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Monetary-unit sampling is most useful when the internal auditor:
A. Is testing the accounts payable balance.
B. Cannot cumulatively arrange the population items.
C. Expects to find several material errors in the sample.
D. Is concerned with overstatements.
Correct Answer: D

According to the Standards, which of the following is applicable to the internal audit activity\’s quality assurance and
improvement program?
A. Periodic monitoring of the internal audit activity should be done.
B. All aspects of the internal audit activity should be evaluated.
C. An external assessment should be obtained every three years.
D. The review of assurance services should be the primary focus.
Correct Answer: B

An audit of an organization\’s fulfillment department discovered that problems in the order processing system led to a
significant number of orders being fulfilled multiple times. During the exit conference, the head of the department
informed the auditors that the processing system would be enhanced within six months to correct the problems. Which
course of action should the chief audit executive follow?
A. Adjust the scope of the next scheduled audit to determine that the problems have been resolved.
B. Monitor the status of corrective action and schedule a follow-up engagement when appropriate.
C. Meet with the audit committee to determine the appropriate follow-up action.
D. Assess the status of corrective action in a follow-up engagement in six months.
Correct Answer: B

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. Curtail the audit engagement to avoid potential legal action. B. Provide a report to senior management recommending a fraud investigation.
C. Continue the original engagement program as planned but include a comment about the assistant director\’s reaction
in the engagement final communication.
D. Add additional testing to determine whether other indicators of fraud exist.
Correct Answer: D

Which of the following is not a reason for an internal auditor to prepare an audit plan before the detailed audit work
A. The objectives of the audit should be set.
B. The organization\’s management should be informed about the work to be performed.
C. Attention should be devoted toward the key audit areas.
D. The timing of the audit should be set.
Correct Answer: B

Because of a new marketing initiative, an organization has reduced requirements for extending credit to new customers.
As a result, outstanding accounts receivable as a percentage of revenue has increased significantly during the past two
years. Which of the following would be least useful in monitoring this finding?
A. Updates from the manager of accounts receivable regarding collection of outstanding receivables.
B. Updates from the information technology division regarding development of a new accounts receivable system.
C. Updates from the controller regarding the status of corrective actions.
D. Updates from the credit and marketing personnel tasked with reevaluating credit policies.
Correct Answer: B

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 6 and 18
months for completion. Consequently, management has developed a detailed action plan, with anticipated completion
dates, for addressing the weaknesses. What is the most appropriate course of action for the chief audit executive to
A. Assess the status of corrective action during a follow-up audit engagement after the action plan has been completed.
B. Assess the effectiveness of corrections by reviewing statistics related to unplanned system outages, and denials of
C. Reassign information systems auditors to assist in implementing management\’s action plan.
D. Evaluate the ability of the action plan to correct the weaknesses and monitor key dates and deliverables. Correct Answer: D

Which of the following is an effective way for an internal auditor to improve communications with the client during a
contentious audit?
A. Encourage the client to participate as a partner in the decision-making process to determine the changes that need to
be made.
B. Clearly explain to the client the role of the internal audit activity in the change process.
C. Obtain the support of the board of directors for proposed changes before discussing the changes with operating
D. Speak privately with key client personnel immediately after proposed changes are announced to address their
Correct Answer: A

What is the most important risk in determining the validity of construction delay claims?
A. Contractor claims may be submitted prior to completion of the work.
B. Contractor claims may include costs considered in the fixed-price portion of the work.
C. Contractor claims may include subcontractor estimates of balances due to the subcontractor.
D. Contractor claims may be understated.
Correct Answer: B

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. Document the manager\’s answers, noting the nature of the nonverbal communication.
B. Document the manager\’s answers but not the nonverbal communication because it is subjective and is not
C. Conclude that the nonverbal communication is persuasive and that sufficient evidence exists to begin a fraud
D. Disregard the interview entirely because the verbal and nonverbal communications were contradictory.
Correct Answer: A

Once an audit report is drafted, the auditor\’s supervisor should review it primarily to ensure that all:
A. Statements are supported and can be authenticated. B. Recommendations for corrective action are clear.
C. Processes within the audited area were reviewed.
D. Sample sizes appear appropriate for any issues found.
Correct Answer: A

An employee in the sales department completes a purchase requisition and forwards it to the purchaser. The purchaser
places competitive bids and orders the requested items using approved purchase orders. When the employee receives
the ordered items, she forwards the packing slips to the accounts payable department. The invoice for the ordered items
is sent directly to the sales department, and an administrative assistant in the sales department forwards the invoices to
the accounts payable department for payment. Which of the following audit steps best addresses the risk of fraud in the
cash receipts process?
A. Verify that approvals of purchasing documents comply with the authority matrix.
B. Observe whether the purchase orders are sequentially numbered.
C. Examine whether the sales department supervisor approves invoices for payment.
D. Determine whether the accounts payable department reconciles all purchasing documents prior to payment.
Correct Answer: C

The internal audit activity\’s primary responsibility in a review or examination of the organization by an external
regulatory body is to:
A. Verify that regulatory reviews occur with adequate frequency.
B. Provide follow-up to determine if the regulator\’s findings are appropriately resolved by management.
C. Prepare documentation for the regulator.
D. Document the responses to the regulator\’s findings.
Correct Answer: B

Which sampling plan requires no additional sampling once the first error is found?
A. Stratified sampling.
B. Attributes sampling.
C. Stop-or-go sampling.
D. Discovery sampling.
Correct Answer: D


An internal auditor was assigned to conduct an inventory control and stock room area engagement. During the audit, the
auditor observed that there were some items that have a shelf life expiration date requirement based on a certificate of
conformance received with the product. The certificates of conformance are kept on file in the inventory area office and
the expiration date is verified at the time the item is taken from stock. The auditor reviewed the items in the stock room
and also on the production floor for the expiration dates to see if there was any expired product. All items with a shelf life
requirement were found to be within the expiration date requirement. Which of the following recommendations would be
A. Take no action, because all the items were within the expiration date requirement, and no corrective action is
B. Permit production staff the access to files where the certificates of conformity are kept, so they can choose the items
with the closest expiration date.
C. Determine the cost of inventory for the items that have a shelf life and apply a new policy regarding inventory levels
to be maintained (i.e., minimums, maximums, reorder points etc.).
D. Add to the product label a andquot;use by dateandquot; line, enter the expiration at the time of receipt, and perform
periodic inventory checks.
Correct Answer: D

An audit engagement objective at a manufacturer is to determine the quality of raw materials purchased. Which of the
following actions would best enable an internal auditor to satisfy this objective?
A. Analyze the provision for sales allowances.
B. Analyze the percentage of scrap incurred during production.
C. Research the rationale for customer returns.
D. Evaluate the volume and characteristics of products rejected during processing.
Correct Answer: D

The newly appointed chief audit executive (CAE) of a large multinational corporation, with seasoned internal audit
departments located around the world, is reviewing responsibilities for engagement reports. According to IIA guidance,
which of the following statements is true?
A. The CAE is required to review, approve, and sign every engagement report.
B. The CAE is required to review, approve, and sign all regulatory compliance engagement reports only
C. The CAE may delegate responsibility for reviewing, approving and signing engagement reports, but should review
the reports after they are issued.
D. The internal audit charter must identify authorized signers of engagement reports.
Correct Answer: C

Which of the following would be included in an internal audit department\’s quality assurance and improvementprogram?
Ongoing internal assessments of the performance of the internal audit department.
Periodic internal reviews through self-assessments.
Assessments conducted by a qualified external reviewer at least once every five years.
A. 1 only
B. 1 and 2 only
C. 2 and 3 only
D. 1, 2, and 3
Correct Answer: D

The internal audit activity of an investment company received a request to provide assurance on the risk management
process. Preliminary discussion with senior management revealed that separate functions within the organization
perform some form of risk management activities. Which of the following is the most effective tool for ensuring that risk
management activities are coordinated among these functions?
A. Delphi technique.
B. Assurance map.
C. Facilitated workshop.
D. Analytical reviews.
Correct Answer: B

An organization has a large number of vendors supplying goods to its various branches across the region. The code of
conduct statements signed by the employees specify that the employees or their families will not sell goods to the
organization. However, during the internal audit of a branch, the internal auditor suspected that some of the employees
may be supplying goods to the organization contrary to the code of conduct. The chief audit executive has requested
that a thorough review be completed to identify the potential employee vendors. Of the following tests, it would be least
useful to compare [List A] with [List B].
[List A] [List B]
A. Vendor bank account numbers Employee bank account numbers
B. Dates of payments to vendors Dates of salary payments to employees
C. Addresses of vendors from the vendor database Addresses of employees from the employee database D. Vendor names Employee names
Correct Answer: B

Which of the following is most appropriate when conducting an interview during the course of a fraud investigation?
A. Schedule the interview well in advance.
B. Explain the detailed purpose to the interviewee.
C. Assume that the interviewee is guilty.
D. Have a witness present during the interview.
Correct Answer: D

In addition to the internal auditor, which of the following parties should be present at an exit or closing conference?
Audit committee members.
The external auditor.
The management responsible for the areas covered by the engagement.
The chief executive officer.
A. 2 only
B. 3 only
C. 3 and 4 only
D. 1, 3, and 4 only
Correct Answer: B

Which of the following is a preventive control for fraud?
A. Determining if the number of manually prepared disbursement checks is high.
B. Reconciling the purchase orders with the requisitions.
C. Verifying that new vendors appear on the vendor pre-approved list. D. Conducting an inventory count of the warehouse.
Correct Answer: C

The most effective procedure to verify compliance with a requirement that materials be purchased from the lowest-
priced source is to compare:
A. Prices paid for selected materials with prices listed on related purchase orders.
B. Bids obtained for selected purchases with related purchase orders.
C. Vendors\’ current prices with prices listed on related purchase orders.
D. Approved vendor lists with bids obtained for selected purchases.
Correct Answer: B

An organization\’s policies allow buyers to authorize expenditures up to $50,000 without any other approval. Which of
the following audit procedures would be most effective in determining if fraud in the form of payments to fictitious
companies has occurred?
A. Use generalized audit software to list all purchases over $50,000 to determine whether they were properly approved.
B. Develop a snapshot technique to trace all transactions by suspected buyers.
C. Use generalized audit software to take a random sample of all expenditures under $50,000 to determine whether
they were properly approved.
D. Use generalized audit software to select a sample of paid invoices to new vendors and examine evidence that shows
that services or goods were received.
Correct Answer: D

The scope of a business process review primarily involves:
A. Appraising the environment and comparing against established criteria.
B. Assessing the organization\’s system of internal controls.
C. Reviewing routine financial information and assessing the appropriateness of various accounting treatments.
D. Evaluating organizational and departmental structures, including assessments of transaction flows.
Correct Answer: D

As part of an operational audit, an auditor compared records of current inventory with usage during the prior two-year
period and determined that the spare parts
inventory was excessive. What step should the auditor perform first?
A. Determine the effects of a stock-out on the organization\’s profitability.
B. Determine whether a clear policy exists for setting inventory limits.
C. Determine who approved the purchase orders for the spare parts.
D. Determine whether purchases were properly recorded.
Correct Answer: B

Why should internal auditors develop a strong relationship with the external auditors?
A. External auditors offer an additional layer of approval to internal auditors\’ reports.
B. External auditors can help improve the effectiveness of internal control sampling techniques.
C. External auditors can offer an independent and knowledgeable viewpoint.
D. External auditors can share information gained from work with similar clients.
Correct Answer: C

According to the International Professional Practices Framework, the internal audit activity\’s decision to defer follow-up
of recommendations and management\’s corrective actions until the next scheduled engagement for the area is justified
A. The reported findings or recommendations are significant enough to require immediate action by management.
B. The action taken by management to address the recommendation is sufficient when weighed against the importance
of the finding.
C. Management has adequately understood and appropriately accepted the risk of not taking action to implement the
D. The significance of the finding or recommendation will allow auditors to perform monitoring by receiving periodic
updates from management on corrective actions taken.
Correct Answer: B

An internal auditor is assigned to conduct an audit of security for a local area network (LAN) in the finance department
of the organization. Investment decisions, including the use of hedging strategies and financial derivatives, use data and
financial models which run on the LAN. The LAN is also used to download data from the mainframe to assist in
decisions. Which of the following should be considered outside the scope of this security audit engagement?
A. Investigation of the physical security over access to the components of the LAN.
B. The ability of the LAN application to identify data items at the field or record level and implement user access security
at that level. C. Interviews with users to determine their assessment of the level of security in the system and the vulnerability of the
system to compromise.
D. The level of security of other LANs in the company which also utilize sensitive data.
Correct Answer: D

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