Certified Internal Auditor (CIA Part 1) Sample Exam Questions

Question #1

Which of the following types of internal audit consulting engagements is an example of a facilitation service?I). Conducting control self assessment workshops.II). Participating on standing committees.III). Reviewing regulatory compliance.IV). Benchmarking.V). Estimating savings from outsourcing processes.

A. and IV only

B. , III, and IV only

C. I, III, and V only

D. , II, III, IV, and V

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Correct Answer: A

Question #2

An annual audit plan would be the primary method of identifying the internal audit activity's

A. uthority

B. esource needs

C. eporting requirements

D. ndependence

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Correct Answer: B

Question #3

Which of the following quality costs are nonconformance costs?

A. ystems development costs

B. osts of inspecting in-process items

C. nvironmental costs

D. osts of quality circles

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Correct Answer: C

Question #4

An employee who recently transferred into the internal audit activity has been assigned to audit the accounts payable system. Which function, if previously performed by the auditor, would represent a conflict of interest?

A. onitoring the allowance for doubtful accounts

B. riting procedures for the handling of duplicate payments

C. igning timekeeping cards for subordinates

D. eviewing shipping documents for accuracy

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Correct Answer: B

Question #5

While analyzing substantial increases in the cost of goods sold, an auditor for a retail organization notes that payments to certain vendors appear to be unusually high. Which of the following procedures would be least effective in investigating possible kickbacks to purchasing agents?

A. onfirm all contract terms and specifications with vendors

B. nalyze, by purchasing agent, all increases in costs of procured goods from specific vendors

C. elect a statistical sample of goods purchased and compare purchase prices with those of other sources of similar goods

D. onsider any changes in the lifestyles or individual consumption habits of the purchasing agents

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Correct Answer: A

Question #6

Which of the following is a control weakness that allows for the greatest probability of fraud?

A. he log-on accounts for the computerized information management system are not immediately canceled for terminated employees

B. cheduled physical counts to verify the perpetual inventory system are frequently delayed because of staff shortages and conflicting priorities

C. n employee is responsible for entering identifying information into the inventory database whenever supplies are delivered

D. he employee who handles all cash sales has responsibility for balancing the cash register and making bank deposits

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Correct Answer: D

Question #7

An audit manager has just returned from an executive training program and has suggested that the audit department develop a mathematical model to help identify factors that may be causing changes in the cost of production. According to the manager, the model should recognize that the company currently has three separate production cost) ': enters. l 'hich of the following approaches would best provide the analysis suggested by the audit manager?

A. evelop a classical variables sampling estimate of cost of production per department, with the sample stratified by the dollar value of each product produced

B. evelop a -gear ratio analysis of the cost of production compared to the cost of raw inventory across the three departments

C. evelop a multiple regression analysis of production costs, including such variables as raw material inventory costs, number of employees in the department, and overtime pay

D. evelop a linear regression analysis relating the cost of production to the cost of goods sold

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Correct Answer: C

Question #8

Which of the following statements is not true regarding ISO 9000 standards?

A. ompliance with the standards is voluntary

B. he ISO 9000 standards are revised every 5 years to account for technological and market developments

C. he objective of ISO 9000 standards is to ensure high quality products and services

D. SO 9000 is a set of generic standards for establishing and maintaining a quality system within a company

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Correct Answer: C

Question #9

An entity had 1.000 units of opening inventory that cost US $10 per unit On May 1. 1 .000 units were purchased at a cost of US $11 each. and on September 1 another 1.000 units were purchased at a cost of US $12 each. If 2.000 units were sold during the year. the company will report cost of goods sold of List A if the List B method of inventory valuation is used.

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: C

Question #10

Assume that employees confessed to a US $500, u-ui-1i- inventory theft but are not able to make restitution. How should this material fraud be shown in the company's financial statements?

A. lassified as a loss and shown as a separate line item in the income statement

B. nitially classified as an accounts receivable because the employees are responsible for the goods

C. ncluded in cost of goods sold because the goods are not on hand, losses on inventory shrinkage are ordinary, and it would cause the least amount of attention

D. ecorded directly to retained earnings because it is not an income-producing item

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Correct Answer: A

Question #11

Which of the following are typical steps in the design of an organization's performance measurement system?

A. nderstand organizational strategy; perform a situational assessment; establish measurement categories; and take actions based upon measurement results

B. ategorize performance measures; establish a data collection plan; analyze data; and predict future performance

C. stablish a measurement plan; create an organizational strategy linked to those measurements; trend measurement data; and measure data variability

D. erform a situational assessment; generate macro measurements; review measurement data; and change strategy based upon measurement results

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Correct Answer: A

Question #12

The process of making sure that the model measures what it is supposed to measure is called

A. tatistical inference

B. ypothesis testing

C. onfidence coefficient analysis

D. alidation

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Correct Answer: D

Question #13

An entity that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months' service at the beginning of each new quarter. Select the term that appropriately describes this situation from the viewpoint of the entity.

A. eferred income

B. arned income

C. ccrued income_

D. repaid expense

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Correct Answer: A

Question #14

Many questionnaires are made up of a series of different questions that use the same response categories (for example strongly agree, agree, neither, disagree, strongly disagree). Some designs will have different groups of respondents answer alternate versions of the questionnaire that present the questions in different orders and reverse the orientation of the endpoints of the scale (for example agree on the right and disagree on the left). The purpose of such questionnaire variations is to

A. liminate intentional misrepresentations

B. educe the effects of pattern response tendencies

C. est whether respondents are reading the questionnaire

D. ake it possible to get information about more than one population parameter using the same questions

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Correct Answer: B

Question #15

The order costs associated with inventory management include

A. nsurance costs, purchasing costs, shipping costs, and obsolescence

B. bsolescence, setup costs, quantity discounts lost, and storage costs

C. uantity discounts lost, storage costs, handling costs, and interest on capital invested

D. urchasing costs, shipping costs, setup costs, and quantity discounts lost

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Correct Answer: D

Question #16

Which statement most accurately describes risk assessment?

A. t is a tool for determining the relative impact of one process on another

B. t is a model used by analysts to determine organizational exposure

C. t is the quantitative and qualitative evaluation of exposures

D. t is the amount of inherent risk in a separately identifiable business entity or transaction

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Correct Answer: C

Question #17

In making a cash flow analysis of property, plant, and equipmentPPE), the internal auditor discovered that depreciation expense for the period was US $10, 000. PPE with a cost of US $50, 000 and related accumulated depreciation of US $30, 000 was sold for a gain of US $1.000. If the carrying amount of PPE increased by US $80, 000 during the period, how much PPE was purchased this period?

A. S $01

B. S $100, 000

C. S $110, 000

D. S$119, 000

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Correct Answer: C

Question #18

When an external auditor unknowingly fails to modify an opinion on financial statements that are materially misstated, this is an example of

A. n inherent risk

B. control risk

C. n audit risk

D. residual risk

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Correct Answer: C

Question #19

Which of the following statements, if true, could justify an auditor's decision not to report governance-related control deficiencies to the audit committee?

A. anagement plans to initiate corrective action

B. he board of directors has a separate corporate governance committee

C. he amounts and the potential risks associated with the deficiencies are not material to the overall organization

D. overnance issues are complex and the auditor should rely on management's analysis of the extent of the problem

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Correct Answer: C

Question #20

During an audit engagement, an internal auditor finds that management is not complying with previous commitments made to the external auditors. However, the auditor determines management's actions to be justified due to significant changes in the business. The best course of action for the auditor to take would be to

A. roceed with the audit engagement and assess the changes actually implemented by management

B. nform the external auditors and seek their guidance

C. nform the external auditors and remove the associated work from the internal audit scope

D. ompare the recommended changes against the changes made by management and advise management which action to take

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Correct Answer: A

Question #21

In November of the current year, the vice-president of a local bank reviews the bank's mortgage portfolio prior to the December 31 year-end. The bank's largest client has mortgages on buildings in three cities. The client has incurred net losses for the past 3 years and is now experiencing serious cash flow problems. For the past 6 months, no payments have been made on any of the three mortgages. The vice-president reluctantly concludes that it is probable that the full amount of principal and interest will

A. o accounting or disclosure of a possible loss in value is necessary

B. ontingency note disclosure of a possible impairment is required

C. he carrying amount of the mortgages should be reduced, with a charge directly to retained earnings

D. he carrying amount of the mortgages should be reduced, with a charge to the income statement

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Correct Answer: D

Question #22

A company had US $30 million in total sales last year and expects US $40 million in total sales this year. Ten percent of each year's sales are on credit that will be paid the following year. The company anticipates the following expenses for this year:· Depreciation of US $5 million.· Labor, materials, taxes, and other expenses of US $51 million. Assume the company begins this year with a zero cash balance. At the end of this year, the company will have a cash deficit of

A. S $8 million

B. S $12 million

C. S $15 million

D. S $17 million

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Correct Answer: B

Question #23

Each stockout of a product sold by Company I-: costs US $I, 750 per occurrence. The carrying cost per unit of inventory is US $5 per year, and the company orders 1, 500 units of product 24 times a year at a cost of US $100 per order. The probability of a stockout at various levels of safety stock isWhat is the optimal safety stock level for the company?

A. units

B. 00 units

C. 00 units

D. 00 units

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Correct Answer: D

Question #24

What is the most likely source of information for a detailed schedule of a company's insurance policies in force?

A. riginal journal entries found in the cash disbursements journal, along with supporting checks processed by the bank

B. olicies and procedures governing insurance coverage

C. he current fiscal year's budget for insurance, together with the beginning balance of the prepaid insurance account

D. he files containing insurance policies with various carriers

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Correct Answer: D

Question #25

At January 1, Year 1, a sole proprietorship's assets totaled U`? $710, 900, and its liabilities amounted to US $120, 000_ During Year 1, owner investments amounted to US $72, 000, and owner withdrawals totaled US $75, 000. At December 31, Year 1, assets totaled US $270, 000 and liabilities amounted to US $171, 000. The amount of profit for Year 1 was

A. S $0

B. S $6, 000

C. S $9, 000

D. S $12, 000

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Correct Answer: D

Question #26

An internal auditor pays to participate in the company's annual golf tournament, which is held outside of normal business hours. The auditor wins the putting contest and is awarded an all-expense-paid weekend vacation. According to the IIA Code of Ethics regarding objectivity, the auditor's best course of action would be to

A. efuse the prize because the amount is significant

B. ccept the prize because the event was held outside of normal business hours

C. efuse the prize because it represents an impairment to objectivity

D. ccept the prize because the auditor received no special treatment

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Correct Answer: D

Question #27

An entity issues 10-year bonds with a face amount of US $1 million, dated January 1, Year 1, and bearing interest at an annual rate of 12% payable semiannually on January 1 and July 1 The full interest amount will be paid each due date. The market rate of interest on bonds of similar risk and maturity, with the same schedule of interest payments, is also 12%. If the bonds are issued on February 1, Year 1, the amount the issuing entity receives from the buyers of the bonds on that date is

A. S $990, 000

B. S $1, 000, 000

C. S $1, 010, 000

D. S $1, 020, 000

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Correct Answer: C

Question #28

During an audit of a major contract, an 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?

A. efective pricing

B. ost mischarging

C. ictitious vendor

D. id rotation

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Correct Answer: B

Question #29

The data below were gathered on two different machine centers and two products.Which item below would be part of a linear programming formulation of this problem?

A. aximize: Contribution > 4A + 5B

B. ubject to: A < O

C. ubject to: 2

D. ubject to: 4A + 5B < 130

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Correct Answer: C

Question #30

The operating condition that car-or-mot be identified by using a queuing model is the

A. verage percentage of time that a service facility is idle

B. robability of a specified number of units in the queue

C. ctual amount of time each unit spends in the queue

D. verage number of units in the system and the mean length of the queue

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Correct Answer: C

Question #31

ABC entities, a manufacturer lessor, leased a chine to XYZ on January 1. The lease meets the criteria for a finance lease. Title to the asset will automatically pass to the lessee at the end of the lease term. Other details are as follow:

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: D

Question #32

According to the International Professional Practices Framework, risk isI). Defined as the negative effect of events that are expected to occur.II). Measured in terms of consequences.III). Measured in terms of likelihood.

A. only

B. and II only

C. I and III only

D. , II, and III

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Correct Answer: C

Question #33

If participants in a control self assessment workshop begin breaking their agreed upon ground rules, the facilitator should

A. gnore the behavior and continue the workshop

B. llow them to continue briefly and then remind them of the ground rules

C. ave the participants modify the ground rules

D. trictly enforce the ground rules

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Correct Answer: B

Question #34

A manufacturer uses a materials requirements planning (MRP) system to track inventory, orders, and raw materials requirements. What condition should an auditor search for in the MRP database if a preliminary assessment indicated that inventory is understated?I). Item cost set at zero.II). Negative quantities on hand.III). Order quantity exceeding requirements.IV). Inventory lead times exceeding delivery schedule.

A. and II only

B. and IV only

C. I and IV only

D. II and IV only

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Correct Answer: A

Question #35

Cost of goods sold in Year 2 was

A. S $147, 000

B. S $160, 000

C. S $167, 000

D. S $180, 000

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Correct Answer: A

Question #36

When the economic order quantity EOQ) decision model is employed, the List A are being offset or balanced

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: A

Question #37

What is the primary factor that determines the depth and breadth of audit followup?

A. he engagement client's written response to the audit findings

B. he auditor's assessment of risk associated with the audit findings

C. he auditor's assessment of personnel responsible for correcting audit findings

D. he availability of audit personnel and financial resources

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Correct Answer: B

Question #38

Which of the following is the method of adding a standard markup to the cast of the product?

A. enetration pricing

B. oing-rate pricing

C. ost-based pricing

D. rice skimming

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Correct Answer: C

Question #39

Company M. which began operations on January 1, Year 1, recognizes income from long-term construction contracts under the percentage-of-completion method in its financial statements and under the completed-contract method for tax reporting. Income under each method follows:There are no other temporary differences. If the applicable tax rate is 25%. what amount should Company M report in its balance sheet at December 31, Year 3, for deferred income tax liability?

A. S $87, 500

B. S $125, 000

C. S $162, 500

D. S $37, 500

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Correct Answer: C

Question #40

An organization automatically compares the total number of transactions processed and passed from its online order-entry system to the number of transactions received in its billing system and calculates variances. This is an example of which of the following information technology controls?

A. ogic test

B. heck digits

C. ata reasonableness tests

D. alancing control activities

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Correct Answer: D

Question #41

The following data were extracted from the financial statements of a company for the year ended December 31.

A. S $11

B. S $17

C. S $54

D. S $69

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Correct Answer: A

Question #42

The top three sales representatives for a company consistently include non-allowable charges on their expense reports. Line management is reluctant to deny reimbursement of the charges for fear of losing the sales representatives. This situation has the greatest negative impact on which of the following internal control components?

A. onitoring

B. ontrol environment

C. nformation and communication

D. ontrol activities

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Correct Answer: B

Question #43

If the amount to be received in 4 years is US $137, 350, and given the correct factor from the 10% time-value-¬of-money table below, what is the current investment?

A. S $30, 034

B. S $43, 329

C. S $93

D. S $201, 094

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Correct Answer: C

Question #44

The scope of a consulting engagement performed by internal auditors should

A. e sufficient to address the objectives agreed upon with the client

B. xclude areas that might be the subject of subsequent assurance engagements

C. e limited to activities within the current operating period

D. e preapproved in conjunction with the annual plan of consulting engagements

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Correct Answer: A

Question #45

An auditor receives anonymous information that fraud is occurring in the operation being audited, but no details are given as to the type of fraud or the individuals involved. There are several areas in which fraud could occur. The auditor should

A. dentify the area that has the greatest volume of transactions and design a sampling plan for substantive testing

B. pply analytical procedures to areas that might be impacted by possible fraudulent activities

C. nterview employees to identify areas where the fraud could be occurring

D. lan detailed tests of the areas that have the highest dollar amount of transactions

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Correct Answer: B

Question #46

Which of the following is not an outcome of control self assessment (CSA)?

A. anagement and employees of business units become trained in risk assessment and management

B. mployees take ownership of the risks and control procedures in their business unit

C. he internal audit activity no longer needs to evaluate risks and control procedures for business units that have implemented CSA

D. verall monitoring improves, and continuous improvement is possible

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Correct Answer: C

Question #47

If a just-in-time purchasing policy is successful in reducing the total inventory costs of a manufacturing company, which of the following combinations of cost changes would be most likely to occur?

A. n increase in purchasing costs and a decrease in stockout costs

B. n increase in purchasing costs and a decrease in quality costs

C. n increase in quality costs and a decrease in ordering costs

D. n increase in stockout costs and a decrease in carrying costs

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Correct Answer: D

Question #48

Compared with another bond with the same risk and maturity but without a conversion feature, a convertible bond has a

A. igher face amount

B. ower face amount

C. igher coupon rate

D. ower coupon rate

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Correct Answer: D

Question #49

An auditor decides to vouch a sample of ledger entries back to their original documentation. In terms of whether all transactions had been recorded, this test would be

A. elevant to the completeness objective

B. rrelevant to the completeness objective

C. more timely test of completeness than evidence from interviews

D. more biased test of completeness than evidence from interviews

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Correct Answer: B

Question #50

All of the following are useful for forecasting the needed level of inventory except

A. nowledge of the behavior of business cycles

B. nternal accounting allocations of costs to different segments of the company

C. nformation about seasonal variations in demand

D. conometric modeling

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Correct Answer: B

Question #51

The use of standard operating procedure questionnaires in audit fieldwork can be beneficial because

A. hese questionnaires can both identify discrepancies and educate clients

B. tandard operating procedures are essential to the effectiveness and efficiency of operations

C. hese questionnaires are more comprehensive than are other types of techniques for gathering data during fieldwork

D. hese questionnaires do not normally require prior clearance with management of the audited area

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Correct Answer: A

Question #52

Which of the following stakeholder groups is least likely to be involved in the development of an organization's performance scorecard?

A. enior managers

B. istributors

C. iddle managers

D. abor union representatives

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Correct Answer: B

Question #53

An anonymous party contacted an organization's fraud hotline and reported that the chief executive officer (CEO) and chief financial officer (CFO) were manipulating financial reserve accounts in order to achieve publicly disclosed earnings targets. All reports to the fraud hotline go directly to the entity's chief audit executive (CAE). Based on a preliminary evaluation of the report, the CAE concluded that the allegations were credible. Which of the following is the most appropriate course of action for th

A. ontact the audit committee chairperson and request that an investigation be initiated by an outside party

B. iscuss the allegations with the entity's chief legal officer to determine if criminal charges should be filed against the CEO and CFO

C. iscuss the situation with the CEO and CFO because they are within the CAE's normal chain of command

D. otify outside regulatory authorities that oversee financial reporting matters

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Correct Answer: A

Question #54

In order to exercise due professional care as defined in the International Professional Practices Framework, an internal auditor shouldI). Consider the probability of significant noncompliance in each audit engagement.II). Perform assurance procedures with sufficient care to ensure that all risks are identified.III). Weigh the cost of assurance against the benefits.

A. and II only

B. and III only

C. I and III only

D. , II, and III

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Correct Answer: B

Question #55

Inadequate risk assessment would have the strongest negative impact in which of the following phases of an audit engagement?

A. etermining the scope

B. eviewing internal controls

C. esting

D. valuating findings

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Correct Answer: A

Question #56

A large financial services firm has a formal privacy policy and recently hired a chief privacy officer. Since the new chief privacy officer has taken over, risk assessments have been performed, priorities have been established, and resources have been allocated to ensure that effective and consistent privacy controls could be implemented and maintained throughout the company. Based on the Capability Maturity Model (CMM), what level of maturity has the firm reached regarding its privacy strategy?

A. efined

B. anaged

C. epeatable

D. ptimized

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Correct Answer: A

Question #57

Due to urgent requests from management, a busy internal audit activity finds that it can no longer meet all of its commitments contained in the annual audit plan. The best course of action for the chief audit executive to take would be to

A. ontinue with the plan and seek opportunities to adjust priorities and reallocate resources

B. dvise senior management and request that they reconsider these additional requests using more rigorous risk assessment and prioritization factors

C. dvise the board and senior management and request a reassessment of the plan

D. dvise the board immediately and seek their support for additional resources to meet the needs of the plan

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Correct Answer: C

Question #58

The sales manager for a builder of custom yachts developed the following conditional table for annual production and salesAccording to the table, how many yachts should be built?

A. 0

B. 0

C. 0

D. 0

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Correct Answer: C

Question #59

An internal auditor has been asked to review the treasury department's compliance with corporate policy related to the use of forward trading to manage currency valuation risk. The auditor finds no related policies in the corporate policy manual but does discover that the department is following a policy developed by the company's bank. The most appropriate response from the auditor would be to

A. ithdraw from the audit engagement because there is nothing to audit due to the lack of a corporate policy

B. erform no further audit work and report the lack of a corporate policy as an audit observation

C. ostpone the audit engagement until a corporate policy can be established

D. se the bank's policy as the audit criteria and determine whether formal adoption should be recommended in the engagement final communication

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Correct Answer: D

Question #60

A records management system is an example of what type of control?

A. reventive

B. etective

C. orrective

D. irective

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Correct Answer: A

Question #61

The decision rule that selects the strategy with the highest utility payoff if the worst state of nature occurs is the

A. inimize regret rule

B. aximize utility rule

C. aximin rule

D. axi max rule

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Correct Answer: C

Question #62

A company uses straight-line depreciation for financial reporting purposes, but uses accelerated depreciation for tax purposes. Which of the following account balances would be lower in the financial statements used for tax purposes than it would be in the general purpose financial statements?

A. ccumulated depreciation

B. ash

C. etained earnings

D. ross fixed assets

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Correct Answer: C

Question #63

During a fraud investigation, an internal auditor finds that one of the suspects is the senior executive to whom fraudulent activities are to be reported. Would it be appropriate for the internal auditor to report interim findings directly to the audit committee without notifying the senior executive?

A. es, because it is important to maintain confidentiality while obtaining evidence

B. es, because the audit committee should make all decisions regarding fraud investigations

C. o, because the auditor should report the findings directly to law enforcement officials

D. o, because all frauds are to be reported to the senior executive

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Correct Answer: A

Question #64

The assets of a liquidating entity should be shown on the balance sheet at their

A. ndepreciated historical cost

B. air valueC Realizable value

C. urrent cost

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Correct Answer: C

Question #65

An entity issued a noninterest bearing note payable due in 1 year in exchange for land. The fair value of the land is not reliably determinable. Which of the following statements is true concerning the accounting for the transaction?

A. he land should be recorded at the future value of the note, and interest should be imputed at the prevailing rate on similar notes

B. o interest should be recognized on the note, and the land should be recorded at the present value of the note

C. nterest on the note should be imputed at the prime rate, and the land should be recorded at the discounted value of the note

D. nterest on the note should be imputed at the prevailing rate for similar notes, and the land should be recorded at the present value of the note

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Correct Answer: D

Question #66

During a review of data center physical security and environmental controls, an auditor should ensure thatI). Visitors are accompanied by authorized personnel at all times II). Only developers and operators have access to the data center III). Fire suppression equipment is tested periodically IV). Fire and water detectors have been installed

A. and III only

B. I and IV only

C. , III, and IV only

D. I, III, and IV only

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Correct Answer: C

Question #67

One of the elements included in the economic order quantity EOQ) formula is

A. afety stock

B. early demand

C. elling price of item

D. ead time for delivery

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Correct Answer: B

Question #68

In an assurance engagement of treasury operations, an internal auditor is required to consider all of the following issues except

A. he audit committee has requested assurance on the treasury department's compliance with a new policy on the use of financial instruments

B. reasury management has not instituted any risk management policies

C. ue to the recent sale of a division, the amount of cash and marketable securities managed by the treasury department has increased by 350 percent

D. he external auditors have indicated some difficulties in obtaining account confirmations

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Correct Answer: D

Question #69

A vendor sells specialty inks on consignment to a manufacturer of colored paper at a price of US $200 per barrel. Payment is made to the vendor in the month the manufacturer uses the barrels in production. The vendor records revenues when the barrels are shipped and makes no adjusting entries to record unearned revenues until the December 31 closing of the books. At the end of July. the manufacturer had 40 barrels of ink on consignment. During August, the vendor consigned 50 barrels and received payment for

A. S $3, 000

B. S $4, 000

C. S $11, 000

D. S $12, 000

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Correct Answer: C

Question #70

Which line segment represents the length of time to consume the total quantity of materials ordered?

A. E

B. C

C. C

D. E

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Correct Answer: C

Question #71

At its balance sheet date, an entity reliably estimates that the expected cost of compensated absences resulting from short-term disability will be US $100, 000. This unused entitlement arose from employee services rendered during the period and is accumulating. How should it be accounted for?

A. nly a disclosure should be made because recognition does not occur until the absences occur

B. n expense should be recorded for US $100, 000

C. n asset of US $100, 000 should be recognized

D. direct reduction to retained earnings of US $100, 000 should occur

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Correct Answer: B

Question #72

One of the main reasons that implementation of a total quality management program works better through the use of teams is

A. eams are more efficient and help an organization reduce its staffing

B. mployee motivation is always higher for team members than for individual contributors

C. eams are a natural vehicle for sharing ideas, which leads to process improvement

D. he use of teams eliminates the need for supervision, thereby allowing a company to reduce staffing

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Correct Answer: C

Question #73

During an audit of a retail organization, an internal auditor found a scheme in which the warehouse director and the purchasing agent diverted approximately $500, 000 of goods to their own warehouse, then sold the goods to third parties. The fraud was not found earlier since the warehouse director updated the perpetual inventory records and then forwarded receiving reports to the accounts payable department for processing. Which of the following procedures would have most likely led to the discovery of the

A. elect a random sample of receiving reports and trace to the recording in the perpetual inventory records

B. elect a random sample of purchase orders and trace to receiving reports and to the records in the accounts payable department

C. ake an annual physical inventory, reconciling amounts with the perpetual inventory records

D. elect a random sample of sales invoices and trace to the perpetual inventory records to see if inventory was on hand

View answer

Correct Answer: C

Question #74

For an entity with a defined postemployment benefit plan, the fair value of plan assets at the beginning of the year was US $500, 000. No unrecognized net cumulative actuarial gain or loss existed. On the last day of the fiscal year. the fair value of plan assets was US $620.000. Benefits paid equaled US $100, 000. and the entity made US $120.000 in contributions. The discount rate was 10%. and the expected long-term rate of return on plan assets was 12%. The actual return on plan assets was

A. S $50, 000

B. S $60, 000

C. S $75, 000

D. S 100, 000

View answer

Correct Answer: D

Question #75

If the entity uses the weighted-average method of inventory valuation, cost of goods sold for the period will be

A. S $186, 978

B. S $197, 000

C. S $228

D. S $235

E. nswer is Pending

View answer

Correct Answer: E

Question #76

Which of the following statements regarding benchmarking is false?

A. enchmarking involves continuously evaluating the practices of best-in-class organization and adapting company processes to incorporate the best of these practices

B. enchmarking, in practice, usually involves a company's formation of benchmarking teams

C. enchmarking is an ongoing process that entails quantitative and qualitative measurement of the difference between the company's performance of an activity and the performance by the best in the world or the best in the industry

D. he benchmarking organization against which a firm is comparing itself must be a direct competitor

View answer

Correct Answer: D

Question #77

Which of the following is a key to successful total quality management?

A. raining quality inspectors

B. ocusing intensely on the customer

C. reating appropriate hierarchies to increase efficiency

D. stablishing a well-defined quality standard, then focusing on meeting it

View answer

Correct Answer: B

Question #78

Which of the following would have the least impact (either positive or negative) on an assessment of a department's control environment?

A. he department managed long-term investments, including investment in derivatives and other financial instruments, to maximize return

B. he department manager sets a tone of honesty and integrity in all business dealings and this tone is emulated by department personnel

C. any department functions were duplicated or verified by other department employees as part of the department's normal procedures

D. udit tests designed to verify compliance with control procedures detected a general failure to follow standard procedures for transaction authorization

View answer

Correct Answer: A

Question #79

An objective of financial reporting is

A. roviding information useful to investors, creditors, donors, and other users for decision making

B. ssessing the adequacy of internal control

C. valuating management results compared with standards

D. roviding information on compliance with established procedures

View answer

Correct Answer: A

Question #80

Cash collections from customers in Year 2 were

A. S $341

B. S $338, 000

C. S $344, 000

D. S $335, 000

View answer

Correct Answer: A

Question #81

Which of the following is not required when ISO 9000 standards are adopted?

A. rganization of a quality management system

B. reation of an internal audit system

C. onsistent high quality products

D. n-site inspections by a registrar

View answer

Correct Answer: C

Question #82

While investigating a compromised Web server, an auditor found that the Web server logs had been deleted. The auditor should recommend that the Web server logs be

A. enerated and maintained on a separate secure server

B. ccessible by administrative users only

C. ncrypted to ensure that the logs cannot be deleted

D. estored automatically to the Web server from backup files

View answer

Correct Answer: A

Question #83

Why is the concept of residual risk important?

A. ecause residual risk is difficult to measure

B. ecause residual risk is all of the risk that remains after controls are established

C. ecause the cost-benefit analysis supporting control design is part of the measure of residual risk

D. ecause the risk that remains after control design and implementation needs to be acceptable to senior management

View answer

Correct Answer: D

Question #84

An organization's decision to outsource its computer systems support is an example of which of the following risk responses?

A. isk acceptance

B. isk sharing

C. isk avoidance

D. isk reduction

View answer

Correct Answer: B

Question #85

The chief commodity trader for a large energy company learns from a friend that a competitor will likely fail its upcoming regulatory audit and will be forced to temporarily decrease production. If the information is true, the trader has short-term opportunities to make trades that will financially benefit the trader's company and will lead to a substantial increase in the trader's performance bonus. However, if the information is not true, making the trades will significantly increase the company's risk of

A. ake the trade because the company and the trader will both benefit

B. ave another trader on staff make the trade in order to avoid a conflict of interest

C. isclose the information to the risk oversight committee but proceed with the trade to capitalize on the opportunity

D. efer the decision to management and risk the loss of the trading opportunity

View answer

Correct Answer: D

Question #86

Which of the following are acceptable resources for a chief audit executive to use when developing a staffing plan?I). Co-sourcing arrangements.II). Employees from other areas of the organization.III). The organization's external auditors.IV). The organization's audit committee members.

A. only

B. and II only

C. I and IV only

D. , II, and IV only

View answer

Correct Answer: B

Question #87

When an order to a supplier for an unusually large number of parts is entered in a company's computerized system, the system prompts the company's senior management to review the transaction. This is an example of which of the following information technology controls?

A. ogic test

B. heck digits

C. ata reasonableness tests

D. alancing control activities

View answer

Correct Answer: C

Question #88

Which of the following would provide the least assurance about the operating effectiveness of an internal control?

A. nterviews with the client's personnel

B. nalysis of system flowcharts

C. bservation of the client's processes

D. nspection of documents and reports

View answer

Correct Answer: B

Question #89

Subsequent measurement of trade receivables is at

A. air value through profit or loss

B. ost

C. mortized cost

D. air value through equity

View answer

Correct Answer: C

Question #90

Various tools are employed to control large scale projects. They include all of the following except:

A. ERT

B. PM

C. tatistical process control

D. antt charts

View answer

Correct Answer: C

Question #91

A fleet maintenance division uses a different code for each type of inventory transaction. A daily summary report lists activity by part number and transaction code. The report is reconciled by the parts room supervisor to the day's material request forms and is then forwarded to the fleet manager for approval. An auditor is considering an analytical review of transaction codes and materials used. One objective of this review might be to

A. rovide evidence of inventory items that are overstocked

B. eveal shortages in perpetual inventory records

C. etermine whether inventory items are properly valued

D. dentify possible material lost due to employee theft

View answer

Correct Answer: D

Question #92

In the standard regression equation y = a + bx, how is the letter b best described?

A. ndependent Variable

B. ependent Variable

C. onstant coefficient

D. ariable coefficient

View answer

Correct Answer: D

Question #93

On March 15, Year 1. Kathleen Corp. adopted a plan to accumulate US $1.000.000 by September 1. Year 5. Kathleen plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Kathleen made the first deposit on September 1, Year 1. Future value and future amount factors are as follows:Future value of US $1 at 1 O% for four periods 1.46 Future amount of ordinary annuity of US $1at 10% for four periods 4.64Future amount of annuity in advance of US $1at 10% for four perio

A. S $250, 000

B. S $215, 500

C. S $195, 700

D. S $684, 930

View answer

Correct Answer: C

Question #94

In an audit test designed to determine if fictitious employees are on the payroll, evidence that all timecards are approved by the employee's immediate supervisor would meet which of the following evidence tests?I). Sufficient.II). Competent.III). Relevant.

A. only

B. and III only

C. I and III only

D. , II, and III

View answer

Correct Answer: C

Question #95

The network below describes the interrelationships of several activities necessary to complete a project. The arrows represent the activities. The numbers between the arrows indicate the number of months to complete each activity. The shortest time to complete the project is

A. months

B. months

C. months

D. 4 months

View answer

Correct Answer: C

Question #96

Which of the following is not a criterion for hedge accounting?

A. he hedge is expected to be highly effective and can be reliably measured

B. he hedge is assessed only at its inception

C. forecast transaction subject to a cash flow hedge must be highly probable

D. he hedge is formally designated and documented at its inception

View answer

Correct Answer: B

Question #97

A means of limiting production delays caused by equipment breakdown and repair is to

A. chedule production based on capacity planning

B. lan maintenance activity based on an analysis of equipment repair work orders

C. re-authorize equipment maintenance and overtime pa}

D. stablish a preventive maintenance program for all production equipment

View answer

Correct Answer: D

Question #98

Big Co. holds 18% of the outstanding voting common shares of Little Co. How will Big report unrealized holding gains and losses on these shares?

A. he treatment varies depending on whether Big classifies the shares as trading securities or available-for¬ sale securities

B. s items of other comprehensive income

C. s components in the calculation of net income

D. s either items of other comprehensive income or components in the calculation of net income, depending on whether the shares have been held longer than one year

View answer

Correct Answer: A

Question #99

In selecting assurance engagements that are consistent with an organization's goals, the chief audit executive would most likely give highest priority to

A. esults of prior audits in potential engagement areas

B. pportunities to achieve operating benefits

C. equests by senior management

D. ssessments of risk and effectiveness of risk management

View answer

Correct Answer: D

Question #100

Subsequent to their initial recognition, which financial assets with quoted market prices in an active market are measured at fair value?

A. ption A

B. ption B

C. ption C

D. ption D

View answer

Correct Answer: C

Question #101

Which one of the following is not a characteristic of an innovative manufacturing company?

A. mphasis on continuous improvement

B. esponsiveness to the changing manufacturing environment

C. mphasis on existing products

D. mproved customer satisfaction through product quality

View answer

Correct Answer: C

Question #102

An analysis of an entity's US $150, 000 accounts receivable at year-end resulted in a US $5, 000 ending balance for its allowance for uncollectible accounts and a bad debt expense of US $2, 000. During the past year. recoveries on bad debts previously written off were correctly recorded at US $500. If the beginning balance in the allowance for uncollectible accounts was US $4, 700. what was the amount of accounts receivable written off as uncollectible during the year?

A. S $1, 200

B. S $1, 800

C. S $2, 200

D. S $2, 800

View answer

Correct Answer: C

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