IA review for FINALS

1 & 2. During a year-end planning meeting with senior management, the director of internal
auditing learns that a recent draft audit report on one of the company’s inventory costing
systems had provoked a discussion in the accounting area. The audit report proposed a
relatively large adjustment due to an error in the local inventory system. The auditor’s
conclusion stated that six other production facilities using the same costing system would
require similar inventory adjustments. The total required adjustment for all seven locations
represented a material adjustment to the financial statements, according to the chief financial
officer (CFO). The CFO questioned the method used by the auditor to calculate the amount of
the inventory adjustment and asked the director of internal auditing to delay processing the
audit report until all aspects of the finding had been fully considered. The director of internal
auditing reports directly to the CFO. The audit committee has not been apprised of this audit
because the audit report is still in draft stage awaiting management comment.
Assuming that there is a meeting later the same day with the audit committee of the board,
which of the following is not a responsibility of the director of internal auditing?
A. Inform the audit committee of senior management's decisions on all significant audit
findings.
B. Highlight significant audit findings and recommendations and report on the approved audit
work schedule.
C. Inform the audit committee of the outcome of earlier meetings with the CFO and the
options being considered for recording the inventory adjustment.
D. Attempt to resolve the inventory issue before reporting the finding to the audit committee.

2. Which of the following actions should the director take?

A. Schedule audits to review the inventory costing systems of all locations after year-end.
B. Recall all copies of the draft report….for management review.
C. Tell the representative of senior management.
D. Offer to review the basis for the conclusions about the inventory evaluation at all locations.
3&4
The director of internal auditing of a midsize internal auditing organization was concerned that
management might outsource the internal auditing function. Therefore, the manager adopted a
very aggressive program to promote the internal auditing department within the organization.
The manager planned to present the results to management and the audit committee and
recommend modification of the Internal Audit Charter after using the new program. The
following lists six actions the audit manager took to promote a positive image within the
organization:
1. Audit assignments concentrated on economy and efficiency audits. The audits focused solely
on cost savings, and each audit report highlighted potential costs to be saved. Negative findings
were omitted. The focus on economy and efficiency audits was new, but the auditees seemed
very happy.
2. Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their
comments were carefully considered when developing the final audit report.
3. The information technology auditor participated as part of a development team to review
the control procedures to be incorporated into a major computer application under
development.
4. Given limited resources, the audit manager performed a risk analysis to determine which
locations to audit.
This was a marked departure from the previous approach of ensuring that all operations are
reviewed at least every three years.
5. In order to save time, the manager no longer required that a standard internal control
questionnaire be completed for each audit.
6. When the auditors found that management and the auditee had not developed specific
criteria or data to evaluate the operations of the auditee, the audit team was instructed to
perform research, develop specific criteria, review the criteria with the auditee, and, if
acceptable, use that criteria to evaluate the auditee’s operations. If the auditee disagreed with
the criteria, a negotiation took place until acceptable criteria could be agreed on. The audit
report commented on the auditee’s operations in conjunction with the agreed-on criteria.
3. Which of the following elements of Action 1 taken by the audit manager would be
considered a violation of the IIA Standards?
I. The type of audits was changed before modifying the charter and going to the audit
committee.
II. Negative findings were omitted from the audit reports.
III. Cost savings and recommendations were highlighted in the report.
Answers
A. I and II.
B. I and III.
C. I only.
D. II and III.
4. Which would be considered a violation of the IIA Standards?
A. Actions 2, 3, and 4.
B. Action 4 only.
C. Action 2 and 3 only.
D. None of the actions.
5. Is action 5 a violation of the IIA Standards?
A. Yes, internal control should be evaluated on every audit, but the internal control
questionnaire is not the mandated approach to evaluate the controls
B. No, Auditors may omit 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 & the internal
control questionnaire is the most efficient method to do so.
D. No, Auditors are not required to fill out internal control questionnaire.
6. Reg. Action 6, which of the following elements of the actions would be considered a violation
to the IIA Standards?
A. Failing to report the lack of criteria to appropriate level of management
B. Developing a set of criteria to the auditee as a basis for evaluating the auditee’s
operations.
C. Communicating on the agreed-on criteria.
D. All of the above.
7. The extent of loans made no fictitious borrowers by the loan officer could be best
determined by
A. Reviewing a representative sample of loan officer’s for properly compliance with
bank policies & procedures.
B. Reviewing a representative sample of loan files properly completed documents such
as loan agreements credit approvals and approval of secured collateral.
C. Comparing the current loan approval balances with those of prior years,
D. Required positive confirmation for all outstanding loans made by loan officer.
8. The preliminary survey indicates that severe staff reductions at the engagement location
have resulted in extensive amounts of overtime among accounting staff. Department members
are visibly stressed and very vocal about the effects of the cutbacks. Accounting payrolls are
nearly equal to prior years, and many key controls, such as segregation of duties, are no longer
in place. The accounting supervisor now performs all operations within the cash receipts and
posting process and has no time to review and approve transactions generated by the
remaining members of the department. Journal entries for the last 6 months since the staff
reductions show increasing numbers of prior-month adjustments and corrections, including
revenues, cost of sales, and accruals that had been misstated or forgotten during month-end
closing activity. The internal auditor should
A. Discuss these findings with audit management to determine whether further work
audit.
B. Proceed to the scheduled audit but add audit personnel based on experience, no. of
finding, and anticipate 2 lack of assistance from accounting management.
9. & 10.
Paragraph 1: The production department has the newest production equipment available
because of a fire that required the replacement of all equipment.
Paragraph 2: The members of the production department have become completely
comfortable with the state of the- art technology over the past year and a half. As a result, the
production department has become an industry leader in production efficiency and
effectiveness.
Paragraph 3: The production department produces an average of 25 units per worker per shift.
The defect rate is 1%.
Paragraph 4: The industry average productivity is 20 units per worker per shift. The industry
defect rate is 3%.
9. Which paragraph would be characterized as the attribute described in the IIA Standards as
“Criteria”?
A. 1
B. 2
C. 3
D. 4
10. Which paragraph would be characterized as the attribute described in the IIA Standards as
“Condition”?
A. 1
B. 2
C. 3
D. 4
11. & 12. An internal audit team recently completed an audit of the company’s compliance with
its lease-versus-purchase policy concerning company automobiles. The audit report noted that
the basis for several decisions to lease rather than purchase automobiles had not been
documented and was not auditable. The report contained a recommendation that operating
management ensure that such lease agreements not be executed without proper
documentation of the basis for the decision to lease rather than buy. The internal auditors are
about to perform follow-up work on this audit report.
The primary purpose for performing a follow-up review is to
A. Ensure timely consideration of the internal auditors' recommendations.
B. Ascertain that appropriate action was taken on reported findings.
C. Allow the internal auditors to evaluate the effectiveness of their recommendations.
D. Document what management is doing in response to the audit report and close the
audit file in a timely manner.
12. Assume that senior management has decided to accept the risk involved in failure to
document the basis for lease versus-purchase decisions involving company automobiles. In such
a case, what would be the auditors’ reporting obligation?
A. The auditors have no further reporting responsibility.
B. Management’s decision & the auditor’s concern should be reported to the
company’s Board of Directors.
C. The auditors should issue a follow-up report to management clearly stating rationale
for the recommendation that the basis for lease-versus purchase decision be
properly documented.
D. The auditors should inform the External Audit & any responsible regulatory agency
that no action has been taken on the finding in question.
13. Given the acceptance of the cost savings audits and the scarcity of internal audit resources,
the audit manager also decided that follow-up action was not needed. The manager reasoned
that cost savings should be sufficient to motivate the auditee to implement the auditor’s
recommendations. Therefore, follow-up was not scheduled as a regular part of the audit plan.
Does the audit manager’s decision violate the Standards?
A. No, The Standards do not specify whether following is needed.
B. Yes, The Standards require the auditors to determine whether the auditee has
appropriately implemented all of the auditor’s recommendations.
C. Yes, Scarcity of resources is not sufficient reason to omit following-up action.
D. No, when there is evidence of sufficient motivation by the auditee, there is no need
for follow-up action.
14. When determining the number and experience level of the internal audit staff to be
assigned to an audit, the director should consider all of the following except the:
A. Complexity of the audit assignment.
B. Available audit resources.
C. Training needs for Internal Audits.
D. Lapsed time since the last audit.
15. An internal audit of sales contracts revealed that a bribe had been paid to secure a major
contract. It was considered possible that a senior executive had authorized the bribe. Which of
the following best describes the proper distribution of the completed audit report?
A. The report should be distributed to the chief executive officer and the appropriate regulatory
agency.
B. The report should be distributed to the board of directors, the chief executive officer, and
the independent auditor.
C. The director of internal auditing should provide the board of directors a copy of the report
and decide whether further distribution is appropriate.
D. The report should be distributed to the board of directors, the appropriate law enforcement
agency, and the appropriate regulatory agency.
16. An inexperienced Internal Auditor notified the senior auditor of a significant variance from
the auditee’s budget. The senior told the new auditor not to worry as 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 auditor should have investigated the matter fully and not bothered the
senior.
B. The senior used proper judgement in curtailing what could have been a wasteful
investigation.
C. The senior should have halted the audit until the variance was fully explained.
D. The senior should have aided the new auditor in formulating a plan for accumulating
appropriate evidence
17. The director of Internal Auditor for a large retail organization reports to the controlled & is
responsible for disclosing for designing & installing computer applications relating to inventory
control. Which of the following is the major limitation of this arrangement?
C. It potentially affects the director’s independence & thereby lessens the value of
audit services.
D. Such arrangements are unlawful because the director participates.
18. During testing of the effectiveness of inventory controls, the auditor makes a note in the
working papers that most of the cycle count adjustments for the facility involved transactions of
the machining department. The machining department also had generated an extraordinary
number of cycle count adjustments in comparison to other departments last year. The auditor
should
A: Interview management and apply other audit techniques to determine whether transaction
controls and procedures within the machining department are adequate.
B: Do no further work because the concern was not identified by the analytical procedures
designed in the audit program.
C: Notify internal audit management that fraud is suspected.
D: Place a note in the working papers to review this matter in detail during the next review.
19. After using the same public accounting firm for several years, the board of directors
retained another public accounting firm to perform the annual financial audit in order to reduce
the annual audit fee. The new firm has now proposed a onetime audit of the cost-effectiveness
of the various operations of the business. The director of internal auditing has been asked to
advise management in making a decision on the proposal.
An argument can be made that the internal auditing department would be better able to
perform such an audit because An engagement can be made that the Internal Auditing
department would be better able to perform such an audit because?
A. External Auditors may net possess the same depth of understanding of the company
as the Internal Auditors.
B. Internal Auditor are required to be objective in performing audits.
C. Audit techniques used by internal auditors are different from those used by external
auditors.
D. Internal auditors will not be vitally concerned with fraud and waste.
20. Additional criteria that should be considered by management in evaluating the prosed
would include all the followings except.
A: Existing expertise of internal auditing staff.
B: Overall cost of the proposed audit.
C: The need to develop in-house expertise.
D. The external auditor’s required adherence to the single audit concept
21. A significant part of the auditor’s working papers will be the conclusions reached by the
auditor regarding the audit area. In some situations, the supervisor might not agree with the
conclusions and will ask the staff auditor to perform more work. Assume that after subsequent
work is performed, the staff auditor and the supervisor continue to disagree on the conclusions
documented in the working paper developed by the staff auditor. Which of the following audit
department responses would not be appropriate? Which of the following audit dept. responses
would not be appropriate?
A. Both the staff auditor and the supervisor document their reasons for reaching different
conclusions. Retain the rationale of both parties in the working papers.
B. Note the disagreement and retain the notice of disagreement and follow-up work in the
audit working papers.
C. Present both conclusions to the director of internal auditing for resolution. The director may
resolve the matter.
D. Present both conclusions in the audit report & let management & the auditee
22. During an audit of purchasing, internal auditors found several violations of company policy
concerning competitive bidding. The same condition had been reported in an audit report last
year, and corrective action had not been taken. Which of the following best describes the
appropriate action concerning this repeat finding?
A. The audit report should note that this same condition had been reported in the prior audit.
B. During the exit interview, management should be made aware that a finding from the prior
report had not been corrected.
C. The director of internal auditing should determine whether management or the board has
assumed the risk of not taking corrective action.
D. The director of internal auditing should determine whether this condition should be reported
to the independent auditor and any regulatory agency.
23. During the year-end physical inventory process, the auditor observed over $1.2 million
worth of items staged in the shipping area and marked “Sold—Do Not Inventory.” The
customer had been on credit hold for three months because of bankruptcy proceedings, but
the sales manager had ordered the shipping supervisor to treat the inventory as sold for
physical inventory purposes. The auditor noted the terms of sale were “FOB Warehouse.” After
confirming no change in corporate policy, the auditor should
A. Recommend that the inventory staged in the shipping area be counted and included along
with the rest of the physical inventory results.
B. Make test counts and trace the results to appropriate records to ensure that the cost is
properly relieved from inventory.
C. Follow up with appropriate procedures to ensure that the inventory staged in the shipping
area appears on related invoicing documentation.
D. Request copies of the signed bills of lading to include with working papers for this physical
inventory.
For 24 and 25
As an internal auditor for a multinational chemical company, you have been assigned to
perform an operational audit at a local plant. This plant is similar in age, sizing, and construction
to two other company plants that have been cited recently for discharge of hazardous wastes.
In addition, you are aware that chemicals manufactured at the plant release toxic by-products.

24. Assume that you have evidence that the plant is discharging hazardous wastes. As a
certified Internal Auditor, what is the appropriate reporting requirement in this situation?
A. Send a copy of your audit report to the appropriate regulatory agency
 B. Ignore the issue; the regulatory inspectors are better qualified to assess the danger.
C. Issue an interim report to the appropriate levels of management.
D. Note the issue in your working papers, but do not report it.
25. Identify your responsibility for detection of hazardous waste discharge problem.
A. You have no responsibility; it is the concern of the appropriate governmental
agency.
B. You are responsible for ensuring compliance with company policies and
procedures.
C. Operational audits do not require a determination of compliance with laws and
regulations.
D. You are required by the Standards to determine compliance with laws and
regulations
26. Which of the following relationships best depicts the appropriate dual reporting
responsibility of the internal auditor? Administratively to the
A. Board of directors, functionally to the Chief Executive Officer
B. Controller, functionally, to the Chief Financial Officer
C. CEO, functionally, to the Board of Directors
D. CEO, functionally, to the External auditor.
27. The director of internal auditing routinely provides activity reports to the board as part of
the board meeting agenda each quarter. Senior management has asked to review the director’s
board presentation before each board meeting so that any issues or questions can be discussed
beforehand. The director should
A. Provide the activity report to senior management as requested & discuss any issues
that may require action to be taken.
B. Not provide activity reports to senior management because such matters are the
sole province of the board.
C. Disclose only those matters in the activity
D. Provide information to senior management that pertains only to completed audits
and findings available in published audit reports.
28. You transferred from the treasury department to the internal auditing department of the
same company last month. The chief financial officer of the company has suggested that since
you have significant knowledge in this area, it would be
a good idea for you to immediately begin an audit of the treasury department. In this
circumstance you should
A. Accept the audit engagement and begin work immediately
B. Discuss the need for such an audit with your former superior, the treasurer.
 C. Suggest that the audit be performed by another members of the internal auditing
staff.
D. Officer to prepare an audit program but suggest that interviews with your former
coworkers be conducted by other members of the internal auditing staff.
29. You have been asked to be a member of a peer review team. In assessing the
independence of the internal audit department being reviewed, you should consider all of the
following factors except:
A. Access to & frequency of communications with the board of directors or its audit
committee.
B. The criteria of education and experience considered necessary when filling vacant
positions on the audit staff
C. The degree to which auditors assume operating responsibilities
D. The scope and depth of audit objectives for the audits included in the review.
30. Adequate internal controls are most likely to be present if
A. Management has planned & organized in a manner that provides reasonable
assurance that the organization’s objectives & goals will be achieved efficiently &
economically
B. Management has exercised due professional care in the design of operating and
functional systems
C. Operating and functional systems & designed installed & implemented in
compliance with law
D. Management has designed, installed and implemented efficient operating &
functional systems.
31. An internal audit director initiated an audit of the corporate code of ethics and the
environment for ethical decision making. Which of the following would most likely be
considered inappropriate regarding the scope and/or recommendations of the audit?
A. A review of the corporate code of ethics and a comparison to other corporate
codes.
B. A survey of corporate employees, asking general questions regarding the ethical
quality of corporate decision making.
C. Administrative of an anonymous “ethics test“ to determine if employees know of
unethical behavior or have acted unethically themselves.
D. A survey of the Board of Directors to determine members level of support for a
corporate code of ethics
32. A company’s management accountants prepared a set of reports for top management.
These reports detail the funds expended and the expenses incurred by each department for the
current reporting period. The function of internal auditing would be to
A. Ensure against any and all noncompliance of reporting procedures.
B. Review the expenditure items and match each item with the expenses incurred.
C. Determine if there are any employees expending funds without authorization.
D. Identify inadequate controls that increase the likelihood of unauthorized expenditures.
33. When faced with an imposed scope limitation, the director of internal auditing should?
A. Refuse to perform the audit until the scope limitation is removed
B. Communicate the potential effects of the scope limitation to the audit committee
of the Board of Directors
C. Increase the frequency of auditing the activity in question
D. Assign more experienced personnel to the engagement.
34. A director of internal auditing has to determine how an organization can be divided into
auditable activities. Which of the following is an auditable activity?
A. A procedure.
B. A system.
C. An account.
D. All of the above.
35. The internal auditing department for a chain of retail stores recently concluded an audit of
sales adjustments in all stores in the southeast region. The audit revealed that several stores
are costing the company an estimated $85,000 per quarter in duplicate credits to customers’
charge accounts. The audit report, published eight weeks after the audit was concluded,
included the internal auditors’ recommendations to store management that should prevent
duplicate credits to customers’ accounts. Which of the following standards for reporting has
been disregarded in the above case?
A. The follow-up actions were not adequate.
B. The auditors should have implemented appropriate corrective action as soon as the
duplicate credits were discovered.
C. Auditor recommendation should not be included in the report.
D. The report was not timely
36. In the past, the internal auditing department of XYZ Company designed and installed
computerized systems for the company. A newly appointed member of the audit committee
has questioned the auditing department’s independence due to its performance of that activity.
Which of the following actions would best satisfy the committee’s concern regarding
independence?
 A. The internal audit department should continue to design and install other computer
systems as long as the internal audit staff possesses the expertise to do so.
B. The internal audit department should refrain from designing and installing any
computer systems for their organization in the future.
C. The internal audit department should not assign those internal auditors who
designed and installed the payroll system to audit the payroll area.
D. The internal audit department should refrain from operating and drafting
procedures for any of its organization's systems.
37. An internal auditor reported a suspected fraud to the director of internal auditing. The
director turned the entire case over to the security department. Security failed to investigate or
report the case to management. The perpetrator continued to defraud the organization until
being accidentally discovered by a line manager two years later. Select the most appropriate
action for the audit
A. The director's actions were correct.
B. The director should have periodically checked the status of the case with Security.
C. The director should have conducted the investigation.
D. The director should have discharged the perpetrator.
38. An Internal Auditor observes that a receivables clerk has physical access to & control of cash
receipt. The auditor worked with the clerk several years before & has a high level of trust in the
individual. Accordingly, the auditor notes in the working papers that controls over receipts are
the adequate. Is the auditor in compliance with the standards?
A. Yes, reasonable care has been noted.
B. No, irregularities were not noted
C. No, alertness to condition where irregularities are most likely was not shown.
D. Yes, the working papers were annotated
39. The internal auditing department has concluded a fraud investigation that revealed a
previously undiscovered materially adverse impact on the financial position and results of
operations for two years on which financial statements have already been issued. The director
of internal auditing should immediately inform
A. The external audit firm responsible for the financial statements affected by the
discovery.
B. The appropriate governmental or regulatory agency.
C. Appropriate management & audit committee of the Board of Directors.
D. The internal accounting function
40. A professional engineer applied for a position in the internal auditing department of a high-
technology firm. The engineer became interested in the position after observing several
internal auditors while they were auditing the engineering department. The director of internal
auditing
A. Should not hire the engineer because of the lack of knowledge of internal auditing
standards.
B. May hire the engineer in spite of lack knowledge of Internal auditing standards.
C. Should not hire the engineer because of the lack of knowledge of a accounting
D. May hire the engineer because of the knowledge of internal auditing gained in the
previous position.