CIA Exam Sample Questions, Best Exam Resources

Question #1

The internal audit activity's responsibility to follow up on reported audit findings should be defined in the

A. ngagement memo issued prior to each audit assignment

B. ission statement of the audit committee

C. nternal audit activity's written charter

D. urpose statement within the applicable audit report

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Correct Answer: C

Question #2

An entity has made all necessary adjusting entries and is now closing its accounts for the period. Dividends of US 1 ...x!.000 were declared and distributed during the year. The entry to close the dividends account would be

A. etained earnings US $30, 000Dividends US $30, 000

B. ividends US $30, 000Retained earnings US $30, 000

C. ncome Summary US $30, 000Dividends US $30, 000

D. ividends US $30, 000Income Summary US $30, 000

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Correct Answer: A

Question #3

An entity sells 1, 500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of US $5 per unit. No safety stocks are held. If the entity has a cost of capital of 1 2%, its annual opportunity cost of carrying inventory is

A. 5 $150

B. 5 $180

C. 5 $300

D. 5 $900

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Correct Answer: A

Question #4

Which of the following best describes the most important criteria when assigning responsibility for specific tasks required in an audit engagement?

A. uditors must be given assignments based primarily upon their years of experience

B. ll auditors assigned an audit task must have the knowledge and skills necessary to complete the task satisfactorily

C. asks must be assigned to the audit team member who is most qualified to perform them

D. ll audit team members must have the skills necessary to satisfactorily complete any task that will be required in the audit engagement

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Correct Answer: B

Question #5

Timing of entry into an emerging industry is a critical choice. Pioneering firms face high risk but low barriers. Which of the following is not a factor that favors early entry?

A. he bases of competition and market segments will change

B. he learning curve advantage will persist

C. ustomer loyalty will be high

D. ost advantages can be secured

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Correct Answer: A

Question #6

Risk within an internal audit engagement is defined as the

A. robability that a balance or class of transactions and related assertions contain misstatements that could be material to the financial statements

B. ncertainty of an event occurring that could have an impact on the achievement of objectives

C. ailure to adhere to organizational policies, plans, and procedures, or the failure to comply with relevant laws and regulations

D. ailure to accomplish established objectives and goals for operations or programs

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Correct Answer: B

Question #7

A cost-volume-profit model developed in a dynamic environment determined that the estimated parameters used may vary between limits. Subsequent testing of the model with respect to all possible values of the estimated parameters is termed

A. sensitivity analysis

B. tatistical estimation

C. tatistical hypothesis testing

D. time-series study

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Correct Answer: A

Question #8

A merchandising company had the following inventory related transactions in its first year of operations:If the company uses the first-in-first-outFIFO) method of inventory valuation, its ending inventory balancerounded) will be

A. S $62, 000

B. S $70, 759

C. S $78, 750

D. S $84, 000

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Correct Answer: C

Question #9

The inherent attractiveness of a national market is most likely increased by which factor?

A. he firm's strategic position

B. he market's exclusion from a regional free trade zone

C. nmet needs of a developing nation

D. roduct adaptation is costly

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Correct Answer: C

Question #10

When firms compete in different geographical locations or have multiple product lines that do not necessarily overlap, the most effective way of responding to an aggressive move by a competitor without directly triggering destructive moves and countermoves is to

A. islead the competitor into taking or not taking an action

B. ake a prior announcement of intended moves

C. nitiate a move in the market where the competitor is strong

D. nitiate direct aggressive moves

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Correct Answer: C

Question #11

Which of the following is not an appropriate control related to sales in a manufacturing company?

A. ustomers' orders are recorded promptly

B. oods shipped are matched with valid customer orders

C. oods returned are inspected for damage by the sales department and then entered into inventory

D. redit department approval is required for credit sales transactions

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Correct Answer: C

Question #12

The sharing of important financial information with employees based upon a foundation of trust and commitment to training is known as

A. elf-managed teams

B. pen-book management

C. uality circles

D. mpression management

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Correct Answer: B

Question #13

When faced with the problem of filling a newly created or recently vacated executive position, organizations must decide whether to promote from within or to hire an outsider. One of the disadvantages of promoting from within is that

A. nternal promotions can have negative motivational effect on the employees of the firm

B. nternal promotions are more expensive to the organization than hiring an outsider

C. t is difficult to identify proven performers among internal candidates

D. iring an insider leads to the possibility of social inbreeding within the firm

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Correct Answer: D

Question #14

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

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Correct Answer: C

Question #15

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 #16

In a client satisfaction survey for an internal audit engagement, client management should be asked to assess which of the following factors?I). Audit team's knowledge of the audited area.II). Usefulness of the audit results.III). Quality of management of the internal audit activity.IV). Clarity of the scope and objectives of the audit engagement.

A. and II only

B. I and IV only

C. , II, and IV only

D. , III, and IV only

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Correct Answer: C

Question #17

A mature group lacks which of the following characteristics?

A. cceptance of individuals' differences

B. embers' awareness of individual roles in group processes

C. ttempts to compel unanimity

D. cceptance of group authority and interpersonal relationships

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Correct Answer: C

Question #18

Intensive distribution is most likely to be used for

A. hopping goods

B. pecialty goods

C. onvenience goods

D. nsought goods

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Correct Answer: C

Question #19

Internal auditors can benefit from a strong relationship with the external auditors because external auditors can

A. rovide internal auditors with an independent and knowledgeable viewpoint

B. oncur with the internal auditors' reports and thus improve the quality of assurance provided to management

C. ncrease the effectiveness of internal control sampling techniques

D. ssist the internal auditor by providing information obtained from similar audits with other clients

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Correct Answer: A

Question #20

Which of the following types of work teams are most likely to be cross-functional?

A. ommand group

B. irtual

C. esearch-and-development

D. nformal

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Correct Answer: C

Question #21

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 #22

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

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Correct Answer: B

Question #23

Which of the following best describes a cost synergy?

A. ecycling of by-products

B. elling one product strengthens sales of another product

C. ransferring knowledge to new uses

D. cquiring new management skills

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Correct Answer: A

Question #24

Which country is best described as having an individualistic culture?

A. ndia

B. apan

C. anada

D. hina

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Correct Answer: C

Question #25

A firm in a declining industry ordinarily adopts one of four strategies. A firm that follows a:

A. uick divestment strategy should have divested during the maturity phase

B. eadership strategy may assume that success will enable the firm to subsequently pursue a harvest strategy

C. arvest strategy seeks a pocket of stable demand

D. iche strategy is engaged in a gradual liquidation

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Correct Answer: B

Question #26

A deferred tax asset is recognized for

A. oodwill if its amortization is nondeductible for tax purposes

B. he initial recognition of an asset that is not part of a business combination and does not affect accounting profit or taxable profit at the date of the transaction

C. deductible temporary difference if the future availability of taxable profit is probable

D. egative goodwill treated as deferred income

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Correct Answer: C

Question #27

An emerging industry is new or newly formed and is small in size initially. An emerging industry results from innovation, changes in cost structures, new customer needs, or another factor that creates an attractive opportunity for selling a product or service. Which of the following is a structural characteristic of an emerging industry?

A. long time horizon for product development

B. ow initial costs and a shallow learning curve

C. obility barriers include economies of scale and brand identification

D. he presence of embryonic companies and spinoffs

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Correct Answer: D

Question #28

An airline should recognize revenue from airline tickets in the period when

A. assenger reservations are booked

B. Passenger reservations are confirmed

C. ickets are issued

D. elated flights occur

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Correct Answer: D

Question #29

The chief audit executive (CAE) routinely provides activity reports to the board during quarterly board meetings. Senior management has asked to review the CAE's board presentation before each board meeting so that any issues or questions can be discussed beforehand. The CAE should

A. rovide the activity reports to senior management as requested and discuss any issues that may require action to be taken

B. ot provide activity reports to senior management because such matters are the sole province of the board

C. isclose only those matters in the activity reports that pertain to expenditures and financial budgets of the internal audit activity

D. rovide information to senior management that pertains only to completed audit engagements and observations available in published engagement final communications

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Correct Answer: A

Question #30

An entity has the following contingencies at a balance sheet date:I). An obligation for clean-up costs relating to environmental damage may, but probably will not, require an outflow of resources. II). An obligation for decommissioning costs of a nuclear reactor may, but probably will not, require an outflow o1 resources.III). The entity is jointly and severally liable for an obligation arising from a lawsuit: the likelihood of an outflow of resources is remote.Which of the above items must be disclosed in

A. and II only

B. I and Ill only

C. and Ill only

D. , II, and Ill

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Correct Answer: A

Question #31

On January 1. a company has no opening inventory balance_ The following purchases are made during the year:There are 10.000 units in invo ntory on December 31. If the company uses the first in. first outFIFO) method of inventory valuation, the ending inventory balance will be

A. S $77, 500

B. S $85, 000

C. S $86, 250

D. S $95, 000

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Correct Answer: A

Question #32

A production manager for a moderate sized manufacturing company began ordering excessive raw materials and had them delivered to a wholesale company that the manager was running as a separate business. The manager falsified receiving documents and approved the invoices for payment. Which of the following audit procedures would most likely detect this fraud?

A. elect a sample of cash disbursements and compare to purchase orders, receiving reports, invoices, and check copies

B. elect a sample of cash disbursements and confirm the amount purchased, purchase price, and date of shipment with the vendors

C. bserve the receiving dock and count materials received; compare the counts to receiving reports completed by receiving personnel

D. erform analytical tests, comparing production, materials purchased, and raw materials inventory levels; investigate any differences

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Correct Answer: D

Question #33

The correct order of the following steps of the accounting cycle is

A. osting, closing, adjusting, reversing

B. osting, adjusting

C. osting, reversing, adjusting, closing

D. djusting, posting

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Correct Answer: B

Question #34

Which one of the following is a social trend affecting the organization?

A. hanges in labor markets

B. ougher legislation to protect the environment

C. ising inflation

D. eplacements for steel in cars and appliances

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Correct Answer: A

Question #35

In a well-developed management environment, the internal audit activity would

A. eport the results of audit engagements to line management as well as to senior management

B. onduct regularly scheduled audits of existing systems and initial audits of new computer systems after they have begun operating

C. nterface primarily with senior management, minimizing interactions with line managers who are the subjects of internal audit work

D. ocus on the maintenance of accounting controls (such as segregation of the duties of authorization, recording, and custody) and report results to the audit committee

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Correct Answer: A

Question #36

Five brand managers in a consumer products company met to determine how well certain promotions had performed. The data that they needed to analyze consisted of approximately 50 gigabytes of daily point of sale (POS) data for each month. The brand managers tried to download the POS data from the mainframe and import it into microcomputer spreadsheets for analysis. Their efforts were unsuccessful, most likely because of

A. he complexity of the mainframe data structure and the large volume of data

B. he difficulty of establishing access privileges for each subset of the mainframe data

C. nconsistencies in the mainframe data due to lack of integrity constraints on the data files

D. rror prone transmission links for downloading the data from the mainframe data files

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Correct Answer: A

Question #37

Which of the following is a benefit from reduced testing during a particular phase of an audit engagement?

A. he size of the internal audit activity can be reduced

B. here is less concern about assessing inherent risk

C. he level of planned audit risk is lowered

D. dditional audit hours are available for pursuing other engagement objectives

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Correct Answer: D

Question #38

According to Arthur D Little, a competitor firm that can act independently and sustain itslong-termstatus irrespective of the behavior of others holds which of the following competitive positions?

A. dominant position

B. strong position

C. favorable position

D. tenable position

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Correct Answer: B

Question #39

Leadership situations vary with regard to the degree to which the leader can determine what subordinates will do, how the subordinates will do it, and what the results will be. Accordingto Fiedler's contingency theory, a leader with a relationship- oriented management style will be most effective when exerting:

A. reat control

B. oderate control

C. ittle control

D. reat or little control

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Correct Answer: B

Question #40

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 #41

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 #42

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 #43

Firm X is considering entry into an industry. To analyze competition within the industry, Firm X evaluated its strategic groups. According to Michael E. Porter,

A. he members of a strategic group pursue different competitive strategies

B. ntergroup competition is increased by market interdependence

C. ow barriers to mobility among strategic groups promote profitability

D. igh substitutability of products reduces competition among groups

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Correct Answer: B

Question #44

Which of the following is the least appropriate action for an internal auditor to take in support of an organization's ethical culture?

A. ssess the state of the ethical climate

B. rovide guidance to employees regarding ethical dilemmas

C. valuate the effectiveness of the organization's code of conduct

D. etermine the appropriateness of expected ethical attitudes and behaviors

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Correct Answer: B

Question #45

Market-skimming pricing strategies could be appropriate when

A. o buyers want the product at a high price

B. he costs of producing a small volume are low

C. ompetitors can easily enter the market

D. he product is of poor quality

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Correct Answer: B

Question #46

A situation in which companies conspire to restrict output and set artificially high prices is known as:

A. ollusive pricing

B. redatory pricing

C. rice discrimination

D. arket-based pricing

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Correct Answer: A

Question #47

According to the Standards, which of the following must an internal auditor take into consideration when performing an assurance engagement of treasury operations?I). The audit committee has requested assurance of the treasury department's compliance with a new policy on the use of financial instruments.II). Treasury management has not instituted any risk management policies.III). Due to the recent sale of a division, the amount of cash and marketable securities managed by the treasury department has increa

A. and II only

B. and IV only

C. , II, and III only

D. I, III, and IV only

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Correct Answer: C

Question #48

Which of the following is the primary concern of an internal auditor in a comprehensive audit of an organization?

A. ccuracy of reports on the source and use of funds

B. xtent of achievement of the organization's mission

C. onfirmation of compliance with policies and procedures

D. ppropriateness of procedures related to the budgeting process

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Correct Answer: B

Question #49

Which of the following is the most appropriate step for the chief audit executive to take in order to avoid defamation of character of the principal suspect in a fraud investigation?

A. estrict the use of potentially damaging words to privileged reports or discussions

B. abel all workpapers, reports, and correspondence of the internal audit activity as private

C. estrict discussions of the fraud to members of management who express an interest in the investigation

D. estroy all investigation workpapers and reports if the fraud cannot be proven

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Correct Answer: A

Question #50

An auditor is using an internal control questionnaire as part of a preliminary survey. Which of the following is the best reason for the auditor to interview management regarding the questionnaire responses?

A. nterviews provide the opportunity to insert questions to probe promising areas

B. nterviews are the most efficient way to upgrade the information to the level of objective evidence

C. nterviewing is the least costly audit technique when a large amount of information is involved

D. nterviewing is the only audit procedure which does not require confirmation of the information that is obtained

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Correct Answer: A

Question #51

The form of departmentation that most readily lends itself to use of profit centers is:

A. roject

B. unctional

C. roduct

D. atrix

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Correct Answer: C

Question #52

The enterprise 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 property, plant, and equipment

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Correct Answer: C

Question #53

During an interview with a manager in a company's claims department, an auditor noted that the manager became nervous and changed the subject whenever the auditor raised questions about certain types of claims. The manager's answers were consistent with company policies and procedures. When documenting the interview, the auditor should

A. ocument the manager's answers, noting the nature of the nonverbal communication

B. ocument the manager's answers but not the nonverbal communication because it is subjective and is not corroborated

C. onclude that the nonverbal communication is persuasive and that sufficient evidence exists to begin a fraud investigation

D. isregard the interview entirely because the verbal and nonverbal communications were contradictory

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Correct Answer: A

Question #54

Which of the following is not a step in the establishment of a competitive intelligence system?

A. ata analysis

B. ata collection

C. nformation dissemination

D. lassification of competitors

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Correct Answer: D

Question #55

The calculation of an economic order quantity EOQ) considers

A. he purchasing manager's salary_

B. corporate charge for advertising expenses

C. he shipping costs to deliver the product to the customer

D. apital costs

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Correct Answer: D

Question #56

The costs of quality that are incurred in detecting units of product that do not conform to product specifications are referred to as

A. revention costs

B. ppraisal costs

C. ework costs

D. ailure costs

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Correct Answer: B

Question #57

Routine tasks, which have few exceptions and problems that are easy to analyze, are conducive to:

A. ormalized structure, in which procedures manuals and job descriptions are common

B. ecentralized decision making, in which decisions are pushed downward in the organization

C. rganic structures that emphasize adaptability and flexibility to changing circumstances

D. igh degrees of job satisfaction on the part of the employees performing them

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Correct Answer: A

Question #58

Given the scarcity of internal audit resources, a chief audit executive (CAE) decided not to schedule a followup of audit recommendations when developing engagement work schedules. Does the CAE's decision violate the Standards?

A. o, because the Standards do not specify whether followup is needed

B. o, because when there is evidence of sufficient motivation by the client, there is no need for followup action

C. es, because scarcity of resources is not a sufficient reason to omit followup action

D. es, because the Standards require the auditors to determine whether the client has appropriately implemented all of the auditor's recommendations

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Correct Answer: C

Question #59

While conducting a payroll audit, an internal auditor in a large government organization found inadequate segregation in the duties assigned to the assistant director of personnel. When the auditor explained the risk of fraud, the assistant director became upset, terminated the interview, and threatened to sue the organization for defamation of character if the audit engagement was not curtailed. The auditor discussed the situation with the chief audit executive (CAE). The CAE should then

A. urtail the audit engagement to avoid potential legal action

B. rovide a report to senior management recommending a fraud investigation

C. ontinue the original engagement program as planned but include a comment about the assistant director's reaction in the engagement final communication

D. dd additional testing to determine whether other indicators of fraud exist

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Correct Answer: D

Question #60

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 #61

Which adjusting entry should be used at year-end to account for interest expense on the long-term debt?

A. nterest expense US $100, 000Interest payable US $100, 000

B. nterest expense US $50, 000Cash US $50, 000

C. nterest payable US $100, 000Interest expense US $100, 000

D. nterest expense US $50, 000Interest payable US $50, 000

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Correct Answer: D

Question #62

In Year 2, a manufacturing company instituted a total quality management TQM) program producing the following report:On the basis of this report, which one of the fallowing statements is most likely true?

A. n increase in conformance costs resulted in a higher quality product and therefore resulted in a decrease in nonconformance costs

B. n increase in inspection costs was solely responsible for the decrease in quality costs

C. uality costs, such as scrap and rework, decreased by 48°/O

D. uality costs, such as returns and repairs under warranty, decreased by 40°l°

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Correct Answer: A

Question #63

Selling below cost in other countries is called

A. redatory pricing

B. rice discrimination

C. umping

D. ollusive pricing

View answer

Correct Answer: C

Question #64

If an auditor expects to find numerous discrepancies between recorded values and audited values of sample selections, which sampling technique would be most appropriate?

A. ttributes sampling

B. robability proportional to size sampling

C. ifference estimation sampling

D. iscovery sampling

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Correct Answer: C

Question #65

A balanced scorecard is primarily concerned with

A. taff

B. tructure

C. trategy

D. ystems

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Correct Answer: C

Question #66

When supervising employees, the behavior most likely to attain long-term positive results for a manager would be to:

A. iscipline employees immediately using oral reprimands, written warnings, and temporary suspensions

B. old weekly meetings during which employees are reminded of work procedures and are praised for the week's accomplishments

C. raise employees on a random schedule and link rewards to performance

D. ell employees that working overtime now will result in a better performance review in 6 months

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Correct Answer: C

Question #67

Management asked the internal audit activity to evaluate the appropriateness of self- insuring against casualty losses and health care for the organization's employees. Should the chief audit executive engage an actuarial consultant to assist in the audit engagement if these skills do not exist on staff?

A. o, because the internal audit activity is skilled in assessing controls and the insurance control concepts are not distinctly different from other control concepts

B. o, because it is a normal audit function to assess risk; this audit engagement is therefore not unique

C. es, because an actuarial consultant is essential to determine whether the health-care costs are reasonable

D. es, because an actuarial consultant has skills, not usually found in the internal audit activity, to identify and quantify self-insurance risks

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Correct Answer: D

Question #68

What is the deferred tax asset or liability reported on Lally's balance sheet on December31. Year 2?

A. S $40, 000

B. S $32, 000

C. S $8, 000

D. S $0

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Correct Answer: D

Question #69

A company's policy requires that all customers be treated in a fair and consistent manner. Which of the following audit procedures would provide the most persuasive evidence that the policy was followed?

A. ompare the aging of outstanding receivables due from each customer

B. ompare credit reports with annual sales for a sample of customers

C. ompare the ratio of outstanding receivables to the authorized credit limit for each customer

D. ompare the sales discounts offered to each customer

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Correct Answer: D

Question #70

Which of the following conditions is the strongest indicator of possible fraud?

A. n assistant treasurer who refuses to take vacations

B. ndependent reconciliations of subsidiary to general ledgers that are not always completed on a timely basis

C. condition of excess manufacturing waste material

D. manager who is often over budget at the end of a reporting period

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Correct Answer: A

Question #71

Several surveys paint out that most managers use full product casts, including unit fixed casts and unit variable costs, in developing cast-based pricing. Which one of the following is least associated with cost-based pricing?

A. rice stability

B. rice justification

C. arget pricing

D. ixed-cost recovery

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Correct Answer: C

Question #72

The most important reason for the chief audit executive to ensure that the internal audit department has adequate and sufficient resources is to

A. nsure that the function is adequately protected from outsourcing

B. emonstrate sufficient capability to meet the audit plan requirements

C. stablish credibility with the audit committee and management

D. ulfill the need for effective succession planning

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Correct Answer: B

Question #73

Which of the following is the most important limitation on the effectiveness of audit committees?

A. udit committees may be composed of independent directors; however, those directors may have close personal and professional friendships with management

B. udit committee members are compensated by the organization and thus favor a stockholder view

C. udit committees devote most of their efforts to external audit concerns and do not pay much attention to internal auditing and the overall control environment

D. udit committee members do not normally have degrees in the accounting or auditing fields

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Correct Answer: A

Question #74

On a balanced scorecard, which is more of an internal process measure than an external- based measure?

A. ycle time

B. rofitability

C. ustomer satisfaction

D. arket share

View answer

Correct Answer: A

Question #75

The chart displays the

A. rithmetic mean of each computer complaint

B. elative frequency of each computer complaint

C. edian of each computer complaint

D. bsolute frequency of each computer complaint

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Correct Answer: D

Question #76

Numerous factors enhance or detract from a group's attractiveness and cohesiveness.Select the factor that enhances cohesiveness.

A. avorable view from the outside-looking-in

B. ide variety of members

C. common threat in the environment

D. oderately large size

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Correct Answer: C

Question #77

A manager believes that the department's most valuable resource is the employees' time. The manager enforces a set of rigid rules for employees. A characteristic of this leadership style is that

A. mployees are encouraged to participate in decision making

B. ersonal interaction among employees is limited

C. rganizational objectives are coordinated with each employee's goals

D. he manager's perceptions are similar to McGregor's Theory Y

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Correct Answer: B

Question #78

What is residual risk?

A. mpact of risk

B. isk that is under control

C. isk that is not managed

D. nderlying risk in the environment

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Correct Answer: C

Question #79

According to the International Professional Practices Framework, which of the following should be considered when determining appropriate followup procedures?

A. omplexity of the corrective action

B. vailability of audit staff

C. vailability of area management

D. nherent risk assessment of the area

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Correct Answer: A

Question #80

If a department outside of the internal audit activity is responsible for reviewing a function or process, the internal auditors should

A. onsider the work of the other department when assessing the function or process

B. ot consider the work of the other department and proceed with an independent audit

C. educe the scope of any audit of the function or process because a review has already been performed by the other department

D. elegate the responsibility for assessing the function or process to the other department

View answer

Correct Answer: A

Question #81

Two individuals are being considered for an audit team that is to perform a highly technical review. Which of the following situations would preclude selection of the individual for the audit due to an objectivity concern?I). Person A is a member of the internal audit staff and has the required technical skills.Person A participated in a controls review of the system to be audited when it was being developed.II). Person B is a technical specialist who understands the audit area but is not a member of the in

A. only

B. I only

C. oth I and II

D. either I nor II

View answer

Correct Answer: D

Question #82

The halo effect may diminish the accuracy of the evaluation of employees. Which of the following is an example?

A. manager rates some employees as very good and some as very poor

B. manager's judgment of one positive trait affects his/her rating of other traits

C. he most recent behavior overshadows overall performance

D. ll personnel who work together are rated within the same narrow range

View answer

Correct Answer: B

Question #83

In a manufacturing organization, all sales prices are determined centrally and are electronically sent to the distribution centers to update their sales price tables. Any pricing deviations must be approved by central headquarters. To determine how this process is functioning, an internal auditor should

A. ocument the flow of sales price information, and determine how the table is accessed and updated

B. evelop a flowchart of the sales order process to determine how orders are taken and priced

C. dentify who approves the shipment of goods and how the goods are priced

D. btain a copy of the existing flowchart for the computer program to determine how price data are accessed

View answer

Correct Answer: A

Question #84

If Bandit Co. reports expenses on an accrual basis, interest expense for the first year of operations is

A. S $5, 000

B. S $7, 500

C. S $10, 000

D. S $12, 500

View answer

Correct Answer: B

Question #85

The purpose of an entry that contains a debit to prepaid property taxes and a credit to property tax expense is to recognize a(n)

A. repaid expense

B. ccrued expense

C. repaid income

D. xpired cost

View answer

Correct Answer: A

Question #86

Management literature describes generic influence tactics that may be used to influence superiors, peers, or subordinates. Which of the following is the most commonly used influence tactic?

A. n upward appeal

B. xchange

C. ational persuasion

D. ressure

View answer

Correct Answer: C

Question #87

The internal audit activity can be involved with systems development continuously, immediately prior to implementation, after implementation, or not at all. An advantage of continuous internal audit involvement compared to the other types of involvement is that

A. he cost of audit involvement can be minimized

B. here are clearly defined points at which to issue audit comments

C. edesign costs can be minimized

D. he threat of lack of audit independence can be minimized

View answer

Correct Answer: C

Question #88

Which of the following is not an appropriate approach to team building?

A. nsuring a balance of complementary team roles

B. hoosing members who need to improve skills

C. eveloping clear and shared values

D. electing team members based on how the members are likely to relate to each other

View answer

Correct Answer: B

Question #89

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 #90

As part of a preliminary survey of the purchasing function, an auditor read the department's policies and procedures manual. The auditor concluded that the manual described the processing steps well and contained an appropriate internal control design. The next engagement objective was to determine the operating effectiveness of internal controls. Which procedure would be most appropriate in meeting this objective?

A. repare a flowchart

B. repare a system narrative

C. erform a test of controls

D. erform a substantive test

View answer

Correct Answer: C

Question #91

An internal auditor is concerned that a division's management may have shipped poor quality merchandise in order to inflate sales and thereby boost the division manager's bonus. Furthermore, the auditor suspects that returned goods are being shipped to other customers as new products before defects are fully corrected. Which of the following audit procedures would be least effective in determining whether such shipments took place?

A. xamine credit memos issued after year end for goods shipped before year end

B. hysically observe the shipping and receiving area for evidence of returned goods

C. nterview customer service representatives regarding unusual numbers of customer complaints

D. equire the division to take a complete physical inventory at year end, and observe the taking of the inventory

View answer

Correct Answer: D

Question #92

Which of the following internal control weaknesses would an auditor most likely detect while reviewing a flowchart that depicts the purchasing function of an organization?

A. urchasing policies have not been updated

B. he organization is not taking advantage of quantity discounts available from its suppliers

C. ayments for goods received have not been authorized at the appropriate level

D. ayments to suppliers are made before goods are received

View answer

Correct Answer: D

Question #93

During the 10-year life of the asset, the entity will report as deferred tax an amount that

A. ncreases steadily for the 10 years

B. s constant

C. ncreases and then decreases

D. ecreases and then increases

View answer

Correct Answer: C

Question #94

At the start of its current fiscal year, Emper Corporation amended its defined postemployment benefit plan. resulting in an increase in the present value of the defined benefit obligationDBO). The benefits become vested after 6 years of service. Past service cost arising from the plan amendment includes US $400, 000 of benefits that are already vested and US $200, 000 of nonvested benefits. If the average period until vesting is 4 years. the minimum past service cost to be recognized in the first year is

A. S $50, 000

B. S $200, 000

C. S $450, 000

D. S $600, 000

View answer

Correct Answer: C

Question #95

Philip enterprises, distributor of compact disks(CDS), is developing its budgeted cost of goods sold for 1998.Philip has developed the following range of sales estimates and associated probabilities for the year:Philip's cost of goods sold averages 80% of sales. t hat is the expected value of Philip's 1998 budgeted cost of goods sold?

A. S $85, 000

B. S $84, 000

C. S $68, 000

D. S $67, 200

View answer

Correct Answer: D

Question #96

On January 31. Year 3, a company prepaid the US $72, 000 rental fee for a parking lot it leases. The rental fee covered a 3-year period beginning February 1. Year 3. What is the effect of this transaction on the December 31 Year 3, financial statements for each of the following?

A. ption A

B. ption B

C. ption C

D. ption D

View answer

Correct Answer: B

Question #97

Nonderivative financial instruments that have1) fixed or determinable payments, 2) a fixed maturity, and3) are held by the investing entity with a positive intent and ability to hold until maturity are what category of financial instruments?

A. eld-to-maturity investments

B. vailable-for-sale financial assets

C. inancial assets or liabilities held for trading

D. air value hedges

View answer

Correct Answer: A

Question #98

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

View answer

Correct Answer: C

Question #99

Which of the following situations would best support the decision of a chief audit executive (CAE) to defer followup activity at a branch office until the next audit engagement?

A. n audit of the branch office is routinely scheduled every three years

B. n site followup of a remote branch may not be feasible due to travel costs

C. ranch office management states that correction of the audit issue may take longer than expected

D. he CAE and management agree that the corrective action taken to date is sufficient

View answer

Correct Answer: D

Question #100

The entity had sales for the period of

A. S $891, 667

B. S $1, 100, 000

C. S $1, 188, 890

D. S $1, 466, 667

View answer

Correct Answer: C

Question #101

Which one of the graphs depicts the demand curve for prestige goods?

A. ption A

B. ption B

C. ption C

D. ption D

View answer

Correct Answer: C

Question #102

Direct staff as a percentage of total staff is an example of which of the following types of efficiency measures?

A. roductivity ratio

B. roductivity index

C. perating ratio

D. esource utilization rate

View answer

Correct Answer: C

Question #103

Which of the following constitute initiating structure behavior?I). Defining dutiesII). Planning and organizing workIII). Helping with work-related problems

A. and II only

B. and Ill only

C. I and Ill only

View answer

Correct Answer: A

Question #104

The expected time of the critical path is

A. 2

B. 3

C. 1

D. 1

View answer

Correct Answer: B

Question #105

DEF is the consignee for 1.000 units of product X for ABC Company. ABC should recognize the revenue from these 1, 000 units when

A. he agreement between DEF and ABC is signed

B. BC ships the goods to DEF

C. EF receives the goods from AB

D. EF sells the goods and informs ABC of the sale

View answer

Correct Answer: D

Question #106

Coordination between the internal auditors and the external auditors tends to

A. ncrease risks due to potential communication issues arising from internal auditors' allegiance to the company

B. ecrease risks due to the internal auditors' knowledge of the company and industry

C. ncrease risks due to differing views on the nature and adequacy of internal controls

D. ecrease risks by using internal auditors to perform low-level external audit testing

View answer

Correct Answer: B

Question #107

Which of the following statements is true for a defined contribution post employment benefit plan?

A. he employer is required to contribute a certain amount each period based on the plan's formula

B. he employer bears the risk of the plan's investment performance

C. ost employment benefits received by employees are defined by the plan's formula

D. he employer and employees are required to contribute equal amounts to the fund

View answer

Correct Answer: A

Question #108

Which of the following factors is critical for the success of participative management?

A. rust

B. ontrol

C. nformation

D. nfluence

View answer

Correct Answer: A

Question #109

Which of the following statements is correct regarding corporate compensation systems and related bonuses?I). A bonus system should be considered part of the control environment of an organization and should be considered in formulating a report on internal control.II). Compensation systems are not part of an organization's control system and should not be reported as suchIII). An audit of an organization's compensation system should be performed independently of an audit of the control system over other fu

A. only

B. I only

C. II only

D. I and III only

View answer

Correct Answer: A

Question #110

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

View answer

Correct Answer: D

Question #111

When a risk assessment process has been used to construct an audit engagement schedule, which of the following should receive attention first?

A. he external auditors have requested assistance for their upcoming annual audit

B. new accounts payable system is currently undergoing testing by the information technology department

C. anagement has requested an investigation of possible lapping in receivables

D. he existing accounts payable system has not been audited over the past year

View answer

Correct Answer: C

Question #112

Which statement best describes total quality management TOM)?

A. OM emphasizes reducing the cast of inspection

B. OM emphasizes better statistical quality control techniques

C. OM emphasizes doing each job right the first time

D. OM emphasizes encouraging crass-functional teamwork

View answer

Correct Answer: C

Question #113

Recommendations should be included in the audit report in order to

A. rovide management with options for addressing audit findings

B. nsure that audit findings are resolved in the manner suggested by the auditor

C. inimize the amount of time required to correct audit findings

D. nsure that audit findings are addressed by management

View answer

Correct Answer: A

Question #114

Which of the following performance criteria would be most useful when measuring the performance of a customer service desk?

A. he number of customer inquiries recorded per day

B. he percentage of customer issues resolved within 24 hours

C. he number of customer complaints recorded per day

D. he percentage of total customers served per day

View answer

Correct Answer: B

Question #115

In performing an audit, you encounter an adjusting journal entry recorded at year-end that contains a debit to rental revenue and a credit to deferred rental revenue. The purpose of this journal entry is to record

A. n accrued revenue

B. n unexpired expense

C. n expired expense

D. liability

View answer

Correct Answer: D

Question #116

If the probability of hot weather, given a hot weather forecast, is 50%, how much would the vendor be willing to pay for the forecast?

A. S $600

B. S $300

C. S $1, 000

D. S $500

View answer

Correct Answer: B

Question #117

Quality costing is similar in service and manufacturing organizations. Nevertheless, the differences between these organizations have certain implications for quality management.Thus,

A. irect labor costs are usually a higher percentage of total costs in manufacturing organizations

B. xternal failure costs are relatively greater in service organizations

C. uality improvements resulting in more efficient use of labor time are more likely to be accepted by employees in service organizations

D. oor service is less likely to result in loss of customers than a faulty product

View answer

Correct Answer: B

Question #118

A reader of a statement of cash flows wishes to analyze the major classes of gross cash receipts and gross cash payments from operating activities. Which methods of reporting cash flows from operating activities will supply that information?

A. oth the direct and indirect methods_

B. nly the direct method

C. nly the indirect method

D. either method

View answer

Correct Answer: B

Question #119

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

View answer

Correct Answer: C

Question #120

Bandit Co. will recognize revenue from the December sale of the maintenance contracts in the , List A, year if it selects basis reporting.

A. ption A

B. ption B

C. ption C

D. ption D

View answer

Correct Answer: A

Question #121

Which of the following scenarios illustrates an organization that has become out of balance by focusing too much on efficiency rather than effectiveness?

A. he job is not completed and resources are wasted

B. he job is completed but resources are wasted

C. he job is not completed but resources are not wasted

D. he job is completed and resources are not wasted

View answer

Correct Answer: C

Question #122

Which of the following is a recognized scheme for procurement fraud?I) Change-order abuse.II) Collusive bidding by contractors.III) Collateral financing.

A. only

B. and II only

C. I and III only

D. , II, and III

View answer

Correct Answer: B

Question #123

During an information security audit, an auditor discovers that the current disaster recovery plan was developed three years ago but never tested. There have been significant changes to information systems since the plan was developed. The auditor should

A. sk management to test the recovery plan immediately

B. ecommend that management and users update and test the recovery plan

C. pdate the recovery plan for management as part of the review

D. eview the recovery plan and report weaknesses to management

View answer

Correct Answer: B

Question #124

In a review of an electronic data interchange application using a third party service provider, the auditor shouldI). Ensure encryption keys meet International Organization for Standardization (ISO) standards.II). Determine whether an independent review of the service provider's operation has been conducted.III). Verify that only public switched data networks are used by the service provider.IV). Verify that the service provider's contracts include necessary clauses, such as the right to audit.

A. and II only

B. and IV only

C. I and III only

D. I and IV only

View answer

Correct Answer: D

Question #125

Which of the following strengthens and increases acceptable behavior by termination or withdrawal of undesirable consequences?

A. ositive reinforcement

B. egative reinforcement

C. eward

D. unishment

View answer

Correct Answer: B

Question #126

The entity has current assets of

A. S $1, 000, 000

B. S $3, 033, 333

C. S $3, 333, 333

D. S $3, 633, 333

View answer

Correct Answer: B

Question #127

A company is deciding whether to purchase an automated machine to manufacture one of its products. Expected net cash flows from this decision depend on several factors, interactions among those factors, and the probabilities associated with different levels of those factors. The method that the company should use to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting from changes in levels of various factors is

A. imulation and sensitivity analysis

B. inear programming

C. orrelation analysis

D. ifferential analysis

View answer

Correct Answer: A

Question #128

Managerial attitudes toward global operations are viewed by researcher HowardPerl mutteras a key to understanding multinational firms. A geocentric attitude is indicated by

A. n identification with national perspectives even though the firm is genuinely international

B. ontrol and evaluation methods that are locally determined

C. ecision making concentrated in the central administrative authority

D. ittle communication among subsidiaries

View answer

Correct Answer: A

Question #129

In order to reduce the costs of processing and paying for small purchases, an organization issued credit cards for use by selected employees to purchase small amounts of expendable goods and services. An internal auditor tested controls over the use of the credit cards and documented the findings in the audit observation. Which of the following statements represents the cause of the audit observation?

A. our of the 30 tested transactions appeared to represent a single purchase of a personal computer, which in total exceeded $1, 950

B. ompany policy limits card use to $500 per transaction

C. n interview with the card provider's customer representative indicated that an automated control feature designed to identify and report on split purchase transactions had not been activated for the organization's credit card system

D. he personal computer purchased via the split purchase was not placed into the organization's capital equipment management system because it had not been acquired through the regular capital asset purchasing system

View answer

Correct Answer: C

Question #130

Setting the introductory price of a new product relatively high is

A. arket-based pricing

B. rice skimming

C. enetration pricing

D. ricing by intermediaries

View answer

Correct Answer: B

Question #131

An internal auditor is deriving cash flow data based on an incomplete set of facts. Bad debt expense was US $2, 000. Additional data for this period follows:How much cash was collected this period on credit sales?

A. S $64, 000

B. S $68, 000

C. S $68, 500

D. S $70, 000

View answer

Correct Answer: B

Question #132

An entity donated land to a municipal for a park. cost of the land was US $75, 000, and the market value at the time of the donation was US $2, as determined by a professional appraisal. If the entity has not chosen to adopt the cost model for- n' r ant of property. plant, and equipment subsequent to initial recognition, the journal entry to record the dial."";itlmn _ of the land is

A. ption A

B. ption B

C. ption C

D. ption D

View answer

Correct Answer: C

Question #133

Monopolistic competition is characterized by

A. relatively large group of sellers who produce differentiated products

B. relatively small group of sellers who produce differentiated products

C. monopolistic market where the consumer is persuaded that there is perfect competition

D. relatively large group of sellers who produce a homogeneous product

View answer

Correct Answer: A

Question #134

Which strategy for a global marketing organization emphasizes relatively strong central control?

A. lobal

B. ultinational

C. reation of an international division

D. lobal

View answer

Correct Answer: A

Question #135

Which type of market structure is most apt to demonstrate price leadership by a major firm in the industry?

A. ure competition

B. onopoly

C. onopolistic competition

D. ligopoly

View answer

Correct Answer: D

Question #136

A bank is developing an integrated customer information system. The type of audit involvement that would most likely help avoid implementation of a system that does not cover all types of accounts would be

A. design review

B. n application control review

C. source code review

D. n access control review

View answer

Correct Answer: A

Question #137

An entity offers its customers credit terms of a 2% discount if paid within 10 days. or the full balance is due within 30 days2/10, n/30). If some customers take advantage of the cash discount and others do not, which of the following accounts will appear on the income statement if the net method of recording receivables is employed? Sales DiscountsSales Discounts Forfeited

A. es Yes

B. es No

C. o No

D. o Yes

View answer

Correct Answer: D

Question #138

On January 1, Year 1, International Entity entered into an equity-settled share-based payment transaction with its senior executives. This award of 1, 000 share options has a 4- year vesting period. The market prices of the options and the related shares on the grant date are US $20 and US $80. respectively. The exercise price is US $85. Assuming that the vesting conditions were not met for 100 of the options because of unexpected events in Year 4, the entry to debit option expense at

A. ecember 31

B. ecember 31

C. ecember 31, Year 2

D. anuary 1, Year 1, is for US $ 20, 000

View answer

Correct Answer: C

Question #139

Which of the following best describes the internal audit activity's role in supporting the board in enterprise-wide risk assessment?

A. nsure that sound risk management processes are in place and functioning

B. versee risk management processes to determine if they are adequate and effective

C. xamine, evaluate, report on, and recommend improvements on the adequacy and effectiveness of risk processes

D. mplement risk management methodologies and controls to address risks identified

View answer

Correct Answer: C

Question #140

The best reason for separating the cash-receiving function from the related record- keeping function is to

A. egregate cash payments from cash receipts

B. rovide accountability for cash received

C. inimize misappropriations in cash receipts

D. mprove physical security over the cash-receiving function

View answer

Correct Answer: C

Question #141

In selecting an instructional strategy for developing internal audit staff, a chief audit executive should first review the

A. epartment's budget constraints

B. nternal auditors' personal development needs

C. ontent of potential training courses

D. rganization's objectives

View answer

Correct Answer: D

Question #142

Now assume the terms required the seller to deliver to the destination instead of the shipping point. What is the correct amount of inventory and freight-in relating to this purchase on the Year 1 financial statements?

A. ption A

B. ption B

C. ption C

D. ption D

View answer

Correct Answer: A

Question #143

Which of the following is not one of the advantages of self-managed teams?

A. otivation is improved because decision making is decentralized

B. mproved processes of production if the teams are supported properly

C. anagerial acceptance by tradition-oriented managers

D. mproved communication because all members understand the team's activities better

View answer

Correct Answer: C

Question #144

Time series forecasting models can include which of the following components?I). Trends.II). Seasonal variations.III). Cycles.

A. only

B. and II only

C. I and III only

D. , II, and III

View answer

Correct Answer: D

Question #145

Business strategies may be characterized by their effects on operations. The distinction between a compact car and a luxury car reflects which operational strategy?

A. ost

B. lexibility

C. ervice

D. uality

View answer

Correct Answer: D

Question #146

High exit barriers may restrain firms from leaving an industry even though returns are poor.Which of the following is not an exit barrier?

A. pecialized assets

B. voidance of environmental safeguard requirements

C. articipation in a group executing an overall strategy

D. ost of labor settlements

View answer

Correct Answer: B

Question #147

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

View answer

Correct Answer: C

Question #148

Coordinating internal and external audit efforts can help reduce the amount of time that the external auditors are on site at an organization because the external auditors can

A. opy audit findings from internal audit reports to create the external audit report

B. ely on work performed by the internal audit activity

C. se risk and control analysis provided by the internal audit activity to guide testing for the external audit staff

D. ocus on high-risk areas only, as long as an internal audit function exists

View answer

Correct Answer: B

Question #149

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?

A. endor fuel invoices that have been reconciled to inventory records

B. ime cards completed by aircraft cleaning and fueling crews

C. bservation of selected aircraft while they are being refueled and cleaned

D. omparison of the standard hourly labor costs for cleaning and fueling personnel with actual labor charges

View answer

Correct Answer: C

Question #150

The chief audit executive is attempting to standardize the engagement procedures used throughout the organization. Many of the internal auditors are employed at distant locations. The CAE wants to select a process that will encourage input from a cross section of internal auditors, facilitate differing perspectives, and encourage acceptance of changes that might result from the standardization. The decision-making process that will most effectively achieve the CAE's goals is

A. decision-making model

B. roup-aided decision making

C. he contingency approach

D. rogrammed decision making

View answer

Correct Answer: B

Question #151

The scope of a business process review primarily involves

A. ppraising the environment and comparing against established criteria

B. ssessing the organization's system of internal controls

C. eviewing routine financial information and assessing the appropriateness of various accounting treatments

D. valuating organizational and departmental structures, including assessments of transaction flows

View answer

Correct Answer: D

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