Test Bank

ACCT 401 Unit 2
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Quality program assessments may be performed internally or
externally. A distinguishing feature of an external assessment is Provide independent assurance.
its objective to
A medium-sized publicly owned organization operating in Coun-
try X has grown to a size that the governing authority believes
warrants the establishment of an internal audit activity. Country X
has legislated internal audit requirements for government-owned
organizations. The organization changed the bylaws to reflect the
The CAE will report to the audit committee.
establishment of the internal audit activity. The governing authority
decided that the chief audit executive (CAE) must be a certified in-
ternal auditor and will report directly to the newly established audit
committee. Which of the items discussed above will contribute the
most to the new CAE's independence?
Which of the following is the appropriate response when noncon-
The chief audit executive must disclose the nonconformance and
formance with the Code of Ethics or the Standards impacts the
the impact to senior management and the board.
overall scope or operation of the internal audit activity?
Which of the following is responsible for developing and maintain-
ing a quality assurance and improvement program that covers all
Chief audit executive.
aspects of the internal audit activity and continuously monitors its
effectiveness?
When is initial use of the conformance phrase by internal auditors
After an external review completed within the past 5 years.
appropriate?
The reporting structure that is most likely to allow the internal audit
activity to accomplish its responsibilities is to report administra- Chief executive officer and functionally to the board of directors.
tively to the
A chief audit executive (CAE) has been requested by the audit
committee to conduct an engagement at a chemical factory as
soon as possible. The engagement will include reviews of health,
Seek permission from the audit committee to obtain appropriate
safety, and environmental (HSE) management and processes.
support from an HSE professional.
The CAE knows that the internal audit activity does not possess
the HSE knowledge necessary to conduct such an engagement.
The CAE must
As a part of a quality program, internal assessment teams most
likely will examine which of the following to evaluate the quality of
Measures of project budgets and audit plan completion.
engagement planning and documentation for individual engage-
ments?
A quality assurance and improvement program of an internal
audit activity provides reasonable assurance that internal auditing
work is performed in accordance with its charter. Which of the
following are designed to provide feedback on the effectiveness
of an internal audit activity? 1, 3, and 4 only
1.Proper supervision
2.Proper training
3.Internal reviews
4.External reviews
An internal audit activity has scheduled an engagement relating
to a construction contract. One portion of this engagement will
include comparing materials purchased with those specified in
Engage an engineering consultant to perform the comparison.
the engineering drawings. The internal audit activity does not
have anyone on staff with sufficient expertise to complete this
procedure. The chief audit executive should
Maintaining individual objectivity is most dependent on Internal auditors avoiding conflicts of interest.
Due professional care implies reasonable care and competence,
not infallibility or extraordinary performance. Thus, which of the The conduct of extensive examinations.
following is unnecessary?
A dual-reporting relationship.
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ACCT 401 Unit 2
Independence permits internal auditors to render impartial and
unbiased judgments. The best way to achieve independence is
through
During the performance of an engagement to evaluate a division's
controls over purchasing, the chief purchasing agent asked why
Consider the specific circumstances before deciding whether to
the internal auditor had requested documents pertaining to trans-
disclose the reasons for the information request.
actions with a particular supplier. The internal auditor's proper
response is to
The internal audit activity collectively must possess or obtain
Information technology controls.
certain competency in
Internal auditors are responsible for continuing their education to
maintain their proficiency. Which of the following is true regarding CIAs have formal requirements that must be met in order to
the continuing education requirements of the practicing internal continue as CIAs.
auditor?
A professional engineer applied for a position in the internal audit
activity of a high technology firm. The engineer became interested
May hire the engineer despite the lack of knowledge of internal
in the position after observing several internal auditors while they
audit standards.
were performing an engagement in the engineering department.
The chief audit executive
The internal audit activity collectively must possess or obtain
The use of the International Professional Practices Framework.
certain competencies. Internal audit staff should be competent in
Reengineering is the thorough analysis, fundamental rethink-
ing, and complete redesign of essential business processes. The
intended result is a dramatic improvement in service, quality, Directing the implementation of the redesigned process.
speed, and cost. An internal auditor's involvement in reengineer-
ing should include all of the following except
Which of the following activities is not presumed to impair the
objectivity of an internal auditor?
1. Recommending standards of control for a new information
system application
1 and 3
2. Drafting procedures for running a new computer application to
ensure that proper controls are installed
3. Performing reviews of procedures for a new computer applica-
tion before it is installed
A certified internal auditor performed an assurance engagement Because of a highly developed system of internal control over
to review a department store's cash function. Which of the follow- the cash function, the final engagement communication assured
ing actions will be deemed lacking in due professional care? senior management that no irregularities existed.
The internal auditors must be able to distinguish carefully between The board reviews the engagement work schedule for the year
a scope limitation and other limitations. Which of the following is and deletes an engagement that the chief audit executive thought
not considered a scope limitation? was important to conduct.
During the course of an engagement, an internal auditor makes
a preliminary determination that a major division has been inap-
propriately capitalizing research and development expense. The
engagement is not yet completed, and the internal auditor has
not documented the problem or determined that it really is a
problem. However, the internal auditor is informed that the chief
audit executive has received the following communication from the
president of the organization:
Inform the president that this scope limitation will need to be
"The controller of Division B informs me that you have discovered
reported to the board.
a questionable account classification dealing with research and
development expense. We are aware of the issue. You are directed
to discontinue any further investigation of this matter until informed
by me to proceed. Under the confidentiality standard of your
profession, I also direct you not to communicate with the outside
auditors regarding this issue."
Which of the following is an appropriate action for the CAE to take
regarding the questionable item?
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ACCT 401 Unit 2
An internal auditor must exercise due professional care in per- Evaluating established operating standards and determining
forming engagements. Due professional care includes whether those standards are adequate.
Which of the following facts, by themselves, could contribute to a
lack of independence of the internal audit activity?
1. The CEO accused the new auditor of not operating "in the best
interests of the organization."
1, 2, and 3
2. The majority of audit committee members come from within the
organization.
3. The internal audit activity's charter has not been approved by
the board.
Which of the following statements about conflict of interest is A conflict of interest only exists when the internal auditor displays
false? unethical behavior or engages in improper acts.
The internal audit activity is considering hiring a person who has
a thorough understanding of internal auditing techniques, ac-
Other internal auditors possess sufficient knowledge of econom-
counting, and principles of management but has nonspecialized
ics and information technology.
knowledge of economics and information technology. Hiring the
person is most appropriate if
To determine the organizational placement of internal audit, the
CAE
1. Works with the board 1 and 2 only
2. Works with senior management
3. Has discretion to independently determine placement
The CAE should report functionally to the board. The board is
responsible for which of the following activities?
1. Internal communication and information flows
2. Approval of the internal audit risk assessment and related audit 2 and 3 only
plan
3. Approval of annual compensation and salary adjustments for
the CAE
The optimal administrative reporting line of the CAE is to CEO or equivalent
Assessing individual objectivity of internal auditors is the respon-
sibility of
Which of the following actions is required of the CAE in regard to
Assess
the objectivity of internal auditors?
Require internal auditors not to subordinate their judgement on
Internal auditors should be objective. Objectivity
audit matters to that of others
Which one of the following is responsible for determining the
appropriate levels of education and experience needed for the Chief audit executive
internal audit staff?
At a minimum, how often should the skills of the internal audit staff
Annually
be assessed?
All of the following will help the CAE identify the available knowl-
External service provider
edge, skills, and competencies of the internal audit staff except
An internal auditor judged an item to be immaterial when planning
an assurance engagement. However, the assurance engagement Adverse effects related to the item are likely to occur
may still include the item if it is subsequently determined that
Consideration of the possibility of material irregularities during
Due professional care calls for
every engagement.
Assessment of a quality assurance and improvement program
Adequacy of the oversight of the work of external auditors
should include evaluation of all the following except
The internal audit activity's quality assurance and improvement
program is the responsibility of
An external assessment of an internal audit activity contains an To conformance with the Standards and an assessment for each
expressed opinion. The opinion may apply standard
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ACCT 401 Unit 2
At what minimal required frequency does the chief audit executive
report the results of internal assessments in the form of ongoing Annually
monitoring to senior management and the board?
Following an external assessment of the internal audit activity,
who is (are) responsible for communicating the results to the Chief audit executive
board?
4/4
CIA Part 1 Multiple Choice
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Assessing individual objectivity of internal auditors is the respon-
sibility of
A. The chief executive officer.
D
B. The board.
C. The audit committee.
D. The chief audit executive.
An internal auditor working for a chemical manufacturer believed
that toxic waste was being dumped in violation of the law. Out of
loyalty to the organization, no information regarding the dumping
was collected. The internal auditor
A. Did not violate the Code of Ethics. Loyalty to the employer in all
C. A person with a duty to act who doess not act violated an ethical,
matters in required.
if not a legal, obligation.
B. Did not violate the Code of Ethics. Conclusive information about
wrongdoing was not gathered.
C. Violated the Code of Ethics by knowingly becoming a party to
an illegal act.
D. Violated the Code of Ethics by failing to protect thee well-being
of the general public.
An internal auditing team has made observations and recom-
mendations that should significantly improve a division's operating
efficiency. Out of appreciation of this work, and because it is the
holiday season, the division manager present to in-charge internal
auditor with a gift of moderate value. Which of the following best
describes the action prescribed by The IIA's Code of Ethics?
C. According to Rule of Conduct 2.2, the decision whether to
A. Accept it, regardless of other circumstances, because its value
accept a gift should be based on the potentional impairment of
is insignificant.
the auditor's judgement.
B. Not accept it prior to submission of the final engagement
communication.
C. Not accept it if he is presumed to impair the internal auditor's
judgment.
D. Not accept it, regardless of other circumstances, because its
value is significant.
Which of the following most likely constitutes a violation of The
IIA's Code of Ethics by an internal auditor?
A. Discussing at a trade convention the organization's controls
over its computer networks.
B. Deleting sensitive information from a final engagement com-
D. Violation of Rules of Conduct 3.2
munication at the request of senior management.
C. Investigating executive expense reports based completely on
rumors of padding.
D. Purchasing stock in a target organization after overhearing an
executive discussion of possible acquisition.
A charter is one of the more important factors positively affecting
the internal audit activity's independence. Which of the following
is least likely to be part of the charter?
C. This is a meter of ongoing judgment for the board and should
A. Access to records within the organization.
not be codified in the charter.
B. The scope of internal audit activities.
C. The length of tenure of the chief audit executive.
D. Access to personnel within the organization.
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. This is not
B. Guiding the ethical conduct of internal auditors.
standard.
C. Stating basic principles that represent the practice of internal
auditing.
D. Fostering improved organizational processes and operations.
Which Standards expand upon the other categories of Standards?
A. Performance Standards C.
B. Attribute Standards
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C. Implementation Standards.
D. All of the choices are correct.
The purpose of the internal audit activity can be best described
as
A. Adding value to the organization.
B. Providing additional assurance regarding fir presentation of
financial statements. A.
C. Expressing an opinion on the adequate design and functioning
of the system of internal control.
D. Assuring the absence of any fraud that would materially affect
the financial statements
The Standards consist of three types of Standards. Which stan-
dards apply to the characteristics of providers of internal auditing
services?
A. Implementation Standards. C.
B. Performance Standards
C. Attribute Standards
D. Independence Standards
A primary purpose of establishing a code of conduct within a
professional organization is to
A. Reduce the likelihood that members of the profession will be
sued for substandard work.
B. Ensure that all members of the profession perform at approxi-
C.
mately the same level of competence.
C. Promote an ethical culture among professionals who service
others.
D. Require members of the profession to exhibit loyalty in all matter
pertaining to the affairs of their organization.
An accounting association established a code of ethics for all
members. What is one of the association's primary purposes of
establishing the code of ethics?
A. The outline criteria for professional behavior to maintain stan-
dards of integrity and objectivity
B. To establish standards to follow for effective accounting prac- A
tice.
C. To provide a framework within which accounting policies could
be effectively developed and executed.
D. The outline criteria that can be used in conducting interviews
of potential new accountants
In analyzing the differences between two recently merged busi-
nesses, the chief audit executive of Organization A notes that it
has a formal code of ethic and Organization B does not. The code
of ethics covers such things as purchase agreements, relation-
ships with vendors, and other issues. Its purpose is to guide indi-
vidual behavior within the firm. Which of the following statements
regarding the existence of the code of ethics in A can be logically
inferred?
I. A exhibits a higher standard of ethical behavior than does B. B.
II. A has established objective criteria by which an individual's
actions can be evaluated.
III. The absence of a formal code of ethics in B would prevent a
successful review of ethical behavior in that organization.
A. I and II.
B. II only.
C. III only.
D. II and III.
A review of an organization's code of conduct revealed that it con-

tained comprehensive guidelines designed to aspire high levels
of ethical behavior. The review also revealed that employees were
knowledgeable of it provisions. However, some employees still did
2 / 30
not comply with the code. What element should a code of conduct
contain to enhance its effectiveness?
A. Periodic review and acknowledgment by all employees.
D.
B. Employee involvement in its development.
C. Public knowledge of its contents and purpose.
D. Provisions for disciplinary action in the event of violations.
The IIA Rules of Conduct set forth in The IIA's Code of Ethics
A. Describe behavior norms expected of internal auditor.
B. Are guidelines to assist internal auditors in dealing with en-
A.
gagement clients.
C. Are interpreted by the Principles.
D. Apply only to particular conduct specifically mentioned.
Today's internal auditor will often encounter a wide range of po-
tential ethical dilemmas, not all of which are explicitly addressed
by The IIA's Code of Ethics. If the internal auditor encounters such
a dilemma, the internal auditor should always
A. Seek counsel from an independent attorney to determine the
personal consequences of potential actions.
B
B. Apply and uphold the principles embodied in The IIA's Code of
Ethics.
C. Seek the counsel of the board before deciding on an action.
D. Act consistently with the code of ethics adopted by the organi-
zation even if such action is not consistent with The IIA's Code of
Ethics.
In complying with The IIA's Code of Ethics, an internal auditor
should
A. Use individual judgment in the application of the principles set
forth in the Code.
B. Respect and contribute to the objectives of the organization A
even if it is engaged in illegal activities.
C. Go beyond the limitation of personal technical skills to advance
the interest of the organization.
D. Primarily apply the competency principle in establishing trust.
An internal auditor who encounters an ethical dilemma not explic-
itly addressed by The IIA's Code of Ethics should always
A. Seek counsel from an independent attorney to determine the
personal consequences of potential actions.
B. Take action consistent with the principles embodied in The IIA's
Code of Ethics. B
C. Seek the counsel of the audit committee before deciding on an
action.
D. Act consistently with the employing organization's code of
ethics even if such action would not be consistent with The IIA's
Code of Ethics.
Which of the following is permissible under The IIA's Code of
Ethics?
A. In response to a subpoena, an auditor appeared in a court of
law and disclosed confidential, audit-related information that could
potentially damage the auditor's organization.
B. An auditor used audit-related information in a decision to buy
A
stock issued by the employer corporations.
C. After praising an employee in a recent audit engagement com-
munication, an auditor accepted a gift from the employee.
D. An auditor did not report significant observations about illegal
activity to the board because management indicated that it would
resolve the issue.
The IIA's Code of Ethics requires internal auditors to perform their

work with
A
A. Honesty, diligence, and responsibility.
B. Timeliness, sobriety, and clarity.
3 / 30
C. Knowledge, skills, and competencies.
D. Punctuality, objectivity, and responsibility.
A CIA is working in a noninternal-auditing position as the director
of purchasing. The CIA signed a contract to procure a large order
from the supplier with the best price, quality, and performance.
Shortly after signing the contract, the supplier presented the CIA
with a gift of significant monetary value. Which of the following
statements regarding the acceptance of the gift is true?
A. Acceptance of the gift is prohibited only if it is not customary.
B. Acceptance of the gift violates The IIA's Code of Ethics and is B
prohibited for a CIA.
C. Because the CIA is no longer acting as an internal auditor,
acceptance of the gift is governed only by the organization's code
of conduct.
D. Because the contract was signed before the gift was offered,
acceptance of the gift does not violate either, The IIA's Code of
Ethics or the organization's code of conduct.
The chief audit executive (CAE) has been appointed to a com-
mittee to evaluate the appointment of the external auditors. The
engagement partner for the external accounting firm wants the
CAE to join her for a week of hunting at her private lodge. The
CAE should
B
A. Accept, assuming both their schedule allow it.
B. Refuse on the grounds of conflict of interest
C. Accept as long as it is not charged to employer time.
D. Ask the comptroller whether accepting the invitation is a viola-
tion of the organization's code of ethics.
In a review of travel and entertainment expenses, a certified
internal auditor questioned the business purposes of an officer's
reimbursed travel expenses. The officer promised to compensate
for the questioned amounts by not claiming legitimate expenses
in the future. If the officer makes good on the promise, the internal
auditor
C
A. Can ignore the original charging of the nonbusiness expenses.
B. Should inform the tax authorities in any event.
C. Should still include the finding in the final engagement commu-
nication.
D. Should recommend that the officer forfeit any frequent flyer
miles received as part of the questionable travel.
An internal auditor for a large regional bank was asked to serve
on the board of directors of a local bank. The bank competes in
many of the same markets as the regional bank but focuses more
on consumer financing than on business financing. In accepting
this position, the internal auditor
I. Violated The IIA's Code of Ethics because serving on the board
may be in conflict with the best interests of the internal auditor's
employer C
II. Violated The IIA's Code of Ethics because the information
gained while serving on the board of directors of the local bank
may influence recommendations regarding potential acquisitions
A. I only.
B. II only.
C. I and II.
D. Neither I nor II.
Which of the following concurrent occupations could appear to
subvert the ethical behavior of an internal auditor?
A. Internal auditor and a well-known charitable organization's local
in-house chairperson. B
B. Internal auditor and part-time business insurance broker.
C. Internal auditor and adjunct faculty member of a local business
college that educated potential employees.
4 / 30
D. Internal auditor and landlord of multiple housing that publicly
advertises for tenants in a local community newspaper listing
monthly rental fees.
Which of the following is permissible under The IIA's Code of
Ethics?
A. Disclosing confidential, engagement-related information that is
potentially damaging to the organization in response to a court
order.
B. Using engagement-related information in a decision to buy an
ownership interest in the employer organization. A.
C. Accepting an unexpected gift from an employee whom the
internal auditor has praised in a recent engagement communica-
tion.
D. Not reporting significant observations and recommendations
about illegal activity to the board because management has indi-
cated it will address the issue.
Which situation most likely violates The IIA's Code of Ethics and
the Standards?
A. The CAE disagrees with the engagement client about the
observations and recommendations in a sensitive area. The CAE
discusses the detail in observations and the proposed recom-
mendations with a fellow CAE from another organization.
B. An organization's charter for the internal audit activity requires
the chief audit executive to present the yearly engagement work
schedule to the board for its approval and suggestions.
C. The engagement manager has removed the most significant
observations and recommendations from the final engagement
A.
communication. The in-charge internal auditor opposed the re-
moval, explaining that she knows the reported conditions exist.
The in-charge internal auditor agrees that, technically, information
is not sufficient to support the observations are the only reason-
able conclusions.
D. Because the internal audit activity lacks skill and knowledge in
a specialty area, the CAE has hired an expert. The engagement
manager has been asked to review the expert's approach to
the assignment. Although knowledgeable about the area under
review, the manager is hesitant to accept the assignment because
off lack of expertise.
Which of the following actions taken by a CAE could be considered
professionally ethical under The IIA's Code of Ethics?
A. The CAE decides to delay an engagement at a branch so that
his nephew, the branch manager, will have time to "clean things
up."
B. To save organizational resources, the CAE cancels all staff
training for the next 2 years on the basis that all staff are too new D.
to benefit from training.
C. To save organizational resources, the CAE limits procedures at
foreign branches to confirmations from branch manager that no
major personnel changes have occurred.
D. The CAE refuses to provide information about organizational
operations to his father, who is a part owner.
During the course of an engagement, an internal auditor discovers
that a clerk is embezzling funds from the organization. Although
this is the first embezzlement ever encountered and the organi-
zation has a security department, the internal auditor decides to
interrogate the suspect. If the internal auditor is violating The IIA's
C
Code of Ethics, the rule violated is most likely
A. Failing to exercise due diligence.
B. Lack of loyalty to the organization.
C. Lack of competence in this area.
D. Failing to comply with the law.
5 / 30
Internal auditors who fail to maintain their proficiency through
continuing education could be found to be in violation of
A. The International Standards for the Professional Practice of
Internal Auditing.
C.
B. The IIA's Code of Ethics.
C. Both the International Standards for the Professional Practice
of Internal Auditing and The IIA's Code of Ethics.
D. None of the answers are correct.
A new staff internal auditor was told to perform an engagement in
an area with which the internal auditor was not familiar. Because
of time constraints, no supervision was provided. The assign-
ment represented a good learning experience, but the area was
clearly beyond the internal auditor's competence. Nonetheless,
the internal auditor prepared comprehensive working papers and
communicated the results to management. In this situation,
A. The internal audit activity violated the Standards by hiring an B
internal auditor without proficiency in the area.
B. The internal audit activity violated the Standards by not provid-
ing adequate supervision.
C. The CAE has not violated The IIA's Code of Ethics because it
does not address supervision.
D. The Standards and The IIA's Code of Ethics were followed by
the internal audit activity.
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?
D.
A. Internal audit activity policies and procedures.
B. The Standards.
C. The Code of Ethics.
D. The internal audit activity's charter.
The board of an organization has charged the CAE with upgrading
the internal audit activity. The CAE's first task is to develop a char-
ter. What item should be included in the statement of objectives?
A. Report all engagement results to the board every quarter.
B. Notify governmental regulatory agencies of unethical business C
practices by organization management.
C. Evaluate the adequacy and effectiveness of the organization's
controls.
D. Submit budget variance reports to management every month.
The authority of the internal audit activity is limited to that granted
by
A. The board and the controller.
C
B. Senior management and the Standards.
C. Management and the board.
D. The board and the chief financial officer.
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.
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
6 / 30
assurance function before beginning the engagement.
D. Terminate the engagement because it will not be productive
without the client's cooperation.
The reporting structure that is most likely to allow the internal audit
activity to accomplish its responsibilities is to report administra-
tively to the
A. Board and functionally to the chief executive officer.
B. Controller and functionally to the chief financial officer.
C. Chief executive officer and functionally to the board of directors.
D. Chief executive officer and functionally to the external auditor.
Which of the following facts, by themselves, could contribute to a
lack of independence of the internal audit activity?
I. the CEO accused the new auditor of not operating "in the bests
interest of the organization."
II. the majority of audit committee members come from within the
organization.
D
III. the internal audit activity's charter has not been approved by
the board.
A. I only.
B. II only.
C. II and III only.
D. I, II, and III.
To avoid being the apparent cause of conflict between an organi-
zation's senior management and the board, the CAE should
A. Communicate all engagement results to both senior manage-
ment and the board.
B. Strengthen the independence of the internal Audit activity D
through organizational position.
C. Discuss all reports to senior management with the board first.
D. Request board approval of policies that include internal audit
activity relationships with the board.
An organization is in the process of establishing its new internal
audit activity. The controller has no previous experience with inter-
nal auditors. Due to this lack of experience, the controller advised
the applicants that the CAE will be reporting to the external audi-
tors. However, the new chief audit executive will have free access
to the controller to report anything important. The controller will
then convey the CAE's concerns to the board of directors. The
internal audit activity will
B
A. Be independent because the CAE has direct access to the
board.
B. Not be independent because the CAE reports to the external
auditors.
C. Not be independent because the controller has no experience
with internal auditors.
D. Not be independent because the organization did not specify
that the applicants must be certified internal auditors.
Independence permits internal auditors to render impartial and
unbiased judgments. The best way to achieve independence is
through
A. Individual knowledge and skills. B
B. A dual-reporting relationship.
C. Supervision within the organization.
D. Organizational knowledge and skills.
Objectivity is most likely impaired by an internal auditor's

A. Continuation on an engagement at a division for which (s)he
will soon be responsible as the result of a promotion.
A
B. Reduction of the scope of an engagement due to budget
restrictions.
C. Participation on a task force that recommends standards for
7 / 30
control of a new distribution system.
D. Review of a purchasing agent's contract drafts prior to their
execution.
Which of the following actions is required of the CAE in regard to
objectivity of internal auditors?
A. Maximize.
D
B. Prioritize.
C. Manage.
D. Assess
The CAE bears the responsibility to do which of the following?
A. Encourage the objectivity of the board.
B. Encourage the objectivity of the CEO.
D
C. Foster an attitude of professional skepticism among members
of the board.
D. Maintain individual objectivity.
Maintaining individual objectivity of internal auditors is the respon-
sibility of
A. The chairperson of the board of directors.
D
B. The chairperson of the audit committee.
C. The external assessment team.
D. The chief audit executive.
When faced with an imposed scope limitation, the chief audit
executive needs to
A. Refuse to perform the engagement until the scope limitation is
removed.
B. Communicate the potential effects of the cope limitation to the B
board.
C. Increase the frequency of engagements concerning the activity
in question.
D. Assign more experienced personnel to the engagement.
In which of the following situations does an internal auditor poten-
tially lack objectivity?
A. An internal auditor reviews the procedures for a new electronic
data interchange (EDI) connection to a major customer before it
is implemented.
B. A former purchasing assistant performs a review of internal
controls over purchasing 4 months after being transferred to the B
internal auditing department.
C. An internal auditor recommends standards of control and per-
formance measures for a contract with a service organization for
the processing of payroll and employee benefits.
D. A payroll accounting employee assists an internal auditor in
verifying the physical inventory of small motors.
An internal auditor who had been supervisor of the accounts
payable section should not perform an assurance review of that
section
A. Because a reasonable period of time in which to establish
independence cannot be determined. B
B. Until at least 1 year 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.
A chief audit executive (CAE) for a very small internal audit
department has just received a request from management to
perform an audit of an extremely complex area in with the CAE
and the department have no expertise. The nature of the au-
dit engagement is within the scope of internal audit activities.
Management has expressed a desire to have the engagement
conducted in the very near future because of the high level of risk
involved. Which of the following responses by the CAE would be
8 / 30
in violation of the Standards?
A. Discuss with management the possibility of outsourcing the
audit of this complex area.
B. Add an outside consultant to the audit staff to assist in the
performance of the audit engagement.
C
C. Accept the audit engagement and begin immediately, since it
is a high-risk area.
D. Discuss the timeline of the audit engagement with management
to determine if sufficient time exists in which to develop appropri-
ate expertise.
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 skill required
to handle all engagements.
B. Inexperienced personnel and train them the way the organiza-
D
tion wants them trained.
C. Degreed accounts because most internal audit work is ac-
counting related.
D. Internal auditors who collectively have the knowledge and skills
needed to perform the responsibilities of the internal audit activity.
Which one of the following is responsible for determining the
appropriate levels of education and experience needed for the
internal audit staff?
A. Human resource manager. B
B. Chief audit executive.
C. Chief executive officer.
D. Treasurer.
Use of external service providers with expertise in healthcare
benefits is appropriate when the internal audit activity is
A. Evaluating the organization's estimate of its liability for postre-
tirement benefits, which include healthcare benefits.
B. Comparing the cost of the organization's healthcare program D
with other programs offered in the industry.
C. Training its staff to conduct an audit of healthcare costs in a
major division of the organization.
D. All of the answers are correct.
The internal audit activity is considering hiring a person who has
a thorough understanding of internal auditing techniques, ac-
counting, and principles of management but has nonspecialized
knowledge of economics and information technology. Hiring the
person is most appropriate if
A. A professional development program is agreed to in advance
of actual hiring. C
B. A mentor is assigned to ensure completion of an individually
designed professional development program.
C. Other internal auditors possess sufficient knowledge of eco-
nomics and information technology.
D. The prospective employee could reasonably be expected to
gain sufficient knowledge of these competencies in the long run.
At a minimum, how often should the skills of the internal audit staff
be assessed?
A. Annually.
A
B. Every 5 years.
C. Quarterly.
D. Semi-annually.
Which of the following statements is true with respect to due

professional care?
A. An internal auditor should perform detailed tests of all transac- C
tions before communicating results.
B. An item should not be mentioned in an engagement communi-
9 / 30
cation unless the internal auditor is absolutely certain of the item.
C. An engagement communication should never be viewed as
providing an infallible truth about a subject.
D. An internal auditor has no responsibility to recommend im-
provements.
Due professional care implies reasonable care and competence,
not infallibility or extraordinary performance. Thus, which of the
following is unnecessary?
A. The conduct of examinations and verifications to a reasonable
B
extent.
B. The conduct of extensive examinations.
C. The reasonable assurance that compliance does exist.
D. The consideration of the possibility of material irregularities.
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
B. Adverse effects related to the item are likely to occur.
C. Related information is reliable.
D. Miscellaneous income is affected.
To ensure that due professional care has been taken at all times
during an engagement, the internal auditor should always
A. Ensure that all financial information related to the audit is
included in the audit plan and examined for nonconformance or
irregularities.
C
B. Ensure that all audit tests are fully documented.
C. Consider the possibility of nonconformance or irregularities at
all times during an engagement.
D. Communicate any noncompliance or irregularity discovered
during an engagement promptly to the audit committee.
An individual became head of the internal audit activity of an
organization 1 week ago. An engagement client has come to the
person complaining vigorously that one of the internal auditors is
taking up an excessive amount of client time on an engagement
that seems to be lacking a clear purpose. In handling this conflict
with a client, the person should consider
A. Discounting what is said, but documenting the complaint. B
B. Whether existing procedures within the internal audit activity
provide for proper planning and quality assurance.
C. Presenting an immediate defense of the internal auditor based
upon currently known facts.
D. Promising the client that the internal auditor will finish the work
within 1 week.
The chief audit executive should develop and maintain a quality
assurance and improvement program that covers all aspects of
the internal audit activity and continuously monitors its effective-
ness. All of the following are included in a quality program except
A
A. Annual appraisals of individual internal auditor's performance.
B. Periodic internal assessment.
C. Supervision.
D. Periodic external assessments.
At what minimal required frequency does the chief audit executive
report the results of internal assessments in the form of ongoing
monitoring to senior management and the board?
A. Monthly C
B. Quarterly.
C. Annually.
D. Biennially.
Internal auditors may report that their activities conform with the
Standards. They may use this statement only if
10 / 30
A. It is supported by the results of the quality program.
B. An independent external assessment of the internal audit ac-
tivity is conducted annually.
C. Senior management or the board is accountable for implement- A
ing a quality program.
D. External assessments of the internal audit activity are made by
external auditors.
Following an external assessment of the internal audit activity,
who is (are) responsible for communication the results to the
board?
A. Internal auditors. C
B. Audit committee.
C. Chief audit executive
D. External auditors.
Which of the following is part of an internal audit activity's quality
assurance program, rather than being included as part of other
responsibilities of the chief audit executive (CAE)?
A. The CAE provides information about and access to internal
audit working papers to the external auditors to enable them to
understand and determine the degree to which they may rely on
the internal auditors' work. D
B. Management approves a formal charter establishing the pur-
pose, authority, and responsibility of the internal audit activity.
C. Each individual internal auditor's performance is appraised at
least annually.
D. Supervision of an internal auditor's work is performed through-
out each audit engagement.
Ordinarily those conducting internal quality program assessments
report to
A. The board.
B
B. The chief audit executive.
C. Senior management.
D. The internal audit staff.
Quality program assessments may be performed internally or
externally. A distinguishing feature of an external assessment is
its objective to
A. Identify tasks that can be performed better.
D
B. Determine whether internal audit services meet professional
standards.
C. Set forth the recommendations for improvement.
D. Provide independent assurance.
Which of the following is not implied by the definition of control?
A. Measurement of progress towards goals.
B. Uncovering of deviations from plans. C
C. Assignment of responsibility for deviations.
D. Indication of the need for corrective action.
Controls provide assurance to management that desired actions
will be accomplished when objectives are established in writing
and
A. Standards are adopted, results are compared with the stan-
dards, and corrective actions are undertaken.
B. Are communicated to employees in writing and are updated by
A
operating personnel as conditions change.
C. Policies and procedures for activities are set out in manuals for
use by properly trained personnel.
D. Internal reviews as to the propriety and effectiveness of the
objectives are undertaken on a periodic basis by the internal audit
activity.
An internal auditor is examining inventory control in a merchandis-
ing division with annual sales of US $3,000,000 and a 40% gross
11 / 30
profit rate. Tests show that 2% of the monetary amount of purchas-
es do not reach inventory because of breakage and employee
theft. Adding certain controls costing US $35,000 annually could
reduce these losses to .5% of purchases. Should the controls be
recommended?
A. Yes, because the projected saving exceeds the cost of the
added controls. B
B. No, because the cost of the added controls exceeds the pro-
jected savings.
C. Yes, because the ideal system of internal control is the most
extensive one.
D. Yes, regardless of cost-benefit considerations, because the
situation involves employee theft.
Which of the following statements best describes the relationship
between planning and controlling?
A. Planning looks to the future; controlling is concerned with the
past.
B. Planning and controlling are completely independent of each
D
other.
C. Planning prevents problems; controlling is initiated by problems
that have occurred.
D. Controlling cannot operate effectively without the tools provided
by planning.
Internal auditors regularly evaluate controls. Which of the following
best describes the concept of control as recognized by internal
auditors?
A. Management regularly discharges personnel who do not per-
form up to expectations.
B. Management takes action to enhance the likelihood that estab- B
lished goals and objectives will be achieved.
C. Control represents specific procedures that accountants and
internal auditors design to ensure the correctness of processing.
D. Control procedures should be designed from the "bottom up"
to ensure attention to detail.
The requirement that purchases be made from suppliers on an
approved vendor list is an example of a
A. Preventive control.
A
B. Defective control.
C. Corrective control.
D. Monitoring control.
Controls may be classified according to the function they are
intended to perform, for example, as detective, preventive, or
directive. Which of the following is a directive control?
A. Monthly bank statement reconciliations. D.
B. Dual signatures on all disbursements over a specific amount.
C. Recording every transaction on the day it occurs.
D. Requiring all members of the internal audit activity to be CIAs
An organization's policies and procedures are part of its overall
system of internal controls. The control function performed by
policies and procedures is
A. Feedforward control. A.
B. Implementation control.
C. Feedback control.
D. Application control.
Managerial control can be divided into feedforward, concurrent,

and feedback controls. Which of the following is an example of a
feedback control? D
A. Quality control training.
B. Budgeting.
12 / 30
C. Forecasting inventory needs.
D. Variance analysis.
The internal audit activity of an organization is an integral part
of the organization's risk management, control, and governance
processes because it evaluates and contributes to the improve-
ment of those processes. Select the type of control provided
when the internal audit activity conducts a systems development
D
analysis.
A. Feedback control.
B Strategic plans.
C. Policies and procedures.
D. Feedforward control.
Which of the following operating controls relate to the organizing
function?
A. Formal procedures for selecting potential suppliers.
B. Procedures providing for clear levels of purchase order ap- B
provals based on the value of the requisition.
C. Written objectives and goals for the department.
D. Timely materials reporting to buyers.
An adequate system of internal controls is most likely to detect a
fraud perpetrated by a
A. Group of employees in collusion.
B
B. Single employee.
C. Group of managers in collusion.
D. Single manager.
Upon receipt of purchased goods, receiving department person-
nel match the quantity received with the packing slip quantity and
mark the retail price on the goods based on a master price list.
The annotated packing slip is then forwarded to inventory control
and goods are automatically moved to the retail sales area. The
C
most significant strength of this activity is
A. Immediately pricing goods for retail sale.
B. Matching quantity received with the packing slip.
C. Using a master price list for marking the sale price.
D. Automatically moving goods to the retail sales area.
Which of the following describes the most effective preventive
control to ensure proper handling of cash receipt transactions?
A. Have bank reconciliations prepared by an employee not in-
volved with cash collections and then have them reviewed by a
supervisor.
B. One employee issues a prenumbered receipt for all cash collec-
tions; another employee reconciles the daily total of prenumbered B
receipts to the bank deposits.
C. Use predeteremined totals (hash totals) of cash receipts to
control posting routines.
D. The employee who receives customer mail receipts prepares
the daily bank deposit, which is then deposited by another em-
ployee.
Which of the following activities performed by a payroll clerk is a
control weakness rather than a control strength?
A. Has custody of the check signature stamp machine.
B. Prepares the payroll register. A
C. Forwards the payroll register to the chief accountant for ap-
proval.
D. Draws the paychecks on a separate payroll checking account.
One payroll engagement objective is to determine whether seg-
regation of duties is proper. Which of the following activities is
incompatible? D
A. Hiring employees and authorizing changes in pay rates.
B. Preparing the payroll and filing payroll tax forms.
13 / 30
C. Signing and distributing payroll checks.
D. Preparing attendance data and preparing the payroll.
Which of the following observations made during the preliminary
survey of a local department store's disbursement cycle reflects
a control strength?
A. Individual department managers use prenumbered forms to
order merchandise from vendors.
B. The receiving department is given a copy of the purchase
order complete with a description of goods, quantity ordered, and C
extended price for all merchandise ordered.
C. The treasurer's office prepares checks for suppliers based on
vouchers prepared by the account payable department.
D. Individual department managers are responsible for the move-
ment of merchandise from the receiving dock to storage or sales
area as appropriate.
Which of the following controls would help prevent overpaying a
vendor?
A. Reviewing and canceling supporting documents when a check
is issued.
A
B. Requiring the check signer to mail the check directly to the
vendor.
C. Reviewing the accounting distribution for the expenditure.
D. Approving the purchase before ordering from the vendor.
A receiving department receives copies of purchase orders for
use in identifying and recording inventory receipts. The purchase
orders list the name of the vendor and the quantities of the
materials ordered. A possible error that this system could allow
is C
A. Payment to unauthorized vendors.
B. Payment for unauthorized purchases.
C. Overpayment for partial deliveries.
D. Delay in recording purchases.
An organization's directors, management, external auditors, and
internal auditors all play important roles in creating a proper
control environment. Senior management is primarily responsible
for
A. Establishing a proper organizational culture and specifying a
system of internal control.
B. Designing and operating a control system that provides rea- A
sonable assurance that established objectives and goals will be
achieved.
C. Ensuring that external and internal auditors adequately monitor
the control environment.
D. Implementing and monitoring controls designed by the board of
directors.
Which of the following would minimize defects in finished goods
caused by poor quality raw materials?
A. Documented procedures for the proper handling of
work-in-process inventory.
B
B. Required material specifications for all purchases.
C. Timely follow-up on all unfavorable usage variances.
D. Determination of the amount of spoilage at the end of the
manufacturing process.
Which of the following control procedures does an internal auditor

expect to find during an engagement to evaluate risk management
and insurance?
A. Periodic internal review of the in-force list to evaluate the A
adequacy of insurance coverage.
B. Required approval of all new insurance policies by the organi-
zation's CEO.
14 / 30
C. Policy of repetitive standard journal entries to record insurance
expense.
D. Cutoff procedures with regard to insurance expense reporting.
Which of the following is an operating control for a research and
development department?
A. Research and development personnel are hired by the payroll
department.
B. Research and development expenditures are reviewed by an
independent person. D
C. All research and development costs are charged to expense in
accordance with the applicable accounting principles.
D. The research and development budget is properly allocated
between new products, product maintenance, and cost reduction
programs.
Obsolete or scrap materials are charged to a predefined project
number. The materials are segregated into specified bin locations
and eventually transported to a public auction for sale. To reduce
the risks associated with this process, an organization should
employ which of the following procedures?
I. Require managerial approval for materials to be declared scrap
or obsolete.
II. Permit employees to purchase obsolete or scrap materials prior
B
to auction.
III. Limit obsolete or scrap materials sales to a pre-approved buyer.
IV. Specify that a fixed fee, rather than a commission, be paid to
the auction firm.
A. II and III.
B. I only.
C. II and IV.
D. I, III, and IV.
A utility with a large investment in repair vehicles would most likely
implement which internal control to reduce the risk of vehicle theft
or loss?
A. Review insurance coverage for adequacy.
B. Systematically account for all repair work orders. D
C. Physically inventory vehicles and reconcile the results with the
accounting records.
D. Maintain vehicles in a secured location with release and return
subject to approval by a custodian.
Which of the following statements is correct regarding corporate
compensation systems and related bonuses?
I. A bonus system should be considered part of the control envi-
ronment of an organization and should be considered in formu-
lating a report on internal control.
II. Compensation systems are not part of an organization's control
system and should not be reported as such.
A
III. An audit of an organization's compensation system should be
performed independently of an audit of the control system over
other functions that impact corporate bonuses.
A. I only.
B. II only.
C. III only.
D. II and III only.
The policies and procedures helping to ensure that management
directives are executed and actions are taken to address risks to
achievement of objectives describes
A. Risk assessments. C
B. Control environments.
C. Control activities.
D. Monitoring.
15 / 30
The function of the chief risk officer (CRO) is most effective when
the CRO
A. Manages risk as a member of senior management.
B. Shares the management of risk with line management of risk D
with line management.
C. Shares the management of risk with the chief audit executive.
D. Monitors risk as part of the enterprise risk management team.
Enterprise risk management
A. Guarantees achievement of organizational objectives.
B. Requires establishment of risk and control activities by internal
auditors. C
C. Involves the identification of events with negative impacts on
organizational objectives.
D. Includes selection of the best risk response for the organization.
Many organizations use electronic funds transfer to pay their
suppliers instead of issuing checks. Regarding the risks associ-
ated with issuing checks, which of the following risk management
techniques does this represent?
D
A. Controlling.
B. Accepting.
C. Transferring.
D. Avoiding.
Management considers risk appetite for all of the following rea-
sons except
A. Evaluating strategic options.
D
B. Setting objectives.
C. Developing risk management techniques.
D. Increasing the net present value of investments.
Inherent risk is
A. A potential event that will adversely affect the organization.
B. Risk response risk.
C. The risk after management takes action to reduce the impact D
of likelihood of an adverse event.
D. The risk when management has not taken action to reduce the
impact or likelihood of an adverse event.
When assessing the risk associated with an activity, an internal
auditor should
A. Determine how the risk should best be managed.
B
B. Provide assurance on the management of the risk.
C. Update the risk management process based on risk exposures.
D. Design controls to mitigate the identified risks.
The primary reason that a bank would maintain a separate com-
pliance function is to
A. Better manage perceived high risks.
A
B. Strengthen controls over the bank's investments.
C. Ensure the independence of line and senior management.
D. Better respond to shareholder expectations.
Which of the following goals sets risk management strategies at
the optimum level?
A. Minimize costs.
D
B. Maximize market share.
C. Minimize losses.
D. Maximize shareholder value.
Internal auditors should review the means of physically safe-
guarding assets from losses arising from
A. Misapplication of accounting principles.
C
B. Procedures that are not cost justified.
C. Exposure to the elements.
D. Underusage of physical facilities.
16 / 30
Which of the following activities is outside the scope of internal
auditing?
A. Evaluating risk exposures regarding compliance with policies,
procedures, and contracts.
B. Safeguarding of assets. B
C. Evaluating risk exposures regarding compliance with laws and
regulations.
D. Ascertaining the extent to which management has established
criteria to determine whether objectives have been accomplished.
In the course of their work, internal auditors must be alert for fraud
and other forms of white-collar crime. The important characteristic
that distinguishes fraud from other varieties of white-collar crime
is that
A. Fraud is characterized by deceit, concealment, or violation of
trust.
B. Unlike other white-collar crimes, fraud is always perpetrated A
against an outside party.
C. White-collar crime is usually perpetrated fro the benefit of an
organization, but fraud benefits an individual.
D. White-collar crime is usually perpetrated by outsiders to the
detriment of an organization, but fraud is perpetrated by insiders
to benefit the organization.
In an organization with separate division that is primarily re-
sponsible for the prevention of fraud, the internal audit activity is
responsible for
A. Examining and evaluating the adequacy and effectiveness of
that division's actions taken to prevent fraud. A
B. Establishing and maintain that division's system of internal
control.
C. Planning that division's fraud prevention activities.
D. Controlling that division's fraud prevention activities.
Which of the following statements is (are) true regarding the
prevention of fraud?
I. The primary means of preventing fraud is through internal con-
trol established and maintained by management.
II. Internal auditors are responsible for assisting in the prevention
of fraud by examining and evaluating the adequacy of the internal
control system. D
III. Internal auditors should assess the operating effectiveness of
fraud-related communication systems.
A. I only.
B. I and II only.
C. II only.
D. I, II, and III.
Internal auditors have a responsibility for helping to deter fraud.
Which of the following best describes how this responsibility is
usually met?
A. By coordinating with security personnel and law enforcement
agencies in the investigation of possible frauds.
D
B. By testing for fraud in every engagement and following up as
appropriate.
C. By assisting in the design of control systems to prevent fraud.
D. By evaluating the adequacy and effectiveness of controls in light
of the potential exposure or risk.
An internal auditor who suspects fraud should
A. Determine that a loss has been incurred.
B. Interview those who have been involved in the control of assets. D
C. Identify the employees who could be implicated in the case.
D. Recommend an investigation if appropriate.
17 / 30
Internal auditors are more likely to detect fraud by develop-
ing/strengthening their ability to
A. Recognize and question changes that occur in organizations.
B. Interrogate fraud perpetrators to discover why the fraud was A
committed.
C. Develop internal controls to prevent the occurrence of fraud.
D. Document computerized operating system programs.
Red flags are conditions that indicate a higher likelihood of fraud.
Which of the following is not considered a red flag?
A. Management has delegated the authority to make purchases
under a certain value to subordinates.
B. An individual has held the same cash-handling job for an
extended period without any rotation of duties. A
C. An individual handling marketable securities is responsible for
making the purchases, recording the purchases, and reporting
any discrepancies and gains/losses to senior management.
D. The assignment of responsibility and accountability in the ac-
counts receivable department is not clear.
Which of the following policies is most likely to result in an envi-
ronment conducive to the occurrence of fraud?
A. Budget preparation input by the employees who are responsible
for meeting the budget.
B
B. Unreasonable sales and production goals.
C. The division's hiring process frequently results in the rejection
of adequately trained applicants.
D. The application of some accounting controls on a sample basis.
Internal auditors have been advised to consider red flag to deter-
mine whether management is involved in a fraud. Which of the
following does not represent a difficulty in using the red flags as
fraud indicators?
A. Many common red flags are also associated with situations in
which no fraud exists. D
B. Some red flags are difficult to quantify or to evaluate.
C. Red flag information is not gathered as a normal part of an
engagement.
D. The red flags literature is not well enough established to have
a positive impact on internal auditing.
An internal auditor should be concerned about the possibility of
fraud if
A. Cash receipts, net of the amounts used to pay petty cash-type
expenditures, are deposited in the bank daily.
B. The monthly bank statement reconciliation is performed by the
same employee who maintains the perpetual inventory records. A
C. The accounts receivable subsidiary ledger and accounts
payable subsidiary ledger are maintained by the same person.
D. One person, acting alone, has sole access to the petty cash
fund (except for a provision for occasional surprise counts by a
supervisor or auditor).
In a sampling application, the group of items about which the
auditor wants to estimate some characteristic is called the
A. Population.
A
B. Attribute of interest.
C. Sample.
D. Sampling unit.
The variability of a population, as measured by the standard

deviation, is the
A. Extent to which the individual values of the items in the popu-
A
lation are spread about the mean.
B. Degree of asymmetry of a distribution.
C. Tendency of the means of large samples (at least 30 items) to
18 / 30
be normally distributed.
D. Measure of the closeness of a sample estimate to a corre-
sponding population characteristic.
A 90% confidence interval for the mean of a population based on
the information in a sample always implies that there is a 90%
chance that the
A. Estimate is equal to the true population mean.
B. True population mean is no larger than the largest endpoint of
D
the interval.
C. Standard deviation will not be any greater than 10% of the
population mean.
D. True population mean lies within the specified confidence inter-
val.
In preparing a sampling plan for an inventory pricing test, which of
the following describes an advantage of statistical sampling over
nonstatistical sampling?
A. Requires nonquantitative expression of sample results. B
B. Provides a quantitative measure of sampling risk.
C. Minimizes nonsampling risk.
D. Reduces the level of tolerable error.
To project the frequency of shipments to wrong addresses, an
internal auditor chose a random sample from the busiest month of
B
each of the four quarters of the most recent year. What underlying
concept of statistical sampling did the auditor violate?
Which one of the following statements about sampling is true?
A. A larger sample is always more representative of the underlying
population than a smaller sample.
B. For very large populations, the absolute size of the sample
has more impact on the precision of its results than does its size
B
relative to its population.
C. For a given sample size, a simple random sample always
produces the most representative sample.
D. The limitations of an incomplete sample frame can almost
always be overcome by careful sampling techniques.
Random numbers can be used to select a sample only when each
item in the population
A. Can be assigned to a specific stratum.
B. Is independent of outside influence. C
C. Can be identified with a unique number.
D. Is expected to be within plus or minus three standard deviations
of the population mean.
When planning an attribute sampling application, the difference
between the expected error rate and the maximum tolerable error
rate is the planned
A. Precision. A
B. Reliability.
C. Dispersion.
D. Skewness.
The size of a given sample is jointly a result of characteristics
of the population of interests and decisions made by the internal
auditor. Everything else being equal sample size will
A. Increase if the internal auditor decides to accept more risk of
incorrectly concluding that controls are effective when they are in
fact ineffective. C
B. Double if the internal auditor finds that the variance of the
population is twice as large as was indicated in the pilot sample.
C. Decrease if the internal auditor increases the tolerable rate of
deviation.
D. Increase as sampling risk increases.
19 / 30
An Internal auditor is planning to use attribute sampling to test
the effectiveness of a specific internal control related to approvals
for cash disbursements. In attribute sampling, decreasing the
estimated occurrence rate from 5% to 4% while keeping all other
sample size planning factors exactly the same would result in a
B
revised sample size that would be
A. Larger.
B. Smaller.
C. Unchanged.
D. Indeterminate.
If all other sample size planning factors were exactly the same
in attribute sampling, changing the confidence level from 95% to
90% and changing the desired precision from 2% to 5% would
result in a revised sample size that would be
B
A. Larger.
B. Smaller.
C. Unchanged.
D. Indeterminate.
What is the chief advantage of stop-or-go sampling?
A. The error rate in the population can be projected to within
certain precision limits.
B. Stop-or-go sampling may reduce the size of the sample that
needs to be taken from a population, thus reducing sampling
B
costs.
C. Stop-or-go sampling allows sampling analysis to be performed
on populations that are not homogeneous.
D. Stop-or-go sampling allows the sampler to increase the confi-
dence limits of the analysis without sacrificing precision.
In a variables sampling application, which of the following will
result when confidence level is changed from 90% to 95%?
A. Stand error of the mean will not be affected.
C
B. Nonsampling error will decrease.
C. Sample size will increase.
D. Point estimate of the arithmetic mean will increase.
An auditor is using the mean-per-unit method of variables sam-
pling to estimate the correct total value of a group of inventory
items. Based on the sample, the auditor estimates, with precision
of +-4% and confidence of 90%, that the correct total is US
$800,000. Accordingly,
A. There is 4% chance that the actual correct total is less than US
720,000 or more than US $880,000. B
B. The chance that the actual correct total is less than US
$768,000 or more than US $832,000 is 10%.
C. The probability that the inventory is not significantly overstated
is between 6% and 14%.
D. The inventory is not likely to be overstated by more than 4.4%
(US $35,200) or understated by more than 3.6% (Us $28,800).
When relatively few items of high monetary value constitute a
large proportion of an account balance, stratified sampling tech-
niques and complete testing of the high monetary-value items will
generally result in a
D
A. Simplified evaluation of sample results.
B. Smaller nonsampling error.
C. Larger estimate of population variability.
D. Reduction in sample size.
Difference estimation sampling would be appropriate to use to

project the monetary error in a population if
A. Subsidiary ledger book balances for some individual inventory C
items are unknown.
B. Virtually no differences between the individual carrying
20 / 30
amounts and the audited amounts exist.
C. A number of nonproportional differences between carrying
amounts and audited amounts exist.
D. Observed differences between carrying amounts and audited
amounts are proportional to carrying amounts.
When an internal auditor uses monetary-unit statistical sampling
to examine the total value of invoices, each invoice
A. Has an equal probability of being selected.
B. Can be represented by no more than one monetary unit. D
C. Has an unknown probability of being selected.
D. Has a probability proportional to it monetary value of being
selected.
An auditor for the state highway and safety department needs to
estimate the average highway weight of tractor-trailer trucks using
the state's highway system. Which estimation method must be
used?
A
A. Mean-per-unit.
B. Difference.
C. Ratio.
D. Probability-proportional-to-size.
Systematic selection can be expected to produce a representative
sample when
A. Random number tables are used to determine the items includ-
ed in the sample.
B. The population is arranged randomly with respect to the audit
B
objective.
C. The sample is determined using multiple random starts and
includes more items than required.
D. Judgmental sampling is used by the auditor to offset any
sampling bias.
The auditor wishes to sample the perpetual inventory records to
develop an estimate of the monetary amount of misstatement,
if any, in the account balance. The account balance is made up
of a large number of small-value items and a small number of
large-value items. The auditor has decided to audit all items over
US $50,000 plus a random selection of other. This audit decision
is made because the auditor expects to find a large amount of
errors in the perpetual inventory records but is not sure that it
B
will be enough to justify taking a complete physical inventory. The
auditor expects the errors to vary directly with the value recorded
in the perpetual records. The most efficient sampling procedure
to accomplish the auditor's objectives is
A. Monetary-unit sampling.
B. Ratio estimation.
C. Attribute sampling.
D. Stratified mean-per-unit sampling.
An auditor is checking the accuracy of a computer-printed inven-
tory listing to determine whether the total monetary value of in-
ventory is significantly overstated. Because there is not adequate
time or resources to check all items in the warehouse, a sample of
inventory items must be used. If the sample size is fixed, which one
of the following would be the most accurate sampling approach in
this case? D
A. Select those items that are most easily inspected.
B. Employ simple random sampling.
C. Sample so that the probability of a given inventory item being
selected is proportional to the number of units sold for that item.
D. Sample so that the probability of a given inventory item being
selected is proportional to its book value.
21 / 30
In planning an assurance engagement, a survey could assist with
all of the following except
A. Obtaining engagement client comments and suggestions on
control problems. D
B. Obtaining preliminary information on controls.
C. Identifying areas for engagement emphasis.
D. Evaluation the adequacy and effectiveness of controls.
Which of the following best describes a preliminary survey?
A. A standardized questionnaire used to obtain an understanding
of management objectives.
B. A statistical sample of key employee attitudes, skills, and knowl-
edge. D
C. A "walk-through' of the financial control system to identify risks
and the controls that can address those risks.
D. A process used to become familiar with activities and risks to
identify areas for engagement emphasis.
In advance of a preliminary survey, a chief audit executive send
a memorandum and questionnaire to the supervisors of the de-
partment to be evaluated. What is the most likely result of that
procedure?
A. It creates apprehension about the engagement. B
B. It involves the engagement client's supervisory personnel in the
engagement.
C. It is an uneconomical approach to obtaining information.
D. It is only useful for engagements of distant locations.
A well-designed internal control questionnaire should
A. Elicit "yes" or "no" responses rather than narrative responses
and be organized by department.
B. Be a sufficient source of data for assessment of control risk. C
C. Help evaluate the effectiveness of internal control.
D. Be independent of the objectives of the internal auditing en-
gagement.
Which of the following statements indicates the wrong way to use
an internal control questionnaire?
A. Clarifying all answers with written remarks and explanations.
B. Filling out the questionnaire during an interview with the person
who has responsibility for the are that is being reviewed. A
C. Constructing the questionnaire so that a "no" response requires
attention.
D. Supplementing the complete questionnaire with a narrative
description or flowchart.
Which of the following is not an advantage of sending an internal
control questionnaire prior to an audit engagements?
A. The engagement client can use the questionnaire for self-eval-
uation prior to the auditor's visit.
B. The questionnaire will help the engagement client understand
D
the scope of the engagement.
C. Preparing the questionnaire will help the auditor plan the scope
of the engagement and organize the information to be gathered.
D. The engagement client will respond only to the questions
asked, without volunteering additional information.
When conducting interviews during the early stages of an internal
auditing engagement, it is more effective to
A. Ask for specific answers that can be quantified.
B. Ask people about their jobs. B
C. Ask surprise questions about daily procedures.
D. Take advantage of the fact that fear is an important part of the
engagement.
To elicit views on broad organizational risks and objectives from
the board and senior management, an internal auditor should
22 / 30
A. List specific risk factors for consideration.
B. Develop spreadsheets with quantitative data relevant to the
industry.
C. Use a nondirective approach to initiating discussion of mitigat- C
ing risks.
D. Ask each member of management about specific risks listed in
an industry reference.
Tolerating silence, asking open-ended questions, and paraphras-
ing are three aids to more effective
A. Meetings.
B
B. Listening.
C. Interviews.
D. Feedback.
Which of the following procedures is the least effective in gather-
ing information about the nature of the processing and potential
problems?
A. Interview supervisors in the claims department to find out more
about the procedures used, and the rationale for the procedures,
and obtain their observations about the nature and efficiency of
processing.
B. Send an email message to all clerical personnel detailing the
B
alleged problems and request them to respond.
C. Interview selected clerical employees in the claims department
to find out more about the procedures used, and the rationale for
the procedures, and obtain their observations about the nature
and efficiency of processing.
D. Distribute a questionnaire to gain a greater understanding of the
responsibilities for claims processing and the control procedures
utilized.
Checklists used to assess risk have been criticized for all of the
following reasons except
A. Providing a false sense of security that all relevant factors are
addressed.
B. Inappropriately implying equal weight to each item on the C
checklist.
C. Decreasing the uniformity of data acquisition.
D. Being incapable of translating the experience or sound reason-
ing intended to be captured by each item on the checklist.
The chief audit executive was reviewing recent reports that had
recommended additional engagements because of risk expo-
sures to the organization. Which of the following represents the
greatest risk and should be the next assignment?
A. Three prenumbered receiving reports were missing.
B. There were several purchase orders issued without purchase C
requisitions.
C. Payment had been made for routine inventory items without a
purchase order or receiving report.
D. Several times cash receipts had been help over an extra day
before depositing.
Data-gathering activities such as interviewing operating person-
nel, identifying standards to be used to evaluate performance, and
assessing risks inherent in a department's operations are typically
performed in which phase of an audit engagement?
B
A. Field work.
B. Preliminary survey.
C. Engagement program development
D. Examination and evaluation of evidence.
In planning an engagement, the internal auditor establishes ob-

jectives to address the risk associated with the activity. Risk is the
A. Possibility that the balance or class of transactions and related
23 / 30
assertions contains misstatements that could be material to the
financial statements.
B. Uncertainty of the occurrence of an event that could affect the
achievement of objectives.
B
C. Failure to adhere to organizational policies plans, and proce-
dures or to comply with relevant laws and regulations.
D. Failure to accomplish established objectives and goals for
operations or programs.
An auditor is least likely to use computer software to
A. Construct parallel simulations.
B. Access client data files. D
C. Prepare spreadsheets.
D. Assess computer control risk.
Which of the following cannot be performed by an auditor using
generalized audit software (GAS)?
A. Identifying missing check numbers.
B. Correcting erroneous data elements, making them suitable for B
audit testwork.
C. Matching identical product information in separate data files.
D. Aging accounts receivable.
Which of the following is the primary reason that many auditors
hesitate to use embedded audit modules?
A. Embedded audit modules cannot be protected from computer
viruses.
B. Auditors are required to monitor embedded audit modules
D
continuously to obtain valid results.
C. Embedded audit modules can easily be modified through man-
agement tampering.
D. Auditors are required to be involved in the system design of the
application to be monitored.
Accounts payable schedule verification may include the use of
analytical information. Which of the following is analytical infor-
mation?
A. Comparing the schedule with the accounts payable ledger or
unpaid voucher file.
B. Comparing the balance on the schedule with the balances of B
prior years.
C. Comparing confirmations received from selected creditors with
the accounts payable ledger.
D. Examining vendors' invoices in support of selected items on the
schedule.
During an engagement, the internal auditor should consider the
following factor(s) in determining the extent to which analytical
procedures should be used during the engagement:
A. Adequacy of the system of internal control.
D
B. Significance of the area being examined.
C. Precision with which the results of analytical audit procedures
can be predicted.
D. All of the answers are correct.
During an operational audit engagement, an auditor compared the
inventory turnover rate of a subsidiary with established industry
standards in order to
A. Evaluate the accuracy of internal financial reports.
B. Test controls designed to safeguard assets. D
C. Determine compliance with corporate procedures regarding
inventory levels.
D. Assess performance and indicate where additional audit work
may be needed.
What is the first phase in the benchmarking process?
A. Organize benchmarking teams.
24 / 30
B. Select and prioritize benchmarking projects.
C. Researching and identifying best-in-class performance. B
D. Data analysis.
The phase of the benchmarking process in which the team must
be able to justify its recommendations is the
A. Prioritize benchmarking projects phase.
B
B. Implementation phase.
C. Data analysis phase.
D. Researching and identifying best in class performance phase.
Researching and identifying best-in-class performance is often
the most difficult phase. Which of the following is not a critical
step?
A. Setting up databases. D
B. Choosing information-gathering methods.
C. Formatting questionnaires.
D. Employee training and empowerment.
An inexperience internal auditor notified the senior auditor of a
significant variance from the engagement client's budget. The
senior told the new internal auditor not to worry because the senior
had heard that there had been an unauthorized work stoppage
that probably accounted for the difference. Which of the following
statements is most appropriate?
A. The new internal auditor should have investigated the matter
D
fully and not bothered the senior.
B. The senior used proper judgment in curtailing what could have
been a wasteful investigation.
C. The senior should have halted the engagement until the vari-
ance was fully explained.
D. The senior should have aided the new internal auditor in for-
mulating a plan for accumulating appropriate information.
While testing the effectiveness of inventory controls, the inter-
nal auditor makes a not in the working papers that most of the
cycle count adjustments for the facility involved transactions of
the machining department. The machining department also had
generated an extraordinary number of cycle count adjustments in
comparison with other departments last year. The internal auditor
should
A. Interview management and apply other engagement proce-
A
dures to determine whether transaction controls procedures with-
in the machining department are adequate.
B. Do no further work because the consent was not identified
by the analytical procedures included in the engagement work
program.
C. Notify internal auditing management that fraud is suspected.
D. Place a note in the working papers to review this matter in detail
during the next engagement.
Which result of an analytical procedure suggests the existence of
obsolete merchandise?
A. Decrease in the inventory turnover rate.
A
B. Decrease in the ratio of gross profit to sales.
C. Decrease in the ratio of inventory to accounts payable.
D. Decrease in the ratio of inventory to accounts receivable.
An internal auditor performs an analytical review by comparing the

gross margins of various divisional operations with those of other
divisions and with the individual division's performance in previous
years. The internal auditor notes a significant increase in the gross
C
margin at one division. The internal auditor does some preliminary
investigation and also notes that no changes occurred in products,
production methods, or divisional management during the year.
The most likely cause of the increase in gross margin is a(n)
25 / 30
A. Increase in the number of competitors selling similar products.
B. Decrease in the number of suppliers of the material used in
manufacturing the product.
C. Overstatement of year-end inventory.
D. Understatement of year-end accounts receivable.
"Except for the missing documentation noted above, the system of
internal controls over petty cash is functioning as intended." The
above statement is an example of a(n)
A. Observation. C
B. Objective.
C. Conclusion.
D. Finding.
The single most important factor in drawing a useful conclusion or
stating a useful opinion in an engagement report is
A. Use of statistical sampling techniques.
D
B. Senior management interest in the engagement outcome.
C. Auditee management assurances.
D. Auditor judgment.
An internal auditor interviewed client personnel and obtained an
understanding of the auditee department's operations. The auditor
then performed testwork. The auditor's presentation of the results
of the testwork will usually take the form of a
A
A. Finding.
B. conclusion.
C. Recommendation.
D. Meeting with senior management.
An internal audit staffer has just completed an assessment of the
engagement client's operating and financial controls. The auditor's
preliminary conclusion is that controls are adequately designed
to achieve management's operating and financial objectives. The
auditor's next step is to
C
A. Present his/her findings to the chief audit executive.
B. Prepare a preliminary report on internal controls for presenta-
tion to the board.
C. Report his/her results to the auditor in charge.
D. Prepare a plan for testing internal controls.
The internal auditor has concluded that an engagement client's
system of internal controls is inadequate to achieve manage-
ment's objectives. The most appropriate next step is to
A. Test controls to determine whether they are functioning as
designed.
B. Halt the engagement and issue a report about inadequate C
controls.
C. Draw preliminary conclusions about internal control.
D. Contact the engagement client's direct supervisor to recom-
mend that the head of the department or function under audit is
transferred or terminated.
An internal auditor's working papers should support the observa-
tions, conclusions, and recommendations to be communicated.
One of the purposes of this requirement is to
A. Provide support for the internal audit activity's financial budget.
B
B. Facilitate quality assurance reviews.
C. Provide control over working papers.
D. Permit the audit committee to review observations, conclusions,
and recommendations.
A working paper is complete when it
A. Complies with the internal audit activity's format requirements.
B. Contain all of the attributes of an observation. D
C. Is clear, concise, and accurate.
D. Satisfies the engagement objective for which it is developed.
26 / 30
The internal auditor prepares working papers primarily for the
benefit of
A. The external auditor.
B
B. The internal audit activity.
C. The engagement client.
D. Senior management.
Which of the following is an unnecessary feature of a working
paper prepared in connection with maintenance costs?
A. The internal auditor has initialed and dated the working paper
as of the date completed even though the working paper was
prepared over the preceding 4 working days.
B. Total repair expense for the month preceding the engagement
D
is shown.
C. The chief audit executive has initialed the working paper as
reviewer although the working paper was prepared by another
person.
D. Total acquisition cost of property, plant, and equipment for the
preceding month is shown.
Engagement working papers are indexed by means of reference
numbers. The primary purpose of indexing is to
A. Permit cross-referencing and simplify supervisory review.
B. Support the final engagement communication A
C. Eliminate the need for follow-up reviews.
D. Determine that working papers adequately support observa-
tions, conclusions, and recommendations.
Which of the following conditions constitutes inappropriate work-
ing-paper preparation?
A. All forms and directives used by the engagement client are
included in the working papers.
A
B. Flowcharts are included in the working papers.
C. Engagement observations are cross-referenced to supporting
documentation.
D. Tick marks are explained in notes.
Which of the following actions constitutes a violation of the confi-
dentiality concept regarding working papers? An internal auditor
A. Takes working papers to his/her hotel room overnight.
D
B. Shows working paper on occasion to engagement clients.
C. Allows the external auditor to copy working papers.
D. Misplaces working papers occasionally.
Working papers contain a record of engagement work performed
and much confidential information. They are the property of the
internal audit activity, which if responsible for their security. Which
of the following is the most important control requirement for
working papers?
A. Allow access to working papers only to internal audit activity
personnel. B
B. Provide for the protection of working papers at all time and to
the extent appropriate.
C. Make the administrative section of the internal audit activity
responsible for the security of working papers.
D. Purge working papers periodically of materials that are consid-
ered confidential.
Working papers should be disposed of when they are of no further
use. Retention policies must
A. Specify a minimum retention period of 3 years.
C
B. Be prepared by the audit committee.
C. Be approved by legal counsel.
D. Be approved by the external auditor.
Which of the following states an inappropriate policy relating to the
retention of engagement working papers?
27 / 30
A. Working papers should be disposed of when they have no
further use.
B. Working papers prepared for fraud investigators should be
retained indefinitely.
B
C. Working-paper retention schedules should be approved by
legal counsel.
D. Working-paper retention schedules should consider legal and
contractual requirements.
When current-file working papers are no longer of use to the
internal audit activity, they should be
A. Destroyed.
B. Placed in the custody of the organization legal department for
A
safekeeping.
C. Transferred to the permanent file.
D. Transferred to the custody of the engagement client for ease of
future records.
Which of the following tools would best give a graphical represen-
tation of a sequence of activities and decisions?
A. Flowchart
A
B. Control chart.
C. Histogram.
D. Run Chart.
Of the following, which is the most efficient source for an auditor
to use to evaluate a company's overall control system?
A. Control flowcharts.
B. Copies of standard operating procedures. A
C. A narrative describing departmental history, activities, and
forms usage.
D. Copies of industry operating standards.
The diamond-shaped symbol is commonly used in flowcharting to
show or represent a
A. Process or a single step in a procedure or program.
C
B. Terminal output display.
C. Decision point, conditional testing, or branching.
D. Predefined process.
Engagement information is usually considered relevant when it is
A. Derived through valid statistical sampling.
B. Objective and unbiased. D
C. Factual, adequate, and convincing.
D. Consistent with the engagement objectives.
Reliable information is
A. Supportive of the engagement observations and consistent
with the engagement objectives.
B. Helpful in assisting the organization in meeting prescribed
goals. D
C. Factual, adequate, and convincing so that a prudent person
would reach the same conclusion as the internal auditor.
D. Competent and the best attainable through the use of appro-
priate engagement techniques.
In an operational audit, the internal auditors discovered an in-
crease in absenteeism. Accordingly, the chief audit executive de-
cided to identify information about workforce morale. To achieve
this engagement objective, the internal auditors must understand
that
A. Morale cannot be reliably analyzed. C
B. Only outcomes that are directly quantifiable can be reliably
analyzed.
C. Reliable information may be obtained about morale factors such
as job satisfaction.
D. Morale is always proportional to compensation.
28 / 30
What characteristic of information is satisfied by an original signed
document?
A. Sufficiency.
B
B. Reliability.
C. Relevance.
D. Usefulness.
An internal auditor is evaluating the advertising function. The or-
ganization has engaged a medium-sized local advertising agency
to place advertising in magazine publications. As part of the
review of the engagement working papers, the internal auditing
supervisor is evaluating the information collected. The internal
auditor reviewed the language in the advertising for its legality
and compliance with fair trade regulations by interviewing the or-
ganization's advertising manager, the product marketing director D
(who may not have been objective), and five of the organization's
largest customers (who may not have been knowledgeable). The
supervisor can justifiably conclude that the information is
A. Reliable
B. Irrelevant.
C. Conclusive.
D. Insufficient.
In deciding whether recorded sales are valid, which of the follow-
ing items of information is most reliable?
A. A copy of the customer's purchase order.
B. A memorandum from the director of shipping department stat-
ing that another employee verified the personal delivery of the
D
merchandise to the customer.
C. Accounts receivable records showing cash collections from the
customer.
D. The shipping document, independent bill of lading, and the
invoice for the merchandise.
The chief audit executive is reviewing the working papers pro-
duced by an internal auditor during a fraud investigation. Among
the items contained in the working papers is a description of an
item of physical information. Which of the following is the most
probable source of this item of information? A
A. Observing conditions.
B. Interviewing people.
C. Examining records.
D. Computing variances.
An internal auditor takes a photograph of the engagement client's
workplace. The photograph is a form of what kind of information?
A. Physical.
A
B. Testimonial.
C. Documentary.
D. Analytical.
The most likely source of information indicating employee theft of
inventory is
A. Physical inspection of the condition of inventory items on hand.
B. A warehouse employee's verbal charge of theft.
D
C. Differences between an inventory count and perpetual inven-
tory records.
D. Accounts payable transactions vouched to inventory receiving
reports.
To verify the proper value of costs charged to real property records
for improvements to the property, the best source of information
is
C
A. Inspection by the internal auditor of real property improve-
ments.
B. A letter signed by the real property manager asserting the
29 / 30
propriety of costs incurred.
C. Original invoices supporting entries into the accounting
records.
D. Comparison of billed amounts with contract estimates.
The most conclusive information to support supplier account bal-
ances is obtained by
A. Reviewing the vendor statements obtained from the accounts
payable clerk.
B
B. Obtaining confirmations of balances from the suppliers.
C. Performing analytical account analysis.
D. Interviewing the accounts payable manager to determine the
internal controls maintained over accounts payable processing.
A set of engagement working papers contained a copy of a
document providing information that an expensive item that had
been special-ordered was actually on hand on a particular date.
The most likely source of this information is a printout from a
computerized C
A. Purchases journal.
B. Cash payments journal.
C. Perpetual inventory file.
D. Receiving report file.
Which of the following techniques is most likely to result in suf-
ficient information with regard to an engagement to review the
quantity of fixed assets on hand in a particular department?
A. Physical observation.
B. Analytical review of purchase requests and subsequent invoic- A
es.
C. Interviews with department management.
D. Examination of the account balances contained in general and
subsidiary ledgers.
An internal auditor at a savings and loan association concludes
that a secured real estate loan is collectible. Which of the following
engagement procedures provides the most persuasive informa-
tion about the loan's collectability?
A. Confirming the loan balance with the borrower.
B. Reviewing the loan file for proper authorization by the credit C
committee.
C. Examining documentation of a recent, independent appraisal
of the real estate.
D. Examining the loan application for appropriate borrowers' sig-
natures.
Which of the following are least valuable in predicting the amount
of uncollectible accounts for an organization?
A. Published economic indices indicating a general business
downturn.
B. Dollar amounts of accounts actually written off by the organi- D
zation for each of the past 6 months.
C. Total monthly sales for each of the past 6 months.
D. Written forecasts from the credit manager regarding expected
future cash collections.
30 / 30
ACT Gleim Quiz 4
Study online at https://quizlet.com/_4vxa2c
An internal auditor is examining inventory control in a merchandis-
ing division with annual sales of US $3,000,000 and a 40% gross
profit rate. Tests show that 2% of the monetary amount of pur-
chases do not reach inventory because of breakage and employee
theft. Adding certain controls costing US $35,000 annually could
reduce these losses to .5% of purchases. Should the controls be
recommended?
c. No, because the cost of the added controls exceeds the pro-
jected savings. a. Yes, regardless of cost-benefit considerations, because the
situation involves employee theft.
b. Yes, because the ideal system of internal control is the most
extensive one.
c. No, because the cost of the added controls exceeds the project-
ed savings.
d. Yes, because the projected saving exceeds the cost of the
added controls.
In documenting the procedures used by several interacting de-
partments the internal auditor will most likely use a(n)
b. Horizontal (or systems) flowchart. a. Gantt chart.

b. Horizontal (or systems) flowchart.
c. Vertical flowchart.
d. Internal control questionnaire.
An internal auditor noted that the accounts receivable department
is separate from other accounting activities. Credit is approved
by a separate credit department. Control accounts and sub-
sidiary ledgers are balanced monthly. Similarly, accounts are aged
monthly. The accounts receivable manager writes off delinquent
accounts after 1 year, or sooner if a bankruptcy or other unusual
circumstances are involved. Credit memoranda are prenumbered
c. Write-offs of delinquent accounts. and must correlate with receiving reports. Which of the following
areas could be viewed as an internal control weakness of the
above organization?
a. Handling of credit memos.

b. Credit approvals.
c. Write-offs of delinquent accounts.
d. Monthly aging of receivables.
Which of the following ensures that all inventory shipments are
billed to customers?
a. Customer billing complaints are investigated by the controller's

office.
c. Shipping documents are prenumbered and are independently
b. Sales invoices are prenumbered and are independently ac-
accounted for and matched with sales invoices.
counted for and traced to the sales journal.
c. Shipping documents are prenumbered and are independently
accounted for and matched with sales invoices.
d. Duties for recording sales transactions and maintaining cus-
tomer account balances are separated.
The internal auditor recognizes that certain limitations are inherent
in any system of internal controls. Which one of the following
scenarios is the result of an inherent limitation of internal control?
a. An employee who is unable to read is assigned custody of

b. A security guard allows one of the warehouse employees to the organization's computer tape library and run manuals that are
remove assets from the premises without authorization. used during the third shift.
b. A security guard allows one of the warehouse employees to
remove assets from the premises without authorization.
c. The comptroller both makes and records cash deposits.
d. The organization sells to customers on account, without credit
approval.
1 / 10
ACT Gleim Quiz 4
Managerial control can be divided into feedforward, concurrent,
and feedback controls. Which of the following is an example of a
feedback control?
b. Variance analysis.
a. Budgeting.
b. Variance analysis.
c. Quality control training.
d. Forecasting inventory needs.
Which of the following tools would best give a graphical represen-
tation of a sequence of activities and decisions?
c. Flowchart. a. Control chart.

b. Run chart.
c. Flowchart.
d. Histogram.
Upon receipt of purchased goods, receiving department person-
nel match the quantity received with the packing slip quantity and
mark the retail price on the goods based on a master price list.
The annotated packing slip is then forwarded to inventory control
and goods are automatically moved to the retail sales area. The
c. Using a master price list for marking the sale price. most significant control strength of this activity is
a. Matching quantity received with the packing slip.

b. Immediately pricing goods for retail sale.
c. Using a master price list for marking the sale price.
d. Automatically moving goods to the retail sales area.
Which of the following controls would prevent the ordering of
quantities in excess of an organization's needs?
a. Automatic reorder by the purchasing department when low

inventory level is indicated by the system.
c. Review of all purchase requisitions by a supervisor in the user
b. A policy requiring agreement of the receiving report and packing
department prior to submitting them to the purchasing depart-
slip before storage of new receipts.
ment.
c. Review of all purchase requisitions by a supervisor in the user
department prior to submitting them to the purchasing depart-
ment.
d. A policy requiring review of the purchase order before receiving
a new shipment.
Which of the following statements best describes the relationship
between planning and controlling?
a. Planning looks to the future; controlling is concerned with the

past.
b. Controlling cannot operate effectively without the tools provided
b. Controlling cannot operate effectively without the tools provided
by planning.
by planning.
c. Planning prevents problems; controlling is initiated by problems
that have occurred.
d. Planning and controlling are completely independent of each
other.
A preliminary survey of the purchasing function indicates that
* Department managers initiate purchase requests that must be
approved by the plant superintendent,
* Purchase orders are typed by the purchasing department using
prenumbered and controlled forms,
b. Purchases could be made from a vendor controlled by a buyer * Buyers regularly update the official vendor listing as new sources
at prices higher than normal. of supply become known,
Rush orders can be placed with a vendor by telephone but must
be followed by a written purchase order before delivery can be
accepted, and
* Vendor invoice payment requests must be accompanied by a
purchase order and receiving report.
2 / 10
ACT Gleim Quiz 4
One possible fault of this system is that
a. Payment can be made for supplies received but not ordered by

the purchasing department.
b. Purchases could be made from a vendor controlled by a buyer
at prices higher than normal.
c. Unnecessary supplies can be purchased by department man-
agers.
d. Payment can be made for supplies not received.
Which of the following aspects of the administration of a compen-
sation program is the most important control in the long run?
a. An informal wage and salary policy to be competitive with the

c. A plan of job classifications based on predefined evaluation industry average.
criteria. b. A level of general compensation that is reasonably competitive.
c. A plan of job classifications based on predefined evaluation
criteria.
d. A wage and salary review plan for individual employee compen-
sation.
The internal auditor wishes to develop a flowchart of (1) the
process of receiving sales order information at headquarters, (2)
the transmission of the data to the plants to generate the shipment,
and (3) the plants' processing of the information for shipment. The
internal auditor should
a. Start with management's decisions to set sales prices. Gath-

er internal documentation on the approval process for changing
sales prices. Complement documentation with a copy of the pro-
c. Start with the receipt of a sales order from a sales representative gram flowchart. Prepare an overview flowchart that links these
and "walk through" both the manual and computerized processing details.
at headquarters and the plant until the goods are shipped and b. Start with a shipment of goods and trace the transaction back
billed. through the origination of the sales order as received from the
sales representative.
c. Start with the receipt of a sales order from a sales representative
and "walk through" both the manual and computerized processing
at headquarters and the plant until the goods are shipped and
billed.
d. Obtain a copy of the plants' systems flowchart for the sales
process, interview relevant personnel to determine if any changes
have been made, and then develop an overview flowchart which
will highlight the basic process.
According to The IIA Glossary appended to the Standards, which
of the following are most directly designed to ensure that risks are
contained?
a. Control processes.
a. Control processes.
b. Governance processes.
c. Internal audit activities.
d. Risk management processes.
Which one of the following situations represents an internal control
weakness in accounts receivable?
a. Customers' statements are mailed monthly by the accounts

d. Delinquent accounts are reviewed only by the sales manager. receivable department.
b. Internal auditors confirm customer accounts periodically.
c. The cashier is denied access to customers' records and monthly
statements.
d. Delinquent accounts are reviewed only by the sales manager.
3 / 10
ACT Gleim Quiz 4
Which of the following activities represents both an appropriate
human resources department function and a deterrent to payroll
fraud?
d. Authorization of additions and deletions from the payroll.
a. Collection and retention of unclaimed paychecks.
b. Authorization of overtime.
c. Distribution of paychecks.
d. Authorization of additions and deletions from the payroll.
To control purchasing and accounts payable, an information sys-
tem must include certain source documents. For a manufacturing
organization, these documents should include
a. Purchase requisitions, purchase orders, receiving reports, and a. Purchase requisitions, purchase orders, receiving reports, and
vendor invoices. vendor invoices.
b. Receiving reports and vendor invoices.
c. Purchase requisitions, purchase orders, inventory reports of
goods needed, and vendor invoices.
d. Purchase orders, receiving reports, and vendor invoices.
Which of the following describes a control weakness?
a. Purchasing procedures are well designed and are followed

unless otherwise directed by the purchasing supervisor.
b. Prenumbered blank purchase orders are secured within the
a. Purchasing procedures are well designed and are followed purchasing department.
unless otherwise directed by the purchasing supervisor. c. Normal operational purchases fall in the range from US $500
to US $1,000 with two signatures required for purchases over US
$1,000.
d. The purchasing agent invests in a publicly traded mutual fund
that lists the stock of one of the organization's suppliers in its
portfolio.
Which of the following control procedures provides the greatest
assurance that all donations to a not-for-profit organization are
immediately deposited in its account?
a. Require that all donations be made by check.

b. Use a lockbox to receive all donations. b. Use a lockbox to receive all donations.
c. Require issuance of a confirmation receipt to all donors, with the
receipt issued by the person who opens and deposits the cash
receipts.
d. Perform periodic reviews of the organization's cash receipts by
tracing deposits to the original posting in the cash receipts records.
Obsolete or scrap materials are charged to a predefined project
number. The materials are segregated into specified bin locations
and eventually transported to a public auction for sale. To reduce
the risks associated with this process, an organization should
employ which of the following procedures?
1. Require managerial approval for materials to be declared scrap

or obsolete.
2. Permit employees to purchase obsolete or scrap materials prior
b. 1 only.
to auction.
3. Limit obsolete or scrap materials sales to a pre-approved buyer.
4. Specify that a fixed fee, rather than a commission, be paid to the
auction firm.
a. 1, 3, and 4.
b. 1 only.
c. 2 and 4.
d. 2 and 3.
4 / 10
ACT Gleim Quiz 4
Of the following, which is the most efficient source for an auditor
to use to evaluate a company's overall control system?
a. Copies of industry operating standards.

d. Control flowcharts.
b. A narrative describing departmental history, activities, and forms
usage.
c. Copies of standard operating procedures.
d. Control flowcharts.
If internal control is well designed, two tasks that should be per-
formed by different persons are
a. Recording of cash receipts and preparation of bank reconcilia-

tions.
a. Recording of cash receipts and preparation of bank reconcilia-
b. Posting of amounts from both the cash receipts journal and cash
tions.
payments journal to the general ledger.
c. Approval of bad debt write-offs, and reconciliation of the ac-
counts payable subsidiary ledger and controlling account.
d. Distribution of payroll checks and approval of sales returns for
credit.
Checks from customers are received in the organization's mail
room each day. What controls should be in place to safeguard
them?
d. Requiring a specific mail clerk to list and restrictively endorse
a. Providing bonding protection for mail clerks.
each check.
b. Establishing a separate post office box for customer payments.
c. Forwarding all checks to the cashier upon receipt.
d. Requiring a specific mail clerk to list and restrictively endorse
each check.
Internal auditors often flowchart a control system and reference
the flowchart to narrative descriptions of certain activities. This is
an appropriate procedure to
a. Gain the understanding necessary to test the effectiveness of

a. Gain the understanding necessary to test the effectiveness of the system.
the system. b. Determine whether the system meets established management
objectives.
c. Document that the system meets international auditing require-
ments.
d. Determine whether the system can be relied upon to produce
accurate information.
An adequate and effective system of internal control provides
reasonable assurance that objectives will be achieved. Controls
may be preventive, detective, or directive. Which of the following
is a detective control for the procurement function?
a. Goods received are counted and compared with quantities on

a. Goods received are counted and compared with quantities on
purchase order and receiving reports.
purchase order and receiving reports.
b. Review and approval of each procurement action is required
prior to the final issuance of a purchase order.
c. Prenumbered standard purchase order forms include all rele-
vant terms required to be used in all applicable instances.
d. The procurement function is organizationally separate from
receiving, disbursing, and accounting.
The requirement that purchases be made from suppliers on an
approved vendor list is an example of a
c. Preventive control. a. Monitoring control.

b. Corrective control.
c. Preventive control.
d. Detective control.
5 / 10
ACT Gleim Quiz 4
Which one of the following is most likely to be considered an
internal control weakness?
a. A clerk in the invoice processing department fails to match

a vendor's invoice with its related receiving report. Checks are
not signed unless all appropriate documents are attached to a
voucher.
d. An accounts receivable clerk, who approves sales returns and
b. The petty cash custodian has the ability to steal petty cash. Doc-
allowances, receives customer remittances and deposits them in
umentation for all disbursements from the fund must be submitted
the bank. Limited supervision is maintained over the employee.
with the request for replenishment of the fund.
c. An inventory control clerk at a manufacturing plant has the ability
to steal one completed television set from inventory a year. The
theft probably will never be detected.
d. An accounts receivable clerk, who approves sales returns and
allowances, receives customer remittances and deposits them in
the bank. Limited supervision is maintained over the employee.
Which of the following is not a type of control?
a. Directive.
b. Reactive.
b. Reactive.
c. Preventive.
d. Detective.
A receiving department receives copies of purchase orders for use
in identifying and recording inventory receipts. The purchase or-
ders list the name of the vendor and the quantities of the materials
ordered. A possible error that this system could allow is
c. Overpayment for partial deliveries.
a. Payment for unauthorized purchases.
b. Payment to unauthorized vendors.
c. Overpayment for partial deliveries.
d. Delay in recording purchases.
Fact Pattern: The marketing department for a major retailer as-
signs separate product managers for each product line. Product
managers are responsible for ordering products and determining
retail pricing. Each product manager's purchasing budget is set
by the marketing manager. Products are delivered to a central
distribution center where goods are segregated for distribution
to the company's 52 department stores. Because receipts are
recorded at the distribution center, the company does not maintain
a receiving function at each store. Product managers are evaluat-
ed on a combination of sales and gross profit generated from their
product lines. Many products are seasonal and individual store
managers can require that seasonal products be removed to make
a.There is no receiving function located at individual stores.
space for the next season's products.
Which of the following is a control deficiency in this situation?
a.There is no receiving function located at individual stores.

b. Evaluating product managers by total gross profit generated by
product line will lead to dysfunctional behavior.
c. The product manager negotiates the purchase price and sets
the selling price.
d. The store manager can require items to be removed, thus af-
fecting the potential performance evaluation of individual product
managers.
Controls may be classified according to the function they are
intended to perform, for example, as detective, preventive, or
directive. Which of the following is a directive control?
c. Requiring all members of the internal audit activity to be CIAs.
a. Recording every transaction on the day it occurs.
b. Monthly bank statement reconciliations.
6 / 10
ACT Gleim Quiz 4
c. Requiring all members of the internal audit activity to be CIAs.
d. Dual signatures on all disbursements over a specific amount.
The initiation of the purchase of materials and supplies would be
the responsibility of the
b. Inventory control department. a. Purchasing department.

b. Inventory control department.
c. Production department.
d. Stores control department.
Which of the following controls would help prevent overpaying a
vendor?
a. Reviewing the accounting distribution for the expenditure.

c. Reviewing and canceling supporting documents when a check
b. Requiring the check signer to mail the check directly to the
is issued.
vendor.
c. Reviewing and canceling supporting documents when a check
is issued.
d. Approving the purchase before ordering from the vendor.
The manager of a production line has the authority to order and
receive replacement parts for all machinery that requires peri-
odic maintenance. The internal auditor received an anonymous
tip that the manager ordered substantially more parts than were
necessary from a family member in the parts supply business.
The unneeded parts were never delivered. Instead, the manager
processed receiving documents and charged the parts to ma-
chinery maintenance accounts. The payments for the undelivered
parts were sent to the supplier, and the money was divided be-
tween the manager and the family member. Which of the following
a. Segregating the receiving function from the authorization of
internal controls would have most likely prevented this fraud from
parts purchases.
occurring?
a. Segregating the receiving function from the authorization of

parts purchases.
b. Establishing predefined spending levels for all vendors during
the bidding process.
c. Using the company's inventory system to match quantities
requested with quantities received.
d. Comparing the bill of lading for replacement parts to the ap-
proved purchase order.
Graphical notations that show the flow and transformation of data
within a system or business area are called
c. Data flow diagrams. a. Program structure charts.

b. Action diagrams.
c. Data flow diagrams.
d. Conceptual data models.
Which of the following situations will cause an internal auditor to
question the adequacy of controls over a purchasing function?
a. Receiving reports are forwarded to purchasing where they are

matched with purchase orders and sent to accounts payable.
a. Receiving reports are forwarded to purchasing where they are b. The accounts payable section prepares documentation for
matched with purchase orders and sent to accounts payable. payments.
c. The original and one copy of the purchase order are mailed to
the vendor. The copy on which the vendor acknowledges accep-
tance is returned to the purchasing department.
d. Unpaid voucher files and perpetual inventory records are inde-
pendently maintained.
7 / 10
ACT Gleim Quiz 4
A manufacturer uses large quantities of small, inexpensive items,
such as nuts, bolts, washers, and gloves, in the production
process. As these goods are purchased, they are recorded in
inventory in bulk amounts. Bins are located on the shop floor to
provide timely access to these items. When necessary, the bins
are refilled from inventory, and the cost of the items is charged to
a consumable supplies account, which is part of shop overhead.
a. Require management review of reports on the cost of consum- Which of the following would be an appropriate improvement of
able items used in relation to budget. controls in this environment?
a. Require management review of reports on the cost of consum-

able items used in relation to budget.
b. Lock the bins during normal working hours.
c. None of these controls are needed for items of minor cost and
size.
d. Relocate bins to the inventory warehouse.
An auditor frequently uses flowcharts to determine whether there
is
c. Inefficiency and lack of controls. a. Authority to meet the performance criteria.

b. Satisfactory performance of an operation.
c. Inefficiency and lack of controls.
d. Sufficient but not excessive personnel assigned to an operation.
Which of the following describes the most effective preventive
control to ensure proper handling of cash receipt transactions?
a. Have bank reconciliations prepared by an employee not in-

volved with cash collections and then have them reviewed by a
supervisor.
d. One employee issues a prenumbered receipt for all cash collec-
b. The employee who receives customer mail receipts prepares
tions; another employee reconciles the daily total of prenumbered
the daily bank deposit, which is then deposited by another em-
ployee.
c. Use predetermined totals (hash totals) of cash receipts to con-
trol posting routines.
d. One employee issues a prenumbered receipt for all cash collec-
tions; another employee reconciles the daily total of prenumbered
The internal audit activity of an organization is an integral part
of the organization's risk management, control, and governance
processes because it evaluates and contributes to the improve-
ment of those processes. Select the type of control provided
when the internal audit activity conducts a systems development
c. Feedforward control. analysis.
a. Policies and procedures.

b. Feedback control.
c. Feedforward control.
d. Strategic plans.
An internal auditor notes year-to-year increases for small tool
expense at a manufacturing facility that has produced the same
amount of identical product for the last 3 years. Production inven-
tory is kept in a controlled staging area adjacent to the receiving
dock, but the supply of small tools is kept in an unsupervised area
b. Move the small tools inventory to the custody of the production near the exit to the plant employees' parking lot. After determining
inventory staging superintendent and implement the use of a that all of the following alternatives are equal in cost and are also
special requisition to issue small tools. feasible for local management, the internal auditor would best ad-
dress the security issue by recommending that plant management
a. Place supply of small tools in a secured area, install a key-ac-

cess card system for all employees, and record each key-access
transaction on a report for the production superintendent.
8 / 10
ACT Gleim Quiz 4
b. Move the small tools inventory to the custody of the production
inventory staging superintendent and implement the use of a
special requisition to issue small tools.
c. Initiate a full physical inventory of small tools on a monthly basis.
d. Close the exit to the employee parking lot and require all plant
employees to use a doorway by the receiving dock that also
provides access to the plant employees' parking area.
Internal control should follow certain basic principles to achieve its
objectives. One of these principles is the segregation of functions.
Which one of the following examples does not violate the principle
of segregation of functions?
a. The sales manager has the responsibility to approve credit and

c. The chief financial officer has the authority to sign checks but the authority to write off accounts.
gives the signature block to the assistant chief financial officer to b. The warehouse clerk, who has the custodial responsibility over
run the check-signing machine. inventory in the warehouse, may authorize disposal of damaged
goods.
c. The chief financial officer has the authority to sign checks but
gives the signature block to the assistant chief financial officer to
run the check-signing machine.
d. The department time clerk is given the undistributed payroll
checks to mail to absent employees.
Fact Pattern: An organization has grown rapidly and has just
automated its human resource system. The organization has
developed a large database that tracks employees, employee
benefits, payroll deductions, job classifications, ethnic code, age,
insurance, medical protection, and other similar information. Man-
agement has asked the internal audit activity to review the new
system.
The automated system contains a table of pay rates matched with

a. Require a supervisor in the department, who does not have the the employee job classifications. The best control to ensure that
ability to change the table of pay rates, to compare the changes the table is updated correctly for only valid pay changes is to
with a signed management authorization.
a. Require a supervisor in the department, who does not have the
ability to change the table of pay rates, to compare the changes
with a signed management authorization.
b. Require that all pay changes be signed by the employee to verify
that the change goes to a bona fide employee.
c. Ensure that adequate edit and reasonableness checks are built
into the automated system.
d. Limit access to the data table to management and line super-
visors who have the authority to determine pay rates.
Organizational independence is required in the processing of
customers' orders in order to maintain an internal control structure.
Which one of the following situations is not a proper segregation
of duties in the processing of orders from customers?
a. Shipping of goods by the shipping department that have been

c. Approval of a sales credit memo because of a product return by
retrieved from stock by the finished goods storeroom department.
the sales department with subsequent posting to the customer's
b. Approval by credit department of a sales order prepared by the
account by the accounts receivable department.
sales department.
c. Approval of a sales credit memo because of a product return by
the sales department with subsequent posting to the customer's
account by the accounts receivable department.
d. Invoice preparation by the billing department and posting to
customers' accounts by the accounts receivable department.
The actions taken to manage risk and increase the likelihood

that established objectives and goals will be achieved are best
a. Control
described as
9 / 10
ACT Gleim Quiz 4
a. Control.
b. Compliance.
c. Supervision.
d. Quality assurance.
10 / 10

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ACCT 401 Unit 2

Study online at https://quizlet.com/_8q6jwn

A review of an organization's code of conduct revealed that it con-

The IIA's Code of Ethics requires internal auditors to perform their

Objectivity is most likely impaired by an internal auditor's

Which of the following statements is true with respect to due

Managerial control can be divided into feedforward, concurrent,

Which of the following control procedures does an internal auditor

The variability of a population, as measured by the standard

Difference estimation sampling would be appropriate to use to

In planning an engagement, the internal auditor establishes ob-

An internal auditor performs an analytical review by comparing the

b. Horizontal (or systems) flowchart. a. Gantt chart.

a. Handling of credit memos.

a. Customer billing complaints are investigated by the controller's

a. An employee who is unable to read is assigned custody of

c. Flowchart. a. Control chart.

a. Matching quantity received with the packing slip.

a. Automatic reorder by the purchasing department when low

a. Planning looks to the future; controlling is concerned with the

One possible fault of this system is that

a. Payment can be made for supplies received but not ordered by

a. An informal wage and salary policy to be competitive with the

a. Start with management's decisions to set sales prices. Gath-

a. Customers' statements are mailed monthly by the accounts

a. Purchasing procedures are well designed and are followed

a. Require that all donations be made by check.

1. Require managerial approval for materials to be declared scrap

a. Copies of industry operating standards.

a. Recording of cash receipts and preparation of bank reconcilia-

a. Gain the understanding necessary to test the effectiveness of

a. Goods received are counted and compared with quantities on

c. Preventive control. a. Monitoring control.

a. A clerk in the invoice processing department fails to match

Which of the following is a control deficiency in this situation?

a.There is no receiving function located at individual stores.

b. Inventory control department. a. Purchasing department.

a. Reviewing the accounting distribution for the expenditure.

a. Segregating the receiving function from the authorization of

c. Data flow diagrams. a. Program structure charts.

a. Receiving reports are forwarded to purchasing where they are

a. Require management review of reports on the cost of consum-

c. Inefficiency and lack of controls. a. Authority to meet the performance criteria.

a. Have bank reconciliations prepared by an employee not in-

a. Policies and procedures.

a. Place supply of small tools in a secured area, install a key-ac-

a. The sales manager has the responsibility to approve credit and

The automated system contains a table of pay rates matched with

a. Shipping of goods by the shipping department that have been

The actions taken to manage risk and increase the likelihood

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