CIA Part 1 Exam Question Bank, Certified Internal Auditor

Question #1

When reviewing operational risk for a department whose manager adopts a laissez-faire style of leadership, it is most important for the internal auditor to verify that

A. mployee decisions follow department and company guidelines

B. he manager considers employees' input when designing new procedures

C. mployees are empowered to deal with unusual or emergency situations

D. anagement has adopted an open-door policy to assist with communication

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Correct Answer: A

Question #2

Management should be included in the development of the audit plan in order to

A. rovide assurance that past audit recommendations have been properly implemented

B. elect the audit tests that will be used for each engagement

C. erify that the highest risks are included in the risk-based audit plan

D. uarantee access to the organization's sites and records for audit work

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Correct Answer: C

Question #3

Price skimming involves

A. etting a low introductory price

B. etting a high introductory price

C. etting different freight charges for customers in different zones

D. sing markups tied closely to the price paid for a product

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Correct Answer: B

Question #4

It would be appropriate for an internal audit activity to use consultants with expertise in health-care benefits when the internal audit activity isI). Conducting an audit of the organization's estimate of its liability for post retirement benefits, which include health care benefits.II). Comparing the cost of the organization's health care program with that of other programs offered in the industry.III). Training its staff to conduct an audit of health care costs in a major division of the organization.

A. only

B. and III only

C. I and III only

D. , II, and III

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Correct Answer: D

Question #5

A company} is formulating its plans for the coming year, including the preparation of its cash budget. Historically, 30% of the company's sales are cash sales. The remaining 70% are credit sales with the following collection pattern.For the month of April, the total cash receipts from sales and collections on account would be

A. S $3, 729, 968

B. S $3, 781, 600

C. S $4, 025, 200

D. S $4, 408, 000

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Correct Answer: B

Question #6

A depreciable asset has an estimated 20% residual value. At the end of the asset's estimated useful life. the accumulated depreciation will equal the original cost of the asset under which of the following depreciation methods?

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: D

Question #7

A manufacturing company produces plastic utensils for a particular segment at the lowest possible cost. The company is pursuing a cost

A. eadership strategy

B. ocus strategy

C. ifferentiation strategy

D. ontainment strategy

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Correct Answer: B

Question #8

When determining cash flows accruing to the entity, using financial statements prepared for tax purposes will result in

A. o effect on cash flow amounts

B. n overstatement of cash flows throughout the economic life of the asset

C. n understatement of cash flows throughout the economic life of the asset

D. n overstatement of cash flows in the early years and then an understatement of cash flows in the later years of the economic life of the asset

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Correct Answer: A

Question #9

Which of the following changes in accounting policies resulting from a significant change in the expected pattern of economic benefit will increase profit?

A. change from FIFO to LIFO inventory valuation when costs are rising

B. change from FIFO to weighted-average inventory valuation when costs are falling

C. change from accelerated to straight-line depreciation in the later years of the depreciable lives of the assets

D. change from straight-line to accelerated depreciation in the early years of the depreciable lives of the assets

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Correct Answer: B

Question #10

The decision to implement enhanced failure detection and back-up systems to improve data integrity is an example of which risk response?

A. isk acceptance

B. isk sharing

C. isk avoidance

D. isk reduction

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Correct Answer: D

Question #11

The purpose of a walk through of an audit client's processes is for an internal auditor to

A. onfirm the completion of tasks

B. ssess the effectiveness of existing internal controls

C. nderstand existing controls and processes

D. etermine the existence of fraud

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Correct Answer: C

Question #12

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 #13

The airlines have been leaders in the use of technology. Customers can make reservations either with an airline or through a travel agency. In this situation, a travel agency is classified as which type of distribution channel?

A. n intermediary

B. jobber

C. distributor

D. facilitating agent

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Correct Answer: A

Question #14

In a statement of cash flowsindirect method), depreciation expense should be presented as

A. n inflow of cash

B. n outflow of cash

C. n addition to profit in converting profit or loss to net cash flows from operating activities

D. deduction from profit in converting profit or loss to net cash flows from operating activities

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Correct Answer: C

Question #15

The Huron Corporation purchases 60, 000 headbands per year. The average purchase lead time is 20 working days, and the maximum lead time is 27 working days. Safety stock equals 1, 750 units. The corporation works 240 days per year. Huron should reorder headbands when the quantity in inventory reaches

A. , 000 units

B. , 750 units

C. , 750 units

D. , 250 units

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Correct Answer: B

Question #16

If appropriate safeguards exist, which of the following is considered a legitimate internal audit rolewithin risk management at an organization?

A. mposing risk management processes

B. roviding consolidated reporting on risks

C. aking accountability for risk management

D. aking decisions on risk responses

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Correct Answer: B

Question #17

On December 31. Year 1 , XYZ led 5-year bonds with a face amount of US $1 million. The bonds carry a stated interest rate of 10% and were sold at par. Interest is payable annually on December 31 According to the provisions of the bond identure, XYZ was to make annual deposits into a bond sinking fund (beginning December 31, Year 2) to accumulate the funds necessary to retire the bonds at their maturity. On December 31 Year 5, all required interest payments and sinking-fund payments due to date had been made

A. urrent liability

B. ong-term liability

C. ontra to long-term investments

D. eferred credit

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Correct Answer: A

Question #18

In developing an appropriate work program for an audit engagement, the most important factor for an audit supervisor to consider is the

A. vailability of records and data

B. otential impact of risks

C. apabilities of audit personnel

D. ime required to complete the engagement

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Correct Answer: B

Question #19

A firm ships its product to a foreign subsidiary and charges a price that may increase import duties but lower the income taxes paid by the subsidiary. The most likely reason for these effects is that the

A. rice is an arm's-length price

B. rice is a cost-plus price

C. ransfer price is too low

D. ransfer price is too high

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Correct Answer: D

Question #20

Which of the following statements is false regarding the efficient and economical achievement of the organization's objectives?

A. conomical performance accomplishes objectives with minimal use of resources with no regard to risk exposure

B. fficient performance accomplishes objectives in a timely manner

C. conomical performance accomplishes objectives with minimal use of resources commensurate with the risk exposure

D. fficient performance accomplishes objectives in an accurate and economical manner

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Correct Answer: A

Question #21

The following information is available for an entity for the quarter ended March 31. of the current year:The gross profit margin is normally 200 of sales. What is the estimated cost of the merchandise inventory at March 31. of the current year?

A. S $20, 000

B. S $40, 000

C. S $60

D. S $180, 000

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Correct Answer: C

Question #22

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 #23

In preparing to facilitate a control self assessment session, an auditor would be least likely to ensure that

A. ey stakeholders are represented in the group

B. n independent content expert is available to help settle disagreements

C. ackground research is completed to familiarize the auditor with relevant issues

D. anagement is consulted on the issues and priorities

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Correct Answer: B

Question #24

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 #25

An audit of an organization's systems development life cycle (SDLC) found that detailed internal control procedures for mission critical business systems were not developed until the systems were implemented. When reporting this finding, the auditor should recommend the development of such procedures during which SDLC phase?

A. nvestigation

B. esign

C. evelopment

D. mplementation

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Correct Answer: B

Question #26

A company's cellular phone costs vary significantly by sales representative and by month. Which of the following would be the most appropriate approach for a consulting project concerning this issue?

A. ontrol self-assessment involving sales representatives

B. enchmarking with other cellular phone users

C. usiness process review of cellular phone needs

D. erformance measurement and design of the budgeting process

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Correct Answer: C

Question #27

According to the Standards, the organizational status of the internal audit activity

A. ust be sufficient to permit the accomplishment of its audit responsibilities

B. s best when the reporting relationship is direct to the board of directors

C. equires the board's annual approval of the audit schedules, plans, and budgets

D. s guaranteed when the charter specifically defines its independence

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Correct Answer: A

Question #28

Which of the following is not true with regard to the internal audit charter?

A. t defines the authorities and responsibilities of the internal audit activity

B. t specifies the minimum resources needed for the internal audit activity

C. t provides a basis for evaluating the internal audit activity

D. t should be approved by senior management and the board

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Correct Answer: B

Question #29

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 #30

During the planning phase of an audit of suspected overbilling on contracts for security services, an auditor should perform all of the following except

A. nterviewing an official of the security services company to determine the cause of recent increases in billings for services

B. nterviewing the manager who requested the audit engagement

C. btaining a copy of the contract between the two organizations

D. reparing an engagement program

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Correct Answer: A

Question #31

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

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Correct Answer: D

Question #32

Which of the following is a red flag associated with improper asset valuation?

A. nusual increase in gross margin

B. nusual decrease in the number of days' purchases in inventory

C. ecurring positive cash flows from operations

D. llowance for bad debts that is increasing in percentage terms

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Correct Answer: A

Question #33

The following is an excerpt from an audit engagement workpaper A Company Accounts Receivable Date Objective To determine if the computer system is correctly recording all accounts receivable transactions. Procedures Judgmental selection of a sample of all accounts receivable balances greater than $50, 000 for positive confirmation of balances. Conclusion Based on the results of testing wherein all but three confirmations were returned, the accounts receivable balance is fairly presented in all material resp

A. t is not appropriate to judgmentally select a sample when testing accounts receivable

B. conclusion should be reached only for the results of overall testing, not for individual procedures

C. he audit procedures used are not consistent with the audit objective

D. he format of the workpaper does not conform to the standard format for workpapers

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Correct Answer: C

Question #34

A manufacturer receives an advance payment for special-order goods that are to be manufactured and delivered within the next year. The advance payment should be reported in the manufacturer's current-year balance sheet as a(n)

A. urrent liability

B. oncurrent liability

C. ontra asset amount

D. ccrued revenue

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Correct Answer: A

Question #35

Evidence discovered during the course of an engagement suggests that multiple incidents of fraudhave occurred. There do not appear to be sufficient controls in place to prevent reoccurrence. Whichof the following is the internal auditor's most appropriate next step?

A. mmediately notify management of the area under review and the other internal auditors involved in the engagement

B. iscuss the situation with the engagement supervisor to determine whether fraud investigation experts are required to investigate the matter properly

C. ully document in the workpapers the evidence that has been discovered and recommend appropriate controls to address the fraud

D. rovide the evidence that was discovered to local law enforcement for possible prosecution of the suspected fraud

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Correct Answer: A

Question #36

A manager discovers by chance that a newly hired employee has strong beliefs that are very different from the manager's and from those of most of the other employees. The manager's best course of action would be to

A. acilitate the reassignment of the new hire as quickly as possible before this situation becomes disruptive

B. sk the rest of the team for their reaction and act according to the group consensus

C. ake no action unless the new hire's behavior is likely to cause harm to the organization

D. ry to counsel the new hire into more reasonable beliefs

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Correct Answer: C

Question #37

Which of the following should be the primary objective of an audit of an entity's business continuity plan?

A. ost of testing and updating the plan

B. elegation of responsibilities for the plan

C. elationship of the plan to risk exposures

D. fficiency of the planning procedures

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Correct Answer: C

Question #38

Which of the following is used to identify and prioritize critical business applications to determine those that must be restored and the order of restoration in the event that a disaster impairs information systems processing?

A. ontingent facility contract analysis

B. ystem backup analysis

C. endor supply agreement analysis

D. isk analysis

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Correct Answer: D

Question #39

If the bank uses the rnaxirna criterion for selecting the location of the branch, it will select

A. 1

B. 2

C. 3

D. 4

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Correct Answer: D

Question #40

Risk assessments are valuable to the internal audit activity's planning process because they assist in

A. liminating all areas with low risk from the audit plan

B. ducating management on the importance of keeping the internal audit activity informed of organizational changes

C. dentifying the audit universe or auditable activities that need to be reviewed

D. dentifying risks that management and the internal auditors have overlooked

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Correct Answer: C

Question #41

Which of the following is most likely to be an element of an effective compliance program?

A. he internal audit activity is assigned responsibility for overseeing the program

B. he program is communicated to employees in a video format on a one-time basis

C. he organization uses monitoring systems designed to detect improper activity

D. he organization obtains as much information as possible when performing background checks on employees

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Correct Answer: C

Question #42

Management of a company is attempting to build a reputation as a world-class manufacturer of quality products. Which of the following measures would not be used by the firm to measure quality?

A. he percentage of shipments returned by customers because of poor quality

B. he number of parts shipped per day

C. he number of defective parts per million

D. he percentage of products passing quality tests the first time

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Correct Answer: B

Question #43

An entity has appropriately used the installment method of accounting sit began operations at the beginning of the current year. The following information pertains to its operations for this year:The amount of gross profit deferred at the end of the current year should be

A. S $720, 000

B. S $288, 000

C. S $216, 000

D. S $144, 000

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Correct Answer: C

Question #44

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

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Correct Answer: C

Question #45

The use of teams in total quality management TOM) is important because

A. ell-managed teams can be highly creative and are able to address complex problems better than individuals can

B. eams are quicker to make decisions, thereby helping to reduce cycle time

C. mployee motivation is higher for team members than for individual contributors

D. he use of teams eliminates the need for supervision, thereby alloying a company to become leaner and more profitable

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Correct Answer: A

Question #46

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

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Correct Answer: C

Question #47

During the development of a purchasing system, an auditor reviewed the payment authorization program. Which of the following actions should the auditor recommend for a situation in which the quantity invoiced is greater than the quantity received?

A. ssue an exception report

B. ay the amount billed and adjust the inventory account for the difference

C. eturn the invoice to the vendor for correction

D. uthorize payment of the full invoice, but maintain an open purchase order record for the missing goods

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Correct Answer: A

Question #48

Which of the following is a major element of the ISO 9000:2008 quality management system standards?

A. he principle that improved employee satisfaction will lead to increased productivity

B. he attitude and actions of the board and management regarding the significance of control within the organization

C. he assessment of the risk that objectives are not achieved

D. requirement for organizations to monitor information on customer satisfaction as a measure of performance

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Correct Answer: D

Question #49

A Gantt chart

A. hows the critical path for a project

B. s used for determining an optimal product mix

C. hows only the activities along the critical path of a network

D. oes not necessarily show the critical path through a network

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Correct Answer: D

Question #50

A retail entity maintains a markup of 25 % based on cost. The entity has the following information for the current year:Beginning inventory was

A. S $40, 000

B. S $85, 000

C. S $110, 000

D. S $265, 000

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Correct Answer: B

Question #51

An organization sells a product for which demand is uncertain. Management would like to ensure that there is sufficient inventory on hand during periods of high demand so that it does not lose sales and customers). To do so, the organization should

A. eep a safety stock

B. se a just-in-time inventory system

C. mploy a materials requirements planning system

D. eep a master production schedule

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Correct Answer: A

Question #52

Assessments of the independence of an organization's external auditors shouldI). Be carried out only when the external auditor is appointed.II). Be carried out when the external auditor is appointed and regularly thereafter.III). Not include any participation by the internal audit activity.IV). Include participation by the internal audit activity.

A. and III only

B. and IV only

C. I and III only

D. I and IV only

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Correct Answer: D

Question #53

An organization contracted a third party to construct a new facility that was estimated to cost $25 million. Which of the following is the most pertinent reason for the organization to audit the contractor's records?

A. he contract includes a right to audit clause

B. he contractor will be paid on a cost plus basis

C. he estimated cost is high

D. he contractor has subcontracted much of the work

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Correct Answer: B

Question #54

The manager for an organization's accounts payable department resigned her post in that capacity.Three months later, she was recruited to the internal audit activity and has been working with theaudit team for the last eight months. Which of the following assignments would the newly hiredinternal auditor be able to execute without any impairments to independence or objectivity?

A. n operations audit of the accounts payable department

B. consulting engagement related to a new accounts payable optimization initiative

C. review of the employees' sports club finances, which are overseen by the chief audit executive

D. n assurance review for a sales program on which she previously provided consultation

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Correct Answer: C

Question #55

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 criterion 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

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Correct Answer: B

Question #56

The rate of gross profit on Year 2 installment sales is

A. 0%

B. 0%

C. 0%

D. 0%

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Correct Answer: A

Question #57

Which of the following is not an appropriate objective for a quality assurance and improvement program?

A. ontinually monitor the internal audit activity's effectiveness

B. ssure conformance with the Standards and Code of Ethics

C. erform an internal assessment at least once every five years

D. ommunicate the results of quality assessments to the board

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Correct Answer: C

Question #58

A regression equation

A. stimates the dependent variables

B. ncompasses factors outside the relevant range

C. s based on objective and constraint functions

D. stimates the independent variable

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Correct Answer: A

Question #59

Annual inventory holding costs equal

A. S $750

B. S $1, 250

C. S $1, 750

D. S $2, 250

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Correct Answer: C

Question #60

If a supervisor fails to give an employee a negative evaluation because of fear of damaging a good working relationship, this is known as the

A. eniency error

B. ecency effect

C. alo effect

D. ontrast error

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Correct Answer: A

Question #61

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 #62

Your company Company '' has decided to enter the European market with one of its products and is now considering three advertising strategies. This market currently belongs to Company X. Company X is mare that your company is entering the market and is itself considering steps to protect its market. An analyst for your company has identified three strategies Company X might develop and has shown the payoffs for each in the tables below The analyst has formulated this

A. ero-sum game

B. ooperative game

C. risoner's dilemma

D. ame against nature

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Correct Answer: A

Question #63

An entity purchased US $1 .000 gross amount of inventory on account with terms of 2 f discount if paid within 10 days. The seller was responsible for delivery to the shipping point, with freight of US $30 prepaid by the seller. The entity records purchases at the net amount The journal entry to record payment 8 days after the invoice date is

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: A

Question #64

A chief audit executive (CAE) suspects that several employees have used desktop computers for personal gain. In conducting an investigation, the primary reason that the CAE would choose to engage a forensic information systems auditor rather than using the organization's information systems auditor is that a forensic information systems auditor would possess

A. nowledge of the computing system that would enable a more comprehensive assessment of the computer use and abuse

B. nowledge of what constitutes evidence acceptable in a court of law

C. uperior analytical skills that would facilitate the identification of computer abuse

D. uperior documentation and organization skills that would facilitate in the presentation of findings to senior management and the board

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Correct Answer: B

Question #65

Value engineering is

A. policy of seeking continuous improvement in all phases of company{ activities

B. method of determining prices based on a cost determination

C. n element of a marketing mix strategy

D. systematic approach to assessing all aspects of cost buildup for a product

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Correct Answer: D

Question #66

Cash interest payments in Year 2 were

A. S $8, 000

B. S $12, 000

C. S $20, 000

D. S $25, 000

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Correct Answer: B

Question #67

Which of the following fraudulent acts is not designed primarily to benefit the organization?

A. ale or assignment of fictitious assets

B. mproper payments such as bribes or kickbacks

C. mproper valuation of transactions

D. cceptance of bribes or kickbacks

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Correct Answer: D

Question #68

When assessing the risk associated with an activity, an internal auditor should

A. etermine how the risk should best be managed

B. rovide assurance on the management of the risk

C. odify the risk management process based on risk exposures

D. esign controls to mitigate the identified risks

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Correct Answer: B

Question #69

If a series of profit lines for and Y are drawn on the graph, the mix of G and Y that will result in the maximum profit can be determined from

A. he last point in the feasible solution region touched by a profit line

B. ny point on the boundary of the feasible solution region touched by a profit line

C. he first paint an the feasible solution region boundary that intersects a profit line

D. ny point on the demand constraint that intersects a profit line

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Correct Answer: A

Question #70

Which of the following is an appropriate management strategy for supporting an organization's code of conduct?I). Offering training opportunities for all employees on ethics topics.II). Surveying employees, suppliers, and customers regarding compliance.III). Using case studies and examples of appropriate and inappropriate behaviors.IV). Establishing clear delineation of responsibilities throughout the organization.

A. I and IV only

B. , II, and III only

C. , III, and IV only

D. , II, III, and IV

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Correct Answer: D

Question #71

In forecasting purchases of inventory for a firm, all of the following are useful except

A. nowledge of the behavior of business cycles

B. nternal allocations of costs to different segments of the firm

C. nformation on the seasonal variations in demand

D. conometric modeling

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Correct Answer: B

Question #72

On May 1, Year 1, an entity issued, at 103 plus accrued interest, 500 of its 12%, US $1, 000 bonds. The bonds are dated January 1, Year 1, and mature on January 1, Year 6. Interest is payable semiannually on January 1 and July 1 The journal entry to record the issuance of the bonds and the receipt of the cash proceeds is

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: C

Question #73

Which of the following statements is the best description of reversing entries?

A. he recording of reversing entries is a mandatory step in the accounting cycle

B. eversing entries are made at the end of the next accounting period, after recording regular transactions of the period

C. eversing entries are identical to the adjusting entries made in the previous period

D. eversing entries are the exact opposite of the adjustments made in the previous period

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Correct Answer: D

Question #74

An entity uses the retail method of inventory estimation for interim reporting purposes. Management expects some normal shrinkage in the inventory because of theft. What effect will the failure to consider this shrinkage have on the computation of1) the cost- retail ratio, and2) the estimated ending inventory at retail?

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: B

Question #75

Which of the following is not relevant when developing recommendations for inclusion in audit reports?

A. easibility

B. ost of implementation

C. nderlying causes

D. iming of followup

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Correct Answer: D

Question #76

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 #77

To mitigate a possible loss and offset risk, an entity can use derivatives or other hedging instruments. Which of the following?

A. ption A

B. ption B

C. ption C

D. ption D

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Correct Answer: D

Question #78

Which of the following is an example of sharing risk?

A. n organization redesigned a business process to change the risk pattern

B. n organization outsourced a portion of its services to a third-party service provider

C. n organization sold an unprofitable business unit to its competitor

D. n order to spread total risk, an organization used multiple vendors for critical materials

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Correct Answer: B

Question #79

An internal auditor is discussing an audit problem with an engagement client. While listening to the client, the internal auditor should

A. repare a response to the client

B. ake mental notes on the speaker's nonverbal communication, as it is more important than what is being said

C. ake sure that all details, as well as the main ideas of the client, are remembered

D. ntegrate the incoming information from the client with information that is already known

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Correct Answer: D

Question #80

An internal auditor would review prior audit reports when planning an audit engagement in order toI). Identify previously reported problem areas for further follow-up.II). Eliminate previously reviewed areas from further examination.III). Gain an understanding of the audited area's business processes and control activities.IV). Understand the concerns or requests of management.

A. I only

B. and III only

C. and IV only

D. I and III only

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Correct Answer: B

Question #81

Conflict triggers include all of the following except

A. nclear job boundaries

B. nrealized expectations

C. tatus differentials

D. uperordinate goals

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Correct Answer: D

Question #82

Access control software on an organization's mainframe computer records detailed information concerning both successful and unsuccessful log on attempts to applications.Which of the following audit tools would be best suited to review the access information that has been recorded?

A. eneralized audit software

B. lowcharting

C. ntegrated test facility

D. est data

View answer

Correct Answer: A

Question #83

A company has established its environmental audit activity as part of its legal department rather than part of its internal audit activity, which reports to the audit committee. The board has requested that the chief audit executive (CAE) provide an annual opinion on whether environmental risks are being properly addressed. In these circumstances, the CAE should recommend to the audit committee that the internal audit activity

A. eview the recommendations in all environmental audit reports

B. iscuss with the environmental auditors the results of their reviews

C. eriodically carry out a quality assessment of the environmental audit activity

D. nclude a review of environmental issues in some internal audit engagements

View answer

Correct Answer: C

Question #84

Assuming all of the following involve material amounts, which is most likely to be classified as an extraordinary item in the income statement?

A. loss because of an expropriation of assets by a foreign government

B. loss because of adjustments of accruals on long-term contracts

C. gain because of the disposal of assets associated with a discontinuing operation of a business

D. one of the above

View answer

Correct Answer: D

Question #85

An objective for an audit of a medical research corporation is to evaluate management's controls to ensure that timely reports are submitted to sponsors of contracted research projects. In planning the audit to achieve this objective, the auditor should begin by

A. eviewing policies and procedures

B. nterviewing a group of research managers

C. bserving report preparation in a number of laboratories

D. ending a questionnaire to a sample of research sponsors

View answer

Correct Answer: A

Question #86

Which of the following channel structures have the best means of managing channel conflict?I). ConventionalII). VerticalIII). HorizontalIV). Multichannel

A. and lI

B. I, III, and IV

C. , III, and IV

D. I and III

View answer

Correct Answer: B

Question #87

An organization has developed a large database that tracks employees, employee benefits, payroll deductions, job classifications, and other similar information. In order to test whether data currently within the automated system are correct, an auditor should

A. se test data and determine whether all the data entered are captured correctly in the updated database

B. elect a sample of data to be entered for a few days and trace the data to the updated database to determine the correctness of the updates

C. se generalized audit software to provide a printout of all employees with invalid job descriptions

D. se generalized audit software to select a sample of employees from the database

View answer

Correct Answer: D

Question #88

A corporation reported salaries expense of US $190, 000 for December of the current year. The following data are from its records:The amount of cash payments for salaries during December of the current year was

A. S $154, 000

B. S $166, 000

C. S $214, 000

D. S $226, 000

View answer

Correct Answer: B

Question #89

In production management, product breakdown into component parts and lead times for procuring these parts is necessary for

A. critical path method CPM) system

B. materials requirements planning MRP) system

C. n economic order quantity EOQ) system

D. n ABC system

View answer

Correct Answer: B

Question #90

What is the tax expense that would have been reported on Lally's income statement for the year ended December 31. Year 1?

A. S $1, 560, 000

B. S $1

C. S $1

D. S $1, 568, 000

View answer

Correct Answer: A

Question #91

On February 1. Year 1. a computer software firm agrees to program a software package. Twelve payments of US $1 0.000 on the first of each month are to be made, with the first payment March 1. Year 1 The software is accepted by the client June 1. Year 2. How much Year 1 revenue should be recognized?

A. S $0

B. S $100

C. S $110

D. S $120

View answer

Correct Answer: A

Question #92

An entity is currently being sued by a customer. A reliable estimate can be made of the costs that would result from a ruling unfavorable to the entity, and the amount involved is material. The entity's managers, lawyers, and auditors agree that the likelihood of an unfavorable ruling is remote. This contingent liability

A. hould be disclosed in a note

B. hould be disclosed as a parenthetical comment in the balance sheet

C. eed not be disclosed

D. hould be disclosed by an appropriation of retained earnings

View answer

Correct Answer: C

Question #93

The drive-through service at a fast-food restaurant consists of driving up to place an order, advancing to a window to pay for the order, and then advancing to another window to receive the items ordered. This type of waiting-line system is

A. ingle channel, single phase

B. ingle channel, multiple phase

C. ultiple channel, single phase

D. ultiple channel, multiple phase

View answer

Correct Answer: B

Question #94

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

View answer

Correct Answer: A

Question #95

During an audit, an internal auditor notes that the following situations exist Unusual profitability compared to other companies in the same industry. Highly complex transactions close to the end of the period. Significant sales to entities whose substance and ownership are not known. Unusual growth in the number of days sales in receivables.These situations indicate what type of fraud?

A. mployee collusion with customer firms

B. ictitious revenues

C. mproper asset valuation

D. nventory theft

View answer

Correct Answer: B

Question #96

Which of the following audit procedures is most suitable for verifying that all sales transactions have been recorded?

A. bservation

B. racing

C. ecomputation

D. ouching

View answer

Correct Answer: B

Question #97

Which of the following factors would not be considered in determining appropriate followup procedures?

A. he significance of the audit finding

B. he effort and cost needed to correct the reported condition

C. he availability of funds in the audited department's budget to correct the reported condition

D. he potential consequences if the corrective action fails

View answer

Correct Answer: C

Question #98

The auditor wishes to determine if the change in investment income during the current year was due to a) changes in investment strategy, b) changes in portfolio mix, or c) other factors. Which of the following analytical review procedures should the auditor use?

A. imple linear regression that compares investment income changes over the past 5 years to determine the nature of the changes

B. atio analysis that compares changes in the investment portfolio on a monthly basis

C. rend analysis that compares the changes in investment income as a percentage of total assets and of investment assets over the past 5 years

D. ultiple regression analysis that includes independent variables related to the nature of the investment portfolio and market conditions

View answer

Correct Answer: D

Question #99

What role, if any, should the internal audit activity have in the process of following up on observations and recommendations made by the external auditors?

A. he internal audit activity should have no role in this process in order to ensure independence

B. he internal audit activity should become involved only if the chief audit executive has sufficient evidence that the follow-up is not occurring

C. he internal audit activity should review the adequacy and effectiveness of management's follow-up actions

D. he internal audit activity should become involved only if specifically requested by management or the board of directors

View answer

Correct Answer: C

Question #100

An organization's accounts payable function improved its internal controls significantly after it received an unsatisfactory audit report. When planning a follow-up audit of the function, what level of detection risk should be expected if the audit and sampling procedures used are unchanged from the prior audit?

A. etection risk is lower because control risk is lower

B. etection risk is lower because control risk is higher

C. etection risk is higher because control risk is lower

D. etection risk is unchanged although control risk is lower

View answer

Correct Answer: D

Question #101

An audit identified a number of weaknesses in the configuration of a critical client/server system. Although some of the weaknesses were corrected prior to the issuance of the audit report, correction of the rest will require between six and 18 months for completion.Consequently, management has developed a detailed action plan, with anticipated completion dates, for addressing the weaknesses. Which of the following is the most appropriate course of action for the chief audit executive to take?

A. ssess the adequacy of the action plan and monitor key dates and deliverables

B. chedule a followup audit engagement to assess the status of corrective action

C. eassign information systems auditors to assist the information technology department in correcting the weaknesses

D. valuate statistics related to unplanned system outages, unauthorized access attempts, and denials of service to assess the effectiveness of corrections

View answer

Correct Answer: A

Question #102

An entity had the following selected per-unit data relating to work-in-process:Selling price US $100Comparison cost 10Historical cost 91Replacement cost 108Normal gross profit 20Selling cost 5In comparison with historical cost, what will be the per-unit impact on gross profit of measuring ending inventory.

A. o effect

B. eduction of US %6

C. eduction of US $26

D. ncrease of US $5,

View answer

Correct Answer: B

Question #103

According to the International Professional Practices Framework, internal auditors should possess which of the following competencies?I). Proficiency in applying internal auditing standards, procedures, and techniques.II). Proficiency in accounting principles and techniques.III). An understanding of management principles.IV). An understanding of the fundamentals of economics, commercial law, taxation, finance, and quantitative methods.

A. only

B. I only

C. and III only

D. , III, and IV only

View answer

Correct Answer: D

Question #104

With regard To IT governance, which of the following is the most effective and appropriate role forthe internal audit activity?

A. ndependently evaluate the skills and experience of potential chief information officer candidates to assess the best fit based on the organization's risk appetite

B. valuate the organization's governance standards and assess IT-related activities to identify gaps and develop policies, ensuring alignment with the organization's risk appetite

C. ssist management in interpreting complex IT-related privacy and security risk exposures and evaluating potential mitigation strategies

D. ssess whether governance activities are aligned with the organization's risk appetite and take into consideration emerging risks

View answer

Correct Answer: D

Question #105

Organizations that use a highly structured command-and-control management approach are at greater risk of

A. elayed response due to the inability to reach consensus among decision makers

B. egative consequences that result from lower-level staff's unwillingness to confront errors by superiors

C. rosion of staff morale due to perceptions of ineffective leadership

D. aste and abuse of organizational resources resulting from management override of controls

View answer

Correct Answer: B

Question #106

A limitation of using ratio analysis in an audit engagement is that it

A. ften uses financial information provided by management which has not been reviewed for reliability and validity

B. s an expensive method of testing

C. equires computer software in order to develop meaningful interpretations of data

D. s useful only when comparisons can be made across other industries

View answer

Correct Answer: A

Question #107

A physical inventory count showed an entity had inventory costing US $1.000.000 on hand at December 31 Year 1 Excluded from this amount were the following:· Goods costing US $82, 000. shipped to a customer free on boardFOB) shipping point on December 28. Year 1 They were expected to be received by the customer on January 4.Year 2.· Goods costing US $122.000. shipped to a customer free on boardF B) 1. ;ti nation December 30, Year 1 They were expected to be received by the customer on January 5, Year 2.Comput

A. S $1, 000, 000

B. S $1, 082, 000

C. S $1, 122, 000

D. S $1, 204, 000

View answer

Correct Answer: C

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