Flashcards V1C4 - V1C4

Question 1

Question: V1C4-0001
The proper organizational role of internal auditing is to
Answers
A: Assist the external auditor in order to reduce external audit fees.
B: Perform studies to assist in the attainment of more efficient operations.
C: Serve as the investigative arm of the audit committee of the board of directors.
D: Serve as an appraisal function to examine and evaluate activities as a service to the organization.

Answer 1

Answer Explanations
Answer (a) is incorrect. Reduction of external audit fees is a result of audit work but not a role.
Answer (b) is incorrect. This does not represent a complete description of the proper role.
Answer (c) is incorrect. This role is too limited for internal auditing. It also serves operations management and top management.
Answer (d) is the correct answer. This alternative describes the basic role concept of internal auditing.

Question 2

Question: V1C4-0002
In some organizations, consideration is being given to the possibility of outsourcing internal audit functions. Management in a large organization should recognize that the external auditor might have an advantage, compared to the internal auditor, because of the external auditor’s
Answers
A: Familiarity with the organization. Its annual audits provide an in-depth knowledge of the organization.
B: Size. It can hire experienced, knowledgeable, and certified staff.
C: Size. It is able to offer continuous availability of staff unaffected by other priorities.
D: Structure. It may more easily accommodate audit requirements in distant locations.

Answer 2

Answer Explanations
Answer (a) is incorrect. The internal audit staff, not the external auditor, through its continuous auditing gains an indepth knowledge of the organization.
Answer (b) is incorrect. The internal audit staff is able to maintain an experienced knowledgeable and certified (CIA) staff, without the potential threat of staff reassignment.
Answer (c) is incorrect. The internal staff is continuously available and not subject to greater priority work with other clients.
Answer (d) is the correct answer. The external auditor can offer better service in other geographical areas because of its dispersion of offices.

Question 3

Question: V1C4-0003
The status of the internal auditing function should be free from the impact of irresponsible policy changes by management. The most effective way to ensure that freedom is to
Answers
A: Have the internal auditing charter approved by both management and the board of directors.
B: Adopt policies for the functioning of the auditing department.
C: Establish an audit committee within the board of directors.
D: Develop written policies and procedures to serve as standards of performance for the department.

Answer 3

Answer Explanations
Answer (a) is the correct answer. Approval of the charter by the board of directors will protect the internal auditing function from management actions, which could weaken the status of the internal auditing department.
Answer (b) is incorrect. While adoption of the Standards serves as a guide and a measure of internal auditing performance, it will not protect and preserve the department’s status.
Answer (c) is incorrect. The establishment of an audit committee does not ensure the status of internal auditing without its involvement in areas such as approval of the charter.
Answer (d) is incorrect. Written policies and procedures serve to guide the audit staff but have little impact on management

Question 4

Question: V1C4-0004
The internal auditor’s responsibility for the prevention of fraud would include all of the following except:
Answers
A: Determining if the organizational environment fosters control consciousness.
B: Ensuring against the occurrence of fraud.
C: Being aware of activities in which fraud is likely to occur.
D: Evaluating the effectiveness of actions taken by management to deter fraud.

Answer 4

Answer Explanations
Answer (a) is incorrect. Internal auditing is responsible for evaluating the organization’s control consciousness.
Answer (b) is the correct answer. Auditor is not responsible for acting as an insurer or guarantor against fraud.
Answer (c) is incorrect. Auditor should be aware of activities where fraud is likely to occur.
Answer (d) is incorrect. Deterrence of fraud is the responsibility of management; evaluating the effectiveness of management efforts is the responsibility of internal auditing.

Question 5

Question: V1C4-0005
The consultative approach to auditing emphasizes
Answers
A: Imposition of corrective measures.
B: Participation with auditees to improve methods.
C: Fraud investigation.
D: Implementation of policies and procedures.

Answer 5

Answer Explanations
Answer (a) is incorrect. Imposition implies an adversarial relationship.
Answer (b) is the correct answer. Since auditors alone cannot implement audit recommendations, auditee participation and involvement makes improvements better.
Answer (c) is incorrect. Auditors, not consultants, investigate fraud.
Answer (d) is incorrect. Due to the requirement for independence, auditors should never implement policies and procedures.

Question 6

Question: V1C4-0006
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 function’s
Answers
A: Operating budget variance.
B: Effectiveness.
C: Performance appraisals.
D: Policies and procedures.

Answer 6

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 the correct answer. In this type of situation, management is highly averse to analysis or possible criticism of their actions and will inhibit the internal audit department’s effectiveness.
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 7

Question: V1C4-0007
A service company is currently experiencing a significant downsizing and process reengineering. Its board of directors has redefined the business goals and established initiatives using technology developed in-house to meet these goals. As a result, a more decentralized approach has been adopted to run the business functions by empowering the business branch managers to make decisions and perform functions traditionally done at a higher level.
The internal auditing staff is made up of the director, two managers, and five staff auditors, all with financial background. In the past, the primary focus of successful audit activities has been the service branches and the six regional division headquarters, which support the branches. These division headquarters are the primary targets for possible elimination. The support functions, such as human resources, accounting, and purchasing, will be brought into the national headquarters and technology will be enhanced to enable and augment these operations.
Based on the above changes and assuming those total audit resources remain the same, what activities should the internal auditing department perform to best serve the organization?
I. Increase audit time in systems development.
II. Increase audit time in service branches.
III. Increase audit time in functions being centralized.
IV. Continue the allocation of audit time as before.
Answers
A: I and II.
B: II and III.
C: I and III.
D: III and IV.

Answer 7

Answer Explanations
Answer (a) is incorrect. Item II is incorrect. While a small incremental increase in audit time may be feasible, the benefit derived would be minimal.
Answer (b) is incorrect. Item II is incorrect. While a small incremental increase in audit time may be feasible, the benefit derived would be minimal.
Answer (c) is the correct answer. Due to the focus on technology, audit time spent reviewing systems development should be increased (Item I). More testing is needed at the central location due to concentration of functions (Item III).
Answer (d) is incorrect. Item IV is incorrect. Change to business goals, processes, and focus will also require proactive change by the internal auditing department.

Question 8

Question: V1C4-0008
A service company is currently experiencing a significant downsizing and process reengineering. Its board of directors has redefined the business goals and established initiatives using technology developed in-house to meet these goals. As a result, a more decentralized approach has been adopted to run the business functions by empowering the business branch managers to make decisions and perform functions traditionally done at a higher level.
The internal auditing staff is made up of the director, two managers, and five staff auditors, all with financial background. In the past, the primary focus of successful audit activities has been the service branches and the six regional division headquarters, which support the branches. These division headquarters are the primary targets for possible elimination. The support functions, such as human resources, accounting, and purchasing, will be brought into the national headquarters and technology will be enhanced to enable and augment these operations.
Up to this point, internal auditing has reported to the chief operating officer. Due to the significant changes, there has been some discussion as to changing this reporting relationship. What would be the best reporting relationship for internal auditing?
Answers
A: Administrative and functional to the president.
B: Administrative to the president, functional to the board.
C: Administrative to the chief financial officer and functional to the president.
D: Administrative and functional to the chief operating officer.

Answer 8

Answer Explanations
Answer (a) is incorrect. Independence is impaired because the president is responsible for the areas to be audited.
Answer (b) is the correct answer. Independence is less likely to be impaired if the internal auditing department reports to the board.
Answer (c) is incorrect. Independence may be impaired in financial audits as well as audits of line functions.
Answer (d) is incorrect. Independence may be impaired for all audits of operational areas.

Question 9

Question: V1C4-0009
A service company is currently experiencing a significant downsizing and process reengineering. Its board of directors has redefined the business goals and established initiatives using technology developed in-house to meet these goals. As a result, a more decentralized approach has been adopted to run the business functions by empowering the business branch managers to make decisions and perform functions traditionally done at a higher level.
The internal auditing staff is made up of the director, two managers, and five staff auditors, all with financial background. In the past, the primary focus of successful audit activities has been the service branches and the six regional division headquarters, which support the branches. These division headquarters are the primary targets for possible elimination. The support functions, such as human resources, accounting, and purchasing, will be brought into the national headquarters and technology will be enhanced to enable and augment these operations.
Branch managers view the internal auditing function as a watchdog for top management. What is the best way for internal auditing to change this view to one that is more cooperative?
Answers
A: Increase focus on control responsibilities.
B: Increase technical skills.
C: Increase confidentiality of investigative audits to minimize fear.
D: Increase solicitation of auditee concerns.

Answer 9

Answer Explanations
Answer (a) is incorrect. Control has negative connotations and breeds antagonism with line personnel.
Answer (b) is incorrect. Interpersonal skills are more important to fostering a cooperative relationship.
Answer (c) is incorrect. Participation and cooperation are paramount in trying to improve auditor-auditee relations, especially in audits that require intense investigation.
Answer (d) is the correct answer. Two-way communication is important in fostering a cooperative relationship.

Question 10

Question: V1C4-0010
As part of the process to improve auditor-auditee relations, it is very important to deal with how internal auditing is perceived. Certain types of attitudes in the work performed will help create these perceptions. From a management perspective, which attitude is likely to be the most conducive to a positive perception?
Answers
A: Objective.
B: Investigative.
C: Interrogatory.
D: Consultative.

Answer 10

Answer Explanations
Answer (a) is incorrect. An objective attitude is desirable, but by itself will not lead to a more positive relationship.
Answer (b) is incorrect. An investigative attitude is not likely to enhance the relationship.
Answer (c) is incorrect. An interrogatory attitude is not likely to enhance the relationship.
Answer (d) is the correct answer. A consultative attitude leads to two-way communication.

Question 11

Question: V1C4-0011
In planning a system of internal operating controls, the role of the internal auditor is to
Answers
A: Design the controls.
B: Appraise the effectiveness of the controls.
C: Establish the policies for controls.
D: Create the procedures for the planning process.

Answer 11

Answer Explanations
Answer (a) is incorrect because it is the role of management.
Answer (b) is the correct answer. This is the proper role of the internal auditor, which is to report the results to management.
Answer (c) is incorrect because it is the role of management.
Answer (d) is incorrect because it is the role of management.

Question 12

Question: V1C4-0012
An audit committee should be designed to enhance the independence of both the internal and external audit functions and to insulate the audit functions from undue management pressures. Using these criteria, audit committees should be composed of
Answers
A: A rotating subcommittee of the board of directors or its equivalent.
B: Only members from the relevant outside regulatory agencies.
C: Members from all important constituencies, specifically including representatives from banking, labor, regulatory agencies, shareholders, and officers.
D: Only external members of the board of directors or its equivalent.

Answer 12

Answer Explanations
Answer (a) is incorrect. Rotating subcommittee members can be internal to a company and would not have independence.
Answer (b) is incorrect. External members should represent different backgrounds, not just regulatory background.
Answer (c) is incorrect. The size of the audit committee is limited and cannot include too many such as representatives from shareholders and labor.
Answer (d) is the correct answer. Audit committees should be made up of external members of the board of directors or other similar oversight committees.

Question 13

Question: V1C4-0013
Accepting the concept that internal auditing should be an integral part of an organization can involve a major change of attitude on the part of top management. Which of the following would be the best way for internal auditors to convince management regarding the need for and benefits of internal auditing?
Answers
A: Persuading top managers to accept the idea of internal audits by contacting company shareholders and regulatory agencies.
B: Educating top managers about the benefits and communicating with them on a regular basis.
C: Negotiating with top management to provide them with rewards, such as favorable audits.
D: Involving top management in deciding which audit findings will be reported.

Answer 13

Answer Explanations
Answer (a) is incorrect. Manipulation is not an option since it can be done only if the party manipulating has power. Its effects are also short-lived and do not lead to long-term commitment.
Answer (b) is the correct answer. Education and communication, although lengthy and costly, are the only way to achieve long-term results.
Answer (c) is incorrect. Negotiation is not an alternative since the two parties do not have equal power. Furthermore, internal auditors often do not have immediate rewards available to them to offer management.
Answer (d) is incorrect. Involving top management in this manner is not appropriate.

Question 14

Question: V1C4-0014
Which of the following features of a large manufacturing company’s organization structure would be a control
weakness?
Answers
A: The IT department is headed by a vice president who reports directly to the president.
B: The chief financial officer is a vice president who reports to the chief executive officer.
C: The audit committee of the board consists of the chief executive officer, the chief financial officer, and a major stockholder.
D: The controller and treasurer report to the chief financial officer.

Answer 14

Answer Explanations
Answer (a) is incorrect. This is a strength since it prevents the information technology operation from being dominated by a user.
Answer (b) is incorrect. This is a strength since it prevents the information technology operation from being dominated by a user.
Answer (c) is the correct answer. The audit committee should be made up of independent directors.
Answer (d) is incorrect. This is a strength since it prevents the information technology operation from being dominated by a user.

Question 15

Question: V1C4-0015
Audit committees have been identified as a major factor in promoting independence of both the internal and external auditor. Which of the following is the most important limitation on the effectiveness of audit committees?
Answers
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 are compensated by the organization and thus favor a stockholder’s view.
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 do not normally have degrees in the accounting or auditing fields.

Answer 15

Answer Explanations
Answer (a) is the correct answer. This is a major limitation that has hampered the effective operation of audit committees.
Answer (b) is incorrect. Audit committee members are usually composed of outside directors. Many of these directors have a broad viewpoint and are not limited to a stockholder’s view.
Answer (c) is incorrect. Audit committees devote considerable time to the external audit function, but the evidence is that they are increasingly devoting time to internal audit reports.
Answer (d) is incorrect. A committee member need not have an accounting degree to understand most reporting and control issues.

Question 16

Question: V1C4-0016
Who should have the least influence on the appointment of the director of internal audit?
Answers
A: The controller.
B: The audit committee.
C: The external auditor.
D: The chief executive officer.

Answer 16

Answer Explanations
Answer (a) is the correct answer. The controller is an auditee, and as such should have the least influence. The highest levels of management and the audit committee are directly involved in the appointment. The external auditor has influence on the appointment because the external auditor requires an appropriate level of expertise and independence in order to rely on the work of the internal auditor.
Answer (b) is incorrect. The audit committee participates in approving the selection and dismissal of the internal audit director.
Answer (c) is incorrect. The external auditor is consulted on the appointment of the director of the internal audit.
Answer (d) is incorrect. The director of internal audit administratively should report to the chief executive officer.
Therefore, the CEO should have some say in the appointment of the director of internal audit.

Question 17

Question: V1C4-0017
During discussions with top management, the director of internal auditing identified several strategic business issues to consider in preparing the annual audit schedule. Which of the following does not represent a strategic issue for this purpose?
Answers
A: A monthly budgeting process will be implemented.
B: An international marketing campaign will be started to develop product recognition and also to leverage the new corporate-based advertising department.
C: Joint venture candidates will be sought to provide manufacturing and sourcing capabilities in European and Asian markets.
D: A human resources database will be established to ensure consistent administration of policies and to improve data retention.

Answer 17

Answer Explanations
Answer (a) is the correct answer. This is an operating decision to facilitate the budgeting process and improve information.
Answer (b) is incorrect. The director will need to ensure that the new marketing process and the centralized advertising department are recognized and monitored in risk assessment and planning activities.
Answer (c) is incorrect. The addition of joint-venture partners will add new or additional concerns for risk assessment and planning in the internal auditing department.
Answer (d) is incorrect. Both the assumptions and ongoing activities related to human resources database would require consideration in the planning and programming of audit activity.

Question 18

Question: V1C4-0018
Audit committees are most likely to participate in approving
Answers
A: Staff promotions and salary increases.
B: Internal audit report findings and recommendations.
C: Audit work schedules.
D: Appointment of the internal audit director.

Answer 18

Answer Explanations
Answer (a) is incorrect. The company’s internal auditing director is responsible for staff promotions.
Answer (b) is incorrect. The company’s internal auditing director is responsible for approving internal audit reports.
Answer (c) is incorrect. This is a part of the internal auditing department’s planning function.
Answer (d) is the correct answer. The independence of the internal auditing department is enhanced when the audit committee participates in naming its director.

Question 19

Question: V1C4-0019
Audit committees are responsible for
Answers
A: Selecting the director of internal auditing.
B: Developing the internal auditing plan and budget.
C: Reviewing and approving the internal audit charter.
D: Selecting the independent accountants.

Answer 19

Answer Explanations
Answer (a) is incorrect. The audit committee should exercise an active oversight role. The actual decision, however, should be left to appropriate senior management of the organization.
Answer (b) is incorrect. Developing the internal audit plan and budget is the responsibility of the audit director.
Answer (c) is the correct answer. This is an oversight activity. It will ensure that internal auditors are carrying out their responsibilities.
Answer (d) is incorrect. Selecting the independent accountants is the responsibility of senior management of the organization. However, the audit committee approves the (1) selection of the internal audit director and independent accountants and (2) audit plan and budget.

Question 20

Question: V1C4-0020
To avoid creating conflict between the chief executive officer (CEO) and the audit committee, the internal auditing director should
Answers
A: Submit copies of all audit reports to the CEO and audit committee.
B: Strengthen independence through organizational status.
C: Discuss all pending reports to the CEO with the audit committee.
D: Request board establishment of policies covering internal auditing relationships with the audit committee.

Answer 20

Answer Explanations
Answer (a) is incorrect. The CEO and audit committee most likely should receive summary reports. Top management and the board ordinarily are not involved in the details of audit work.
Answer (b) is incorrect. Independence is not sufficient to avert conflict unless reporting relationships are well defined.
This answer is incorrect. Refer to the correct answer explanation.
Answer (d) is the correct answer. The action the internal auditing director should take to avoid conflict between the CEO and the audit committee (IIA Standards).

Question 21

Question: V1C4-0021
Which of the following would not be an appropriate member of an audit committee?
Answers
A: The vice president of the local bank used by the company.
B: An academic specializing in business administration.
C: A retired executive of a firm that had been associated with the corporation.
D: The firm’s vice president of operations.

Answer 21

Answer Explanations
Answer (a) is incorrect. This is normally independent of the firm’s internal operations and external to the firm.
Answer (b) is incorrect. This is normally independent of the firm’s internal operations and external to the firm.
Answer (c) is incorrect. This is normally independent of the firm’s internal operations and external to the firm.
Answer (d) is the correct answer. Audits may be conducted in the member’s area of control and responsibility. Thus, the potential member is not independent of the audit function. The potential member is also not an outside director.