization; (b) authorize access to records, personnel, and physical properties relevant to the performance of audits; and (c) define the scope of internal auditing activities.” Accordingly, not only is the frequency of audits not included in the charter, but also such information is not related to the operational effectiveness of the internal audit department.
Answer (b) is incorrect. The manner of reporting audit findings (how they are reported, to whom they will be reported, etc.) is not included in the charter and is not related to operational effectiveness of the internal audit department.
Answer (c) is incorrect. The procedures to be employed by internal auditors in investigating and reporting fraud are not included in the charter.
Answer (d) is correct. The IIA’s Standards state that the charter should include the internal auditors’ access to those records, personnel, and physical properties that are relevant to their work. Having limitations on such access would impact the operational effectiveness of the internal audit department because the internal auditor would not be able to conduct the audit in the proper approach that he designed it.

Question 18

Question: V1C3-0018
A director of internal auditing has reviewed credentials, checked references, and interviewed a candidate for a staff position. The director concludes that the candidate has a thorough understanding of internal auditing techniques, accounting, and management. However, the director notes that the candidate has limited knowledge of economics and computer science. Which of the following actions would be most appropriate?
Answers
A: Reject the candidate because of the lack of knowledge required by the Standards.
B: Offer the candidate a position despite the lack of knowledge in certain essential areas.
C: Encourage the candidate to obtain additional training in economics and computer science and then reapply.
D: Offer the candidate a position if other staff members possess sufficient knowledge in economics and computer science.

Answer 18

Answer Explanations
Answer (a) is incorrect. The IIA Standards state the general subjects that staff should possess knowledge of but clearly state that every auditor need not possess knowledge of all of them.
Answer (b) is incorrect. The department’s needs may be for additional expertise in economics or computer science.
Answer (c) is incorrect. This may be good advice, but it does not adequately address the department’s present needs.
Answer (d) is correct. This is the most realistic way to address the department’s staffing needs

Question 19

Question: V1C3-0019
Which audit planning tool is general in nature and is used to ensure adequate audit coverage over time?
Answers
A: The long-range schedule.
B: The audit program.
C: The department budget.
D: The department charter.

Answer 19

Answer Explanations
Answer (a) is correct. The long-range program gives evidence of coverage of key functions at planned intervals.
Answer (b) is incorrect. The audit program is limited in scope to a particular project.
Answer (c) is incorrect. The department budget may be used to justify head count, but it is not used to ensure adequate audit coverage over time.
Answer (d) is incorrect. The department charter is not an audit planning tool.

Question 20

Question: V1C3-0020
A professional engineer applied for a position in the internal auditing department of a high-technology firm. The engineer became interested in the position after observing several internal auditors while they were auditing the engineering department. The director of internal auditing
Answers
A: Should not hire the engineer because of the lack of knowledge of internal auditing standards.
B: May hire the engineer in spite of the lack of knowledge of internal auditing standards.
C: Should not hire the engineer because of the lack of knowledge of accounting and taxes.
D: May hire the engineer because of the knowledge of internal auditing gained in the previous position.

Answer 20

Answer Explanations
Answer (a) is incorrect. Each new employee of an internal auditing department is not required to have knowledge of internal auditing standards. It is required that the department collectively has this knowledge.
Answer (b) is correct. Internal auditing standards are required to be known by the department collectively. Individual internal auditing staff members may, however, bring special skills to the department instead of specific knowledge of internal auditing standards.
Answer (c) is incorrect. Each individual internal auditor is not required to have knowledge of accounting or taxes.
Answer (d) is incorrect. What knowledge that was acquired by observing is irrelevant to the skills necessary for internal auditing.

Question 21

Question: V1C3-0021
Upon being appointed, a new director of internal auditing found an inexperienced audit staff that was over budget on most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors.
Additionally, there was no evidence that a quality assurance program existed.
As a means of controlling projects and avoiding time-budget overruns, decisions to revise time budgets for an audit should normally be made
Answers
A: Immediately after the preliminary survey.
B: When a significant deficiency has been substantiated.
C: When inexperienced audit staff is assigned to an audit.
D: Immediately after expanding tests to establish reliability of findings.

Answer 21

Answer Explanations
Answer (a) is correct. Time budgets should be appraised for revision after the preliminary survey and preparation of the audit program.
Answer (b) is incorrect. When a deficiency has been substantiated, no further audit work is required.
Answer (c) is incorrect. The assignment of inexperienced staff should have no effect on the time budget.
Answer (d) is incorrect. Expanded tests should have no effect on the time budget; the budget would have already been expanded as necessary.

Question 22

Question: V1C3-0022
Upon being appointed, a new director of internal auditing found an inexperienced audit staff that was over budget on most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors.
Additionally, there was no evidence that a quality assurance program existed.
Determining that audit objectives have been met is part of the overall supervision of an audit assignment and is the ultimate responsibility of the
Answers
A: Staff internal auditor.
B: Audit committee.
C: Internal auditing supervisor.
D: Director of internal auditing.

Answer 22

Answer Explanations
Answer (a) is incorrect. According to the Standards, the director of internal auditing is responsible for supervision.
Answer (b) is incorrect. According to the Standards, the director of internal auditing is responsible for supervision.
Answer (c) is incorrect. According to the Standards, the director of internal auditing is responsible for supervision.
Answer (d) is correct. The director of internal auditing is responsible for supervision, including determining that audit objectives are being met.

Question 23

Question: V1C3-0023
Upon being appointed, a new director of internal auditing found an inexperienced audit staff that was over budget on most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors.
Additionally, there was no evidence that a quality assurance program existed.
To properly evaluate the operations of an internal auditing department, a quality assurance program should include
Answers
A: Periodic supervision of internal audit work on a sample basis.
B: Internal reviews, by other than the internal audit staff, to appraise the quality of department operations.
C: External reviews at least once every three years by qualified persons who are independent of the organization.
D: Periodic rotation of audit managers.

Answer 23

Answer Explanations
Answer (a) is incorrect. Supervision should be carried out continually, not just on a periodic test basis.
Answer (b) is incorrect. Internal reviews should be conducted by internal auditors and should focus on specific audit projects.
Answer (c) is correct. External reviews should be conducted at least once every three years.
Answer (d) is incorrect. Periodic rotation of audit managers is not required.

Question 24

Question: V1C3-0024
The internal auditing department of a large corporation has established its operating plan and budget for the coming year. The operating plan is restricted to the following categories: a prioritized listing of all audits, staffing, a detailed expense budget, and the commencement date of each audit. Which of the following best describes the major deficiency of this operating plan?
Answers
A: Requests by management for special projects are not considered.
B: Opportunities to achieve operating benefits are ignored.
C: Measurability criteria and targeted dates of completion are not provided.
D: Knowledge, skills, and disciplines required to perform work are ignored.

Answer 24

Answer Explanations
Answer (a) is incorrect. Prioritizing audits would consider this factor.
Answer (b) is incorrect. Prioritizing audits would consider this factor.
Answer (c) is correct. This is a requirement of the Standards.
Answer (d) is incorrect. Staffing for each audit would include this consideration.

Question 25

Question: V1C3-0025
The capabilities of individual staff members are key features in the effectiveness of an internal auditing department.
Select the primary consideration used when staffing an internal auditing department.
Answers
A: Background checks.
B: Job descriptions.
C: Continuing education.
D: Organizational orientation.

Answer 25

Answer Explanations
Answer (a) is incorrect. Background checks help assure that statements made by prospective employees are accurate. However, they are not the primary requisite.
Answer (b) is correct. Properly formulated job descriptions provide a basis for the identifying job qualifications (including training and experience).
Answer (c) is incorrect. Continuing education occurs after the proper people are hired.
Answer (d) is incorrect. A thorough orientation helps the new employee become productive more rapidly. However, it will not overcome hiring the wrong person.

Question 26

Question: V1C3-0026
Internal audit staff members should be afforded an appropriate means through which they can discuss problems and receive updates regarding departmental policies. The most appropriate forum for this objective is
Answers
A: The department’s informal communication lines.
B: Intradepartment memoranda.
C: Staff meetings.
D: Employee evaluation conferences.

Answer 26

Answer Explanations
Answer (a) is incorrect. Informal communication is not the most appropriate forum.
Answer (b) is incorrect. Memoranda are generally impersonal and do not afford a good opportunity for maximum exchange of ideas.
Answer (c) is correct. Formal staff meetings provide the best opportunity for ensuring that issues are addressed timely and efficiently.
Answer (d) is incorrect. The employee evaluation conference is not a timely place to discuss problems and receive updates.

Question 27

Question: V1C3-0027
The peer review process can be performed internally or externally. A distinguishing feature of the external review is its objective to
Answers
A: Identify tasks that can be performed better.
B: Determine if audit activities meet professional standards.
C: Set forth the recommendations for improvement.
D: Provide an independent evaluation.

Answer 27

Answer Explanations
Answer (a) is incorrect. Internal peer review process will identify things that can be done better.
Answer (b) is incorrect. Internal review process will assess if audit activities meet professional standards.
Answer (c) is incorrect. Internal review process will set forth recommendations for improvement.
Answer (d) is correct. External review process will provide independent evaluation for management and the audit committee.

Question 28

Question: V1C3-0028
Exit conferences serve to ensure the accuracy of the information used by an internal auditor. A secondary purpose of an exit conference is to
Answers
A: Get immediate action on a recommendation.
B: Improve relations with auditees.
C: Agree to the appropriate distribution of the final report.
D: Brief senior management on the results of the audit.

Answer 28

Answer Explanations
Answer (a) is incorrect. An interim report would have been used to accomplish this.
Answer (b) is correct. The exit conference can be used to allow operating management to air their views and to present any operational objections to specific recommendations.
Answer (c) is incorrect. The distribution of reports is not a secondary purpose of an exit conference.
Answer (d) is incorrect. Senior management should be given a greatly condensed view of the results of an audit.

Question 29

Question: V1C3-0029
The advantage attributed to the establishment of internal auditing field offices for work at remote locations is best described as
Answers
A: The possibility of increased objectivity of personnel assigned to a field office.
B: A reduction of travel time and related travel expense.
C: The increased ease of maintaining uniform company-wide standards.
D: More contact with senior audit personnel leading to an increase in control.

Answer 29

Answer Explanations
Answer (a) is incorrect. Objectivity of field office personnel decreases.
Answer (b) is correct. Advantage of field office.
Answer (c) is incorrect. Disadvantage: decreases ease of maintaining standards.
Answer (d) is incorrect. Senior audit personnel are expected to be at corporate level.

Question 30

Question: V1C3-0030
The director of internal auditing is preparing the work schedule for the next budget year and has limited audit resources. In deciding whether to schedule the purchasing or the personnel department for an audit, which of the following would be the least important factor?
Answers
A: There have been major changes in operations in one of the departments.
B: The audit staff has recently added an individual with expertise in one of the areas.
C: There are more opportunities to achieve operating benefits in one of the departments than in the other.
D: The potential for loss is significantly greater in one department than the other.

Answer 30

Answer Explanations
Answer (a) is incorrect. This is an important factor according to the Standards.
Answer (b) is correct. Audit needs, not auditor skill availability, should drive audit schedules.
Answer (c) is incorrect. This is an important factor according to the Standards.
Answer (d) is incorrect. This is an important factor according to the Standards.

Question 31

Question: V1C3-0031
According to the IIA Standards, an internal auditing department’s activity reports should
Answers
A: List the material findings of major audits.
B: List unresolved findings.
C: Report the weekly activities of the individual auditors.
D: Compare audits completed with audits planned.

Answer 31

Answer Explanations
Answer (a) is incorrect. This is not an activity report as defined by the Standards.
Answer (b) is incorrect. This is not an activity report as defined by the Standards.
Answer (c) is incorrect. This is not an activity report as defined by the Standards.
Answer (d) is correct. This information is a status report to be provided to the audit oversight authority.

Question 32

Question: V1C3-0032
The best means for the internal auditing department to determine whether its goal of implementing broader audit coverage of functional activities has been met is through
Answers
A: Accumulation of audit findings by auditable area.
B: Comparison of the audit plan to actual audit activity.
C: Surveys of management satisfaction with the internal auditing function.
D: Implementation of a quality assurance program.

Answer 32

Answer Explanations
Answer (a) is incorrect. The number of audit findings is not an indicator of audit breadth or quality.
Answer (b) is correct. Comparison of the plan to actual activity will reveal if the planned breadth was achieved.
Answer (c) is incorrect. Management satisfaction does not directly relate to the expressed goal (broader audit coverage).
Answer (d) is incorrect. Implementation of a quality assurance program has no bearing on the stated goal.

Question 33

Question: V1C3-0033
Why should organizations require auditees to promptly reply and outline the corrective action that has been implemented on reported deficiencies?
Answers
A: To remove items from the “pending” list as soon as possible.
B: To effect savings or to institute compliance as early as possible.
C: To indicate concurrence with the audit findings.
D: To ensure that the audit schedule is kept up to date.

Answer 33

Answer Explanations
Answer (a) is incorrect. This is a mechanical immaterial aspect of the report process.
Answer (b) is correct. This is the objective of the audit.
Answer (c) is incorrect. The auditee may not concur with the finding. This may or may not be considered in closing the audit.
Answer (d) is incorrect. This is an administrative function of the audit organization.

Question 34

Question: V1C3-0034
Which of the following factors serves as a direct input to the internal auditing department’s financial budget?
Answers
A: Audit work schedules.
B: Activity reports.
C: Past effectiveness of the internal auditing department in identifying cost savings.
D: Auditing department’s charter.

Answer 34

Answer Explanations
Answer (a) is correct. As specified in the IIA’s Standards, audit work schedules determine both staffing plans and financial budgets.
Answer (b) is incorrect. Activity reports compare actual performance with goals and schedules and compare actual expenditures with financial budgets.
Answer (c) is incorrect. While past performance is an indicator of the value of internal auditing, it will not impact the funds committed to current operations.
Answer (d) is incorrect. The charter for an internal auditing department defines the purpose, authority, and responsibility of the department.

Question 35

Question: V1C3-0035
While attending a social function, an internal auditor described to a group of friends the elements of a sensitive audit on which he was working. The internal auditing director’s best avenue for proceeding is to
Answers
A: Fire the auditor to set an example for other auditors.
B: Remove the auditor from all audits in that area or in other sensitive areas.
C: Reprimand the auditor for “talking shop” at a social function.
D: Explain that the act is an ethical violation of the profession and that further such action could result in dismissal or other serious effects.

Answer 35

Answer Explanations
Answer (a) is incorrect. There was no intent to do wrong. The sanction is probably too severe. Also, the staff may lose a good auditor.
Answer (b) is incorrect. The single occurrence described does not warrant this action.
Answer (c) is incorrect. This is partly correct but it has no instructive value.
Answer (d) is correct. This is an instructive solution and explains the defect in the actions of the internal auditor.

Question 36

Question: V1C3-0036
The internal auditing department for a large corporation recently concluded an audit of sales department travel expenses.
Which of the following groups should receive a copy of the audit report?
Answers
A: Sales director and vice president for marketing.
B: Chairman of the board, chief operating officer, and vice president for marketing.
C: Chairman of the board, controller, and sales director.
D: Chief financial officer, sales director, and chief executive officer.

Answer 36

Answer Explanations
Answer (a) is correct. Audit reports should be distributed to those members of the organization who are able to ensure that audit results are given due consideration, in this case, the sales director and vice president of marketing would be sufficient.
Answer (b) is incorrect. The distribution should include only that shown in Answer (a). The chairman of the board and chief operating officer need not be involved unless significant problems were revealed.
Answer (c) is incorrect. The distribution should include only those people shown in answer (a). The chairman of the board and controller need not be involved unless significant problems were revealed.
Answer (d) is incorrect. The distribution should include only those people shown in answer (a). Chief financial officer and chief executive officer involvement would not be needed.

Question 37

Question: V1C3-0037
External review of an internal auditing department is not likely to evaluate
Answers
A: Adherence to the internal auditing department’s charter.
B: Compliance with the IIA Standards
C: Detailed cost-benefit analysis of the internal auditing department.
D: Audit planning documents, particularly those submitted to senior management and the audit committee.

Answer 37

Answer Explanations
Answer (a) is incorrect. Included in the evaluation of the performance of an internal auditing department per the IIA Standards.
Answer (b) is incorrect. It is included in the evaluation of the performance of an internal auditing department per the IIA Standards.
Answer (c) is correct. The cost benefit of internal auditing is neither easily quantifiable nor the subject of an external review.
Answer (d) is incorrect. It is included in the evaluation of the performance of an internal auditing department per the IIA Standards.

Question 38

Question: V1C3-0038
An internal auditing manager has a small team of employees, but each individual is self-motivated and could be termed a “high achiever.” The audit manager has been given a particularly difficult assignment. Even for a high achiever, the probability that this job can be completed by one individual by the required deadline is low. Select the best course for the audit manager.
Answers
A: Assign one individual since high achievers thrive on high risks.
B: Assign two staff members to moderate the risk of failure.
C: Assign the entire staff to ensure the risk of failure is low.
D: Ask company management to cancel the job.

Answer 38

Answer Explanations
Answer (a) is incorrect. High achievers prefer moderate risks. They perform best with moderate risks.
Answer (b) is correct. High achievers thrive when the job provides for personal responsibility, feedback, and moderate risks
Answer (c) is incorrect. High achievers prefer moderate risks. They perform best with moderate risks.
Answer (d) is incorrect. High achievers prefer moderate risks. They perform best with moderate risks.

Question 39

Question: V1C3-0039
Recent criticism of an internal auditing department suggested that audit coverage was not providing adequate feedback to senior management on the processes used in the organization’s key lines of business. The problem was further defined as lack of feedback on the recent implementation of automated support systems. Which two functions does the director of internal auditing need to improve?
Answers
A: Staffing and communicating.
B: Staffing and decision making.
C: Planning and organizing.
D: Planning and communicating.

Answer 39

Answer Explanations
Answer (a) is incorrect. There is no indication that there are staffing problems (i.e., insufficient audit personnel) or that audit personnel lack necessary skills to provide feedback on automated support systems.
Answer (b) is incorrect. There is no indication that staffing or decision making is a problem.
Answer (c) is incorrect. There is no indication that organizing is a problem.
Answer (d) is correct. The problem of lack of feedback indicates the director has problems in planning and allocating audit resources, and communicating this need to the audit staff.

Question 40

Question: V1C3-0040
In some cultures and organizations, managers insist that the internal auditing function is not needed to provide a critical assessment of the organization’s operations. A management attitude such as this will most probably have an adverse affect on the internal auditing department’s
Answers
A: Operating budget variance.
B: Charter.
C: Performance appraisals.
D: Policies and procedures.

Answer 40

Answer Explanations
Answer (a) is incorrect. An operating budget variance report is a control device used to monitor actual performance versus budget. Management foot-dragging could cause unfavorable variances, but favorable variances could also occur if many audits were cut short due to scope impairments.
Answer (b) is correct. In this type of situation, management is highly averse to analysis or possible criticism of their actions and will not grant the internal auditors an adequate charter.
Answer (c) is incorrect. An unbiased evaluation of audit staff would not be affected by lack of cooperation on the part of nonaudit management.
Answer (d) is incorrect. Policies and procedures of the internal audit function are developed by the internal audit department and should not be affected by nonaudit management.

Question 41

Question: V1C3-0041
Successful consultative communication in an internal audit is partially based on feedback from auditees about auditors’ actions during the audit. This feedback
Answers
A: Should go only to senior management as a means of reviewing the auditors.
B: Should go only to the auditors to help them improve their audit performance.
C: Should go to both management and the auditors to ensure business value is being added.
D: Will keep auditees on the defensive regarding the auditors.

Answer 41

Answer Explanations
Answer (a) is incorrect. The auditors also need to know the feedback so they can improve relations with auditees for the next audit.
Answer (b) is incorrect. Management should also know if communication is poor because of some auditor behavior.
Answer (c) is correct. Both management and auditors should be involved in improving the image of internal audit in the organization.
Answer (d) is incorrect. Involving the auditees should reduce conflict and defensiveness and make the audit more participative.

Question 42

Question: V1C3-0042
Which of the following components of the enterprise risk management (ERM) framework addresses processes and people in an organization?
Answers
A: Strategic risks.
B: Operational risks.
C: Financial risks.
D: Hazard risks.

Answer 42

Answer Explanations
Answer (a) is incorrect. The strategic risks include risks related to strategy, political, economic, regulatory, and global market conditions. They also include reputation risks, leadership risks, brand management risks, and customer risks.
Answer (b) is correct. The operational risk is related to the organization’s internal systems, products, services, processes, technology, and people.
Answer (c) is incorrect. The financial risk includes risks from volatility in foreign currencies, interest rates, and commodities. It also includes credit risk, liquidity risk, and market risk.
Answer (d) is incorrect. The hazard risk includes risks that are insurable, such as natural disasters, various insurable liabilities, impairment of physical assets and property, and terrorism.

Question 43

Question: V1C3-0043
Which of the following is not the goal of enterprise risk management (ERM) initiatives?
Answers
A: Integrating risks.
B: Creating shareholder value.
C: Protecting shareholder value.
D: Enhancing shareholder value.

Answer 43

Answer Explanations
Answer (a) is correct. The ERM approach is more than just integrating risks where risks are a part of uncertainty. The goal of an ERM initiative is to create, protect, and enhance shareholder value by managing the uncertainties that could influence in achieving the organization’s objectives.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.

Question 44

Question: V1C3-0044
The scope of enterprise risk management (ERM) encompasses which of the following:
I. Creating opportunities.
II. Derisking opportunities.
III. Analyzing strengths.
IV. Focusing on weaknesses.
Answers
A: I and II.
B: I and III.
C: III and IV.
D: I, III, and IV.

Answer 44

Answer Explanations
Answer (a) is correct. According to the IIA Research Foundation, ERM defines risk as any event or action that could adversely influence an organization’s ability to achieve its objectives. ERM encompasses the more traditional view of potential hazards (threats) as well as opportunities. Management must consider derisking the opportunities when creating and evaluating new opportunities. Risks and opportunities move together, and the key is to determine if the potential of a given opportunity exceeds the risks.
Answer (b) is incorrect. Items III and IV are part of the strength, weaknesses, opportunity, and threat (SWOT) analysis used in strategic management. When companies fail to manage risks, opportunities are missed and shareholder value can be lost, which creates great pressure on management to improve corporate governance.
Answer (c) is incorrect. Items III and IV are part of the strength, weaknesses, opportunity, and threat (SWOT) analysis used in strategic management. When companies fail to manage risks, opportunities are missed and shareholder value can be lost, which creates great pressure on management to improve corporate governance.
Answer (d) is incorrect. Items III and IV are part of the strength, weaknesses, opportunity, and threat (SWOT) analysis used in strategic management. When companies fail to manage risks, opportunities are missed and shareholder value can be lost, which creates great pressure on management to improve corporate governance.

Question 45

Question: V1C3-0045
Enterprise risk management (ERM) focuses on which of the following:
Answers
A: Value-added potential.
B: Risk management process.
C: Asset management principles.
D: Management accountability.

Answer 45

Answer Explanations
Answer (a) is correct. According to the IIA Research Foundation, the chief audit executives (CAEs) of the study companies understand the value-added potential of ERM, which makes them very effective ERM champions. ERM adds value because it is both inward-looking and forward-thinking.
Answer (b) is incorrect. It is a part of the value-added potential.
Answer (c) is incorrect. It is a part of the value-added potential.
Answer (d) is incorrect. It is a part of the value-added potential.

Question 46

Question: V1C3-0046
The role and focus of the internal audit function in enterprise risk management (ERM) with the objective of improving corporate governance includes which of the following:
I. Follow-up on ERM scorecards.
II. Internal controls for ERM.
III. The IIA’s Standards on ERM.
IV. Follow-up on ERM metrics.
Answers
A: I and II.
B: II and III.
C: I and IV.
D: III and IV.

Answer 46

Answer Explanations
Answer (a) is incorrect. Internal controls and the IIA’s Standards on ERM, either individually or jointly, will not improve corporate governance.
Answer (b) is incorrect. Internal controls and the IIA’s Standards on ERM, either individually or jointly, will not improve corporate governance.
Answer (c) is correct. Traditionally, the internal audit’s role has been to provide reliable, overall assessment of risks and internal control effectiveness. In light of ERM implementation in improving corporate governance, internal auditors now (1) take a more business-oriented approach to audit company’s operations, (2) change their audit approach to focus on business risk, (3) perform more effective follow-up on open ERM scorecards and metrics to increase management accountability, and (4) review formal action plans developed by management as part of the ERM implementation. Scorecards, metrics, and formal action plans are key parts of the ERM infrastructure.
Answer (d) is incorrect. See the answer given for answers (a) and (b).

Question 47

Question: V1C3-0047
Which of the following attributes of the internal audit department can hinder the implementation of enterprise risk management (ERM) in the auditor’s organization?
I. Control-based audit approach.
II. Use of traditional auditing tools.
III. Consultant role.
IV. Facilitation skills.
Answers
A: I and II.
B: II and III.
C: I and IV.
D: III and IV.

Answer 47

Answer Explanations
Answer (a) is correct. In order to meet the ERM implementation challenge, the internal auditor should (1) use a riskbased audit approach (not a control-based approach), (2) be a consultant to the ERM implementation team (not as a policeman), (3) focus on future events (not past events), and (4) acquire competent skills to become an ERM facilitator (not use traditional accounting and auditing tools and skills).
Answer (b) is incorrect. The consultant role does not hinder the implementation of ERM.
Answer (c) is incorrect. Facilitation skills do not hinder the implementation of ERM.
Answer (d) is incorrect. See the responses given for answers (b) and (c).

Question 48

Question: V1C3-0048
Corporate governance is concerned with
Answers
A: The trend toward more women on boards of directors.
B: Hostile takeovers becoming the norm.
C: The legitimacy of state charters issued in Delaware.
D: The relative roles, rights, and accountability of such stakeholder groups as owners, board members, managers, employees, and others.

Answer 48

Answer Explanations
Answer (a) is incorrect. More women on the board is encouraged.
Answer (b) is incorrect. Hostile takeovers are not the norm.
Answer (c) is incorrect. Delaware is not the only state in which a company can incorporate.
Answer (d) is correct. Corporate governance refers to the methods by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed. Corporate governance is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and others who assert to be stakeholders.

Question 49

Question: V1C3-0049
The major issue embedded in the structure of modern corporations that has contributed to the corporate governance problem has been
Answers
A: Excessive executive compensation.
B: Early retirement programs, such as the one implemented by IBM.
C: The separation of ownership from control.
D: Union domination of the proxy machinery.

Answer 49

Answer Explanations
Answer (a) is incorrect. It is a minor issue.
Answer (b) is incorrect. It is a minor issue.
Answer (c) is correct. The major condition embedded in the structure of modern corporations that has contributed to the corporate governance problem has been the separation of ownership from control.
Answer (d) is incorrect. It is a minor issue.

Question 50

Question: V1C3-0050
The method by which a company exists and describes the basic terms of its existence is
Answers
A: Corporate governance.
B: Corporate charter.
C: Corporate ownership.
D: Compensation issues.

Answer 50

Answer Explanations
Answer (a) is incorrect. It does not deal with a company’s existence.
Answer (b) is correct. The method by which a firm is being governed, directed, administered, or controlled and the goals for which it is being governed are based on the corporate charter.
Answer (c) is incorrect. It does not deal with a company’s existence.
Answer (d) is incorrect. It does not deal with a company’s existence.

Question 51

Question: V1C3-0051
Which of the following is not a proper role of corporate board of directors?
Answers
A: Guardian.
B: Governance.
C: Guarantor.
D: Guidance.

Answer 51

Answer Explanations
Answer (a) is incorrect. It is a proper role for the directors.
Answer (b) is incorrect. It is a proper role for the directors.
Answer (c) is correct. The board of directors provides governance, guidance, and oversight. They are not guarantors for shareholders.
Answer (d) is incorrect. It is a proper role for the directors.