MC Test #2

Question 1

In assessing organizational risk in a manufacturing organization, which of the following would have the greatest long-range impact on the organization?

a. Advertising budget.

b. Production scheduling.

c. Inventory policy.

d. Product quality.

Answer 1

D

Question 2

Internal auditors often prepare process maps and reference portions of these maps to narrative descriptions of certain activities. This is an appropriate procedure to:

a. Determine the ability of the activities to produce reliable information.

b. Obtain the understanding necessary to test the process.

c. Document that the process meets internal audit standards.

d. Determine whether the process meets established management objectives.

Answer 2

B

Question 3

What is a business process?

a. How management plans to achieve the organization’s objectives.

b. The set of connected activities linked with each other for the purpose of achieving an objective or goal.

c. A group of interacting, interrelated, or interdependent elements forming a complex whole.

d. A finite endeavor (having specific start and completion dates) undertaken to create a unique product or service that brings about beneficial change or added value

Answer 3

B

Question 4

If a risk appears in the bottom right of quadrant II in the above risk control map, it means that:

a. There is an appropriate balance between risk and control.

b. The controls may be excessive relative to the risk.

c. The controls may be inadequate relative to the risk.

d. There is not enough information to make a judgment

Answer 4

B

Question 5

If a risk appears in the middle of quadrant IV in the above risk control map, it means that:

a. There is an appropriate balance between risk and control.

b. The controls may be excessive relative to the risk.

c. The controls may be inadequate relative to the risk.

d. There is not enough information to make a judgement

Answer 5

A

Question 6

Which of the following circumstances would concern the internal auditor the most?

a. A risk in the lower left corner of quadrant I.

b. A risk in the lower right corner of quadrant II.

c. A risk in the upper left corner of quadrant III.

d. A risk in the upper right corner of quadrant IV.

Answer 6

C

Question 7

Which of the following are business processes?

I.Strategic planning.

II.Review and write-off of delinquent loans.

III. Safeguarding of assets.

IV.Remittance of payroll taxes to the respective tax authorities.

a. I and III.

b. II and IV.

c. I, II, and IV.

d. I, II, III, and IV.

Answer 7

C

Question 8

After business risks have been identified, they should be assessed in terms of their inherent:

a. Impact and likelihood.

b. Likelihood and probability.

c. Significance and severity.

d. Significance and control effectiveness.

Answer 8

A

Question 9

A major upgrade to an important information system would most likely represent a high:

a. External risk factor.

b. Internal risk factor.

c. Other risk factor.

d. Likelihood of future systems problems.

Answer 9

B

Question 10

Which of the following is true regarding business process outsourcing?

a. Outsourcing a core, high-risk business process reduces the overall operational risk.

b. Outsourced processes should not be included in the internal audit universe.

c. The independent outside auditor is required to review all significant outsourced business processes.

d. Management’s controls to ensure the outsourcing provider meets contractual performance requirements should be tested by the internal audit function.

Answer 10

D

Question 11

A company has recently outsourced its payroll process to a third-party service provider. An audit team was scheduled to audit payroll controls in the annual audit plan prepared prior to the outsourcing. What action should the audit team take, considering the outsourcing decision?

a. Cancel the engagement, because the processing is being performed outside the organization.

b. Review only the controls over payments to the third-party provider based on the contract.

c. Review only the company’s controls over data sent to and received from the third-party service provider.

d. Review the controls over payroll processing in both the company and the third-party service provider.

Answer 11

D

Question 12

How does a control manage a specific risk?

a. It reduces the likelihood of the event giving rise to the risk.

b. It reduces the impact of the event giving rise to the risk.

c. It reduces either likelihood or impact or both.

d. It prevents the occurrence of the event.

Answer 12

C

Question 13

Per the Standards, internal audit functions must establish:

a. Internal quality assurance and improvement program assessments.

b. External quality assurance and improvement program assessments.

c. Both internal and external quality assurance and improvement program assessments.

d. Neither internal nor external quality assurance and improvement program assessments

Answer 13

C

Question 14

Senior management has requested that the internal audit function perform an operational review of the telephone marketing operations of a major division and recommend procedures and policies for improving management control over the operation. The internal audit function should:

a. Accept the audit engagement because independence would not be impaired.

b. Accept the engagement, but indicate to management that recommending controls would impair audit independence so that management knows that future audits of the area would be impaired.

c. Not accept the engagement because internal audit functions are presumed to have expertise on accounting controls, not marketing controls.

d. Not accept the engagement because recommending controls would impair future objectivity of the department regurding this Auditee

Answer 14

A

Question 15

Which of the following is the best reason for the CAE to consider the organization’s strategic plan in developing the annual internal audit plan?

a. To emphasize the importance of the internal audit function to the organization.

b. To make recommendations to improve the strategic plan.

c. To ensure that the internal audit plan supports the overall business objectives.

d. To provide assurance that the strategic plan is consistent with the organization’s values.

Answer 15

C

Question 16

The Standards requires policies and procedures to guide the internal audit staff. Which of the following statements is false with respect to this requirement?

a. A small internal audit function may be managed informally through close supervision and written memos.

b. Formal administrative and technical audit manuals may not be needed by all internal audit functions.

c. The CAE should establish the function’s policies and procedures.

d. All internal audit functions should have a detailed policies and procedures manual

Answer 16

D

Question 17

Which of the following is not a responsibility of the CAE?

a. To communicate the internal audit function’s plans and resource requirements to senior management and the board for review and approval.

b. To oversee the establishment, administration, and assessment of the organization’s system of internal controls and risk management processes.

c. To follow up on whether appropriate management actions have been taken on significant issues cited in internal audit reports.

d. To establish a risk-based plan to accomplish the objectives of the internal audit function consistent with the organization’s goals.

Answer 17

b

Question 18

The Standards requires the CAE to share information and coordinate activities with other internal and external providers of assurance services. With regard to the independent outside auditor, which of the following would not be an appropriate way for the CAE to meet this requirement?

a. Holding a meeting between the CAE and the independent outside audit firm’s partner to discuss the upcoming audit of the financial statements.

b. Providing the independent outside auditor with access to the workpapers for an audit of third-party contractors.

c. Requiring the independent outside auditor to have the CAE’s approval of their annual audit plan for conducting the financial statement audit.

d. Requesting that the internal audit function receive a copy of the independent outside auditor’s managment letter

Answer 18

c

Question 19

Organizational independence exists if the CAE reports <List> to some other organizational level than the CEO or similar head of the organization as long as the internal audit activity <List> without interference:</List></List>

a. List A: administratively; List B: controls the scope and performance of work and reporting of results.

b. List A: administratively; List B: approved the internal audit budget and risk-based internal audit plan.

c. List A: functionally; List B: controls the scope and performance of work and reporting of results.

d. List A: functionally; List B: approves the internal audit budget and risk-based internal audit plan.

Answer 19

a

Question 20

12. According to the IPPF, internal auditors should possess which of the following skills?

I.Internal auditors should understand human relations and be skilled in dealing with people.

II.Internal auditors should be able to recognize and evaluate the materiality and significance of deviations from good business practices.

III. Internal auditors should be experts on subjects such as economics, commercial law, taxation, finance, and IT.

IV.Internal auditors should be skilled in oral and written communication.

a. II only.

b. I and III only.

c. III and IV only.

d. I, II, and IV only

Answer 20

d

Question 21

Which of the following best describes an auditor’s responsibility after noting some indicators of fraud?

a. Expand activities to determine whether an investigation is warranted.

b. Report the possibility of fraud to senior management and ask how to proceed.

c. Consult with external legal counsel to determine the course of action to be taken.

d. Report the matter to the audit committee and request funding for outside specialists to help investigate the possible fraud.

Answer 21

A

Question 22

Which of the following activities are designed to provide feedback on the effectiveness of an internal audit activity?

I.Proper supervision.

II.Proper training.

III. Internal assessments.

IV.External assessments.

a. I, II, and III only.

b. I, II, and IV only.

c. I, III, and IV only.

d. All of these

Answer 22

C

Question 23

Professional skepticism means that internal auditors beginning an assurance engagement should:

a. Assume the auditee is dishonest until they gather evidence that clearly indicates otherwise.

b. Assume the auditee is honest until they gather evidence that clearly indicates otherwise.

c. Neither assume the auditee is honest nor assume they are dishonest.

d. Assume that internal controls are designed inadequately and/or operating ineffectively.

Answer 23

c

Question 24

Which of the following statements regarding audit evidence would be the least appropriate for an internal auditor to make?

a. “I consider the level of risk involved when deciding the kind of evidence I will gather.”

b. “I do not perform procedures that provide persuasive evidence because I must obtain convincing evidence.”

c. “I evaluate both the usefulness of the evidence I can obtain and the cost to obtain it.”

d. “I am seldom absolutely certain about the conclusions I reach based on the evidence I examine.”

Answer 24

B

Question 25

Documentary evidence is one of the principal types of corroborating information used by an internal auditor. Which one of the following examples of documentary evidence generally is considered the most reliable?

a. A vendor’s invoice obtained from the accounts payable department.

b. A credit memorandum prepared by the credit manager.

c. A receiving report obtained from the receiving department.

d. A copy of a sales invoice prepared by the sales department.

Answer 25

A

Question 26

An internal auditor must weigh the cost of an audit procedure against the persuasiveness of the evidence to be gathered. Observation is one audit procedure that involves cost-benefit tradeoffs. Which of the following statements regarding observation as an audit procedure is/are correct?

I.Observation is limited because individuals may react differently when being watched.

II.Observation is more effective for testing completeness than it is for testing existence.

III. Observation provides evidence about whether certain controls are operating as designed.

a. I only.

b. II only.

c. I and III.

d. I, II, and III.

Answer 26

C

Question 27

Your audit objective is to determine whether purchases of office supplies have been properly authorized. If purchases of office supplies are made through the purchasing department, which of the following procedures is most appropriate?

a. Vouch purchase orders to approved purchase requisitions.

b. Trace approved purchase requisitions to purchase orders.

c. Inspect purchase requisitions for proper approval.

d. Vouch receiving reports to approved purchase orders.

Answer 27

A

Question 28

7. A production manager of MSM Company ordered excessive raw materials and had them delivered to a side business he operated. The manager falsified receiving reports and approved the invoices for payment. Which of the following procedures would most likely detect this fraud?

a. Vouch cash disbursements to receiving reports and invoices.

b. Confirm the amounts of raw materials purchased, purchase prices, and dates of shipment with vendors.

c. Perform ratio and trend analysis. Compare the cost of raw materials purchased with the cost of goods produced.

d. Observe the receiving dock and count materials received. Compare the counts with receiving reports completed by receiving employees.

Answer 28

C

Question 29

An internal auditor is concerned that fraud, in the form of payments to fictitious vendors, may exist. Company purchasers, responsible for purchases of specific product lines, have been granted the authority to approve expenditures up to $10,000. Which of the following applications of generalized audit software would be most effective in addressing the auditor’s concern?

a. List all purchases over $10,000 to determine whether they were properly approved.

b. Take a random sample of all expenditures under $10,000 to determine whether they were properly approved.

c. List all major vendors by product line. Select a sample of major vendors and examine supporting documentation for goods or services received.

d. List all major vendors by product line. Select a sample of major vendors and send negative confirmations to validate that they actually provided goods or services.

Answer 29

C

Question 30

Which of the following most completely describes the appropriate content of internal audit assurance engagement workpapers?

a. Objectives, procedures, and conclusions.

b. Purpose, criteria, techniques, and conclusions.

c. Objectives, procedures, facts, conclusions, and recommendations.

d. Subject, purpose, sampling information, and analysis.

Answer 30

c

Question 31

Which of the following represents the most persuasive evidence that trade receivables actually exist?

a. Positive confirmations.

b. Sales invoices.

c. Receiving reports.

d. Bills of lading

Answer 31

a

Question 32

Competent evidence is best defined as evidence that:

a. Is persuasive, reasonably free from error and bias, and faithfully represents that which it purports to represent.

b. Is obtained by observing people, property, and events.

c. Is supplementary to other evidence already gathered and tends to strengthen or confirm it.

d. Proves an intermediate fact, or group of facts, from which still other facts can be inferred.

Answer 32

A

Question 33

Workpaper summaries, if prepared, can be used to:

a. Promote efficient workpaper review by internal audit supervisors.

b. Replace the detailed workpaper files for permanent retention.

c. Serve as an engagement final communication to senior management.

d. Document the full development of engagement observations and recommendations.

Answer 33

A

Question 34

Which of the following is not likely to be an assurance engagement objective?

a. Evaluate the design adequacy of the payroll input process.

b. Guarantee the accuracy of recorded inventory balances.

c. Assess compliance with health and safety laws and regulations.

d. Determine the operating effectiveness of fixed asset controls.

Answer 34

b

Question 35

A process objective stating “All contracts must be approved by an officer of the company before being consummated” is an example of what type of objective?

a. Strategic.

b. Operations.

c. Reporting.

d. Compliance

Answer 35

d

Question 36

Analytical procedures can be applied during which phase(s) of an assurance engagement?

a. Plan phase.

b. Perform phase.

c. Communicate phase.

d. Plan and perform phases.

Answer 36

d

Question 37

Which of the following auditee-prepared documents will likely be of greatest assistance to the internal auditors in their assessment of process design adequacy?

a. Policies and procedures manual.

b. Organization charts and job descriptions.

c. Detailed flowcharts depicting the flow of the process.

d. Narrative memoranda listing key tasks for portions of the process

Answer 37

C

Question 38

Which of the following controls is not likely to be an entity-level control?

a. All employees must receive ongoing training to ensure they maintain their competence.

b. All cash disbursement transactions must be approved before they are paid.

c. All employees must comply with the Code of Ethics and Business Conduct.

d. An organization wide risk assessment is conducted annually.

Answer 38

b

Question 39

Which of the following is not typically a key element of flowcharts or narrative memoranda?

a. Overall process objectives.

b. Key inputs to the process.

c. Key outputs from the process.

d. Key risks and controls

Answer 39

a

Question 40

Which of the following external risks is least likely to impact the accuracy of financial reporting?

a. The standard-setting body in the organization’s country issues a new financial accounting standard.

b. A recent judicial court case increases the likelihood that pending litigation will result in an unfavorable outcome.

c. Changes in standard industry contracts now allow for netting of payables and receivables.

d. Competitor pressures cause the organization to pursue new sales channels

Answer 40

d

Question 41

Which of the following groups’ risk tolerance levels are least relevant when conducting an assurance engagement?

a. Senior management.

b. Process-level management.

c. The internal audit function.

d. Vendors and customers.

Answer 41

d

Question 42

Which of the following controls is likely to be least relevant when evaluating the design adequacy of a cash collections process?

a. Calculating the amount of cash received.

b. Documenting the rationale for selecting the bank account into which the deposit will be made.

c. Matching the total deposits to the amounts credited to customers’ accounts receivable balances.

d. Segregating the preparation of deposit slips from the adjustment of customer account balances

Answer 42

b

Question 43

An internal auditor determines that the process is not designed adequately to reduce the underlying risks to an acceptable level. Which of the following should the internal auditor do next?

a. Write the audit report. There’s no reason to test the operating effectiveness of controls that are not designed adequately.

b. Test compensating controls in other (adjacent) processes to see if the impact of the design inadequacy is reduced to an acceptable level.

c. Test the existing key controls anyway to prove that, despite the design inadequacy, the process is still meeting the process objectives.

d. Postpone the engagement until the design inadequacy has been rectified.

Answer 43

B

Question 44

A specific objective of an audit of an organization’s expenditure cycle is to determine if all goods paid for have been received and charged to the correct account. This objective would address which of the following primary objectives identified in The IIA’s International Standards for the Professional Practice of Internal Auditing?

I.Reliability and integrity of financial and operational information.

II. Compliance with laws, regulations, and contracts.

III. Effectiveness and efficiency of operations.

IV. Safeguarding of assets.

a. I and II only.

b. I and IV only.

c. I, II, and IV only.

d. II, III, and IV only.

Answer 44

B

Question 45

In an assurance engagement of treasury operations, an internal auditor is required to consider all of the following issues except:

a. The audit committee has requested assurance on the treasury department’s compliance with a new policy on use of financial instruments.

b. Treasury management has not instituted any risk management policies.

c. Due to the recent sale of a division, the amount of cash and marketable securities managed by the treasury department has increased by 350 percent.

d. The external auditors have indicated some difficulties in obtaining account confirmations.

Answer 45

D