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Internal Auditing FinalFact Pattern: An internal auditing team has been assigned to review "the customer satisfaction measurement system" that the Industrial Products Division implemented 2 years ago. This system consists of an annual mail survey conducted by the division's cus Those who did not respond may be systematically different from those who did. When an internal auditor is interviewing to gain information, (s)he will not be able to remember everything that was said in the interview. The most effective way to record interview information for later use is to Organize notes around topics on the interview plan and note responses in the appropriate area, reviewing the notes after the meeting to make additions. 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. Reliable evidence is best describe as evidence that An internal auditor's objective is to determine the cause of inventory shortages shown by the physical inventories taken by an independent service organization that used some engagement client personnel. The internal auditor addresses this objective by re Both external and internal and not sufficient During a preliminary survey of the accounts receivable function, an internal auditor discovered a potentially major control deficiency while preparing a flowchart. What immediate action should the internal auditor take regarding the weakness? Highlight the weakness to ensure that procedures to test it are included in the engagement work program Fact Pattern: Management answered "yes" to every question when filling out an internal control questionnaire and stated that all listed requirements and control activities were part of their procedures. An internal auditor retrieved this questionnaire fro Engagement information must be corroborated in some way Internal auditors should be active listeners to gain the most information in an internal audit interview. Which of the following best describes how an active listener behaves in an interview? The listener Listens with acceptance, empathy, and intensity Listening effectiveness is best increased by Resisting both internal and external distractions The internal auditor wants to understand the actual flow of data regarding cash processing. The most convincing information is obtained by Performing a walk-through of the processing and obtaining copies of all documents used. Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back Sufficiency and relevance When evaluating communication, the internal auditor should be aware that nonverbal communication A letter to the internal auditor in response to an inquiry is an example of which type of information? As part of a payroll engagement, an internal auditor used an internal control questionnaire. Positive responses were given to each of the following questions by the payroll department manager: Identifying, analyzing, evaluating, and recording An internal auditor must weigh the cost of an engagement procedure against the persuasiveness of the evidence to be gathered. Observation is one engagement procedure that involves cost-benefit trade-offs. Which of the following statements regarding observ An internal auditor conducts a preliminary survey and identifies a number of significant engagement issues and reasons for pursuing them in more depth. The engagement client informally communicates concurrence with the preliminary survey results and asks Consider the engagement to be terminated with no communication of results needed because the engagement client has already agreed to take constructive action. The most persuasive information about the existence of newly acquired computers for the sales department is Which of the following types of tests is the most persuasive if an internal auditor wants assurance of the existence of inventory stored in a warehouse? Physically observing the inventory in the warehouse Documents provide information with differing degrees of persuasiveness. If the engagement objective is to obtain information that payment has actually been made for a specific invoice from a vendor, which of the following documents ordinarily is the most A canceled check, made out to the vendor and referenced to the invoice, included in a cutoff bank statement that the internal auditor received directly from the bank. Which of the following examples of audit evidence is the most persuasive? Real estate deeds that were properly recorded with a government agency The internal auditor for a construction contractor finds materials costs increasing as a percentage of billings and suspects that materials billed to the organization are being delivered to another contractor. What type of information will best enable the To determine the sufficiency of information regarding interpretation of a contract, an internal auditor uses During an operational engagement, an internal auditor compares the inventory turnover rate of a subsidiary with established industry standards to Assess the performance of the subsidiary and indicate where additional engagement work may be needed. Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back Which of the following statements describes an internal control questionnaire? It Provides indirect evidence that might need corroboration. An assurance engagement in the quality control department is being planned. Which of the following is least likely to be used in the preparation of a preliminary survey questionnaire? An analysis of quality control documents An internal auditor has set an engagement objective of determining whether all cash receipts are deposited intact daily. To satisfy this objective, the internal auditor interviewed the controller who gave assurances that all cash receipts are deposited as Relevant but not sufficient or reliable An internal auditing manager is conducting the annual meeting with manufacturing division management to discuss proposed engagement plans and activities for the next year. After some discussion about the past year's activity at 12 plants in the division, The SOP questionnaires should improve control adequacy, but the internal auditors need to verify that controls are working as documented in the SOP. A supportive behavior that a listener, such as an auditor or a supervisor, can use to encourage a speaker is to Stop other activity or work while the person is talking Which of the following activities represents the greatest risk to a post-merger manufacturing organization and is therefore most likely to be the subject of an internal audit engagement? Combining purchasing functions While performing an engagement relating to an organization's cash controls, the internal auditor observed that cash deposits are not deposited intact daily. A comparison of a sample of cash receipts lists revealed that each cash receipt list equaled cash Sufficient, reliable, and relevant What characteristic of information is satisfied by an original signed document? An auditor is considering developing a questionnaire to research employee attitudes toward control procedures. Which of the following is a criterion that should not be considered in designing the questionnaire? Questions should be worded such that a "No" answer indicates a problem In engagement planning, internal auditors should review all relevant information. Which of the following sources of information would most likely help identify suspected violations of environmental regulations? Review of correspondence the entity has conducted with governmental agencies. As part of an engagement to evaluate safety management programs, an internal auditor interviews the individual responsible for writing, issuing, and maintaining safety procedures. While the internal auditor's primary interest is to identify the controls e During the conversation, make an effort to anticipate the approach of a point of critical interest. Management is investigating the acquisition of an upgraded version of the existing client-server system to increase the system's capacity. Management has requested that the internal auditor perform an operational engagement to determine the efficiency of A review of computer job log records, listings of scheduled jobs, and computer down-time. Ordinarily, what source of information should most affect the internal auditor's conclusions? The auditor used a questionnaire during interviews to gather information about the nature of claims processing. Unfortunately, the questionnaire did not cover a number of pieces of information offered by the person being interviewed. Consequently, the aud The auditor failed to consider the importance of the information offered. In planning an engagement, the internal auditor establishes objectives to address the risk associated with the activity. Risk is the Uncertainty of the occurrence of an event that could affect the achievement of objectives. Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back All criteria are violated Internal auditors must make a preliminary assessment of risks when conducting an assurance engagement. This assessment may involve quantitative (objective) and subjective factors. The least subjective factor is The organization's recognized losses on derivatives An internal auditor is interviewing an employee. While listening to the interviewee, the internal auditor should Integrate the incoming information from the interviewee with information that is already known. Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back The internal auditors of a financial institution are performing an engagement to evaluate the institution's investing and lending activities. During the last year, the institution has adopted new policies and procedures for monitoring investments and the a. Interview management to identify changes made in policies regarding investments or loans During interviews with the inventory management personnel, an internal auditor learned that salespersons often order inventory for stock without receiving the approval of the vice president of sales. Also, detail testing showed that there are no written a Corroborative information In testing the write-off of a deteriorated piece of equipment, the best information about the condition of the equipment is A physical inspection of the actual piece of equipment The most persuasive information regarding the asset value of newly acquired computers is Documentation prepared externally Which of the following is(are) true when using cluster sampling? An auditor was presented with a population of 1,253 invoices for the period under audit. The auditor selected every 60th invoice for testing. This is an example of An internal auditor is planning to use monetary-unit sampling for testing the monetary value of a large accounts receivable population. The advantages of using monetary-unit sampling (MUS) include all of the following except that it Results in a smaller sample size than classical variables sampling for larger numbers of misstatements. An important difference between a statistical and a judgmental sample is that with a statistical sample, Population estimates with measurable reliability can be made. To project the frequency of shipments to wrong addresses, an internal auditor chose a random sample from the busiest month of each of the four quarters of the most recent year. What underlying concept of statistical sampling did the auditor violate? Failing to give each item in the population an equal chance of selection An auditor is designing a sampling plan to test the accuracy of daily production reports over the past 3 years. All of the reports contain the same information except that Friday reports also contain weekly totals and are prepared by managers rather than Using multiple random starts An automobile parts manufacturer has received complaints from customers about declining quality. After a quick review, management realizes the problem has no single source. To perform a thorough process of problem identification, the most appropriate tool The standard error of a sample reflects The degree of variation in sample items An auditor applying a discovery-sampling plan with a 5% risk of overreliance may conclude that there is A 95% probability that the actual rate of occurrence in the population is less than the critical rate if no exceptions are found. An internal auditor uses a number of techniques to select samples. A frequently, and appropriately, used technique is random selection. In which of the following situations would random selection be least justified? The auditor needs to Obtain evidence on the proper sales cut-off by sampling items from the monthly sales journal to determine if the items were recorded in the correct time period. The supervisor of claims processing for a health insurance firm selects all claims processed in the past 2 days by a particular employee for audit. From this sample, the supervisor can develop An understanding of the details contained in the processing task. If all other sample size planning factors were exactly the same in attribute sampling, changing the confidence level from 95% to 90% and changing the desired precision from 2% to 5% would result in a revised sample size that would be Statistical quality control often involves the use of control charts whose basic purpose is to Detect performance trends away from normal operations If all other factors in a sampling plan are held constant, changing the measure of tolerable misstatement to a smaller value will cause the sample size to be When an internal auditor's sampling objective is to obtain a measurable assurance that a sample will contain at least one occurrence of a specific critical exception existing in a population, the sampling approach to use is Ratio estimation sampling would be inappropriate to use to project the monetary error in a population if Subsidiary ledger book balances for some inventory items are unknown. Fact Pattern: An organization has collected data on the complaints made by personal computer users and has categorized the complaints. The chart displays the Absolute frequency of each computer complaint The director of sales asks for a count of customers grouped in descending numerical rank by (1) the number of orders they place during a single year and (2) the dollar amounts of the average order. The visual format of these two pieces of information is m A distinguishing characteristic of random number sample selection is that each Item in the population has an equal chance of being selected. Fact Pattern: Using mean-per-unit sampling to estimate the value of inventory, an internal auditor had the following results: The confidence level could not be quantified An internal auditor is planning to use attribute sampling to test the effectiveness of a specific internal control related to approvals for cash disbursements. In attribute sampling, decreasing the estimated occurrence rate from 5% to 4% while keeping all In preparing a sampling plan for an inventory pricing test, which of the following describes an advantage of statistical sampling over nonstatistical sampling? Provides a quantitative measure of sampling risk In sampling applications, the standard deviation represents a measure of the
Degree of data variability A bank's internal auditor wishes to determine whether all loans are supported by sufficient collateral, properly aged regarding current payments, and accurately categorized as current or noncurrent. The best audit procedure to accomplish these objectives Use generalized audit software to read the total loan file, age the file by last payment due, and extract a statistical sample stratified by the current and aged population. Examine each loan selected for proper collateralization and aging. Which sampling plan requires no additional sampling once the first error is found? Management is legally required to prepare a shipping document for all movement of hazardous materials. The document must be filed with bills of lading. Management expects 100% compliance with the procedure. Which of the following sampling approaches is mo Fact Pattern: An auditor is testing on a company's large, normally distributed accounts receivable file. The objectives of the audit are to test end-of-period monetary balances and accounts receivable posting exception (error) rates. To test the accounts Which of the following techniques could be used to estimate the standard deviation for a sampling plan? If all other factors specified in an attribute sampling plan remain constant, decreasing the confidence level from 95% to 90% would cause the required sample size to The measure of variability of a statistical sample that serves as an estimate of the population variability is the Variability of the monetary amount of individual items in a population affects sample size in which of the following sampling plans? The internal auditor for an insurance company is conducting an audit of claims processing and wants to assess the average length of time taken to process automobile claims to determine whether processing is being completed within standards set by company Mean-per-unit variables sampling If an internal auditor is sampling to test compliance with a particular company policy, which of the following factors should not affect the allowable level of sampling risk? The experience and knowledge of the auditor A specified range is based on an estimate of a population characteristic calculated from a random sample. The probability that the range contains the true population value is the Difference estimation sampling would be appropriate to use to project the monetary error in a population if A number of nonproportional differences between carrying amounts and audited amounts exist. Statistical sampling is appropriate to estimate the value of an auto dealer's 3,000 line-item inventory because statistical sampling is Random numbers can be used to select a sample only when each item in the population Can be identified with a unique number The most appropriate methodology for drawing a sample from 3,000 time cards to check for signatures would be An auditor is conducting a survey of perceptions and beliefs of employees concerning an organization health care plan. The best approach to selecting a sample is to Use stratified sampling where the strata are defined by marital and family status, age, and salaried/hourly status. Monetary-unit sampling (MUS) is most useful when the internal auditor Is concerned with overstatements A 90% confidence interval for the mean of a population based on the information in a sample always implies that there is a 90% chance that the True population mean lies within the specified confidence interval. Which of the following factors would most likely preclude the auditor from using monetary-unit sampling? The auditor expects to find that a large percentage of items sampled have misstatements. How does stop-or-go attribute sampling differ from fixed-sample-size attribute sampling? Total expected sample size will always be smaller. Fact Pattern: An organization has collected data on the complaints made by personal computer users and has categorized the complaints. Using the information collected, the organization should focus on The number of computer complaints associated with the lack of user knowledge and hardware problems. An auditor for the state highway and safety department needs to estimate the average highway weight of tractor-trailer trucks using the state's highway system. Which estimation method must be used? Which one of the following is not an important consideration in determining the appropriate sample size? Whether the sample is designed to estimate a mean or a proportion. An auditor is using the mean-per-unit method of variables sampling to estimate the correct total value of a group of inventory items. Based on the sample, the auditor estimates, with precision of �4% and confidence of 90%, that the correct total is US $80 The chance that the actual correct total is less than US $768,000 or more than US $832,000 is 10%. An auditor is least likely to use computer software to Assess computer control risk Fact Pattern: The internal auditor of a construction enterprise that builds foundations for bridges and large buildings performed a review of the expense accounts for equipment (augers) used to drill holes in rocks to set the foundation for the buildings. Report the observations, as they are, to management and recommend an investigation for possible fraud After completing an engagement work program step regarding materials movement between storage and assembly, the internal auditor would most likely prepare a(n) An internal auditor decides to perform an inventory turnover analysis for both raw materials inventory and finished goods inventory. The analysis would be potentially useful in a. Identifying obsolete inventory The single most important factor in drawing a useful conclusion or stating a useful opinion in an engagement report is During an engagement, the internal auditor should consider the following factor(s) in determining the extent to which analytical procedures should be used during the engagement: a. Adequacy of the system of internal control A fire destroyed a large portion of an organization's inventory. Management is filing an insurance claim and needs to use the internal auditors' working papers in preparing the claim. Management May use the working papers in preparing the claim, but such use should be approved by the chief audit executive Working papers should be disposed of when they are of no further use. Retention policies must Be approved by legal counsel Which of the following conditions constitutes inappropriate working-paper preparation? All forms and directives used by the engagement client are included in the working papers. Engagement working papers include Providing a basis for evaluating the internal audit quality program The internal auditor is most likely to make working papers available to the engagement client when Engagement client comments are needed to evaluate significance and accuracy An internal auditor prepared
a working paper that consisted of a list of employee names and identification numbers as well as the following statement: Justification for the sample size The phase of the benchmarking process in which the team must be able to justify its recommendations is the Engagement working papers are indexed by means of reference numbers. The primary purpose of indexing is to Permit cross-referencing and simplify supervisory review An example of an internal nonfinancial benchmark is The percentage of customer orders delivered on time at the company's most efficient plant During an operational audit engagement, an auditor compared the inventory turnover rate of a subsidiary with established industry standards in order to Assess performance and indicate where additional audit work may be needed Fact Pattern: A medium-sized municipality provides 8.5 billion gallons of water per year for 31,000 customers. The water meters are replaced at least every 5 years to ensure accurate billing. The water department tracks unmetered water to identify water c Deviations from the goal should be analyzed and corrected Which of the following concepts distinguishes the retention of computerized audit documentation from the traditional hard copy form? Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures. A primary advantage of using generalized audit software (GAS) packages in auditing the financial statements of a client that uses a computer system is that the auditor may Access information stored on computer files without a complete understanding of the client's hardware and software features. Accounts payable schedule verification may include the use of analytical information. Which of the following is analytical information? Comparing the balance on the schedule with the balances of prior years Assume an internal auditor computes an inventory turnover rate by product line and identifies a number
of product lines with a rate of less than 3.5. Which of the following conclusions can be justified by these engagement results? None of these answers are correct The use of an analytical review to verify the correctness of various operating expenses would not be a preferred approach if An auditor notes strong indicators of a specific fraud involving these accounts. Which of the following is the most important if working papers are to have the characteristics that will ensure that they achieve their primary purposes? Working papers must provide sufficient, reliable, and useful information to support the engagement results. An adequately documented working paper should Which result of an analytical procedure suggests the existence of obsolete merchandise? Decrease in the inventory turnover rate Working papers contain a record of engagement work performed and much confidential information. They are the property of the organization and remain under control of the internal audit activity, which is responsible for their security. Which of the follow Provide for the protection of working papers at all times and to the extent appropriate. Except for the missing documentation noted above, the system of internal controls over petty cash is functioning as intended." The preceding statement is an example of a(n) An internal auditor performs an analytical review by comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The internal auditor notes a significant incr Overstatement of year-end inventory An internal audit activity's policies regarding engagement records should address such matters as their content, retention period, handling of access requests, and responsibility for control and security. Which of the following statements relevant to the Most records not protected by the attorney-client privilege are accessible in criminal proceedings. An internal auditor's preliminary analysis of accounts receivable turnover revealed the following rates: Which of the following is the most likely cause of the decrease in accounts receivable turnover? Liberalization of credit policy The primary purpose of an internal auditor's working papers is to Provide documentation of the planning and execution of engagement procedures performed The internal auditor has gained an understanding of the design of an engagement client's internal controls. The most appropriate next step is to Draw preliminary conclusions about internal control An organization provides credit cards to selected employees for business use. The credit card company provides a computer file of all transactions by employees of the organization. An auditor plans to use generalized audit software (GAS) to select relevan Which of the following most completely describes the appropriate content of working papers? Engagement objectives, procedures, observations, conclusions, and recommendations Productivity statistics are provided quarterly to the board of directors. An internal auditor checked the ratios and other statistics in the four most recent reports. The internal auditor used scratch paper and copies of the reports to verify the accuracy The internal auditor's working papers are not sufficient to facilitate an efficient review of the internal auditor's work. When current-file working papers are no longer of use to the internal audit activity, they should be Fact Pattern: A medium-sized municipality provides 8.5 billion gallons of water per year for 31,000 customers. The water meters are replaced at least every 5 years to ensure accurate billing. The water department tracks unmetered water to identify water c Further audit investigation of unmetered water is not warranted Two major retail organizations, both publicly traded and operating in the same geographic area, have recently merged. Both are approximately the same size and have internal audit activities. Organization A has little EDI experience. Organization B has inv Promotional activities that offer large discounts coupled with the payment of bonuses to employees who reach targeted sales goals. A small city managed its own pension fund. According to the city charter, investments could be made only in bonds, money market funds, or high-quality stocks. The internal auditor has already verified the existence of the pension fund's assets. The fund b Prepare a more detailed estimate of income by consulting a dividend and reporting service that lists the interest or dividends paid on specific stocks and bonds What is the first phase in the benchmarking process? Select and prioritize benchmarking projects Which of the following represents a limitation on the use of generalized audit software (GAS)? It can only be used on hardware with compatible operating systems. The internal auditor prepares working papers primarily for the benefit of The internal audit activity Which of the following strategies will an auditor most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system? Continuous monitoring and analysis of transaction processing with an embedded audit module. Which of the following is the primary reason that many auditors hesitate to use embedded audit modules? Auditors are required to be involved in the system design of the application to be monitored Each individual working paper should, at a minimum, contain a(n) Which of the following does not describe one of the functions of engagement working papers? Aids in the professional development of the operating staff Which of the following examples of audit evidence is the most persuasive?Which of the following types of audit evidence is the most persuasive? Bank statements obtained from the client.
Which form of audit evidence would the internal auditor consider to be the most reliable?Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles, or documents that have been filmed, digitised or otherwise transformed into electronic form.
What are the 3 types of internal audits?Types of Internal audits include compliance audits, operational audits, financial audits, and an information technology audits.
Which one of the following best describes the role of internal auditing in following up on audit recommendations?Answer and Explanation: The correct answer is b. Internal Audit should determine if the management has taken appropriate action as agreed to and the desired results are being...
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Which of the following types of tests is the most persuasive if an internal auditor wants assurance of the existence of inventory stored in a warehouse?
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