Which of the following can aid in measuring the effectiveness of an internal audit

function?
Pareto principle
Stevens’ Power
Law
Gresham's Law
Kano principle
Incorrect. The Pareto principle states that there are vital few (20%) and trivial
many (80%) things in the world.
Incorrect. The Stevens’ Power Law states that there are four types of scales
that can be used to define how things or data can be measured, arranged, or
counted. These scales include nominal, ordinal, interval, and ratio scales, and
these scales are used in big-data analytics, as data counting methods.
Incorrect. The Gresham's Law of planning states that managers pay more
attention and put more time and effort into planning programmed activities
(i.e., routine and simple tasks) than planning for nonprogrammed activities
(i.e., rare and complex tasks).
Correct. The Kano principle can be applied to a feedback process from audit
clients using three rating scales such as satisfied, neutral, and dissatisfied for
measuring the effectiveness of internal audit function.

The chief audit executive (CAE) of a company is aware of a material inventory shortage caused
by internal control deficiencies at one manufacturing plant. The shortage and related causes are
of sufficient magnitude to impact the external auditor's report. Based on the IIA Code of Ethics,
identify the CAE's most appropriate course of action:

Say nothing; guard against interfering with the independence of the external auditors.
Discuss the issue with management and take appropriate action to ensure that the external
auditors are informed.

Inform the external auditors of the possibility of a shortage but allow them to make an
independent assessment of the amount.

Report the shortages to the board of directors and allow them to report it to the external
auditor.
Incorrect. This is a material fact that could distort a report of operations if not
revealed.
Correct. The IIA Code of Ethics calls for compliance with the Standards, which
charge the CAE with coordination with external auditors and exchanging
information. In addition, the Code of Ethics requires that all material facts
known be revealed. Since coordination impacts the external auditor's work, in
which the internal auditors are participating, the situation must be divulged.
Incorrect. The shortage is known, and the external auditors should be told
more than that there is a possibility.
Incorrect. The CAE should discuss the issue with management first and later
with the board of directors. The CAE can report these issues directly with the
external auditors.