MC - Internal Audit

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Chapter 10

Question Answer

1.Professional skepticism means that internal auditors

beginning an assurance engagement should:

C-Neither assume client personnel

are honest nor assume they are

dishonest2.Which of the following statements regarding audit

eidence would be the lease appropriate for an internalauditor to make!

"-#$ do not perform procedures that

proide persuasie eidence because$ must obtain conincing eidence.#

%.&udit eidence is generally considered sufficient when:"-'here is enough of it to support

well-founded conclusions

(.)ocumentary eidence is one of the principal types of

corroborating information used by an internal auditor.Which of the following e*amples of documentary

eidence generally is considered the most reliable!

&-& endor+s inoice obtained fromthe accounts payable department

,.Which of the following statements regardingobseration as an audit procedure isare correct!

C-$ and $$

.Which of the following is the least reasonablee*planation for the changes obsered by the auditor!

C-/ales returned for the credit wereoerstated in years 2 and %

0.Which of the following procedures is most

appropriate!

&-ouch purchase orders to

approed purchase reuisitions

3.Which of the following procedures would most likelydetect this fraud!

C-Perform ratio and trend analysis.

4.Which of the following applications of generali5ed

audit software would be most effectie in addressing the

auditor+s concern!

C-6ist all ma7or endors by productline.

18.which of the following most completely describes theappropriate content of internal audit assurance

engagement working papers!

C-9b7ecties procedures factsconclusions and recommendations

Chapter 11

1. 'he primary reason for an internal auditor to use statistical sampling rather thannonstatistical sampling is to:

A. Allow the auditor to quantitfy, and therefore control, the risk of making an

incorrect decision based on sample evidence

". 9btain a smaller sample than would be reuired if nonstatistical sampling were

usedC. reduce the problems associated with the auditor+s 7udgement concerning the

competency of the idence gathered when nonstatistial is used


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). 9btain a sample more representatie of the population than would be obtained if

nonstatistical sampling techniues were used

2. Which of the follwing is an element of sampling risk as opposed to an element of

nonsampling risk!

&. etermining a sample si!e that is too small.". Performing an inappropriate audit procedure.C. ;ailing to detect a control deiation.

). ;orgetting to perfomr a specified audit procedure.

%. ;or wchich of the following would an internal auditor most likely use attribute sampling!

&. )etermining whether the yer-end inentory balance was oerstated.

". /electing fi*ed asset additions to inspect.

C. Choosing inentory items to test count

. "nspecting employee timecards for proper approval

(. $f all other factors specified in an attribute sampling plan remain contstant chanign thee*pected population deiation rate from 1< to 2< and changing the tolerable deiation

rate from 0< to < would cause the reuired sample si5e to:

A. "ncrease

". )ecrease

C. =emain the same

). Change by 2s? of an assurance engagement!

A. +lan and perfom phases

". Perform Phase.C. Communicate phase

). Plan phase

(. Which of the following auditee-prepared documents will likely be of greatest assistance

to the internal auditor in their assessment of process desing adeuacy!

&. Narratie memoranda listing key tasks for portions of the process

". 9rgani5ation charts and 7ob descriptions

C. etailed flowchars depicting the flow of the process

). Policies and procedures manual

,. Which of the following controls is not likely to be an entity-leel control!

&. &ll employees must reciee ongoing training to ensure they maintain their competence

#. All cash disbursement transactions must be approved before they are paid

C. &ll employees must comply with the Code of Bthics and "usiness Conduct

). &n organi5ationwide risk assessment is conducted annually

. Which of the following is not typically a key element of flowcharts or narratie

memoranda!


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&. ey risks and controls

". ey inputs to the process.C. ey outputs from the process

. 6verall process of ob-ectives.

0. Which of the following e*ternal risks is least lkely to impact the accuracy of the financial

reporting!

&. 'he standard setting body in the organi5ation+s country isseus a financial accounting

standard

". & recent 7udicial court case increase the likelihood that pending litigation will result inan unfaorable outcome

C. Changes in standard industry contracts now allow for netting of payables and

receiables

. Competitor pressures cause the organi!ation to pursue new sales channels

3. Which of the following groups+ risk tolerance leels are least releant when conducting

an assurance engagement!

A. 7endors and customers

". Process-leel management

C. 'he internal audit function). /enior management

4. Which of the following controls is likeley to be least releant when ealuating the desingadeuacy of a cash collections process!

&. Calculating the amount of cash receied

#. ocumenting the rationale for selecting the bank account into which the deposit

will be made

C. Aatching the total deposits to the amounts credited to customers+ &= balances

). /egregating the preperation of deposit slips from the ad7ustment of customer accountbalances

18. &n internal auditor determiens that the process is not designed adeuately to reduce theunderlying risks to an acceptable leel. Which of the following should the internal auditor

do ne*t!

&. Wirte the audit report there+s no reason to test the operating effectieness of cotnrols


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that are not designed adeuately.

#. $est compensating cotnrols in other 8ad-acent9 processes to see if the impact of

the desing inadequacy is reduced to an acceptable level

C. 'est the e*isting key controls anyway to proe that despite the design inadeuy theprocess is still meeting the process ob7ecties.

). Postpone the engagement until the design inadeuacy has been rectified

11. $n an internal auditor identifies na e*ception while testing which of the foloowing may

be appropriate!

&. 'est additional items to determine whether the e*ception is an isolated occurrence or

indicatie of a control deficiency

". Dain an understanding of the root cause that is the reason the e*ception occurred.

C. )raft an obseration for the audit report.

. All of the above

12. Which of the folllowing is an appropriate conclusion that can be drawn when the internalauditor idnetifies an obseration from testing controls!

&. 'he process ob7ecties cannot be achieed.

". 'he area may be ulnerable to fraud

C. Certain risk are not effectively mitigated

). 9erall the process is not operating effectiely

1%. 9nce an obseration is identified by the internal auditor it should be:

&. /cheduled for follow-up". )iscussed with the audit committee

C. $ncluded in the final audit report. ocumented in the working papers.

Chapter 1:

1. =ecommendations should be included in final audit communications to:

A. +rovide management with options for addressing audit observations

". Bnsure that problems are resoled in the manner suggested by the auditor


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C. Ainimi5e the amount of time reuired to correct audit obserations.

). Duarantee that audit obserations are addressed regardless of cost

2. 9nce an obseration is identified by the internal auditor it should be:

&. )ocumented in the working papers

". =eported to the independent outside auditors

C. /cheduled for follow-up

. "ncluded in the final audit report

%. &ccording to the $PP; which of the following are part of the minimum reuirements for

an engagement final communication!

$. "ackground information

$$. Purpose of the enagement

$$$. Bngagement scope

$. =esults of the engagement

. /ummaries

&. $ $$ an $

". $ $$$ and

C. $$ $$$ and $

). $$ $ and

(. Which of the following would not be considered a primary ob7ectie of a closing or e*it

conference!

&. to resole conflicts

". 'o identify concerns for future audit enagements

C. 'o discuss the engagement obserations and recommendations

). 'o identify management+s actions and responses to the engagement obserations and

recommendations

,. )uing a reiew of purchasing operations an internal auditor found that procedures in use

did not agree with stated company procedures. @oweer audit tests reealed that the

procedures used represented an increase in efficiency and a decrease in processing time

without a discernible decrease in control. 'he internal auditor should:

&. =eport the lack of adherence to documented procedures as an operational deficiency


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". )eelop a flowchart of the new procedures and include it in the report to management.

C. ;eport the change and suggest that the change in procedures be documented

). /uspend the completion of the engagement cliet documents the new procedures

. & formal enagement communication must:

&. proide an opportunity for the auditee to respond

". )ocument the correctie actions reuired of senior management

C. Proide a formal means by which the independent outside auditor assesses potential

reliance on the internal audit function

). =eport significant obserations

0. Which of the following does the C&B need to consider when determining the e*tent offollow up reuired!

$. /ignificance of the reposrted obseration

$$. Past e*perience with the manager charged with the correctie action

$$$. )egree of effort and cost needed for the correctie action

$. 'he e*perience of the internal audit staff.

&. $ and $$$

". $ $$ and $$$

C. $$ $$$ and $.). $ $$ $$$ and $

3. &n e*cerpt from an internal audit obseration indicates that trael adances e*ceeded

prescribed ma*imum amounts. Company policy proides trael funds to authori5ed

employees for trael. &dances are not e*ceed (, days of anticipated e*penses. Company

procedures do not reuire 7ustiication for large trael adances. $n this audit obseration

the element of an audit finding known as #effect# is:

B. &dances are not to e*ceed estimated e*penses for (, days.

;. 'rael adances e*ceed prescribed ma*imum amounts.

. /mployees accumulate large, unneeded advances

@. Enauthori5ed employees are gien trael adances13. $nternal audit reports can be structured to motiate management to correct deficienceis.

Which of the following report-writing techniues is most likely to be effectie!

&. /tate the procedural inadeuacies and resulting improprieties in specific terms". =ecommend changes and state the punitie measures that will follow if the

recommendations are not implemented

C. 6ist the deficiences found so as to proide an easy-to-follow checklist


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). uggest practical improvements to address the identified observations

14. 'he primary purpose of issuing an interim report during an internal audit is to:

&. +rovide auditee management the opportunity to act on certain observations

immediately

". /et the stage for the final report

C. Promptly inform auditee management and their superisors of audit proceduresperformed to date

). )escribe the scope of the audit

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MC - Internal Audit