Which of the following statements about the chief audit executives responsibilities for internal audit resources is most accurate?

B.

An effective personnel function is necessary for hiring, training, and monitoring human resources. One purpose of this function is to recruit, select, hire, train, supervise, and evaluate individuals who are suitable in light of job requirements, job descriptions, and job specifications (the abilities needed for particular jobs). In a review of this function, an appropriate objective is to determine whether the selection process is being properly performed. Thus, a potential employee's references should be checked to determine whether (s)he is truthful and has the desired qualifications.

Whether hourly employees are being paid only for hours actually worked as indicated by time cards or similar reports is *an objective of an engagement to review payroll.*

The internal auditor is concerned with the overall valuation of inventory. Rank the following sources of engagement information from most persuasive to least persuasive in addressing the assertion as to the valuation of inventory.
1. Calculate inventory turnover by individual product.
2. Assess the net realizability of all inventory items with a turnover ratio of 2.0 or less by interviewing the marketing manager as to the marketability of the product.
3. Calculate the net realizable value (NRV) of all inventory products (using software to calculate NRV based on the last selling price) and compare NRV with cost.
4. Take a statistical sample of inventory and examine the latest purchase documents (invoices and receiving slips) to calculate inventory cost.
A 4, 1, 3, 2.
B 1, 4, 2, 3.
C 2, 3, 4, 1.
D 1, 2, 3, 4.

Fact Pattern: The following data were gathered during an internal auditor's investigation of the reason for a material increase in bad debts expense. In preparing an engagement communication, each of the items might be classified as criteria, condition, cause, effect, or background information.
1.
Very large orders require management's approval of credit.
2.
Engagement procedures showed that sales personnel regularly disregard credit guidelines when dealing with established customers.
3.
A monthly report of write-offs is prepared but distributed only to the accounting department.
4.
Credit reports are used only on new accounts.
5.
Accounting department records suggest that uncollectible accounts could increase by 5% for the current year.
6.
The bad debts loss increased by US $100,000 during the last fiscal year.
7.
Even though procedures and criteria were changed to reduce the amount of bad-debt write-offs, the loss of commissions because of written-off accounts has increased for some sales personnel.
8.
Credit department policy requires the review of credit references for all new accounts.
9.
Current payment records are to be reviewed before extending additional credit to open accounts.
10.
To reduce costs, the use of outside credit reports was suspended on several occasions.
11.
Because several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review.
12.
According to the new credit manager, strict adherence to established credit policy is not necessary.

The condition attribute is best illustrated by items numbered
A 3, 4, and 12.
B 5, 6, and 7.
C 2, 10, and 11.
D 1, 8, and 9.

C. 2, 10, and 11.

The condition attribute is the factual evidence that the internal auditor found in the course of the examination (the current state). Items 2, 10, and 11 state information gathered by the internal auditor as a result of engagement procedures.

A 3, 4, and 12. Cause
B 5, 6, and 7. Effect
C 2, 10, and 11.
D 1, 8, and 9. Criteria

Fact Pattern: The internal audit activity has just completed an engagement to review loan processing and commercial loan account balances for a financial institution. Following are a few excerpts from the working papers indicating potential engagement observations.
A. The auditors took a statistical sample of 100 loan applications and determined that only 85 loans were granted.
B. Of the 85 loans granted, the auditors noted that 4 loans should have been reviewed and approved by the loan committee but were not. Organizational policy states that all loans must be approved by the committee prior to funding. Each of the 4 loans, however, was approved by the vice president. The matter was discussed with the vice president, who indicated it was a competitive loan situation to a new customer and in the best interests of the financial institution to expedite the loan and establish a firm relationship with a growing customer. All of the other loans were formally approved by the loan committee.
C. Of the 81 loans approved by the loan committee, the auditors found 7 in which the actual amount lent exceeded the approved amount.
The auditors noted three instances in which loans were made to related groups of organizations without an analysis of the total amount of loans made to the controlling entity. There may be statutory limitations on the amount of loans that can be made to any individual controlling organization.
D. Of the 81 loans approved by the loan committee, the auditors found that 14 contained either insufficient documentation or were not received by the committee in a timely fashion in advance of their meeting.
The statistical sample was taken with a 95% confidence level using attribute sampling with a tolerable error limit of 4%. Assume that the sampling plan was implemented correctly.

Assume with regard to item B, the vice president asks the loan committee to review the loans on an after-the-fact basis. Assume further, upon this subsequent review, the loan committee approves the loans on the after-the-fact basis. Which of the following conclusions is true regarding the communication of the engagement observations?
1. The sample deviation rate would drop to 0%.
2. The item should still be reported in the audit report because it was not approved in a timely manner in accordance with organizational policies.
3. The item should be reported as a nondeviation because subsequent action validated the vice president's approach.
A 1 only.
B 2 only.
C 1, 2, and 3.
D 3 only.

Which of the following is the best reason for the chief audit executive to consider the strategic plan in developing the annual audit plan?

Which of the following is a responsibility of the audit committee with regards to the internal audit activity?

Which of the following is most essential for guiding the internal audit staff in the conduct of an audit?

What action must the chief audit executive take when's he believes that senior management has accepted a level of residual risk that is unacceptable to the organization?