Plan Engagements

Question 1

An internal auditor discovered an error in a receivable due from a major stockholder. The receivable’s balance accounts for less than 1% of the company’s total receivables. Would the auditor be likely to consider the error to be material?
No, if there will be further transactions with this stockholder.
Yes, because a related party is involved.
Yes, if relative risk is low.
No, because a small dollar amount is in error.

Answer 1

Yes, because a related party is involved.

Question 2

Although encouraged by IIA Standards, which of the following is not usually found in the final internal audit reports?
Auditee’s advanced responses whether valid or not.
Auditee’s noteworthy accomplishments.
Auditee’s corrective action plans.
Auditee’s final comments prior to issuing the final audit report.

Answer 2

Auditee’s noteworthy accomplishments.

Question 3

The following is the complete text of a deficiency finding included in the internal audit report for a bank:
The late charges were waived on an excessive number of delinquent installment loan payments at the Spring Street Branch. We were informed that an officer does not approve late charge waivers. Approximately $5,000 per year in revenues is being lost. In order to provide a better control over late charges waived and loss of income, we recommend that a lending officer be responsible for waiving late charges and that this approval be in writing.
Which of the following elements of a deficiency finding isnotproperly addressed?
Condition.
Effect.
Cause.
Criteria or standards.

Answer 3

Criteria or standards.

Question 4

The finance department of a governmental unit has a computer based model for forecasting tax revenue to use in preparing annual budgets. The internal audit group has been asked to audit the model. A reasonable objective of the audit would be to:
Confirm that the model forecasts each kind of revenue within a small percentage of actual revenue.
Verify that for varying input values the model gives results consistent with revenue behavior.
Determine whether the programs used for this year?s forecast were identical to those used in the previous year.
Ensure that the model was modified so that it would have forecasted the previous year?s actual revenue.

Answer 4

Verify that for varying input values the model gives results consistent with revenue behavior.

Question 5

An audit of an automated accounts receivable function for a single-plant furniture manufacturing company has just been completed. Significant findings include late posting of customers? payments, late mailing of monthly invoices, and erratic follow-up on past-due accounts. Which of the following managers should attend the exit conference for this audit?
Head of the audit team, controller, and vice president of information systems.
Director of internal auditing, chief financial officer, chief executive officer, and vice president of information systems.
Head of the audit team, manager of the accounts receivable department, and manager of the data processing department.
Director of internal auditing, chief operating officer, and controller.

Answer 5

Head of the audit team, manager of the accounts receivable department, and manager of the data processing department.

Question 6

The internal auditing department encounters a scope limitation from senior management that will affect its ability to meet its goals and objectives for a potential auditee. The nature of the scope limitation should be:
Communicated to management, stating that the limitation will not be accepted because it would impair the audit department’s independence.
Noted in the audit work papers, but the audit should be carried out as scheduled and the scope limitation worked around, if possible.
Communicated, preferably in writing, to the board.
Communicated to the external auditors so they can investigate the area in more detail.

Answer 6

Communicated, preferably in writing, to the board.

Question 7

Successful communication between the auditor and the auditee partially depends on achieving appropriate emphasis so both parties are aware of the most important points in their discussion. Which of the following approaches would provide themostemphasis in an audit report?
Calm discussion in a conversational tone.
Key points embedded in discussion.
Graphics, repetition, and itemization.
Solid paragraphs and detailed appendices.

Answer 7

Graphics, repetition, and itemization.

Question 8

Which of the following is not an advantage of issuing an interim report?
Final report-writing time can be minimized.
A formal, written interim report may negate the need for a final report in certain circumstances.
An interim report can be conducted on an informal basis and may be communicated only verbally.
An interim report allows information requiring immediate attention to be communicated.

Answer 8

A formal, written interim report may negate the need for a final report in certain circumstances.

Question 9

What action should an internal auditor take on discovering that an audit area was omitted from the audit program?
Perform the additional work needed without regard to the added time required to complete the audit.
Continue the audit as planned and include the unforeseen problem in a subsequent audit.
Evaluate whether completion of the audit as planned will be adequate.
Document the problem in the work papers and take no further action until instructed to do so.

Answer 9

Evaluate whether completion of the audit as planned will be adequate.

Question 10

In the performance of an audit, audit risk is best defined as the risk that an auditor:
May not have the expertise to adequately audit a specific activity.
Might not select documents that are in error as part of the examination.
May fail to detect a significant error or weakness during an examination.
May not be able to properly evaluate an activity because of its poor internal accounting controls.

Answer 10

May fail to detect a significant error or weakness during an examination.

Question 11

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
Which of the following analytical review procedures would provide themostinsight into the reasonableness of the increase in health care costs?
Develop a comparison of overall health insurance costs incurred by the company with similar costs incurred by companies in the same industry.
Obtain the government index of health care costs for the comparable period of time, and compare the rate of increase with that of the cost per employee incurred by the company.
Obtain a bid from another health care administrator to provide the same administrative services as the current health care administrator.
Develop a comparison of the costs incurred with similar costs incurred by other companies.

Answer 11

Obtain the government index of health care costs for the comparable period of time, and compare the rate of increase with that of the cost per employee incurred by the company.

Question 12

In the preparation of an audit program, which of the following items is not essential?
The preparation of a budget identifying the costs of resources needed.
A review of material from prior audit reports.
The performance of a preliminary survey.
A review of performance standards set by management.

Answer 12

The preparation of a budget identifying the costs of resources needed.

Question 13

The scope of an internal audit is initially defined by the:
Preliminary survey.
Scheduling and time estimates.
Audit program.
Audit objectives.

Answer 13

Audit objectives.

Question 14

An audit report recommendation should address what attribute of an audit finding?
Cause.
Effect.
Criteria.
Statement of condition.

Answer 14

Cause.

Question 15

During an exit conference, an auditor and an auditee disagreed about a well-documented audit finding. Which of the following would describe an appropriate manner to handle the situation, assuming that it cannot be resolved prior to issuing the audit report?
Present the finding giving all of the facts and conclusions resulting from the testing.
Change the finding to agree with the auditee’s position.
Present both the audit finding and auditee’s position on the finding.
Defer reporting the item and plan to perform more detailed work during the next audit.

Answer 15

Present both the audit finding and auditee’s position on the finding.

Question 16

The following data were gathered during an internal auditor’s investigation of the reason for a material increase in bad debts expenses. In preparing a report of the finding, each of the items might be classified as criteria, cause, condition, effect, or background information.
1.Very large orders require management’s approval of credit.
2.Audit tests showed that sales personnel regularly disregard credit guidelines when dealing with established customers.
3.A monthly report of write-offs is prepared but distributed only to the accounting department.
4.Credit reports are used only on new accounts.
5.Accounting department records suggest that uncollectible accounts could increase by 5% for the current year.
6.The bad debts loss increased by $100,000 during the last fiscal year.
7.Even though procedures and criteria were changed to reduce the amount of bad-debt write-offs, the loss of commissions due to written-off accounts has increased for some sales personnel.
8.Credit department policy requires the review of credit references for all new accounts.
9.Current payment records are to be reviewed before extending additional credit to open accounts.
10.To reduce costs, the use of outside credit reports was suspended on several occasions.
11.Since several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review.
12.According to the new credit manager, strict adherence to established credit policy is not necessary.
Effect is best illustrated by items numbered:
5, 6, and 7.
3, 4, and 12.
2, 10, and 11.
1, 8, and 9.

Answer 16

5, 6, and 7.

Question 17

Upon reviewing the results of the audit report with the audit committee, executive management agreed to accept the risk of not implementing corrective action on certain audit findings. Evaluate the following and select thebestalternative for the internal auditing director.
Notify regulatory authorities of management’s decision.
Internal audit responsibility has been discharged, and no further audit action is required.
Conduct a follow-up audit to determine whether corrective action was taken.
Perform additional audit steps to further identify the policy violations.

Answer 17

Internal audit responsibility has been discharged, and no further audit action is required.

Question 18

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
The auditor needs to determine the scope of the proposed audit of insurance coverage by the company. Which of the following statements is (are)correctregarding the potential scope of the audit?
I.Since it is an internal audit, the audit department should concentrate on processing that occurs within the company and not on auditing the correctness of transaction processing by the health care processor.
II.The auditor should interview management prior to beginning the audit to understand (1) its concerns and (2) the underlying assumptions made and rationale used when making the self-insurance decision.
III.The auditor should consider engaging an actuarial consultant to better understand the risks involved in order to help determine the scope of the audit.
II and III.
Both I and II.
I only.
II only.

Answer 18

II and III.

Question 19

An oral audit report may be most appropriate when:
Higher-level management needs a summary of individual audits.
It is used only for internal reporting within the internal auditing department.
A permanent record of the report is needed.
Emergency action is needed.

Answer 19

Emergency action is needed.

Question 20

Which of the following is not a major purpose of an audit report?
Get results.
Inform.
Persuade.
Assign responsibility.

Answer 20

Assign responsibility.

Question 21

An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives.
+Verify the existence of unused machinery being stored in the warehouse.
+Determine whether machinery had been damaged during storage.
+Review the handling procedures being performed by personnel at the warehouse.
+Determine whether proper accounting procedures are being followed for machinery kept in the warehouse.
+Calculate the current fair market value of warehouse inventories.
+Compare the total value of the machinery to company accounting records.
It was confirmed that, of the 30 machines selected from purchasing records for the sample, 13 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. Twelve others had been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, there exist both situational factors and message characteristics that can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
Which of the following would seem to be a message characteristic that the auditor who prepared the above report overlooked?
Sequence of message.
Nature of the audience.
Prior encounters with the auditee.
Noise.

Answer 21

Sequence of message.

Question 22

An internal auditor is assigned to conduct an audit of security of a local area network (LAN) in the finance department of the organization. Investment decisions, including the use of hedging strategies and financial derivatives, use data and financial models that run on the LAN. The LAN is also used to download data from the mainframe to assist in the decisions. In determining the scope of the audit, which of the following items should be consideredoutside the scopeof the security audit?
The ability of the LAN application to identify data items at the field or record level and implement user access security at that level.
Interviews with users to determine their assessment of the level of security in the system and the vulnerability of the system to compromise.
The level of security of other LANs in the company that also utilize sensitive data.
Investigation of the physical security over access to the components of the LAN.

Answer 22

The level of security of other LANs in the company that also utilize sensitive data.

Question 23

The following data were gathered during an internal auditor’s investigation of the reason for a material increase in bad debts expenses. In preparing a report of the finding, each of the items might be classified as criteria, cause, condition, effect, or background information.
1.Very large orders require management’s approval of credit.
2.Audit tests showed that sales personnel regularly disregard credit guidelines when dealing with established customers.
3.A monthly report of write-offs is prepared but distributed only to the accounting department.
4.Credit reports are used only on new accounts.
5.Accounting department records suggest that uncollectible accounts could increase by 5% for the current year.
6.The bad debts loss increased by $100,000 during the last fiscal year.
7.Even though procedures and criteria were changed to reduce the amount of bad-debt write-offs, the loss of commissions due to written-off accounts has increased for some sales personnel.
8.Credit department policy requires the review of credit references for all new accounts.
9.Current payment records are to be reviewed before extending additional credit to open accounts.
10.To reduce costs, the use of outside credit reports was suspended on several occasions.
11.Since several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review.
12.According to the new credit manager, strict adherence to established credit policy is not necessary.
Criteria are best illustrated by items numbered:
3, 4, and 12.
1, 8, and 9.
2, 10, and 11.
5, 6, and 7.

Answer 23

1, 8, and 9.

Question 24

An audit report relating to an audit of a bank categorizes findings into “deficiency findings” for major problems and “other areas for improvement” for less serious problems. Which of the following excerpts would properly be included under “other areas for improvement”?
Many secured loans did not contain hazard insurance coverage for tangible property collateral.
The bank is incurring unnecessary postage cost by not combining certain special mailings to checking account customers with the monthly mailing of their statements.
At one branch a large amount of cash was placed on a portable table behind the teller lines.
Loan officers also prepare the cashier’s checks for disbursement of the loan proceeds.

Answer 24

The bank is incurring unnecessary postage cost by not combining certain special mailings to checking account customers with the monthly mailing of their statements.

Question 25

During the course of an audit, the auditor makes a preliminary determination that a major division has been inappropriately capitalizing research and development expense. The audit is not yet completed, and the auditor has not documented the problem or determined that it really is a problem. However, the auditor is informed that the director of internal auditing has received the following communication from the president of the company:
The controller of Division B informs me that you have discovered a questionable account classification dealing with research and development expense. We are aware of the issue. You are directed to discontinue any further investigation of this matter until informed by me to proceed. Under the confidentiality standard of your profession, I also direct you not to communicate with the outside auditors regarding this issue.
Which of the following would be an appropriate action for the director to take regarding the questionable item?
Immediately report the communication to the Institute of Internal Auditors and ask for an ethical interpretation and guidance.
Continue to investigate the area until all the facts are determined, and document all the relevant facts in the audit work papers.
Inform the president that this scope limitation will need to be reported to the chairperson of the audit committee.
Immediately notify the external auditors of the problem to avoid aiding and abetting a potential crime by the organization.

Answer 25

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

Question 26

It is important that the auditor be able to carefully distinguish between a scope limitation and other limitations on the audit. According to the IIAStandards, which of the following wouldnotbe considered a scope limitation?
I.The divisional management of an auditee has indicated that the division is in the process of converting a major computer system and has indicated that the information technology portion of the planned audit will have to be postponed until next year.
II.The audit committee reviews the audit plan for the year and deletes an audit that the director thought was important to conduct.
III.The auditee has indicated that certain customers cannot be contacted because the organization is in the process of negotiating a long-term contract with them and does not want to upset the customers.
IV.None of the responses is correct.

Answer 26

II only.

Question 27

An internal auditor in a retail company reports to the corporate director of internal audit. The auditor is assigned to audit a regional division. The audit reports are to be sent both to the corporate office and the division controller in the region. The auditor has been on location for six months and has submitted monthly reports, each month auditing a part of the operation as assigned by corporate internal auditing. This month, for the first time, the auditor has audited the inventory controls, following procedures established by the corporate internal auditing staff.
After seeing the audit report on inventory control, the divisional controller called and requested a meeting with the auditor. At the meeting, the divisional controller loudly and abusively criticized the accuracy of the auditor’s work, the soundness of the auditor’s methods, and the results presented in the reports. In the past, while not always agreeing with the auditor’s conclusions, the divisional controller always had rational discussions and developed appropriate follow-up steps to correct the problems the auditor found.
The divisional controller could have handled the situation better by:
Accepting the report because the auditor has consistently done good work, and this one report is not that important.
Changing the methods used by corporate audit.
Discussing the objections to the inventory report with the auditor to get agreement on changes and appropriate additional work.
Accepting the report but informing the director of internal auditing that the report was unsatisfactory.

Answer 27

Discussing the objections to the inventory report with the auditor to get agreement on changes and appropriate additional work.

Question 28

An internal auditor in a retail company reports to the corporate director of internal audit. The auditor is assigned to audit a regional division. The audit reports are to be sent both to the corporate office and the division controller in the region. The auditor has been on location for six months and has submitted monthly reports, each month auditing a part of the operation as assigned by corporate internal auditing. This month, for the first time, the auditor has audited the inventory controls, following procedures established by the corporate internal auditing staff.
After seeing the audit report on inventory control, the divisional controller called and requested a meeting with the auditor. At the meeting, the divisional controller loudly and abusively criticized the accuracy of the auditor’s work, the soundness of the auditor’s methods, and the results presented in the reports. In the past, while not always agreeing with the auditor’s conclusions, the divisional controller always had rational discussions and developed appropriate follow-up steps to correct the problems the auditor found.
This particular audit was not the auditor’s best work, and the auditor realizes this. The auditor should:
Ask for time off for training in the weak areas.
Explain the personal problems that kept the auditor from working as hard on this report as could be expected.
Ask the divisional controller to identify specific areas in which the report is deficient, and, if the objections are justified, revise the report.
Defend the work now and try to improve it in the future.

Answer 28

Ask the divisional controller to identify specific areas in which the report is deficient, and, if the objections are justified, revise the report.

Question 29

Assume your company is considering purchasing a small toxic waste disposal company. As internal auditors, you are part of the team doing a due diligence review for the acquisition. Your scope (as auditors) would most likelynotinclude:
A review of the purchased company’s procedures for acceptance of waste material and comparison with legal requirements.
An evaluation of the merit of lawsuits currently filed against the waste company.
Analysis of the company’s compliance with, and disclosure of, loan covenants.
Assessment of the efficiency of the waste company’s operations and profitability.

Answer 29

An evaluation of the merit of lawsuits currently filed against the waste company.

Question 30

An internal auditor in a retail company reports to the corporate director of internal audit. The auditor is assigned to audit a regional division. The audit reports are to be sent both to the corporate office and the division controller in the region. The auditor has been on location for six months and has submitted monthly reports, each month auditing a part of the operation as assigned by corporate internal auditing. This month, for the first time, the auditor has audited the inventory controls, following procedures established by the corporate internal auditing staff.
After seeing the audit report on inventory control, the divisional controller called and requested a meeting with the auditor. At the meeting, the divisional controller loudly and abusively criticized the accuracy of the auditor’s work, the soundness of the auditor’s methods, and the results presented in the reports. In the past, while not always agreeing with the auditor’s conclusions, the divisional controller always had rational discussions and developed appropriate follow-up steps to correct the problems the auditor found.
Despite never having said so, the divisional controller had always thought the auditor’s work was substandard. The divisional controller could have handled the situation better by:
Calling the corporate director of internal audit and insist that the auditor be replaced.
Documenting shortcomings regularly and reporting them to the director of internal auditing.
Discussing the auditor’s work with other internal auditors to compare the auditor’s methods with others used in the company.
Providing training on auditing of inventory controls so the auditor would do a better job the next time.

Answer 30

Documenting shortcomings regularly and reporting them to the director of internal auditing.

Question 31

A company recently experienced a substantially reduced net profit from sales of product line A. Line A is produced in a dedicated machine shop. The internal auditors have been assigned the task of determining the cause of the reduced net profit. Which of the following wouldmost likelyidentify the problem?
Interviews with the staff engaged in the production of line A.
An analysis of the financial and operational reports.
A walk-through of the machine shop.
A review of prior audit results.

Answer 31

An analysis of the financial and operational reports.

Question 32

Which of the following is a proper step in an audit program?
Definition of audit objectives.
Planning for audit reporting.
Observation of procedures.
Notification of the audit.

Answer 32

Observation of procedures.

Question 33

An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives: verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of the machinery to company accounting records. It was confirmed that of the 30 machines selected from purchasing records for the sample, 10 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, both situational factors and message characteristics can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The objectives of an audit report are to inform and to influence. Whether these objectives are met depends on the clarity of the writing. Which of the following principles of report clarity wasviolatedin the above audit report?
I.Appropriately organize the report.
II.Keep most sentences short and simple.
III.Use active voice verbs.
IV.All of the above.

Answer 33

IV.

Question 34

The following data were gathered during an internal auditor’s investigation of the reason for a material increase in bad debts expenses. In preparing a report of the finding, each of the items might be classified as criteria, cause, condition, effect, or background information.
1.Very large orders require management’s approval of credit.
2.Audit tests showed that sales personnel regularly disregard credit guidelines when dealing with established customers.
3.A monthly report of write-offs is prepared but distributed only to the accounting department.
4.Credit reports are used only on new accounts.
5.Accounting department records suggest that uncollectible accounts could increase by 5% for the current year.
6.The bad debts loss increased by $100,000 during the last fiscal year.
7.Even though procedures and criteria were changed to reduce the amount of bad-debt write-offs, the loss of commissions due to written-off accounts has increased for some sales personnel.
8.Credit department policy requires the review of credit references for all new accounts.
9.Current payment records are to be reviewed before extending additional credit to open accounts.
10.To reduce costs, the use of outside credit reports was suspended on several occasions.
11.Since several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review.
12.According to the new credit manager, strict adherence to established credit policy is not necessary.
Condition is best illustrated by items numbered:
2, 10, and 11.
3, 4, and 12.
1, 8, and 9.
5, 6, and 7.

Answer 34

2, 10, and 11.

Question 35

The following information is extracted from a draft of an audit report prepared on the completion of an audit of the inventory warehousing procedures for a division.
[#5]We performed extensive tests of inventory record keeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this be due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this report, the excess inventory has led to a higher-than-average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels.
[#6]We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out the reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared.
[#7]Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about (1) locating inventory when needed for production and (2) incurring unusually large amounts of inventory write-offs because of obsolescence.
[#8]We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for significant cost savings and we are proud to be a part of the process.
A major deficiency in paragraph #6 related to the completeness of the audit report is:
The factual evidence for the audit finding is not given.
The cause of the problem is not defined.
The risk is presented in an overdramatic fashion.
The recommendation is incomplete.

Answer 35

The recommendation is incomplete.

Question 36

The following information is extracted from a draft of an audit report prepared on the completion of an audit of the inventory warehousing procedures for a division.
[#5]We performed extensive tests of inventory record keeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this be due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this report, the excess inventory has led to a higher-than-average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels.
[#6]We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out the reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared.
[#7]Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about (1) locating inventory when needed for production and (2) incurring unusually large amounts of inventory write-offs because of obsolescence.
[#8]We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for significant cost savings and we are proud to be a part of the process.
A major writing problem in paragraph #5 is:
The specific identification of “component parts” may be offensive to the personnel responsible for those parts and may reflect negatively on them.
The use of potentially emotional words, such as “conservatism” of local management.
The reference to other parts of the audit report citing excessive inventory write-downs for obsolescence is not appropriate. If there is a problem, it should all be discussed within the context of the specific audit finding.
The presentation of findings before recommendations. The report would have more impact if recommendations were made before the findings are discussed.

Answer 36

The use of potentially emotional words, such as “conservatism” of local management.

Question 37

One purpose of the exit conference is for the internal auditor to:
Require corrective action for deficiencies found.
Review the performance of audit personnel assigned to the engagement.
Review and verify the appropriateness of the audit report based on auditee input.
Present the final audit report to management.

Answer 37

Review and verify the appropriateness of the audit report based on auditee input.

Question 38

Which of the following individuals would normallynotreceive an internal auditing report related to a review of the purchasing cycle?
The independent external auditor.
The general auditor.
The director of purchasing.
The chairman of the board of directors.

Answer 38

The chairman of the board of directors.

Question 39

The following information is to be included in a finding of an inventory control audit of a tent and awning manufacturer. The issue relates to overstocked rope.
I.The quantity on hand at the time of the audit represented a 10-year supply based on normal usage.
II.The company had held an open house of its new factory two months prior to the audit and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order.
III.Rope is reordered when the inventory level reaches a one-month supply and is based on usage during the previous 12 months.
IV.The quantity to be ordered should be adequate to cover expected usage for the next six months.
V.The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order.
VI.A public warehouse, costing $500 per month, was required to store the rope.
VII.The purchasing agent receives an annual salary of $59,000.
Which of these statements should be in the cause section of the finding?
I only.
VII only.
II only.
VI only.

Answer 39

II only.

Question 40

The following information is to be included in a finding of an inventory control audit of a tent and awning manufacturer. The issue relates to overstocked rope.
I.The quantity on hand at the time of the audit represented a 10-year supply based on normal usage.
II.The company had held an open house of its new factory two months prior to the audit and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order.
III.Rope is reordered when the inventory level reaches a one-month supply and is based on usage during the previous 12 months.
IV.The quantity to be ordered should be adequate to cover expected usage for the next six months.
V.The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order.
VI.A public warehouse, costing $500 per month, was required to store the rope.
VII.The purchasing agent receives an annual salary of $59,000.
Which of these statements should be in the condition section of the finding?
VII only.
IV only.
VI only.
I only.

Answer 40

I only.

Question 41

The internal auditing department of an organization has been in existence for ten years. It has established a charter, which has not yet been approved by the audit committee. However, the audit committee is chaired by the chief executive officer (CEO) and includes the controller and one outside board member. The director reports directly to the controller who approves the internal audit work plan. Thus, the auditing department has never felt the need to push for a formal approval of the charter. The organization is publicly held and has nine major divisions. The previous director of internal auditing was recently dismissed following a dispute between the director and a major auditee. The CEO accused the director of not operating “in the best interests of the organization.” A new director with significant experience in both public accounting and internal auditing has just been hired. Within the first month, the new director encountered substantial resistance from an auditee regarding the nature of an audit and the audit department’s access to records.
In considering the internal auditing department’s independence, which of the following facts, by themselves, could contribute to a lack of internal audit independence?
I.The CEO accused the previous director of not operating “in the best interests of the organization.”
II.The majority of audit committee members come from within the organization.
III.The internal audit charter has not been approved by the board or the audit committee.
II and III only.
I only.
I, II, and III.
II only.

Answer 41

II and III only.

Question 42

A governmental agency constrained by scarce audit and human resources wishes to know the status of its program for licensing automobiles. In particular, management is concerned about the possibility of:
+A backlog in new license applications, and
+Poor controls over the collection and processing of application fees.
The results of the preliminary survey and limited audit testing conducted by the internal auditing department revealed that the licensing process was operating as intended. No major deficiencies were noted. How should the internal auditing department proceed?
Complete the audit as scheduled to ensure that other issues do not exist that were not noted during the survey phase.
Send a memorandum report to the executive director and other concerned parties summarizing the preliminary survey results and indicating that the audit has been canceled.
Perform no further audit work, issue a formal audit report with the survey results, and discuss the results with management.
Perform no further audit work, discuss pertinent issues with management and the executive director, and prepare an audit program for future use so that another survey will not be necessary.

Answer 42

Send a memorandum report to the executive director and other concerned parties summarizing the preliminary survey results and indicating that the audit has been canceled.

Question 43

The following information is to be included in a finding of an inventory control audit of a tent and awning manufacturer. The issue relates to overstocked rope.
I.The quantity on hand at the time of the audit represented a 10-year supply based on normal usage.
II.The company had held an open house of its new factory two months prior to the audit and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order.
III.Rope is reordered when the inventory level reaches a one-month supply and is based on usage during the previous 12 months.
IV.The quantity to be ordered should be adequate to cover expected usage for the next six months.
V.The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order.
VI.A public warehouse, costing $500 per month, was required to store the rope.
VII.The purchasing agent receives an annual salary of $59,000.
Which of these statements should be in the effect section of the finding?
VI only.
II only.
III only.
V only.

Answer 43

VI only.

Question 44

The following information is extracted from a draft of an audit report prepared on the completion of an audit of the inventory warehousing procedures for a division.
[#5]We performed extensive tests of inventory record keeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this be due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this report, the excess inventory has led to a higher-than-average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels.
[#6]We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out the reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared.
[#7]Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about (1) locating inventory when needed for production and (2) incurring unusually large amounts of inventory write-offs because of obsolescence.
[#8]We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for significant cost savings and we are proud to be a part of the process.
A major deficiency in paragraph #5 related to the completeness of the audit report is:
The report does not adequately describe the potential effect of the conditions noted.
The recommendations are not required and are not appropriate, given the nature of the problem identified.
There is no indication of the potential cause of the problem.
The report does not contain criteria by which the concept of excessive inventory is judged.

Answer 44

The report does not contain criteria by which the concept of excessive inventory is judged.

Question 45

Several levels of management are interested in the results of the marketing department audit. What is thebestmethod of communicating the results of the audit?
Discuss results with marketing management and issue a summary report to top management.
Discuss results with all levels of management.
Write detailed reports for each level of management.
Write a report to the marketing management and give summary reports to other management levels.

Answer 45

Write a report to the marketing management and give summary reports to other management levels.

Question 46

A manufacturing company has been expanding rapidly and is considering adding a new production line. Employees are currently working double shifts and receiving large amounts of overtime pay. Demand for all of the company’s products is currently high, but management worries about demand fluctuations with changes in the economy and technological developments by competitors. Management is concerned with such issues as whether it is efficiently using its resources, whether it is expanding too rapidly or not rapidly enough, whether employee morale is decreasing, and whether future expansion should be financed internally or through debt.
Management requests the auditor to examine factors that would help improve the efficiency with which resources are used in the purchasing and production processes. Which of the following procedures would be theleasteffective in addressing management’s concern?
Perform a comparison of production costs over the past three years. Identify any large deviations and investigate causes.
Perform an evaluation of the planning process to determine goods to be ordered and the method of purchasing goods.
Interview personnel involved in the production process to gain insight on production or acquisition problems.
Compare the company’s total cost of goods sold, as a percentage of total sales, with industry averages.

Answer 46

Compare the company’s total cost of goods sold, as a percentage of total sales, with industry averages.

Question 47

In planning an audit, an on-site survey could assist with all of the following except:
Obtaining preliminary information on internal controls.
Evaluating the effectiveness of the system of internal controls.
Obtaining auditee comments and suggestions on control problems.
Identifying areas for audit emphasis.

Answer 47

Evaluating the effectiveness of the system of internal controls.

Question 48

The internal auditing department of an organization has been in existence for ten years. It has established a charter, which has not yet been approved by the audit committee. However, the audit committee is chaired by the chief executive officer (CEO) and includes the controller and one outside board member. The director reports directly to the controller who approves the internal audit work plan. Thus, the auditing department has never felt the need to push for a formal approval of the charter. The organization is publicly held and has nine major divisions. The previous director of internal auditing was recently dismissed following a dispute between the director and a major auditee. The CEO accused the director of not operating “in the best interests of the organization.” A new director with significant experience in both public accounting and internal auditing has just been hired. Within the first month, the new director encountered substantial resistance from an auditee regarding the nature of an audit and the audit department’s access to records.
Given the current dispute with an auditee regarding audit scope, which of the following internal auditing actions isnotappropriate?
Meet with the board to obtain approval of the audit charter to mitigate the existence of this problem and similar problems that may occur in the future.
Indicate to the auditee that if the resistance continues, the auditing department will not be available to perform cost/benefit audits for the department in the future.
Report the dispute, if it remains unresolved, to the board.
Review the approved work plan with the CEO and controller and ask for immediate guidance in dealing with the auditee.

Answer 48

Indicate to the auditee that if the resistance continues, the auditing department will not be available to perform cost/benefit audits for the department in the future.

Question 49

An internal auditor has completed an audit of an organization’s activities and is ready to issue a report. However, the auditee disagrees with the internal auditor’s conclusions. The auditor should:
Issue the audit report and indicate that the auditee has provided a scope limitation that has led to a difference as to the conclusions.
Issue the audit report and state both the auditor and auditee positions and the reasons for the disagreement.
Perform more work, with the auditee’s concurrence, to resolve areas of disagreement. Delay the issuance of the report until agreement is reached.
Withhold the issuance of the audit report until agreement on the issues is obtained.

Answer 49

Issue the audit report and state both the auditor and auditee positions and the reasons for the disagreement.

Question 50

Audit programs testing internal controls should:
Be generalized so as to be usable at all locations of a particular department.
Be generalized to fit all situations without regard to departmental lines.
Reduce costly duplication of effort by ensuring that every aspect of an operation is examined.
Be tailored for the audit of each operation.

Answer 50

Be tailored for the audit of each operation.

Question 51

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
The health care processor wishes to implement controls that would help prevent the fraud by dentists who are billing the health care processor for services that were not provided. Assume further that all the claims are submitted electronically to the health care processor. Which of the following control procedures would be themosteffective?
Send confirmations to the dentists requesting them to confirm the exact nature of the claims submitted to the health care processor.
Develop an integrated test facility and submit false claims to verify that the system is detecting such claims on a consistent basis.
Require all submitted claims to be accompanied by a signed statement by the dentists testifying to the fact that the claimed procedures were performed.
Develop a program that identifies procedures performed on an individual in excess of expectations based on: the age of the employee, whether a similar procedure was performed recently, or the average cost per claim.

Answer 51

Develop a program that identifies procedures performed on an individual in excess of expectations based on: the age of the employee, whether a similar procedure was performed recently, or the average cost per claim.

Question 52

Writing an audit program occurs at which stage of the audit process?
As the audit is performed.
At the end of each audit, the standard audit program should be revised for the next audit to ensure coverage of noted problem areas.
Subsequent to testing internal controls to determine whether to rely on the controls or audit around them.
During the planning stage.

Answer 52

During the planning stage.

Question 53

An auditor for a bank noted a significant deficiency relating to access to cash in the bank’s vault at one of the branch banks. Which of the following is themostsatisfactory means of addressing this deficiency? The auditor should:
Discuss the deficiency with the branch manager only after the audit report is published.
Discuss the deficiency with the branch manager before drafting the written audit report. If the auditor and branch manager agree on corrective action and the action is initiated before the report is published, the deficiency need not be included in the report.
Discuss the deficiency with the branch manager before drafting the written audit report. If the auditor and branch manager agree on corrective action, include both the deficiency and corrective action in the audit report.
Not discuss the deficiency with the branch manager before or after the audit report is published; discussion may dilute the impact of the written report.

Answer 53

Discuss the deficiency with the branch manager before drafting the written audit report. If the auditor and branch manager agree on corrective action, include both the deficiency and corrective action in the audit report.

Question 54

The following information is to be included in a finding of an inventory control audit of a tent and awning manufacturer. The issue relates to overstocked rope.
I.The quantity on hand at the time of the audit represented a 10-year supply based on normal usage.
II.The company had held an open house of its new factory two months prior to the audit and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order.
III.Rope is reordered when the inventory level reaches a one-month supply and is based on usage during the previous 12 months.
IV.The quantity to be ordered should be adequate to cover expected usage for the next six months.
V.The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order.
VI.A public warehouse, costing $500 per month, was required to store the rope.
VII.The purchasing agent receives an annual salary of $59,000.
Which of these statements should be in the criteria section of the finding?
III only.
II only.
III and IV only.
V only.

Answer 54

III and IV only.

Question 55

An internal audit director has noticed that staff auditors are presenting more oral reports to supplement written reports. Thebestreason for the increased use of oral reports by the auditors is that they:
Permit auditors to counter arguments and provide additional information that the audience may require.
Can be delivered in an informal manner without preparation.
Reduce the amount of testing required to support audit findings.
Can be prepared using a flexible format. thereby increasing overall audit efficiency.

Answer 55

Permit auditors to counter arguments and provide additional information that the audience may require.

Question 56

The best control over the work on which audit opinions are based is:
Preparation of working papers.
Staffing of audit activities.
Preparation of time budgets for auditing activities.
Supervisory review of all audit work.

Answer 56

Supervisory review of all audit work.

Question 57

An internal auditing department has scheduled an audit of a construction contract. One portion of this audit will include comparing materials purchased to those specified in the engineering drawings. The auditing department does not have anyone on staff with sufficient expertise to complete this audit step. Select thebestalternative for the director of internal auditing.
Perform the entire audit using current staff.
Accept the contractor’s written representations.
Delete the audit from the schedule.
Engage an engineering consultant to perform the comparison.

Answer 57

Engage an engineering consultant to perform the comparison.

Question 58

A manufacturing company has been expanding rapidly and is considering adding a new production line. Employees are currently working double shifts and receiving large amounts of overtime pay. Demand for all of the company’s products is currently high, but management worries about demand fluctuations with changes in the economy and technological developments by competitors. Management is concerned with such issues as whether it is efficiently using its resources, whether it is expanding too rapidly or not rapidly enough, whether employee morale is decreasing, and whether future expansion should be financed internally or through debt.
Which of the following factors mightbestindicate the possibility of fraudulent activity in the production process?
Inventory, per accounting records, has decreased at the same time that the cost of goods sold has increased.
Interviews with employees indicate they have a general dissatisfaction with management and believe that productivity could be greatly improved if management listened to employees.
Although scrap is generated, there is no income reported from scrap sales.
Employee overtime has increased 50% during the past year.

Answer 58

Although scrap is generated, there is no income reported from scrap sales.

Question 59

An auditor begins an audit with a preliminary evaluation of internal control, the purpose of which is to decide on the extent of future auditing activities. If the auditor?s preliminary evaluation of internal control results in a finding that controls may be inadequate, the next step would be:
The preparation of a flowchart depicting the internal control system.
To implement the desired controls.
An expansion of audit work prior to the preparation of an audit report.
An exception noted in the audit report if losses have occurred.

Answer 59

An expansion of audit work prior to the preparation of an audit report.

Question 60

The following information is extracted from a draft of an audit report prepared on the completion of an audit of the inventory warehousing procedures for a division.
[#5]We performed extensive tests of inventory record keeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this be due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this report, the excess inventory has led to a higher-than-average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels.
[#6]We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out the reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared.
[#7]Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about (1) locating inventory when needed for production and (2) incurring unusually large amounts of inventory write-offs because of obsolescence.
[#8]We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for significant cost savings and we are proud to be a part of the process.
A major deficiency in paragraph #8 is:
I.The nature of the follow-up action is inappropriate.
II.The findings have not been discussed with division management before they are presented to upper management.
III.The cost savings mentioned are not supported in the report.
IV.I, II, and III
I only.III only.I, II, and III.II only.

Answer 60

I, II, and III.

Question 61

A manufacturing company has been expanding rapidly and is considering adding a new production line. Employees are currently working double shifts and receiving large amounts of overtime pay. Demand for all of the company’s products is currently high, but management worries about demand fluctuations with changes in the economy and technological developments by competitors. Management is concerned with such issues as whether it is efficiently using its resources, whether it is expanding too rapidly or not rapidly enough, whether employee morale is decreasing, and whether future expansion should be financed internally or through debt.
Management is concerned that employee productivity and morale may be decreasing even though production workers are being paid more overtime wages. Which of the following audit procedures would beleasteffective in addressing this concern?
Obtain “best practices” production data from a comparable industry, and identify areas of differences. Follow up with interviews of production supervisors.
Take a statistical sample of employees, and interview selected employees regarding their morale, productivity, and views on methods to improve efficiency.
Develop a schedule of production per employee over the past two years stratified by production during standard work shifts and production during overtime periods.
Develop a schedule of employee pay and analyze changes in overtime pay.

Answer 61

Develop a schedule of employee pay and analyze changes in overtime pay.

Question 62

An internal auditor has just completed an on-site survey in order to become familiar with the company?s payroll operations. Which of the following should be performed next?
Establish initial audit objectives.
Conduct fieldwork.
Assign audit personnel.
Write the audit program.

Answer 62

Write the audit program.

Question 63

An internal auditor would most likely judge an error in an account balance to be material if the error involves a(n):
Clerical mistake that is unlikely to occur again.
Large percentage of net income.
Unusual transaction for the company.
Unverified routine transaction.

Answer 63

Large percentage of net income.

Question 64

The IIAStandardsrequire that the director of internal auditing or designee decide to whom the final audit report will be distributed. Findings concerning significant internal control weakness are included in an audit report on the accounts payable system of a company whose securities are publicly traded. The director of internal auditing has chosen to send copies of this audit report to the audit committee and the external auditor. Which of the following is themost likelyreason for distributing copies to the audit committee and the external auditor?
The audit committee and external auditor will need to take corrective action on the deficiency findings.
The activities of the audit committee and external auditor may be affected because of the potential for misstated financial statements.
A regulatory agency’s guidelines require such distribution.
The audit committee and external auditor are normally sent copies of all internal audit reports as a courtesy.

Answer 64

The activities of the audit committee and external auditor may be affected because of the potential for misstated financial statements.

Question 65

The internal audit department of a major financial institution completed an audit of the company’s derivatives trading operations in its foreign branch. The audit report was critical of the lack of controls in the trading process and the lack of effective monitoring of successful traders by the home office. The auditor suspected, but did not state, that the reason the home office tolerated the behavior of the foreign branch trading unit was that the branch, and in particular one individual trader, had been very successful. The success created enormous profits and thereby influenced the bonuses of all members of senior management. After receiving the audit report, senior management indicated that corrective action was under way. Based on the imminent corrective action, the auditor did not report the finding to the audit committee.
Which of the following statements is (are) correct regarding the company’s compensation system and related bonuses?
I.The bonus system should be considered part of the control environment of the organization and should be considered in formulating a report on internal control.
II.Compensation systems are not part of an organization’s control system and should not be reported as part of an organization’s control system.
III.An audit of the compensation system should be performed independently of an audit of the control system over the company’s derivatives trading activities and should not be considered an integral part of the derivatives audit.
II only.
I only.
III only.
II and III.

Answer 65

I only.

Question 66

According to the IIAStandards, an internal auditor’s role with respect to operating objectives and goals includes:
Developing and implementing control procedures.
Approving the operating objectives or goals to be met.
Determining whether underlying assumptions are appropriate.
Accomplishing desired operating program results.

Answer 66

Determining whether underlying assumptions are appropriate.

Question 67

An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives.
+Verify the existence of unused machinery being stored in the warehouse.
+Determine whether machinery had been damaged during storage.
+Review the handling procedures being performed by personnel at the warehouse.
+Determine whether proper accounting procedures are being followed for machinery kept in the warehouse.
+Calculate the current fair market value of warehouse inventories.
+Compare the total value of the machinery to company accounting records.
It was confirmed that, of the 30 machines selected from purchasing records for the sample, 13 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, there exist both situational factors and message characteristics that can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The following elements are usually included in final audit reports: purpose, scope, results, conclusions, and recommendations. Which of the following describes all of the elementsmissingfrom the above report?
Scope, conclusion, recommendation.
Result, conclusion, recommendation.
Purpose, scope, recommendation.
Purpose, result, recommendation.

Answer 67

Scope, conclusion, recommendation.

Question 68

The following information is extracted from a draft of an audit report prepared on the completion of an audit of the inventory warehousing procedures for a division.
[#5]We performed extensive tests of inventory record keeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this be due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this report, the excess inventory has led to a higher-than-average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels.
[#6]We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out the reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared.
[#7]Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about (1) locating inventory when needed for production and (2) incurring unusually large amounts of inventory write-offs because of obsolescence.
[#8]We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for significant cost savings and we are proud to be a part of the process.
A major deficiency in paragraph #7 related to the completeness of the audit report is:
The condition for the audit finding is not clearly explained.
There is not a separate section adequately discussing the risks associated with the audit finding.
The recommendation does not follow from the findings. The recommendation could have been reached without any audit findings.
The reference to other parts of the audit report citing excessive inventory write-downs for obsolescence is not appropriate. If there is a problem, it should all be discussed within the context of the specific audit finding.

Answer 68

The condition for the audit finding is not clearly explained.

Question 69

In order to determine the extent of audit tests to be performed during fieldwork, preparing the audit program should be the next step after completing the:
Time budgets for specific audit tasks.
Survey of company policies.
Preliminary survey.
Assignment of audit staff.

Answer 69

Preliminary survey.

Question 70

The preliminary survey discloses that a prior audit deficiency was never corrected. Subsequent fieldwork confirms that the deficiency still exists. Which of the following courses of action should the internal auditor pursue?
Order the person(s) responsible to correct the problem. They have had long enough to do so.
Take no action. To do otherwise would be an exercise of operational control.
Discuss the issue with the person(s) responsible for the problem. They should know how to solve the problem.
Discuss the issue with the director of internal auditing. The problem requires an ad hoc solution.

Answer 70

Discuss the issue with the person(s) responsible for the problem. They should know how to solve the problem.

Question 71

Interviewing operating personnel, identifying the objectives of the auditee, identifying standards used to evaluate performance, and assessing the risks inherent in the auditee?s operations are activities typically performed in which phase of an internal audit?
The reporting phase.
The audit programming phase.
The fieldwork phase.
The preliminary survey phase.

Answer 71

The preliminary survey phase.

Question 72

Fieldwork has been defined as “a systematic process of objectively gathering evidence about an entity’s operations, evaluating it, and determining if those operations meet acceptable standards.” Which of the following isnotpart of the work performed during fieldwork?
Developing a written audit program.
Creating working papers that document the audit.
Expanding or altering audit procedures if circumstances warrant.
Applying the audit program to accomplish audit objectives.

Answer 72

Developing a written audit program.

Question 73

Which of the following techniques is best for emphasizing a point in a written communication?
Highlight the point through the use of nonparallel structure.
Use passive rather than active voice.
Use a short sentence with one idea rather than a longer sentence with several ideas.
Place the point in the middle rather than at the beginning or end of the paragraph.

Answer 73

Use a short sentence with one idea rather than a longer sentence with several ideas.

Question 74

An internal auditor in a retail company reports to the corporate director of internal audit. The auditor is assigned to audit a regional division. The audit reports are to be sent both to the corporate office and the division controller in the region. The auditor has been on location for six months and has submitted monthly reports, each month auditing a part of the operation as assigned by corporate internal auditing. This month, for the first time, the auditor has audited the inventory controls, following procedures established by the corporate internal auditing staff.
After seeing the audit report on inventory control, the divisional controller called and requested a meeting with the auditor. At the meeting, the divisional controller loudly and abusively criticized the accuracy of the auditor’s work, the soundness of the auditor’s methods, and the results presented in the reports. In the past, while not always agreeing with the auditor’s conclusions, the divisional controller always had rational discussions and developed appropriate follow-up steps to correct the problems the auditor found.
If the internal auditor believes the criticism is completely unjustified, the auditor should:
Offer to personally rewrite the report and develop the follow-up steps to correct the inventory problems to show the accuracy of the work.
Ask the divisional controller to identify specific areas of disagreement and document them in the management response section of the audit report.
Confront the divisional controller just as loudly to communicate that the auditor can be just as aggressive and can survive in the corporate environment.
Ignore the divisional controller’s response.

Answer 74

Ask the divisional controller to identify specific areas of disagreement and document them in the management response section of the audit report.

Question 75

The internal auditing unit has recently completed an operational audit of its company’s accounts payable function. The audit director decided to issue a summary report in conjunction with the final report. Who would be the most likely recipient(s) of just the summary audit report?
Accounts payable manager.
External auditor.
Controller.
Audit committee of the board of directors.

Answer 75

Audit committee of the board of directors.

Question 76

During a preliminary survey, an auditor notes that several accounts payable vouchers for major suppliers show adjustments for duplicate payment of prior invoices. This would indicate:
An unrecorded liability for the amount of purchases that are not processed while awaiting supplier master file address maintenance.
A lack of control in the receiving area that prevents timely notice to the accounts payable area that goods have been received and inspected.
The existence of a sophisticated accounts payable system that correlates overpayments to open invoices and therefore requires no further audit concern.
A need for additional testing to determine related controls and the current exposure to duplicate payments made to suppliers.

Answer 76

A need for additional testing to determine related controls and the current exposure to duplicate payments made to suppliers.

Question 77

An audit finding is worded as follows:
The capital budget includes funds to purchase 11 new vehicles. Review of usage records showed that 10 vehicles in the fleet of 70 had been driven less than 2,500 miles during the past year. Vehicles have been assigned to different groups whose usage rates have varied greatly. There was no policy requiring rotation of vehicles between high- and low-usage groups. Lack of criteria for assigning vehicles and a system for monitoring their usage could lead to purchasing unneeded vehicles.
Based on the facts presented in this finding, it would beappropriateto recommend that management:
Delay the proposed vehicle purchases until the apparent excess capacity is adequately explained or absorbed.
Establish a system to rotate vehicles among users periodically.
Withhold approval of the capital budget until other projects can be reviewed by internal auditing.
Establish a minimum of 2,500 miles per quarter as criteria for assigning vehicles to user groups.

Answer 77

Delay the proposed vehicle purchases until the apparent excess capacity is adequately explained or absorbed.

Question 78

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
Assume the auditor becomes concerned that significant fraud may be taking place by dentists who are billing the health care processor for services that were not provided. For example, employees may have their teeth cleaned, but the dentists charge the processor for pulling teeth and developing dentures. Themosteffective audit procedure to determine whether such a fraud exists would be to:
Develop a schedule of payments made to individual dentists. Verify that payments were made to the dentists by confirming the payments with the health care processor.
Take a random sample of payments made to dentists and confirm the amounts paid with the dentists??? offices to determine that the amounts agree with the amounts billed by the dentists.
Take a random sample of claims submitted by dentists and trace through the system to determine whether the claims were paid at the amounts billed.
Take a discovery sample of employee claims that were submitted through dentist offices and confirm the type of service performed by the dentists through direct correspondence with the employee who had the service performed.

Answer 78

Take a discovery sample of employee claims that were submitted through dentist offices and confirm the type of service performed by the dentists through direct correspondence with the employee who had the service performed.

Question 79

The internal audit department of a major financial institution completed an audit of the company’s derivatives trading operations in its foreign branch. The audit report was critical of the lack of controls in the trading process and the lack of effective monitoring of successful traders by the home office. The auditor suspected, but did not state, that the reason the home office tolerated the behavior of the foreign branch trading unit was that the branch, and in particular one individual trader, had been very successful. The success created enormous profits and thereby influenced the bonuses of all members of senior management. After receiving the audit report, senior management indicated that corrective action was under way. Based on the imminent corrective action, the auditor did not report the finding to the audit committee.
Which of the following statements, if true, could have justified the auditor’s decision not to report the control concerns to the audit committee?
Derivatives are complex, and the auditor should rely on management’s analysis of the extent of the problem.
The board of directors has a separate committee to make recommendations on compensation.
Management plans to initiate corrective action.
The amounts of trading and the potential risks associated with the foreign branch are not material to the overall organization.

Answer 79

The amounts of trading and the potential risks associated with the foreign branch are not material to the overall organization.

Question 80

An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives: verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of the machinery to company accounting records. It was confirmed that of the 30 machines selected from purchasing records for the sample, 10 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, both situational factors and message characteristics can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The following elements are usually included in final audit reports: purpose, scope, results, conclusions, and recommendations. Which of the following describes all of the elementsmissingfrom the above report?
Result, conclusion, recommendation.
Scope, conclusion, recommendation.
Purpose, result, recommendation.
Purpose, scope, recommendation.

Answer 80

Scope, conclusion, recommendation.

Question 81

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
Assume that the auditor’s preliminary findings indicate that certain dentists are billing the health care processor for services that were not provided and that this practice is not being detected or prevented by the health care processor. The auditor wishes to present to management an estimate of the amounts involved. The auditor chooses an approach that will sample claims by dentists and will verify whether the claims are appropriate. Thebestaudit sampling approach would be:
Classical variables estimation of claims submitted by the suspected dentists stratified by dollar amount of services performed.
Attribute sampling classifying the existence of a nonvalid claim as a deviation.
Dollar-unit sampling of all dentists to determine if the fraud might exceed a predetermined limit.
Discovery sampling based on a low to moderate level of fraud expectation.

Answer 81

Classical variables estimation of claims submitted by the suspected dentists stratified by dollar amount of services performed.

Question 82

The advantage attributed to the establishment of internal auditing field offices for work at foreign locations isbestdescribed as:
More contact with senior audit personnel, leading to an increase in control.
The increased ease of maintaining uniform company-wide standards.
The possibility of increased objectivity of personnel assigned to a field office.
A reduction of travel time and related travel expense.

Answer 82

A reduction of travel time and related travel expense.

Question 83

An outside consultant is developing a system to be used for the management of a city?s capital facilities. An appropriate scope of an audit of the consultant?s product would be to:
Review the handling of idle equipment.
Review the consultant?s contract to determine its propriety.
Determine the adequacy of the controls built into the system.
Establish the parameters of the value of the items being managed and controlled.

Answer 83

Determine the adequacy of the controls built into the system.

Question 84

The major purpose of an exit conference is:
Correction of deficiencies found.
Communication with all affected parties.
Assessment of audit staff’s performance.
Presentation of the final audit report.

Answer 84

Communication with all affected parties.

Question 85

A standardized internal audit program would not be appropriate for the following situation:
A complex or changing operating environment.
A stable operating environment undergoing only minimal changes.
Multiple locations with similar operations.
Subsequent inventory audits performed at same location.

Answer 85

A complex or changing operating environment.

Question 86

Many administrative audit tasks are performed during the course of an audit. Various audit tasks are shown below and given a number. In the answers, the numbered tasks are grouped as being done primarily by a staff auditor, audit manager, or director of audit. Only one of the following groupings is correct. Select the answer in which listed tasks aremostappropriately grouped according to the auditor position.
1The auditee is selected and the scope of the audit assigned.
2An initial interview is held with the auditee explaining the scope of the audit.
3Working papers are prepared showing audit work performed.
4Audit work is supervised during the fieldwork.
5Working papers are reviewed.
6Inquiry is made of auditee management to explain unusual findings.
7Working papers are finalized and a preliminary report is prepared.
8Review draft audit report prior to discussion with management.
9After the audit report has been discussed with auditee management, the report and working papers receive a final review before the audit report is signed, published, and distributed.
Not all tasks are listed in each answer, and some of the numbered tasks could be done by more than one of the three auditing personnel.
A) staff - 3,6,7. manager - 2,5,8. director 1,8,9
B) staff - 2,4,7. manager - 3,4,8. director 1,6,9
C) staff - 3,7,9. manager - 2,4,6. director 2,3,8
D) staff - 2,7,9. manager - 4,6,8. director 1,5,6

Answer 86

A.

Question 87

An internal auditor suspects fraud in the purchasing department. To whom should the auditor communicate this first?
The audit committee.
The board of directors.
The vice president of purchasing.
Audit management.

Answer 87

Audit management.

Question 88

One of the primary roles of an audit program is to:
Document an auditor?s understanding of the internal control system.
Delineate the audit risk accepted by the auditor.
Provide for a standardized approach to the audit engagement.
Serve as a tool for planning, directing, and controlling audit work.

Answer 88

Serve as a tool for planning, directing, and controlling audit work.

Question 89

The following information is to be included in a finding of an inventory control audit of a tent and awning manufacturer. The issue relates to overstocked rope.
I.The quantity on hand at the time of the audit represented a 10-year supply based on normal usage.
II.The company had held an open house of its new factory two months prior to the audit and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order.
III.Rope is reordered when the inventory level reaches a one-month supply and is based on usage during the previous 12 months.
IV.The quantity to be ordered should be adequate to cover expected usage for the next six months.
V.The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order.
VI.A public warehouse, costing $500 per month, was required to store the rope.
VII.The purchasing agent receives an annual salary of $59,000.
Which of these statements should be in the recommendation section of the finding?
III only.
III and IV only.
V only.
VI only.

Answer 89

V only.

Question 90

According to the IIAStandards, reported audit findings emerge by a process of comparing “what should be” with “what is.” In determining “what should be” during an audit of a company’s treasury function, which of the following would be theleastdesirable criteria against which to judge current operations?
Company policies and procedures delegating authority and assigning responsibilities.
The operations of the treasury function as documented during the last audit.
Codification of best practices of the treasury function in relevant industries.
Finance textbook illustrations of generally accepted good treasury function practices.

Answer 90

The operations of the treasury function as documented during the last audit.

Question 91

The IIAStandardsrequire that internal auditors discuss conclusions and recommendations at appropriate levels of management before issuing final written reports. Which of the following is the primary reason that a closing conference should be documented by the auditor?
The information may be needed if a dispute arises.
The IIAStandardsrequire that closing conferences be documented.
The information may be needed to revise future audit programs.
Closing conference documentation becomes a basis for future audits.

Answer 91

The information may be needed if a dispute arises.

Question 92

Recommendations in audit reports may or may not actually be implemented. Which of the followingbestdescribes internal auditing’s role in follow-up on audit recommendations? Internal auditing:
Should request that independent auditors follow up on audit recommendations.
Should be charged with the responsibility for implementing audit recommendations.
Has no role; follow-up is management’s responsibility.
Should follow up to ascertain that appropriate action is taken on audit recommendations.

Answer 92

Should follow up to ascertain that appropriate action is taken on audit recommendations.

Question 93

Which of the following is a step in an audit program?
Observe the procedures used to identify defective units produced.
Auditors may not reveal findings to nonsupervisory, operational personnel during the course of this audit.
The audit will commence in six weeks and include tests of compliance.
Determine whether the manufacturing operations are effective and efficient.

Answer 93

Observe the procedures used to identify defective units produced.

Question 94

The auditor has planned an audit of the effectiveness of the quality assurance function as it affects the receiving of goods, the transfer of the goods into production, and the scrap costs related to defective items. The auditee argues that such an audit is not within the scope of the internal auditing function and should come only under the purview of the quality assurance department. What would be themostappropriate audit response?
Terminate the audit because an operational audit will not be productive without the auditee’s cooperation.
Indicate that the audit will only examine the function in accordance with the standards set, and approved, by the quality assurance function before beginning the audit.
Refer to the audit department charter and the approved audit plan, which includes the area designated for audit in the current time period.
Since quality assurance is a new function, seek the approval of management as a mediator to set the scope of the audit.

Answer 94

Refer to the audit department charter and the approved audit plan, which includes the area designated for audit in the current time period.

Question 95

An audit program for a comprehensive audit of a purchasing function should include:
Specific methods to accomplish audit objectives.
A statement of the audit objectives of the operation under review with agreement by the auditee.
A focus on risks impacting the financial statements as opposed to controls.
Work steps arranged by relative priority based on perceived risk.

Answer 95

Specific methods to accomplish audit objectives.

Question 96

Which of the following best describes a preliminary survey?
A walk-through of the financial control system to identify risks and the controls that can address those risks.
A standardized questionnaire used to obtain an understanding of management objectives.
A process used to become familiar with activities and risks in order to identify areas for audit emphasis.
A statistical sample of key employee attitudes, skills, and knowledge.

Answer 96

A process used to become familiar with activities and risks in order to identify areas for audit emphasis.

Question 97

An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives: verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of the machinery to company accounting records. It was confirmed that of the 30 machines selected from purchasing records for the sample, 10 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, both situational factors and message characteristics can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The behavioral science literature identifies diffusion as an effective approach to resolving conflict. An auditor effectively using diffusion in working with a confrontational auditee would:
Emphasize differences between the parties.
Avoid the conflict situation.
Identify the sources of conflict and address them directly.
Set aside critical issues temporarily and try to reach agreement on less controversial issues first.

Answer 97

Set aside critical issues temporarily and try to reach agreement on less controversial issues first.

Question 98

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
When the audit was assigned, management asked the auditor to evaluate the appropriateness of using self-insurance to minimize risk to the organization. Given the scope of the audit requested by management, should the auditor engage an actuarial consultant to assist in the audit if these skills do not exist on staff?
No. It is a normal audit function to assess risk; therefore, this audit engagement is not unique.
Yes. An actuary is essential to determine whether the health care costs are reasonable.
No. The audit department is skilled in assessing controls, and the insurance control concepts are not distinctly different from other control concepts.
Yes. The actuary has skills not usually found in auditors to identify and quantify self-insurance risks.

Answer 98

Yes. The actuary has skills not usually found in auditors to identify and quantify self-insurance risks.

Question 99

In which section of the final report should the internal auditor describe the audit objectives?
Scope.
Purpose.
Criteria.
Condition.

Answer 99

Purpose.

Question 100

The IIAStandardsrequire auditors to discuss conclusions and recommendations at appropriate levels of management before issuing final written reports. Auditors usually accomplish this by conducting exit conferences. Which of the followingbestdescribes the purpose of exit conferences?
To allow auditees to get started implementing recommendations as soon as possible.
To ensure that there have been no misunderstandings or misinterpretations of facts.
To allow auditors to sell findings and recommendations to management.
To allow auditors to explain complicated findings before a written report is issued.

Answer 100

To ensure that there have been no misunderstandings or misinterpretations of facts.

Question 101

An internal auditor is assigned to perform an audit of the company’s insurance program, including the appropriateness of the approach to minimizing risks to the company. The company self-insures against large casualty losses and health benefits provided for all its employees. The company is a large national firm with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The company’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling them.
Assume that the auditor wishes to test whether the health care processor is meeting contract requirements regarding the proper payment or denial of employee claims. Thebestaudit approach would be to take a sample of:
Claims filed with the health care processor and determine whether they were either appropriately paid or denied.
Employees and interview them regarding their health care experiences with proper and timely payment by the health care processor.
Claims paid by the health care processor and determine whether all the payments were proper.
Claims paid by the health care processor and engage an outside expert to analyze whether the claims were appropriately processed.

Answer 101

Claims filed with the health care processor and determine whether they were either appropriately paid or denied.

Question 102

An internal auditor conducts a preliminary survey and identifies a number of significant audit issues and reasons for pursuing them in more depth. The auditee informally communicates concurrence with the preliminary survey results and asks that the auditor not report on the areas of significant concern until the auditee has an opportunity to respond to the problem areas. Which of the following audit responses wouldnotbe appropriate?
Consider the risk involved in the areas involved, and if the risk is high, proceed with the audit.
Consider the audit to be terminated with no report needed since the auditee has already agreed to take constructive action.
Keep the audit on the audit time schedule and discuss with management the need for completing the audit on a timely basis.
Work with the auditee to keep the audit on schedule and address the significant issues in more depth, as well as the auditee’s responses, during the course of the audit.

Answer 102

Consider the audit to be terminated with no report needed since the auditee has already agreed to take constructive action.

Question 103

The following data were gathered during an internal auditor’s investigation of the reason for a material increase in bad debts expenses. In preparing a report of the finding, each of the items might be classified as criteria, cause, condition, effect, or background information.
1.Very large orders require management’s approval of credit.
2.Audit tests showed that sales personnel regularly disregard credit guidelines when dealing with established customers.
3.A monthly report of write-offs is prepared but distributed only to the accounting department.
4.Credit reports are used only on new accounts.
5.Accounting department records suggest that uncollectible accounts could increase by 5% for the current year.
6.The bad debts loss increased by $100,000 during the last fiscal year.
7.Even though procedures and criteria were changed to reduce the amount of bad-debt write-offs, the loss of commissions due to written-off accounts has increased for some sales personnel.
8.Credit department policy requires the review of credit references for all new accounts.
9.Current payment records are to be reviewed before extending additional credit to open accounts.
10.To reduce costs, the use of outside credit reports was suspended on several occasions.
11.Since several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review.
12.According to the new credit manager, strict adherence to established credit policy is not necessary.
Cause is best illustrated by items numbered:
1, 8, and 9.
3, 4, and 12.
5, 6, and 7.
2, 10, and 11.

Answer 103

3, 4, and 12.

Question 104

A manufacturing company has been expanding rapidly and is considering adding a new production line. Employees are currently working double shifts and receiving large amounts of overtime pay. Demand for all of the company’s products is currently high, but management worries about demand fluctuations with changes in the economy and technological developments by competitors. Management is concerned with such issues as whether it is efficiently using its resources, whether it is expanding too rapidly or not rapidly enough, whether employee morale is decreasing, and whether future expansion should be financed internally or through debt.
Of the following management requests, which is within the normal audit scope as stated in the IIAStandards?
Perform an independent evaluation of management’s planning process as a basis for making recommendations.
Analyze financing alternatives and present the alternatives to the audit committee.
Undertake a make-or-buy decision analysis to determine whether the company should subcontract for part of its manufacturing versus adding capacity. Report the recommendation to management for approval.
Talk with banks to identify financing alternatives and negotiate contract alternatives, which would be presented to management for evaluation.

Answer 104

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

Question 105

An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report:
The audit was performed to accomplish several objectives: verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of the machinery to company accounting records. It was confirmed that of the 30 machines selected from purchasing records for the sample, 10 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.
When communicating with auditees, both situational factors and message characteristics can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
Which of the following would seem to be a message characteristic that the auditor who prepared the above report overlooked?
Sequence of message.
Noise.
Nature of the audience.
History of prior events leading to the current encounter.

Answer 105

Sequence of message.

Question 106

A primary purpose of the closing conference is to:
Gather audit evidence.
Resolve remaining issues.
Implement audit findings.
Determine the scope of the audit.

Answer 106

Resolve remaining issues.

Question 107

Which of the following would not be considered an objective of the audit closing or exit conference?
To resolve conflicts.
To identify management’s actions and responses to the findings.
To identify concerns for future audits.
To discuss the findings.

Answer 107

To identify concerns for future audits.

Question 108

An internal auditor judged an item to be immaterial when planning an audit. However, the auditor may still include the item if it is subsequently determined that:
Related evidence is reliable.
Adverse effects related to the item are likely to occur.
Miscellaneous income is affected.
Sufficient staff is available.

Answer 108

Adverse effects related to the item are likely to occur.

Question 109

At a meeting with audit managers, the director of internal auditing is allocating the audit work schedule for next year?s plan. Which of the following methods would ensure that each audit manager receives an appropriate share of both the work schedule and internal auditing department resources?
The full list of scheduled audits is published for the audit staff, and work assignments are made based on career interests and travel requirements.
Each of the audit managers selects the individual audit assignments desired, based on preferences for the audit area and the management personnel involved in the audit.
Auditable units are assigned to each manager based on risk and skill analysis.
Each audit manager chooses audit assignment preferences based on the total staff hours that are currently available to each manager within the department.

Answer 109

Auditable units are assigned to each manager based on risk and skill analysis.

Question 110

Which of the following would not be included in the statement of scope in an audit report?
Period covered by the audit.
Audit objectives.
Activities not audited.
Nature and extent of the auditing performed.

Answer 110

Audit objectives.

Question 111

The current ratio increased during the past year while the quick ratio decreased. Which of the following explanations wouldbestexplain the reason that the current ratio increased while the quick ratio decreased?
The significant buildup of inventory.
The substantial increase in accounts receivable.
The large increase in the amount of intangible assets that affects the current ratio but not the quick ratio.
A substantial increase in accounts payable that affects the current ratio but not the quick ratio.

Answer 111

The significant buildup of inventory.

Question 112

The following information is available from the financial statements of a manufacturing division. The director of internal auditing is reviewing the data to identify potential risks as a basis for planning the audit. The division has not been audited by the internal auditing department in the past three years. The division conducts most of its business autonomously. The division has historically relied on one major product. However, that product is aging and will soon lose its patent protection.
Which of the following wouldnotexplain the decrease in cost of goods sold as a percentage of sales ratio? The division:
Recorded subsequent year’s sales in the current year, but adjusted inventory to actual goods on hand at year-end.
Liquidated inventory in conjunction with a plan to bring its current ratio more in line with the industry average.
Increased the selling price of its products by selling to less creditworthy customers.
Is incorrectly capitalizing certain production costs.

Answer 112

Liquidated inventory in conjunction with a plan to bring its current ratio more in line with the industry average.

Question 113

The following information is available from the financial statements of a manufacturing division. The director of internal auditing is reviewing the data to identify potential risks as a basis for planning the audit. The division has not been audited by the internal auditing department in the past three years. The division conducts most of its business autonomously. The division has historically relied on one major product. However, that product is aging and will soon lose its patent protection.
The division had a large increase in sales in the previous year (20X2). Which of the following hypotheses would the data support regarding the potential cause of the sales increase? The division:
Sold off most of its intangible assets, realizing a profit on the sale.
Liquidated a substantial part of its older inventory.
Acquired another company and accounted for the purchase as a purchase transaction, not a pooling.
Reduced its selling price for most of its product line.

Answer 113

Acquired another company and accounted for the purchase as a purchase transaction, not a pooling.