Quizlet Week 4 Lisud

"the safest place to be is within the
will of god."
thursday, november 4, 2010
Statistical Sampling for Substantive Testing
Statistical Sampling for Substantive Testing
MULTIPLE CHOICE:
1. In applying variables sampling, an auditor attempts to
a. Estimate a qualitative characteristic of interest. b. Determine

various rates of occurrence for specified attributes. c. Discover at
least one instance of a critical error. d. Predict a monetary
population value within a range of precision.
ANSWER: D
2. The measure of variability of a statistical sample that serves as

an estimate of the population variability is the
a. Basic precision. b. Range. c. Standard deviation. d. Interval.
ANSWER: C
3. An auditor selects a statistical sample from a large inventory of

replacement parts. Which of the following audit objectives would be
most appropriate if the sampling method used is probability
proportional to size (PPS)?
a. The auditor plans to estimate the total dollar value of the

inventory when a recorded book value does not exist.
b. The auditor plans to make a statement concerning the total dollar
amount of error in the population from the recorded book value. c.
The auditor wishes to accept or reject the hypothesis that the
proportion of defective parts in the population is less than 5%. d.
The auditor wishes to estimate the proportion of defective parts in
the population.
ANSWER: B
4. Precision is defined as the range (plus or minus) within which the

true answer most likely falls. Reliability, also referred to as the
confidence level, is the likelihood that the sample range
contains the true value. Of the following statements
concerning precision and reliability, which one is not true?
a. Precision is set by the auditor and is a function of

materiality and risk.
b. The narrower the range of precision, the smaller the sample

size.
c. An increase in control risk, other parameters remaining

unchanged, causes a narrowing of the precision range.
d. Overall audit risk is the complement of reliability.
ANSWER: B
5. In an application of mean per unit sampling, the following

information has been obtained:
Reported book value $600,000 Point estimate (estimated

total value) 591,000 Allowance for sampling risk
(precision) +- 22,000 Tolerable error +- 45,000
The appropriate conclusion would be that the reported book value is

a. Acceptable only if the risk of incorrect rejection is at least twice
the risk of incorrect acceptance. b. Acceptable. c. Not acceptable. d.
Acceptable only if the risk of incorrect acceptance is at least twice
the risk of incorrect rejection.
ANSWER: B
6. Sampling risk refers to the possibility that:
a. The auditor may use a less than optimal statistical method for the
circumstances, e.g. difference estimation instead of ratio
estimation. b. The auditor may fail to recognize an error that is
included in the sample. c. Even though a sample is properly chosen,
it may not be representative of the population. d. The confidence
level and/or precision established by the auditor are not
appropriate.
ANSWER: C
7. The primary reason for an auditor to use statistical sampling is to
a. Obtain a smaller sample than would be required by non-statistical

sampling techniques. b. Obtain a sample more representative of the
population than would be obtained by non-statistical sampling
techniques. c. Allow the auditor to quantify, and therefore control,
the risk of making an incorrect decision based on sample evidence.
d. Meet requirements of Statements on Auditing Standards.
ANSWER: C
8. The variability of a population, as measured by the standard

deviation, is the
a. Extent to which the individual values of the items in the

population are spread about the mean. b. Degree of asymmetry of a
distribution. c. Tendency of the means of large samples (at least 30
items) to be normally distributed. d. Measure of the closeness of a
sample estimate to a corresponding population characteristic.
ANSWER: A
9. Management has asked the internal auditing staff to evaluate the

efficiency of the accounts payable system, particularly whether it
would be economically feasible to reduce the number of discounts
lost through slow payment. The audit staff decides that it needs to
determine the amount currently being lost and can do so by taking
a sample from payments made in the last six months, examining
each, and recording the amount, if any, of the discount lost. This
information can be used to project the total amount of discounts
lost for the period. This proposed plan is an example of
a. Attribute sampling. b. Acceptance sampling. c. Variables

sampling. d. Discovery sampling.
ANSWER: C
10. During an audit involving testing of accounts receivable

balances, an auditor decides to specify a precision interval of
$100,000 instead of the $200,000 precision interval that was called
for in the sampling plan contained in the audit program. Which of
the following would be a result of the auditor's decision to narrow
the precision interval?
a. An increase in the required sample size. b. A decrease in the

required sample size. c. An increase in the population standard
deviation. d. A decrease in the population standard deviation.
ANSWER: A
11. To determine the number of items to be selected in a sample for
a particular substantive test of details, the auditor should consider
all of the following except
a. Tolerable error. b. Expected error. c. Allowable risk of incorrect

acceptance. d. Characteristics of the population.
ANSWER: D
12. Sample size
a. Increases with the use of higher confidence levels. b. Decreases

with the use of higher confidence levels. c. Remains unchanged with
changes in confidence levels. d. Increases with the use of lower
confidence levels.
ANSWER: A
13. In sampling for variables, which of the following must be
known in order to estimate the appropriate sample size required to

meet the auditor's needs in a given situation?
a. The total amount of the population. b. The desired standard

deviation. c. The desired confidence level. d. The estimated rate of
error in the population.
ANSWER: C
14. In a variables sampling application, which of the following will

result when the confidence level is changed from 90% to 95%?
a. Standard error of the mean will not be affected. b. Non-sampling

error will decrease. c. Sample size will increase. d. Point estimate of
the arithmetic mean will increase.
ANSWER: C
15. An auditor wishes to estimate inventory shrinkage by weighing
a sample of inventory items. From past experience, the auditor
knows that a few specific items are subject to unusually large
amounts of shrinkage. In using statistical sampling, the auditor's
best course of action is to
a. Eliminate any of the items known to be subject to unusually large

amounts of shrinkage. b. Increase the sample size to lessen the
effect of the items subject to unusually large amounts of shrinkage.
c. Stratify the inventory population so that items subject to
unusually large amounts of shrinkage are reviewed separately. d.
Continue to draw new samples until a sample is drawn which
includes none of the items known to be subject to large amounts of
shrinkage.
ANSWER: C
16. In conducting a substantive test of an account balance, an

auditor hypothesizes that no material error exists. The risk that
sample results will support the hypothesis when a material error
actually does exist is the risk of
a. Incorrect rejection. b. Alpha error. c. Incorrect acceptance. d.

Type I error.
ANSWER: C
17. Which of the following best illustrates the concept of sampling

risk?
a. A randomly chosen sample may not be representative of the

population as a whole on the characteristic of interest.
b. An auditor may select audit procedures that are not appropriate

to achieve the specific objective. c. An auditor may fail to recognize
errors in the documents examined for the chosen sample. d. The
documents related to the chosen sample may not be available for
inspection.
ANSWER: A
18. Using the following results from a variables sample, compute

the achieved precision:
Population size = 10,000 Sample size = 144 Sample standard

deviation = $24.00 Confidence level = 90% (Z = 1.65) Mean =
$84.00
a. $5,702 b. $33,000 c. $20,000 d. $16,500
ANSWER: B
19. Which of the following sampling plans would be designed to

estimate a numerical measurement of a population, such as a dollar
value?
a. Discovery sampling. b. Numerical sampling. c. Sampling for

variables. d. Sampling for attributes.
ANSWER: C
20. An auditor is using the mean-per-unit method of variables

sampling to estimate the correct total value of a group of inventory
items. Based on the sample, the auditor estimates with precision of
+-4% and confidence of 90% that the correct total is $800,000.
This means that:
a. There is a 4% chance that the actual correct total is less

than $720,000 or more than $880,000. b. There is a 10%
chance that the actual correct total is less than $768,000 or
more than $832,000. c. The probability that the inventory is
not significantly overstated is between 6% and 14%.
d. The inventory is not likely to be overstated by more than

4.4% ($35,200) nor understated by more than 3.6%
($28,800).
ANSWER: B
21. Which of the following statements is correct concerning the

auditor's use of statistical sampling?
a. An auditor needs to estimate the dollar amount of the standard

deviation of the population to use classical variables sampling. b. An
assumption of PPS sampling is that the underlying accounting
population is normally distributed. c. A classical variables sample
needs to be designed with special considerations to include negative
balances in the sample. d. The selection of zero balances usually
does not require special sample design considerations when using
PPS sampling.
ANSWER: A
22. Which of the following statements concerning alpha and beta

risk is true?
a. As alpha risk increases, beta risk decreases.
b. As inherent risk and/or control risk increase, beta risk

should also increase.
c. As inherent risk and/or control risk increase, beta risk

should decrease.
d. As a "rule of thumb," the auditor generally sets beta risk
equal to or less than 10%, inasmuch as it is the basis for
the audit opinion.
ANSWER: C
23. Statistical samples as compared to non-statistical samples

permit the auditor to
a. Quantify and control sampling risk. b. Eliminate non-sampling

errors of every type. c. Obtain smaller sample sizes in all cases. d.
Use less complex formulas than those required to evaluate non-
statistical samples.
ANSWER: A
24. Probability-proportional-to-size (PPS) sampling is less efficient if
a. Computerized account balances are being audited. b. Statistical

inferences are to be made. c. The audit objective is oriented to
understatements. d. The account contains a large number of
transactions.
ANSWER: C
25. A number of factors influences the sample size for a substantive

test of details of an account balance. All other factors being equal,
which of the following would lead to a larger sample size?
a. Lowering of assessed level of control risk. b. Lowering of

assessed inherent risk through use of analytical review procedures.
c. Smaller expected frequency of errors. d. Smaller measure of
tolerable error.
ANSWER: D
26. For variables sampling purposes, changes in certain parameters
affect sample size positively while changes in others have a
negative effect. In this regard, which of the following
statements is true?
a. An increase in beta risk reduces sample size.
b. Population size affects sample size inversely, i.e., as

population size increases, sample size decreases.
c. An increase in alpha risk increases sample size.
d. As materiality (M) increases, sample size increases.
ANSWER: A
27. A population that is physically separated into two or more

groups based on the sample variation being less than that
for the entire population is called a
a. Systematic sample. b. Judgment sample. c. Simple random

sample. d. Stratified sample.
ANSWER: D
28. The standard deviation of a sample will usually decrease with
a. A decrease in sample size. b. The use of stratification. c. An

increase in desired precision. d. An increase in confidence level.
ANSWER: B
29. An auditor is primarily concerned with substantial

overstatements of accounts receivable balances and expects few, if
any, errors. In an effort to concentrate on the large dollar values,
the auditor would logically employ
a. Ratio estimation. b. Probability proportional to size sampling c.
Discovery sampling. d. Mean per unit sampling.
ANSWER: B
30. Consider the following sampling plan: An auditor took a sample

of 30 receiving reports completed in the last 12 months. The
receiving reports were filed along with their corresponding
requisitions and purchase orders by the date on which the goods
were moved from the receiving department to their storage area in
the warehouse. Sampling from a five-place random digit table, the
first two digits were used to determine the month (from 1 to 12)
and the next two digits to determine the day of the month (from 1
to 31). The auditor discarded random numbers for which
corresponding dates did not exist or on which the warehouse was
closed. For each selected date the auditor then took as the sample
item the second report in the file for that day. Can the auditor rely
on the statistical inference of this test?
a. Yes, because the plan eliminated any possible deliberate or

unconscious bias in the auditor's selection of the sample items. b.
Yes, because a random number table was used to make the
selection. c. No, because the auditor sampled without replacement.
d. No, because all items do not have an equal chance of being
selected.
ANSWER: D
31. In testing accounts receivable, an auditor sends out positive

confirmation requests to 100 randomly selected customers. A
customer returns the confirmation indicating that the balance is
correct when, in fact, the balance is overstated. This is an example
of
a. Tainting. b. Sampling error. c. Standard error. d. Non-sampling
error.
ANSWER: D
32. An auditor wishes to use stratified sampling to estimate the

book value of a large accounts receivable file. The auditor has a
complete listing of the file in account number order. The listing is
several pages long and includes the account balance of each
customer. Several customers have very large account balances
while most balances are small. Which of the following would be the
most appropriate means of classifying members of this population
into strata?
a. Account balance. b. Account number. c. Alphabetically by name.

d. Numerically by pages of the listing.
ANSWER: A
33. Auditors who prefer statistical to non-statistical sampling believe

that the principal advantage of statistical sampling flows from its
unique ability to
a. Define the precision required to provide adequate satisfaction. b.

Provide a mathematical measurement of risk.
c. Establish conclusive audit evidence with decreased audit effort. d.

Promote a more legally defensible procedural approach.
ANSWER: B
34. In a probability-proportional-to-size sample with a sampling

interval of $10,000, an auditor discovered that a selected account
receivable with a recorded amount of $5,000 had an audit amount
of $2,000. The projected error of this sample was
a. $3,000 b. $4,000 c. $6,000 d. $8,000
ANSWER: C
35. An auditor selects a preliminary sample of 100 items out of a

population of 1,000 items. The sample statistics generate an
arithmetic mean of $60, a standard deviation of $6, and a
standard error of the mean of $.60. If the sample was
adequate for the auditor's purposes and the auditor's desired
precision was plus or minus $1,000, the minimum acceptable
dollar value of the population would be
a. $61,000. b. $60,000. c. $59,000. d. $58,800.
ANSWER: C
36. During the audit of inventories an external auditor specified a

precision of five percent instead of the four percent contained in the
preliminary audit program. What would be the impact of the change
in precision?
a. A decrease in population standard deviation. b. An increase in

population standard deviation. c. A decrease in required sample
size. d. An increase in required sample size.
ANSWER: C
37. The inventory of a subsidiary consists of 12,980 items valued at

$19,625,000. The inventory data are not available in computer
readable form, but are contained in 217 pages of printout with 60
lines per page. Each page has a page total. Based on the last audit,
the auditor expects there to be a few errors of overstatement. The
most efficient
sampling technique to test the reasonableness of the stated value is

a. Stratified mean-per-unit estimation. b. Probability proportional to
size sampling (PPS) c. Difference estimation. d. Ratio estimation.
ANSWER: B
38. Statistical sampling would be appropriate to estimate the value

of an auto dealer's 3,000 line-item inventory because statistical
sampling is:
a. Reliable and objective. b. Thorough and complete. c. Thorough

and accurate. d. Complete and precise.
ANSWER: A
39. In a variables estimation application involving a book value of

$550,000, with a tolerable error of specified precision limits of plus
or minus $50,000, the auditor has calculated a point estimate of the
population value to be $490,000. At the 95% reliability level,
sample results indicate an achieved precision of plus or minus
$50,000. Based on these data, the auditor would
a. Conclude that the book value is acceptable at the 95% reliability

level. b. Reject the book value and extend control testing. c.
Conclude that the book value is acceptable at a level of reliability
higher than 95%. d. Extend substantive testing.
ANSWER: D
40. What effect does an increase in the standard deviation have on

the required sample size of mean-per-unit estimation and
probability proportional to size sampling? Assume no change in
any of the other characteristics of the population and no
change in desired precision and confidence.
Mean-per-unit Estimation PPS
a. Decrease in sample size No change in sample size
b. No change in sample size Decrease in sample size c. Increase in

sample size No change in sample size
d. No change in sample size Increase in sample size
ANSWER: C
41. Use of the difference estimation sampling technique to estimate

dollar amounts is inappropriate when
a. The total book value is known and corresponds to the sum of all
the individual book values. b. A book value for each sample item is
unknown. c. There are some observed differences between audited
values and book values. d. The audited values are nearly
proportional to the book value.
ANSWER: B
42. Select the description which illustrates sampling risk.
a. Applying audit procedures which are inappropriate for the audit

objectives. b. Failing to recognize errors or deviations in the
documents examined. c. Arriving at incorrect statistical conclusions
due to computational errors. d. Choosing a sample which has
proportionately more errors than the population.
ANSWER: D
43. A bank auditor is interested in estimating the average account

balance of its depositors based on a sample. This substantive test is
an example of
a. Attribute sampling. b. Discovery sampling. c. Acceptance

sampling. d. Variables sampling.
ANSWER: D
COMPLETION:
44. Of the two variations of classical variables sampling,
often results in smaller sample sizes
and is therefore more cost-effective under those
circumstances.
ANSWER: DIFFERENCE ESTIMATION
45. Detection risk, defined as the risk that material errors or fraud
that are not prevented or detected by the client's system of
internal control, will not be discovered by the auditor, is
referred to as by statisticians.
ANSWER: BETA RISK
46. Rejecting a book value that is stated fairly is referred to as risk.
ANSWER: ALPHA
47. Standard deviation is defined as the degree of variation of

individual values about the population mean. The more
narrowly dispersed the values in the population, the (larger or
smaller) the standard deviation.
ANSWER: SMALLER
48. In applying probability proportional to size sampling, the auditor

rejects a book value as being materially overstated when
upper error limit is (greater or less) than the tolerable error.
ANSWER: GREATER
49. For PPS sampling purposes, the allowance for sampling risk is
the sum of basic precision plus the .
ANSWER: INCREMENTAL ALLOWANCE
50. The incremental allowance for precision need be calculated only

when errors are found in logical units that are (larger or
smaller) than the _______________
ANSWER: SMALLER, SAMPLING INTERVAL
51. As contrasted with classical variables sampling, probability

proportional to size sampling has the advantage of
automatically the population such that logical units equal to or
greater than the _____________
_________ have a 100% chance of being included in the sample.
ANSWER: STRATIFYING, SAMPLING INTERVAL
52. Probability proportional to size sampling has its greatest

applicability to situations in which the auditor suspects a few
material errors of .
ANSWER: OVERSTATEMENT
53. In evaluating sampling results for mean per unit sampling

purposes, achieved precision (A') must be equal to or
______ (greater or less) than desired precision (A). Otherwise,
the actual beta risk is higher than specified in the sampling
plan, and further sampling would be necessary to reduce the
risk to an acceptable level.
ANSWER: LESS
MATCHING:
54. Match the following terms with their definitions:
A. Projected error
B. Achieved precision
C. Basic precision
D. Desired precision
E. Finite correction factor
F. Range of acceptability
H. Sampling risk
I. Standard deviation
J. Upper error limit
K. Reliability
L. Sampling interval
M. Precision
N. Logical sampling unit
____1. The risk that the auditor’s conclusions regarding

a population are incorrect.
____2. A measure of population variability.
____3. The range within which the true answer most likely
falls.
____4. The likelihood that the sample range contains the
true
value.
____5. Required for mean per unit and difference

estimation
sampling applications when the preliminary sample size
equals or exceeds 5% of the population size.
____6. The calculated range within which the true answer

most
likely falls.
____7. The range of possible values considered acceptable

to the
auditor.
____8. The item to which a randomly selected dollar

attaches.
____9. The distance between two consecutive sample items.
____10. Auditor’s best estimate of overstatement error.
SOLUTION:
1. H
2. I
3. M
4. K
5. E
6. B
7. F
8. N
9. L
10. A
PROBLEM/ESSAY:
55. An auditor wishes to randomly select a sample of customers'

accounts receivable for confirmation purposes. The population
consists of 4,000 accounts with a book value of $6,000,000. The
preliminary estimate of standard deviation (computer calculated
from book value) is $25. The auditor considers $40,000 to be a
material misstatement of accounts receivable. The auditor has
assessed inherent risk at 60% and control risk at 70%, and has set
alpha risk and overall audit risk at 10%.
a. Assuming the following Z values, calculate the sample size:
ALPHA/2
OR BETA Z VALUE
1.00% 2.33
2.00 2.06
2.50 1.96
5.00 1.65
10.00 1.29
20.0 .85
24.0 .71
b. An examination of the sample items produces a sample mean of

$1,200 and a standard deviation of the sample items equal to
$22. What is the estimated population value?
c. What is the achieved precision?
d. What is the minimum audit adjustment based on these
findings?
SOLUTION:
a. 35
b. $4,800,000
c. $24,539
d. Downward adjustment of $1,184,4539
56. An auditor suspects that the client's ending merchandise
inventory is materially overstated and wishes to apply
probability proportional to size sampling to estimate the extent of

overstatement. The inventory consists of 10,000 line items on
computer printouts with a total book value of $14,000,000. The
auditor has set the risk of incorrect acceptance at 5%, the tolerable
error at $180,000, and the anticipated error at $70,000.
a. Given the following reliability and expansion factors at a 5% risk
of incorrect acceptance, calculate sample size:
OVERSTATEMENT
ERRORS RELIABILITY FACTOR EXPANSION FACTOR
0 3.00 1.60
1 4.75
2 6.30
3 7.76
b. What is the sampling interval?
c. In auditing the sample, the auditor discovered the following

errors:
Item Book Value Audited Value
A $20,000 0
E $800,000 $400,000
S $220,000 0
Calculate the projected error.
d. Determine the allowance for sampling risk and the upper
error limit.
SOLUTION:
a. 618
b. $22,653
c. $642,653
d. Allowance for sampling risk = $84,949 ($67,959 + $16,990)
Upper error limit = $727,602 ($642,653 + $84,949)

posted by padelacrz at 9:42 pm
2 comments:
ACCT 4631 - Internal Auditing: CIA Quiz

In a variables sampling application, which of the following will result
when confidence level is changed from 90% to 95%?
A. Sample size will increase.
B. Nonsampling error will decrease.
C. Point estimate of the arithmetic mean will increase.
D. Standard error of the mean will not be affected.
Answer A is correct.
In any sampling application (attribute or
variables), an increase in the confidence level
requires a larger sample.
The standard error of a sample reflects
A. The error in the population that the auditor can accept.
B. The degree of variation in sample items.
C. The projected population error based on errors in the sample.
D. The average rate of error in the sample.
Answer B is correct.
The standard error of the sample enables the auditor to assess the precision (confidence interval)
used to describe the population. The greater the standard error, the higher the precision the auditor
must use.
3/22
The size of a given sample is jointly a result of characteristics of the population of interest and
decisions made by the internal auditor. Everything else being equal, sample size will
A. Increase if the internal auditor decides to accept more risk of incorrectly concluding that
controls are effective when they are in fact ineffective.
B. Double if the internal auditor finds that the variance of the population is twice as large as was
indicated in the pilot sample.
C. Decrease if the internal auditor increases the tolerable rate of deviation.
D. Increase as sampling risk increases.
Answer C is correct.
In an attribute test, the tolerable deviation rate is inversely related to sample size. If it is
increased, sample size will decrease.
In a variables sampling application, which of the following will result when confidence level is
changed from 90% to 95%?
A. Sample size will increase.
B. Nonsampling error will decrease.
C. Point estimate of the arithmetic mean will increase.
D. Standard error of the mean will not be affected.
In any sampling application (attribute or variables), an increase in the confidence level requires
a larger sample.
In an attribute sampling application, holding other factors constant, sample size will increase as
which of the following becomes smaller?
A. Expected rate of occurrence.
B. Confidence coefficient.
C. Population.
D. Planned precision.
Answer D is correct.
In an attribute test, planned precision is inversely related to sample size; its decrease
(tightening) will increase sample size.
The standard error of a sample reflects
A. The error in the population that the auditor can accept.
B. The degree of variation in sample items.
C. The projected population error based on errors in the sample.
D. The average rate of error in the sample.
The standard error of the sample enables the auditor to assess the precision (confidence
interval) used to describe the population. The greater the standard error, the higher the
precision the auditor must use.
Which of the following must be known to evaluate the results of an attribute sample?
A. Estimated dollar value of the population.
B. Finite population correction factor.
C. Standard deviation of the sample values.
D. Actual size of the sample selected.
Sample size is used to evaluate the actual occurrence rate (number of a particular attribute
identified ÷ actual sample size) of the attribute of interest, such as a control deviation.
In sampling applications, the standard deviation represents a measure of the
A. Extent of precision achieved.
B. Expected error rate.
C. Degree of data variability.
D. Level of confidence desired.
The standard deviation measures the variability within a population.
A 90% confidence interval for the mean of a population based on the information in a sample
always implies that there is a 90% chance that the
A. True population mean lies within the specified confidence interval.
B. True population mean is no larger than the largest endpoint of the interval.
C. Estimate is equal to the true population mean.
D. Standard deviation will not be any greater than 10% of the population mean.
The confidence level, e.g., 90%, is specified by the auditor. A confidence interval based on the
specified confidence level, also called precision, is the range around a sample value that is
expected to contain the true population value. In this situation, if the population is normally
distributed and repeated simple random samples are taken, the probability is that 90% of the
confidence intervals constructed around the sample results will contain the population value.
Which form of sampling is most likely to be used in a fraud investigation?
A. Discovery sampling.
B. Probability-proportional-to-size (PPS) sampling.
C. Acceptance sampling for attributes.
D. Stop-or-go sampling.
Attribute sampling tests the effectiveness of controls because it can estimate a rate of
occurrence of control deviations in a population. Discovery sampling is a form of attribute
sampling that is appropriate when only a single deviation might be critical, such as when an
auditor investigates fraud. The sample size is calculated so that the sample includes at least
one example of a deviation if it occurs in the population at a given rate.
Which sampling plan requires no additional sampling once the first error is found?
A. Attribute sampling.
B. Stop-or-go sampling.
C. Stratified sampling.
D. Discovery sampling.
Discovery sampling is a form of attribute sampling used to identify critical deviations in a
population. The occurrence rate is assumed to be at or near 0%, and the method cannot be
used to evaluate results statistically if deviations are found in the sample. Hence, discovery
sampling is used for tests of controls, but it is appropriate only when one deviation is critical.
The sample size is calculated so that the sample will contain at least one example of a deviation
if it occurs in the population at a given rate.
Statistical sampling is appropriate to estimate the value of an auto dealer's 3,000 line-item
inventory because statistical sampling is
A. Complete and precise.
B. Thorough and complete.
C. Reliable and objective.
D. Thorough and accurate.
The results of statistical (probability) sampling are objective and subject to the laws of
probability. Hence, sampling risk can be quantified and controlled at a specified level of
confidence (reliability). Sampling risk is the risk that the sample selected does not represent the
population.
If all other sample size planning factors were exactly the same in attribute sampling, changing
the confidence level from 95% to 90% and changing the desired precision from 2% to 5% would
result in a revised sample size that would be
A. Larger.
B. Smaller.
C. Indeterminate.
D. Unchanged.
In an attribute test, the confidence level is directly related, and the precision is inversely related,
to sample size. Thus, if the confidence level is reduced and precision is widened, sample size
will be smaller.
The variability of a population, as measured by the standard deviation, is the
A. Tendency of the means of large samples (at least 30 items) to be normally distributed.
B. Measure of the closeness of a sample estimate to a corresponding population characteristic.
C. Degree of asymmetry of a distribution.
D. Extent to which the individual values of the items in the population are spread about the
mean.
The standard deviation measures the degree of dispersion of items in a population about its
mean.
An important difference between a statistical and a judgmental sample is that with a statistical
sample,
A. More accurate results are obtained.
B. A smaller sample can be used.
C. No judgment is required because everything is computed according to a formula.
D. Population estimates with measurable reliability can be made.
The principal benefit of statistical sampling is that it permits the auditor to make a quantitative
assessment of how closely the sample represents the population for a given level of reliability,
i.e., how unbiased the sample is.
When sampling methods are used, the concept of sufficiency of information means that the
samples selected provide
A. The best information that is reasonably obtainable.
B. Reasonable assurance that the information has a logical relationship to the engagement
objective.
C. Reasonable assurance that they are representative of the sampled population.
D. Absolute assurance that a sample is representative of the population.
Sufficient information is factual, adequate, and convincing so that a prudent, informed person
would reach the same conclusions as the auditor (Inter. Std. 2310). If properly designed and
executed, a statistical sample is representative of the sampled population.
An auditor applying a discovery-sampling plan with a 5% risk of overreliance may conclude that
there is
A. A 95% probability that the actual rate of occurrence in the population is less than the critical
rate if only one exception is found.
B. Greater than a 95% probability that the actual rate of occurrence in the population is less
than the critical rate if no exceptions are found.
C. A 95% probability that the actual rate of occurrence in the population is less than the critical
rate if the occurrence rate in the sample is less than the critical rate.
D. A 95% probability that the actual rate of occurrence in the population is less than the critical
rate if no exceptions are found.
Discovery sampling is a form of attribute sampling that is appropriate when even a single
deviation would be critical. The sample size is calculated so that it will include at least one
instance of a deviation if deviations occur in the population at a given rate. If no exceptions are
found, the correct conclusion is that the probability is 95% that the occurrence rate is less than
the critical rate.
In selecting a sample of items for variables testing, an auditor must consider the desired
precision, the standard deviation, and the
A. Acceptable risk level.
B. Sampling interval.
C. Recorded monetary amount of the population.
D. Expected occurrence rate.
Four factors determine the size of a classical variables sample: the confidence coefficient, the
estimated standard deviation of the population, the population size, and the tolerable
misstatement (desired precision).
The measure of variability of a statistical sample that serves as an estimate of the population
variability is the
A. Confidence interval.
B. Standard deviation.
C. Range.
D. Basic precision.
The standard deviation is a measure of variability. If the sample is representative, its standard
deviation will approximate that of the population.
A specified range is based on an estimate of a population characteristic calculated from a
random sample. The probability that the range contains the true population value is the
A. Standard error of the mean.
B. Error rate.
C. Confidence level.
D. Lower precision limit.
In principle, given repeated sampling and a normally distributed population, the confidence level
is the percentage of all the precision intervals that may be constructed from simple random
samples that will include the population value. In practice, the confidence level is regarded as
the probability that a precision interval calculated from a simple random sample drawn from a
normally distributed population will contain the population value.
Fact Pattern: An auditor is testing on a company's large, normally distributed accounts
receivable file. The objectives of the audit are to test end-of-period monetary balances and
accounts receivable posting exception (error) rates.
The expected population exception rate is 3% for the accounts receivable posting processes. If
the auditor has established a 5% tolerable rate, the auditor would use which sampling plan for
testing the actual exception rate?
A. Difference or mean-per-unit estimation.
B. Discovery.
C. Attribute.
D. Stratified.
The accounts receivable posting exception rate would be determined using attribute sampling.
Attribute sampling is used for applications involving binary (yes/no or right/wrong) propositions.
Whether an item has been posted requires a yes/no answer.
Which one of the following statements about sampling is true?
A. The limitations of an incomplete sample frame can almost always be overcome by careful
sampling techniques.
B. A larger sample is always more representative of the underlying population than a smaller
sample.
C. 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.
D. For a given sample size, a simple random sample always produces the most representative
sample.
When the size of the population is very large, the absolute size of the sample may vary
considerably even though its size relative to the population does not.
A distinguishing characteristic of random number sample selection is that each
A. Item in the population has an equal chance of being selected.
B. Item's chance for selection is proportional to its dollar value.
C. Stratum in the population has an equal number of items selected.
D. Item is selected from a stratum having minimum variability.
A random sample is one in which every item in the population has an equal and nonzero chance
of being selected.
In a sampling application, the group of items about which the auditor wants to estimate some
characteristic is called the
A. Population.
B. Sample.
C. Sampling unit.
D. Attribute of interest.
The population is the group of items about which an auditor wishes to draw conclusions.
THIS SET IS OFTEN IN FOLDERS WITH...

Topic 10
Analytical procedures in which current financial statements are
compared with budgets or previous statements are primarily intended
to determine the
A. Existence of specific errors or omissions.
B. Overall reasonableness of statement contents.
C. Use of an erroneous cutoff date.
D. Adequacy of financial statement disclosure.
Analytical procedures often provide the internal auditor with an efficient and effective means of
obtaining evidence. The assessment results from comparing information with expectations identified
or developed by the internal auditor. Analytical procedures are useful in identifying (1) unexpected
differences, (2) the absence of differences when they are expected, (3) potential errors, (4) potential
fraud or illegal acts, or (5) other unusual or nonrecurring transactions or events (PA 2320-1, para. 2).
Thus, a comparison of current-period information with budgets or previous-period information is
helpful in planning the engagement. This comparison may identify conditions, such as unreasonable
amounts in financial statements, that may require subsequent engagement procedures.
Which of the following is an essential factor in evaluating the sufficiency of
information? The information must
A. Bear a direct relationship to the observation and include all of the elements of
an observation.
B. Be well documented and cross-referenced in the working papers.
C. Be based on references that are considered competent.
D. Be convincing enough for a prudent person to reach the same decision.
Sufficient information is factual, adequate, and convincing so that a prudent, informed person would
reach the same conclusions as the auditor (Inter. Std. 2310).
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Analytical procedures in which current financial statements are compared with budgets or
previous statements are primarily intended to determine the
A. Existence of specific errors or omissions.
B. Overall reasonableness of statement contents.
C. Use of an erroneous cutoff date.
D. Adequacy of financial statement disclosure.
Analytical procedures often provide the internal auditor with an efficient and effective means of
obtaining evidence. The assessment results from comparing information with expectations
identified or developed by the internal auditor. Analytical procedures are useful in identifying (1)
unexpected differences, (2) the absence of differences when they are expected, (3) potential
errors, (4) potential fraud or illegal acts, or (5) other unusual or nonrecurring transactions or
events (PA 2320-1, para. 2). Thus, a comparison of current-period information with budgets or
previous-period information is helpful in planning the engagement. This comparison may identify
conditions, such as unreasonable amounts in financial statements, that may require subsequent
engagement procedures.
Which of the following is an essential factor in evaluating the sufficiency of information? The
information must
A. Bear a direct relationship to the observation and include all of the elements of an observation.
B. Be well documented and cross-referenced in the working papers.
C. Be based on references that are considered competent.
D. Be convincing enough for a prudent person to reach the same decision.
Sufficient information is factual, adequate, and convincing so that a prudent, informed person
would reach the same conclusions as the auditor (Inter. Std. 2310).
An internal auditor's working papers should support the observations, conclusions, and
recommendations to be communicated. One of the purposes of this requirement is to
A. Facilitate quality assurance reviews.
B. Provide support for the internal audit activity's financial budget.
C. Permit the audit committee to review observations, conclusions, and recommendations.
D. Provide control over working papers.
Engagement working papers, among other things, provide a basis for the internal audit activity's
quality assurance and improvement program (PA 2330-1, para. 2).
During interviews with the inventory management personnel, an internal auditor learned that
salespersons often order inventory for stock without receiving the approval of the vice president
of sales. Also, detail testing showed that there are no written approvals on purchase orders for
replacement parts. The results of detail testing are a good example of
A. Subjective information.
B. Corroborative information.
C. Circumstantial information.
D. Indirect information.
Corroborative information is evidence from a different source that supplements and confirms
other information. For example, oral testimony that a certain procedure was not performed may
be corroborated by the absence of documentation.
Which of the following cannot be performed by an auditor using generalized audit software
(GAS)?
A Matching identical product information in separate data files.
B Aging accounts receivable.
C. Correcting erroneous data elements, making them suitable for audit testwork.
D. Identifying missing check numbers.
GAS can help an auditor identify erroneous data, but correcting them before performing
testwork is inappropriate.
Tolerating silence, asking open-ended questions, and paraphrasing are three aids to more
effective
A. Interviews.
B. Feedback.
C. Listening.
D. Meetings.
Listening entails decoding and understanding the first message sent. The sender then becomes
a listener with respect to the feedback. Hence, listening is necessary at both ends of the
communication channel. Other aids to effective listening are using body language to encourage
the speaker, showing appropriate emotion to signify empathy, understanding and correcting for
one's biases, avoiding making premature judgments, and briefly summarizing what has been
said.
Which of the following does not describe one of the functions of engagement working papers?
A. Aids in the planning, performance, and review of engagements.
B. Provides the principal support for engagement communications.
C. Facilitates third-party reviews.
D. Aids in the professional development of the operating staff.
Engagement working papers generally (1) aid in planning, performance, and review of
engagements; (2) provide the principal support for engagement results; (3) document whether
engagement objectives were achieved; (4) support the accuracy and completeness of the work
performed; (5) provide a basis for the internal audit activity's quality assurance and
improvement program; and (6) facilitate third-party review (PA 2330-1, para. 2).
Which of the following is the most important if working papers are to have the characteristics
that will ensure that they achieve their primary purposes?
A. Working papers must provide sufficient, reliable, and useful information to support the
engagement results.
B. Working papers must be of standard format and standard content.
C. Working papers must be arranged in logical order following the engagement work program
sequence.
D. Working papers must be properly indexed and cross-referenced to the draft final engagement
communication.
Working papers document the information obtained, the analyses made, and the support for the
conclusions and engagement results (PA 2330-1, para. 1). In turn, internal auditors must identify
sufficient, reliable, relevant, and useful information to achieve the engagement's objectives
(Perf. Std. 2310).
Analytical procedures
A. Are never sufficient by themselves to support management assertions.
B. Are considered direct information about the assertion being evaluated.
C. May provide the best available information for the completeness assertion.
D. Involve such tests as confirmation of receivables.
Analytical procedures usually involve summarizing and comparing data so that trends and other
important relationships may be detected. Procedures range from simple comparisons of
amounts reported to advanced statistical and modeling techniques. The use of analytical
procedures involves judgment and focuses on the overall reasonableness of recorded amounts.
Thus, analytical procedures provide information that all transactions and accounts that should
be presented are included. In some circumstances, the internal auditor may be able to
determine that analytical procedures by themselves provide the desired level of assurance.
Which of the following is a false statement about the reliability of audit evidence?
A. Evidence obtained from independent sources outside the organization is more reliable than
evidence obtained from internal sources.
B. A copy of a document is as reliable as the original.
C. The more effective the organization's internal control, the more assurance it provides about
the accounting data.
D. The auditor's direct personal knowledge is more reliable than information obtained indirectly.
Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the
engagement's objectives. Reliable information is best attainable through the use of appropriate
engagement (interpretation). Several factors increase the reliability of audit evidence. Evidence
is more reliable if it is (1) obtained from sources independent of the engagement client, (2)
corroborated by other information, and (3) direct, such as the internal auditor's personal
observation. Also, an original document is more reliable than a copy.
The most persuasive information about the existence of newly acquired computers for the sales
department is
A. Physical examination.
B. Inquiry of management.
C. Documentation prepared externally.
D. Observation of engagement client's procedures.
Information is considered more or less persuasive depending on the engagement client's
degree of control. The following is a hierarchy from most persuasive to least persuasive: internal
auditor's examination and observation, externally developed information, internally developed
information, and oral information from the client. Thus, the most persuasive information about
the existence assertion for a new asset is physical examination.
A working paper is complete when it
A. Is clear, concise, and accurate.
B. Contains all of the attributes of an observation.
C. Complies with the internal audit activity's format requirements.
D. Satisfies the engagement objective for which it is developed.
Engagement working papers, among other things, document whether engagement objectives
were achieved (PA 2330-1, para. 2).
Which of the following evidence is the most reliable?
A. Hearsay from an independent source.
B. Original, signed contract corroborated by a bank's copies of checks.
C. Evidence corroborated by engagement client management.
D. Expert appraisal by audit client engineer.
Evidence is more reliable if it is (1) obtained from sources independent of the engagement
client, such as confirmations of receivables or expert appraisals that are timely and made by a
source with no connection to the auditee; (2) corroborated by other information; (3) direct, such
as the internal auditor's personal observation, rather than indirect, such as hearsay; and (4) an
original document, not a copy. The original copy of the contract with the contracted price,
corroborated by a bank's (independent party's) copy of the payment checks, is more reliable
than the other choices.
The internal auditor prepares working papers primarily for the benefit of
A. The internal audit activity.
B. Senior management.
C. The external auditor.
D. The engagement client.
Engagement working papers generally (1) aid in planning, performance, and review of
engagements; (2) provide the principal support for engagement results; (3) document whether
engagement objectives were achieved; (4) support the accuracy and completeness of the work
performed; (5) provide a basis for the internal audit activity's quality assurance and
improvement program; and (6) facilitate third-party review (PA 2330-1, para. 2). Hence, they
primarily benefit internal auditors.
During the working-paper review, an internal auditing supervisor finds that the internal auditor's
observations are not adequately cross-referenced to supporting documentation. The supervisor
will most likely instruct the internal auditor to
A. Eliminate any cross-references to other working papers because the system is unclear.
B. Familiarize himself or herself with the sequence of working papers so that (s)he will be able
to answer questions about the conclusions stated in the final engagement communication.
C. Prepare a working paper to indicate that the full scope of the engagement was carried out.
D. Provide a cross-referencing system that shows the relationship among observations,
conclusions, recommendations, and the related facts.
Cross-referencing is important because it simplifies review either during the engagement or
subsequently by creating a trail of related items through the working papers. It thus facilitates
preparation of the final engagement communication and later engagements for the same
engagement client.
The most reliable information an internal auditor can assess when determining an organization's
legal title to inventories is
A. Purchase orders.
B. Paid vendor invoices.
C. Monthly gross profit and inventory levels.
D. Records of inventories stored at off-site locations.
Mere possession of inventory does not signify that another party does not have a claim to it. For
example, the inventory may be held on consignment. Payment of vendor invoices is the
culmination of the purchases-payables cycle. The paid invoice evidences the purchaser's
ownership of the inventory.
Which of the following represents the most reliable information that a receivable actually exists?
A. A receiving report.
B. A bill of lading.
C. A positive confirmation.
D. A sales invoice.
A confirmation is a direct communication between the internal auditor and the debtor. A positive
confirmation is the most reliable kind of confirmation because it asks the debtor to respond
regardless of whether (s)he agrees with the information given. The negative confirmation asks
for a response only when the debtor disagrees. Positive confirmations are used when balances
are large or the internal auditor believes that a substantial number of accounts are in dispute or
contain errors or irregularities. The negative form is used when risk is low, balances are small,
and the recipients are likely to give confirmation their consideration. Often, a combination of the
two forms will be used.
Reliable information is
A. Supportive of the engagement observations and consistent with the engagement objectives.
B. Competent and the best attainable through the use of appropriate engagement techniques.
C. Factual, adequate, and convincing so that a prudent person would reach the same
conclusion as the internal auditor.
D. Helpful in assisting the organization in meeting prescribed goals.
Reliable information is the best attainable information through the use of appropriate
engagement techniques (Inter. Std. 2310). An original document is the prime example of such
information.
When an auditor performs tests on a computerized inventory file containing over 20,000 line
items, that auditor can maintain independence and perform most efficiently by
A. Using the systems department's programmer to write an extraction program.
B. Using a generalized audit software package.
C. Asking the console operator to print every item that costs more than US $100.
D. Obtaining a printout of the entire file and then selecting each nth item.
Independence can be preserved when the auditor acquires general audit software (GAS) from
an external source rather than relying on auditee-developed audit software. Also, efficiency is
enhanced to the extent GAS can be used (as compared to manual auditing or writing special
audit programs). The leading GAS packages are currently ACL and IDEA.
Which of the following statements about audit evidence is true?
A. A copy of a source document has less evidential value than the original.
B. To be representative of a population, a sample must contain at least 10% of the items in the
population.
C. A purchase order marked "paid" is persuasive evidence for the receipt of goods.
D. Physical observation of accounts payable is the most convincing form of evidence to support
the assertion of completeness.
Evidence is more reliable if it is an original document, not a copy.
In engagement planning, internal auditors should review all relevant information. Which of the
following sources of information would most likely help identify suspected violations of
environmental regulations?
A. Review of correspondence the entity has conducted with governmental agencies.
B. Discussions conducted with the external auditors in coordinating engagement efforts.
C. Discussions with operating executives.
D. Review of trade publications.
Correspondence from regulators is likely to be a valid and relevant source of information about
environmental violations. This externally generated documentation and the engagement client's
responses thereto may indicate a significant loss exposure for the engagement client.
The auditor conducted an interview with the supervisor. The auditor noted that the supervisor
became uncomfortable and nervous, and changed the subject whenever the auditor raised
questions about certain types of claims. The supervisor's answers were consistent with
company policies and procedures. When documenting the interview, the auditor should
A. Ignore the specific answers given in the interview, because they are self-serving.
B. Conclude that the nonverbal communication is persuasive and that sufficient evidence exists
to charge fraud against the group.
C. Document the supervisor's answers noting the nature of the nonverbal communications.
D. Not document the nonverbal communication because it is subjective and is not corroborated.
Auditors frequently encounter and act upon nonverbal communication. If the nonverbal
communication affects the auditor's perception of the information gathered, it should be
documented so that it can be considered as the audit proceeds.
The use of an analytical review to verify the correctness of various operating expenses would
not be a preferred approach if
A. Operating expenses vary in relation to other operating expenses, but not in relation to
revenue.
B. An auditor notes strong indicators of a specific fraud involving these accounts.
C. An auditor would like to identify large, unusual, or non-recurring transactions during the year.
D. Operations are relatively stable and have not changed much over the past year.
Analytical auditing procedures assist internal auditors in identifying conditions that may require
subsequent engagement procedures. Accordingly, if the auditor already suspects fraud
involving operating expenses, a more directed audit approach is appropriate.
Which of the following represents the general order of persuasiveness, from most to least, for
the types of information listed below?
1. Inquiry of management
2. Observation of engagement client's procedures
3. Physical examination
4. Documentation prepared externally
A. 4, 1, 2, 3.
B. 3, 2, 4, 1.
C. 4, 3, 1, 2.
D. 2, 4, 1, 3.
An auditor's physical examination provides the most persuasive form of evidence. First-hand
observation by the auditor of client personnel performing procedures is the next most
persuasive. Information originating from a third party is less persuasive than information
personally gathered by the auditor but more persuasive than information originating with the
client. Oral information from the client is the least convincing.
Ordinarily, what source of information should most affect the internal auditor's conclusions?
A. Oral.
B. Inquiry.
C. Informal.
D. External.
External information is ordinarily more reliable than the other types of information listed because
it is generated from sources independent of the engagement client. The internal auditor should
select the strongest information available to support engagement observations, conclusions,
and recommendations.

Topics 12, 13, 14
Several levels of management are interested in the results of an engagement performed in the
marketing department. What is the best method of communicating the results of the engagement?
A. Write detailed communications for each level of management.
B. Discuss results with marketing management and issue a summary communication to senior
management.
C. Write a communication to the marketing management and give summary communications to
other management levels.
D. Discuss results with all levels of management.
The CAE distributes the final engagement communication to the management of the audited activity
and to those members of the organization who can ensure engagement results are given due
consideration and take corrective action or to ensure that corrective action is taken. Where required
by the internal audit charter or organizational policy, the CAE also communicates to other interested
or affected parties, such as external auditors and the board (PA 2440-1, para. 4).
During an interview with a data input clerk to discuss a computerized system used to track employee
training requirements and compliance, an internal auditor identifies a potentially significant weakness
in the system. The internal auditor should
A. Ask the clerk about the weakness and determine immediately whether the observation should be
communicated.
B. Conduct a second interview after determining whether the weakness actually exists.
C. Ask indirect questions that will help get more factual information relating to the potential
weakness.
D. Not mention the weakness, directly or indirectly, to avoid making the clerk uncomfortable.
Indirect questions may allow the internal auditor to obtain some information without making the clerk
feel accused. An interviewee who has been put at ease and does not feel threatened is more likely
to be cooperative.
1/71
Several levels of management are interested in the results of an engagement performed in the
marketing department. What is the best method of communicating the results of the
engagement?
A. Write detailed communications for each level of management.
B. Discuss results with marketing management and issue a summary communication to senior
management.
C. Write a communication to the marketing management and give summary communications to
other management levels.
D. Discuss results with all levels of management.
The CAE distributes the final engagement communication to the management of the audited
activity and to those members of the organization who can ensure engagement results are
given due consideration and take corrective action or to ensure that corrective action is taken.
Where required by the internal audit charter or organizational policy, the CAE also
communicates to other interested or affected parties, such as external auditors and the board
(PA 2440-1, para. 4).
During an interview with a data input clerk to discuss a computerized system used to track
employee training requirements and compliance, an internal auditor identifies a potentially
significant weakness in the system. The internal auditor should
A. Ask the clerk about the weakness and determine immediately whether the observation
should be communicated.
B. Conduct a second interview after determining whether the weakness actually exists.
C. Ask indirect questions that will help get more factual information relating to the potential
weakness.
D. Not mention the weakness, directly or indirectly, to avoid making the clerk uncomfortable.
Indirect questions may allow the internal auditor to obtain some information without making the
clerk feel accused. An interviewee who has been put at ease and does not feel threatened is
more likely to be cooperative.
According to the International Professional Practices Framework, which of the following is part
of the minimum requirements for an engagement final communication?
1. Background information.
2. Purpose of the engagement.
3. Engagement scope.
4. Results of the engagement.
5. Summaries.
A. 2, 4, and 5 only.
B. 1, 3, and 5 only.
C. 1, 2, and 3 only.
D. 2, 3, and 4 only.
Although the format and content of the final engagement communications may vary by
organization or type of engagement, they are to contain, at a minimum, the purpose, scope, and
results of the engagement (PA 2410-1, para. 1).
Which of the following is the best approach for obtaining feedback from engagement clients on
the quality of internal audit work?
A. Distribute questionnaires to selected engagement clients shortly before preparing the internal
audit annual activity report.
B. Provide questionnaires to engagement clients at the beginning of each engagement and
request that the clients complete and return them after the engagements.
C. Ask questions during the exit interviews and send copies of the documented responses to
the clients.
D. Call engagement clients after the exit interviews and send copies of the documented
responses to the clients.
The client satisfaction survey should be provided to the client at the beginning of the
engagement. This allows the client to gauge the internal audit activity's performance on specific
measures during the engagement.
In the planning phase, the scope of an internal audit engagement is defined by the
A. Engagement work program.
B. Preliminary survey.
C. Engagement objectives.
D. Scheduling and time estimates.
The established scope must be sufficient to satisfy the objectives of the engagement (Perf. Std.
2220).
An internal auditor has just completed a survey to become familiar with the organization's
payroll operations as part of an unplanned engagement. Which of the following most likely is
performed next?
A. Conduct field work.
B. Write the engagement work program.
C. Establish initial engagement objectives.
D. Assign internal audit personnel.
The survey allows the internal auditor to become familiar with the engagement client and
therefore provides input to the work program.
Avoiding unnecessary technical language is best associated with which quality of
communication addressed in the Standards?
A. Accurate.
B. Concise.
C. Clear.
D. Complete.
Communications must be accurate, objective, clear, concise, constructive, complete, and timely
(Perf. Std. 2420). Clear communications are easily understood and logical. Clarity can be
improved by avoiding unnecessary technical language and providing all significant and relevant
information (Inter. Std. 2420).
Internal auditors need to determine the extent to which management has established adequate
control criteria. For this purpose, which of the following actions may be appropriate?
1. Determining whether objectives have been accomplished
2. Using management's adequate control criteria in their evaluation
3. Working with management to develop appropriate control evaluation criteria
A. 1 and 2 only.
B. 1, 2, and 3.
C. 2 only.
D. 1 only.
"Adequate criteria are needed to evaluate controls. Internal auditors must ascertain the extent to
which management has established adequate criteria to determine whether objectives and
goals have been accomplished. If adequate, internal auditors must use such criteria in their
evaluation. If inadequate, internal auditors must work with management to develop appropriate
evaluation criteria" (Impl. Std. 2210.A3).
Which of the following is not an objective of the exit meeting for an engagement performed by
the internal auditors?
A. To resolve conflicts.
B. To identify concerns for future engagements.
C. To discuss the observations, conclusions, and recommendations.
D. To identify management's actions and responses to the observations, conclusions, and
recommendations.
The purpose of post-engagement meetings (exit meetings) is to help avoid misunderstandings
or misinterpretations of fact by providing the opportunity for the engagement client to clarify
specific items and express views of the observations, conclusions, and recommendations (PA
2440-1, para. 2). Identifying concerns for future engagements is thus not a purpose of the exit
meeting.
Data-gathering activities such as interviewing operating personnel, identifying standards to be
used to evaluate performance, and assessing risks inherent in a department's operations are
typically performed in which phase of an audit engagement?
A. Preliminary survey.
B. Field work.
C. Examination and evaluation of evidence.
D. Engagement program development.
Engagement planning should include performing, as appropriate, a survey to (1) become
familiar with the activities, risks, and controls to identify areas for engagement emphasis and (2)
invite client comments and suggestions from engagement clients (PA 2210.A1-1, para. 3).
Among other things, the survey should include discussions with the engagement client (e.g.,
interviews with operating personnel) and documenting key control activities (including identifying
performance standards).
Fact Pattern:
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%.
Which paragraph should be characterized as the attribute described in the Standards as
"condition"?
A. 1
B. 3
C. 4
D. 2
Condition is defined as the factual evidence that the internal auditor found in the course of the
examination (the current state) (PA 2410-1, para. 7). Paragraph 3 describes the actual
productivity of the firm.
The most appropriate use of an oral engagement communication is to communicate
A. Conditions that demand immediate action.
B. Matters that are not material.
C. Complex matters to operating management when the possibility exists that misunderstanding
would result from reducing them to writing.
D. Sensitive matters to management when the chief audit executive does not want to commit
them to writing.
Interim reports are written or oral and are used to communicate information that requires
immediate attention. Therefore, the most appropriate use of an oral engagement communication
would be in an interim report to communicate conditions that demand immediate action. The
use of interim reports does not diminish or eliminate the need for a final report (PA 2410-1, para.
14).
When reviewing engagement working papers, the primary responsibility of an engagement
supervisor is to determine that
A. Working papers adequately support the engagement observations, conclusions, and
recommendations.
B. Standard internal audit activity procedures are adhered to with regard to working paper
preparation and technique.
C. Each worksheet is properly identified with a descriptive heading.
D. Working papers are properly referenced and kept in logical groupings.
All engagement working papers are reviewed to ensure they support engagement
communications and necessary audit procedures are performed (PA 2340-1, para. 3).
Which statement most accurately describes how criteria are established for use by internal
auditors in determining whether goals and objectives have been accomplished?
A. Management is responsible for establishing the criteria.
B. The industry in which a company operates establishes criteria for each member company
through benchmarks and best practices for that industry.
C. Appropriate accounting or auditing standards, including international standards, should be
used as the criteria.
D. Internal auditors should use professional standards or government regulations to establish
the criteria.
Internal auditors must ascertain the extent to which management has established adequate
criteria to determine whether objectives and goals have been accomplished (Impl. Std.
2210.A3). Thus, management is always responsible for establishing the criteria.
All of the following are acceptable criteria on which an internal audit may be based except
A. Standards or guidelines.
B. Policies and procedures.
C. Management cooperation with audit activities.
D. Control frameworks.
Management cooperation with audit activities is not a measure or expectation but rather a
condition. A condition is the factual evidence that the internal auditor found in the course of the
examination.
When a final engagement communication contains a significant error, the Standards require the
chief audit executive to
A. Communicate corrected information to all those who might have relied on the original
communication.
B. Issue a written report to individuals who received the original communication.
C. Issue a written report to individuals who can ensure that engagement results are given due
consideration.
D. Communicate corrected information to all individuals who received the original
communication.
If a final engagement communication contains a significant error or omission, the CAE must
communicate corrected information to all who received the original communication (Perf. Std.
2421). Hence, the Standards do not require a written report.
Internal audit activity policy requires that final engagement communications not be issued
without a management response. An engagement with significant observations is complete
except for management's response. Evaluate the following courses of action and select the best
alternative.
A. Wait for management's response and then issue the engagement communication.
B. Modify the policy to allow a specific time period for management's response.
C. Issue an interim engagement communication regarding the important issues noted.
D. Discuss the situation with the external auditors.
Interim reports are used to communicate information that requires immediate attention, to
communicate a change in engagement scope for the activity under review, or to keep
management informed of engagement progress when engagements extend over a long period.
The use of interim reports does not diminish or eliminate the need for a final report (PA 2410-1,
para. 14).
During the working-paper review, an internal auditing supervisor finds that the internal auditor's
observations are not adequately cross-referenced to supporting documentation. The supervisor
will most likely instruct the internal auditor to
A. Eliminate any cross-references to other working papers because the system is unclear.
B. Prepare a working paper to indicate that the full scope of the engagement was carried out.
C. Familiarize himself or herself with the sequence of working papers so that (s)he will be able
to answer questions about the conclusions stated in the final engagement communication.
D. Provide a cross-referencing system that shows the relationship among observations,
conclusions, recommendations, and the related facts.
Cross-referencing is important because it simplifies review either during the engagement or
subsequently by creating a trail of related items through the working papers. It thus facilitates
preparation of the final engagement communication and later engagements for the same
engagement client.
An internal auditor makes inquiries of the floor manager, observes inventory-counting
procedures, and inspects warehouse equipment to determine whether management's goals are
being met. These evidence-gathering procedures are performed in which of the following
phases of an engagement?
A. Conducting the preliminary survey.
B. Establishing engagement objectives.
C. Developing the engagement program.
D. Field work.
Methods of gathering evidence, such as making inquiries, observing inventory, and inspecting
equipment are used in the field work phase of the engagement. This phase follows the
determination of engagement objectives and scope, risk assessment, and planning.
20. The purpose of including a time budget in an engagement work program is to
A. Provide a means of controlling and evaluating the progress of the engagement.
B. Restrict the scope of the engagement.
C. Provide an objective means of evaluating the internal auditor's competence.
D. Ensure timely completion of the engagement.
Supervision includes, among other things, ensuring the approved engagement program is
completed unless changes are justified and authorized (PA 2340-1, para. 1). For this purpose, a
time budget is necessary to evaluate and control the progress of the engagement. It permits
comparison of the actual time spent on a procedure with its allotted time.
Which of the following is least likely to be placed on the agenda for discussion at a pre-
engagement meeting?
A. Client personnel needed.
B. Objectives and scope of the engagement.
C. Expected starting and completion dates.
D. Sampling plan and key criteria.
Possible objectives and scope for the engagement, the client personnel to whom the auditors
need access, and the expected start and completion dates for the engagement are all
appropriate matters for discussion at a pre-engagement meeting. The sampling plan cannot be
drafted until risk is assessed and the engagement objectives are set.
The chief audit executive is responsible for engagement supervision. The most important form
of supervision during the field work phase of engagements 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. Ensuring that the approved engagement work program is completed unless changes are
justified and authorized.
D. Providing suitable instructions to subordinates at the outset of the engagement and
approving the engagement work program.
Supervision includes ensuring the approved engagement program is completed unless changes
are justified and authorized (PA 2340-1, para. 1). Execution of the work program requires
supervision during field work. The other supervisory tasks generally are carried out before or
after field work.
You are conducting an engagement to evaluate the organization's marketing effort. You agreed
to keep the marketing vice president informed of your progress on a regular basis. What method
should be used for those progress reports?
A. Oral or written interim reports.
B. Written reports signed by the chief audit executive.
C. Briefing by the appropriate marketing first-line supervisor.
D. Copies of working paper summaries.
Interim reports are written or oral and may be transmitted formally or informally. Interim reports
are used to communicate information that requires immediate attention, to communicate a
change in engagement scope for the activity under review, or to keep management informed of
engagement progress when engagements extend over a long period (PA 2410-1, para. 14).
Engagement work programs testing controls ordinarily must
A. Reduce costly duplication of effort by ensuring that every aspect of an operation is examined.
B. Be generalized so as to be usable at all locations of a particular department.
C. Be generalized to fit all situations without regard to departmental lines.
D. Be specifically designed for each operation evaluated.
A work program must be adapted to the specific needs of the engagement after the internal
auditor establishes the engagement objectives and scope and determines the resources
required. A pro forma (standard) work program is not appropriate for a complex or changing
environment. Its stated objectives and procedures may no longer be relevant.
While planning an engagement, an internal auditor establishes engagement objectives to
describe what is to be accomplished. Which of the following is a key issue to consider in
developing engagement objectives?
A. The qualifications of the internal auditing staff selected for the engagement.
B. Recommendations of the engagement client's employees.
C. Risks associated with the activities to be reviewed.
D. The recipients of the final engagement communication.
Internal auditors establish engagement objectives to address the risks associated with the
activity under review. For planned engagements, the objectives proceed and align to those
initially identified during the risk assessment process from which the internal audit plan is
derived (PA 2210-1, para. 1).
The effectiveness of an internal auditing engagement is related to the results and the action
taken on those results. Which of the following activities contributes to engagement
effectiveness?
A. Adhering to a time budget.
B. Having budget revisions approved by the project supervisor.
C. Preparing weekly time reports.
D. Conducting an exit meeting with engagement clients.
An exit meeting (post-engagement meeting) is an opportunity for discussion of engagement
results, i.e., observations, conclusions, and recommendations. The effectiveness of an
engagement is enhanced by the exit meeting because it provides the engagement client an
opportunity to clarify specific items and to express views of the observations, conclusions, and
recommendations.
Which of the following items does not constitute evidence of proper supervision of an internal
auditing engagement?
A. The internal audit manager carefully reviews all analytical procedures performed by internal
audit seniors during the preliminary planning for an engagement to determine if the conclusions
are justified.
B. An internal audit manager is not intimately involved in an engagement, but does review the
results to ensure that all engagement objectives are being met.
C. An internal audit manager approves the engagement work program and gives instructions to
subordinates at the outset of the engagement, and is available for consultation, but does not
actively participate in the performance of procedures.
D. A senior internal auditor continuously deviates from the approved engagement work
program, but consistently completes the engagement within the approved time budget. The time
budget is approved by the internal audit manager, and compliance with the time budget is
reviewed by the internal audit manager.
Supervision includes ensuring the approved engagement program is carried out unless changes
are justified and authorized (PA 2340-1, para. 1). Accordingly, the deviations from the planned
engagement work program by the senior internal auditor should be approved by a supervisor.
Developing engagement observations, conclusions, and recommendations involves comparing
the condition with the relevant standard or criterion. Which of the following choices best
represents an appropriate standard or criterion to support engagement observations,
conclusions, and recommendations?
A. A quality standard operating procedure (number and date) for the department.
B. A sound industry practice, based on the internal auditor's knowledge and experience
obtained during many engagement assignments within the organization.
C. An internal accounting control principle, cited and copied from a public accounting reference.
D. All of the answers represent an appropriate standard or criterion to support engagement
observations, conclusions, and recommendations.
Acceptable industry standards, standards developed by professions or associations, standards
in law and government regulations, and other sound business practices are usually deemed to
be appropriate criteria.
Communication skills are important to internal auditors. The internal auditor should be able to
effectively convey all of the following to the engagement client except
A. The evaluations based on a preliminary survey of an engagement client.
B. Recommendations that are generated in relationship to a specific engagement client.
C. The engagement objectives for a specific engagement client.
D. The risk assessment used in selecting the area for engagement investigation.
Internal auditors need to be skilled in oral and written communications so that they can clearly
and effectively convey such matters as engagement objectives, evaluations, conclusions, and
recommendations (PA 1210-1, para. 1). The internal auditor's risk assessment is not specifically
mentioned.
The action taken by an internal auditor who discovers a significant area not included in the
engagement work program should be to
A. Evaluate whether completion of the engagement as planned will be adequate.
B. Perform the additional work deemed necessary without regard to the additional time needed
to complete the engagement.
C. Continue the engagement as planned and include the unforeseen area in a subsequent
engagement.
D. Document the observation in the working papers and take no further action until instructed to
do so.
A work program documents engagement procedures selected in advance but should be
modified, as appropriate, during the course of the engagement (PA 2200-1). The work program
must be approved prior to its implementation, and any adjustments approved promptly (Impl.
Std. 2240.A1). Work programs are necessarily tentative because the internal auditors are likely
to encounter unexpected situations while performing detailed procedures. If they learn that a
significant area is not covered, the internal auditors must determine whether they can achieve
the engagement objectives and satisfy their professional responsibilities without modification of
the work program. Modification will necessitate consultation with superiors to obtain
authorization to adjust time and financial budgets.
Scope statements for assurance engagements may include which of the following?
1. Boundaries of the process
2. Areas that are within the scope and those that are excluded
3. Time frame limitations
4. Final report distribution
A. 1, 2, and 3 only.
B. 1 and 2 only.
C. 1, 2, and 4 only.
D. 2 and 3 only.
Audit scope statements (1) describe the limits of the engagement, (2) identify activities to be
reviewed and any related activities that are excluded, and (3) specify a time frame for
completion.
In a well-developed management environment, the internal audit activity
A. Focuses primarily on asset management and report results to the audit committee.
B. Interfaces primarily with senior management, minimizing interactions with line managers who
are the subjects of internal audit work.
C. Conducts initial audits of new computer systems after they have begun operating.
D. Reports the results of an audit engagement to line management as well as to senior
management.
Internal auditors discuss conclusions and recommendations with appropriate levels of
management before the chief audit executive (CAE) issues the final engagement
communications (PA 2440-1, para. 1). The level of participants in the discussions and reviews
varies by organization and nature of the report; they generally include those individuals who are
knowledgeable of detailed operations and those who can authorize the implementation of
corrective action (para. 3).
The scope statement of an engagement communication should
A. Identify the activities reviewed and describe the nature and extent of work performed.
B. Define the standards, measures, or expectations used in evaluating engagement
observations.
C. Communicate the internal auditor's evaluation of the effect of the observations on the
activities reviewed.
D. Describe the engagement objectives and tell the reader why the engagement was
conducted.
Scope statements identify the audited activities and may include supportive information such as
time period reviewed and related activities not reviewed to delineate the boundaries of the
engagement. They may describe the nature and extent of engagement work performed (PA
2410-1, para. 4).
Documentation required to plan an internal audit engagement includes information that
A. Resources needed to complete the engagement were considered.
B. Intended engagement observations have been clearly identified.
C. Internal audit activity resources are efficiently and effectively employed.
D. Planned engagement work will be completed on a timely basis.
Internal auditors must develop and document a plan for each engagement, including the
engagement's objectives, scope, timing, and resource allocations (Perf. Std. 2200).
As part of planning an engagement, the internal auditor in charge does all of the following
except
A. Distribute reports from meetings with management.
B. Determine the period covered.
C. Determine to whom engagement results will be communicated.
D. Conduct meetings with management responsible for the activity under review.
The CAE determines how, when, and to whom engagement results will be communicated (PA
2200-1, para. 5).
A final communication issued by an internal auditor following an assurance engagement should
contain an expression of opinion when
A. The internal auditors' work is to be used by external auditors.
B. A full-scope engagement has been conducted in an area.
C. An opinion will improve communications with the readers of the communication.
D. The area of the engagement is the financial statements.
Final communication of engagement results must, where appropriate, contain the internal
auditor's opinion and/or conclusions (Impl. Std. 2410.A1). Improving communications with the
reader satisfies the appropriateness criterion.
Field work is a systematic process of objectively gathering information about an entity's
operations, evaluating it, and determining whether those operations meet acceptable standards.
Which of the following is not part of the work performed during field work?
A. Creating working papers that document the engagement.
B. Developing a written engagement work program.
C. Expanding or altering engagement procedures if circumstances warrant.
D. Applying the engagement work program to accomplish engagement objectives.
The engagement work program is the culmination of the planning process.
Which of the following is an appropriate statement of an engagement objective?
A. To observe the physical inventory count.
B. To include information about stockouts in the final engagement communication.
C. To search for the existence of obsolete inventory by computing inventory turnover by product
line.
D. To determine whether inventory stocks are sufficient to meet projected sales.
An engagement objective is a broad statement developed by internal auditors to define intended
engagement accomplishments (The IIA Glossary). Determining whether inventory stocks are
sufficient to meet projected sales is an engagement objective because it defines an audit
accomplishment, not an engagement procedure. A procedure is designed to gather information
that corroborates and documents conclusions about objectives.
Which of the following should not be one of the primary reasons why an internal auditor may
communicate sensitive information outside the normal chain of command?
A. The desire to stop the wrongful, harmful, or improper activity.
B. The internal auditor does not agree with how the board or directors or management may
correct the problem.
C. A professional obligation requires disclosure of the activity to an outside party.
D. Legal advice indicates that the internal auditor should disclose the sensitive information to an
outside party.
An internal auditor who communicates sensitive information outside the chain of command
should be motivated by the desire to stop the wrongful, harmful, or improper activity; legal
advice; or a professional obligation. A personal disagreement is the least satisfactory reason.
A work program for a comprehensive assurance engagement to evaluate a purchasing function
should include
A. Procedures arranged by relative priority based upon perceived risk.
B. A focus on risks affecting the financial statements as opposed to controls.
C. A statement of the engagement objectives for the operation under review with agreement by
the engagement client.
D. Procedures to accomplish engagement objectives.
Work programs are a necessary part of engagement planning. They include the procedures for
collecting, analyzing, interpreting, and documenting information during the engagement (PA
2240-1, para. 2).
The best control over the work on which internal auditors' opinions are based is
A. Preparation of engagement working papers.
B. Supervisory review of all engagement work.
C. Preparation of time budgets for internal audit activities.
D. Staffing of internal audit activities.
The engagement must be properly supervised to ensure objectives are achieved, quality is
ensured, and staff is developed (Perf. Std. 2340). Supervision includes (1) ensuring the auditors
possess the requisite knowledge, skills, and other competencies; (2) providing appropriate
instructions during planning and approving the engagement program; (3) ensuring the approved
engagement program is complete unless changes are justified and authorized; (4) determining
working papers adequately support observations, conclusions, and recommendations; (5)
ensuring communications are accurate, objective, clear, concise, constructive, and timely; (6)
ensuring objectives are met; and (7) providing opportunities for developing internal auditors'
knowledge, skills, and other competencies (PA 2340-1, para. 1). Hence, supervision is a control
that applies to all aspects of engagements.
A relatively new internal auditor is completing a final engagement communication. The
communication should most appropriately be signed by the
A. Internal auditor and the manager of the activity under review to indicate that they concur with
the report.
B. Chair of the audit committee.
C. Chief audit executive.
D. Internal auditor because of a greater level of detailed knowledge of the report.
The CAE determines which internal auditor is authorized to sign the report (PA 2410-1, para.
15).
If an auditor's preliminary evaluation of internal controls results in an observation that controls
may be inadequate, the next step is to
A. Expand audit work prior to the preparation of an engagement final communication.
B. Prepare a flowchart depicting the internal control system.
C. Implement the desired controls.
D. Note an exception in the engagement final communication if losses have occurred.
After identifying the risks, the auditor determines the procedures to be performed and the scope
(nature, timing, and extent) of those procedures (PA 2210-1, para. 3). If the preliminary
evaluation indicates increased control risk, the auditor usually decides to apply additional
engagement procedures to reach the engagement objectives.
The manner in which data and evidence is gathered, evaluated, and summarized for
presentation should be done with care and precision. Which quality of communications does this
statement best describe?
A. Objective.
B. Constructive.
C. Accurate.
D. Timely.
Communications should be accurate, objective, clear, concise, constructive, complete, and
timely (Perf. Std. 2420). Accurate communications are free from errors and distortions and are
faithful to the underlying facts (Inter. Std. 2420).
The primary reason for having written formal audit reports is to
A. Record observations and recommended courses of action.
B. Provide a formal means by which the external auditor assesses potential reliance on the
internal audit activity.
C. Provide an opportunity for engagement client response.
D. Document the corrective actions required of senior management.
A written formal audit report provides client personnel and senior management with a consistent
version of the conditions found by the auditors and of the recommended remedial actions.
Internal auditors must develop and document a plan for each engagement. The planning
process should include all the following except
A. Obtaining background information about the activities to be reviewed.
B. Identifying sufficient information to achieve engagement objectives.
C. Determining how, when, and to whom the engagement results will be communicated.
D. Establishing engagement objectives and scope of work.
Internal auditors must develop and document a plan for each engagement, including the
engagement's objectives, scope, timing, and resource allocations (Perf. Std. 2200). Identifying
sufficient information to achieve engagement objectives is done during field work, not planning.
The content and format of engagement communications may vary. However, according to the
Standards, a necessary element is statement of
A. Documentation of previous oral communications.
B. The status of observations from prior engagement communications.
C. Related activities not reviewed.
D. Engagement objectives.
Communications must include the engagement's objectives and scope as well as applicable
conclusions, recommendations, and action plans (Perf. Std. 2410).
Exit meetings serve to ensure the accuracy of the information used by an internal auditor. A
secondary purpose of an exit meeting is to
A. Agree to the appropriate distribution of the final engagement communication.
B. Brief senior management on the results of the engagement.
C. Improve relations with the engagement clients.
D. Get immediate action on a recommendation.
Discussion of conclusions and recommendations with the engagement client not only provides a
quality control review but is also a courtesy that enhances the internal auditor-client relationship.
In addition, the exit meeting is an important aspect of the participative approach to internal
auditing because it involves the client in the engagement process as well as in any
recommended changes arising from the engagement.
In beginning an engagement, an internal auditor reviews written procedures that detail
segregations of responsibility adopted by management to strengthen internal controls. These
written procedures should be viewed as which attribute of an observation?
A. Effect.
B. Condition.
C. Cause.
D. Criteria.
Criteria are the standards, measures, or expectations used in making an evaluation and/or
verification (the correct state) (PA 2410-1, para. 7). The written procedures represent the
standards (criteria) against which an observation concerning segregation of responsibility
should be measured.
Before an assurance engagement can be performed, the auditor must identify appropriate
criteria. The sources of such criteria are least likely to include
A. Benchmarks for the leading firms in the industry.
B. Historical cost information for the processes examined.
C. Government regulations for the industry.
D. Best practices for another industry.
Acceptable industry standards, standards developed by professions or associations, standards
in law and government regulations, and other sound business practices are usually deemed to
be appropriate criteria.
When making a presentation to management, the internal auditor wants to report observations,
conclusions, and recommendations and to stimulate action. These objectives are best
accomplished by
A. Delivering a lecture on the engagement results.
B. Showing a series of slides or overheads, which graphically depict the engagement results;
limit verbal commentary.
C. Using slides/overheads to support a discussion of major points.
D. Handing out copies of the final engagement communication, asking the participants to read it,
and asking for questions.
Using audiovisual aids to support a discussion of major points results in the greatest retention of
information. One study concluded that 85% of the information presented in this way will be
remembered after 3 hours, and 65% after 3 days.
Successful communication between the internal auditor and the engagement client partially
depends on achieving appropriate emphasis so that both parties are aware of the most
important points in their discussion. Which of the following approaches provides the most
emphasis in an engagement communication?
A. Key points embedded in discussion.
B. Graphics, repetition, and itemization.
C. Calm discussion in a conversational tone.
D. Solid paragraphs and detailed appendices.
Graphic illustrations (e.g., pictures, charts, or graphs), oral and written repetition such as
summaries, and itemized lists (bulleted or numbered) are good ways of emphasizing
information.
A purpose of the internal auditors' exit meeting with appropriate levels of management is to
A. Generate commitment for appropriate managerial action.
B. Obtain information to evaluate internal control.
C. Present the final engagement communication to the chief executive officer.
D. Inform members of the board of engagement results.
Discussion of conclusions and recommendations with the engagement client not only provides a
quality control review but is also a courtesy that enhances the internal auditor-client relationship.
In addition, the exit meeting is an important aspect of the participative approach to internal
auditing because it involves the client in the engagement process as well as in any
recommended changes arising from the engagement. People are more likely to accept changes
if they have participated in the decisions and in the methods used to implement changes.
Engagement working papers are reviewed to ensure that
A. They are properly referenced for easy follow-up within the next year.
B. They meet or exceed the work standards of the organization's external auditors.
C. They are properly cross-referenced to the engagement communications.
D. No issues are open at the conclusion of the field work.
All engagement working papers are reviewed to ensure they support engagement
communications and necessary audit procedures are performed (PA 2340-1, para. 3).
Which of the following statements is true with respect to a time budget for an internal audit
engagement?
A. Time budgets should be used for financial audits, but not for operational audits.
B. Time budgets should be strictly adhered to, regardless of circumstances.
C. Requests for time budget adjustments should be approved by the audit committee.
D. Time budgets should normally be prepared in terms of hours or days.
A budget is a plan that contains a quantitative statement of expected results. It may be defined
as a quantified program. All engagement projects and other assignments must be kept under
budgetary control. Time budgets for engagement projects are usually prepared in employee-
hours or employee-days.
An internal auditor's final engagement communication contains the statement: "The training
department expended $100,000 on the development of a training course that cannot be used."
That statement is an example of
A. Criteria.
B. Cause.
C. Recommendation.
D. Effect.
The effect attribute is the risk or exposure the organization and/or others encounter because the
condition is not consistent with the criteria (the impact of the difference) (PA 2410-1, para. 7).
The description of the needless expenditure of $100,000 fulfills this attribute.
Which of the following statements is an engagement objective?
A. Recompute each month's bank reconciliation.
B. Analyze the pattern of any cash shortages.
C. Observe the deposit of the day's cash receipts.
D. Evaluate whether cash receipts are adequately safeguarded.
Engagement objectives are broad statements developed by internal auditors that define
intended engagement accomplishments (The IIA Glossary). Procedures are the means to reach
conclusions related to the objectives. Evaluating whether cash receipts are adequately
safeguarded is an objective because it states what the engagement is to accomplish.
According to the Standards, when should a signed report be issued?
A. Only if required by the particular engagement.
B. At predetermined stages as the engagement progresses.
C. Whenever an opinion is expressed.
D. At the conclusion of an engagement.
A signed report is issued after the engagement's completion (PA 2410-1, para. 15).
The scope section of an internal auditor's final engagement communication should identify
A. The engagement techniques used.
B. Any unresolved differences with engagement clients.
C. Any limitations imposed.
D. The sampling methodology employed.
Since limitations set the boundaries of the engagement, they must be identified in the scope
section.
Which of the following should be identified as a deficiency by an engagement supervisor who is
reviewing working papers?
A. A letter to the engagement client outlining the scope of the engagement was recorded in the
working papers.
B. A draft communication concerning an engagement observation recorded in the working
papers omitted the criteria used for evaluation.
C. A memorandum recorded in the working papers explained why an engagement work
program step was omitted.
D. A memorandum recorded in the working papers explained why the time budget for a part of
the engagement was exceeded.
Observations are included in engagement communications. According to PA 2410-1,
observations have four attributes: criteria, condition, cause, and effect. Thus, omitting the
criteria used in making an evaluation or verification results in a failure to support observations
properly.
In planning an engagement, the internal auditor establishes objectives to address the risk
associated with the activity. Risk is the
A. Uncertainty of the occurrence of an event that could affect the achievement of objectives.
B. Failure to adhere to organizational policies, plans, and procedures or to comply with relevant
laws and regulations.
C. Possibility that the balance or class of transactions and related assertions contains
misstatements that could be material to the financial statements.
D. Failure to accomplish established objectives and goals for operations or programs.
Risk is the possibility that an event will occur having an impact on the achievement of
objectives. Risk is measured in terms of impact and likelihood (The IIA Glossary).
An auditor experienced in air-quality issues discovered a significant lack of knowledge about
legal requirements for controlling air emissions while interviewing the manager of the
environmental, health, and safety (EHS) department. The auditor should
A. Alter the scope of the engagement to focus on activities associated with air emissions.
B. Share extensive personal knowledge with the EHS manager.
C. Report potential violations in this area to the appropriate regulatory agency.
D. Take note of the weakness and direct additional questions to determine the potential effect of
the lack of knowledge.
An engagement's objectives and procedures address the risks associated with the activities
under review. The preliminary risk assessment identifies significant activities requiring
examination as potential objectives. Thus, the auditor ensures that the field work is designed to
identify potential instances of noncompliance. In the closing conference, the auditor should
recommend additional training for the EHS manager.
One of the primary roles of an engagement work program is to
A. Provide for a standardized approach to the engagement.
B. Document an internal auditor's evaluations of controls.
C. Assess the risks associated with the activity under review.
D. Serve as a tool for planning and conducting engagement work.
Among other things, work programs state the objectives of the engagement, identify technical
requirements, and state the nature and extent of testing required (PA 2200-1, para. 1).
The established scope of the engagement must be sufficient to satisfy the objectives of the
engagement. When developing the objectives of the engagement, the internal auditor considers
the
A. Information included in the engagement work program.
B. Probability of significant noncompliance.
C. Results of engagement procedures.
D. Resources required.
Internal auditors must consider the probability of significant errors, fraud, noncompliance, and
other exposures when developing assurance engagement objectives (Impl. Std. 2210.A2).
The internal auditor-in-charge has just been informed of the next engagement, and the
engagement team has been assigned. Select the appropriate phase for finalizing the
engagement budget.
A. After the completion of all field work.
B. After the preliminary survey.
C. During the initial planning meeting.
D. During formulation of the long-range plan.
A survey permits an informed approach to planning and carrying out engagement work and is
an effective tool for allocating the internal audit activity's resources where they can be used
most effectively. Among other things, the results of the survey should include preliminary
estimates of time and resource requirements. Thus, after the preliminary survey has been
completed, the final engagement budget can be prepared.
One purpose of the exit meeting is for the internal auditor to
A. Require corrective action.
B. Review and verify the appropriateness of the engagement communication based upon client
input.
C. Review the performance of internal auditors assigned to the engagement.
D. Present the final engagement communication to management.
Internal auditors discuss conclusions and recommendations with appropriate levels of
management before the CAE issues the final engagement communications. This is usually
accomplished during the course of the engagement or at post-engagement meetings (PA 2440-
1, para. 1). Another technique is the review of draft engagement conclusions, observations, and
recommendations by management of the activity reviewed. These discussions and reviews help
ensure that there have been no misunderstandings or misinterpretations of fact by providing the
opportunity for the engagement client to clarify specific items and to express views of the
observations, conclusions, and recommendations (para. 2).
Which of the following is most appropriate for inclusion in the summary of a final engagement
communication?
A. Reference to areas not covered by the engagement.
B. Engagement client responses to recommendations.
C. A concise statement of engagement observations.
D. Discussion of recommendations given in prior years' engagement communications.
A signed report is issued after the engagement's completion. Summary reports highlighting
engagement results are appropriate for levels of management above the engagement client (PA
2410-1, para. 15).
A docket is to a judge as what is to an auditor performing an engagement?
A. Audit report.
B. Work program.
C. Audit documentation.
D. Charter.
Internal auditors must develop and document work programs that achieve the engagement
objectives (Perf. Std. 2240). Work programs establish the procedures for collecting, analyzing,
interpreting, and documenting information during the engagement. During the engagement,
each procedure is signed off to indicate that the work has been completed. Like a court docket,
a work program is used to keep track of the events/workload (i.e., audit procedures/court cases)
to be accomplished.
Final engagement communications should, at a minimum, contain the purpose, scope, and
results of the engagement. Engagement observations and recommendations should be based
on four attributes: criteria, condition, cause, and effect. The cause can best be described as
A. Resultant evaluations of the effects of the observations and recommendations.
B. Factual evidence that the internal auditor found.
C. The risk or exposure because of the condition found.
D. Reason for the difference between the expected and actual conditions.
The cause attribute is the reason for the difference between the expected and actual conditions
(PA 2410-1, para. 7). Cause provides the answer to the question "Why?" and should be the
basis for corrective action.
Writing an engagement work program most likely occurs at which stage of the engagement?
A. Subsequent to evaluating risk management and control systems.
B. As the engagement is performed.
C. During the planning stage.
D. At the end of each engagement when the standard work program should be revised for the
next engagement to ensure coverage of noted problem areas.
The engagement work program is the culmination of the planning stage.
If an engagement client's operating standards are vague and thus subject to interpretation, the
internal auditor must
A. Interpret the standards in their strictest sense because standards are otherwise only
minimum measures of acceptance.
B. Determine best practices in this area and use them as the standard.
C. Omit any comments on standards and the engagement client's performance in relationship to
those standards because such an analysis would be meaningless.
D. Seek agreement with management as to the criteria to be used to measure operating
performance.
Adequate criteria are needed to evaluate controls. Internal auditors must ascertain the extent to
which management has established adequate criteria to determine whether objectives and
goals have been accomplished. If adequate, internal auditors must use such criteria in their
evaluation. If inadequate, internal auditors must work with management to develop appropriate
evaluation criteria (Impl. Std. 2210.A3).
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"the safest place to be is within the

Statistical Sampling for Substantive Testing

Statistical Sampling for Substantive Testing

1. In applying variables sampling, an auditor attempts to

a. Estimate a qualitative characteristic of interest. b. Determine

2. The measure of variability of a statistical sample that serves as

a. Basic precision. b. Range. c. Standard deviation. d. Interval.

3. An auditor selects a statistical sample from a large inventory of

a. The auditor plans to estimate the total dollar value of the

4. Precision is defined as the range (plus or minus) within which the

a. Precision is set by the auditor and is a function of

b. The narrower the range of precision, the smaller the sample

c. An increase in control risk, other parameters remaining

d. Overall audit risk is the complement of reliability.

5. In an application of mean per unit sampling, the following

Reported book value $600,000 Point estimate (estimated

The appropriate conclusion would be that the reported book value is

6. Sampling risk refers to the possibility that:

7. The primary reason for an auditor to use statistical sampling is to

a. Obtain a smaller sample than would be required by non-statistical

8. The variability of a population, as measured by the standard

a. Extent to which the individual values of the items in the

9. Management has asked the internal auditing staff to evaluate the

a. Attribute sampling. b. Acceptance sampling. c. Variables

10. During an audit involving testing of accounts receivable

a. An increase in the required sample size. b. A decrease in the

a. Tolerable error. b. Expected error. c. Allowable risk of incorrect

12. Sample size

a. Increases with the use of higher confidence levels. b. Decreases

13. In sampling for variables, which of the following must be

known in order to estimate the appropriate sample size required to

a. The total amount of the population. b. The desired standard

14. In a variables sampling application, which of the following will

a. Standard error of the mean will not be affected. b. Non-sampling

a. Eliminate any of the items known to be subject to unusually large

16. In conducting a substantive test of an account balance, an

a. Incorrect rejection. b. Alpha error. c. Incorrect acceptance. d.

17. Which of the following best illustrates the concept of sampling

a. A randomly chosen sample may not be representative of the

b. An auditor may select audit procedures that are not appropriate

18. Using the following results from a variables sample, compute

Population size = 10,000 Sample size = 144 Sample standard

a. $5,702 b. $33,000 c. $20,000 d. $16,500

19. Which of the following sampling plans would be designed to

a. Discovery sampling. b. Numerical sampling. c. Sampling for

20. An auditor is using the mean-per-unit method of variables

a. There is a 4% chance that the actual correct total is less

d. The inventory is not likely to be overstated by more than

21. Which of the following statements is correct concerning the

a. An auditor needs to estimate the dollar amount of the standard

22. Which of the following statements concerning alpha and beta

a. As alpha risk increases, beta risk decreases.

b. As inherent risk and/or control risk increase, beta risk

c. As inherent risk and/or control risk increase, beta risk

23. Statistical samples as compared to non-statistical samples

a. Quantify and control sampling risk. b. Eliminate non-sampling

24. Probability-proportional-to-size (PPS) sampling is less efficient if

a. Computerized account balances are being audited. b. Statistical

25. A number of factors influences the sample size for a substantive

a. Lowering of assessed level of control risk. b. Lowering of

a. An increase in beta risk reduces sample size.

b. Population size affects sample size inversely, i.e., as