Question 1

Which of the following is true of a horizontal flowchart as compared to a vertical flowchart?

Accepted Answer

The answer of Which of the following is true of...

Question 2

When comparing an organization's current performance to that of the prior year, an internal auditor found that: Total labor costs had increased. More overtime costs had been incurred. The total number of workers had increased. Net income was 10 percent lower. Based solely on this information, which of the following is a valid conclusion?

Accepted Answer

The net income decreased by 10% while the number of workers increased, leading to a decrease in net income per worker.

Question 3

Which of the following, if observed, would not indicate the need to extend the search for other indicators of fraud in a purchasing department?

Accepted Answer

Convincing management to adopt a policy of paying vendors more timely to avoid penalties is a legitimate business decision and does not inherently indicate fraud.

Question 4

Which of the following statements is true about visual observation during an audit engagement? 1. Visual observations should not be documented as the facts have not been substantiated. 2. Complex conditions observed should be verified prior to communicating observations to management. 3. Visual observations can be used to detect ineffective controls, idle resources, and safety hazards. 4. Visual observation can be used during both preliminary survey and fieldwork stages of the audit engagement.

Accepted Answer

Visual observations should be documented and can be used to detect issues like ineffective controls and safety hazards. Complex conditions should be verified before reporting, and visual observation is applicable in both preliminary and fieldwork stages.

Question 5

Which of the following would provide the best evidence of compliance with an airline's standard of having aircraft refueled and cleaned within a specified time of arrival at an airport?

Accepted Answer

Observation of selected aircraft while they are being refueled and cleaned provides direct evidence of compliance with the specified time standards.

Question 6

During an audit of a major contract, an internal auditor finds that actual hours and dollars billed are consistently at or near budgeted amounts. This condition is a red flag for which of the following procurement fraud schemes?

Accepted Answer

Cost mischarging occurs when actual hours and dollars billed are manipulated to match budgeted amounts, potentially indicating fraudulent billing practices.

Question 7

According to IIA guidance, which of the following best describes acceptable methods for internal auditors to obtain qualified continuing professional education hours?

Accepted Answer

The IIA guidance recognizes volunteering in relevant professional organizations, formal education, and online training courses as acceptable methods for obtaining continuing professional education hours.

Question 8

A production division received 45 responses to a customer-service survey distributed to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. Which of the following is the most likely reason that the division manager would be concerned about nonresponse bias in this situation?

Accepted Answer

Nonresponse bias occurs when the individuals who do not respond to a survey differ in meaningful ways from those who do respond, potentially skewing the results.

Question 9

A retail sales company has discontinued a product that normally sold for $100. During the first month of a sale of the product, a 20 percent discount was given. Later that sale price was reduced by an additional 40 percent. What was the overall discount from the original selling price?

Accepted Answer

The first discount reduces the price to $80 (20% off $100). The second discount is 40% off $80, which is $32, making the final price $48. The overall discount is $100 - $48 = $52, which is 52% of the original price.

Question 10

Which type of control is designed to directly mitigate internal and external risks at the organization wide level, furthering the achievement of many overall organizational objectives?

Accepted Answer

Entity-level controls are designed to mitigate risks at the organization-wide level and support the achievement of overall organizational objectives.

Question 11

Which of the following is not an advantage of face-to-face interviews over electronic surveys?

Accepted Answer

Face-to-face interviews are generally more expensive to conduct than electronic surveys due to costs associated with travel, personnel, and time.

Question 12

Feedback on engagements from audit clients, annual benchmarking of the internal audit activity's (IAA's) performance against best practice, and analyses of project budgets and audit plan completion are all tools that can best be used by the IAA for which purpose?

Accepted Answer

These tools are used for completing internal assessments as they help evaluate the performance and effectiveness of the internal audit activity.

Question 13

Company A has a formal comprehensive corporate code of ethics while company B does not. Which of the following statements regarding the existence of the code of ethics in company A can be logically inferred? 1. Company A exhibits a higher standard of ethical behavior than does company B. 2. Company A has established objective criteria by which an employee's actions can be evaluated. 3. The absence of a formal corporate code of ethics in company B would prevent a successful audit of ethical behavior in that company.

Accepted Answer

A formal corporate code of ethics provides objective criteria for evaluating employee actions, but it does not necessarily mean the company exhibits higher ethical behavior or that an audit cannot be conducted without it.

Question 14

After completing a net present value (NPV) calculation on a proposed project, an analyst explores the change in NPV with changes in the interest rate. This additional analysis is referred to as:

Accepted Answer

Sensitivity analysis involves changing one variable at a time to see how it affects the outcome, such as NPV, to understand the impact of changes in key assumptions.

Question 15

Which of the following might alert an internal auditor to the possibility of fraud in a division? 1. The division is not scheduled for an external audit this year. 2. Sales have increased by 10 percent. 3. A significant portion of management's compensation is directly tied to reported net income of the division.

Accepted Answer

A significant portion of management's compensation being tied to reported net income can create an incentive for management to manipulate financial results, which could alert an internal auditor to the possibility of fraud.

Question 16

Once the cause of a problem has been identified, the next step is to:

Accepted Answer

After identifying the cause of a problem, the next logical step is to generate alternative solutions to address the issue effectively.

Question 17

According to IIA guidance, which of the following statements is true regarding the reporting of results from a quality assurance and improvement program review of the internal audit activity?

Accepted Answer

The IIA guidance states that the results of a quality assurance and improvement program should be shared with both the board and management, and the monitoring of recommended improvements should be reported at least annually.

Question 18

An internal auditor is checking the accuracy of a computer-printed inventory listing to determine whether the total dollar value of inventory is significantly overstated. Because there is no time or resources to check all items in the warehouse, a sample of inventory items must be used. If the sample size is fixed, which of the following would be the most accurate sampling approach?

Accepted Answer

Sampling proportional to book value ensures that items with higher values, which have a greater impact on the total inventory value, are more likely to be included in the sample. This approach helps in accurately assessing whether the total dollar value of inventory is significantly overstated.

Question 19

A chief audit executive (CAE) submits internal audit activity (IAA) plans and information about significant interim changes to senior management and the board for review. Which other piece of information should the CAE provide to senior management and the board?

Accepted Answer

The CAE should provide information on resource requirements and limitations to ensure that the board and senior management are aware of any constraints that might impact the internal audit activity's ability to fulfill its responsibilities effectively.

Question 20

An internal auditor used a questionnaire during an interview to gather information about the nature of credit sales processing. The questionnaire did not cover some pertinent information offered by the person being interviewed, and the auditor did not document the potential problems for further investigation. The primary deficiency with the above process is that:

Accepted Answer

The primary deficiency is that the auditor failed to consider the importance of the information offered, as they did not document the potential problems for further investigation.

Exam 3: The Internal Audit Activity Role in Governance, Risk, and Control