IIA-CIA-Part2 Practice Exam Questions with Answers Practice of Internal Auditing Certification

Compliance assurance engagements evaluate the organization's adherence to laws, regulations, policies, or procedures. Assessing controls for consumer privacy aligns with compliance objectives, particularly under data protection regulations such as GDPR or CCPA. Option A refers to training, not assurance. Option C pertains to operational metrics, while Option D relates to financial reporting, not compliance. The IIA CIA syllabus identifies compliance engagements as critical for ensuring organizational alignment with external legal and regulatory expectations (Section III: Compliance Audits).

A. Vendor contracts:While vendor contracts may reveal terms, they do not directly identify potential conflicts of interest.

B. Employee master list:Correct. Comparing the employee master list with vendor information can help identify conflicts of interest, such as vendor ownership or employee relationships.

C. Payment records:Useful for verifying transactions but not for identifying conflicts of interest.

D. Purchasing policy:Provides guidelines but does not assist directly in identifying conflicts.

CIA Exam Syllabus Reference:

Domain II: Risk Management and Control – Identifying and Mitigating Conflicts of Interest.

When there is a deadlock between the internal auditor and management over a significant issue such as access controls, escalating the issue to senior management is the most effective strategy. This approach ensures that the disagreement is addressed at a higher organizational level, where a decision can be made that aligns with the organization's risk tolerance and priorities. References: = IIA Standard 2600 - Resolution of Senior Management's Acceptance of Risks.

A. Draft report:Delays action on the weakness, which could be addressed sooner.

B. Preliminary observation document:While helpful, this is not as immediate as verbal communication.

C. Final report:Waiting until the final report would unnecessarily delay corrective action.

D. Verbal communication during the engagement, followed by the final report issuance:Correct. Verbal communication allows immediate management action, with documentation to follow.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Effective Communication of Findings.

Facilitated team workshops are a risk assessment approach that involves gathering data from work teams representing different levels of an organization. This method encourages collaboration and open discussion among team members, allowing for a comprehensive identification and evaluation of risks from various perspectives within the organization. It helps in capturing a wide range of insights and facilitates consensus on risk priorities, making it a valuable tool for effective risk assessment.

References:

The Institute of Internal Auditors (IIA) Practice Guide on "Risk Assessment in Audit Planning"

COSO Enterprise Risk Management Framework

The statement that the risk management process supports internal audit by evaluating whether critical controls are adequate and effective is true. The risk management process provides a framework for identifying, assessing, and managing risks, and internal audit uses this information to evaluate the adequacy and effectiveness of controls in place to mitigate those risks. This support helps internal audit focus on areas of high risk and ensure that controls are functioning as intended.

References:

IIA Standards: 2120 - Risk Management

IIA Practice Guide: Assessing the Adequacy of Risk Management Processes

A. Review year-over-year trending of total dollars spent in each period:This is the correct approach because year-over-year analysis focuses on identifying anomalies or significant variances in expenses over time. Trends in data can help detect unexpected spikes, dips, or patterns that indicate irregularities or inefficiencies. This aligns with analytical procedures in expense analysis under the CIA Exam Syllabus Part 2, which emphasizes the use of comparative techniques to evaluate reasonableness.

B. Review changes to the vendor master file for suspicious activity:While reviewing vendor master file changes is essential for fraud detection and control testing, it does not directly help in determining the reasonableness of monthly expenses.

C. Review the percentage of on-time payments against prior periods:Examining payment timeliness relates to operational efficiency and cash flow management, not directly to evaluating whether monthly expenses are reasonable.

D. Review total expenses for accounting against other department expenses in the organization:Comparing accounting department expenses to those of other departments might indicate disparities but does not consider differences in department-specific activities and needs.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Analytical Procedures and Testing Methods.

Strengthening password policies and ensuring unique passwords are used within a specified period are key measures in preventing unauthorized access and reducing the risk of fraud. Password management is a critical aspect of IT security and can significantly mitigate the risk of cyber fraud. The other recommendations (Options B, C, and D) address operational issues but do not directly impact fraud prevention as effectively as enhancing password security does.References:

IIA Standard 2110: Governance.

IIA Practice Guide on IT Controls and Cybersecurity.

When employees continue to violate segregation-of-duty controls despite previous recommendations, the most effective approach is to recommend appropriate awareness training. This training can help employees understand the importance of these controls and how to comply with them, addressing the root cause of the violations. References: = IIA Standard 2130 - Control and IIA Practice Guide: “Auditing Segregation of Duties”.

When an internal auditor identifies a major control weakness during a preliminary survey, the appropriate response is to bring it to the attention of the process owner for resolution. This approach aligns with the standards and guidelines provided by the Institute of Internal Auditors (IIA), particularly under the International Standards for the Professional Practice of Internal Auditing (Standards).

IIA Standard 2120 – Risk Management:

According to Standard 2120, the internal auditor must evaluate the effectiveness of the organization's risk management processes. Identifying and reporting control weaknesses is a key aspect of this evaluation. By bringing the issue to the attention of the process owner, the internal auditor ensures that those responsible for managing the process are aware of the risk and can take appropriate corrective actions.

IIA Standard 2060 – Reporting to Senior Management and the Board:

While it might seem logical to report directly to senior management (as option A suggests), the IIA recommends that the process owner be given the opportunity to address the issue first. Standard 2060 emphasizes that significant risk exposures and control issues should be reported to senior management and the board, but only after they have been discussed with the appropriate process owners.

IIA Standard 2440 – Disseminating Results:

According to Standard 2440, the communication of audit results should be consistent with the objectives of the audit engagement. It is good practice to inform the process owner promptly so they can address the issue before the audit report is finalized. This approach helps in mitigating the risk at an early stage and ensures that the control weaknesses are appropriately managed.

Ethical Considerations:

The IIA’s Code of Ethics requires internal auditors to act with integrity and to ensure that their communications are honest and constructive. Notifying the process owner immediately reflects a proactive and ethical approach to audit findings. It allows for timely corrective actions and demonstrates the auditor's commitment to improving the organization's control environment.

Option A (Issue a final report to senior management): This step is premature at this stage of the audit. Issuing a final report without allowing the process owner to address the issue could lead to unnecessary escalation and may undermine the collaborative nature of the audit process.

Option C (Note the control weakness for discussion during the exit meeting): While discussing the issue during the exit meeting is part of the process, it is more effective to address the control weakness immediately rather than waiting until the exit meeting, where valuable time might be lost.

Option D (Carry out an investigation for disciplinary action): This is beyond the internal auditor's scope unless the situation specifically warrants an investigation. The focus of the auditor should be on control improvements rather than disciplinary measures, which are typically managed by HR or legal departments.

Detailed Explanation:Why Not Other Options?

A survey with closed-ended questions can produce quantifiable evidence. Closed-ended questions limit responses to predefined options, making it easier to analyze and quantify the results. This type of survey is effective in gathering specific, comparable data from respondents.

References:

IIA Practice Guide: Survey Methods in Internal Auditing

IIA Standards: 2310 - Identifying Information

Flowcharts provide a visual depiction of the processes in the area under review, helping internal auditors and stakeholders understand the workflow and identify key control points. Additionally, flowcharts highlight control points, which assist auditors in evaluating the design of controls. These visual tools make it easier to identify potential gaps or weaknesses in the control design and understand how different processes and controls interact. They do not reduce the need for testing whether employees are observing internal control processes or directly prioritize internal control design weaknesses.References: The IIA's International Standards for the Professional Practice of Internal Auditing, Standard 2201 - Planning Considerations.

According to the IIA’s Fraud and Internal Audit position paper1, internal auditors should not investigate fraud unless they have the specific experience and expertise required to do so. Therefore, the most appropriate option for the chief audit executive is to appoint an independent fraud investigation specialist to work with the selected internal auditors. This will ensure that the investigation is conducted in a professional and ethical manner, and that the evidence is not compromised or tainted. The other options are not suitable because they do not address the immediate need for fraud investigation expertise, and they may expose the organization to legal or reputational risks.

When senior management is challenging regulatory fines that could adversely affect the organization's ability to continue business, the chief audit executive (CAE) should assess the level of financial risks that may affect the organization’s stability. This approach allows the CAE to evaluate the potential impact of the fines on the organization’s financial health and ensure that appropriate risk management strategies are in place.

IIA References:

IIA Standard 2120: Risk Management requires internal auditors to evaluate the effectiveness and contribute to the improvement of risk management processes. In this scenario, assessing the financial risks helps ensure that the organization is adequately prepared to address the consequences of the fines.

The Practice Guide on Risk Management suggests that when facing significant risks, such as regulatory fines, the internal audit activity should assess the potential impact on the organization’s financial stability and provide insights for management to consider in their decision-making process.

When preparing an internal control questionnaire for the procurement department, referencing relevant procurement laws or regulations ensures that the questions are aligned with the legal and regulatory requirements governing procurement activities. This approach helps to ensure that the questionnaire addresses all necessary compliance issues and identifies potential gaps in the organization's procurement processes that could lead to non-compliance.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2201 - Planning Considerations

Nonsampling risk refers to the risk that the auditor reaches an incorrect conclusion due to errors not related to the sample itself but to other factors such as misinterpretation of data, incorrect application of procedures, or human error.

IIA Practice Advisory 2320-3:

This advisory explains that nonsampling risk occurs when an auditor misinterprets results or applies the wrong audit procedure. It differs from sampling risk, which is the risk that a sample is not representative of the population.

Misinterpretation of Sampling Results:

In this case, the senior IT auditor misinterprets the sampling results during the audit of inventory valuation. This is a classic example of nonsampling risk, where the error is due to the auditor’s misunderstanding or misapplication of the data, rather than an issue with the sampling process itself.

IIA Standard 2320 – Analysis and Evaluation:

This standard requires that auditors apply sufficient care and skill in analyzing and interpreting audit evidence. Nonsampling risk can occur if this standard is not met, resulting in incorrect conclusions.

Option A (Sampling risk): This refers to the risk that the sample does not accurately represent the population, which is not the issue here.

Option B (Control risk): This refers to the risk that a control will fail to prevent or detect errors or fraud, unrelated to this situation.

Option D (Residual risk): This refers to the risk that remains after controls are implemented, also unrelated to this scenario.

Detailed Explanation:Why Not Other Options?Conclusion: Option C is correct as it accurately describes the situation where the auditor misinterprets the sampling results, which is a form of nonsampling risk, according to IIA guidance.

When estimating the impact of an inherent risk, internal auditors should consider both financial and nonfinancial factors. Financial factors include direct monetary impacts, while nonfinancial factors may include reputational damage, operational disruptions, and compliance issues. Considering a broad range of factors provides a comprehensive understanding of the potential impact of the risk, which is essential for effective risk assessment and management.

References:

Institute of Internal Auditors (IIA) Standards: Performance Standards 2120: Risk Management

COSO Enterprise Risk Management (ERM) Framework: Risk Assessment and Risk Response Components

A. Book value per common share ratio is lower than that of the prior year:This represents year-over-year comparison, which is an example of historical benchmarking, not internal benchmarking.

B. Staff turnover ratio is higher than the comparable organization in the same industry:This represents external benchmarking, as it involves comparing against a peer organization.

C. Utilities expense of the sales unit is higher than that of the customer service unit:Correct. This is internal benchmarking, as it compares performance metrics within the same organization.

D. Sales are significantly higher than the industry’s average for five years:This is an example of external benchmarking against the industry standard.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Benchmarking Techniques.

An internal control questionnaire is most appropriate in situations where controls need to be assessed across decentralized offices. This tool helps gather consistent information on the presence and effectiveness of controls in multiple locations, ensuring a standardized approach to control assessment. It allows for efficient data collection and comparison, which is critical in decentralized environments where processes and controls may vary. References: IIA Practice Guide – Evaluating Internal Controls, IIA Standard 2130 – Control

To manage the risk associated with volatile crude oil prices, purchasing crude oil-related derivatives such as futures or options is an appropriate risk management technique. These financial instruments allow the organization to hedge against price fluctuations by locking in prices or securing the right to purchase at a specific price, thereby providing financial stability and predictability. Option A is not directly related to hedging crude oil price risks. Option B involves speculative trading, which can be risky. Option D may not be feasible or cost-effective compared to using derivatives.References: COSO's Enterprise Risk Management – Integrating with Strategy and Performance.

Top of Form

According to the IIA’s Implementation Guide for Standard 2340 - Engagement Supervision1, one of the activities that the chief audit executive or the designated engagement supervisor should perform is to review and approve the engagement work program before the commencement of fieldwork. The engagement work program should be based on the engagement objectives, scope, and approach, and should reflect the risks and controls identified during the planning phase. The engagement work program should also be discussed with the engagement team to ensure that they understand the tasks and procedures to be performed, and to address any questions or concerns. The engagement supervisor should document the approval of the work program and any subsequent changes in the workpapers.

To test the theory that shutdowns are occurring due to outdated purchasing requirements that have not been updated for changes in production techniques, the auditor should compare the parts needed based on the most current production estimates and the revised materials requirements plan (MRP) with the purchase orders generated from the system. This comparison will help identify discrepancies between what is needed and what is being ordered, highlighting whether the system is failing to update purchasing requirements correctly. This method directly addresses the suspected cause of the shutdowns and provides clear evidence for or against the auditor’s theory.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2310 – Identifying Information.

When an internal audit team leader encounters difficulties due to the lack of a system of internal controls, the most appropriate course of action is to add a consulting component to the scheduled assurance engagement. This approach allows the internal audit team to provide advice and recommendations on establishing internal controls while still fulfilling their assurance responsibilities. By integrating consulting activities, the auditors can help the business unit improve its control environment, which can then be assessed in the assurance engagement.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Consulting Engagements

IIA Standard 1130 - Impairment to Independence or Objectivity

When auditing an organization's cash-handling activities, the most reliable form of testimonial evidence comes from a knowledgeable person who is independent of the cashiering duty. This independence ensures that the testimonial evidence is unbiased and not influenced by those directly involved in the processes being reviewed. Such evidence is considered more reliable as it is less likely to be affected by personal interests or biases.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Evaluating Evidence

IIA Standard 2310 - Identifying Information

The request for new vendor information to be summarized weekly and for invoices to be flagged automatically in the processing system indicates the use of continuous auditing. Continuous auditing involves ongoing, real-time monitoring of transactions and controls, which allows for the early detection of anomalies or issues.

IIA References:

IIA Standard 2320: Analysis and Evaluation suggests that internal auditors should use appropriate technology to support their analysis. Continuous auditing tools are designed to monitor transactions continuously, enabling auditors to identify and address risks more proactively.

The Practice Guide on Continuous Auditing outlines the benefits of real-time monitoring and how it can be integrated into the audit process to enhance the timeliness and relevance of audit results.

Discovery sampling is most effective for investigating the auditor's suspicion that the head of commercial lending has been granting loans without the required collateral. This sampling technique is designed to detect at least one occurrence of a specific characteristic (in this case, loans without collateral) within a population. It is particularly useful for identifying fraud or non-compliance with specific policies and procedures. Discovery sampling focuses on finding exceptions, making it suitable for the auditor’s investigation into potential misconduct.References: The IIA's Global Technology Audit Guide (GTAG) and The IIA's International Standards for the Professional Practice of Internal Auditing.

The primary guideline for preparing audit engagement workpapers is that they should be understandable to another internal auditor who was not involved in the engagement. This ensures that workpapers are clear, complete, and sufficiently detailed so that another auditor can understand the work performed, the evidence gathered, and the conclusions reached without needing additional explanations.

IIA References:

IIA Standard 2330: Documenting Information requires internal auditors to document relevant information to support the conclusions and engagement results. The Practice Advisory 2330-1 emphasizes that workpapers should be understandable and provide a clear trail of the audit process and conclusions, facilitating peer review and quality assurance processes.

The IIA’s Practice Guide on Audit Documentation suggests that workpapers should be prepared with the understanding that another internal auditor, unfamiliar with the work, may need to review them for quality assurance or other purposes.

The statement that "Senior management is charged with overseeing the establishment risk management and control processes" is false. Senior management is typically responsible for establishing risk management and control processes, not just overseeing them. The board or its committees usually have the oversight role.

The most critical factor in determining which engagements should be included in the annual internal audit plan is the organization's annual risk management strategy. This strategy identifies the key risks facing the organization and ensures that the internal audit plan aligns with the areas of highest risk. This prioritization helps ensure that internal audit resources are focused on areas that could have the most significant impact on the organization. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"Risk-Based Internal Auditing" (IIA Practice Guide)

A. The policy for granting, modifying, and deleting user access:Correct. Understanding the policy ensures the auditor knows the framework and controls in place.

B. A sample of change request forms:Useful for testing but not as foundational as reviewing the policy.

C. User access reports reviewed by management:This evaluates monitoring but does not establish a baseline understanding of controls.

D. A current listing of system users and employees:Important for reconciliation but secondary to understanding the control framework.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Preliminary Surveys.

Preliminary communication with HR management is essential to ensure a smooth audit process. According to IIA guidance, the auditor in charge (AIC) should notify HR management before the planning stage begins to facilitate cooperation and alignment. Additionally, scheduling formal status meetings at the start of the engagement helps in setting expectations, clarifying the scope, and ensuring ongoing communication throughout the audit process. These steps foster transparency and collaboration. References:

IIA Standards - 2200: Engagement Planning

IIA Practice Advisory - 2200-1: Engagement Planning

When preparing a detailed risk assessment during engagement planning, the internal auditor should collaborate with the management of the function being reviewed. Management has the most in-depth knowledge of their business objectives, processes, and the associated risks. This cooperation ensures that the risk assessment is comprehensive, accurate, and relevant to the specific context of the function under review. It also helps in identifying any potential areas of concern that might not be evident to external parties.

References:

IIA Standard 2201: "Planning Considerations"

IIA Practice Guide: "Assessing the Adequacy of Risk Management Processes"

The primary purpose of implementing a program whereby employees are rotated from other parts of the organization into the internal audit activity is to provide an opportunity for the recruitment of employees as permanent internal auditors. This rotation program helps in identifying talented individuals who might have the aptitude and interest in internal auditing. It serves as a recruitment strategy by exposing employees from other departments to the internal audit function, potentially increasing the pool of candidates for permanent internal auditor positions. This approach also benefits the internal audit activity by bringing in fresh perspectives and diverse experiences from different areas of the organization.References: IIA's Practice Guide on Human Resources Management, specifically regarding staffing and career development within internal audit functions.

Judgmental sampling, also known as non-statistical sampling, is a technique where the internal auditor uses their professional judgment to select a sample that they believe is most representative of the population. In this scenario, the internal auditors are choosing to review a sample of complaints from the last three months based on their professional judgment that these complaints are reflective of current marketing practices. This method is particularly useful when the auditor has specific knowledge about the population that allows them to make informed selections.

References:

Institute of Internal Auditors (IIA) Standards: Performance Standards 2320: Analysis and Evaluation

Internal Audit Manual: Sampling Techniques and Methodologies

Best practices in internal auditing emphasize the importance of follow-up on engagement outcomes to ensure that agreed-upon actions are implemented and effective. According to Standard 2500 – Monitoring Progress, the chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management. This ensures that corrective actions are taken and that the internal audit function fulfills its role in improving the organization's governance, risk management, and control processes. Allocating resources for follow-up is crucial to maintain accountability and support continuous improvement.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2500 – Monitoring Progress.

According to MA (Management Accounting) guidance and internal auditing standards, when assessing the likelihood of fraud risk, internal auditors should consider historical data and patterns within the organization. Past fraud allegations and actual occurrences provide valuable insights into potential vulnerabilities and areas where controls might have previously failed. This historical perspective helps in evaluating the current fraud risk environment and in identifying areas that require stronger controls or more vigilant monitoring.

References:

IIA Practice Guide: "Assessing the Risk of Fraud"

COSO (Committee of Sponsoring Organizations of the Treadway Commission) Fraud Risk Management Guide

When using benchmarking to test the employee turnover rate, the internal auditor should compare the organization's turnover rate to the published turnover rates of peer organizations. This method provides a relevant standard or point of reference to evaluate the organization's performance relative to similar entities. By using external benchmarks, the auditor can identify whether the turnover rate is above or below industry norms, which helps in assessing the effectiveness of the organization's HR practices.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Internal Audit and Organizational Performance

IIA Standard 1220 - Due Professional Care

While discussing risks with the audit client can provide useful insights, it is the least structured method compared to using all available information from the risk-based plan, considering client efforts to manage risk, and reviewing prior risk assessments. These latter methods are more systematic and ensure that the audit work program is comprehensive and focused on relevant risks. References: = IIA Standard 2200 - Engagement Planning, IIA Practice Guide: “Developing the Audit Plan”.

A compliance assurance engagement focuses on evaluating whether an organization is adhering to applicable laws, regulations, policies, and procedures. Assessing the design adequacy of controls related to consumer privacy and confidentiality is a prime example of such an engagement, as it ensures that the organization’s controls are designed to comply with relevant privacy laws and regulations, thereby protecting consumer data and maintaining compliance.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2410 - Criteria for Communicating

To obtain a responsive action plan from management, the auditor is most likely to achieve this when both parties agree on the "Effect" attribute of the audit finding. The "Effect" refers to the impact or potential impact of the identified issue on the organization's operations, objectives, or risk profile. When management and the auditor agree on the significance and consequences of the finding, there is a shared understanding of the urgency and importance of addressing the issue. This alignment increases the likelihood that management will develop and commit to an effective action plan to remediate the finding.

References:

IIA Practice Guide: "Formulating and Expressing Internal Audit Opinions"

COSO Internal Control – Integrated Framework

In this scenario, the internal auditor performed a test of controls on the accounts receivable ledger and found that the error rate was within management's expectations. Since the audit focused on the accounts receivable controls, the conclusion should be specific to the scope of the engagement. The auditor can provide positive assurance about the effectiveness of the controls over the recording of transactions in the accounts receivable ledger, as the evidence gathered supports this conclusion.

IIA References:

IIA Standard 2410: Criteria for Communicating states that communications must include the engagement’s objectives and scope as well as applicable conclusions, recommendations, and action plans. Since the engagement was focused on accounts receivable, the assurance provided should relate specifically to the controls in that area.

The Practice Guide on Communicating Results emphasizes that conclusions and assurance should be directly related to the scope of the engagement and the evidence obtained.

The chief audit executive (CAE) is responsible for the approval of the engagement objectives and scope. While the head of customer service and other stakeholders may provide input, it is ultimately the CAE's responsibility to ensure that the engagement aligns with the internal audit plan and meets the organization's overall objectives. The CAE's approval ensures the independence and objectivity of the internal audit function.

References:

The Institute of Internal Auditors (IIA) Standard 2010 - Planning

IIA Standard 2200 - Engagement Planning

According to IIA guidance, reliable information must be factual, adequate, and convincing to ensure that a prudent and informed person would reach the same conclusions as the internal auditor. This means that the information should be supported by sufficient and appropriate evidence that can be independently verified and substantiated. Reliability of information is crucial for the credibility of audit findings and for making informed decisions based on those findings.

References:

The Institute of Internal Auditors (IIA) Standard 2310 – Identifying Information: "Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the engagement’s objectives."

IIA Practice Guide on "Audit Evidence"

During engagement planning, an internal auditor uses a flowchart to evaluate the design of controls. A flowchart visually represents the processes and controls within the organization, helping the auditor identify control points, weaknesses, and potential risks. This understanding is critical for planning the audit, as it allows the auditor to design tests that effectively assess whether the controls are properly designed and implemented to mitigate risks.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2210 – Engagement Objectives.

A. Determine whether the purchasing department complies with policy by examining a random selection of purchase orders:Correct. Reviewing a random sample of purchase orders is a standard procedure for evaluating compliance with purchasing policies, such as approval requirements, vendor selection, and adherence to budget constraints.

B. Evaluate whether purchasing requests are properly approved by authorized staff by obtaining independent verification from the vendors:Vendor verification is not typically used to evaluate internal approvals as this information is available within the organization’s records.

C. Ascertain whether material receipts are recorded on a timely basis by reviewing physical inventory stock counts:Physical inventory reviews focus on inventory management and reconciliation, not specifically on the timeliness of receipts.

D. Determine whether prices charged for goods received are correct by reviewing the appropriate accounts payable record by vendor:While reviewing accounts payable records helps verify the accuracy of pricing, it does not directly evaluate the purchasing department’s adherence to procedures.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Audit Engagement Objectives and Procedures.

According to the IIA guidance, when reviewing an organizational process, the engagement work test typically focuses on process controls. This involves evaluating the design and effectiveness of controls in place to mitigate identified risks and ensure the achievement of process objectives. Assessing process controls helps auditors determine if the controls are operating as intended and are sufficient to manage the associated risks.

References:

The Institute of Internal Auditors (IIA) Standards

Internal Audit Engagement Planning and Execution

When documenting findings from a nonstatistical sample, internal auditors should record the factual observations and quantify the results where possible. In this case, the auditor should document that 17% of the sampled accounts receivable balances exceeded the approved unsecured credit limit. This provides a clear, quantifiable basis for the finding, which is critical for accurate reporting and for management to understand the scope of the issue. Documenting this percentage also supports the auditor's conclusions and recommendations for corrective actions.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Audit Sampling.

IIA Standard 2310 - Identifying Information

The primary reason for audit supervision to include the approval of the engagement report is to ensure that the findings and conclusions presented in the report are substantiated by adequate and appropriate evidence. This is critical for maintaining the credibility and reliability of the audit function.

IIA Standard 2340 – Engagement Supervision:

This standard requires that engagements be properly supervised to ensure that objectives are achieved, audit work is performed according to appropriate standards, and that the results are supported by sufficient, reliable, and relevant evidence.

Substantiation of Findings:

Approval of the engagement report by the supervisor ensures that the findings and conclusions are not only accurate but also supported by documented evidence. This substantiation is essential for the report to be credible and for the audit to fulfill its purpose.

IIA Practice Advisory 2340-1:

The advisory emphasizes the role of supervisors in reviewing and approving the engagement report to ensure that all findings are well-founded and appropriately supported by the audit evidence.

Option A (Ensure objectives are met): While meeting objectives is important, the primary focus of report approval is to ensure that the findings are substantiated.

Option B (Ensure senior management support): Support from management is necessary, but it should be based on a report that is well-supported by evidence.

Option C (Ensure style and grammar): Style and grammar are secondary considerations; the primary focus should be on the accuracy and substantiation of findings.

Detailed Explanation:Why Not Other Options?Conclusion: Option D is correct because the primary reason for the supervisor’s approval of the engagement report is to ensure that the findings are substantiated by evidence, ensuring the credibility and reliability of the audit report, in line with IIA standards.

According to the Institute of Internal Auditors (IIA) guidance, organizations have the most influence over the "opportunity" aspect of the fraud triangle. The fraud triangle consists of three elements: pressure, opportunity, and rationalization. While pressure and rationalization are largely influenced by personal and external factors beyond the organization's direct control, opportunity refers to the circumstances that allow fraud to occur, which can be directly managed and controlled by the organization through internal controls, policies, and procedures. References: = IIA's "Managing the Business Risk of Fraud: A Practical Guide" and the IIA's Practice Guide on "Internal Audit's Role in Preventing and Detecting Fraud".

When developing a workpaper preparation policy, it is essential to ensure that all workpapers are directly related to the engagement objectives. The term "relevant" in this context means that the workpapers must be pertinent and appropriate to the audit engagement’s objectives, ensuring that they support the findings, conclusions, and recommendations.

IIA Standard 2330 – Documenting Information:

This standard requires that internal auditors document relevant information to support engagement conclusions and recommendations. Relevance is key because it ensures that the documentation directly pertains to the objectives of the audit engagement.

Relevance of Workpapers:

Relevant workpapers are those that provide evidence and information that directly supports the audit’s objectives. This relevance ensures that the audit’s findings and conclusions are based on information that is applicable and directly related to the scope of the audit.

IIA Practice Advisory 2330-1:

The advisory suggests that workpapers should be organized and structured in a way that clearly relates to the audit objectives. Including a requirement for relevance in the workpaper policy helps ensure that all documented evidence is pertinent to the audit's goals.

Option A (Understandable): While workpapers should be understandable, this does not directly address the need for workpapers to relate to the engagement objectives.

Option C (Economical): Workpapers being economical refers to their efficiency in documentation, not their relevance to objectives.

Option D (Complete): Completeness is important but refers to the extent of documentation rather than its relevance to specific objectives.

Detailed Explanation:Why Not Other Options?Conclusion: Option B is correct because including the requirement that workpapers be relevant ensures that they directly relate to the engagement objectives, aligning with IIA standards on documentation.

If the Chief Audit Executive (CAE) disagrees with management's decision to deem certain action plans no longer necessary, the CAE must discuss the matter with the board. The board has the ultimate responsibility for oversight of the internal audit function and for ensuring that management addresses audit recommendations appropriately. Escalating the issue to the board ensures that the CAE fulfills their duty to report significant issues and disagreements to those charged with governance.

References:

The Institute of Internal Auditors (IIA) Standard 2600 – Communicating the Acceptance of Risks: "When the chief audit executive believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the chief audit executive must discuss the matter with senior management. If the decision regarding residual risk is not resolved, the chief audit executive must report the matter to the board for resolution."

Defining activities by business processes is a structured approach that allows the internal audit activity to identify engagement opportunities effectively. This method ensures that all critical processes are reviewed systematically and that risks are identified and assessed in the context of how they affect the entire business process. This approach is comprehensive and aligns with best practices in internal auditing.

References:

The Institute of Internal Auditors (IIA) Standards

Internal Audit Planning and Engagement Standards

According to IIA guidance, when the internal audit activity investigates potential ethics violations in a foreign subsidiary, communication of any internal ethics violations to external parties may occur, but only with appropriate safeguards. This ensures that sensitive information is protected and that the organization complies with both local and international legal requirements. Cross-cultural differences and local laws must be considered, but the primary focus is on maintaining appropriate safeguards during communication. References: IIA Practice Guide – Auditing Ethics Programs, IIA Standard 2440 – Disseminating Results

A. The sample rate of occurrence plus the precision exceeds the acceptable error rate:Correct. If the sample rate of occurrence (estimated error rate in the sample) plus the margin of error exceeds the acceptable error rate, it indicates a potential issue. To refine the estimate and maintain the desired confidence level and precision, the sample size needs to be increased.

B. The sample rate of occurrence is less than the acceptable error rate:If the sample rate is below the acceptable error rate, there is no immediate need to adjust the sample size.

C. The acceptable rate of occurrence less the precision exceeds the sample rate of occurrence:This condition does not imply the need to increase sample size but rather suggests acceptable results.

D. The sample rate of occurrence plus the precision equals the acceptable error rate:This indicates the estimate is at the threshold, but it does not necessitate increasing the sample size unless more precision is required.

CIA Exam Syllabus Reference:

Domain II: Risk Management and Control – Sampling and Error Analysis.

The chief audit executive (CAE) should meet with the chief IT officer to discuss the incident, the investigation, and any control improvements that will be implemented (1). Additionally, developing an appropriate audit program with the IT auditor to review the organization’s Internet-based sales process and key controls (3) is a proactive approach to ensure future incidents are prevented and to enhance the organization's security posture. References: = IIA Standard 2120 - Risk Management and IIA Standard 2201 - Planning Considerations.

A. ICQs are most useful in more organic, decentralized organizations with specialized departmental or regional characteristics:ICQs are standard tools and can be used in a variety of organizational structures, not just decentralized ones.

B. An ICQ can be used effectively either by sending it in advance for management of the area under review to complete or by testing each procedure and recording the results:Correct. ICQs are versatile tools that can be used for both self-assessment by management and as part of a detailed audit procedure.

C. An ICQ is not an efficient tool, as it can only inquire about controls and it does not test them:ICQs can test controls indirectly by revealing whether they are documented and applied properly.

D. ICQs are also known as checklist audits and encourage management of the area under review to answer "no" or "yes" more accurately:ICQs are not limited to a checklist format and their value goes beyond simple yes/no answers.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Tools for Assessing Internal Controls.

An operational audit is conducted to evaluate whether an organization’s processes or areas are performing as intended, accomplishing their objectives, and doing so in an efficient and economical way. This type of audit focuses on the effectiveness, efficiency, and economy of operations.

IIA Definition of Operational Auditing:

Operational auditing involves reviewing and assessing the effectiveness and efficiency of operations. The goal is to ensure that the organization’s operations are running as intended and achieving their objectives in a cost-effective manner.

IIA Standard 2100 – Nature of Work:

This standard emphasizes that internal audit activity should evaluate the effectiveness and efficiency of operations, aligning with the objectives of an operational audit.

Key Aspects of Operational Audits:

Effectiveness: Evaluates whether objectives are being met.

Efficiency: Assesses whether resources are being used optimally.

Economy: Ensures that costs are minimized without compromising quality or performance.

Option A (Compliance audit): Focuses on whether the organization adheres to laws, regulations, and policies, not on operational efficiency.

Option C (Financial audit): Involves verifying the accuracy of financial records, not the operational performance.

Option D (Provider audit): This term is not commonly used in IIA guidance and does not accurately describe the scenario.

Detailed Explanation:Why Not Other Options?

The internal auditor has primarily obtained testimonial evidence. Testimonial evidence is derived from interviews, discussions, and responses from employees or other parties. It involves collecting and analyzing verbal information to draw conclusions, which is precisely what the auditor did by conducting interviews, documenting them, analyzing the summaries, and drawing conclusions based on this information.

References:

IIA Standards: 2310 - Identifying Information

IIA Practice Guide: Audit Evidence

For compliance engagements, particularly those related to critical processes such as cash disbursements, it is important to distribute the final audit report to individuals with oversight and decision-making responsibilities. The accounts payable manager oversees the process, the chief financial officer (CFO) has overall financial oversight, and the audit committee provides governance and oversight of the audit function. This ensures that the report is reviewed by those with the authority to implement changes and address any issues identified. References:

IIA Standards - 2440: Disseminating Results

IIA Practice Advisory - 2440-1: Disseminating Results

According to IIA guidance, an appropriate role for the internal audit activity with regard to the organization's risk management program is to attain an adequate understanding of the organization's key risk mitigation strategies. This enables internal auditors to evaluate the effectiveness of risk management processes and provide assurance on the adequacy of risk controls. Identifying and managing risks, ensuring risk management processes exist, and ensuring controls exist to mitigate risks are responsibilities of management, not internal audit.

References:

IIA Standards: 2120 - Risk Management

IIA Practice Guide: Internal Audit's Role in Risk Management

For audit evidence to be considered reliable, it must be accurate, truthful, and verifiable. The absence of the bank heading, logo, or address on the bank statements raises concerns about the authenticity and integrity of the documents. Without these elements, there is no assurance that the statements are legitimate and have not been tampered with or falsified. Therefore, this evidence may not be reliable for audit purposes.References:

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards)

"Auditing: A Risk-Based Approach to Conducting a Quality Audit" by Karla M. Johnstone, Audrey A. Gramling, Larry E. Rittenberg

According to IIA guidance, the chief audit executive (CAE) is responsible for establishing policies and procedures for the internal audit activity, including the retention of audit records. These requirements should be aligned with the organization’s overall processes and procedures to ensure consistency and compliance with legal and regulatory requirements. This approach ensures that the retention policy is tailored to the specific needs and context of the organization, while also maintaining alignment with broader organizational policies.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2330 - Documenting Information

The Institute of Internal Auditors (IIA) - Practice Advisory 2330-1: Document Retention

In the context of an internal audit observation, the cause component should be added to explain why the subsidiary has thousands of client contracts on paper instead of in the required electronic system. The cause helps identify the root reason behind the non-compliance with the organization's rules of record management. In this case, the cause could be the lack of sufficient assistants to scan the contracts into the system. Including the cause in the observation provides clarity on the underlying issues and helps in formulating effective recommendations to address the problem.

References:

The Institute of Internal Auditors (IIA) Standard 2410.A1 – Criteria for Communicating: "Final communication of engagement results must, where appropriate, contain the internal auditors’ overall opinion and/or conclusions."

IIA Practice Guide on "Root Cause Analysis"

When planning an assurance engagement, especially for a foreign subsidiary, it is essential to communicate effectively with management to ensure transparency and set expectations. According to IIA guidance, the preliminary communication should include critical information that helps the management of the area under review understand the purpose, scope, and logistics of the audit.

IIA Standard 2201 – Planning Considerations:

This standard emphasizes that the internal auditor should plan the engagement to achieve the engagement objectives effectively. It includes discussing the scope, objectives, timing, and resource allocations with management.

Key Elements to Include in Preliminary Communication:

Scope of the Engagement: Clearly defining what the audit will cover ensures that both the auditors and the management understand the boundaries and focus areas of the audit.

Estimated Time Frame: Providing a timeline helps management plan their activities and ensures that the audit process does not interfere with critical operations.

Names of the Auditors: Identifying the audit team helps in establishing a working relationship and allows management to know who will be conducting the audit.

IIA Practice Advisory 2201-1:

This advisory suggests that early communication of the scope, timing, and staffing helps in gaining the management’s cooperation and sets the stage for a successful audit.

Option B and D (Including resources and travel budget): These details are more administrative and do not need to be included in the preliminary communication to management.

Option C (Resources, budget, and scope): While scope is important, resources and budget are internal matters and not essential in preliminary communication with management.

Detailed Explanation:Why Not Other Options?Conclusion: Option A is correct as it ensures that the management is informed about the key aspects of the audit that directly impact them, aligning with IIA’s standards for audit planning and communication.

The chief audit executive (CAE) can best illustrate the value of the internal audit activity by reporting the overall performance resulting from the internal audit balanced scorecard. The balanced scorecard includes metrics that measure the effectiveness, efficiency, and impact of the internal audit function, providing a comprehensive view of its contributions to the organization. This approach demonstrates how internal audit activities align with and support the organization's strategic objectives. References:

The IIA’s Practice Guide on Measuring Internal Audit Performance.

The IIA’s Practice Guide on Internal Audit Effectiveness.

In the five-attribute approach to documenting deficiencies, the attribute that answers the question "What should be in place?" is Criteria. Criteria represent the standards, measures, or expectations used in making an evaluation and/or verification (what should be). It defines what the process or control should achieve, serving as a benchmark against which the actual condition (what is) is compared. The criteria are essential for identifying deviations and determining the nature and significance of deficiencies.References: IIA's International Standards for the Professional Practice of Internal Auditing, Standard 2410 – Criteria for Communicating.

The initial step the CAE should take is to discuss the issue with the members of management responsible for the risk area. This discussion allows the CAE to understand the reasons for the lack of action, provide an opportunity for management to explain their position, and encourage them to implement the necessary mitigation measures. If this discussion does not lead to satisfactory action, the CAE would then escalate the issue to senior management or the board as appropriate.References:

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards)

"Internal Auditing: Assurance and Advisory Services" by Urton L. Anderson et al.

The chief audit executive (CAE) has the responsibility to provide assurance and insight on risk management processes. In a meeting with senior management to discuss significant risks, the CAE should focus on evaluating whether the risks accepted by senior management align with the organization’s risk appetite and are within acceptable levels. The CAE should ensure that the risk management practices are adequate and that senior management is aware of any risks that might exceed the organization's tolerance levels. This approach is aligned with the role of internal audit in providing independent and objective evaluations.

References:

Institute of Internal Auditors (IIA) Standards: Performance Standards 2120: Risk Management

IIA Practice Guide: Assessing the Risk Management Process

In the context of the fraud triangle, the condition where a vice president’s unquestioned authority enabled the theft of funds is best described as "opportunity." Opportunity refers to the circumstances that allow fraud to occur, including the ability to override controls or exploit a lack of oversight. This is one of the three elements of the fraud triangle, which also includes rationalization and pressure. References: IIA Practice Guide – Fraud and Internal Audit, COSO Fraud Risk Management Guide

An internal auditor's decision to issue a preliminary audit report is best justified when the internal audit team expects management to address certain issues immediately due to their severe impact. Preliminary reports are issued to promptly communicate critical findings that require urgent attention, ensuring that management is aware of and can take corrective action on significant issues without waiting for the final report.

References:

IIA Standards: 2410 - Criteria for Communicating

IIA Practice Guide: Reporting Results

In this situation, the internal auditor has identified a significant risk related to the failure to maintain air quality monitoring equipment. Since the CEO and the manager have acknowledged the risk but decided not to take corrective action due to cost concerns, the chief audit executive (CAE) should escalate the issue to the board. This step is necessary to ensure that the board is fully informed of the potential regulatory and reputational risks.

IIA Standard 2600 – Communicating the Acceptance of Risks:

This standard requires the CAE to communicate to senior management and the board when management has accepted a level of risk that the CAE believes is unacceptable. The board needs to be made aware of the situation to ensure they can take appropriate action if needed.

Risk Communication:

The CAE’s responsibility includes ensuring that all significant risks are communicated to the highest level of the organization. In this case, the potential for regulatory sanctions and reputational damage due to inaccurate air quality monitoring is a significant risk that the board should be aware of.

IIA Practice Advisory 2600-1:

The advisory emphasizes that when the CAE believes that management has accepted a level of risk that could be detrimental to the organization, it is the CAE’s duty to escalate the matter to the board.

Option A (Implement corrective actions): It is not the CAE's role to implement corrective actions; this responsibility lies with management.

Option C (Discuss with external auditors): While external auditors can provide additional perspectives, the CAE should directly communicate significant risks to the board.

Option D (Contact the regulatory agency): This is an extreme step that should only be considered if the organization fails to address the issue after internal escalation.

Detailed Explanation:Why Not Other Options?

Ensuring that risks to the timely completion of the engagement are assessed should be performed first during engagement supervision activities. This initial step is crucial as it sets the foundation for the entire audit process. By identifying and assessing risks early, the audit supervisor can develop appropriate plans and strategies to mitigate these risks, ensuring that the engagement stays on track and is completed within the allocated time frame. Addressing this aspect first helps in prioritizing tasks, allocating resources effectively, and managing any potential obstacles that might delay the audit process.

References:

The Institute of Internal Auditors (IIA) Standards

Internal Audit Engagement Planning and Risk Assessment Procedures

The most effective management action to prevent similar issues in the future involves both corrective and preventive measures. Coaching the IT specialist addresses the immediate knowledge gap and mistake that occurred. Introducing a secondary control, such as a review or verification step, ensures that future access requests are granted correctly, thereby preventing similar errors. This combination addresses the root cause and adds a layer of assurance. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"IT Control Objectives for Sarbanes-Oxley" (IT Governance Institute)

In internal auditing, evidence must meet certain criteria to support conclusions and recommendations. According to IIA guidance, evidence should be sufficient, reliable, relevant, and useful. In this scenario, the internal auditor concludes that additional staff are needed to fully utilize a fraud surveillance system based on an employee’s statement. However, the conclusion may lack sufficient evidence to support it.

IIA Standard 2310 – Identifying Information:

This standard requires that internal auditors identify sufficient, reliable, relevant, and useful information to achieve the engagement’s objectives. "Sufficiency" refers to the quantity of evidence necessary to convince an informed person of the validity of the auditor’s findings and recommendations.

Sufficiency of Evidence:

The auditor's conclusion about the need for additional staff is based on a single employee’s remark, which is not sufficient evidence. The auditor would need to gather more evidence, such as analyzing workload data, reviewing system logs, or assessing staff capacity, to support the conclusion fully.

IIA Practice Advisory 2310-1:

This advisory emphasizes the need for auditors to obtain enough factual evidence to support their findings. Relying solely on anecdotal evidence from one employee does not meet the standard for sufficiency.

Option B (Reliability): Reliability refers to the accuracy and credibility of the evidence. The employee's statement might be credible but still insufficient in quantity.

Option C (Relevancy): The employee’s comment is relevant to the issue, but relevancy alone does not make the evidence sufficient.

Option D (Usefulness): The information could be useful, but it lacks the sufficiency needed to justify the auditor’s conclusion.

Detailed Explanation:Why Not Other Options?

External benchmarking using trend analysis involves comparing a company's performance metrics with industry standards or averages over a certain period to identify trends and areas for improvement. Comparing common-size financial statements of the subsidiary with the averages of the industry for the last two periods allows for a normalized comparison by expressing financial statement items as a percentage of a common base figure (e.g., total assets or sales). This method highlights the subsidiary's financial structure and performance trends in relation to industry norms, facilitating a comprehensive analysis. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"Benchmarking: An Essential Tool for Assessment, Improvement, and Market Leadership" (Michael J. Spendolini)

Broad legislative reforms present the most critical external risk to an organization because they can fundamentally change the regulatory environment in which the organization operates. Such changes can impact compliance requirements, operational processes, and strategic planning. The organization must quickly adapt to remain compliant and avoid penalties or legal issues. This type of risk is external and largely uncontrollable, making it particularly critical compared to internal changes or new market entries.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2120 – Risk Management.

According to IIA guidance, a newly promoted chief audit executive (CAE) should prioritize the review of audit reports based on the significance of the findings indicated by the opinion statements. A graded positive opinion (1) suggests that the audit found strong controls with no significant issues, while a third-party opinion (4) typically involves external assessments that may not require immediate internal action. Therefore, these opinions would receive the lowest review priority. In contrast, negative assurance opinions (2) and limited assurance opinions (3) indicate potential issues or limitations in the effectiveness of controls, necessitating higher priority review to address any significant concerns promptly. References: IIA Standard 2410 – Criteria for Communicating, IIA Practice Advisory 2410-1

When setting the scope for identifying and assessing key risks and controls in a process, developing the scope of the audit based on a bottom-up perspective is the least appropriate approach. A bottom-up perspective typically focuses on individual controls and processes without necessarily aligning with the organization’s critical business objectives and risk appetite. Effective risk assessment should begin with a top-down approach, identifying key business objectives and the associated risks, and then determining the necessary controls to manage these risks. References: IIA Practice Guide – Auditing Key Risk Management, IIA Standard 2200 – Engagement Planning

The most reliable assurance comes from findings that demonstrate both the identification of issues and the effectiveness of corrective actions. In the provided scenarios, the accounts payable audit (2) and the cash handling process audit (4) illustrate instances where issues were identified, and actions were either needed (2) or taken promptly (4), thus providing a clear basis for forming an opinion on internal control adequacy. References: = IIA Standard 2410 - Criteria for Communicating and Standard 2500 - Monitoring Progress.

According to IIA guidance, if the internal audit activity does not have sufficient time to complete its usual root cause analysis, the chief audit executive (CAE) may recommend that management conduct further work to identify the root cause and address the issue. This approach ensures that the root cause is still identified and addressed without delaying the audit report, maintaining the integrity and usefulness of the audit findings while leveraging management’s resources.

References:

IIA Standards: 2410.A1 - Criteria for Communicating

IIA Practice Guide: Root Cause Analysis

A RACI (responsible, accountable, consult, and inform) chart is the tool that an internal auditor should use to determine whether all principal stakeholders are involved in a project. A RACI chart clearly defines roles and responsibilities for each task or deliverable in a project, ensuring that all necessary stakeholders are identified and their involvement is appropriately documented.

References:

IIA Practice Guide: Auditing Project Management Activities

IIA Standards: 2201 - Planning Considerations

According to the Institute of Internal Auditors (IIA) guidance, the independence and objectivity of the internal audit function are fundamental principles. Independence is compromised if the internal audit function takes on roles or responsibilities that are part of management's duties. Coordinating and managing the risk management process is a management responsibility. If internal auditors assume this role, it impairs their ability to remain independent and objective when auditing the effectiveness of the risk management process. References: IIA Standard 1112 – Chief Audit Executive Roles Beyond Internal Auditing

A. Information obtained from historic audits and memos:Useful for context but not typically part of the formal work program.

B. Risk and control registers or matrices:Used in the planning phase but not part of the detailed execution in the work program.

C. Resource deployment plans and sampling methodologies:Correct. These are essential components of the work program, guiding audit execution and resource allocation.

D. Prior findings and management responses:Inform planning but do not typically appear in the work program itself.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Engagement Work Program.

Nonstatistical sampling allows auditors to use their professional judgment to determine the sample size and select the items to be tested. Unlike statistical sampling, which relies on probabilistic methods to determine the sample size and selection, nonstatistical sampling is more flexible and can be tailored to the specific circumstances of the audit engagement.

IIA References:

IIA Standard 2320: Analysis and Evaluation suggests that internal auditors should apply appropriate methods to analyze data and draw conclusions. Nonstatistical sampling allows for the application of professional judgment, which can be advantageous in certain audit situations where rigid statistical methods may not be practical or necessary.

The Practice Guide on Sampling discusses the differences between statistical and nonstatistical sampling, highlighting that nonstatistical sampling relies more on the auditor’s judgment, which can be beneficial in certain contexts.

Given this, the correct answer is C. Nonstatistical sampling provides for the use of subjective judgment in determining the sample size.

If an internal auditor decides to adjust the audit work program during the fieldwork phase of an assurance engagement, the most appropriate next step is to obtain approval from the engagement supervisor. This ensures that any changes to the scope or procedures are reviewed and sanctioned by the audit management, maintaining the integrity and alignment of the audit objectives.

References:

IIA Standards: 2240 - Engagement Work Program

IIA Practice Guide: Engagement Planning

The most important group or individual for the CAE to consult to determine the scope of the audit regarding compliance with new environmental regulations is the environmental, health, and safety manager. This individual or group has specialized knowledge about the organization’s operations, regulatory requirements, and existing controls related to environmental compliance. Consulting with the environmental, health, and safety manager ensures that the audit scope is comprehensive and accurately addresses the pertinent risks and compliance requirements. References: IIA Standard 2201 – Planning Considerations, IIA Practice Advisory 2210.A1-1

According to IIA guidance, the auditor in charge should consider the number, experience, and availability of audit staff as well as the nature, complexity, and time constraints of the engagement when determining resource requirements. These factors ensure that the engagement is staffed appropriately and that the audit team has the necessary skills and time to perform the audit effectively.

References:

IIA Standards: 2230 - Engagement Resource Allocation

IIA Practice Guide: Coordination and Reliance: Developing an Assurance Map

If the chief audit executive (CAE) determines that management has chosen to accept a high-level risk that may be unacceptable to the organization, the CAE should first discuss the matter with senior management. If senior management does not address the concern, the CAE should escalate the issue to the board. This escalation process ensures that the highest levels of governance are aware of significant risks and can take appropriate action if necessary. It also aligns with the CAE's responsibility to ensure that risks are properly managed within the organization.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2600 - Communicating the Acceptance of Risks

According to the Institute of Internal Auditors (IIA) guidance, workpapers are crucial for documenting the evidence that supports audit findings and conclusions. They serve as the primary reference for any reported control deficiencies, providing detailed documentation and justification for the audit results. Workpapers must be thorough and clearly demonstrate the basis for audit observations and recommendations. While audit reports summarize findings, the detailed support for these findings is found within the workpapers.

References:

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2330: Documenting Information.

IIA Practice Guide, "Audit Workpapers."

When deciding whether to report a finding, the sufficiency of the information is critical. Sufficiency refers to the quantity of information obtained to support audit conclusions and recommendations. In this case, the internal auditors need to ensure that the sample size and the evidence collected are adequate to demonstrate that the issue of employees signing purchase orders in a designated acting capacity due to employee absence is significant enough to report. Ensuring sufficiency helps validate that the finding is well-supported and justifies its inclusion in the audit report.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2310 - Identifying Information

Confirmation letters are generally considered the most reliable source of documentary evidence because they involve direct verification of information with an independent third party. This type of evidence is less prone to bias or manipulation compared to internal documents like policy statements or remittance advices.

IIA References:

IIA Standard 2310: Identifying Information requires that internal auditors gather sufficient, reliable, relevant, and useful information to support engagement results. Third-party confirmations, such as confirmation letters, are considered highly reliable because they come from independent sources.

The Practice Guide on Audit Evidence highlights that external confirmations provide strong evidence of the accuracy of the information being audited.

When an internal auditor identifies a potential significant weakness in a control and management does not agree with the assessment, the appropriate next step is to perform additional audit work to better articulate the risk. This means gathering more evidence, conducting further analysis, and providing clearer examples of how the weakness could impact the organization. By doing this, the auditor can better communicate the potential consequences and severity of the risk to management, increasing the likelihood of reaching a mutual understanding and agreement on the necessary actions.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Communicating Risk and Control Information

IIA Standard 2310 - Identifying Information

IIA Standard 2410 - Criteria for Communicating

When developing the scope of an audit engagement, the internal auditor typically considers factors that directly impact the audit’s objectives, risks, and execution. This includes the potential impact of key risks (Option B), the expected outcomes and deliverables (Option C), and the operational and geographic boundaries (Option D). While the need and availability of automated support (Option A) may be a practical consideration for how the audit is conducted, it is not fundamental to defining the scope of the audit engagement itself. The scope is primarily concerned with what is to be audited and why, rather than how the audit will be performed.References:

IIA Standard 2200: Engagement Planning.

IIA Practice Guide on Audit Engagement Planning.

Consulting engagements involve advisory and value-adding activities requested by management, as outlined in IIA Standard 1000. Helping design the risk management program aligns with this definition, as it supports management's efforts without direct assurance. Options A, C, and D are assurance engagements, as they involve evaluations of process effectiveness or control adequacy. The CIA Part 2 syllabus emphasizes the importance of distinguishing between assurance and consulting engagements (Section II: Types of Engagements).

The current ratio is a financial metric that measures a company's ability to pay short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities. This ratio provides insight into the liquidity and short-term debt-paying ability of a company, making it a key indicator for assessing financial health and stability in the short term.References:

The Institute of Internal Auditors (IIA), Financial Ratios and Analysis

"Financial Management: Theory & Practice" by Eugene F. Brigham and Michael C. Ehrhardt

According to IIA guidance, the primary purpose of the exit conference is to ensure timely communication of observations and findings, especially those that require immediate management action. This meeting allows auditors to discuss their findings with management, address any disagreements, and clarify the facts before the final report is issued. It does not require the attendance of both the chief audit executive and the chief executive over the activity (B), nor is it solely for reviewing anticipated results (C) or the performance of the internal auditors (D). References: IIA Standard 2440 – Disseminating Results, IIA Practice Advisory 2440-1

In internal auditing, it is crucial to have the necessary skills and expertise to effectively evaluate and assess the area under review. When internal auditors lack the required skills, the chief audit executive (CAE) must take steps to ensure the engagement is performed effectively. Option D suggests bringing in a consultant who is independent of the area under review and has the missing expertise. This approach ensures that the engagement is conducted with the necessary knowledge and objectivity, thus maintaining the quality and integrity of the audit process. Unlike options A and B, which compromise the audit's effectiveness, and option C, which could create conflicts of interest, option D provides an optimal solution.References: The IIA's International Standards for the Professional Practice of Internal Auditing, Standard 1210 - Proficiency and Standard 1220 - Due Professional Care.

The CAE should discuss the concerns with the finance manager and work together to agree on the engagement objectives. This collaborative approach ensures that the engagement objectives are aligned with the finance manager's needs and expectations, and it allows the CAE to provide relevant and tailored assistance regarding the new management system for managing receivables.

References:

IIA Standards: 2010 - Planning

IIA Practice Guide: Consulting Services

A. Decline the audit engagement, because the Standards prohibit internal auditors from performing engagements where they lack the necessary competencies:The Standards allow for outsourcing or co-sourcing to meet competency gaps. Declining outright is not necessary.

B. Accept the audit engagement and use the engagement as an opportunity to develop the audit team’s IT expertise while performing the audit work:This approach risks compromising audit quality as the team lacks expertise.

C. Temporarily hire an experienced and knowledgeable IT analyst from the organization's IT department to lead the audit:This could create independence issues, as the IT analyst is part of the auditee’s function.

D. Outsource the audit engagement to a reputable IT audit consulting firm:Correct. Outsourcing ensures that the engagement is performed by qualified professionals, maintaining quality and adherence to the Standards.

CIA Exam Syllabus Reference:

Domain IV: Managing the Internal Audit Function – Resourcing and Competency Management.

Administering control questionnaires to individuals with primary responsibilities in the process can yield valuable information about processes and controls. However, one significant drawback is that the information gathered may be limited regarding the actual functionality of the controls. This approach relies on the respondents' knowledge and perceptions, which may not accurately reflect the effectiveness of the controls in practice. Moreover, respondents might not fully understand the auditor’s intentions or may provide biased or incomplete information, thereby limiting the depth of insights into how controls function in real-world scenarios.References:

IIA Standard 2201: Planning Considerations

IIA Practice Guide: Assessing the Adequacy of Risk Management Processes

According to IIA guidance, when assembling an engagement team to audit a vendor, it is crucial to include internal auditors who have expertise in investigating vendor fraud. This expertise is essential for identifying and assessing fraud risks associated with the vendor and ensuring a thorough and effective audit. While proficiency in financial statement analysis and local accounting principles is valuable, the specific context of vendor fraud requires specialized knowledge in that area.

References:

IIA Standards: 1210.A2 - Proficiency

IIA Practice Guide: Auditing Third-Party Risk Management

When developing a talent management strategy, a chief audit executive would find a gap analysis most helpful. A gap analysis identifies the differences between the current skills and competencies of the internal audit staff and the skills and competencies needed to achieve the audit function's objectives. This analysis helps in understanding the specific areas where training, recruitment, or other talent development efforts are necessary, thus enabling the development of a targeted and effective talent management strategy.

References:

IIA Practice Guide: "Talent Management for Internal Auditors"

IIA Standard 2030: "Resource Management"

The flowchart indicates that different individuals are responsible for various stages of the bank reconciliation process. The Treasury Accountant posts payments and performs reconciliations, while the Senior Treasury Accountant obtains and uploads bank statements, and the Treasury Supervisor approves/reviews the reconciliations. This segregation of duties ensures that no single individual has control over all aspects of the financial transaction process, which helps in preventing errors and fraud.References:

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards)

"Auditing and Assurance Services" by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley

The five-attribute approach to documenting deficiencies typically includes the following attributes: condition (the current state or issue identified), cause (the reason for the condition), effect (the impact or potential impact of the condition), and recommendation (suggested actions to address the deficiency). These attributes provide a comprehensive framework for understanding the deficiency, its implications, and the steps needed to rectify it, ensuring clear and actionable audit findings.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Documenting Information

If senior management decides to accept risks, such as doing business with a questionable vendor, and the chief audit executive (CAE) believes this poses a significant risk to the organization, the CAE should escalate the issue to the board. The board has the ultimate responsibility for overseeing risk management and can decide on the appropriate action to take in response to the risk.

IIA References:

IIA Standard 2600: Communicating the Acceptance of Risks states that when the CAE believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the CAE must discuss the matter with senior management. If the decision regarding risk remains unchanged, the CAE must inform the board.

The Practice Guide on Risk Management highlights the importance of the CAE keeping the board informed of significant risks that management has chosen to accept, particularly when these risks could have a material impact on the organization.

The most likely reason the chief risk officer (CRO) chose the workshop approach is that it allows workshop participants to learn while contributing ideas toward the objectives. Workshops facilitate an interactive and collaborative environment where participants can share their insights and experiences. This approach helps in generating innovative solutions and fosters a sense of ownership among participants. It also enables participants to gain a better understanding of the issues at hand and the potential improvements that can be made. References: IIA Practice Guide – Facilitation and Collaboration Techniques, COSO Framework on Risk Management

When management decides not to implement a critical recommendation, especially one related to regulatory compliance and potential reputational risk, it is essential for the chief audit executive (CAE) to escalate the issue to senior management. This step ensures that management fully understands the risks involved and can make an informed decision.

IIA Standard 2600 – Communicating the Acceptance of Risks:

This standard requires the CAE to communicate to senior management and the board when management has accepted a level of risk that the CAE believes is unacceptable. The CAE must ensure that the decision-makers are aware of the potential consequences.

Importance of Escalation:

By convening a meeting with senior management, the CAE can discuss the risks of non-compliance, including potential regulatory sanctions and reputational damage. This discussion provides an opportunity for senior management to reassess the decision in light of these risks.

IIA Practice Advisory 2600-1:

The advisory suggests that when significant risks are not being addressed by management, the CAE should communicate these concerns to higher levels of the organization. This ensures that the risks are not ignored and that appropriate action can be taken.

Option A (Do nothing): This is not appropriate, as the CAE has a responsibility to escalate significant risks.

Option B (Contact regulatory agency): This is an extreme step and should not be the first course of action. The issue should be discussed internally before involving external regulators.

Option D (Highlight to external auditors): While external auditors might need to be informed, the issue should first be addressed within the organization.

Detailed Explanation:Why Not Other Options?

According to IIA guidance, the CAE has the ultimate responsibility for the internal audit activity but may delegate tasks such as reviewing, approving, and signing engagement reports to qualified internal audit staff. This delegation helps in managing workload and leveraging expertise within the team. However, the CAE should still periodically review the reports to maintain oversight and ensure quality. References: = IIA Standard 2060 - Reporting to Senior Management and the Board, and Standard 2400 - Communicating Results.

The internal audit activity's role in regard to the organization's risk management program includes ensuring that a proper and effective risk management process is in place. This involves evaluating the risk management processes and providing assurance that risks are identified and managed effectively. The internal audit activity should not be responsible for managing risks (Option A), but should ensure there is a systematic process (Option B). Attaining an adequate understanding of key mitigation strategies (Option C) and identifying appropriate controls (Option D) are part of the audit process, but ensuring the existence of a proper process is the primary responsibility. References: IIA Standard 2120 – Risk Management

When creating a risk and control matrix to understand a complex manufacturing process, the internal auditor should start by conducting a walk-through of all related activities. This approach allows the auditor to observe the processes in action, understand the flow of transactions, and identify key controls and risks. A walk-through provides a comprehensive understanding of the operational context, which is essential for developing an accurate and effective risk and control matrix.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Auditing the Control Environment

IIA Standard 2210 - Engagement Objectives

Bank confirmations are the most reliable source for verifying the current year-end bank balances. These confirmations are direct responses from the bank to the auditor, providing independent verification of the account balances as of the end of the year. This external confirmation is considered more reliable than internal documents like bank statements, reconciliations, or general ledger balances because it comes directly from a third-party source, ensuring its accuracy and completeness.References:

The Institute of Internal Auditors (IIA) - Practice Guide: External Confirmations

Auditing Standards (e.g., ISA 505 - External Confirmations)

Internal control questionnaires (ICQs) are used to gather information about the presence and effectiveness of controls within an organization. One of the limitations of ICQs is that the answers provided by respondents can be easily misinterpreted. This misinterpretation can occur due to unclear questions, differences in understanding terminology, or respondents not fully comprehending the context of the questions. Therefore, while ICQs are useful tools for identifying control issues, they require careful interpretation and often necessitate follow-up for clarification to ensure accurate understanding and assessment of the controls.

References:

The Institute of Internal Auditors (IIA) Practice Guide: "Internal Control Questionnaires"

IIA Standard 2310: Identifying Information

A physical inspection of the retail outlet would provide the most reliable evidence that the completed renovation work conformed to the plan. This method allows the auditor to directly observe the completed work and compare it with the original plans and specifications, ensuring that the renovation meets the required standards and expectations.

References:

IIA Standards: 2310 - Identifying Information

IIA Practice Guide: Auditing Capital Projects and Construction

According to IIA guidance, elements of evaluation reflect a valid principle for the internal audit activity to rely on the work of internal or external assurance providers. This principle involves assessing the competence, objectivity, and performance of the assurance providers to ensure their work can be relied upon. Proper evaluation helps internal auditors determine the extent to which they can use the work of others in forming their conclusions.

References:

IIA Standards: 2050 - Coordination and Reliance

IIA Practice Guide: Reliance by Internal Audit on Other Assurance Providers

When developing the objectives for an assurance engagement in a newly acquired subsidiary, the most critical items to consider are the organizational strategy, objectives, risks, control framework, and the expectations of stakeholders regarding the audit. This holistic approach ensures that the internal audit aligns with the broader goals and risk management processes of the organization, providing a comprehensive evaluation of the subsidiary's operations within the context of the entire entity.

Organizational Strategy and Objectives: Understanding the overarching goals and strategic direction of the organization helps to align the audit objectives with business priorities and ensures that the subsidiary’s operations are evaluated in the context of their contribution to these goals.

Risks: Identifying and assessing the risks associated with the subsidiary is essential for focusing audit efforts on areas that could significantly impact the organization. This involves understanding both inherent and residual risks.

Control Framework: Evaluating the existing control framework within the subsidiary helps determine the adequacy and effectiveness of controls in mitigating identified risks.

Stakeholder Expectations: Considering what stakeholders expect from the audit helps in shaping objectives that address key concerns and provide valuable insights, fostering greater acceptance and implementation of audit recommendations.

This comprehensive approach ensures the audit is relevant, targeted, and capable of adding significant value to the organization by addressing key risk areas and strategic objectives.

References:

The Institute of Internal Auditors (IIA) Standards

IIA Practice Guide: Formulating and Expressing Internal Audit Opinions

The observation in question includes the condition ("no approved credit risk management policy" and "17 out of 50 contacts showed clients with a poor credit history") and the cause (the subsidiary concluding contacts with high-risk clients). However, it lacks the effect, which should explain the potential or actual impact of this deficiency on the organization (e.g., financial losses, increased credit risk). Additionally, it is missing the criteria, which should reference the specific rules or policies that are not being followed (e.g., the organization’s credit risk management policy requirements). Including these components would provide a complete and actionable observation.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Audit Reports and Working Papers

In the risk control map, Risk C is positioned in the upper left quadrant, indicating it is critical (high risk significance) but with a low level of control. This suggests that the current controls are insufficient to mitigate the high level of risk associated with Risk C. For critical risks, a higher level of control is necessary to ensure that the risk is properly managed and mitigated. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"Risk Management Framework" (COSO)

A finding can be removed from the final audit report if management provides additional information that accurately contradicts the initial findings. This indicates that the initial findings may have been based on incomplete or incorrect information. Disagreements (Option A) or beliefs about the insignificance (Option D) of the finding do not justify removal unless they are supported by new, contradicting evidence. Even if corrective actions are already taken (Option B), the original finding may still be relevant for documentation and historical context.References:

IIA Standard 2410: Criteria for Communicating.

IIA Practice Guide on Communicating Results.

The International Standards for the Professional Practice of Internal Auditing encourage auditors to acknowledge satisfactory performance to provide a balanced report. However, it is not a mandatory requirement. Including positive observations can help foster a constructive relationship with management and provide a more balanced view of the audited area.References:

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards)

"Internal Auditing: Assurance and Advisory Services" by Urton L. Anderson et al.

The primary reason for internal auditors to conduct interim communications with management of the area under review is to provide timely discussion of results. This allows management to be informed of preliminary findings and issues as they arise, enabling quicker corrective actions and avoiding surprises in the final report. Interim communications help ensure that audit results are relevant and actionable. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2410 - Criteria for Communicating.

The IIA’s Practice Guide on Communicating Results.

A. To better understand and influence executives' planning:Influencing planning is not a primary purpose of networking.

B. To make executives aware of the benefits that the internal audit activity can provide:Correct. Networking ensures executives understand how internal audit can add value.

C. To assist executives in setting the organization’s risk appetite:Risk appetite is primarily a management responsibility.

D. To have a better understanding of the training needed for the audit team:Training needs can be assessed through other means.

CIA Exam Syllabus Reference:

Domain IV: Managing the Internal Audit Function – Stakeholder Engagement.

When recalculating exchange losses from foreign currency purchases, the internal auditor needs to validate the spot exchange rate on the transaction date (2) and the terms of the forward contract (3). These details are crucial to accurately assess the financial impact and ensure that the hedge is effectively mitigating the exchange rate risk. References: = IIA’s Practice Guide: “Auditing Derivatives” and IIA Standard 1220 - Due Professional Care.

Entity-level controls set the tone and establish the framework for the overall control environment within an organization. If these controls are poorly designed or deficient, they can undermine the effectiveness of process-level controls, even if those controls are well-designed. Entity-level controls include governance, risk management, and compliance controls that influence the entire organization. Therefore, deficiencies at this level can have a widespread impact, preventing lower-level controls from functioning properly.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2130 – Control.

Facilitated team workshops are the method of examining entity-level controls that involve gathering information from work groups that represent different levels in an organization. These workshops encourage interactive discussion and collaboration among participants from various departments and hierarchical levels, providing a comprehensive view of entity-level controls and promoting a better understanding of control processes and issues.

References:

IIA Standards: 2210 - Engagement Objectives

IIA Practice Guide: Assessing the Adequacy of Risk Management Processes

To mitigate the risk that all bank accounts may not be included in the daily reconciliation process, the most effective response is to ensure that the treasury analyst reviews a daily report generated by the treasury system. This report highlights any bank statements that have not been uploaded into the accounting system, ensuring that all accounts are accounted for in the reconciliation process. This automated approach reduces the risk of human error and ensures completeness and accuracy in the reconciliation process.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Auditing the Treasury Function

IIA Standard 2130 - Control

During the planning phase of a new engagement, an engagement supervisor is responsible for ensuring that the engagement is designed effectively to meet its objectives. One of the critical tasks involves approving the engagement work program. The work program outlines the detailed steps and procedures that the audit team will follow during the engagement. By approving this program, the supervisor ensures that it is comprehensive, aligned with the engagement objectives, and capable of addressing identified risks and controls effectively. This step is essential to ensure that the engagement is conducted systematically and covers all necessary areas.

References:

The Institute of Internal Auditors (IIA) Standard 2200: Engagement Planning

IIA Practice Advisory 2200-1: Engagement Planning Considerations

A. Inform management and request that the plan be tested immediately:Testing without updating the plan could lead to irrelevant results given the significant changes to the systems.

B. Update the recovery plan for management, as part of the review:The auditor’s role is to assess and recommend, not to perform management’s responsibilities.

C. Evaluate the recovery plan and report weaknesses to management:Evaluation alone does not address the need for an update and testing of the outdated plan.

D. Recommend that management and users update and test the recovery plan:Correct. This approach addresses the deficiencies in the plan and ensures alignment with current systems.

CIA Exam Syllabus Reference:

Domain II: Risk Management and Control – Disaster Recovery and Business Continuity Planning.

According to IIA guidance, the audit objective for an assurance engagement must consider the possibility of fraud and noncompliance. This consideration is essential for ensuring that the audit adequately addresses potential risks that could impact the organization. Assessing the possibility of fraud and noncompliance helps in identifying areas where controls might be deficient and where significant risks might be present, thus enabling the internal audit activity to provide meaningful and relevant recommendations.

References:

The Institute of Internal Auditors (IIA) Standard 2120 – Risk Management: "The internal audit activity must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk."

IIA Practice Guide on "Fraud Risk Assessment"

According to IIA guidance, a draft work program prepared by the engagement supervisor after concluding a preliminary assessment would test the process controls. The work program outlines the specific procedures and steps the internal audit team will take to evaluate the effectiveness of the controls in place to mitigate identified risks.

References:

IIA Standards: 2240 - Engagement Work Program

IIA Practice Guide: Engagement Planning

Stratified sampling is a technique that involves dividing a population into subgroups (strata) that share similar characteristics and then taking a sample from each subgroup. In the context of testing purchase transactions by different procurement officers, the transactions can be stratified based on the officers, ensuring that the audit team selects a sample that represents each officer's transactions. This method helps in achieving a more accurate and reliable assessment of the procurement process across all officers.References:

The Institute of Internal Auditors (IIA), Practice Guide on Sampling

"Auditing and Assurance Services: An Integrated Approach" by Alvin A. Arens, Randal J. Elder, Mark S. Beasley

When reviewing the board of directors, internal auditors should consider testing the presence of an independent critical mass. This refers to the existence of a sufficient number of independent directors who can provide unbiased judgment and oversight. Independence is a cornerstone of effective governance, ensuring that decisions are made in the best interest of the organization without undue influence from management. This attribute is crucial for maintaining the integrity and objectivity of the board's decisions and actions.References: IIA's Practice Guide on Assessing Organizational Governance.

An internal auditor's primary role is to evaluate and improve the effectiveness of risk management, control, and governance processes. To test the reliability of a customer database, the auditor would focus on identifying potential issues that could affect the accuracy and completeness of the data. This involves reviewing records, reports, and conducting data analysis to identify anomalies, inconsistencies, or patterns that suggest problems with the data. This step directly assesses the reliability of the database, which is crucial for ensuring that the information is accurate and reliable.

References:

Institute of Internal Auditors (IIA) Standards: Performance Standards 2320: Analysis and Evaluation

Internal Audit Manual: Data Integrity and Database Auditing Techniques

According to IIA guidance, a common assurance service performed by the internal audit activity is validating whether employees are following established policies and procedures in various departments, such as procurement. Assurance services involve assessing evidence and providing conclusions regarding the effectiveness of governance, risk management, and control processes. Ensuring compliance with established policies and procedures is a fundamental assurance activity that helps organizations maintain control and mitigate risks.

References:

The Institute of Internal Auditors (IIA) Standard 2130 – Control: "The internal audit activity must assist the organization in maintaining effective controls by evaluating their effectiveness and efficiency and by promoting continuous improvement."

IIA Practice Guide on "Assurance Engagements"

Trend analysis is the analytics procedure that an internal auditor would use to compare performance information from one quarter to another. This technique involves analyzing data over a specific period to identify patterns, trends, and changes in performance metrics. Trend analysis helps auditors understand the direction of key performance indicators and assess whether performance is improving, declining, or remaining stable.

References:

The Institute of Internal Auditors (IIA) Standards

Data Analytics Techniques in Internal Auditing

When an internal auditor identifies a potential control deficiency based on a preliminary survey, such as the lack of established procedures for adding and approving new vendors, the next appropriate step is to gather more detailed information. Interviewing personnel involved in the accounts payable function allows the auditor to understand the context, confirm the accuracy of the questionnaire responses, and gain insights into the potential risks and impacts associated with the observed deficiency. This step is crucial before documenting the issue or planning further audit procedures to ensure the information is accurate and complete.References: The IIA's International Standards for the Professional Practice of Internal Auditing, Standard 2201 - Planning Considerations.

According to the International Standards for the Professional Practice of Internal Auditing (Standards) set by the Institute of Internal Auditors (IIA), internal audit functions are allowed flexibility in including consulting engagements in their annual plans. Standard 2010 – Planning states that "the chief audit executive must establish a risk-based plan to determine the priorities of the internal audit activity, consistent with the organization’s goals." This risk-based plan should consider the potential value-add of consulting engagements. Consulting engagements that are expected to add significant value or align with strategic objectives are often included, but not all requests need to be automatically included unless they meet these criteria.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2010 – Planning.

Root cause analysis identifies underlying reasons for control deficiencies or inefficiencies, enabling organizations to address systemic issues and enhance controls. IIA Practice Guide: Root Cause Analysis (2018) highlights its role in promoting continuous improvement. Reperformance (Option A) and vouching (Option B) are audit techniques to verify accuracy but do not diagnose systemic issues. Independent confirmation (Option C) corroborates evidence but does not uncover root causes. Root cause analysis aligns with the CIA Part 2 objective of enhancing organizational efficiency.

Management action plans should include, at a minimum, an owner of the action plan. The owner is responsible for ensuring that the action plan is implemented and for overseeing the corrective measures. This accountability is crucial for effective follow-up and resolution of audit findings.

References:

IIA Standards: 2500 - Monitoring Progress

IIA Practice Guide: Follow-up Process in the Internal Audit Activity

According to IIA guidance, the chief audit executive (CAE) is responsible for evaluating and verifying management's response to audit recommendations. The CAE must also determine the need and scope for additional work based on the adequacy and timeliness of management's corrective actions. This ensures that the audit recommendations are effectively implemented and that any residual risks are appropriately managed. References: IIA Standard 2500 – Monitoring Progress, IIA Practice Advisory 2500.A1-1

When identifying specific processes to include in the scope of an assurance engagement, the most useful information for an internal auditor is recent area performance indicators against productivity metrics. This data helps the auditor identify areas with potential risks or inefficiencies that might warrant further examination.

IIA Standard 2200 – Engagement Planning:

This standard requires auditors to develop a plan for each engagement, including objectives and scope, based on a thorough understanding of the area under review. Performance indicators provide valuable insights into areas that may not be meeting productivity or efficiency targets.

Use of Performance Indicators:

Performance indicators allow the auditor to identify processes that may be underperforming or where there may be significant variances from expected outcomes. This helps in focusing the audit on areas with the greatest potential for improvement or risk.

IIA Practice Advisory 2201-2:

The advisory suggests that auditors should consider using performance data, such as productivity metrics, to determine where to focus their audit efforts. This data-driven approach ensures that the audit is relevant and adds value.

Option A (Recognition awards): Awards do not provide insight into risks or underperformance that might require audit attention.

Option B (Timing of the last audit): While useful, the timing alone does not indicate current risks or issues.

Option C (Management's presentation): This may provide some insights, but it is often more narrative and less data-driven than performance indicators.

Detailed Explanation:Why Not Other Options?Conclusion: Option D is correct because recent performance indicators against productivity metrics provide the most relevant information for identifying processes to include in the scope of an assurance engagement, ensuring that the audit is focused on areas of significant risk or opportunity for improvement, in line with IIA standards.