OPERATIONS AUDITING REVIEWER

Multiple Choice Questions

Identify the choice that best completes the statement or answers the question.

1. During an engagement to evaluate the organization's accounts payable function, an internal auditor plans to
confirm balances with suppliers. What is the source of authority for such contacts with units outside the
organization?
a. Internal audit activity policies and procedures.
b. The Standards.
c. The Code of Ethics.
d. The internal audit activity’s charter.
2. To avoid being the apparent cause of conflict between an organization's senior management and the audit
committee, to chief audit executive should
A. Communicate all engagement results to both senior management and the audit committee.
B. Strengthen the independence of the internal audit activity through organizational status.
C. Discuss all reports to senior management with the audit committee first.
D. Request board approval of policies that include internal audit activity relationships with the audit
committee.
a. Communicate all engagement results to both senior management and the audit committee.
b. Strengthen the independence of the internal audit activity through organizational status.
c. Discuss all reports to senior management with the audit committee first.
d. Request board approval of policies that include internal audit activity relationships with
the audit committee.
3. The authority of the internal audit activity is limited to that granted by
a. The board and the controller.
b. Senior management and the Standards.
c. Management and the board.
d. The audit committee and the chief financial officer.
4. Participation on a system conversion team falls into which possible category of consulting engagements?
a. Formal consulting engagements.
b. Special consulting engagements.
c. Informal consulting engagements.
d. Emergency consulting engagements.
5. Internal auditing has planned an engagement to evaluate the effectiveness of the quality assurance function as
it affects the receipt of goods, the transfer of the goods into production, and the scrap costs related to defective
items. The engagement client argues that such an engagement is not within the scope of the internal audit
activity and should come under the purview of the quality assurance department only. What is the most
appropriate response?
a. Refer to the internal audit activity’s charter and the approved engagement plan that
includes the area designated for evaluation in the current time period.
b. Because quality assurance is a new function, seek the approval of management as a
mediator to set the scope of the engagement.
c. Indicate that the engagement will evaluate the function only in accordance with the
standards set by, and approved by, the quality assurance function before beginning the
engagement.
d. Terminate the engagement because it will not be productive without the client’s
cooperation.
6. A charter is being drafted for a newly formed internal audit activity. Which of the following best describes the
appropriate organizational status that should be incorporated into the charter?
a. The chief audit executive should report to the chief executive officer but have access to the
board of directors.
b. The chief audit executive should be a member of the audit committee of the board of
directors.
c. The chief audit executive should be a staff officer reporting to the chief financial officer.
d. The chief audit executive should report to an administrative vice president.
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 7. The status of the internal audit activity should be free from the effects of irresponsible policy changes by
management. The most effective way to assure that freedom is to
a. Have the internal audit charter approved by the board.
b. Adopt policies for the functioning of the internal audit activity.
c. Establish an audit committee within the board.
d. Develop written policies and procedures to serve as standards of performance for the
internal audit activity.
8. Internal auditors may provide consulting services that add value and improve an organization's operations.
The performance of the services
a. Impairs internal auditors' objectivity with respect to an assurance service involving the
same engagement client.
b. Precludes generation of assurance from a consulting engagement.
c. Should be consistent with the internal audit activity's empowerment reflected in the
charter.
d. Imposes no responsibility to communicate information other than to the engagement
client.
9. Independence is most like the impaired by internal auditor's
a. Continuation on an engagement at the division for which (s)he will soon be responsible as
the result of a promotion.
b. Reduction of the scope of an engagement due to budget restrictions.
c. Participation on a task force that recommends standards for control of a new distribution
system.
d. Review of a purchasing agent's contract drafts prior to their execution.
10. An internal auditor has recently received an offer from the manager of the marketing department of all
weekend's free use of his beachfront condominium. No engagement is currently being conducted in the
marketing department, and none is scheduled. The internal auditor
a. Should reject the offer and report it to the appropriate supervisor.
b. May accept the offer because its value is immaterial.
c. May accept the offer because no engagement is being conducted or planned.
d. May accept the offer if approved by the appropriate supervisor.
11. When faced with an impulse scope limitation, the chief audit executive should
a. Refuse to perform the engagement until the scope limitation is removed.
b. Communicate the potential effects of the scope limitation to the audit committee of the
board of directors.
c. Increase the frequency of engagements concerning the activity in question.
d. Assign more experienced personnel to the engagement.
12. Prior to performing consulting services, the Chief Audit Executive should get approval from whom?
a. The audit committee.
b. The board of directors.
c. The chief executive officer.
d. The external auditor.
13. For control and monitoring functions that the CAE has a relationship with (risk management, compliance,
security, legal, etc.) the CAE should do which of the following?
a. Facilitate the reporting of material risk and control issues to the Chief Executive Officer.
b. Facilitate the reporting of material risk and control issues to the external auditor.
c. Facilitate the reporting of material risk and control issues to the audit committee.
d. Facilitate the reporting of material risk and control issues to no one, since this is not a
responsibility of the CAE.
14. The reporting relationship within the organization's management structure that facilitates the day-to-day
operations of the internal audit function is referred to as which of the following?
a. Administrative reporting.
b. Financial reporting.
c. Management reporting.
d. Functional reporting.
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15. Which of the following statements is an appropriate reason for the internal audit activity not to participate in
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the systems development process?

 a. Participation will affect independence, and the internal auditors will not be able to perform
an objective evaluation after the system is implemented.
b. Participation will delay implementation of the project.
c. Participation will cause the internal auditors to be labeled as partial owners of the
application, and they will then have to share the blame for any problems that remain in the
system.
d. None of the answers are correct.
16. The internal audit function should be free to audit and report on any activity that also reports to its
administrative head if it deems that coverage appropriate for its audit plan. Any limitation in scope or
reporting of results of these activities should be brought to the attention of whom?
a. Chief Executive Officer.
b. Chief Financial Officer.
c. External Auditor.
d. Audit Committee.
17. Regardless of which reporting relationship the organization chooses, several key actions can help assure that
the reporting lines support and enable the effectiveness and independence of the internal auditing activity.
Which key action will not achieve its functional reporting purpose?
a. The functional reporting line should go directly to the Audit Committee or its equivalent
to ensure the appropriate level of independence and communication.
b. The CAE should meet with the audit committee or its equivalent, with management, to
reinforce the independence and nature of this reporting relationship.
c. The audit committee should have the final authority to review and approve the annual
audit plan and all major changes to the plan.
d. At all times, the CAE should have open and direct access to the chair of the audit
committee and its members; or the chair of the board or full board if appropriate.
18. An internal auditor who had been supervisor of the accounts payable section should not perform an assurance
review of that section
a. Because there is no way to measure a reasonable period of time in which to establish
independence.
b. Until a reasonable period of time has elapsed.
c. Until after the next annual review by the external auditors.
d. Until it is clear that the new supervisor has assumed the responsibilities.
19. Assuming that the internal auditing staff possesses the necessary experience and training, which of the
following services is most appropriate for a staff internal auditor to undertake?
a. Substitute for the accounts payable supervisor while (s)he is on sick leave.
b. Determine the profitability of alternative investment acquisitions and select the best
alternative
c. As part of an evaluation team, review vendor accounting software internal controls and
rank according to exposures.
d. Participate in an internal audit of the accounting department shortly after transferring from
the accounting department.
20. Which of the following is not a right of the shareholder of a corporation?
a. Right to inspect the books and records.
b. Right to share in dividends if declared.
c. Right to determine the mission of the corporation.
d. Right to sue on behalf of the corporation if the officers and directors fail to uphold
corporate rights.
21. To which of the following rights is a stockholder of a public corporation entitled?
a. The right to have annual dividends declared and paid.
b. The right to vote for the election of officers.
c. The right to a reasonable inspection of corporate records.
d. The right to have the corporation issue a new class of stock.
22. A corporate stockholder is entitled to which of the following rights?
a. Elect officers.
b. Receive annual dividends.
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c. Approve dissolution.
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d. Prevent corporate borrowing.

23. The articles of incorporation and bylaws of a corporation serve as a basis for the governance structure of a
corporation. Which of the following items are normally included in the bylaws of the corporation as opposed
to the articles of incorporation?
a. Purpose of the corporation.
b. Number of authorized shares of stock.
c. Procedure for electing directors.
d. Powers of the corporation.
24. Which of the following forms of compensation would encourage management to take on excessive risk?
a. A fixed salary.
b. A salary and bonuses based on current period net income.
c. A salary plus stock options that cannot be exercised for 10 years.
d. A salary plus restricted stock.
25. Which of the following is a legal rule that prevents directors from being held liable for making bad decisions
if they act with good faith, loyalty, and due care?
a. The good faith rule.
b. The business judgment rule.
c. The due care rule.
d. The director liability rule.
26. Which of the following does not act as an external corporate governance mechanism?
a. External auditors.
b. The SEC.
c. Credit analysts.
d. Independent boards of directors.
27. Which of the following is not a statutory requirement regarding the committees of the board of directors of
publicly held corporations registered with the SEC?
a. All members of the compensation committee must be independent
b. At least one member of the compensation committee must be a "compensation expert"
c. All members of the audit committee must be independent.
d. At least one member of the audit committee must be a "financial expert."
28. Which of the following is not a requirement of the Wall Street Reform and Consumer Protection
(Dodd-Frank) Act for publicly held corporations registered with the SEC?
a. If it is decided that the CEO should also be appointed chairman of the board, the
corporation must disclose why this decision was made.
b. The members of the compensation committee of the board must be independent.
c. Shareholders must be allowed a nonbinding vote on officer compensation at least every
three years.
d. All members of the audit committee of the board must be financial experts.
29. An important corporate governance mechanism is the internal audit function. For good corporate governance,
the chief internal audit executive should have direct communication to the audit committee and report to
a. The chief financial officer.
b. The chief executive officer.
c. The controller.
d. The external auditors.
30. The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing
cover what two major types of internal auditing services?
a. Assurance and consulting.
b. Financial and operational.
c. Compliance and taxation.
d. Audit and review.
31. Which of the following is not a section of the Institute of Internal Auditors' International Standards for the
Professional Practice of Internal Auditing?
a. Performance Standards.
b. Independence Standards.
c. Implementation Standards.
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d. Attribute Standards.
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32. Which of the following divisions of the SEC reviews corporate filings?
a. The Office of the Chief Accountant.
b. The Division of Enforcement.
c. The Division of Corporate Disclosure.
d. The Division of Corporate Finance.
33. Which of the following is not a principle related to the component of the control environment?
a. Demonstrate a commitment to integrity and ethical values.
b. Demonstrate a commitment to attract, develop and retain competent individuals.
c. Identify and assess changes that could significantly impact the system of internal control.
d. Hold individuals accountable for their internal control responsibilities.
34. According to the COSO framework, evaluators that monitor controls within an organization should have
which of the following sets of characteristics?
a. Competence and objectivity.
b. Respect and judgment.
c. Judgment and objectivity.
d. Authority and responsibility.
35. According to COSO, the use of ongoing and separate evaluations to establish a new baseline after changes
have been made can best be accomplished in which of the following stages of the monitoring-for-change
continuum?
a. Control baseline.
b. Change identification.
c. Change management.
d. Control revalidation/update.
36. Which of the following is not a control environment factor?
a. Integrity and ethical values.
b. Board of directors or audit committee.
c. Human resources policies and procedures.
d. Control monitoring.
37. Which of the following is not a component in the COSO framework for internal control?
a. Control environment.
b. Segregation of duties.
c. Risk assessment.
d. Monitoring.
38. Which of the following is not a limitation of internal control?
a. Human judgment in decision-making may be faulty.
b. External forces may attack the system.
c. Management may override internal control.
d. Controls may be circumvented by collusion.
39. Which of the following would generally be entitled to a reward for whistle-blowing under the Dodd-Frank
Act?
a. An external auditor who discovers a violation while performing an audit of a company's
financial statement and internal control under SEC requirements.
b. A customer of a company who discovers a violation in the course of doing business with
the company.
c. A director of a company who discovers a violation while performing her duties as a
director.
d. An internal auditor of a company who discovers a violation while performing an audit of
compliance.
40. Jarrett Corporation is considering establishing an enterprise risk management system. Which of the following
is not a benefit of enterprise risk management?
a. Helps the organization seize opportunities.
b. Enhances risk response decisions.
c. Improves the deployment of capital.
d. Ensures that the organization shares all major risks.
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41. Management of Warren Company has decided to respond to a particular risk by hedging the risk with futures
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contracts. This is an example of risk

 a. Avoidance.
b. Acceptance.
c. Reduction.
d. Sharing.
42. Devon Company is using an enterprise risk management system. Management of the company has set the
company's objectives, identified events, and assessed risks. What is the next step in the enterprise risk
management process?
a. Establish control activities to manage the risks.
b. Monitor the risks.
c. Determine responses to the risks.
d. Identify opportunities.
43. Kelly, Inc. is considering establishing an enterprise risk management system. Which of the following is not a
limitation of such a system?
a. Business objectives are not usually articulated.
b. The system may break down.
c. Collusion among two or more individuals can result in system failure.
d. Enterprise risk management is subject to management override.
44. A production manager for a moderate-sized manufacturer began ordering excessive raw materials and had
them delivered to a wholesaler he runs as a side business. He falsified receiving documents and approved the
invoices for payment. Which of the following engagement procedures most likely will detect this fraud?
a. Take a sample of cash disbursements; compare purchase orders, receiving reports,
invoices, and check copies.
b. Take a sample and confirm the amount purchased, purchase price, and date of shipment
with the vendors.
c. Observe the receiving dock and count materials received; compare your counts to
receiving reports completed by receiving personnel.
d. Prepare analytical tests comparing production, materials purchased, and raw materials
inventory levels and investigate differences.
45. To determine whether credit controls are inconsistently applied, preventing valid sales to creditworthy
customers, the internal auditor should
a. Confirm current accounts receivable.
b. Trace postings on the accounts receivable ledger.
c. Analyze collection rates and credit histories.
d. Compare credit histories for those receiving credit and for those denied credit.
46. Which of the following engagement techniques would be most persuasive in determining that significant
inventory values on the books of an acquiree are accurately stated?
a. Obtain a management representation letter stating that inventory values are correctly
stated.
b. Flowchart the inventory and warehousing cycle and form an opinion based on the quality
of internal controls.
c. Conduct a physical inventory and bring in an independent expert if necessary to value
inventory items.
d. Interview purchasing and materials control personnel to ascertain the quality of internal
controls over inventory.
47. In a review of the accounting department's bank reconciliation unit, which of the following is an appropriate
engagement procedure to test canceled checks for authorized signatures?
a. Compare the check date with the first cancellation date.
b. Determine that all checks are signed by individuals authorized by the board.
c. Examine a representative sample of signed checks and determine that the signatures are
authorized in the organization's signature book.
d. Complete the tests of controls over check signatures in 4 hours.
48. The audit committee has expressed concern that the financial institution has been taking on higher-risk loans
in pursuit of short-term profit goals. Which of the following engagement procedures provides the least
amount of information to address this concern?
a. Perform an analytical review of interest income as a percentage of the investment portfolio in
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comparison with a group of peer financial institutions.

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b. Take a random sample of loans made during the period and compare the riskiness of the loans with
 that of a random sample of loans made 2 years ago.
c. Perform an analytical review that involves developing a chart to compare interest income plotted over
the past 10 years.
d. Develop a multiple-regression time-series analysis of income over the past 5 years including such
factors as interest rate in the economy, size of loan portfolio, and dollar amount of new loans each
year.
49. The scope of internal auditing work encompasses a systematic, disciplined approach to evaluating and
improving the adequacy and effectiveness of all of the following processes except
a. Risk management.
b. Control.
c. Financial statements.
d. Governance.
50. All of the following are primary objectives of the overall management process except
a. Improving the effectiveness of risk management, control, and governance processes.
b. Compliance with laws, regulations, ethical and business norms, and contracts.
c. Identification of risk exposures and use of effective strategies to control them.
d. Safeguarding of the organization's assets.
51. Which of the following is not a type of control?
a. Preventive.
b. Reactive.
c. Detective.
d. Directive.
52. Internal auditors can play a more proactive role in assisting with the initial establishment of a risk
management process for the organization. However, if such assistance exceeds normal assurance and
consulting activities conducted by internal auditors, independence may be impaired. Which of the following
would impair the independence of an internal auditor who had participated in the initial establishment of a
risk management process?
a. Developing assessments and reports on the risk management process.
b. Managing the identified risks.
c. Evaluating the adequacy and effectiveness of management's risk processes.
d. Implementing controls to address the risks identified.
53. An organization should establish compliance standards and procedures, and should develop a written business
code of conduct to be followed by its employees. Which of the following is true concerning business codes of
conduct and the compliance standards?
a. Compliance standards should be straightforward and reasonably capable of reducing the prospect of
criminal conduct.
b. The compliance standards should be codified in the charters of the audit committee.
c. Companies with international operations should institute various compliance programs based on
selective geographic locations, that reflect appropriate local regulations.
d. In order to prevent future legal liability, the code should consist of legal terms and definitions.
54. Environmental compliance information and training is most applicable, and should be provided, to which of
the following departments?
a. Sales.
b. Human resources.
c. Manufacturing.
d. Information technology.
55. Employees have the most confidence in a hotline monitored by which of the following?
a. An expert from the legal department, backed by a non-retaliation policy.
b. An in-house representative, backed by a retaliation policy.
c. An on-site ombudsperson, backed by a non-retaliation policy.
d. An off-site attorney who can better protect attorney-client privilege.
56. Which of the following is an effective tool for uncovering unethical or illegal activity in an organization?
a. The screening of applicants.
b. The ethics interview.
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c. The background check.

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d. The ethics questionnaire.

57. Termination or other discipline of employees may be limited by all of the following except
a. Whistle-blowers laws.
b. Employer responsibilities with regard to employer good faith doctrines.
c. Union contracts.
d. Exceptions to the employee-at-will doctrine.
58. Which of the following is not a major component of auditing e-commerce activities?
a. Make certain that goals and objectives can be achieved.
b. Assess the internal control structure.
c. Review the interface issues.
d. Evaluate the business continuity and disaster recovery plans.
59. The e-commerce project that an auditor is most likely to assess as having the lowest risk is one that
a. Covers the integration of the planning, design, and implementation of the e-commerce
system with the strategies of the organization.
b. Considers governmental and regulatory requirements, and other external factors in its risk
assessment.
c. Calls for using outside vendors to provide hosting services.
d. Addresses the security of the software and the accuracy of transaction processing.
60. With regard to e-commerce, risk is best defined as
a. The uncertainty of an event occurring that could have a negative impact on the
achievement of objectives.
b. The uncertainty of an event occurring that could positively impact management's ability to
safeguard organizational assets.
c. The uncertainty of an event occurring that could have a positive impact on the
achievement of objectives.
d. The uncertainty of an event occurring that could have an impact on the effective and
efficient use of an organization's resources.
61. Which of the following questions is best associated with the safeguards and controls risk element?
a. What could happen that would adversely affect the organization's ability to achieve its
objectives and execute its strategies?
b. What can be done to prevent and avoid, mitigate, and detect risks and provide
notification?
c. What is the potential financial impact of the occurrence of an uncertain event?
d. How often might an uncertain event occur?
62. The details of the audit program used to audit e-commerce activities in specific organizations will vary
depending on all but which of the following factors?
a. Industry.
b. Organizational culture.
c. Country.
d. Legal and business models.
63. Based on the facts given, which of the following carries the least environmental, health, and safety risk?
a. A malfunction at a nuclear plant that causes a blackout and results in a loss of public
confidence.
b. A chemical plant that disposes of waste in a nearby river.
c. A hydroelectric power plant that is located several miles from a small town.
d. A skyscraper construction site that has had several mishaps, including injuries and death.
64. Internal auditors can play a role in an organization's planning for business continuity and disaster recovery.
Which of the following is a way in which the internal audit activity helps with the planning phase of a
business continuity or disaster recovery plan?
a. Assessing an organization's internal and external environment during the plan formulation process,
including the turnover of management, changes in market conditions, and changes in controls.
b. Examining the plan to determine that it reflects the operations that have been included and evaluated in
the risk assessment process and contains sufficient internal control concerns and prescriptions.
c. Verifying the adequacy of the plan to ensure the timely resumption of operations and processes after
adverse circumstances.
d. Examining the plan to determine whether it is structured to incorporate important changes that could
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take place over time.

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65. From a modern internal auditing perspective, which one of the following statements represents the most
important benefit of an internal auditing activity to the management?
a. Assurance that published financials statements are correct.
b. Assurance that fraudulent activities will be detected.
c. Assurance that the organization is complying with legal requirements.
d. Assurance that there is reasonable control over day-to-day operations.
66. Which of the following is not a part of The IIA’s stated purpose?
a. Cultivate, promote, and disseminate information concerning internal auditing and related
subjects.
b. To establish and maintain high standards of integrity, honor, and character among internal
auditors.
c. To adopt a common body of knowledge listings and disciplines related to internal auditing
and the competencies that internal auditors must develop within each discipline.
d. To cause the publication of articles relating to internal auditing and practices and methods
thereof.
67. What kind of considerations have contributed most significantly to the improved status and broadened scope
of internal auditing?
a. Economic considerations.
b. Public policy considerations.
c. Market considerations.
d. Management considerations.
68. A major reason for establishing an internal audit activity is to
a. Relieve overburdened management of the responsibility for establishing effective controls.
b. Safeguard resources entrusted to the organization.
c. Ensure the reliability and integrity of financial and operational information.
d. Evaluate and improve the effectiveness of control processes.
69. One of the purposes of the Standards for the Professional Practice on Internal Auditing as stated in the
Introduction to the current version of the Standards is to
a. Encourage the professionalization of internal auditing.
b. Establish the independence of the internal audit activity and emphasize the objectivity of internal auditing.
c. Encourage external auditors to make more extensive use of the work of internal auditors.
d. Establish the basis for evaluating internal auditor performance.
70. The most accurate term for the procedures used by the representatives of the organization’s stakeholders to
provide oversight of processes administered by management is
a. Governance.
b. Control.
c. Risk management.
d. Monitoring.
71. Internal Auditing is an assurance and consulting activity. An example of an assurance service is a(n)
a. Advisory engagement.
b. Facilitation engagement.
c. Training engagement.
d. Compliance engagement.
72. What action should the chief audit executive take when (s)he believes that senior management has accepted a
level of residual risk that is unacceptable to the organization?
a. Report to the matter to the board for the resolution.
b. Report to the matter to an external authority.
c. Discuss the matter with external auditors.
d. Discuss the matter with senior management.
73. The actions taken to enhance risk management and increase the likelihood that established objectives and
goals will be achieved are best described as
a. Supervision.
b. Quality assurance.
c. Control.
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d. Compliance.
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74. When purchasing temporary investments, which one of the following best describes the risk associated with
the ability to sell the investment in a short period of time without significant price concessions?
a. Interest rate risk.
b. Purchasing power risk.
c. Financial risk.
d. Liquidity risk.
75. Business risk is the risk inherent in a firm's d operations that excludes financial risk. It depends on all of the
following factors except
a. Amount of financial leverage.
b. Sales price variability.
c. Demand variability.
d. Input price variability.
76. Which of the following classes of securities are listed in order from lowest risk/opportunity for return to
highest risk/opportunity for return?
a. U.S. Treasury bonds; corporate first mortgage bonds; corporate income bonds; preferred
stock.
b. Corporate income bonds; corporate mortgage bonds; convertible preferred stock;
subordinated debentures.
c. Common stock; corporate first mortgage bonds; corporate second mortgage bonds;
corporate income bonds.
d. Preferred stock; common stock; corporate mortgage bonds; corporate debentures.
77. An asset with high risk will have a(n)
a. Low expected return.
b. Lower price than an asset with low risk.
c. Increasing expected return.
d. High standard deviation of returns.
78. A firm must select from among several methods of financing arrangements when meeting its capital
requirements. To acquire additional growth capital while attempting to maximize earnings per share, a firm
should normally
a. Attempt to increase both debt and equity in equal proportions, which preserves a stable
capital structure and maintains investor confidence.
b. Select debt over equity initially, even though increased debt is accompanied by interest
costs and a degree of risk.
c. Select equity over debt initially, which minimizes risk and avoids interest costs.
d. Discontinue dividends and use current cash flow, which avoids the cost and risk of
increased debt and the dilution of EPS through increased equity.
79. A higher degree of operating leverage compared with the industry average implies that the firm
a. Has higher variable costs.
b. Has profits that are more sensitive to changes in sales volume.
c. Is more profitable.
d. Is less risky.
80. In general, it is more expensive for a company to finance with equity capital than with debt capital because
a. Long-term bonds have a maturity date and must therefore be repaid in the future.
b. Investors are exposed to greater risk with equity capital.
c. Equity capital is in greater demand than debt capital.
d. Dividends fluctuate to a greater extent than interest rates.
81. The maximum capital expansion that can be supported in the coming year without resorting to external equity
financing is
a. P2 million.
b. P3 million.
c. P5 million.
d. Cannot determine from the information given.
82. Osgood Products has announced that it plans to finance future investments so that the firm will achieve an
optimum capital structure. Which one of the following corporate objectives is consistent with this
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announcement?
a. Maximize earnings per share.
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b. Minimize the cost of debt.

 c. Maximize the net worth of the firm.
d. Minimize the cost of equity.
83. According to the capital asset pricing model (CAPM), the relevant risk of a security is its
a. Company-specific risk.
b. Diversifiable risk.
c. Systematic risk.
d. Total risk.
84. Which of the following is directly applied in determining the value of a stock when using the dividend
growth model?
a. The firm's capital structure.
b. The firm's cash flows.
c. The firm's liquidity.
d. The investor's required rate of return on the firm's stock.
85. A firm seeking to optimize its capital budget has calculated its marginal cost of capital and projected rates of
return on several potential projects. The optimal capital budget is determined by
a. Calculating the point at which marginal cost of capital meets the projected rate of return,
assuming that the most profitable projects are accepted first.
b. Calculating the point at which average marginal cost meets average projected rate of
return, assuming the largest projects are accepted first.
c. Accepting all potential projects with projected rates of return exceeding the lowest
marginal cost of capital.
d. Accepting all potential projects with projected rates of return lower than the highest
marginal cost of capital.
86. The purposes of the Standards include all of the following except
a. Establishing the basis for the measurement of internal audit performance.
b. Guiding the ethical conduct of internal auditors.
c. Delineating basic principles that represent the practice of internal auditing as it should be.
d. Fostering improved organizational processes and operations.
87. According to the Professional Practices Framework of The IIA, which pronouncements represent
nonmandatory guidance for implementing the Standards?
a. Attribute Standards.
b. Implementation Standards
c. Performance Standards.
d. Practice Advisories.
88. Use of outside service providers with expertise in health care benefits is appropriate when the internal audit
activity is
a. Evaluating the organization's estimate of its liability for postretirement benefits, which include health
care benefits.
b. Comparing the cost of the organization's health care program with other programs offered in the
industry.
c. Training its staff to conduct an audit of health care costs in a major division of the organization.
d. All of the answers are correct.
89. A chief audit executive has reviewed credentials, checked references, and interviewed a candidate for a staff
position. The CAE concludes that the candidate has a thorough understanding of internal auditing techniques,
accounting, and finance. However, the candidate has limited knowledge of economics and information
technology. Which action is most appropriate?
a. Reject the candidate because of the lack of knowledge required by the Standards.
b. Offer the candidate a position despite lack of knowledge in certain essential areas.
c. Encourage the candidate to obtain additional training in economics and information technology and then
reapply.
d. Offer the candidate a position if other staff members possess sufficient knowledge in economics and
information technology.
90. If the internal audit activity does not have the skills to perform a particular task, an outside service provider
could be brought in from
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I. The organization's external audit firm

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II. An outside consulting firm

 III. The engagement client
IV. A college or university
a. III.
b. II, IV.
c. I, II, III.
d. I, II, IV.
91. Your organization has selected you to develop an internal audit activity. Your approach will most likely be to
hire
a. Internal auditors each of whom possesses all the skills required to handle all engagements.
b. Inexperienced personnel and train them the way the organization wants them trained
c. Degreed accountants because most internal audit work is accounting related.
d. Internal auditors who collectively have the knowledge and skills needed to perform the
responsibilities of the internal audit activity.
92. Internal auditing is unique in that its scope often encompasses all areas of an organization. Thus, it is not
possible for each internal auditor to possess detailed competence in all areas that might be the subject of
engagements. Which of the following competencies should every internal auditor have?
a. Understanding of taxation and law as it applies to operation of the organization.
b. Proficiency in accounting principles.
c. Understanding of management principles.
d. Proficiency in information technology.
93. The internal auditor should exercise due professional care in conducting a formal consulting engagement by
understanding all of the following except
a. Possible motivations and reasons of those requesting the service.
b. Potential benefits in the form of compensation to be derived from the engagement.
c. Skills and resources needed to conduct the engagement.
d. Potential impact on future audit assignments and engagements.
94. Jack is conducting a formal consulting engagement for XYZ Corp. In addition to the independence and
objectivity evaluation and due professional care considerations, Jack should do which of the following?
I. Document general terms, understandings, deliverables, and other key factors of the
formal consulting engagement in a written agreement or plan.
II. Evaluate the consulting engagement for comparability with the internal audit activity's
overall plan of engagements.
III. Conduct appropriate meetings and gather necessary information to assess the nature
and extent of the services to be provided.
a. I and II.
b. II and III.
c. I and III.
d. I, II, and III.
95. Internal auditors should possess all of the following except
a. Proficiency in applying internal auditing standards.
b. An understanding of management principles.
c. he ability to maintain good interpersonal relations.
d. The ability to conduct training sessions in quantitative methods.
96. What is the most appropriate solution to resolve staff communication problems with engagement clients?
a. Provide staff with sufficient training to enhance communication skills.
b. Avoid unnecessary communication with engagement clients.
c. Discuss communication problems with staff auditors
d. Meet with engagement clients to resolve communication problems
97. Which of the following statements is true with respect to due professional care?
a. An internal auditor should perform detailed tests of all transactions before communicating
results.
b. An item should not be mentioned in an engagement communication unless the internal
auditor is absolutely certain of the item.
c. An engagement communication should never be viewed as providing an infallible truth
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about a subject.
d. An internal auditor has no responsibility to recommend improvements.
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 98. An internal auditor observes that a receivables clerk has physical access to and control of cash receipts. The
auditor worked with the clerk several years before and has a high level of trust in the individual. Accordingly,
the auditor notes in the engagement working papers that controls over receipts are adequate. Has the auditor
exercised due professional care?
a. Yes, reasonable care has been taken.
b. No, irregularities were not noted.
c. No, alertness to conditions most likely indicative of irregularities was not shown.
d. Yes, the engagement working papers were annotated.
99. An internal auditor judged an item to be immaterial when planning an assurance engagement. However, the
assurance engagement may still include the item if it is subsequently determined that
a. Sufficient staff is available.
b. Adverse effects related to the item are likely to occur.
c. Related information is reliable.
d. Miscellaneous income is affected.
100. An internal auditor fails to discover an employee fraud during an assurance engagement. The nondiscovery is
most likely to suggest a violation of the Standards if it was the result of a
a. Failure to perform a detailed review of all transactions in the area.
b. Determination that any possible fraud in the area would not involve a material amount.
c. Determination that the cost of extending procedures in the area would exceed the potential
benefits.
d. Presumption that the internal controls in the area were adequate and effective.

=end=

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OPERATIONS AUDITING REVIEWER
Answer Section

MULTIPLE CHOICE

1. D
2. D
3. C
4. B
5. A
6. A
7. A
8. C
9. A
10. A
11. B
12. B
13. C
14. A
15. D
16. D
17. B
18. B
19. C
20. C
21. C
22. C
23. C
24. B
25. B
26. D
27. B
28. D
29. B
30. A
31. B
32. D
33. C
34. A
35. C
36. D
37. B
38. B
39. B
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40. D
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41. D
42. C
43. A
44. D
45. D
46. C
47. C
48. C
49. C
50. A
51. B
52. B
53. A
54. C
55. C
56. D
57. B
58. A
59. A
60. A
61. B
62. B
63. C
64. A
65. D
66. C
67. B
68. D
69. D
70. A
71. D
72. D
73. C
74. D
75. A
76. A
77. D
78. B
79. B
80. B
81. C
82. C
83. C
84. D
85. A
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86. B
87. D
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88. D
 89. D
90. A
91. D
92. C
93. B
94. D
95. D
96. A
97. C
98. C
99. B
100. D

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