Section 3 Flashcards
When relatively few items of high dollar-value constitute a large proportion of an account balance, stratified sampling techniques and complete testing of the high dollar-value items will generally result in a
A. Reduction in sample size
B. Simplified evaluation of sample results
C. Larger estimale of population variability
D. Smaller non-sampling error
A. Reduction in sample size
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account.
The collection of a current accounts receivable of 29.000 would
A. Increase the current rabo
B. Not affect the current or quick rabios
C.Increase the quick ratio
D. Decrease the current rabo and the quick rabo
A. Increase the current rabo
Management of a telephone and cable television enterprise has requested an engagement to evaluate its service department. The department is responsible for handling all customer inquiries regarding telephone or cable performance and assigning staff personnel to fix the problem, installing now cable lines and hooking them up to the customer's home, selling complementary products such as designer telephones, selling complementary services such as premium cable television services, and additional telephone services such as call-waiting, three-line hookup, etc. Management is very customer oriented and has a policy that 95% of customer complaints or inquiries must be fully addressed to the customer's satisfaction within 24 hours of receiving the call. All customer service inquiries that require a service technician must be logged in by the responding service agent Although the department exists to handle customer needs, it is also viewed by management as a profit center. All revenue is generated from the sale of complementary services or equipment and from service revenue. The department has been in existence for only three years and management has not developed a mechanism to evaluate the department's performance. However, management is concerned that the department might not be meeting management's goals. During the preliminary planning, the following information is gathered. Current Year Prov. Year Prior Year Preliminary Information (2010) (2009) (2008) Number of complaints logged 37.500 35,000 34,000 Seenon C - Performing the Engagemon DA Por 2 - Practior of Internal Auditing - 2020 Number of service calls al customer locations 10,080 10.000 8.640 Number of customers. 1,250.000 1.100.000 1.000,000 Service call revenue $510.000 $500.000 $432,000 Sales of complementary services of equipment $6.250.000 $4.400.000 $3.750.000 No of Staff Supp Staff-7 Supp Staff-7 Supp Staff-5 Technicians Technicians 7 Technicians-7 Technicians-6 Total Service Department Costs $1.344.000 $1.275.000 $1.056.000 The best engagement procedure to determine whether the organization is meeting its objective of satisfying 95% of customer inquiries within 24 hours is lo A. Select a mean-per-unit statistical sample from the total population base and trace the sample to the customer complaint log to determine whether or not 95% of the sample had their complaints addressed within 24 hours B. Develop a customer satisfaction survey and send it to all customers, and include a question about the timeliness of service. C. Develop a customer satisfaction survey and send it to a stalistically selected sample of customers based on mean-per-unit sampling and ask them to identify the time it took for the service department to satisfactorily address their problem. Calculate a mean and standard deviation D. Select an attribute sample from the population of logged-in customer complaints and trace lo records indicating its disposition, noting time and nature of disposition
D. Select an attribute sample from the population of logged-in customer complaints and trace lo records indicating its disposition, noting time and nature of disposition
An example of an internal nonfinancial benchmark is
A. The percentage of customer orders delivered on time al the company’s most efficient plant.
B. A $50,000 limit on the cost of employee training programs at each of the company’s plants
C. The average actual cost per pound of a specific product al the company’s most efficient plant.
D. The labor rate of comparably skilled employees al a major competitor’s plant
A. The percentage of customer orders delivered on time al the company’s most efficient plant.
The population from which it is drawn, the internal auditor
A. Will usually use random sampling with replacement.
B. Cannot use random sampling procedures unless the items to be sampled are available in machine-readable form.
C. Should use judgmental quantify and concentrate on high-risk items.
D. Can statistically quantify the sample results only if the sample was selected in such a way that each population item has an equal or known probability of selection.
D. Can statistically quantify the sample results only if the sample was selected in such a way that each population item has an equal or known probability of selection.
In testing the write-off of a degenerated piece of equipment the best information about the condition of the equipment is
A. A physical inspection of the actual piece of equipment
B. The equipment manager’s statement regarding condition
C. The production department’s equipment downtime report
D. Accounting records showing maintenance and repair costs
A. A physical inspection of the actual piece of equipment
Which of the following states an Inappropriate policy relating to the retention of engagement working papers?
A. Working papers should be disposed of when they have no further use,
B. Working papers retention schedules should be approved by legal counsel.
C. Working papers prepared for fraud, investigators should be retained indefinitely.
D. Working papers retention schedules should consider legal and contractual requirements.
C. Working papers prepared for fraud, investigators should be retained indefinitely.
An operational engagement relating to the production function includes a procedure to compare actual costs with standard costs. The purpose of this engagement procedure is to
A. Determine the accuracy of the system used to record actual costs.
B. Assess the reasonableness of standard costs
C. Measure the effectiveness of the standard cost system.
D. Assist management in its evaluation of effectiveness and efficiency
D. Assist management in its evaluation of effectiveness and efficiency
Windham Company has current assets of 400.000 and current liabilities of 500.000. Windham Company’s current ratio would be increased by
A. Refinancing a 100,000 long-term loan with short-term debt.
B. The purchase of 100.000 of inventory on account.
C. The payment of 100.000 of accounts payable
D. The collection of 100.000 of accounts receivable
B. The purchase of 100.000 of inventory on account.
An important difference between a statistical and a judgmental sample is that with a statistical sample.
A. More accurate results are obtained
B. Population estimates with measurable reliability can be made
C. A smaller sample can be used.
D. No judgment is required because everything is computed according to a formula.
B. Population estimates with measurable reliability can be made
Norton, Inc. has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
A. a previously declared stock dividend was distributed
B. the company purchased inventory on open account
C. the company wrote off an uncollectible receivable
D. the company sold merchandise on open account that earned a normal gross margin.
D. the company sold merchandise on open account that earned a normal gross margin.
With regards to sample size, which of the following statements are true?
I. There is a direct relationship between population size and sample size
Il. The lower the acceptable risk of error, the larger the sample size will need to be.
III. The lower the tolerable error, the larger the sample will need to be
A. I only
B. Il and Ill
C. Il and Ill only
D. I and Il only
C. Il and Ill only
The chief audit executive (CAE) of inter internal auditing of a mid-sized internal auditing organization was concerned that management might outsource the internal auditing function. There the CAE adopted a very aggressive program to promote the internal auditing department within the organization. The CAE planned to present the result to management and the audit committee and recommend modification of the Internal Audit Charter after using the the new program.
In order to save time, the CAE no longer required that a standard internal control questionnaire be completed for each audit.
Is this a violation of the Standards?
A. No. Auditors are not required to fill out internal control questionnaires on every audit.
B. No. Auditors may moit necessary procedures if there is a time constraint. It is a matter of audit judgement.
C. Yes. Internal Control should be evaluated on every audit engagement and the internal control questionnaire is the most efficient method to so.
D. Yes. Internal control should be evaluated on every audit, but the internal control questionnaire is not the mandated approach to evaluate the controls.
A. No. Auditors are not required to fill out internal control questionnaires on every audit.
As part of the test of the effectiveness of a disaster recovery plan, the internal auditor plans to interview five employees from each of five different departments (25 employees in all). After the first few interviews, what is the best way for the internal auditor to remain attentive during the remaining interviews?
A. Ask the questions in a slightly different format and in a different sequence
B. Make up completely different questions to stay interested
C. Have the rest of the employees write down their responses
D. Interview the remaining employees in groups of four or five.
A. Ask the questions in a slightly different format and in a different sequence
The chef audit executive (CAE) of a mid-sized internal audit activity (IAA) was concerned that management might outsource the internal auditing function Thus, the CAE adopted a very aggressive program to promote the LAA within the organization. The CAE planned to present the results lo senior management and the board and recommend modification of the IAA’s charter after using the new program. One of the recommendations was that to save time the CAE no longer required that a standard internal control questionnaire be completed for each engagement
Is this inappropriate?
A. No Internal auditors may omit necessary procedures if there is a time constraint It is a matter of professional judgment
B. Yes, Internal control should be evaluated on every engagement but the internal control questionnaire is not the mandated approach to evaluate the controls
C. No Internal auditors are not required to fill out internal control questionnaires on every engagement
D. Yes Internal control should be evaluated on every engagement and the infernal control questionnaire is the most efficient method to do so
C. No Internal auditors are not required to fill out internal control questionnaires on every engagement
When reviewing engagement working papers, the primary responsibility of an engagement supervisor is to determine that
A. Working papers are properly referenced and kept in logical groupings.
B. Each worksheet is properly identified with a descriptive heading
C. Working papers adequately support the engagement observations, conclusions, and recommendations
D. Standard internal audit activity procedures are adhered to with regard lo working paper preparation and technique
C. Working papers adequately support the engagement observations, conclusions, and recommendations
An adequately documented working paper should
A. Be concise but complete.
B. Contain examples of all forms and procedures used by the engagement client.
C. Not contain copies of engagement client records.
D. Follow a unique form and arrangement.
B. Contain examples of all forms and procedures used by the engagement client.
An internal auditor’s working papers should be reviewed by the
A. Audit committee of the board
B. Management of the organization’s security division.
C. Management of the engagement client
D. Chief audit executive
D. Chief audit executive
An internal auditor becomes concerned that fraud, in the form of payments to bogus entities, may exist Buyers, who are responsible for all purchases for specific product lines, are able to approve expenditures up to $50.000 without any other approval. Which of the following procedures would be most effective in addressing the internal auditor’s concerns?
A. Use generalized audit software to list all major vendors by product line, select a sample of paid invoices lo new vendors and examine information indicating that services or goods were received
B. Use generalized audit software to lake a random sample of all expenditures under $50.000 to determine whether they were properly approved.
C. Develop a “snapshot” technique to trace all transactions by suspected buyers
D. Use generalized audit software lo list all purchases over $50,000 to determine whether they were properly approved
A. Use generalized audit software to list all major vendors by product line, select a sample of paid invoices lo new vendors and examine information indicating that services or goods were received
In evaluating the quality of housekeeping services performed in a large hospital. the most reliable source of evidence would be
A. Interviews with a sample of medical personnel
B. A review of housekeeping records maintained by the medical records department of the hospital
C. A review of survey forms returned by medical personnel directly to the manager of housekeeping services
D. Interviews with top hospital officials
A. Interviews with a sample of medical personnel
An internal auditor is planning to use attribute sampling to test the effectiveness of a specific internal control related to approvals for cash disbursements. In attribute sampling, decreasing the estimated occurrence rate from 5% to 4% while keeping all other sample size planning factors exactly the same would result in a revised sample size that would be A. Smaller B. Indeterminate. C. Unchanged. D. Larger.
A. Smaller
In a set of audit working papers, an internal auditor notes the following statement
“The company has 80 remote warehouses and each warehouse contains from 100 to 500 products.”
From this note, the internal auditor can conclude
A. The average number of products in the warehouses is 300.
B. There are at least two warehouses with the same number of products
C. The majority of the warehouses have more than 250 products
D. The total number of products contained in all the warehouses is at least 8,400
D. The total number of products contained in all the warehouses is at least 8,400
Engagement working papers should include
A. All working papers prepared during a previous engagement performed in the same area.
B. Documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal control
C. Copies of all procedures that were reviewed during the engagement
D. Copies of all source documents examined in the course of the engagement
B. Documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal control
An internal auditor is assigned to perform an engagement to evaluate the organization’s insurance program, including the appropriateness of the approach to minimizing risks. The organization self-insures against large casualty losses and health benefits provided for all its employees. It is a large national entity with over 15.000 employees located in various parts of the country Il uses an outside claims processor to administer its health care program. The
organization’s medical costs have been rising by approximately 8% per year for the past five years, and management is concerned with controlling these costs
Which of the following analytical review procedures would provide the most insight into the reasonableness of the increase in health care costs?
A. Obtain a bid from another health care administrator to provide the same administrative services as the current health care administrator
B. Develop a comparison of the costs incurred with similar costs incurred by other companies
C. 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
D. Develop a comparison of overall health insurance costs incurred by the company
C. 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
An internal auditor is considering the use of Probability-Proportional-to-Size (PPS) sampling This technique is likely to be especially beneficial if
A. auditor is interested in testing the proper valuation of accounts payable
B. The error rate in the population is believed to be quite large
C. The auditor believes that the items to be tested are just as likely to be overstated as understated
D. The auditor is interested in testing the accuracy and valuation of accounts receivable
D. The auditor is interested in testing the accuracy and valuation of accounts receivable
The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. Afetr 6 months in the internal audit activity (IAA), they will move back to line poisitons. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and clearing comments, the CAE asks the team to indicate the information criteria that are violated.
During the planning stage of an engagement, the internal auditor made an on-site observation of the vehicle maintenance department and included the following statement in a memorandum summary of the results:
“ We noted that several maintenance garages were deteriorating badly. Fencing around the property was in need of repair”
Which of the following informational criteria, if any, is violated? A. No criteria are violated B. Sufficiency C. Reliability D. Relevance
A. No criteria are violated
Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit A company’s ROI is increased if
A. Net profit margin on sales increases by the same percentage as total assets
B. Sales decrease by the same dollar amount that expenses increase
C. Sales increase by the same dollar amount as expenses and total assets
D. Sales remain the same and expenses are reduced by the same dollar amount in a total assets increase
D. Sales remain the same and expenses are reduced by the same dollar amount in a total assets increase
The use of probability-proportional-to-size (PPS) sampling is inefficient if
A. Bank accounts are being examined
B. The number of sampling units is large C. Each account is of equal importance
D. Statistical inferences are to be made
C. Each account is of equal importance
Which one of the following statements is false regarding surveys?
A. Surveys are relatively low in cost, but the answers may not be indicative of the larger population
B. Surveys are useful for collecting data for marketing purposes
C. In the use of surveys, internal auditors are not concerned with a problem called non-response bias
D. Surveys are a type of questionnaire that are sent to people outside the organization
C. In the use of surveys, internal auditors are not concerned with a problem called non-response bias
An auditor is performing an operational audit of the shipping der from the shipping department files On is of the days on Is that the auditor concluded that the shipping
A This conclusion would negate any need to perform any need to perform tests of efficiency
B. The shipping department is effective in meeting its responsibilities
C. None of the above
D. The number of items selected for testing is inadequate to justify the conclusion
C. None of the above
An internal auditor decides to perform an inventory turnover analysis for both raw materials inventory and finished goods inventory. The analysis would be potentially useful in
A. Identifying potential problems in purchasing activities
B. All of the answers are correct.
C. Identifying products for which management has not been turned to changes in market demand
D. Identifying obsolete inventory.
B. All of the answers are correct.
A manager responsible for the supervision and review of other Internal auditors needs the necessary skills, knowledge, and other competencies Which of the following does not describe a skill, knowledge or other competency necessary to supervise a particular engagement?
A. Assuring that an engagement communication is supported and accurate relative to the information documented in the engagement working papers
B. Determine that staff auditors have completed the engagement procedures and that engagement objectives have been met
C. The ability to review and analyze an engagement work program to determine whether the proposed engagement procedures will result in information relevant to the engagement’s objectives
D. Use risk assessment and other judgmental processes to develop an engagement work schedule for the internal audit activity and present the schedule to the board
D. Use risk assessment and other judgmental processes to develop an engagement work schedule for the internal audit activity and present the schedule to the board
The best evidence to determine if excess levels of inventory are accumulating is
A. Reviewing purchase orders
B. Counting inventory and comparing quantity to perpetual records
C. Analyzing last quarter’s excess inventory reports
D. Comparing current production requirements with the total of inventory on hand and on order
D. Comparing current production requirements with the total of inventory on hand and on order
Which of the following represents appropriate evidence of supervisory review of engagement working papers?
I. A supervisor’s initials on each working paper
II. An engagement working paper review checklist
III. A memorandum specifying the nature, extent, and results of the supervisory review of working papers
IV. Performance appraisals that assess the quality of working papers prepared by auditors
A. I. I. Ill, and IV
B. I. Ill. and IV only
C. Il and IV only
D. I. Il. and Ill only.
D. I. Il. and Ill only.
An internal auditor’s working papers should support the observations, conclusions, and recommendations to be communicated. One of the purposes of Mills requirement is to
A. Provide control over working papers.
B. Provide support for the internal audit activity’s financial budget.
C. Facilitate quality assurance reviews
D. Permit the audit committee to review observations, conclusions, and recommendations
C. Facilitate quality assurance reviews
Working paper summaries, if prepared, can be used to
A. Serve as an engagement communication to senior management
B. Promote efficient working paper review by internal auditing supervisors
C. Replace the detailed working paper files for permanent retention.
D. Document the full development of engagement observations
B. Promote efficient working paper review by internal auditing supervisors
An inexperienced internal auditor notified the senior auditor of a significant variance from the engagement client’s budget. The senior told the new internal auditor not to worry because the
senior had heard that there had been an unauthorized work stoppage that probably accounted for the difference Which of the following statements is most appropriate?
A. The new internal auditor should have investigated the matter fully and not bothered the senior.
B. The senior used proper judgment in curtalang what could have been a wasteful investigation.
C. The senior should have aided the new internal auditor in formulating a plan for accumulating appropriate information
D. The senior should have halted the engagement until the variance was fully explained
C. The senior should have aided the new internal auditor in formulating a plan for accumulating appropriate information
The auditor wants to determine that the program is approving items for payment only when the purchase order, receiving report, and vendor invoice match within the tolerable 0.5%. Assume all the following suggested audit procedures would have been implemented to function over the proper time period. Which of the following computerized audit procedures would provide the most persuasive evidence as to the proper operation of the program?
A. Using generalized audit software to take a random sample of purchase orders and tracing the selected items to the vendor invoice and receiving document.
B. Using a test data approach al year-end by submitting mock purchase orders, vendor invoices, and receiving quantities
C. Implementing an integrated test facility with auditor-submitted test items throughout the period under analysis
D. Implementing a Systems Control and Audit Review File (SCARF) audit technique, which will automatically select all transactions when the purchase order exceeds a specific dollar limit
C. Implementing an integrated test facility with auditor-submitted test items throughout the period under analysis
A bank’s policies require that a lending officer review all loan requests and forward those deemed appropriate for funding to the lending committee for approval. The most efficient audit procedure to determine if loans that were not funded were rejected using criteria consistent with that contained in bank policies would be to select an attributes sample of
A. All loan applications, review the applications, and trace them to either a funded or rejected loan to determine if all actions taken were consistent with bank policies
B. Loans not funded and review the loan applications and the reasons for rejecting them
C. Loans presented to the lending committee for approval and determine if actions taken by the committee were consistent with bank policies
D. Loans that were funded, review the loan applications, and determine if the funded loans complied with bank policies
B. Loans not funded and review the loan applications and the reasons for rejecting them
Internal auditors should review the means of physically safeguarding assets from losses arising from
A. Misapplication of accounting principles
B. Procedures that are not cost justified
C. Under usage of physical facilities
D. Exposure to the elements
D. Exposure to the elements
To test compliance with a policy regarding sales returns recorded during the most recent year an auditor systemically selected five percent of the actual return’s recorded in March and April Returns during these two busiest months of the year represented about 25 percent of total annual returns Error projections from this sample have limited usefulness because
A. The systemic selection of returns during the two months is not sufficiently random
B. The small size of the sample relative to the population makes sampling risk unacceptable
C. The failure to stratify the population according to sales volume results in his
D. The error rates during the two busiest months may not be representative of the whole year
D. The error rates during the two busiest months may not be representative of the whole year
A company is simulating the actions of a government agency in which 50% of the time a recall of a product is required, 40% of the time only notification of the buyer about a potential defect is required, and 10% of the time no action on its part is required Random numbers of 1 to 100 are being used An appropriate assignment of random numbers for the recall category would be A. 11:60 B. 1.40 C. 61-100 D. 40-90
A. 11:60
To be sufficient, audit evidence should be
A. Directly related to the finding and include all of the elements of a finding
B. Well-documented and cross-referenced in the workpapers
C. Based on references that are considered reusable
D. Convincing enough for a prudent person to reach the same conclusion as the and for
D. Convincing enough for a prudent person to reach the same conclusion as the and for
The internal auditor prepares working papers primarily for the benefit of
A. Senior management.
B. The engagement client
C. The external auditor. D. The internal audit activity
D. The internal audit activity
An internal auditor has the following information available to write a memorandum on the progress of developing new engagement software for accounts receivable
The programmers, who were to start on the sampling software last week, will not be able to start until next week The programmers want to purchase a commercially available software package The funds for the software are not in the budget.
By using the software, the programmers expect to complete their work on schedule
The purchased software will reduce programming costs by substantially more than the cost of the software
The programming of the sampling techniques is expected to be completed one week early The overall project is expected to be completed on time
Except for the software package and the programming costs. the project is on budget
The most important message for the internal auditor to convey lo senior management is
A. The programmers want to buy new software
B. The project is expected to be completed on time and within budget
C. The programming of the sampling techniques will be completed one week early
D. The development of the new software is behind schedule
B. The project is expected to be completed on time and within budget
An assurance engagement in the quality control department is being planned. Which of the following is least likely to be used in the preparation of a preliminary survey questionnaire?
A. The permanent engagement file
B. Management’s charter for the quality control department
C. The prior engagement communications
D. An analysis of quality control documents
D. An analysis of quality control documents
The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity (IAA), they will move back to line positions. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and cleaning comments. The CAE asks the team to indicate the informational criteria that are violated.
In an engagement to evaluate the effectiveness and validity of a subsidiary’s marketing expenditures, the internal auditors identified the following information
- Analytical comparisons of advertising expenditures and changes in shopping patterns and item sales.
- Direct observation of various advertising media used
- Review of a marketing survey of general public reaction to the marketing plan.
Which of the following informational criteria, if any is violated? A. No criteria are violated B. Relevance C. Sufficiency D. Reliability
A. No criteria are violated
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account
The purchase of raw materials for 85.000 on open account would
A. Increase net working capital
B. Increase the current ratio.
C. Decrease the current ratio.
D. Decrease net working capital
C. Decrease the current ratio.
Which one of the following best reflects the basic elements of a data flow diagram?
A. Data flows, data storage, and program flowchart
B. Data source, data destination, data flows, transformation processes, and data storage
C. Data flows, program flowchart, and data destination.
D. Data sources, data flows, computer configurations, flowchart, and data storage
B. Data source, data destination, data flows, transformation processes, and data storage
During a review of a division’s operations, an internal auditor notes that
- Sales revenue has remained the same.
- Inventory has increased significantly.
- Gross margin has increased significantly.
Which of the following statements, if true, could explain the change noted in gross margin?
I. The company has developed a new manufacturing process that is much more efficient
Il. Sales price per unit has increased
Ill. Inventory is overstated
A. I. Il and Ill only
B. I and Il only
C. I only
D. Ill only
A. I. Il and Ill only
Working papers provide the documentary support for the internal auditor’s report. Which of the following is not a good practice for working papers?
A. Working papers should be organized chronologically, i.e., with the papers prepared earliest at the front of the file.
B. Working papers should be kept secure at all times to prevent accidental loss or unauthorized access.
C. Internal auditors within a given organization should develop standardized methods for organization and documentation.
D. Working papers should be sufficient to support the internal auditors report without additional verbal elaboration by the internal auditor.
A. Working papers should be organized chronologically, i.e., with the papers prepared earliest at the front of the file.
If an auditor’s preliminary evaluation of internal controls results in a finding that controls may be inadequate, the next step would be to
A. Expand audit work prior to the preparation of an audit report.
B. Implement the desired controls,
C. Prepare a flowchart depicting the internal control system.
D. Note an exception in the audit report if losses have occurred.
A. Expand audit work prior to the preparation of an audit report.
Which of the following best describes what should determine the extent of supervision required for a particular internal auditing engagement?
A. Whether the engagement involves possible fraud on the part of management.
B. The Internal audit activity’s prior experience in dealing with the particular engagement client.
C. The proficiency of the internal auditors and the complexity of the engagement.
D. Whether the engagement involves possible violations of laws or governmental regulations.
C. The proficiency of the internal auditors and the complexity of the engagement.
A working paper is complete when it
A. Is dear, concise, and accurate.
B. Complies with the internal audit activity’s format requirements.
C. Satisfies the engagement objective for which it is developed.
D. Contains all of the attributes of an observation.
C. Satisfies the engagement objective for which it is developed.
As used in the verification of an accounts payable schedule, which of the following ¡s best described as an analytical test?
A. Comparing confirmations received from selected creditors with the accounts payable ledger.
B. Comparing the balance on the schedule with the balances of prior years.
C. Examining vendors’ invoices in support of selected items on the schedule
D. Comparing the items on the schedule with the accounts payable ledger or unpaid voucher file.
B. Comparing the balance on the schedule with the balances of prior years.
Which of the following best describes engagement supervision?
A. Supervision is most important in the planning phase of the engagement to ensure appropriate coverage. B. Supervision is a continuing process beginning with planning and ending with the conclusion of the engagement.
C. Supervision is primarily exercised at the final review stage of an engagement to ensure the accuracy of the engagement communications,
D. The manager of each engagement has the ultimate responsibility for supervision
B. Supervision is a continuing process beginning with planning and ending with the conclusion of the engagement.
Which of the following concepts distinguishes the retention of computerized engagement working papers from that of the traditional hardcopy form?
A. Computerized flies can be used in engagement procedures,
B. Work programs can be standardized to eliminate the need for a survey at each location.
C. Informational support for all observations is copied and provided to local management during the closing conference and to each person receivin9
the final engagement communication.
D. Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures.
D. Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures.
The primary objective of maintaining security over working papers is to
A. Facilitate engagements by external auditors.
B. Prohibit engagement clients from seeing working papers.
C. Facilitate subsequent engagements in the same department.
D. Prohibit unauthorized changes or removal of information.
D. Prohibit unauthorized changes or removal of information.
Sampling is most useful when the internal auditor
A. Is concerned with overstatements.
B. Expects to find several material misstatements in the sample.
C. Is testing the accounts payable balance.
D Cannot cumulatively arrange the population items
A. Is concerned with overstatements.
Which of the following procedures should be performed as part of a preliminary review in an audit of a banks investing and lending activities?
A. Review reports of audits performed by regulatory and outside auditors since the last internal audit,
B. Review minutes of the board of director& meetings to identify changes in policies affecting investments and loans.
C. interview management to identify changes made in policies regarding investments or loans.
D. All of the above.
D. All of the above.
A chain retailer has outlets in forty non-overlapping through similar local markets. Recently, the retailer conducted its largest promotional campaign ever. Each outlet was unrestricted in allocating its promotional budget between local print, radio, or television advertising or in underspending the budget. The internal auditor wishes to evaluate the effectiveness of these tactics. In this case
A. Time series analysis should be used since the promotion occurred over time.
B. Multiple regression analysis may be an effective tool for modeling the relationship between sales and promotional tactics.
C. Since the relationship between promotional expenditures and sales is probably non-linear, regression analysis should not be used.
D. Discriminant analysis would be the best tool for discriminating between effective and ineffective promotional tactics
B. Multiple regression analysis may be an effective tool for modeling the relationship between sales and promotional tactics.
An organization uses electronic data interchange and on-line-systems rather than paper-based documents for purchase order, receiving reports, and invoices. Which of the following audit procedure would be an auditor use to determine if invoices are paid only for goods received and approved prices?
A. Select a monetary-unit sample of accounts payable and confirm the amounts directly with the vendor.
B. Select a statistical sample of major vendors and trace the amounts paid to specific invoices.
C. Use generalized audit software to select a sample of payments and match purchase orders, invoices, and receiving reports stored on the computer using a common reference.
D. Use generalized audit software to identify all receipts for a particular day and trace the receiving reports to checks issued.
C. Use generalized audit software to select a sample of payments and match purchase orders, invoices, and receiving reports stored on the computer using a common reference.
Which of the following ¡s the primary advantage of using an internal control questionnaire?
A. It reduces the risk of overlooking important aspects of the system.
B. It forces an internal auditor to acquire a full understanding of the system.
C. The negative responses indicate the only areas needing further engagement work.
D. It provides a clear picture of the interrelationships that exist between the various controls.
A. It reduces the risk of overlooking important aspects of the system.
Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must
A. Be convincing enough for a prudent person to reach the same decision.
B. Be based on references that are considered reliable.
C. Bear a direct relationship to the finding and Include all of the elements of a finding.
D. Be well documented and cross-referenced in the working papers.
A. Be convincing enough for a prudent person to reach the same decision.
When testing the year end balance for trade accounts payable, the use of a software package to identify unauthorized vendors in a vendor database is most valuable in developing tests to determine
A. Accuracy of the receiving cutoff used.
B. Existence of valid recorded liabilities.
C. Valuation of recorded transactions.
D. Ownership of the recorded payables.
B. Existence of valid recorded liabilities.
In deciding whether recorded sales are valid, which of the following items of information is most reliable?
A. A copy of the customer’s purchase order.
B. The shipping document, independent bill of lading, and the invoice for the merchandise.
C. A memorandum from the director of the shipping department stating that another employee verified the personal delivery of the merchandise to the customer.
D. Accounts receivable records showing cash collections from the customer.
B. The shipping document, independent bill of lading, and the invoice for the merchandise.
An auditor suspects that a human resources computer system contains erroneous data, such as Invalid job classifications, ages in excess of retirement age, and invalid ethnic classifications. The best approach to determine the extent of the potential problem would be to
A. Review and test access controls to ensure that access is limited to authorized individuals.
B. Submit test data to test the effectiveness of edit controls over the input of data
C. Use generalized audit software to identify all data that is not within specified parameters,
D. Use generalized audit software to select a sample of employee records. Use the sample to determine the validity of data Items and project the result to the entire system
C. Use generalized audit software to identify all data that is not within specified parameters,
In which of the following situations would probability-proportional-to-size (PPS) sampling be more effective and efficient than ratio estimation?
A. The population has a low degree of variability in dollar amount.
B The population has a high degree of variability in dollar amount,
C. The population is expected to contain few differences between the recorded amount and the actual amount.
D. The population contains a large number of differences between the recorded amount and the actual amount.
C. The population is expected to contain few differences between the recorded amount and the actual amount.
Working papers often contain information of potential future value. A retention policy for working papers should be devised after consultation with
A. The bonding organization.
B. Engagement clients. C. Legal counsel,
D. The board,
C. Legal counsel,
An organization uses electronic data interchange (EDI) and online systems rather than paper-based documents for purchase orders, receiving reports, and invoices. Which of the following audit procedures would an auditor use to determine if invoices are paid only for goods received and at approved
prices?
A Take a monetary-unit sample of accounts payable and confirm the amounts directly with the vendors.
B. Use generalized audit software to identify all receipts for a particular day and trace the receiving reports to checks issued.
C. Using a statistical sample of major vendors, trace the amounts paid to specific invoices.
D. Use generalized audit software to select a sample of payments and match purchase order, invoice, and receiving reports stored on the computer using a common reference.
D. Use generalized audit software to select a sample of payments and match purchase order, invoice, and receiving reports stored on the computer using a common reference.
Which of the following should be identified as a deficiency by an engagement supervisor who is reviewing working papers?
A. A memorandum recorded in the working papers explained why an engagement work program step was omitted.
B. A letter to the engagement client outlining the scope of the enga9ement was recorded in the working papers.
C. A draft communication concerning an engagement observation recorded in the working papers omitted the criteria used for evaluation,
D. A memorandum recorded In the working papers explained why the time budget for a part of the engagement was exceeded.
C. A draft communication concerning an engagement observation recorded in the working papers omitted the criteria used for evaluation,
On an audit of the purchasing department, an internal auditor receives information from an employee alleging that a buyer for the company favors a particular supplier. The best source of evidence to evaluate this allegation is
A. Analyzing supplier ratings.
B. Reviewing the file of open purchase orders.
C. Discussing purchases from the supplier with the buyer.
D. Reviewing purchase files for all recent awards to supplier.
D. Reviewing purchase files for all recent awards to supplier.
Which of the substantive fieldwork procedures presented below provides the best information about completeness of recorded revenues?
A. Reconciling the sales journal to the general ledger control account.
B. Vouching shipping records to the customer order file.
C. Reconciling shipping records to recorded sales.
D. Vouching charges made to the accounts receivable subsidiary ledger to supporting shipping records.
C. Reconciling shipping records to recorded sales.
The chief audit executive (CAE) is reviewing some of the basic concepts inherent In the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months In the internal audit activity (IAA), they will move back to line positions. Each of them has fairly extensive organizational experience and Is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and clearing comments, The CAE asks them to indicate the informational criteria that are violated.
The organization is required to comply with certain specific standards related to environmental issues. One of these standards requires that certain hazardous chemicals be placed in certified containers for shipment to a governmental disposal site. The container must bear an Inspection seal signed within the last 90 days by a governmental Inspector. Based on the following tests, the internal auditor concluded that the organization was in
compliance for the engagement period:
I. Determine from each chemical loading supervisor that compliance requirements are understood
Il. inspect sealed containers for evidence of leakage.
lii. Ask chemical loading personnel about procedures performed.
Which of the following informational criteria, if any, is violated?
A. Sufficiency.
B. No criteria are violated.
C. Relevance.
D. Reliability.
A. Sufficiency.
The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months In the Internal audit activity (1M). they will move back to line positions. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers. holding back the review notes and clearing comments. The CAE asks them to indicate the informational criteria that are violated.
The organization’s inventories are under the administration of three production managers. The internal auditors perform a standard limited test of finished goods inventory balances every year. During this year’s engagement concerning inventories, the internal auditors noted finished goods inventories were abnormally high, sales were consistent with prior years, and returns and allowances appeared normal, The internal auditors performed the usual random sample recount of several finished goods Inventory cards without discrepancy and then extended the testing to include 10 raw materials and 10 work-in-process cards, noting no exceptions. The following statement was included in the engagement working papers:
“Our standard test of finished goods Inventories revealed no exceptions to the inventory count. We extended our tests this year to include both raw materials and work-in-process without exception. At the time of our engagement, the supervising Inventory managers were not available: however, the division secretary indicated that performance standards were on rile. It appears that there Is adequate awareness and understanding of the
performance standards.”
Which of the following informational criteria is not violated? A. Reliability. B. All criteria are violated. C. Relevance. D Sufficiency.
B. All criteria are violated.
The preliminary survey phase of an engagement to evaluate recruiting activity shows that hotel and airfare expenses are approximately equal. Both hotel and airline arrangements are made by the recruiting group secretary. Based on this information, the scope of fieldwork should include
A. Obtaining assurance that candidates’ legal rights are protected during the course of the Interview experience.
B. Considering competitive factors involved in the selection of hotel accommodations.
C. Recommending that someone outside the recruiting group make hotel and airline reservations.
D. Comparing the detail of hotel charges per candidate’s expense reports to copies of hotel bills obtained directly from hotel sources.
B. Considering competitive factors involved in the selection of hotel accommodations.
The chief audit executive (CAE) is responsible for engagement supervision. The most important form of supervision during the fieldwork phase of engagement involves
A. Making sure that communications are accurate, objective, clear, concise, constructive, and timely.
B. Appraising each internal auditor’s performance at least annually.
C Providing suitable instructions to subordinates at the outset of the engagement and approving the engagement program
D. Seeing that the approved engagement work program is carried out unless changes are both justified and authorized.
D. Seeing that the approved engagement work program is carried out unless changes are both justified and authorized.
The primary purpose of an engagement working paper prepared in connection with payroll expense is to
A. Provide documentation to support payroll taxes due.
B. Verify the work done by the internal auditor.
C. Record the names of all employees.
D. Record payroll data and analyses to support reported recommendations.
D. Record payroll data and analyses to support reported recommendations.
The degree to which the auditor Is justified in believing that the estimate based on a random sample will fall within a specified range Is called A. Precision. B. Sampling risk. C. Non-sampling risk. D. Confidence level.
D. Confidence level.
In developing an engagement work program and communicating engagement results, the internal auditor should be alert for a condition that might reflect low materiality of an observation but high relative risk to the overall operation of the organization. Which of the following conditions would reflect such a situation?
A. No written quality-assurance procedure exists for a high-volume production line Item with low unit cost that has a 15% scrap experience.
B. The cashier is commingling personal funds with a $1.000 imprest cash fund.
C. Levels of approval authority for purchasing personnel are not set forth in the manual of purchasing procedures.
D. Many random clerical errors arise from the desire of employees to meet production quotas.
A. No written quality-assurance procedure exists for a high-volume production line Item with low unit cost that has a 15% scrap experience.
Which of the following activities does not constitute engagement supervision?
A. Preparing a preliminary engagement work program.
B. Ensuring that engagement communications meet appropriate criteria,
C. Providing appropriate instructions to the internal auditors.
D. Reviewing engagement working papers.
A. Preparing a preliminary engagement work program.
If an internal auditor is sampling to test compliance with a particular company policy, which of the following factors should not affect the allowable level of sampling risk?
A. The acceptable level of risk of making an incorrect audit conclusion.
B. The cost of performing auditing procedures on sample selections.
C. The adverse consequences of noncompliance.
D. The experience and knowledge of the auditor.
D. The experience and knowledge of the auditor.
Which of the following most completely describes the appropriate content of working papers?
A. Purpose, criteria, techniques, and conclusions
B. Audit subject, purpose. sampling information, and analysis.
C. Engagement objectives, procedures, and conclusions.
D. Engagement objectives, procedures, facts, conclusions, and recommendations.
D. Engagement objectives, procedures, facts, conclusions, and recommendations.
Competent evidence is best defined as evidence which
A. Proves an intermediate fact, or group of facts, from which still other facts can be interred.
B. Is reasonably tree from error and bias and faithfully represents that which it purports to represent.
C. Is supplementary to other evidence already gathered and which tends to strengthen or confirm it.
D. Is obtained by observing people. property, and events.
B. Is reasonably tree from error and bias and faithfully represents that which it purports to represent.
Which of the tests provides the least significant information when testing for suspected fraudulent sales?
A. Confirming sales transactions with customers and investigating nonresponses.
B. Performing analysis of write-offs and sales returns, and comparing the amounts over the past several years.
C. Performing analytical tests of sales by comparing sales and gross margins over time, D. Tracing a sample of Inventory removal slips from inventory through billing to the sales journal.
D. Tracing a sample of Inventory removal slips from inventory through billing to the sales journal.
While interviewing a data input clerk, an auditor identifies a potentially significant weakness in a system The auditor should
A. Avoid any further mention of the weakness.
B. Ask the clerk about the weakness and determine immediately ¡f the finding should be reported.
C. Schedule a second interview and use other means to determine if the weakness actually exists.
D. Ask indirect questions that will help elicit more factual information relating to the potential weakness.
D. Ask indirect questions that will help elicit more factual information relating to the potential weakness.
Which of the following are least valuable in predicting the amount of uncollectible accounts for an organization?
A Published economic indices indicating a general business downturn.
B. Total monthly sales for each of the past six months.
C. Dollar amounts of accounts actually written of? by the organization for each of the past six months.
D. Written forecasts (rom the credit manager regarding expected future cash collections.
D. Written forecasts (rom the credit manager regarding expected future cash collections.
The number-of-days-receivables-held ratio may be understated if the company
A. Does not use average receivables In the ratio calculation.
B. Uses average receivables in the ratio calculation. C. Uses a natural business year for its accounting period.
D. Uses a calendar year for its accounting period.
D. Uses a calendar year for its accounting period.
An Internal auditor is planning to use PPS (Probability-Proportional-Size) sampling for testing the dollar value of a large accounts receivable population. The advantages of using PPS sampling include all of the following except
A. It is an efficient model for establishing that a low error rate population is not materially misstated.
B. It does not require the normal distribution approximation required by variables sampling.
C. It can be applied to a group of accounts because the sampling units are homogenous.
D. it results in a smaller sample size than classical variables sampling for larger numbers of misstatements.
D. it results in a smaller sample size than classical variables sampling for larger numbers of misstatements.
The chief audit executive (CAE) is reviewing the working papers produced by an internal auditor during a fraud investigation. Among the items contained in the working papers is a description of an item of physical information. Which of the following is the most probable source of this item of
information?
A. Computing variances.
B. Interviewing people. C. Observing conditions.
D. Examining records,
C. Observing conditions.
Which one of the following statements about sampling is hue?
A. For a given sample size, a simple random sample always produces the most representative sample B. For very large populations, the absolute size of the sample has more Impact on the precision of its results than does its size relative to its population.
C. A larger sample Is always more representative of the underlying population than a smaller sample
D. The limitations of an incomplete sample frame can almost always be overcome by careful sampling techniques
B. For very large populations, the absolute size of the sample has more Impact on the precision of its results than does its size relative to its population.
