Which of the following engagement procedures will provide the least relevant information for determining that payroll payments were made to bona fide employees?

CONDUCT ENGAGEMENTS (25–35%)

9 11 11 11 11

16 17 18 18

1.7 IIA’s Performance Standards (a) Performing the Engagement (b) Communicating Results

20 20 27

Multiple-Choice Questions Collect Data and Evaluate Audit Evidence Develop and Review Workpapers Report Engagement Results Multiple-Choice Answers and Explanations Collect Data and Evaluate Audit Evidence Develop and Review Workpapers Report Engagement Results

1.5 Develop and Review Audit Working Papers 1.6 Audit Reporting (a) Audit Report Purpose (b) Audit Report Timeliness (c) Audit Report Contents

Report Presentation Report Distribution Oral Reports Summary Reports

(d) (e) (f) (g)

1 1 3 4 5 5 6 6

Theory 1.1 Audit Scheduling 1.2 Audit Supervision 1.3 Collecting Data and Information 1.4 Evaluate the Audit Evidence (a) Types of Audit Evidence (b) Standards of Audit Evidence (c) Appropriateness of Audit Evidence (d) Information Sources for Audit Evidence

36 36 47 50 59 59 70 73

THEORY

PY R

1.1 Audit Scheduling An audit schedule is an essential part of planning internal auditing department activities. Since audit resources, in terms of available time and the number of auditors, are limited, the audit manager needs to balance the needs of the audit plan and the availability of resources. It is prudent to hire auditors with different skill and experience levels so that all required skills are available among the audit staff even though each auditor may not have all the required skills. It is the audit manager’s responsibility to match the available audit resources to the audit requirements. If the required resources are not available, the audit manager should try to acquire them from either internal or external sources. The audit manager will notice that there are constraints on the conduct of the audit that may affect the completion of the audits as planned. Some examples of such constraints are staff unavailability due to illness or termination; auditee not ready for the audit due to some business considerations such as mergers, demergers, and other extraordinary events; and time constraints, such as accounting month closing work, quarter-end work, or year-end work. The audit manager needs to consider all these constraints with alternative plans in place. When it comes to assigning the audit staff to particular audit responsibilities, the two approaches most often taken are the “team” concept and the “pool” concept. Under the team concept, individuals are given responsibility only for certain segments of the organization. Under the pool concept, individuals are made available for assignment to any audit. What works best is determined by the needs of individual organizations, but both approaches have their advantages and drawbacks. The team approach offers the opportunity for the individual staff members to become proficient in given areas quickly. Experienced audit staff members are more likely to work in specialized team-type areas. The pool approach allows the individual staff member to gain experience in a broader sense in many areas of the organization. What usually works in practice is a blending of the two approaches, with new staff auditors being available under the pool concept and more experienced auditors developing supervisory skills as well as expertise in more specialized areas. During the planning of the audit, the audit manager needs to break down the audit project into small and manageable tasks, which can be assigned to audit staff to facilitate monitoring the audit results and progress. Project management tools and techniques, such as program evaluation and review techniques (PERT), critical path methods (CPM), and periodic progress reports, might help the audit manager to plan and control major and complex audit projects.

WILEY CIA EXAM REVIEW: VOLUME 2

KEY CONCEPTS TO REMEMBER: MANAGING AN AUDIT ASSIGNMENT • An audit department can use the pool concept to assign all staff and most senior auditors to engagements. Monthly audit work schedules would most likely ensure effective staff utilization. • The effectiveness of an audit assignment is related to the findings and the action taken on those findings. Conducting an exit interview with auditees would contribute to assignment effectiveness. • The internal audit department time budgets normally should be prepared in terms of hours or days. • A primary purpose of an exit conference is to ensure the accuracy of the information used by an internal auditor. A secondary benefit of an exit conference is to improve relations with auditees. One purpose of the exit conference is for the internal auditor to review and verify the appropriateness of the audit report based on auditee input. • The primary reason that the auditor should document a closing conference is that information may be needed if a dispute arises. • A purpose of an audit closing conference is to generate commitment for appropriate managerial action. • A primary purpose of the audit closing conference is to resolve remaining issues. • The best purpose of an exit conference is to ensure that there have been no misunderstandings or misinterpretation of fact. The auditors are required to discuss conclusions and recommendations at appropriate levels of management before issuing final written reports. The purpose of the exit conference is not whether the objectives of the audit and the scope of the audit work are known by the auditee, the auditee understands the audit program, or the list of persons who are to receive the final report are identified. • The primary purpose of conducting a closing conference with the manager of an organizational unit audited should be to confirm the soundness of audit results and make such modifications as seem justified. • During an exit conference, an auditor and an auditee disagreed about a welldocumented audit finding. Assuming that the disagreement cannot be resolved prior to issuing the audit report, it should be handled by presenting both the audit finding and the auditee’s position on the finding. Reasons for disagreement should be stated. • Audit objectives of the audit closing or exit conference are to discuss the findings, to resolve conflicts, and to identify management’s actions and responses to the findings. • Recommendations in audit reports may or may not actually be implemented. • Working papers should include identifying concerns for future audits, but such concerns are not an objective of the audit closing conference. • Interim reports are issued during an audit to communicate information requiring immediate action. • An oral report is appropriate when there are significant problems discovered during the audit. • If an audit is done in a sales department, a copy of the audit report should be sent to the sales director and vice president of marketing. • Participants who would be appropriate to attend an exit conference include the responsible internal auditor, representatives from management who are knowledgeable of detailed operations, and those who can authorize implementation of corrective action. • After an audit report with adverse findings has been communicated to appropriate auditee personnel, proper action is to schedule a follow-up review. • Due professional care calls for consideration of the possibility of material irregularities during every audit assignment. • Due care in the conduct of an audit implies the conduct of examinations and verifications to a reasonable extent.

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• When written performance standards established by management are vague and have to be interpreted by the auditor, the auditor should establish agreement with the auditee as to the standards needed to measure performance. • An auditor begins an audit with a preliminary evaluation of internal controls, the purpose of which is to decide on the extent of future auditing activities. If the auditor’s preliminary evaluation of internal controls results in a finding that controls may be inadequate, the next step would be an expansion of audit work prior to the preparation of an audit report. • The performance appraisal system for evaluating an auditor should include specific accomplishments directly related to the performance of the audit program (i.e., based on task outcomes). 1.2 Audit Supervision The most effective way to ensure the quality and expedite the progress of an audit assignment is by exercising proper supervision from the start of the planning process to the completion of audit work and reporting. Supervision adds seasoned judgment to the work performed by less experienced staff and provides necessary on-the-job training for them. Assigning and using staff is important to satisfying audit objectives. Since skills and knowledge vary among auditors, work assignments must be commensurate with skills and abilities. Supervisors should satisfy themselves that staff members clearly understand their assigned tasks before starting the work. Staff should be informed not only of what work they are to do and how they are to proceed but also why the work is to be conducted and what it is expected to accomplish. With experienced staff, the supervisors’ role may be more general. They may outline the scope of the work and leave details to assistants. With a less experienced staff, a supervisor may have to specify not only how to gather data but also techniques for analyzing them. Effective supervision ensures that audit assignments are properly planned and produce a high- quality and consistent product. A competent supervisor can help in preparing audit plans, developing and controlling budgets and schedules, improving auditor and auditee relationships, ensuring the preparation of consistent and quality working papers, and reviewing audit reports. Supervision is a continuing process, beginning with audit planning and ending with the conclusion of audit assignments and distribution of the final audit report. Supervisors should attend the initial and final meetings with the auditee, when possible. Supervisors should approve both the initial audit work program and any revisions to the audit work program. Nonconformance to the approved audit work program should be recorded in the working papers, giving adequate reasons. Supervisors should review the working papers and monitor and control audit budgets and schedules through observation and periodic progress and time reports. When supervisors review the audit report, they should refer to the working papers to ensure that all evidence and findings are adequately supported and that the deficiency audit findings are objective, fair, significant, and factual. KEY CONCEPTS TO REMEMBER: AUDIT SUPERVISION • “The proficiency of the internal auditors and the difficulty of the audit assignment” best describes what should determine the extent of supervision required for a particular internal audit assignment. The extent of supervision is not determined by whether the audit involves possible fraud on the part of management, whether the audit involves possible violations of laws or government regulations, or the audit organization’s prior experience in dealing with the particular auditee. • Time budgets, weekly status reports, and time reports would be of most assistance in the supervision of a specific audit assignment. An assignment board would be of least assistance. • Using only daily, close supervision and written memoranda is an acceptable approach for managing a small department, but is not appropriate for use with a large audit department. • Supervising an audit engagement properly includes ensuring that the approved audit program is carried out.

WILEY CIA EXAM REVIEW: VOLUME 2

• Audits should be properly supervised to produce professional audits of consistently high quality. This requires review of all audit programs, working papers, and draft audit reports. • Best control over the work on which audit opinions are based is a supervisory review of all audit work. An audit opinion is the auditor’s professional judgment of the situation, which was reviewed by an audit supervisor. • When reviewing the audit working papers, the audit supervisor is to determine whether working papers adequately support the audit findings, conclusions, and audit reports. • “An audit finding recorded in the working papers and report draft that omits the criteria used for evaluation” should be a deficiency found by an audit supervisor when reviewing a set of working papers. • An audit supervisor should evaluate the evidence collected by the auditor during the review of the audit working papers. Substantive testing supports the “sufficient” evidence; tests of control support “competent” evidence. The relationship of the sample to the audit objectives supports “relevant” evidence. An example of relevant evidence is selecting a stratified sample of billings by an agency specializing in newspaper advertising when the company is requesting an artwork for a magazine advertising. “Insufficient” evidence is when an auditor interviews the firm’s advertising manager, products marketing director, and major customers to determine the adequacy of contract and compliance with fair trade regulations. The auditor should have talked to legal counsel also. 1.3 Collecting Data and Information Information is the heart of the problem-solving process. Decisions are made using the information to solve existing problems and to make decisions. For the information to be useful in so many ways, it has to meet certain quality attributes, such as availability, timeliness, accuracy, and relevancy. Knowledge is power. Knowledge is the result of information. The amount and the right kind of information a person has can make the difference between an informed decision and a guess, between success and failure. Knowledge is a synthesis of information. In this information age, knowing means winning. The more one knows about something, the more control one has over one’s own destiny. The need for relevant information is not only to avoid present failures, but also to maximize future opportunities and minimize potential future problems. As changes create a need for more information, the value of information will begin to increase significantly. The successful executives and professionals (e.g., auditors) will be those who have mastered the art of being information conscious. Information consists of facts, figures, rules, news, statistics, data, values, impressions—pieces of intelligence that singly or jointly increase awareness of the subject matter. Information should be differentiated from assumptions. An assumption is a conclusion based on noninformation, which can be true or false. It has no evidence. Assumptions are made all the time. We make false assumptions, such as certain data are: easy to find when in fact they are difficult to find, difficult to find when in fact they are easy, inexpensive to buy when in fact they are expensive, and expensive to buy when in fact they are inexpensive. Information is obtained only by asking questions or searching for it. Information is an outcome of a process that involves fact gathering, data collection, measurement, interpretation, analysis, and forecasting. Information can be said to be the result of data. Data consist of raw numbers and facts. Information consists of meaningful numbers and facts. Information involves the addition of a certain value to data through some level of selection, interpretation, or rearrangement. Since management makes decisions and auditors use information, they need to know how and where the information is coming from. At least four sources of information are available: primary and secondary information and internal and external sources (see Exhibit 1.1).

1: CONDUCT ENGAGEMENTS

Sources of Information Primary information (original, expensive) Secondary information (not original, inexpensive) Internal sources (facts about the firm, used in planning) External sources (facts about the economy, markets)

Exhibit 1.1: Sources of information

Primary information is firsthand information from an original source. Secondary information is secondhand. Primary information is usually expensive to gather while secondary information is inexpensive. Internal sources involve facts about an organization (sales data, customer data, financial data, and product data). Internal sources are used in planning and performance measurement. External sources are facts about the world outside the organization. This information involves facts about competitors, markets, demographics, the environment, and the economy. Managers often make decisions without external sources. External sources are not usually perceived as being that important; they are more difficult to obtain and often are neglected, resulting in bad consequences. The goal should be to combine external sources with internal sources. Managers should think of problems and opportunities as information needs, as a series of questions that need to be answered. Information consciousness means to think information when thinking about problems. 1.4 Evaluate the Audit Evidence (a) Types of Audit Evidence. Audit evidence is information that provides a factual basis for audit opinions. It is the information documented by the auditors and obtained through observing conditions, interviewing people, examining records, and testing documents. Audit evidence may be categorized as physical, 1 documentary, testimonial, and analytical (see Exhibit 1.2). Types of audit evidence

Physical (direct inspection and observation) Documentary (letters, contracts, records) Testimonial (obtained from others) Analytical (computations, comparisons)

Exhibit 1.2: Types of audit evidence

Physical evidence is obtained by direct inspection or observation of people, property, or events. Such evidence may be documented in the form of memoranda summarizing the matters inspected or observed, photographs, charts, maps, or actual samples. An auditor’s observation of the functioning of an internal control system produces physical evidence. Examples of physical evidence include: taking a photograph of the auditees’ workplace, such as improperly stored materials or unsafe conditions; observing conditions; test counting a batch of inventory; and testing the existence of an asset. Documentary evidence consists of created information, such as letters, contracts, accounting records, invoices, and management information on performance. Examples of documentary evidence include: a page of the general ledger containing irregularities placed there by perpetrator of a fraud; and determining whether erroneous billings occurred when the auditor for a construction contractor finds material costs increasing as a percentage of billings and suspects that materials billed to the company are being delivered to another contractor. A contract is the most appropriate evidence for the auditor to obtain and review when evaluating the propriety of a payment to a consultant. Testimonial evidence is obtained from others through statements received in response to inquiries, through interviews, or through responses to questionnaires. Testimonial evidence needs to be evaluated from the standpoint of whether the individual may be biased or have only partial knowledge about the area. Testimonial evidence obtained under conditions where persons may speak freely is more credible than testimonial evidence obtained under compromising conditions (e.g., where persons may be intimidated). Examples of testimonial evidence include: a written, signed statement from an interviewee in response to a question asked by an auditor during an interview; a written statement by or a letter from an

Comptroller General of the United States, Government Auditing Standards (Washington, DC: US General Accounting Office, 1994).

WILEY CIA EXAM REVIEW: VOLUME 2

auditee in response to a specific inquiry made by an auditor; and a letter from the company’s attorney in response to inquiries about possible litigation. Analytical evidence includes computations, comparisons, reasoning, and separation of information into components. Examples of analytical evidence include: to evaluate the reasonableness of the quantity of scrap material resulting from a certain production process compared to industry standards; to evaluate the reasonableness of account balances; and concluding that there was an adequate separation of duties in the counting and recording of cash receipts. (b) Standards of Audit Evidence. All audit evidence should meet the three standards of sufficiency, competence, and relevance. Evidence is sufficient if it is based on facts. Competent evidence is reliable evidence. The term “relevance” refers to the relationship of the information to its use. When audit evidence does not meet these three standards, additional (corroborative) evidence is required before expressing an audit opinion (see Exhibit 1.3). Sufficiency (evidence is convincing) Standards of evidence

Competence (evidence is reliable) Relevance (evidence is logical)

Exhibit 1.3: Standards of evidence

(c) Appropriateness of Audit Evidence. The phrase “appropriateness of audit evidence” refers to persuasiveness (sufficiency), relevance, and competence (reliability). The following discussion helps auditors determine what constitutes sufficient, relevant, and competent evidence to support their findings and conclusions. Evidence is sufficient if there is enough of it to support the auditors’ findings. In determining the sufficiency of evidence, it may be helpful to ask: Is there enough evidence to persuade a reasonable person of the validity of the findings? An essential factor in evaluating the “sufficiency” of evidence is that it must be convincing enough for a prudent person to reach the same decision. Therefore, sufficiency deals with the persuasiveness of the evidence (see Exhibit 1.4 for hierarchy of persuasive evidence). When appropriate, statistical methods may be used to establish sufficiency. When sampling methods are used, the concept of sufficiency of evidence means that the samples selected provide reasonable assurance that they are representative of the sampled population. Interviewing the auditee is not enough to provide sufficient evidence. Some examples of sufficient evidence follow: • Verifying the quantity of fixed assets on hand by physical observation would provide the most persuasive evidence of quantity on hand. • Using test data, an auditor has processed both normal and atypical transactions through a computerized payroll system to test calculations of regular and overtime pay amounts. Sufficient competent evidence of controls exists if test data results are compared to predetermined results or expectations. • The audit procedure that provides the most persuasive evidence about the loan’s collectibility is to examine the documentation of a recent, independent appraisal of the real estate that was used a security. • The most persuasive evidence that the incoming supply counts are made by the receiving department is a periodic observation by the internal auditor over the course of the audit. • “A positive confirmation received directly from the customer” is the most persuasive evidence concerning the existence and valuation of a receivable. • If the audit objective is to gain evidence that payment has actually been made for a specific invoice from a vendor, the most persuasive evidence would be obtained by a canceled check, made out to the vendor and referenced to the invoice, included in a cutoff bank statement, which the auditor received directly from the bank. • If an auditor wants assurance of the existence of inventory stored in a warehouse, the most persuasive evidence is to physically observe the inventory in the warehouse. • Externally prepared documents (e.g., invoice) would provide the most persuasive evidence regarding an asset value that was acquired.

1: CONDUCT ENGAGEMENTS

• A physical examination would provide the most persuasive evidence for testing the existence of an asset. Physical examination

Most persuasive

Externally prepared documents Auditor observation of auditee’s procedures Auditor inquiry of managment Least persuasive

Exhibit 1.4: Hierarchy of persuasive evidence

Evidence used to support a finding is relevant if it has a logical, sensible relationship to that finding. Relevant evidence is consistent with the audit objectives and supports audit findings and recommendations. Evidence is competent to the extent that it is consistent with fact (i.e., evidence is competent if it is valid). “Competent” evidence is satisfied by an original signed document, but copies do not provide competent evidence. Evidence that is both available and reliable is competent. Competent information is reliable and the best available through the use of appropriate audit functions. The next presumptions are useful in judging the competence of evidence. However, these presumptions are not to be considered sufficient in themselves to determine competence. • Evidence obtained from a credible independent source is more competent than that secured from the audited organization. An external source of evidence should impact audit conclusions most. • Evidence developed under an effective system of management controls is more competent than that obtained where such control is weak or nonexistent. • Evidence obtained through the auditors’ direct physical examination, observation, computation, and inspection is more competent than evidence obtained indirectly. An example of external and internal evidence is when an auditor reviews the count sheets, inventory printouts, and memos from the last inventory during determination of causes of inventory shortages shown by the physical inventories. Examples of competent evidence follow: • An audit objective of an accounts receivable function is to determine if prescribed standard procedures are followed when credit is granted. An audit procedure providing the most competent evidence would be selecting a statistical sample of credit applications and testing them for conformance with prescribed procedures. • The most “reliable” (competent) evidence of determining a company’s legal title to inventories is paid vendor invoices. • A contract dispute has arisen between a company and a major supplier. To resolve the dispute, the most competent evidence would be the original contract. • A positive confirmation of an accounts receivable that proves that it actually exists is competent evidence. • In deciding whether recorded sales are valid, most “competent” evidence would be obtained by looking at the shipping document, the independent bill of lading, and the invoice for the merchandise. Auditors should, when they deem it useful, obtain from officials of the audited entity written representations concerning the competence of the evidence they obtain. Written representations ordinarily confirm oral representations given to the auditor, indicate and document the continuing appropriateness of such representations, and reduce the possibility of misunderstandings concerning the matters that are the subject of the representations. An example of relevant evidence is aging of accounts receivables, which provides relevant evidence regarding the validity of receivables and thus the allowance account. (d) Information Sources for Audit Evidence. The auditors’ approach to determining the sufficiency, relevance, and competence of evidence depends on the source of the information that constitutes the evi-

WILEY CIA EXAM REVIEW: VOLUME 2

dence (see Exhibit 1.5). Information sources include original data gathered by auditors and existing data gathered by either the auditee or a third party. Data from any of these sources may be obtained from computer-based systems. Information Sources for Evidence Data gathered by the auditors Data gathered by the auditee Data gathered by third parties Data gathered from computer-based systems

Exhibit 1.5: Information sources for evidence

(i) Data gathered by the auditors. These data include the auditors’ own observations and measurements. Among the methods for gathering these types of data are questionnaires, structured interviews, and direct observations. The design of these methods and the skill of the auditors applying them are the keys to ensuring that these data constitute sufficient, competent, and relevant evidence. When these methods are applied to determine cause, auditors are concerned with eliminating rival explanations of cause. Doing so involves considering three types of validity (1) internal validity, (2) construct validity, and (3) external validity. 1. Internal validity means that A (the program as defined for the particular audit) caused B (the effect measured in the audit). 2. Construct validity refers to whether the auditors are measuring or observing what they intend to. 3. External validity refers to the ability to generalize the auditors’ findings to a broader universe. (ii) Data gathered by the auditee. Auditors can use data gathered by the auditee as part of their evidence. If those data are significant to the overall body of evidence supporting their findings, auditors should obtain additional evidence of the reliability of those data. Statements by auditee management or personnel about the reliability of operations data should be corroborated with other evidence. Auditors can obtain the necessary evidence by testing the effectiveness of the entity’s controls over the reliability of the data, by direct tests of the data, or by a combination of the two. When the auditors’ tests of data disclose errors in that data, the auditors should consider the significance of those errors in relation to the audit objectives. If the auditors conclude that these errors are so significant that the data are not valid or reliable, they should consider whether to • Seek evidence from other sources • Redefine the audit’s objectives to eliminate the need to use the invalid or unreliable data, or • Use the data, but clearly indicate in their report the data’s limitations and refrain from making unwarranted conclusions or recommendations Similar considerations apply when the auditors are unable to obtain sufficient, competent, and relevant evidence about the validity and reliability of the auditee’s data. (iii) Data gathered by third parties. The auditors’ evidence may also include data gathered by third parties. In some cases, these data may already have been audited, or the auditors may be able to audit this evidence themselves. Often, however, it will not be practical to obtain evidence of the data’s validity and reliability. How the use of unaudited third-party data affects the auditors’ report depends on the data’s significance to the overall body of evidence supporting the auditors’ findings. If it is significant, the auditors should clearly indicate in their report the data’s limitations and refrain from making unwarranted conclusions or recommendations based on those data. (iv) Data gathered from computer-based systems. Auditors should obtain sufficient evidence that computer-processed data are valid and reliable when those data are significant to the overall body of evidence supporting the auditors’ findings, and any conclusions or recommendations. (When the reliability of a computer-based system is the primary objective of the audit, the auditor should conduct a review of the system’s general and application controls.) This is necessary regardless of whether the data are provided to auditors or auditors independently extract them. (When the auditor uses computer-processed data or includes them in the report for background or information purposes, and when those data are not significant to the auditor’s results, citing the source of the data and stating that they were not verified will satisfy the reporting standards for accuracy and completeness).

1: CONDUCT ENGAGEMENTS

Auditors should determine if other auditors have worked to establish the validity and reliability of the data or the effectiveness of the controls over the system that produced it. If they have, auditors may be able to use that work. If not, auditors can obtain evidence about the validity and reliability of computer-processed data from tests of general and application controls, direct tests of the data, or a combination of both. 1.5 Develop and Review Audit Working Papers Working papers document the basis for findings, conclusions, and auditors’ recommendations, and should contain sufficient information to enable an experienced auditor previously not connected with the audit to ascertain from them what work the auditors performed to support the findings, conclusions, or recom2 mendations. This is the ultimate objective of the audit working papers. The working papers not only document the auditors’ work, but also allow for the review of audit quality. Working papers are the link between fieldwork and the audit report. The requirements to prepare working papers may be satisfied with documentation maintained on disks, tapes, or film. Working papers serve three purposes: (1) they provide the principal support for the auditors’ report, (2) aid the auditors in conducting and supervising the audit, and (3) allow others to review the audit’s quality (see Exhibit 1.6). Purposes of working papers

Support the audit report Aid in conducting and supervising the audit Allow others to review the audit’s quality

Exhibit 1.6: Purposes of audit working papers

Audit organizations should establish policies and procedures to ensure the safe custody and retention of working papers for a time sufficient to satisfy legal and administrative requirements. These policies should also cover the need to make the working papers available for others to review audit quality. These quality reviewers need a written explanation of the basis for the auditor’s significant judgments. Arrangements need to be made to ensure that the director of internal audit will make working papers available to others after approval. Working papers should contain • The objective, scope, and methodology, including any sampling criteria used, and results of the audit • Evidence of the work performed to support findings, judgments, and conclusions • Evidence of supervisory reviews of the work conducted Working papers can be prepared electronically. The contents of the working papers will be the same whether they are paper or electronic. However, the electronic media requires additional considerations due to technological factors. These considerations include generating backup copies of working papers, security and control procedures to access working papers, and data file retention procedures. Exhibit 1.7 presents major advantages and disadvantages for both manually and electronically prepared working papers. Manually prepared working papers Advantages • Can feel and touch the paper • Can make notes and comments easily • Approved by tax authorities • Easy to work with due to familiar media

Electronically prepared working papers Advantages • Do not take valuable space to file and store • Easy to transport among auditors • Cross-referencing is easy to do • Changes can be made quickly and easily • Save time overall • Quick sharing of information among audit staff when used through a computer network • Approved by tax authorities

Disadvantages • Materials are bulky to handle • Take value space for filing and storage • Difficult to make changes; take more time • Difficult to transport especially when there are multiple volumes • Paper can easily be destroyed by fire, flood • Cross-referencing is difficult and time-consuming to do

Disadvantages • Require specific technical training • Cannot put normal signature • Require elaborate access controls • Cannot feel and touch like the “paper” • Not easy to work with compared to paper • Require access to a computer • Cross-referencing is difficult to verify

Exhibit 1.7: Advantages and disadvantages of manually and electronically prepared working papers

Ibid.

WILEY CIA EXAM REVIEW: VOLUME 2

KEY CONCEPTS TO REMEMBER: AUDIT WORKING PAPERS • The functions of audit working papers are to: facilitate third-party reviews; aid in the planning, performance, and review of audits; provide the principal evidential support for the auditor’s report; explain all audit verification symbols properly; and make cross-references between the working papers and the audit report. However, the working papers are not to aid in the professional development of the operating staff or teach auditing skills to nonauditors. • The purpose of “summaries” in working papers is to distill the most useful information from several working papers into a more usable form. • A working paper is complete when it satisfies the audit objectives for which it is developed. • Working papers document the auditing procedures performed, the information obtained, and the conclusions reached. Each individual working paper should, at a minimum, contain a descriptive heading. • When determining the retention period for the working papers of a contract audit, it is best to seek the assistance of the legal department to ensure compliance with contract provisions. • Working papers provide the principal evidential support for the internal auditor’s report and are the principal purpose for retaining the working papers. • Working papers should include documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal control. • When reviewing the audit working papers, the audit supervisor must determine that working papers adequately support audit findings, conclusions, and audit reports. • To properly control working papers, the auditor should not make them available to people who have no authority to use them. With working papers, the auditor can share the results of an audit with the auditee, permit access to external auditors, and permit access to government auditors. • Audit working papers should be reviewed to ensure that no issues are open at the conclusion of the fieldwork. • The director of internal auditing should establish policies for indexing and the type of working papers files maintained. • An adequately documented working paper should be concise but complete. • Working papers are the property of the auditor. Good control of working papers requires that only the auditor who created a working paper can change an electronic working paper. • When audit conclusions are challenged, the auditor’s factual rebuttal is best facilitated by cross-referencing the working papers. • Working papers should be disposed of when they are of no further use and in accordance with departmental policy. Retention and destruction policies should be approved by legal counsel. • A primary purpose of an auditor’s working papers is to provide evidence of the planning and execution of audit procedures performed. • Working papers on fraud audits should not be retained indefinitely. Some guidelines are: working papers should be disposed of when they have no further use, working paper retention schedules should be approved by legal counsel, and working paper retention schedules should consider legal and contractual requirements. Working papers should not be retained indefinitely. • Audit working papers should not be overdocumented by including unnecessary forms, reports, and documents. • Statistical summaries of working papers are used to consolidate numeric data scattered among several schedules. • An auditor’s working papers should support the findings and recommendations to be reported and should facilitate peer reviews.

1: CONDUCT ENGAGEMENTS

• The primary purpose for indexing working papers is to permit cross-referencing and simplify supervisory review. • The supervisory review of working papers determines that working papers adequately support findings, conclusions, recommendations, and audit reports. • The primary objective of maintaining security over working papers is to prohibit unauthorized changes or removal of information. • An internal auditor’s working papers should be reviewed by the management of the internal auditing department and should contain certain standard information, such as heading, date work sheet completed, auditor’s initials, and index number. Including all forms and directives used by the auditee department in the working papers would constitute inappropriate working paper preparation. A working paper can include flowcharts, findings cross-referenced to supporting documentation, and tick marks explained in footnotes. The question of whether a working paper is complete or not is determined by whether the audit objective has been met and supported. Working papers should describe objectives, procedures, facts, conclusions, and recommendations. Working paper summaries can be used to promote efficient working paper review by supervisors. Working paper control is best described by a restricting access to only those who have a legitimate need to know. 1.6 Audit Reporting (a) Audit Report Purpose. Written audit reports serve multiple purposes. They communicate the results of the audit work to auditees and others, make the results less susceptible to misunderstanding, and facili3 tate follow-up reviews to determine whether appropriate corrective actions have been taken. (b) Audit Report Timeliness. To be of maximum use, the audit report must be timely. A carefully prepared report may be of little value to decision makers if it arrives too late. Therefore, the audit organization should plan for the prompt issuance of the audit report and conduct the audit with this goal in mind. The auditors should consider interim reporting, during the audit, of significant matters to appropriate auditees. Such communication, which may be oral or written, is not a substitute for a final written report, but it does alert auditees to matters needing immediate attention and permits them to correct the problems before the final report is completed. ADVANTAGES AND DISADVANTAGES OF INTERIM REPORTS Advantages • Final report-writing time can be minimized. • Communication of critical information requiring immediate attention is facilitated. • Informal and verbal communication can take place. Disadvantages • A formal, written interim report may negate the need for a final report in certain circumstances. • It puts more demand on auditors to make sure the evidence is solid and complete. Summary reports highlighting audit results may be appropriate for levels of management above the auditee. They may be issued separately from or in conjunction with the final report. (c) Audit Report Contents. The contents of the audit report should include: objectives, scope, and methodology; audit findings, conclusions, and recommendations; compliance with standards, regulations, and laws; management (auditee’s) responses; and noteworthy accomplishments (see Exhibit 1.8).

Ibid.

WILEY CIA EXAM REVIEW: VOLUME 2 Components of Report Contents Objectives, scope, and methodology Audit findings, conclusions, and recommendations Compliance with standards, regulations, and laws Auditee’s (management) responses Auditee’s noteworthy accomplishments

Exhibit 1.8: Components of report contents

(i) Objectives, scope, and methodology. Readers need knowledge of the objectives of the audit, as well as the audit scope and methodology for achieving the objectives, to understand the purpose of audit, judge the merits of the audit work and what is reported, and understand any significant limitations. The statement of objectives being reported on should explain why the audit was made and state what the report is to accomplish. Articulating what the report is to accomplish normally involves identifying the audit subject and the aspect of performance examined. Because what is reported depends on the objectives, the statement should also communicate what finding elements are discussed and whether conclusions and recommendations are given. Effective Communication Effective communication (written and oral) skills are crucial for advancement in today’s team-oriented workplace. Such skills are more important than technical skills and greatly needed to solve problems. The statement of objectives tells the reader the boundaries of the audit. To preclude misunderstanding in cases where the objectives are particularly limited and broader objectives can be inferred, it may be necessary to clearly define the audit boundaries by stating objectives that were not pursued. The statement of scope should describe the depth and coverage of the audit work conducted to accomplish the audit’s objectives. As applicable, it should explain the relationship between the universe and what was audited, identify organizations and geographic locations at which audit work was conducted and the period covered, cite the kinds and sources of evidence used and the techniques used to verify it, and explain any quality or other problems with the evidence. Significant constraints imposed on the audit approach by data limitations or scope impairments must be disclosed. The statement on methodology should clearly explain the evidence-gathering and analysis techniques used to accomplish the audit’s objectives. The explanation should identify any assumptions. It should describe any comparative techniques applied and measures and criteria used to assess performance in conducting the audit. If sampling is involved, the statement should describe the sample design and state why it was chosen. Every effort should be made to avoid any misunderstanding on the part of the reader concerning the work that was and was not done to achieve the audit objectives, particularly when the work was limited because of constraints on time or resources. DETERMINING THE SIGNIFICANCE OF AUDIT FINDINGS Audit findings and recommendations have a direct link in that recommendations should address or correct the findings. The benefit from audit work is not in the recommendations made, but in their effective implementation. Important measures of audit organization’s effectiveness are the type of issues it tackles and the changes or improvements it is able to effect. Audit findings need to be significant to be of any use to the audited organization. This is because correcting a deficient audit finding requires resources. The significance of audit findings can be assessed from two aspects: (1) the nature of the finding itself and (2) the quality of the recommendations. With respect to the nature of the finding itself, both quantitative and qualitative aspects of a finding should be considered when determining its significance. Examples of quantitative as-

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pects include: revenues increased, costs decreased, and number of defects reduced. Examples of qualitative aspects include: customer satisfaction increased, employee morale improved, and compliance to laws and regulations is achieved. With respect to quality, recommendations should be action-oriented and effective. To achieve the desired action, action-oriented recommendations must be • Properly directed • Hard-hitting • Specific • Convincing • Significant To be effective, recommendations must identify a course of action that will correct identified problem or cause significant improvements. Effective recommendations • Deal with underlying causes • Are feasible • Are cost-effective • Consider alternatives The significance of a recommendation depends on the subject matter and the specific situation. Frequently, significance can be assessed in terms of dollars. For example, assume that implementation of an audit recommendation would correct inadequate internal controls in an area where very significant amounts of money are subject to theft or manipulation. The inadequate controls are readily recognizable as a significant deficiency. A recommendation to strengthen the internal controls in an area of such significance and susceptibility would be key and worthy of special emphasis. However, dollars are only one measure of significance, not necessarily the most important one. For example, the need to ensure implementation of recommendations to provide safe operations of a manufacturing or nuclear plant can hardly be overemphasized. Implementing such recommendations could prevent the loss of life, substantial bodily injury, or environmental contamination. There is a vast difference between recommendations dealing with conditions that are imminently life threatening and those that are just significant enough to be reportable. The significance of a finding and a recommendation should be known to the auditor and communicated to the auditee early during an assignment. The fact that a recommendation is considered to be a key one should not come as a surprise to the auditee being audited. It should have been made apparent during early discussions with the auditee and certainly at the exit conference. Emphasis on key recommendations should be continued as the findings and recommendations are reported. Key recommendations should be identified and highlighted in reports in a context that makes their significance apparent. Executive summaries and transmittal memorandums can be used to further establish and emphasize the significance of key recommendations. (ii) Audit findings, conclusions, and recommendations. The report should include a full discussion of the significant audit findings and, where applicable, auditors’ conclusions. The report should present the significant findings developed in response to each audit objective. Any audit finding not included in the audit report because of insignificance should be separately communicated to management, preferably in writing. The audit report should reference findings communicated in a management letter. All communications should be documented in the working papers. Sufficient, competent, and relevant information about findings should be included to promote adequate understanding of the matters reported and to provide convincing but fair presentations in proper perspective. Appropriate background information that readers need to understand the findings should also be included. Audit findings have often been regarded as containing the elements of criteria, condition, and effect, plus causes when problems are found. However, the elements needed for a finding depend entirely on the objectives of the audit. Thus, a finding or set of findings is complete to the extent that the audit objectives are satisfied and the report clearly relates those objectives to the finding’s elements.

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DESIRABLE ATTRIBUTES OF A DEFICIENCY AUDIT FINDING Audit findings have often been regarded as containing the elements of criteria, condition, 4 and effect, plus cause when problems are found. However, the elements needed for a finding depend entirely on the objectives of the audit. This means the elements “cause” and “effect” may be optional for a compliance audit, but they are musts for an operational audit. Thus, a finding or set of findings is complete to the extent that the audit objectives are satisfied and the report clearly relates those objectives to the finding’s elements. A deficiency audit finding should have four elements or attributes, with a recommendation as optional (see Exhibit 1.9). Criteria (what should be) Elements of a deficiency finding

Condition (what is) Cause (why condition occurred) Effect (what is the consequence) Recommendations (what is to be done)

Exhibit 1.9: Elements of a deficiency audit finding

Criteria. Criteria are the standards used to determine whether an operation, function, or program meets or exceeds expectations. Criteria provide a context for understanding the results of the audit. The audit plan, where possible, should state the criteria to be used. In selecting criteria, auditors have a responsibility to use only criteria that are reasonable, attainable, and relevant to the matters being audited. Some examples of different types of criteria are • Targets or goals set by management or prescribed by law or regulation • Technically developed standards or norms • Expert opinions • Prior years’ performance • Performance of similar entities • Expected direction of change in outcomes When the criteria are vague, the auditors should seek interpretation. If interpretation is not available, auditors should strive to agree on the appropriateness of these measures with the interested parties or, if applicable, indicate that they were unable to report on performance because of the lack of definite criteria. It represents “what should be” at the time of the audit. Condition. Condition is a situation that exists. It has been observed and documented during the audit. It represents “what is” at the time of the audit. Cause. Cause has two meanings, which depend on the audit objectives. When the auditors’ objective is to explain why the poor (or good) performance observed in the audit happened, the reasons for the observed performance are referred to as “cause.” Identifying the cause of problems is necessary before making constructive recommendations for correction. Because problems can result from a number of plausible factors, auditors need to clearly demonstrate and explain with evidence and reasoning the link between the problems and the factor(s) they identified as the cause. When the auditors’ objective includes estimating the impact of a program on changes in physical, social, or economic conditions, they seek evidence of the extent to which the program itself is the “cause” of those changes. Effect. Like cause, effect also has two meanings, which depend on the audit objectives. When the auditors’ objectives include identifying the actual or potential consequences of a condition that varies (either positively or negatively) from the criteria identified in the audit, “effect” is a measure of those consequences. Auditors often use effect in this sense to demonstrate the need for corrective action in response to identified problems. When the auditors’ objectives include estimating the effectiveness of an operation or a program in causing changes in physical, social, or economic conditions, “effect” is a measure of the impact achieved by the operation or program. Here effect is the extent to which positive or negative changes in actual 4

Ibid.

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physical, social, or economic conditions can be identified and attributed to program or operations. Recommendations. Recommendations state what an audit organization believes should be done to accomplish beneficial results. They do not direct what must be done but seek to convince others (e.g., the auditee) of what needs to be done. Recommendations should be action-oriented, convincing, well supported, and effective. When appropriately implemented, they should get the desired beneficial results. The audit report should contain conclusions when called for by the audit objectives. Conclusions are logical inferences about the function or operation based on the auditors’ findings. Conclusions should be specified and not left to be inferred by readers. The report should not be written on the basis that a bare recital of facts makes the conclusions inescapable. The strength of the auditors’ conclusions depends on the persuasiveness of the evidence supporting the findings. The audit report should contain recommendations when the potential for significant improvement in operations and performance is substantiated by the reported findings. Recommendations to effect compliance with laws and regulations and improve management controls should also be made when significant instances of noncompliance are noted or significant weaknesses in controls are found. The audit report should also disclose the status of known uncorrected significant findings and recommendations from prior audits that affect the objectives and findings of the current audit. Reports containing constructive recommendations can encourage improvements in the conduct of audited activities. Recommendations are most constructive when they are directed at resolving the cause of identified problems, are action-oriented and specific, and are addressed to parties that have the authority to act, and are feasible and, to the extent practical, cost-effective. (iii) Compliance with standards, regulations, and laws. The statement of conformity refers to the applicable standards that the auditors should have followed during the audit. The statement need not be qualified when standards that were not applicable were not followed. When applicable standards were not followed, the auditors should modify the statement to disclose in the scope section of their report the required standard that was not followed, why, and the known effect htat not following the standard had on the results of the audit. The auditors’ report should include all instances of noncompliance that auditors determine are significant. All instances of fraud or other illegal acts that could result in the entity, or manager or employee of the entity, being subject to criminal prosecution should also be reported. In reporting significant instances of noncompliance identified in response to the audit objectives, the auditors should place their findings in proper perspective. To give the reader a basis for judging the prevalence and consequences of noncompliance, the instances of noncompliance should be related to the universe or the number of cases examined and is quantified in terms of dollar value, if appropriate. (iv) Management responses. One of the most effective ways to ensure that a report is fair, complete, and objective is to obtain advance review and comments by responsible auditee (management) and others, as may be appropriate. Including the views of the auditee produces a report that shows not only what was found and what the auditors think about it, but also what the responsible persons think about it and what they plan to do about it. Auditors should normally request that the responsible auditees’ views on significant findings, conclusions, and recommendations adversely affecting the audited entity be submitted in writing. When written comments are not obtained, oral comments should be requested. Advance comments should be objectively evaluated and recognized, as appropriate, in the report. A promise or plan for corrective action should be noted, but should not be accepted as justification for dropping a significant finding or a related recommendation. When the comments oppose the report’s findings, conclusions, or recommendations, and are not, in the auditors’ opinion, valid, the auditors may choose to state their reasons for rejecting them. Conversely, the auditors should modify their report if they find the comments valid. (v) Noteworthy accomplishments. Significant management accomplishments identified during the audit that were within the scope of the audit should be included in the audit report, along with deficiencies. Such information is necessary to fairly present the situation the auditors found and to provide appropriate balance to the report. In addition, inclusion of such accomplishments may lead to improved performance by other department heads or managers that read the report.

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(d) Report Presentation. The audit report should be complete, accurate, objective, convincing, and as clear and concise as the subject permits (see Exhibit 1.10). Characteristics of Report Presentation Complete (contains all related information) Accurate (evidence presented is true) Objective (balanced in content and tone) Convincing (findings are persuasive) Clear (easy to read and understand) Concise (conveys just the message)

Exhibit 1.10: Characteristics of report presentation

(i) Complete. Being complete requires that the report contain all information needed to satisfy the audit objectives, promote an adequate and correct understanding of the matters reported, and meet the applicable report content requirements. It also means including appropriate background information. Giving readers an adequate and correct understanding means providing perspective on the extent and significance of reported findings, such as frequency of occurrence relative to the number of cases or transactions tested and the relationship of the findings to the entity’s operations. Except as necessary to make convincing presentations, detailed supporting data need not be included. In most cases, a single example of a deficiency is not sufficient to support a broad conclusion or a related recommendation. All that it supports is that there was a deviation, an error, or a control weakness. HOW TO GET ACTION ON AUDIT RECOMMENDATIONS Four basic principles to ensure the benefits of the audit work include (1) quality recommendations, (2) commitment, (3) monitoring and follow-up system, and (4) special attention to key recommendations. 1. Quality Recommendations. Whether audit results are achieved depends on the quality of the recommendation. A recommendation that is not convincing will not be implemented. A recommendation that does not correct the basic cause of a deficiency may not achieve the intended result. Basic to effective audit work are recommendations that, when adequately implemented, accomplish a defined and worthwhile result. They must state a clear, convincing, and workable basis for implementation. Their utility and continued relevance should be reevaluated as followup action progress. 2. Commitment. When the auditor is committed to the need for action on a recommendation, he or she will do what needs to be done to get it implemented. Without that commitment, a recommendation may not achieve the desired action. Auditors and audit organizations must be committed to identifying and bringing about needed change. The auditor’s commitment should be personal and professional. The audit organization should be supportive and reinforce the commitment to its staff. 3. Aggressive Monitoring and Follow-up. Acceptance of a recommendation does not ensure results; effective implementation does. Continued attention is required until results are achieved. The audit organization should have a system that provides the structure and discipline needed to promote action on audit recommendations. It should ensure that recommendations are aggressively pursued until they have been resolved and successfully implemented. Also, auditors should assess whether the audited organizations have a follow-up system internally that adequately meets their basic responsibility for resolving and implementing audit recommendations. 4. Special Attention to Key Recommendations. While all recommendations require follow-up, some deal with particularly serious or flagrant matters. They should receive special attention. Auditors should ensure that key recommendations are fairly considered when effective use of the first three principles has not done so. They should reassess strategies to get positive action on those recommendations. Outside intervention (e.g., senior management, audit committee)

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should be considered when it would help to get necessary action on key recommendations of great significance. SOURCE: “How to Get Action on Audit Recommendations” (Washington, DC: U.S. General Accounting Office, 1991).

(ii) Accurate. Accuracy requires that the evidence presented be true and that findings be correctly portrayed. The need for accuracy is based on the need to assure readers that what it reported is credible and reliable. One inaccuracy in a report can cast doubt on the validity of an entire report and can divert attention from its substance. Also, inaccurate reports can damage the credibility of the issuing audit organization and reduce the effectiveness of reports it issues. The report should include only information, findings, and conclusions that are supported by competent and relevant evidence in the auditors’ working papers. That evidence should demonstrate the correctness and reasonableness of the matters reported. The term “correct portrayal” means describing accurately the audit scope and methodology, and presenting findings and conclusions in a manner consistent with the scope of audit work. (iii) Objective. Objectivity requires that the presentation of the entire report be balanced in content and tone. A report’s credibility is significantly enhanced when it presents evidence in an unbiased manner so that readers can be persuaded by the facts. The audit report should be fair and not be misleading, and should place the audit results in proper perspective. This means presenting the audit results impartially and guarding against the tendency to exaggerate or overemphasize deficient performance. In describing shortcomings in performance, auditors should present the explanation of responsible auditees, including the consideration of any unusual difficulties or circumstances they faced. The tone of reports should encourage favorable reaction to findings and recommendations. Titles, captions, and the text of reports should be stated constructively. Although findings should be presented clearly and forthrightly, the auditors should keep in mind that one of their objectives is to persuade and that this can best be done by avoiding language that generates defensiveness and opposition. Although criticism of past performance is often necessary, the report should emphasize needed improvements. (iv) Convincing. Being convincing requires that the audit results are responsive to the audit objectives, the findings are presented persuasively, and the conclusions and recommendations follow logically from the facts presented. The information presented should be sufficient to enable the readers of the validity of the findings, the reasonableness of the conclusions, and the desirability of implementing the recommendations. Reports designed in this way can help focus the attention of management on the matters that warrant attention and can help stimulate correction. (v) Clear. Clarity requires that the report be easy to read and understand. Reports should be written in language as clear and simple as the subject permits. Use of straightforward, nontechnical language is essential to simplicity of presentation. If technical terms and unfamiliar abbreviations and acronyms are used, they should be clearly defined. Acronyms should be used sparingly. Both logical organization of material and accuracy and precision in stating facts and in drawing conclusions are essential to clarity and understanding. Effective use of titles and captions and topic sentences make the report easier to read and understand. Visual aids (i.e., pictures, charts, graphs, and diagrams) should be used when appropriate to clarify and summarize complex material. (vi) Concise. Being concise requires that the report be no longer than necessary to convey the message. Too much detail detracts from a report, may even conceal the real message, and may confuse or discourage readers. Also, needless repetition should be avoided. Although room exists for considerable judgment in determining the content of reports, those that are complete but still concise are likely to receive greater attention. (e) Report Distribution. First, the final report should be distributed to auditees directly interested in the audit work results and those responsible for acting on the findings and recommendations. Higher-level members in the organization may receive only a summary report. Reports may also be distributed to other interested or affected parties, such as external auditors and the board of directors. Certain information may not be appropriate for disclosure to all report recipients because it is privileged, proprietary, or related to improper or illegal acts. Such information, however, may be disclosed in

WILEY CIA EXAM REVIEW: VOLUME 2

a separate report. If the conditions being reported involve senior management, report distribution should be to the board of the organization. (f) Oral Reports. In some circumstances, it might be appropriate for auditors to issue oral reports. If they issue an oral report, the auditors should keep a written record of what they communicated and the basis for not issuing a written report. An oral report may be most appropriate when emergency action is needed. Before issuing an oral report, auditors should determine that both of these conditions exist 1. An oral report would effectively meet decision makers’ needs for information about the results of the audit. 2. It is unlikely that parties other than those who would receive the oral report would have a significant interest in the results of the audit. (g) Summary Reports. Summary written audit reports are generally intended for high-level management and/or the audit committee. However, a detailed audit report dealing with payroll department with significant control weaknesses should be most useful to the payroll department manager. KEY CONCEPTS TO REMEMBER: AUDIT REPORTS • The first-line supervisor is the lowest organizational level to receive the final report of the operational audit of the production department. • The scope statement of an audit report should identify the audited activities and describe the nature and extent of the auditing performed. • Interim reports are issued during an audit to communicate information requiring immediate attention. • An audit report recommendation should address the “cause” of an audit finding. • “Significance of deficiencies” is a proper element in an audit results section of a report. • After an audit report with adverse findings has been communicated to appropriate auditee personnel, proper action is to schedule a follow-up review. • An oral report to auditee management would be appropriate when an internal auditor observed that assembly-line workers without protective clothing were being exposed to dangerous chemicals. • An oral report is appropriate when significant problems are discovered during the audit. • The auditor can use oral reports to give immediate information to management and to exchange thoughts more accurately with a face-to-face discussion. • The director of internal auditing or designee is responsible for the distribution of an audit report. • If an audit is done in the sales department, a copy of the audit report should be sent to the sales director and vice president of marketing. • An audit report should never be viewed as providing an infallible truth about a subject under the “due professional care” standard. • An auditor found that employees in the plant maintenance department were not signing their time cards. This situation also existed during the last audit. The auditor should include this finding in the current audit report. • “An evaluation of the impact (“effect”) of the findings on the activities reviewed” is not always required in an audit report. The audit report should include a statement that describes the audit objectives and identifies the audited activities, conducted, and presents pertinent statements of facts. • When there is a disagreement between the auditor and the auditee concerning audit findings and recommendations, the most appropriate method of reporting would be to state both positions and identify the reasons for the disagreement • An audit report with routine findings in the accounts payable department should be distributed to the accounts payable supervisor, the department manager, division general manager, external auditor, and the corporate controller, not to the board of directors or audit committee

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• The reason for requiring auditees to promptly reply and outline the corrective action that has been implemented on reported deficiencies is to effect savings or to institute compliance as early as possible • A report issued by an internal auditor should contain an expression of opinion when an opinion will improve communications with the reader of the report. An audit opinion is the auditor’s professional judgment of the situation, which was reviewed. Due professional care requires that the auditor’s opinions be based on sufficient factual evidence that warrants the expression of the opinions. Due care does not require the performance of extensive audit examinations. It requires the conduct of examination and verifications to a reasonable extent, the reasonable assurance that compliance does exist, and the consideration of the possibility of material irregularities. • Certain information may not be appropriate for disclosure to all report recipients because it is privileged, proprietary, or related to improper or illegal acts. If conditions being reported involve improper acts of a senior manager, the audit report should be distributed to the board of directors. • Internal audit reports should contain the purpose, scope, and results. The audit results should contain the criteria, condition, effect, and cause of the finding. The cause is the reason for the difference between the expected and actual conditions. • Internal auditing reports should be distributed to those members of the organization who are able to ensure that audit results are given due consideration. For higher-level members of the organization, that requirement can be satisfied with summary reports. • The final audit report should be reviewed, approved, and signed by the internal auditing director or designee. • The chairman of the board of directors would normally not receive an internal auditing report related to a review of the purchasing cycle. Others who would receive such a report include the director of purchasing, the external auditor, and the general auditor. • When a member of senior management commits illegal acts, such information may be disclosed in a separate audit report and distributed to the company’s audit committee of the board of directors. • The summary audit report for an accounts payable audit should be issued to the audit committee of the board of directors, not to the accounts payable manager, external auditor, and controller. • Issuing an audit report eight weeks after the audit was concluded is not timely—two or three weeks is timely. • An audit report containing significant internal control weaknesses in the accounts payable system of a company whose securities are publicly traded should be distributed to the audit committee and the external auditor due to potential for misstated financial statements. • The findings in the audit report should include pertinent factual statements concerning the control weaknesses that were uncovered during the course of the audit. • An audit policy should state that final audit reports will not be issued without a management response. An audit report with significant findings is completed except for management response. The best alternative is to issue an interim report regarding the important issues noted. • Audit findings often emerge by a process of comparing “what should be” with “what is.” Findings are based on the attributes of criteria, condition, cause, and effect. The effect of the audit finding is risk or exposure encountered because of the condition. • An objective audit report is one that is described as factual, unbiased, and free from distortion. • It is important to develop a distribution list for each audit report, because the list specifies those individuals who have responsibilities with regard to the report. • The most appropriate use of an oral audit report is to communicate conditions that demand immediate action.

WILEY CIA EXAM REVIEW: VOLUME 2

• When an auditor has agreed to keep the marketing department vice president informed of the marketing audit progress on a regular basis, oral or written interim reports should be used for those progress reports. • To enhance communications with senior management, auditors include a summary report with each written audit report. The summary report should contain highlights of the audit results. • The primary reason for issuing a written audit report is to achieve precision by pinpointing problems and to achieve permanence. Oral reports do not have these attributes. • The primary audience for the written report issued by the internal auditing department at the completion of an audit should be those managers inside or outside the audited area who can take corrective action. • A concise statement of audit findings would be most appropriate for inclusion in the management summary section of a final internal auditing report. • The final operational audit report regarding supply activities of a division would be circulated to the lowest level of management with sufficient authority to take action on audit recommendations, as it is their responsibility. • A reason to use interim audit reports is to communicate a change in audit scope. • The “Purpose” section of the final audit report would include a discussion of audit objectives. • When illegal acts are being performed by several of the highest-ranking officers of the company, the audit report should be addressed to the audit committee of the board of directors. • Opinions in the audit reports are the auditor’s evaluations of the effects of the findings on the activities reviewed. • In a review of warranty programs for new products introduced by a company with low and declining profits, an auditor has determined, and management has acknowledged, that the company will be unable to fulfill promised warranty coverage. The auditor should inform the audit committee. • During an audit of a joint venture, the auditor discovered numerous audit exceptions where some credits would be due to each party. The audit report should contain all material audit exceptions and provide each partner with a net amount due. • IIA Standards require auditors to follow up to see that the corrective action satisfies the audit recommendations. 1.7 IIA’s Performance Standards (a) Performing the Engagement 2300—Performing the Engagement—Internal auditors should identify, analyze, evaluate, and record sufficient information to achieve the engagement’s objectives. 2310—Identifying Information—Internal auditors should identify sufficient, reliable, relevant, and useful information to achieve the engagement’s objectives. 2320—Analysis and Evaluation—Internal auditors should base conclusions and engagement results on appropriate analyses and evaluations. 2330—Recording Information—Internal auditors should record relevant information to support the conclusions and engagement results. 2330.A1—The chief audit executive should control access to engagement records. The chief audit executive should obtain the approval of senior management and/or legal counsel prior to releasing such records to external parties, as appropriate. 2330.A2—The chief audit executive should develop retention requirements for engagement records. These retention requirements should be consistent with the organization’s guidelines and any pertinent regulatory or other requirements. 2330.C1—The chief audit executive should develop policies governing the custody and retention of engagement records, as well as their release to internal and external parties. These policies

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should be consistent with the organization’s guidelines and any pertinent regulatory or other requirements. 2340—Engagement Supervision—Engagements should be properly supervised to ensure objectives are achieved, quality is assured, and staff is developed. IIA’s Practice Advisory 2300-1: The Internal Auditor’s Use of Personal Information in Conducting Audits Nature of This Practice Advisory Internal auditors should consider these suggestions when considering the use of personal information in the conduct of an assurance or consulting engagement. This practice advisory is not intended as comprehensive guidance related to the use of personal information, but rather a reminder of the importance of its appropriate use in accordance with the laws and policies of the relevant jurisdiction where the audit is being conducted and where the organization conducts business. Compliance with Practice Advisories is optional. 1. Concerns relating to the protection of personal privacy and information are becoming more apparent, focused, and global as advancements in information technology and communications continually introduce new risks and threats to privacy. Privacy controls are legal requirements for doing business in most of the world. 2. “Personal information” generally refers to information that can be associated with a specific individual or that has identifying characteristics that might be combined with other information to do so. It can include any factual or subjective information, recorded or not, in any form or media. Personal information might include, for example • Name, address, identification numbers, income, or blood type • Evaluations, comments, social status, or disciplinary actions • Employee files, credit records, loan records 3. For the most part, laws require organizations to identify the purposes for which personal information is collected at or before the time the information is collected and that organizations do not use or disclose personal information for purposes other than those for which it was collected, except with the consent of the individual or as required by law. 4. It is important that internal auditors understand and comply with all laws regarding the use of personal information in their jurisdiction and those jurisdictions where their organization conducts business. 5. The internal auditor must understand that it may be inappropriate, and in some cases illegal, to access, retrieve, review, manipulate, or use personal information in conducting certain internal audit engagements. 6. The internal auditor should investigate issues before initiating audit effort and seek advice from in-house legal counsel if there are any questions or concerns in this respect. IIA’s Practice Advisory 2310-1: Identifying Information Nature of This Practice Advisory Internal auditors should consider these suggestions when identifying information. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. Information should be collected on all matters related to the engagement objectives and scope of work. Internal auditors use analytical auditing procedures when identifying and examining information. Analytical auditing procedures are performed by studying and comparing relationships among both financial and nonfinancial information. The application of analytical auditing procedures for identifying information to be examined is based on the premise that, in the absence of known conditions to the contrary, relationships among information may reasonably be expected to exist and continue. Examples of contrary conditions include unusual or nonrecurring transactions or events; accounting, organizational, operational, environmental, and technological changes; inefficiencies; ineffectiveness; errors; irregularities, or illegal acts.

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2. Information should be sufficient, competent, relevant, and useful to provide a sound basis for engagement observations and recommendations. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor. Competent information is reliable and the best attainable through the use of appropriate engagement techniques. Relevant information supports engagement observations and recommendations and is consistent with the objectives for the engagement. Useful information helps the organization meet its goals. IIA’s Practice Advisory 2320-1: Analysis and Evaluation Nature of This Practice Advisory Internal auditors should consider these suggestions when using analysis and evaluation to reach conclusions. This guidance is not intended to represent all the considerations that may be necessary during such an evaluation, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. This guidance is repeated in Part 1 and Part 2 for proper coverage of the subject matter. 1. Analytical audit procedures provide internal auditors with an efficient and effective means of assessing and evaluating information collected in an engagement. The assessment results from comparing information with expectations identified or developed by the internal auditor. Analytical audit procedures are useful in identifying, among other things • Differences that are not expected • The absence of differences when they are expected • Potential errors • Potential irregularities or illegal acts • Other unusual or nonrecurring transactions or events 2. Analytical audit procedures may include • Comparison of current period information with similar information for prior periods • Comparison of current period information with budgets or forecasts • Study of relationships of financial information with the appropriate nonfinancial information (e.g., recorded payroll expense compared to changes in average number of employees) • Study of relationships among elements of information (e.g., fluctuation in recorded interest expense compared to changes in related debt balances) • Comparison of information with similar information for other organizational units • Comparison of information with similar information for the industry in which the organization operates 3. Analytical audit procedures may be performed using monetary amounts, physical quantities, ratios, or percentages. Specific analytical audit procedures include, but are not limited to, ratio, trend, and regression analysis; reasonableness tests; period-to-period comparisons; comparisons with budgets, forecasts, and external economic information. Analytical audit procedures assist internal auditors in identifying conditions that may require subsequent engagement procedures. Internal auditors should use analytical audit procedures in planning the engagement in accordance with the guidelines contained in Section 2200 of the International Standards for the Professional Practice of Internal Auditing (Standards) (Practice Advisory 2210-1). 4. Analytical audit procedures should also be used during the engagement to examine and evaluate information to support engagement results. Internal auditors should consider the factors listed next in determining the extent to which analytical audit procedures should be used. After evaluating these factors, internal auditors should consider and use additional audit procedures, as necessary, to achieve the engagement objective. • The significance of the area being examined • The assessment of risk and effectiveness of risk management in the area being examined • The adequacy of the system of internal control • The availability and reliability of financial and nonfinancial information • The precision with which the results of analytical audit procedures can be predicted

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• The availability and comparability of information regarding the industry in which the organization operates • The extent to which other engagement procedures provide support for engagement results 5. When analytical audit procedures identify unexpected results or relationships, internal auditors should examine and evaluate such results or relationships. This examination and evaluation should include making inquiries of management and application of other engagement procedures until internal auditors are satisfied that the results or relationships are sufficiently explained. Unexplained results or relationships from applying analytical audit procedures may be indicative of a significant condition, such as a potential error, irregularity, or illegal act. Results or relationships that are not sufficiently explained should be communicated to the appropriate levels of management. Internal auditors may recommend appropriate courses of action, depending on the circumstances. IIA’s Practice Advisory 2330-1: Recording Information Nature of This Practice Advisory Internal auditors should consider these suggestions when recording information. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. Working papers that document the engagement should be prepared by the internal auditor and reviewed by management of the internal audit activity. The working papers should record the information obtained and the analyses made and should support the bases for the observations and recommendations to be reported. Engagement working papers generally • Provide the principal support for the engagement communications • Aid in the planning, performance, and review of engagements • Document whether the engagement objectives were achieved • Facilitate third-party reviews • Provide a basis for evaluating the internal audit activity’s quality program • Provide support in circumstances such as insurance claims, fraud cases, and lawsuits • Aid in the professional development of the internal audit staff • Demonstrate the internal audit activity’s compliance with the International Standards for the Professional Practice of Internal Auditing (Standards) 2. The organization, design, and content of engagement working papers will depend on the nature of the engagement. Engagement working papers should document these aspects of the engagement process. • Planning • Risk assessment • The examination and evaluation of the adequacy and effectiveness of the system of internal control • The engagement procedures performed, the information obtained, and the conclusions reached • Review • Communication • Follow-up 3. Engagement working papers should be complete and include support for engagement conclusions reached. Among other things, engagement working papers may include • Planning documents and engagement programs • Control questionnaires, flowcharts, checklists, and narratives • Notes and memoranda resulting from interviews • Organizational data, such as organization charts and job descriptions • Copies of important contracts and agreements • Information about operating and financial policies • Results of control evaluations • Letters of confirmation and representation

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4. 5. 6.

• Analysis and tests of transactions, processes, and account balances • Results of analytical auditing procedures • The engagement’s final communications and management’s responses • Engagement correspondence if it documents engagement conclusions reached Engagement working papers may be in the form of paper, tapes, disks, diskettes, films, or other media. If engagement working papers are in the form of media other than paper, consideration should be given to generating backup copies. If internal auditors are reporting on financial information, the engagement working papers should document whether the accounting records agree or reconcile with such financial information. The chief audit executive should establish working paper policies for the various types of engagements performed. Standardized engagement working papers such as questionnaires and audit programs may improve the efficiency of an engagement and facilitate the delegation of engagement work. Some engagement working papers may be categorized as permanent or carry-forward engagement files. These files generally contain information of continuing importance. These are typical engagement working paper preparation techniques. • Each engagement working paper should identify the engagement and describe the contents or purpose of the working paper. • Each engagement working paper should be signed (or initialed) and dated by the internal auditor performing the work. • Each engagement working paper should contain an index or reference number. • Audit verification symbols (tick marks) should be explained. • Sources of data should be clearly identified.

IIA’s Practice Advisory 2330.A1-1: Control of Engagement Records Nature of This Practice Advisory Internal auditors should consider these suggestions involving control of engagement records. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. Engagement working papers are the property of the organization. Engagement working paper files should generally remain under the control of the internal audit activity and should be accessible only to authorized personnel. 2. Management and other members of the organization may request access to engagement working papers. Such access may be necessary to substantiate or explain engagement observations and recommendations or to utilize engagement documentation for other business purposes. These requests for access should be subject to the approval of the chief audit executive (CAE). 3. It is common practice for internal and external auditors to grant access to each other’s audit working papers. Access to audit working papers by external auditors should be subject to the approval of the CAE. 4. In some circumstances, parties outside the organization other than external auditors request access to audit working papers and reports. Prior to releasing such documentation, the CAE should obtain the approval of senior management and/or legal counsel, as appropriate. IIA’s Practice Advisory 2330.A1-2: Legal Considerations in Granting Access to Engagement Records Nature of This Practice Advisory Internal auditors should consider these suggestions when considering granting access to engagement records to those outside the internal audit activity. This guidance is not intended to represent all the considerations that may be necessary. Compliance with Practice Advisories is optional. CAUTION: Internal auditors are encouraged to consult legal counsel in all matters involving legal issues as requirements may vary significantly in different jurisdictions. The guidance contained in this Practice Advisory is based primarily on the legal system in the United States of America. 1. Internal audit engagement records include reports, supporting documentation, review notes, and correspondence, regardless of storage media. Internal auditors, with the support of management and governing boards to whom they provide audit services, develop the engagement records. En-

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gagement records are generally produced under the presumption that their contents are confidential and may contain a mix of both facts and opinions. However, those who are not immediately familiar with the organization or its internal audit process may misunderstand these facts and opinions. Access to engagement records by outside parties has been sought in several different types of proceedings, including criminal prosecutions, civil litigation, tax audits, regulatory reviews, government contract reviews, and reviews by self-regulatory organizations. Virtually all of an organization’s records that are not protected by the attorney-client privilege are accessible in criminal proceedings. In noncriminal proceedings, the issue of access is less clear and may vary according to the legal jurisdiction of the organization. 2. Explicit practices in the documents of the internal audit activity may increase the control of access to engagement records. These suggestions are discussed in the paragraphs below.

3. 4.

10.

• Charter • Job descriptions • Internal department policies • Procedures for handling investigations with legal counsel The internal audit charter should address access to and control of organizational records and information, regardless of media used to store the records. Written job descriptions should be created for the internal audit activity and should include the complex and varied duties auditors perform. Such descriptions may help internal auditors when addressing requests for engagement records. They will also help internal auditors understand the scope of their work and external parties to comprehend the duties of internal auditors. Internal department policies should be developed with regard to the operation of the internal audit activity. These written practices should cover, among other matters, what should be included in engagement records, how long departmental records should be retained, how outside requests for access to department records should be handled, and what special practices should be followed in handling an investigation with legal counsel. These are discussed below. A policy relating to the various types of engagements should specify the content and format of the engagement records and how internal auditors should handle their review notes (i.e., retained as a record of issues raised and subsequently resolved or destroyed so third parties cannot gain access to them). Also, a policy should specify the length of retention for engagement records. These time limits will be determined by the needs of the organization as well as legal requirements. (It is important to check with legal counsel on this issue.) Departmental policies should explain who in the organization is responsible for ensuring the control and security of departmental records, who can be granted access to engagement records, and how requests for access to those records are to be handled. These policies may depend on the practices followed in the industry or legal jurisdiction of the organization. The CAE and others in internal auditing should be alert to changing practices in the industry and changing legal precedents. They should anticipate those who might someday seek access to their work products. The policy granting access to engagement records should also address these issues. • Process for resolving access issues • Time period for retention of each type of work product • Process for educating and reeducating the internal audit staff concerning the risks and issues regarding access to their work products • Requirement for periodically surveying the industry to determine who may want access to the work product in the future A policy should provide guidance to the internal auditor in determining when an audit warrants an investigation, that is, when an audit becomes an investigation to be handled with an attorney and what special procedures should be followed in communicating with the legal counsel. The policy should also cover the matter of executing a proper retention letter to have any information given to the attorney be privileged. Internal auditors should also educate the board and management about the risks of access to engagement records. The policies relating to who can be granted access to engagement records, how those requests are to be handled, and what procedures are to be followed when an audit warrants an investigation should be reviewed by the audit committee of the board of directors (or

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equivalent governing body). The specific policies will vary depending on the nature of the organization and the access privileges that have been established by law. 11. Careful preparation of engagement records is important when disclosure is required. These steps should be considered. • Disclose only the specific documents requested. Engagement records with opinions and recommendations are generally not released. Documents that reveal attorneys’ thought processes or strategies will usually be privileged and not subject to forced disclosure. • Release copies only, keeping the originals, especially if the documents were prepared in pencil. If the court requests originals, the internal audit activity should keep a copy. • Label each document as confidential and place a notation on each document that secondary distribution is not permitted without permission. IIA’s Practice Advisory 2330.A2-1: Retention of Records Nature of This Practice Advisory Internal auditors should consider these suggestions when developing record retention requirements. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. Record retention requirements should be designed to include all engagement records, regardless of the format in which the records are stored. IIA’s Practice Advisory 2340-1: Engagement Supervision Nature of This Practice Advisory Internal auditors should consider these suggestions when supervising engagements. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. The chief audit executive (CAE) is responsible for assuring that appropriate engagement supervision is provided. Supervision is a process that begins with planning and continues throughout the examination, evaluation, communication, and follow-up phases of the engagement. Supervision includes • Ensuring that the auditors assigned possess the requisite knowledge, skills, and other competencies to perform the engagement. • Providing appropriate instructions during the planning of the engagement and approving the engagement program. • Seeing that the approved engagement program is carried out unless changes are both justified and authorized. • Determining that engagement working papers adequately support the engagement observations, conclusions, and recommendations. • Ensuring that engagement communications are accurate, objective, clear, concise, constructive, and timely. • Ensuring that engagement objectives are met. • Providing opportunities for developing internal auditors’ knowledge, skills, and other competencies. 2. Appropriate evidence of supervision should be documented and retained. The extent of supervision required will depend on the proficiency and experience of internal auditors and the complexity of the engagement. The CAE has overall responsibility for review but may designate appropriately experienced members of the internal audit activity to perform the review. Appropriately experienced internal auditors may be utilized to review the work of other less experienced internal auditors. 3. All internal audit assignments, whether performed by or for the internal audit activity, remain the responsibility of the CAE. The CAE is responsible for all significant professional judgments made in the planning, examination, evaluation, report, and follow-up phases of the engagement. The

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CAE should adopt suitable means to ensure that this responsibility is met. Suitable means include policies and procedures designed to • Minimize the risk that professional judgments may be made by internal auditors or others performing work for the internal audit activity that are inconsistent with the professional judgment of the CAE such that a significant adverse effect on the engagement could result. • Resolve differences in professional judgment between the CAE and internal audit staff members over significant issues relating to the engagement. Such means may include (a) discussion of pertinent facts; (b) further inquiry and/or research; and (c) documentation and disposition of the differing viewpoints in the engagement working papers. In instances of a difference in professional judgment over an ethical issue, suitable means may include referral of the issue to those individuals in the organization having responsibility over ethical matters. 4. Supervision extends to staff training and development, employee performance evaluation, time and expense control, and similar administrative areas. 5. All engagement working papers should be reviewed to ensure that they properly support the engagement communications and that all necessary audit procedures have been performed. Evidence of supervisory review should consist of the reviewer initialing and dating each working paper after it is reviewed. Other techniques that provide evidence of supervisory review include completing an engagement working paper review checklist; preparing a memorandum specifying the nature, extent, and results of the review, and/or evaluation; and acceptance within electronic working paper software. 6. Reviewers may make a written record (review notes) of questions arising from the review process. When clearing review notes, care should be taken to ensure that the working papers provide adequate evidence that questions raised during the review have been resolved. Acceptable alternatives with respect to disposition of review notes are • Retain the review notes as a record of the questions raised by the reviewer and the steps taken in their resolution. • Discard the review notes after the questions raised have been resolved and the appropriate engagement working papers have been amended to provide the additional information requested. (b) Communicating Results 2400—Communicating Results—Internal auditors should communicate the engagement results. 2410—Criteria for Communicating—Communications should include the engagement’s objectives and scope as well as applicable conclusions, recommendations, and action plans. 2410.A1—Final communication of engagement results should, where appropriate, contain the internal auditor’s overall opinion and or conclusions. 2410.A2—Internal auditors are encouraged to acknowledge satisfactory performance in engagement communications. 2410.A3—When releasing engagement results to parties outside the organization, the communication should include limitations on distribution and use of the results. 2410.C1—Communication of the progress and results of consulting engagements will vary in form and content depending on the nature of the engagement and the needs of the client. 2420—Quality of Communications—Communications should be accurate, objective, clear, concise, constructive, complete, and timely. 2421—Errors and Omissions—If a final communication contains a significant error or omission, the chief audit executive should communicate corrected information to all parties who received the original communication. 2430—Engagement Disclosure of Noncompliance with the Standards—When noncompliance with the Standards impacts a specific engagement, communication of the results should disclose the • Standard(s) with which full compliance was not achieved • Reason(s) for noncompliance • Impact of noncompliance on the engagement

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2440—Disseminating Results—The chief audit executive should communicate results to the appropriate parties. 2440.A1—The chief audit executive is responsible for communicating the final results to parties who can ensure that the results are given due consideration. 2440.A2—If not otherwise mandated by legal, statutory, or regulatory requirements, prior to releasing results to parties outside the organization, the chief audit executive should • Assess the potential risk to the organization • Consult with senior management and/or legal counsel as appropriate • Control dissemination by restricting the use of the results 2440.C1—The chief audit executive is responsible for communicating the final results of consulting engagements to clients. 2440.C2—During consulting engagements, risk management, control, and governance issues may be identified. Whenever these issues are significant to the organization, they should be communicated to senior management and the board. IIA’s Practice Advisory 2400-1: Legal Considerations in Communicating Results Nature of This Practice Advisory Internal auditors should consider these suggestions when communicating the results of audit engagements. This guidance is not intended to represent all the considerations that may be necessary when communicating results. Compliance with Practice Advisories is optional. CAUTION: Internal auditors are encouraged to consult legal counsel in all matters involving legal issues as requirements may vary significantly in different jurisdictions. The guidance contained in this Practice Advisory is based primarily on the legal system in the United States of America. 1. Internal auditors should exercise caution when including results and issuing opinions in audit communications and working papers regarding law and regulatory violations and other legal issues. Established policies and procedures regarding the handling of these matters and a close working relationship with other appropriate areas (legal counsel, compliance, etc.) is strongly encouraged. 2. Internal auditors are required to gather evidence, make analytical judgments, report their results, and ensure corrective action is taken. Internal auditors’ requirement for documenting engagement records may conflict with legal counsel’s desire not to leave discoverable evidence that could harm a defense. For example, even if an internal auditor conducts an investigation properly, the facts disclosed may harm the organization counsel’s case. Proper planning and policy making is essential so that a sudden revelation does not place the corporate counsel and internal auditor at odds with one another. These policies should include role definition and methods of communication. The internal auditor and corporate counsel should also foster an ethical and preventive perspective throughout the organization by sensitizing and educating management about the established policies. Internal auditors should consider the following guidelines, especially in connection with engagements that may give rise to disclosing or communicating results to parties outside the organization. 3. There are four elements necessary to protect the attorney-client privilege. There must be • A communication • Made between “privileged persons” • In confidence • For the purpose of seeking, obtaining, or providing legal assistance for the client This privilege, which is used primarily to protect communications with attorneys, can also apply to communications with third parties working with the attorney. 4. Some courts have recognized a privilege of critical self-analysis that shields from discovery selfcritical materials such as audit work product. In general, the recognition of this privilege is premised on the belief that the confidentiality of the reviews in the instances involved outweighs the valued public interests. As one court explained The self-critical analysis privilege has been recognized as a qualified privilege that protects from discovery certain critical self-appraisals. It allows individuals or businesses to candidly assess their compliance with regulatory and legal requirements without creating evidence that may be

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used against them by their opponents in future litigation. The rationale for the doctrine is that such critical self-evaluation fosters the compelling public interest in observance of the law.

5. In general, three requirements must usually be met for the privilege to apply. • The information subject to the privilege must result from a self-critical analysis undertaken by the party asserting the privilege. • The public must have a strong interest in preserving the free flow of the information contained in the critical analysis. • The information must be of the type whose flow would be curtailed if discovery were allowed. In some instances, courts also have considered whether the critical analysis preceded or caused the plaintiff’s injury, where the analysis comes after the events giving rise to the claim, the justification for the privilege is said to be at its strongest. 6. The courts have generally been more reluctant to recognize self-evaluative privileges when the documents are sought by a government agency rather than a private litigant; presumably this reluctance results from recognition of the government’s relatively stronger interest in enforcing the law. The self-evaluative privilege is particularly relevant to functions and activities that have established self-regulatory procedures. Hospitals, security brokers, and public accounting firms are among those that have established such procedures. Most of these procedures are associated with quality assurance procedures that have been added to an operating activity such as financial auditing. 7. Three elements must be satisfied to protect documents from disclosure under the work-product doctrine. Documents must be • Some type of work product (i.e., memo, computer program). • Prepared in anticipation of litigation. • The party preparing must be an agent of the attorney. 8. Documents prepared before the attorney-client relationship comes into existence are not protected by the work-product doctrine. Delivering documents, prepared before the attorney-client relationship is formed, to the attorney will not protect those documents under the work-product doctrine. In addition, the doctrine is qualified. The documents will not be protected under the doctrine if a substantial need for the information exists and the information is not otherwise available without undue hardship. Thus in R: Grand Jury, the audit committee of the corporation conducted interviews to determine if any questionable foreign payments were made. Their report was protected from discovery under the work-product doctrine except for those portions that contained the results of the interviews with deceased persons (599 F.2d 1224 [1979]). IIA’s Practice Advisory 2410-1: Communication Criteria Nature of This Practice Advisory Internal auditors should consider these suggestions when communicating the results of engagements. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. Although the format and content of the engagement final communications may vary by organization or type of engagement, they should contain, at a minimum, the purpose, scope, and results of the engagement. 2. Engagement final communications may include background information and summaries. Background information may identify the organizational units and activities reviewed and provide relevant explanatory information. It may also include the status of observations, conclusions, and recommendations from prior reports and an indication of whether the report covers a scheduled engagement or is responding to a request. Summaries, if included, should be balanced representations of the engagement communication’s content. 3. Purpose statements should describe the engagement objectives and may, where necessary, inform the reader why the engagement was conducted and what it was expected to achieve. 4. Scope statements should identify the audited activities and include, where appropriate, supportive information such as time period reviewed. Related activities not reviewed should be identified if

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5. 6.

10.

11. 12.

necessary to delineate the boundaries of the engagement. The nature and extent of engagement work performed also should be described. Results should include observations, conclusions, opinions, recommendations, and action plans. Observations are pertinent statements of fact. Those observations necessary to support or prevent misunderstanding of the internal auditor’s conclusions and recommendations should be included in the final engagement communications. Less significant observations or recommendations may be communicated informally. Engagement observations and recommendations emerge by a process of comparing what should be with what is. Whether there is a difference or not, the internal auditor has a foundation on which to build the report. When conditions meet the criteria, acknowledgment in the engagement communications of satisfactory performance may be appropriate. Observations and recommendations should be based on these attributes. • Criteria: The standards, measures, or expectations used in making an evaluation and/or verification (what should exist). • Condition: The factual evidence that the internal auditor found in the course of the examination (what does exist). • Cause: The reason for the difference between the expected and actual conditions (why the difference exists). • Effect: The risk or exposure the organization and/or others encounter because the condition is not consistent with the criteria (the impact of the difference). In determining the degree of risk or exposure, internal auditors should consider the effect their engagement observations and recommendations may have on the organization’s operations and financial statements. • Observations and recommendations may also include engagement client accomplishments, related issues, and supportive information if not included elsewhere. Conclusions and opinions are the internal auditor’s evaluations of the effects of the observations and recommendations on the activities reviewed. They usually put the observations and recommendations in perspective based on their overall implications. Engagement conclusions, if included in the engagement report, should be clearly identified as such. Conclusions may encompass the entire scope of an engagement or specific aspects. They may cover, but are not limited to, whether operating or program objectives and goals conform with those of the organization, whether the organization’s objectives and goals are being met, and whether the activity under review is functioning as intended. An opinion may include an overall assessment of controls or area under review or may be limited to specific controls or aspects of the engagement. Engagement communications should include recommendations for potential improvements, acknowledgments of satisfactory performance, and corrective actions. Recommendations are based on the internal auditor’s observations and conclusions. They call for action to correct existing conditions or improve operations. Recommendations may suggest approaches to correcting or enhancing performance as a guide for management in achieving desired results. Recommendations may be general or specific. For example, under some circumstances, it may be desirable to recommend a general course of action and specific suggestions for implementation. In other circumstances, it may be appropriate only to suggest further investigation or study. Engagement client accomplishments, in terms of improvements since the last engagement or the establishment of a well-controlled operation, may be included in the engagement final communications. This information may be necessary to fairly present the existing conditions and to provide a proper perspective and appropriate balance to the engagement final communications. The engagement client’s views about engagement conclusions, opinions, or recommendations may be included in the engagement communications. As part of the internal auditor’s discussions with the engagement client, the internal auditor should try to obtain agreement on the results of the engagement and on a plan of action to improve operations, as needed. If the internal auditor and engagement client disagree about the engagement results, the engagement communications may state both positions and the reasons for the disagreement. The engagement client’s written comments may be included as an appendix to the engagement report. Alternatively, the engagement client’s views may be presented in the body of the report or in a cover letter.

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13. Certain information may not be appropriate for disclosure to all report recipients because it is privileged, proprietary, or related to improper or illegal acts. Such information, however, may be disclosed in a separate report. If the conditions being reported involve senior management, report distribution should be to the board of the organization. 14. Interim reports may be written or oral and may be transmitted formally or informally. Interim reports may be used to communicate information that requires immediate attention, to communicate a change in engagement scope for the activity under review, or to keep management informed of engagement progress when engagements extend over a long period. The use of interim reports does not diminish or eliminate the need for a final report. 15. A signed report should be issued after the engagement is completed. Summary reports highlighting engagement results may be appropriate for levels of management above the engagement client. They may be issued separately from or in conjunction with the final report. The term “signed” means that the authorized internal auditor’s name should be manually signed in the report. Alternatively, the signature may appear on a cover letter. The internal auditor authorized to sign the report should be designated by the chief audit executive. If engagement reports are distributed by electronic means, a signed version of the report should be kept on file by the internal audit activity. IIA’s Practice Advisory 2420-1: Quality of Communications Nature of This Practice Advisory Internal auditors should consider these suggestions when preparing communications. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with Practice Advisories is optional. 1. Accurate communications are free from errors and distortions and are faithful to the underlying facts. The manner in which the data and evidence are gathered, evaluated, and summarized for presentation should be done with care and precision. 2. Objective communications are fair, impartial, and unbiased and are the result of a fair-minded and balanced assessment of all relevant facts and circumstances. Observations, conclusions, and recommendations should be derived and expressed without prejudice, partisanship, personal interests, and the undue influence of others. 3. Clear communications are easily understood and logical. Clarity can be improved by avoiding unnecessary technical language and providing all significant and relevant information. 4. Concise communications are to the point and avoid unnecessary elaboration, superfluous detail, redundancy, and wordiness. They are created by a persistent practice of revising and editing a presentation. The goal is that each thought will be meaningful but succinct. 5. Constructive communications are helpful to the engagement client and the organization and lead to improvements where needed. The contents and tone of the presentation should be useful, positive, and well meaning and contribute to the objectives of the organization. 6. Complete communications are lacking nothing that is essential to the target audience and include all significant and relevant information and observations to support recommendations and conclusions. 7. Timely communications are well timed, opportune, and expedient for careful consideration by those who may act on the recommendations. The timing of the presentation of engagement results should be set without undue delay and with a degree of urgency so as to enable prompt, effective action. IIA’s Practice Advisory 2440-1: Recipients of Engagement Results Nature of This Practice Advisory Internal auditors should consider these suggestions when reporting results. This guidance is not intended to represent all the considerations that may be necessary, but simply a recommended set of items that should be addressed. Compliance with this Practice Advisory is optional. 1. Internal auditors should discuss conclusions and recommendations with appropriate levels of management before issuing final engagement communications.

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2. Discussion of conclusions and recommendations is usually accomplished during the course of the engagement and/or at postengagement meetings (exit interviews). Another technique is the review of draft engagement issues, observations, and recommendations by management of the audited activity. These discussions and reviews help ensure that there have been no misunderstandings or misinterpretations of fact by providing the opportunity for the engagement client to clarify specific items and to express views of the observations, conclusions, and recommendations. 3. Although the level of participants in the discussions and reviews may vary by organization and by the nature of the report, they will generally include those individuals who are knowledgeable regarding detailed operations and those who can authorize the implementation of corrective action. 4. The chief audit executive (CAE) or designee should review and approve the final engagement communication before issuance and should decide to whom the report will be distributed. The CAE or a designee should approve and may sign all final reports. If specific circumstances warrant, consideration should be given to having the auditor-in-charge, supervisor, or lead auditor sign the report as a representative of the CAE. 5. Final engagement communication should be distributed to those members of the organization who are able to ensure that engagement results are given due consideration. This means that the report should go to those who are in a position to take corrective action or ensure that corrective action is taken. The final engagement communication should be distributed to management of the activity under review. Higher-level members in the organization may receive only a summary communication. Communications may also be distributed to other interested or affected parties, such as external auditors and the board. IIA’s Practice Advisory 2440-2: Communications outside the Organization Nature of This Practice Advisory Internal auditors should consider these guidance if called on to disseminate information outside the organization. Such situations can arise when internal auditors are requested to provide a report or other information to someone outside the organization for which the internal audit services were provided. This guidance is a recommended set of items to be addressed and is not intended to represent all the considerations that may be necessary. Compliance with Practice Advisories is optional. 1. Internal auditors should review guidance contained in the engagement agreement or organizational policies and procedures related to reporting information outside the organization. The audit activity charter and the audit committee charter may also contain guidance related to reporting information outside the organization. If such guidance does not exist, the internal auditor should facilitate adoption of appropriate policies by the organization. Examples of information that could be included in the policies are • Authorization required to report information outside the organization • Process for seeking approval to report information outside the organization • Guidelines for permissible and nonpermissible types of information that can be reported • Outside persons authorized to receive information and the types of information they can receive • Related privacy regulations, regulatory requirements, and legal considerations for reporting information outside the organization • Nature of assurances, advice, recommendations, opinions, guidance, and other information that can be included in communications resulting in dissemination of information outside the organization 2. Requests can relate to information that already exists; for example, a previously issued internal audit report. Requests can also be received for information that must be created or determined, resulting in a new internal audit engagement. If the request relates to information or a report that already exists, the internal auditor should review the information to determine whether it is suitable for dissemination outside the organization. 3. In certain situations it may be possible to revise an existing report or information to make it suitable for dissemination outside the organization. In other situations it may be possible to generate a new report based on work previously conducted. Appropriate due professional care should be exercised when revising, customizing, or creating a new report based on work previously conducted.

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4. When reporting information outside the organization, these matters should be considered. • Need for a written agreement concerning the information to be reported • Identification of information providers, sources, report signers, information recipients, and related persons to the report or information disseminated • Identification of objectives, scope, and procedures to be performed in generating applicable information • Nature of report or other communication, including opinions, inclusion or exclusion of recommendations, disclaimers, limitations, and type of assurance or assertions to be provided • Copyright issues and limitations on further distribution or sharing of the information 5. Engagements performed to generate internal audit reports or communications to be reported outside the organization should be conducted in accordance with applicable International Standards for the Professional Practice of Internal Auditing (Standards) and include reference to such Standards in the report or other communication. 6. If during the conduct of engagements to disseminate information outside the organization the internal auditor discovers information deemed to be reportable to management or the audit committee, the internal auditor should provide suitable communication to appropriate individuals. IIA’s Practice Advisory 2440-3: Communicating Sensitive Information within and outside the Chain of Command Related Standard 2600—Resolution of Management’s Acceptance of Risks—When the chief audit executive believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the chief audit executive should discuss the matter with senior management. If the decision regarding residual risk is not resolved, the chief audit executive and senior management should report the matter to the board for resolution. Related Rules of Conduct of the Code of Ethics—Integrity Internal auditors 1.1 Shall perform their work with honesty, diligence, and responsibility. 1.2 Shall observe the law and make disclosures expected by the law and the profession. 1.3 Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization. 1.4 Shall respect and contribute to the legitimate and ethical objectives of the organization. Related Rules of Conduct of the Code of Ethics—Confidentiality Internal auditors 3.1 Shall be prudent in the use and protection of information acquired in the course of their duties. 3.2 Shall not use information for personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization. Nature of This Practice Advisory An internal auditor may discover information about exposures, threats, uncertainties, fraud, waste and mismanagement, illegal activities, abuse of power, misconduct that endangers public health or safety, or other wrongdoings. In some cases, the new information will have significant consequences, and the supporting evidence will be substantial and credible. The dilemma posed to internal auditors in these types of situations is complex, often involving cultural and business practice differences, legal structures, local and national laws, as well as professional standards, ethical codes, and personal values. The manner in which the internal auditor seeks to resolve the situation may create reprisals and potential liability. Because of those risks and ramifications, the internal auditor should proceed with care to evaluate the evidence and the reasonableness of his or her conclusions and to examine the various potential actions that could be taken to communicate the sensitive information to persons who have the authority to resolve the matter and to stop the improper activity. In some countries, certain actions may be prescribed by local laws or regulations.

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This Practice Advisory is offered to stimulate thinking about the many issues and challenges that the internal auditor may face in these situations. While providing information and suggesting factors that may be considered by an internal auditor, the Practice Advisory is not a comprehensive examination of the topic, and it does not offer legal or expert advice for the auditor. Internal auditors should seek legal counsel when the situation is sensitive and has significant consequences. This Practice Advisory was developed with the utmost care and after lengthy deliberation. However, the IIA does not assume responsibility for the use of the information contained in this Practice Advisory or for its applicability to specific situations in practice, and it does not give assurance that the suggested actions will be successful. Compliance with Practice Advisories is optional. 1. Internal auditors often come into the possession of information that is critically sensitive and substantial to the organization and has significant potential consequences. That information may relate to exposures, threats, uncertainties, fraud, waste and mismanagement, illegal activities, abuse of power, misconduct that endangers public health or safety, or other wrongdoings. Those types of matters may adversely impact the organization’s reputation, image, competitiveness, success, viability, market values, investments and intangible assets, or earnings. They are likely to increase an organization’s risk exposures. Communicating Sensitive Information to Those in the Chain of Command 2. Once the internal auditor has decided that the new information is substantial and credible, the auditor would normally communicate the information, on a timely basis, to those in management who can act on it. In most instances, those communications will resolve the matter from an internal audit perspective, so long as management takes the appropriate action to manage the associated risks. If the communications result in a conclusion that management, by inadequate actions or lack of actions, is exposing the organization to an unacceptable level of risk, the chief audit executive (CAE) should consider other options to achieve a satisfactory resolution. 3. Among those possible actions, the CAE could discuss concerns about the risk exposure with senior management within his or her normal chain of command. Since the audit or other committee of the governing board would also be expected to be in the CAE’s chain of command, the members of the board committee would normally be apprised of the CAE’s concerns. If, after those discussions with senior management, the CAE is still unsatisfied and concludes that senior management is exposing the organization to an unacceptable risk and is not taking appropriate action to halt or correct the situation, senior management and the CAE would present the essential information and their differences of opinion to the members or a committee of the governing board. 4. That simple chain-of-command communication scenario may be accelerated for certain types of sensitive occurrences because of national laws, regulations, or commonly followed practices. For instance, in the case of evidence of fraudulent financial reporting by a company with publicly traded securities in the United States of America, regulations prescribe that the audit committee of the board be immediately informed of the circumstances surrounding the possibility of misleading financial reports, even though senior management and the CAE may be in substantial agreement on what actions need to be taken. Laws and regulations in several countries specify that members or a committee of the governing board should be informed of discoveries of violations of criminal, securities, food, drugs, or pollution laws and other illegal acts, such as bribery or other improper payments to government officials or to agents of suppliers or customers. Communicating outside the Chain of Command 5. In some situations, an internal auditor may face the dilemma of considering whether to communicate the discovered information to persons outside the normal chain of command or even outside the organization. The act of disclosing adverse information to someone in the organization who is outside the individual’s normal chain of command, or to a governmental agency or other authority that is wholly outside the organization, is commonly referred to as “whistle-blowing.” 6. In studies about whistle-blowing, it has been reported that most whistle-blowers disclose the sensitive information internally, even if outside the normal chain of command, particularly if they trust the policies and mechanisms of the organization to investigate an allegation of an illegal or other improper activity and to take appropriate action. However, some persons possessing sensitive information may decide to take the information outside the organization, particularly if they fear retribution by their employers or fellow employees, doubt that the issue will be properly investigated,

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believe that it will be concealed, or possess evidence about an illegal or improper activity that jeopardizes the health, safety, or well-being of people in the organization or community. The primary motive of most whistle-blowers who are acting on good faith is to halt the illegal, harmful, or improper behavior. 7. An internal auditor who is facing a similar dilemma and needs to consider all possible options must evaluate alternative ways to communicate the risk to some person or group outside his or her normal chain of command. Because of risks and ramifications associated with these approaches, the internal auditor should proceed with care to evaluate the evidence and the reasonableness of his or her conclusions and to examine the merits and disadvantages of each potential action. It may be appropriate for an internal auditor to take this type of action if doing so will result in responsible action by persons in senior management or in governance positions, such as members of the governing board or one of its committees. An internal auditor would likely consider communicating outside the organization’s governance structure to be a last option. An internal auditor would reserve this type of action for those rare occasions when he or she is convinced that the risk and its possible consequences are serious and there is high probability that the organization’s existing management and governance mechanisms cannot or will not effectively address the risk. 8. Many member countries in the Organization for Economic Cooperation and Development (OECD) have laws or administrative regulations requiring public servants with knowledge of illegal or unethical acts to inform an inspector general, other public official, or ombudsman. Some national laws pertaining to whistle-blowing–type actions protect citizens if they come forward to disclose specific types of improper activities. Among the activities listed in the laws and regulations of those countries are • Criminal offenses and other failures to comply with legal obligations • Acts that are considered miscarriages of justice • Acts that endanger the health, safety, or well-being of individuals • Acts that damage the environment • Activities that conceal or cover up any of the above Other countries offer no guidance or protection. The internal auditor should be aware of the laws and regulations of the various localities in which the organization operates and should take actions that are consistent with those legal requirements. The internal auditor should consider obtaining legal advice if he or she is uncertain of the applicable legal requirements. 9. Many professional associations hold their members to a duty to disclose illegal or unethical activities. The distinguishing mark of a “profession” is its acceptance of broad responsibilities to the public and its protection of the general welfare. In addition to examining the legal requirements, IIA members and all Certified Internal Auditors should follow the requirements outlined in the IIA’s Code of Ethics concerning illegal or unethical acts. Internal Auditor’s Decision 10. An internal auditor has a professional duty and an ethical responsibility to evaluate carefully all the evidence and the reasonableness of his or her conclusions and decide whether further actions may be needed to protect the interests of the organization, its stakeholders, the outside community, or the institutions of society. Also, the auditor will need to consider the duty of confidentiality imposed by the IIA’s Code of Ethics to respect the value and ownership of information and avoid disclosing it without appropriate authority, unless there is a legal or professional obligation to do so. In this evaluation process, the auditor should seek the advice of legal counsel and, if appropriate, other experts. Those discussions may be helpful in providing a different perspective on the circumstances as well as offering opinions about the potential impact and consequences of various possible actions. The manner in which the internal auditor seeks to resolve this type of complex and sensitive situation may create reprisals and potential liability. 11. Ultimately, the internal auditor must make a personal decision. The decision to communicate outside the normal chain of command should be based on a well-informed opinion that the wrongdoing is supported by substantial, credible evidence and that a legal or regulatory imperative or a professional or ethical obligation requires further action. The auditor’s motive for acting should be the desire to stop the wrongful, harmful, or improper activity.

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MULTIPLE-CHOICE QUESTIONS (1-216)

Collect Data and Evaluate Audit Evidence 1. An operational audit is being performed to evaluate the productivity of telephone sales representatives relative to last year. The organization sells two similar products, one of which is priced 20% higher than the other. Prices did not change during the two years subject to the audit, and the gross profit percentage is the same for both products. The sales representatives are paid a base salary plus a commission. Which one of the following items represents the best evidence that the organization’s sales representatives are more productive this year than last year? a. The revenue per representative is higher this year than last year. b. The number of sales calls is higher this year than last year. c. The ratio of the number of new customers to the number of prospects contacted is higher this year than last year. d. Unit sales increased at a higher rate this year than last year. 2. Data gathered in support of an audit conclusion can be rated on a continuum of reliability. The most reliable form of evidence would be an a. Internal document obtained from the auditee. b. External document obtained directly from an outside source. c. Internal document subject to rigorous internal review procedures. d. Internal document that has been circulated through an outside party. 3. The purchasing manager of a manufacturing company was concerned with the rising prices of some direct materials provided by a supplier. The purchasing manager told the supplier to either maintain the current prices or withdraw as a supplier for the company’s direct materials. The supplier devised a plan to circumvent the purchasing manager’s intent without actually violating the purchasing manager’s mandate. Which one of the following is the probable action taken by the supplier? a. The supplier maintained prices in the short run but later returned to a pattern of increasing prices. b. The supplier decided to stop providing the direct materials to the manufacturing company, since holding the line on prices would have a negative impact. c. The supplier maintained prices but substituted a lower grade of direct materials. d. The supplier worked through the president of the manufacturing company to force the purchasing manager to cancel the mandate. Items 4 through 9 are based on the following: The internal auditing department has just completed an audit of loan processing and commercial loan account balances for a financial institution. Following are a few excerpts from their working papers indicating potential audit findings: A. We took a statistical sample of 100 loan applications and determined that only 85 loans were granted. B. Of the 85 loans granted, we noted that four loans should have been reviewed and approved by the

loan committee but were not. Company policy states that the committee, prior to funding, must approve all loans. The vice president, however, approved each of the four loans. The matter was discussed with the vice president, who indicated it was a competitive loan situation to a new customer and in the best interests of the financial institution to expedite the loan and establish a firm relationship with a growing customer. The loan committee formally approved all of the other loans. C. Of the 81 loans approved by the loan committee, we found 7 where the actual amount loaned exceeded the approved amount. D. We noted 3 instances in which loans were made to related groups of companies without an analysis of the total amount of loans made to the controlling entity. There may be statutory limitations on the amount of loans that can be made to any individual controlling organization. E. Of the 81 loans approved by the loan committee, we found that 14 contained either insufficient documentation or were not received by the committee in a timely fashion in advance of their meeting. The statistical sample was taken with a 95% confidence level using attribute sampling with a tolerable error limit of 4%. You may assume that the sampling plan was implemented correctly. 4. Regarding item A only, which of the following audit conclusions is justified? a. There is a 15% deviation rate in total loans processed. b. There is a problem in processing that should be followed up by the auditor to determine why 15 of the loans may have been lost. c. The loans that have been made comply with company procedures while the loans that were not made do not. d. None of the above. 5. Regarding item B, which of the following would be correct? I. The sample deviation rate exceeds 4%. II. The auditor should examine the nature of the loans approved by the vice president to see if there is a pattern. III. The audit finding should be included in the auditor’s report with a suggestion that the loan committee review the loans. a. b. c. d.

II only. II and III only. III only. I, II, and III.

6. Assume that, with regard to item B, the vice president asks the loan committee to review the loans on an after-thefact basis. Assume further that, upon this subsequent review, the loan committee approves the loans on the after-the-fact basis. Which of the following conclusions would be correct regarding the reporting of the audit finding in the auditor’s report? I. The sample deviation rate would drop to 0%. II. The item should still be reported in the audit report because it was not approved in a timely manner in accordance with company policies.

1: CONDUCT ENGAGEMENTS III. The item should be reported as a nondeviation because subsequent action validated the vice president’s approach. a. b. c. d.

I only. II only. III only. I, II, and III.

7. Regarding item C, which of the following actions would be inappropriate on the part of the auditor? a. Examine the loans to determine if there is a pattern of the loans to companies. Summarize amounts and include in the audit report. b. Report the amounts to the loan committee and leave it up to them to correct. Take no further follow-up action at this time and do not include the items in the audit report. c. Follow up with the vice president and include the vice president’s acknowledgment of the situation in the audit report. d. Determine amount of differences and make an assessment as to whether the dollar differences are material. If the amounts are not material, not in violation of government regulations, and can be rationally explained, omit the finding from the audit report. 8. Regarding item D, which of the following would be correct? I. The deviation rate is under 4%; therefore, the finding need not be reported to management and the audit committee. II. The auditor should review appropriate regulations and possibly get legal counsel opinion on the finding prior to including the finding in the final audit report. III. The auditor should report the finding to the vice president who approved the loans and ask for a follow-up report during the audit scheduled next year. No further action need be taken at this time. IV. Review a plan by the loan committee to prevent such occurrences in the future and include a summary and analysis of the plan in the final audit report. a. b. c. d.

I only. III only. II and IV. II only.

9. Regarding item E, which of the following conclusions/ audit actions is appropriate? a. There is no audit finding since the loan committee approved all of the loans. b. Before issuing a final audit report, the auditor should investigate to determine the reasons for the lack of documentation and timely submittal to the loan committee and include that analysis in the report. c. The auditor should include the audit findings in the report only if the auditor is able to determine the cause of the findings. d. Both choice (b) and (c) are correct. 10. Which of the following documents would provide the best evidence that a purchase transaction has actually occurred?

a. b. c. d.

Canceled check issued in payment of the procured goods. Ordering department’s original requisition for the goods. Receiving memorandum documenting the receipt of the goods. Supplier’s invoice for the procured goods.

Items 11 through 15 are based on the following: The internal auditor of a financial institution is performing an audit of the real estate loans portfolio. The auditor wants to test the basic assertions on the existence and valuation of the loans and to determine that the loans do not exceed the bank’s policy that loans to any single entity do not exceed 8% of the total loan portfolio. The auditor wants to be 95% confident in the test results. Consequently, the auditor took a judgment sample of 100, which included the 20 largest account balances and selected others. The auditor was aware that some of the account balances were controlled by common holding corporations, but did not feel the need to combine the accounts since they were all listed as separate accounts in the bank’s computer files and represented different real estate developments with separate legal entities. The auditor sent confirmations to the 100 entities and received the following results: • 82 of the 100 returned the positive confirmations and reported no exceptions, 53 did so in response to a first inquiry, 25 responded to a second request, and the remaining four responded after management called the customer and asked them to respond. • Of the remaining 18 accounts, the auditor found the following: A. For seven accounts, customers returned confirmations showing differences in either the terms of the loan or a disagreement on the amount outstanding. Most were minor, but one customer reported that the account had a zero balance. Upon subsequent investigation, it was found the cash payment had been recorded to a commercial account with the same company. The bank agreed to adjust the loan balances to the amounts confirmed; therefore, the auditor concluded there were no differences on the account balances. B. For five accounts, the auditor traced the loan balance to a signed loan contract, a check disbursing the funds, and examined a payment subsequent to year-end. C. For two accounts, the auditor examined payments made on the account in the subsequent period and verified it was for the correct balance. D. For the remaining four accounts, there were no payments, but the auditor examined the bank’s internal file, which showed a signed contract and a loan application signed by the customer. The auditor was satisfied that all 100 account balances had been accounted for and, with the possible exception of the last four, was confident in the correct balances. The auditor reasoned that there was positive assurance that 96 out of 100 were correct and some assurance that the other 4 were correct because of a valid loan application and contract. The auditor concluded that the 95% confidence level had been achieved. The auditor also noted that none of the 100 account balances exceeded 8% of the real estate loan portfolio.

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11. Which of the following would constitute an error on the part of the auditor in interpreting the data and drawing a conclusion? I. Concluding that the 95% confidence level had been achieved. II. Concluding there were no significant differences in the account balances because most of the differences on the returned items were minor and the bank agreed to change them. III. Concluding that the five account balances described in item B represented valid account balances and were appropriately recorded. a. b. c. d.

I and II. I only. II and III. I, II, and III.

12. The auditor often has to evaluate the reliability of data to reach audit conclusions. Consider the following four sources of audit evidence gathered by the auditor and rank from the most persuasive to least persuasive: I. The twenty-five positive responses received in connection with the second request. II. The four positive responses received in response to a call by management. III. The five accounts tested by alternative means in item B. IV. The seven responses in item A that showed account balance differences. a. b. c. d.

III, II, IV, I. I, II, III, IV. II, IV, I, III. I, IV, III, II.

13. Assuming the responses obtained from the customers are accurate, which of the following auditor conclusions is/are justified by the data? I. There is no violation of the bank’s policy on the total loan balance for a single entity. II. The portfolio account balance as recorded exists. III. The portfolio account balance as recorded is properly valued. a. b. c. d.

I only. I and II. II only. I, II, and III.

14. If the auditor had decided to utilize an integrated test facility instead of using confirmations to test the account balance, the auditor would have gathered evidence to test which of the following assertions? I. II. III. IV.

Existence. Valuation. The computer program properly accrues interest income. Payments entered into the system are properly matched to account balances by the computer program. a. b. c. d.

III and IV only. I and II only. I and III only. I, II, III, and IV.

15. The auditor decides to expand the audit tests to gather more information about the collectibility and cash realization of the account balances. As a first step, the auditor wants to understand more about the procedures used by the organization to deal with collectibility and the ultimate cash realization of the account balances. Which of the following techniques would be the least effective in gathering the information? a. Develop a questionnaire and administer to appropriate personnel. b. Obtain a systems flowchart describing the processing of normal loan transactions. c. Make inquiries of the credit department on criteria used and evidence gathered to support loan writeoffs. Document in a narrative. d. Interview the credit department and develop a flowchart of the key decisions made regarding collectibility of account balances. 16. The auditor wants to understand the actual flow of data regarding cash processing. The most convincing evidence would be obtained by a. Reviewing the systems flowchart. b. Performing a “walk-through” of the processing and obtaining copies of all documents used. c. Reviewing the programming flowchart for evidence of control procedures placed into the computer programs. d. Interviewing the treasurer. 17. The following are potential sources of evidence regarding the effectiveness of the division’s total quality management program. Assume that all comparisons are for similar time periods and duration and current items are compared with similar items before the implementation of the total quality management program. The least persuasive evidence would be a comparison of a. Employee morale over the two time periods. b. Scrap and rework costs over the two time periods. c. Customer returns over the two time periods. d. Manufacturing and distribution costs per unit over the two time periods. 18. The auditor is concerned with the overall valuation of inventory. Rank the following sources of audit evidence from most persuasive to least persuasive in addressing the assertion as to the valuation of inventory. I. Calculate inventory turnover by individual product. II. Assess the net realizability of all inventory items with a turnover ratio of 2.0 or less by interviewing the marketing manager as to the marketability of the product. III. Calculate the net realizable value (NRV) of all inventory products (using audit software to calculate NRV based on the last selling price) and compare NRV with cost. IV. Take a statistical sample of inventory and examine the latest purchase documents (invoices and receiving slips) to calculate inventory cost. a. b. c. d.

I, II, III, IV. I, IV, II, III. IV, I, III, II. II, III, IV, I.

19. The auditor wishes to test the assertion that all claims paid by a medical insurance company contain proper authorization and documentation, including but not limited to the validity of the claim from an approved physician and an indi-

1: CONDUCT ENGAGEMENTS cation that the claim complies with the claimant’s policy. The most appropriate audit procedure would be to a. Select a random statistical sample of all policyholders and examine all claims for the sampled items during the year to determine if they were handled properly. b. Select a sample of claims filed and trace to documentary evidence of authorization and other supporting documentation. c. Select a sample of claims denied and determine that all claims denied were appropriate. The claims denied file is much smaller, and the auditor can obtain greater coverage with the sample size. d. Select a sample of paid claims from the claims (cash) disbursement file and trace to documentary evidence of authorization and other supporting documentation. Items 20 through 22 are based on the following: An auditor of a public company has the following information available to write a memorandum on the progress of developing new audit software for accounts receivable: The programmers, who were to start on the sampling software last week, will not be able to start until next week. The programmers want to spend $5,000 for a commercially available software package. The $5,000 for the software is not in the budget. By using the software, the programmers expect to complete their work on schedule. Programming costs will be reduced by $12,500 if the programmers can use the purchased software. The programming of the sampling techniques is expected to be completed one week early. The overall project is expected to be completed on time. Except for the software package and the programming costs, the project is on budget.

20. The most important message for the auditor to convey to senior management is a. The development of the new audit software is behind schedule. b. The programmers want to buy new software that costs $5,000. c. The project is expected to be completed on time and within budget. d. The programming of the sampling techniques will be completed one week early. 21. To emphasize information in a memorandum, it is best to place the information a. In the middle of the memorandum and use passive voice. b. In the middle of the memorandum and use active voice. c. At the beginning of the memorandum and use passive voice. d. At the beginning of the memorandum and use active voice. 22. Regarding the unbudgeted $5,000 for the purchase of a software package, the auditor should a. Disclose it with the $12,500 reduction in programming costs to show the complete picture. b. Leave it out of the report because it is irrelevant. c. Emphasize it because it is outside the budget. d. Leave it out of the report to avoid criticism. 23. In evaluating the validity of different types of audit evidence, which one of the following conclusions is incorrect?

a. b. c. d.

Recomputation, although highly valid, is limited in usefulness due to its limited scope. The validity of documentary evidence is independent of the effectiveness of the control system in which it was created. Internally created documentary evidence is considered less valid than externally created documentary evidence. The validity of confirmations varies directly with the independence of the party receiving the confirmation.

24. Which of the following is generally not true when evaluating the persuasiveness of evidence? The evidence is considered more persuasive if a. Verified by internally maintained documents rather than by written inquiry of third party. b. Obtained under conditions of strong controls rather than weak controls. c. Known by an auditor’s personal knowledge rather than from a third-party confirmation. d. Obtained from an external source rather than from an internal source. Items 25 through 27 are based on the following: Listed below are four examples of common types of audit evidence. Use the evidence types to answer the three questions. I. II. III. IV.

Inquiry of management. Observation of auditee’s procedures. Physical examination. Documentation prepared externally.

25. The most persuasive evidence to test the existence of newly acquired computers for the sales department would be a. Inquiry of management b. Observation of auditee’s procedures c. Physical examinations d. Documentation prepared externally 26. The most persuasive evidence regarding the asset value of the acquired computers would be a. Inquiry of management b. Observation of auditee’s procedures c. Physical examinations d. Documentation prepared externally 27. Which of the following represents the general order of persuasiveness, from most to least, for the evidence types listed above? a. (III, IV, II, I). b. (IV, I, II, III). c. (II, IV, I, III). d. (IV, III, I, II). 28. Which of the following procedures would provide the most relevant evidence to determine the adequacy of the allowance for doubtful accounts receivable? a. Confirmation of the receivables. b. Analysis of the following month’s payments on the accounts receivable balances outstanding. c. Test the controls over the write-off of accounts receivable to ensure that management approves all write-offs. d. Analyze the allowance through an aging of receivables and an analysis of current economic data.

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29. Which of the following audit procedures would provide the least relevant evidence that the company had included all of its outstanding debt on a recent disclosure statement that was made public? a. Send bank confirmations to all banks that have done business with the company, asking for information on outstanding notes. b. Prepare a schedule of outstanding notes using the company’s list of notes payable, and trace them to the general ledger and disclosure statement. c. Compare the notes listed in last year’s audited disclosure statement with the notes listed this year and reconcile the differences. d. Analyze the interest expense and notes payable accounts to determine if interest has been recorded for notes that are not on the disclosure statement. 30. Which of the following audit procedures would provide the least relevant evidence in determining that payroll payments were made to bona fide employees? a. Reconcile time cards in use to employees on the job. b. Examine canceled checks for proper endorsement and compare to personnel records. c. Test for segregation of the authorization for payment from the hire/fire authorization. d. Test the payroll account bank reconciliation by tracing outstanding checks to the payroll register. Items 31 and 32 are based on the following: The two statements below are the result of an audit of an organization’s cash controls. Specifically, the statements were part of the evidence gathered to satisfy the audit objective of “determining whether all cash receipts are deposited intact daily.” I. During an interview, the controller assured an internal auditor that all cash receipts are deposited as soon, as is reasonably possible. II. A comparison of a sample of cash receipts lists with the total of daily cash receipts journal entries and daily bank deposit slip amounts revealed that (1) each cash receipts list equaled cash journal entry amounts but not daily bank deposit amounts and (2) each cash receipts list totals equaled bank deposit totals in the long run. 31. As evidence that can be used to satisfy the audit objective stated above, Statement I taken alone is a. Sufficient but not competent or relevant. b. Sufficient, competent, and relevant. c. Not sufficient, competent, or relevant. d. Relevant but not sufficient or competent. 32. As evidence to support a finding that “Cash deposits are not deposited intact daily,” Statement II is a. Sufficient but not competent or relevant. b. Sufficient, competent, and relevant. c. Not sufficient, competent, or relevant. d. Relevant but not sufficient or competent. 33. The most persuasive means of assessing production quality control is to a. Evaluate the number and reasons for sales adjustments. b. Analyze labor efficiency variances. c. Analyze materials efficiency variances. d. Evaluate the production/inventory/sales mix.

34. Which of the following forms of evidence represents the most competent evidence that a receivable actually exists? a. A positive confirmation. b. A sales invoice. c. A receiving report. d. A bill of lading. 35. In testing the write-off of a deteriorated piece of equipment, the best evidence of the condition of the equipment would be a. The equipment manager’s statement regarding condition. b. Accounting records showing maintenance and repair costs. c. A physical inspection of the actual piece of equipment. d. The production department’s equipment downtime report. 36. Which of the following audit procedures provides the best evidence about the collectibility of notes receivable? a. Confirmation of note receivable balances with the debtors. b. Examination of notes for appropriate debtors’ signatures. c. Reconciliation of the detail of notes receivable and the provision for uncollectible amounts to the general ledger control. d. Examination of cash receipts records to determine promptness of interest and principal payments. 37. Assuming all of the procedures below are satisfactorily performed, to test the valuation of receivables, the auditor should rely most on a. Mailing positive confirmation requests. b. Completing an aging schedule of accounts receivable. c. Comparing the accounts receivable total with totals from prior periods. d. Recalculating the value of selected individual accounts receivable. 38. What standard of evidence is satisfied by an original signed document? a. Sufficiency. b. Competence. c. Relevance. d. Usefulness. 39. The director of internal auditing is reviewing the working papers that were produced by an auditor during a fraud investigation. Among the items contained in the working papers is a description of an item of “physical evidence.” Which of the following is the most probable source of this item of evidence? a. Observing conditions. b. Interviewing people. c. Examining records. d. Computing variances. 40. Evidence that is both the best available and reliable is a. Sufficient. b. Competent. c. Relevant. d. Documentary.

1: CONDUCT ENGAGEMENTS 41. When sampling methods are used, the concept of sufficiency of evidence means that the samples selected provide a. Reasonable assurance that they are representative of the sampled population. b. The best evidence that is reasonably obtainable. c. Reasonable assurance that the evidence has a logical relationship to the audit objective. d. Absolute assurance that a sample is representative of the population. 42. An internal auditor takes a photograph of the auditee’s workplace. The photograph is a form of what kind of evidence? a. Physical. b. Testimonial. c. Documentary. d. Analytical. 43. Which of the following is an example of “documentary’” evidence? a. A photograph of an auditee’s workplace. b. A letter from a former employee alleges a fraud. c. A page of the general ledger containing irregularities placed there by the perpetrator of a fraud. d. A page of the auditor’s working papers containing the computations that demonstrate the existence of an error or irregularity. 44. Which of the following techniques would best result in sufficient evidence with regard to an audit of the quantity of fixed assets on hand in a particular department? a. Physical observation. b. Analytical review of purchase requests and subsequent invoices. c. Interviews with department management. d. Examination of the account balances contained in general and subsidiary ledgers. 45. Which technique is most appropriate for testing the quality of the preaudit of payment vouchers described in an internal control questionnaire (ICQ)? a. Analysis. b. Evaluation. c. Verification. d. Observation. 46. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must a. Be well documented and cross-referenced in the working papers. b. Be based on references that are considered reliable. c. Bear a direct relationship to the finding and include all of the elements of a finding. d. Be convincing enough for a prudent person to reach the same decision. 47. Accounts payable schedule verification may include the use of analytical evidence. Which of the following is most appropriately described as analytical evidence? a. Comparing the items on the schedule with the accounts payable ledger or unpaid voucher file. b. Comparing the balance on the schedule with the balances of 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.

48. Of the following, audit evidence is best described as: a. The records of preliminary planning and surveys, the audit program, and the results of fieldwork. b. The information documented by the auditors and obtained through observing conditions, interviewing people, and examining records. c. An intermediate fact, or group of facts, from which the auditor can infer the fairness of an assertion being audited. d. Detailed documentation for systems that do not achieve desired objectives, actions that were taken improperly, and actions that should have been taken but were not. 49. Which of the following documents would provide the most persuasive evidence concerning the existence and valuation of a receivable? a. A credit approval document supported by the customer’s audited financial statements. b. A copy of a sales invoice to the customer in the auditee’s records. c. A positive confirmation received directly from the customer. d. A customer’s purchase order in the auditee’s records related to the credit sale. 50. Which of the substantive fieldwork procedures presented below provides the best evidence about the completeness of recorded revenues? a. Reconciling the sales journal to the general ledger control account. b. Vouching charges made to the accounts receivable subsidiary ledger to supporting shipping records. c. Vouching shipping records to the customer order file. d. Reconciling shipping records to recorded sales. 51. Which of the following types of tests would be the most persuasive if an internal auditor wanted assurance of the existence of inventory stored in a warehouse? a. Examination of the shipping documents supporting recorded transfers to and from the warehouse. b. Obtaining written confirmation from management. c. Physically observing the inventory in the warehouse. d. Examination of warehouse receipts contained in the auditee’s records. 52. Documents provide evidence that is of differing degrees of persuasiveness. If the audit objective is to gain evidence that payment has actually been made for a specific invoice from a vendor, which of the following documents would generally provide the most persuasive evidence? a. An entry in the auditee’s cash disbursements journal supported by a voucher package containing the vendor’s invoice. b. A canceled check, made out to the vendor and referenced to the invoice, included in a cutoff bank statement that the auditor received directly from the bank. c. An accounts payable subsidiary ledger that shows payment of the invoice. d. A vendor’s original invoice stamped “PAID” and referenced to a check number. 53. One objective of an internal audit of the receiving function is to determine whether receiving clerks independently

WILEY CIA EXAM REVIEW: VOLUME 2

count incoming supplies before completing the “quantity received” section of the receiving report. Which of the following is the most persuasive evidence that the counts are made? a. The receiving section supervisor’s assurance based on personal observation that the counts are made. b. A receiving clerk’s initials on all receiving reports attesting to the fact that the count was made. c. Assurance from the warehouse supervisor that the accuracy of the perpetual inventory is the result of the reliability of the entries in the quantity received section. d. Periodic observations by the internal auditor over the course of the audit. 54. An internal auditor is auditing the corporate advertising function. The company has engaged a medium-size local advertising agency to place advertising in magazine publications. As part of the review of the audit working papers, the internal auditing supervisor is evaluating the evidence collected. The auditor reviewed the language in the advertising for its legality and compliance with fair trade regulations by interviewing the firm’s advertising manager, the products marketing director (who may not have been objective), and five of the firm’s largest customers (who may not have been knowledgeable). The supervisor can justifiably conclude that the evidence is a. Competent. b. Irrelevant. c. Conclusive. d. Insufficient. 55. During an audit of cash controls, an auditor compared a sample of cash receipts lists with (1) the total of daily cash receipts journal entries and (2) daily bank deposit slip amounts. The comparison revealed that (1) each cash receipts list equaled cash journal entry totals but not daily bank deposit amounts and (2) totals for cash receipts lists equaled bank deposit totals in the long run. To support a finding that “Cash receipts are not deposited intact daily,” the above evidence is a. Sufficient, but not competent or relevant. b. Sufficient, competent, and relevant. c. Not sufficient, competent, or relevant. d. Relevant, but not sufficient or competent. 56. Which of the following procedures would provide the best evidence of the effectiveness of a credit-granting function? a. Observe the process. b. Review the trend in receivables write-offs. c. Ask the credit manager about the effectiveness of the function. d. Check for evidence of credit approval on a sample of customer orders. 57. An auditor performs an analytical review of division operations and notes the following: • • • • •

Current ratio is increasing Quick ratio is decreasing Number of days sales in inventory is increasing Sales are constant Current liabilities are constant

From this, the auditor can conclude that I. The company has produced fewer products this year than last year. II. Cash or accounts receivable have decreased. III. The gross margin has decreased. a. b. c. d.

I only. II only. I and III. II and III.

Items 58 and 59 are based on the following: During a review of a division’s operations, an auditor notes that • • • •

Sales revenue has remained the same. Customer base is unchanged. Inventory has increased significantly. Gross margin has increased significantly.

58. Which of the following statements, if true, could explain the change noted in gross margin? I. The company has developed a new manufacturing process that is much more efficient. II. Sales price per unit has increased. III. Inventory is overstated. a. b. c. d.

I only. I and II only. III only. I, II, and III.

59. Assume that divisional management stated that the gross margin increase is due to increased efficiency in manufacturing operations. The auditor wishes to investigate this assertion. Which of the following audit procedures would be most relevant to the assertion? a. Obtain a physical count of inventory. b. For a sample of products, compare costs per unit this year to those of last year, test cost buildups, and analyze standard cost variances. c. Take a physical inventory of equipment to determine if there were significant changes. d. Take a sample of finished goods inventory and trace raw materials cost back to purchase prices in order to determine the accuracy of the recorded raw materials price. 60. Audit findings must be based on sufficient, competent, relevant, and useful evidence. Which of the following statements is true about evidence? a. Physical observation provides the most reliable evidence of the existence of accounts receivable. b. Purchase orders are relevant evidence that goods paid for have been received. c. An appropriate conclusion about a population based on a sample requires that the sample be representative of the population. d. A copy of an original document is as reliable as the original document. 61. An auditor must weigh the cost of an audit procedure against the persuasiveness of the evidence to be gathered. Observation is one audit procedure that involves cost-benefit trade-offs. Which of the following statements regarding observation as an audit technique is(are) correct?

1: CONDUCT ENGAGEMENTS I. Observation is limited because individuals may react differently when being observed. II. When testing financial statement balances, observation is more persuasive for the completeness assertion than it is for the existence assertion. III. Observation is effective in providing evidence on how the company’s processes differ from that specified by written policies. a. b. c. d.

I only. II only. I and III only. I, II, and III.

62. Which of the following is the best source for an audit team to use to identify common risks faced by a company? a. Checklists or reminder lists. b. Flowcharts. c. Questionnaires. d. Research reported in professional journals and textbooks. 63. The audit effort most likely to yield relevant evidence in determining the adequacy of an organization’s “disaster recovery plan” should focus on a. The completeness of the plan as to facilities, operations, communications, security, and data processing. b. The sufficiency of the list of replacement equipment needed in event of a disaster. c. Whether the plan is in the planning or developmental stage. d. The role of the internal auditing department in developing and testing the plan. 64. Which of the substantive fieldwork procedures presented below provides the best evidence about the completeness of recorded revenues? a. Reconciling the sales journal to the general ledger control account. b. Vouching charges made to the accounts receivable subsidiary ledger to supporting shipping records. c. Vouching shipping records to the customer order file. d. Reconciling shipping records to recorded sales. 65. The IIA Standards define competent evidence as a. Factual, adequate, and convincing. b. Reliable and the best attainable through the use of appropriate audit techniques. c. Consistent with the audit objectives, findings and recommendations. d. Information that helps the organization meets its goals. 66. You are an internal auditor whose company is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is a. Examination of the company’s escheatment account. b. Interview with the company’s treasurer and cash manager. c. Preparation and review of standard bank confirmation inquiries. d. Analytical computations comparing current cash in the bank with previous accounting periods.

67. An auditor would primarily rely on which type of evidential matter when evaluating the collectibility of accounts receivable? a. Positive confirmation. b. Negative confirmation. c. Aged accounts receivable listing. d. Management’s representations. 68. What evidence is appropriate to determine that recorded purchase transactions were valid and at the best price? a. Purchase requisitions, journal voucher entries, and bid quotes. b. Purchase requisitions, purchase orders, and bid quotes. c. Receiving reports, purchase orders, and purchase requisitions. d. Purchase orders, receiving reports, and bid quotes. 69. Audit information is generally considered relevant when it is a. Derived through valid statistical sampling. b. Objective and unbiased. c. Factual, adequate, and convincing. d. Consistent with the audit objectives. Items 70 through 72 are based on the following: An internal auditor is auditing the corporate advertising function. The company has engaged a medium-size local advertising agency to place advertising in magazine publications. As part of the review of the audit working papers, the internal auditing supervisor is evaluating the evidence collected. 70. The auditor examined the company’s advertising agency’s internal controls and, based on the preliminary survey, has determined that there are no problems. The supervisor believes there should be substantive testing and has decided that the evidence gathered to date is not a. Competent. b. Relevant. c. Sufficient. d. Useful. 71. The auditor examined a statistical sample of the agency’s billings to clients for newspaper advertising space. The agency specializes in newspaper advertising that is predominantly typeset plates or mats; however, the agency’s work for the company is essentially artwork for magazine advertising. The supervisor, concerned with the relationship of the sample to the work performed for the company, has decided that the evidence is not a. Competent. b. Relevant. c. Sufficient. d. Reliable. 72. The auditor reviewed the language in the advertising for its legality and compliance with fair trade regulations by interviewing the firm’s advertising manager, the products marketing director (who may not have been objective), and five of the firm’s largest customers (who may not have been knowledgeable). The supervisor has decided that the evidence is a. Competent. b. Relevant. c. Conclusive. d. Insufficient.

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73. One criticism of the banking industry is that loan committees were not properly carrying out their function of examining proposed loans, determining that proper collateral exists, and assessing the associated risk before approving the loan. In gathering evidence to determine if the loan committee is operating effectively, the auditor should a. Interview loan officers to see if their individual loan recommendations were followed. b. Reconcile the total amount of loans made plus those rejected with the total amount of loans submitted to the committee for approval. c. Examine individual loans for signatures of the committee members and determine the amount of loans made during each meeting and an approximation of time spent in approving the loans. d. All of the above. 74. Which of the following procedures would provide the most relevant evidence to determine the adequacy of the allowance for doubtful accounts receivable? a. Confirm the receivables. b. Analyze the following month’s payments on the accounts receivable balances outstanding. c. Test the controls over the write-off of accounts receivable to ensure that management approves all write-offs. d. Analyze the allowance through an aging of receivables and an analysis of current economic data. 75. Observation is considered a reliable audit procedure, but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique? a. It is the most effective audit methodology to utilize in filling out internal control questionnaires. b. It is the most persuasive methodology to learn how transactions are really processed during the period under audit. c. It is rarely sufficient to satisfy any audit assertion other than existence. d. It is the most persuasive audit technique for determining if fraud has occurred. 76. An internal auditor at a savings and loan concludes that a secured real estate loan is collectible. Which of the following audit procedures provides the most persuasive evidence about the loan’s collectibility? a. Confirming the loan balance with the borrower. b. Reviewing the loan file for proper authorization by the credit committee. c. Examining documentation of a recent, independent appraisal of the real estate. d. Examining the loan application for appropriate borrowers’ signatures. 77. The internal auditor for a construction contractor finds material costs increasing as a percentage of billings and suspects that materials billed to the company are being delivered to another contractor. What type of evidence would best enable the auditor to determine whether erroneous billings occurred? a. Documentary. b. Physical examination. c. Confirmation. d. Analytical review.

78. One of the audit objectives of an audit of the organization’s accounts receivable function is to determine if prescribed standard procedures are followed when credit is granted. Which of the following audit procedures would produce the most competent evidence? a. Ask management of the credit department if specific policies and procedures are followed when granting credit. b. Select a statistical sample of credit applications and test them for conformance with prescribed procedures. c. Analytically review the relationships between trends in credit sales and bad debts. d. Review procedures for periodically aging accounts receivable. 79. Which of the following tests can help the auditor evaluate the adequacy of the company’s allowance for doubtful accounts? a. Reconciling the accounts receivable subsidiary ledgers with the control account. b. Preparing an aging analysis. c. Reviewing authorization of credit terms. d. Tracing a sample of credit memos to the accounts receivable subsidiary ledger. 80. To identify shortages of specific items in an inventory of expensive goods held for retail sale, the most appropriate audit work step is to a. Apply the retail method of inventory valuation. b. Compare physical inventory counts to perpetual records. c. Develop inventory estimates based on the gross profit percentage method. d. Analyze current and previous inventory turnover rates. Items 81 and 82 are based on the following: An internal auditor is examining the purchasing function. Competitive bids are required on purchases exceeding $2,000 unless the executive vice president signs a waiver from the bid requirement. During the most recent year the firm issued 3,000 purchase orders, of which 180 were for amounts exceeding $2,000. 81. Which of the following audit procedures will result in the most competent evidence of compliance with the bid procedure? a. Select a representative sample of requests for bids and trace them back to the related purchase orders, ascertaining that the amount of the purchase exceeds $2,000. b. Select a representative sample of purchase orders exceeding $2,000 and examine underlying documentation, ascertaining that requests for bids or properly signed waiver forms are on file. c. Interview the head of the purchasing department and inquire as to whether there have been any departures from the bid procedure. d. Interview the executive vice president and inquire as to the frequency and circumstances of occasions where waivers from the bid requirement have been signed. 82. Before purchase invoices are approved for payment, an accounting clerk is supposed to compare invoice prices with

1: CONDUCT ENGAGEMENTS purchase order prices and indicate their agreement by signing in a designated space on the payment voucher form. Which of the following audit procedures would result in sufficient evidence that this requirement is being followed? a. Select the 20 largest payment vouchers and examines them for the signature of the accounting clerk. b. Select the 20 largest payment vouchers, examine them for signature, and compare the prices on the invoices and related purchase orders. c. Select a representative sample of payment vouchers and examine them for the signature of the accounting clerk. d. Select a representative sample of vouchers, examine them for the signature of the accounting clerk, and compare the prices on the invoices and related purchase orders. Items 83 through 85 are based on the following: A company provides valves, pipe and specialty items to chemical plants in a large metropolitan area. Stock reorder decisions are based on quarterly sales reports and must be approved by the vice president of sales. The company has a highly motivated and well-paid sales force. Often a good salesperson can earn more in commissions than from base salary. Salespeople use portable computers to enter orders while in the field. As sales orders are entered, all out-of-stock conditions are noted. Restocking orders are created whenever inventory levels fall below reorder points. The products handled by the company are subject to rapid obsolescence and have little scrap value once obsolescence is reached. The annual inventory is performed by an inventory service using professional counters. All count information is given to the company for entry and balancing. Over the past several years, the company has experienced unusually large write-offs as a result of its annual physical inventory. 83. An auditor’s objective is to determine the cause of inventory shortages shown by the physical inventories. The auditor addresses this objective by reviewing the count sheets, inventory printouts, and memos from the last inventory. The source of information and the sufficiency of this evidence are a. Internal and not sufficient. b. External and sufficient. c. Both external and internal and sufficient. d. Both external and internal and not sufficient. 84. In order to identify the amount of obsolete inventory that may exist in an organization, the internal auditor probably would collect evidence using all of the following procedures except: a. Confirmation. b. Scanning. c. Recomputation. d. Analytical review. 85. During interviews with the inventory management personnel, the auditor learned that salespeople often order inventory for stock without receiving the approval of the vice president of sales. Also, detail testing showed that there are no written approvals on purchase orders for replacement parts. The detail testing is a good example of a. Indirect evidence. b. Circumstantial evidence. c. Corroborative evidence. d. Subjective evidence.

86. In an audit of the procurement system, which of the following procedures would an auditor perform to determine whether competitive bidding procedures were adequate? I. Bids are solicited based on properly approved requests. II. A sufficient number of vendors were selected to ensure competition. III. Incoming bids are first returned to the buyer for control purposes. a. b. c. d.

I and III. II and III. I, II, and III. I and II.

87. Which of the following audit procedures would be most effective in determining whether vendor invoices are being processed on a timely basis while maximizing the company’s use of cash? a. Determine the length of processing time between the receipt of the vendor’s invoice to the payment date for the related disbursement. b. Interview the accounts payable manager to determine the procedures and standards for processing vendor invoices. c. Compare the vendor’s invoice due date with the payment date as indicated on the canceled check. d. Compare the date stamped on the invoice for receipt with the corresponding payment date for the disbursement. 88. Behavioral scientists have identified human tendencies that can erode the quality of decision making. Which of the following best describes a behavioral decision error referred to as “framing error”? a. Evaluating positive information favorably and negative information unfavorably. b. Getting locked into losing courses of action because of personal commitment. c. Evaluating the probabilities of outcomes as point estimates instead of ranges. d. Becoming overconfident because of past successes. 89. When an internal auditor encounters active opposition, as when auditees remain unconvinced of the auditor’s reasonably presented point of view, the most effective way to gain consensus is to a. Refer the matter to the auditees’ superior. b. Wait to reason with auditees late in the day when they may be more reasonable. c. Rely on logic and explain the auditor’s point again. d. Find a point of agreement by letting auditees explain their position again. Items 90 and 91 are based on the following: An audit of environmental controls, including regulatory compliance, has been concluded. Possible corrective actions are being discussed at a closing conference. 90. The environmental manager states that funds are not available in this year’s budget to make necessary changes and repairs to the hazardous-waste storage yard. The deficiencies prevent management from complying with controls established to manage waste safely and to comply with regulations. The auditor should a. Insist that the changes and repairs be made, regardless of any apparent budget constraints.

WILEY CIA EXAM REVIEW: VOLUME 2 b. c. d.

Agree that corrective action may be postponed until funds can be provided in the following year’s budget. Accept temporary, but clearly incomplete, corrective action in order to improve the situation. Involve senior management in the decision.

91. The environmental manager proposes a minimal approach that will safely manage waste as well as keep the company in compliance with applicable regulations. The auditor prefers an approach that would correct the deficiencies but also enhance operations, believing that the company has an obligation to go beyond compliance. How should the auditor resolve this difference? a. Accept the proposed corrective action. b. Elevate this issue to senior management, citing benchmarking studies in support of the auditor’s position. c. Report management’s inadequate action to the audit committee. d. Accept the corrective action as satisfactory in the short term, but insist that the environmental manager agree to adopt the auditor’s approach as soon as it is feasible. 92. During fieldwork to test controls over access into restricted work areas, two employees approached the auditor and stated that they experience headaches and other symptoms as a result of some of the chemicals used in certain processes. The auditor should a. Take detailed statements from each of the employees and pursue the allegations. b. Tell the employees that the internal audit department is not interested in such information. c. Advise the employees that such information be better communicated through management channels, and inform audit management. d. Refer the employees to the company’s legal department. 93. Because of the nature of work at a company’s plants, radiation safety is important. An audit to test the system of controls over the purchase, distribution, and use of radioactive material is being conducted. The process is well documented, and employees in the safety department are very familiar with the department’s procedures. Since the purchasing and facilities departments are involved in the process, the auditor is considering reviewing their radioactive material handling procedures as well. The auditor should a. Have confidence in the rigorous and detailed safety department procedures, since that department has the main responsibility for radiation safety, and do not use audit time to review other departments. b. Adjust the audit schedule and budget, if needed, and interview the appropriate individuals in purchasing and facilities to ascertain whether additional controls exist that complement those identified within the safety department. c. Test the controls identified within the safety department; if results are unfavorable, consider whether to involve the other departments. d. Defer questions regarding purchasing, facilities, and other departments until audit projects can be scheduled for those departments.

94. During an interview with a data input clerk to discuss a computerized system used to track employee training requirements and compliance, an auditor identifies a potentially significant weakness in the system. The auditor should a. Not mention the weakness, directly or indirectly, to avoid making the clerk uncomfortable. b. Ask indirect questions that will help get more factual information relating to the potential weakness. c. Ask the clerk about the weakness and determine immediately if the finding should be reported. d. Conduct a second interview after determining whether the weakness actually exists. 95. As part of an audit of safety management programs, an auditor interviews the individual responsible for writing, issuing, and maintaining safety procedures. While the auditor’s primary interest is to identify the controls that ensure that procedures are kept current, the individual has a tremendous amount of information and seems intent on telling the auditor most of it. What might the auditor do to guard against missing what is important? a. Write down everything the individual says. If the auditor gets behind, ask for a pause and catch up. After the interview, the auditor can sift through the notes and be confident of finding the key information. b. Tape record the interview and later extract the relevant information. c. Do not sort through extraneous information. Revisit the topic with the individual’s supervisor and get any needed information at that time. d. During the conversation, make an effort to anticipate the approach of a point of critical interest. 96. In evaluating the validity of different types of audit evidence, which of the following conclusions is incorrect? a. Recomputation, although highly valid, is limited in usefulness due to its limited scope. b. The validity of documentary evidence is independent of the effectiveness of the control system in which it was created. c. Internally created documentary evidence is considered less valid than externally created documentary evidence. d. The validity of confirmations varies directly with the independence of the party receiving the confirmation. 97. An internal auditor is discussing an audit problem with an auditee. While listening to the auditee, the internal auditor should a. Prepare a response to the auditee. b. Take mental notes on the speaker’s nonverbal communication, as it is more important than what is being said. c. Make sure all details, as well as the main ideas of the auditee, are remembered. d. Integrate the incoming information from the auditee with information that is already known. 98. An internal auditor would trace copies of sales invoices to shipping documents in order to determine that a. Customer shipments were billed. b. Sales that are billed were also shipped.

1: CONDUCT ENGAGEMENTS c. d.

Shipments to customers were also recorded as receivables. The subsidiary accounts receivable ledger was updated.

99. To test whether debits to accounts receivable represent valid transactions, the auditor should trace entries from the a. Sales journal to the accounts receivable ledger. b. Accounts receivable ledger to the cash receipts journal. c. Accounts receivable ledger to sales documentation. d. Cash receipts documentation to the accounts receivable ledger. 100. An auditor traces individual time tickets to the payroll cost distribution and also traces totals from the payroll cost distribution to the various work-in-process accounts. If no exceptions are found, this constitutes evidence that a. The work-in-process accounts have not been “padded” by the inclusion of unsupported payroll costs. b. Individual time tickets have been properly authorized. c. Payroll costs have been accurately distributed to work in process accounts. d. Employees have been paid only for time actually worked. 101. Shipping documents should be traced to and compared with sales records or invoices to a. Determine whether payments are properly applied to customer accounts. b. Ensure that shipments are billed to customers. c. Determine whether unit prices billed are in accordance with sales contracts. d. Ascertain whether all sales are supported by shipping documents. 102. A manufacturer of earth-moving equipment is occasionally unable to ship replacement parts on time. The late shipments keep the manufacturer from meeting delivery commitments to its customers. The best approach for determining the cause of the late shipments is to a. Trace replacement parts that were shipped late through production and handling records. b. Track the production and handling processes to find average turnaround times. c. Compute the production and handling capacities for replacement parts. d. Examine the terms and conditions of the delivery commitments to customers. 103. In deciding whether recorded sales are valid, which of the following items of evidence would be considered most competent? a. A copy of the customer’s purchase order. b. A memorandum from the director of the shipping department stating that another employee verified the personal delivery of the 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. 104. The most reliable evidence an auditor can assess when determining a company’s legal title to inventories is a. Monthly gross profit and inventory levels.

b. c. d.

Purchase orders. Paid vendor invoices. Records of inventories stored at off-site locations.

105. During an investigation of unexplained inventory shrinkage, an internal auditor is testing inventory additions as recorded in the perpetual inventory records. Because of internal control weaknesses, the information recorded on receiving reports may not be reliable. Under these circumstances, which of the following documents would provide the best evidence of additions to inventory? a. Purchase orders. b. Purchase requisitions. c. Vendors’ invoices. d. Vendors’ statements. Develop and Review Workpapers 106. Each individual workpaper should, at a minimum, contain a. An expression of an audit opinion. b. A tick mark legend. c. A complete flowchart of the system of internal controls for the area being reviewed. d. A descriptive heading. 107. Working papers serve the following purpose for the internal auditor: a. Provide the auditee a place to make responses to audit recommendations. b. Make the audit report more readable by providing a place to append exhibits. c. Provide the principal evidential support for the internal auditor’s report. d. Provide a place to summarize overall audit recommendations. 108. Working papers should include a. Documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal control. b. Copies of all source documents examined in the course of the audit. c. Copies of all procedures which were reviewed during the audit. d. All workpapers prepared during a previous audit of the same area. 109. When reviewing audit working papers, the primary responsibility of an audit supervisor is to determine that a. Each worksheet is properly identified with a descriptive heading. b. Working papers are properly referenced and kept in logical groupings. c. Standard departmental procedures are adhered to with regard to workpaper preparation and technique. d. Working papers adequately support the audit findings, conclusions, and reports. 110. To properly control working papers, the auditor should not a. Share the results of an audit with the auditee. b. Permit access to external auditors. c. Permit access to government auditors. d. Make them available to people who have no authority to use them. 111. An audit working paper is complete when

WILEY CIA EXAM REVIEW: VOLUME 2 a. b. c. d.

The audit objective has been met. Operational activity describing the essential basis of the audit has been included. Condensation and careful summarization of detail is present. Working papers are properly indexed and crossindexed.

112. When determining the retention period for the workpapers of a contract audit, it is best to a. Review the corporate policy manual developed by the records management area for the section regarding business records. b. Seek the assistance of the legal department to ensure compliance with contract provisions. c. Check with the corporate accounting department since accounting records are involved. d. Follow the contractor’s own record retention policies. Items 113 through 115 are based on the following: You are an audit supervisor, reviewing the working papers of a staff auditor’s overall examination of the firm’s sales function. The pages are not numbered or cross-referenced. Further, the working papers were dropped and reassembled at random before they were brought to you. You decide to put the working papers in the proper order according to the IIA Standards. The first stage of this activity is to identify each page as a part of (1) the preliminary survey, (2) the review of the adequacy of the system of internal control, (3) the review for effectiveness of the system of internal control, or (4) the review for quality of performance. 113. The first page you select documents a compliance test performed during the course of the audit. This page belongs with the following activity: a. Preliminary survey. b. Review for adequacy of the system. c. Review for effectiveness of the system. d. Review for quality of performance. 114. The second page you select documents an interview with a salesperson discussing the overall sales cycle. This page belongs with the following activity: a. Preliminary survey. b. Review for adequacy of the system. c. Review for effectiveness of the system. d. Review for quality of performance. 115. The third page you select is a blank copy of the sales contract form now in use by the firm. Annotated on the form in several places are the words “key control” followed by a brief explanation. You recognize the writing as that of the staff auditor who performed the audit. This document belongs with the following activity: a. Preliminary survey. b. Review for adequacy of the system. c. Review for effectiveness of the system. d. Review for quality of performance. 116. Productivity statistics are provided quarterly to the board of directors. An auditor checked the ratios and other statistics in the four most recent reports. The auditor used scratch paper and copies of the board reports to verify the accuracy of computations and compared the data used in the computations with supporting documents. The auditor wrote a

note describing his work for the working papers and then discarded the scratch paper and report copies. The auditor’s note stated The ratios and other statistics in the quarterly board reports were checked for the last four quarters and appropriate supporting documents were examined. All amounts appear to be appropriate.

In this situation a. Four quarters is not a large enough sample on which to base a conclusion. b. The auditor’s working papers are not sufficient to facilitate an efficient review of the auditor’s work. c. The auditor should have included the scratch paper in the working papers. d. The auditor did not consider whether the information in the board report was compiled efficiently. 117. Auditors use a variety of indexing and cross-referencing methods in their audit workpapers. An internal auditing manager might devise a workpaper indexing method tailored to a specific organization’s needs. A government audit agency would devise one method for all organizations under the agency’s jurisdiction. Which of the following best explains the reason for this difference between the two workpaper indexing methods? a. The internal auditing manager devises a method that simplifies the review process within a particular organization, but the government audit agency devises one uniform method to simplify the review process of the vastly different organizations to be audited. b. The method of the internal auditing manager is prescribed by the Standards, but the method of the government audit agency is required by agency policy. c. The method of the internal auditing manager is prescribed by the Standards, but law requires the method of the government audit agency. d. The internal auditing manager devises a method specified by the organization’s audit committee, but the government audit agency devises one uniform method that is required by law. 118. Working papers provide the documentary support for the internal auditor’s report. Which of the following is not a good practice for working papers? a. Working papers should be sufficient to support the internal auditors’ report without additional verbal elaboration by the internal auditor. b. Working papers should be kept secure at all times to prevent accidental loss or unauthorized access. c. Working papers should be organized chronologically, that is, with the papers prepared earliest at the front of the file. d. Internal auditors within a given organization should develop standardized methods for organization and documentation. 119. A good working paper for a bank reconciliation should include (either directly or through cross-reference) all of the following except: a. A legend explaining all tick marks employed. b. A list of outstanding checks. c. A list of all deposits made during the period in question. d. The cash balance per the general ledger as of the reconciliation date.

1: CONDUCT ENGAGEMENTS 120. Which of the following microcomputer applications would be least helpful in preparing audit working papers? a. Spreadsheet software. b. Word processing software. c. Utilities software. d. Database software. 121. When hiring entry-level internal audit staff, which of the following will most likely predict the applicant’s success as an auditor? a. Grade point average on college accounting courses. b. Ability to fit well socially into a group. c. Ability to organize and express thoughts well. d. Level of detailed knowledge of the company. 122. An internal auditing supervisor, when reviewing a staff member’s working papers, identified an unsupported statement that the auditee’s unit was operating inefficiently. What action should the supervisor direct the auditor to take? a. Remove the comment from the working paper file. b. Obtain the auditee’s concurrence with the statement. c. Research and identify criteria to measure operating efficiency. d. Explain that it is the opinion of the staff member. 123. Internal auditors often include summaries within their working papers. Which of the following best describes the purpose of such summaries? a. Summaries are prepared to conform to the IIIA Standards. b. Summaries are usually required for the completion of each section of an audit program. c. Summaries distill the most useful information from several working papers into a more usable form. d. Summaries are used to document the fact that the auditor has considered all relevant evidence. 124. A working paper is complete when it a. Complies with the auditing department’s format requirements. b. Contains all of the elements of a finding. c. Is clear, concise, and accurate. d. Satisfies the audit objective for which it is developed. 125. Working papers should be disposed of when they are of no further use. Retention policies a. Should specify a minimum retention period of three years. b. Should be prepared by the audit committee. c. Should be approved by legal counsel. d. Should be approved by the external auditor. 126. An adequately documented working paper should a. Be concise but complete. b. Follow a unique form and arrangement. c. Contain examples of all forms and procedures used by the auditee. d. Not contain copies of auditee records. 127. Working papers are the property of the auditor. Good control of working papers a. Precludes showing working papers to auditees. b. Requires retention of working papers for at least three years. c. Requires that only the auditor who created the working paper change electronic working papers.

Prevents surrender to a summons issued by a governmental agency.

Items 128 and 129 are based on the following: An internal auditing department has a project under way to determine whether it can go to electronic working papers. Decision criteria will be based primarily on the requirements of internal auditing standards and on the experience of other audit departments. 128. The feasibility study should recognize that internal auditing standards specify that for the design and content of working papers in the form of media other than paper a. Conversion to paper should occur no later than the time of final review. b. Consideration should be given to generating backup copies of working papers. c. The media selected should determine working paper design and content. d. Working paper retention should be solely a function of the media used. 129. Which of the following long-term effects associated with electronic working papers is most likely to occur after conversion from manual working papers? a. Significant training needs for auditors. b. Reductions in the average time to complete audits. c. More comprehensive working papers. d. Working papers must be printed. 130. Working papers have the following characteristic: a. They are the property of the organization and are available to all company employees. b. They document the auditing procedures performed, the information obtained, and the conclusions reached. c. They become the property of the independent outside auditors when completed. d. They should be retained permanently in the organization’s records. 131. An internal auditing department has been piloting the use of electronic working paper files. Full implementation is expected in the near future. Select a disadvantage of electronic working papers. a. Each staff auditor must have a personal computer. b. Critical working papers must still be printed off. c. Cross-referencing is more tedious. d. They require specific technical training. 132. The primary purpose of an auditor’s working papers is to a. Provide evidence of the planning and execution of audit procedures performed. b. Serve as a means with which to prepare the financial statements. c. Document deficiencies in internal control structure with recommendations to management for improvement. d. Comply with the auditing standards of the profession. 133. Which of the following statements relating to the retention of audit working papers is an inappropriate policy? a. Working papers should be disposed of when they have no further use.

WILEY CIA EXAM REVIEW: VOLUME 2 b. c. d.

Working papers on fraud audits should be retained indefinitely. Legal counsel should approve working paper retention schedules. Working paper retention schedules should consider legal and contractual requirements.

134. Auditors use a variety of indexing and cross-referencing methods in their audit working papers. An internal auditing manager might devise a working paper indexing method tailored to a specific organization’s needs. A government audit agency would devise a method for all organizations under the agency’s jurisdiction. Which of the following best explains the reason for this difference in working paper index methods between the two? a. The internal auditing manager devises a method that simplifies the review process within a particular organization, but the government audit agency devises one uniform method to simplify the review process of the vastly different organizations to be audited. b. The method of the internal auditing manager is prescribed by the IIA Standards, but the method of the government audit agency is required by the regulatory agency. c. The method of the internal auditing manager is prescribed by the IIA Standards, but law requires the method of the government audit agency. d. The internal auditing manager devises that method specified by the organization’s audit committee, but the government audit agency devises one uniform method that is required by law. 135. Which of the following should be identified as a deficiency by an audit supervisor when reviewing a set of working papers? a. A memorandum explaining why the time budget for a part of the audit was exceeded. b. An audit finding recorded in the working papers and report draft that omits the criteria used for evaluation. c. A memorandum explaining why an audit program step was omitted. d. A letter to the auditee outlining the scope of the audit. 136. In general, internal auditing working papers should be a. Retained according to the guidelines published by the federal government. b. Retained for three years as specified in the IIA Standards. c. Disposed of in accordance with departmental policy. d. Disposed of after the performance of two subsequent audits. 137. A recent fire in a company’s warehouse has destroyed a large portion of its inventory. Management is in the process of filing an insurance claim and needs to use the internal auditors’ inventory working papers in preparing the claim. According to the IIA Standards, which of the following is correct? a. Management may not use any of the internal auditors’ working papers in preparing the insurance claim. b. Management may use the internal auditors’ inventory working papers in preparing the insurance

c. d.

claim, but the director of internal auditing should approve such use. Management should be precluded from preparing the insurance claim and such function should be given to the internal auditing department. Management may use the internal auditors’ inventory working papers in preparing the insurance claim, but both the company’s external independent auditors and the director of internal auditing should approve such use.

138. An internal audit manager is reviewing the audit working papers prepared by the staff. Which of the following review comments is true? a. Each working paper should include the actual and the budgeted time related to such audit work. b. Including copies of all the forms and directives of the auditee department constitutes “unnecessary” overdocumentation. c. Conclusions need not be documented in the working papers when the audit objectives are achieved. d. Each working papers should include a statement regarding the auditees’ cooperation during the conduct of the audit. 139. Which of the following concepts distinguishes the retention of computerized audit working papers from the traditional hard-copy form? a. Analyses, conclusions, and recommendations are filed on electronic media and are therefore subject to computer system controls and security procedures. b. Evidential support for all findings is copied and provided to local management during the closing conference and to each person receiving the final report. c. Computerized data files can be used in information technology audit procedures. d. Audit programs can be standardized to eliminate the need for a preliminary survey at each location. 140. When audit conclusions are challenged, the auditor’s factual rebuttal is best facilitated by a. Summaries in the audit program. b. Pro forma working papers. c. Cross-referencing of the working papers. d. Explicit procedures in the audit program. Report Engagement Results 141. Which of the following techniques is best for emphasizing a point in a written communication? a. Place the point in the middle rather than at the beginning or end of the paragraph. b. Use passive rather than active voice. c. Highlight the point through the use of nonparallel structure. d. Use a short sentence with one idea rather than a longer sentence with several ideas. 142. Which of the following statements conveys negative information in such a way that a favorable response from the auditee may still be achieved? a. Your bookkeeper has failed to reconcile the bank statement each month. b. The bank statements have not been reconciled each month. c. Unfortunately, your bookkeeper has not taken the time to reconcile the bank statement each month.

1: CONDUCT ENGAGEMENTS d.

You have apparently failed to inform your bookkeeper that the bank statements should be reconciled on a timely basis.

Items 143 and 144 are based on the following: A company recently experienced a substantially reduced net profit from sales of product-line A. Line A is produced in a dedicated machine shop. The internal auditors have been assigned the task of determining the cause of the reduced net profit. 143. The in-charge auditor should, as a first step a. Test material vouchers for validity. b. Evaluate the elements of cost and compare to prior periods. c. Compare production records with cost standards. d. Analyze scrap and surplus records. 144. Which of the following would most likely identify the problem? a. A review of prior audit results. b. A walk-through of the machine shop. c. Interviews with the staff engaged in the production of line A. d. An analysis of the financial and operational reports. 145. An internal audit director has noticed that staff auditors are presenting more oral reports to supplement written reports. The best reason for the increased use of oral reports by the auditors is that such reports a. Reduce the amount of testing required to support audit findings. b. Can be delivered in an informal manner without preparation. c. Can be prepared using a flexible format, thereby increasing overall audit efficiency. d. Permit auditors to counter arguments and provide additional information that the audience may require. Items 146 through 150 are based on the following: The following information is to be included in a finding of an inventory control audit of a tent and awning manufacturer. The issue relates to overstocked rope. I. The quantity on hand at the time of the audit represented a 10-year supply based on normal usage. II. The company had held an open house of its new factory two months prior to the audit and had used the rope to provide safety corridors through the plant for visitors. This was not considered when placing the last purchase order. III. Rope is reordered when the inventory level reaches a one-month supply and is based on usage during the previous twelve months. IV. The quantity to be ordered should be adequate to cover expected usage for the next six months. V. The purchasing department should review inventory usage and inquire about any unusual fluctuations before placing an order. VI. A public warehouse, costing $500 per month, was required to store the rope. VII. The purchasing agent receives an annual salary of $59,000.

146. Which of these statements should be in the criteria section of the finding? a. II only. b. III only. c. III and IV only. d. V only. 147. Which of these statements should be in the condition section of the finding? a. I only. b. IV only. c. VI only. d. VII only. 148. Which of these statements should be in the cause section of the finding? a. I only. b. II only. c. VI only. d. VII only. 149. Which of these statements should be in the effect section of the finding? a. II only. b. III only. c. V only. d. VI only. 150. Which of these statements should be in the recommendation section of the finding? a. III only. b. III and IV only. c. V only. d. VI only. Items 151 and 152 are based on the following: The internal audit department of a major financial institution completed an audit of the company’s derivatives trading operations in its foreign branch. The audit report was critical of the lack of controls in the trading process and the lack of effective monitoring of successful traders by the home office. The auditor suspected, but did not state, that the reason that the home office tolerated the behavior of the foreign branch trading unit was that the branch, and in particular one individual trader, had been very successful. The success created enormous profits and thereby influenced the bonuses of all members of senior management. After receiving the audit report, senior management indicated that corrective action was under way. Based on the imminent corrective action, the auditor did not report the finding to the audit committee. 151. Which of the following statements is/are correct regarding the company’s compensation system and related bonuses? I. The bonus system should be considered part of the control environment of the organization and should be considered in formulating a report on internal control. II. Compensation systems are not part of an organization’s control system and should not be reported as part of an organization’s control system. III. An audit of the compensation system should be performed independently of an audit of the control system over the company’s derivatives trading activities and should not be considered an integral part of the derivatives audit. a.

I only.

WILEY CIA EXAM REVIEW: VOLUME 2 b. c. d.

II only. III only. II and III.

152. Which of the following statements, if true, could have justified the auditor’s decision not to report the control concerns to the audit committee? a. Management plans to initiate corrective action. b. The board of directors has a separate committee to make recommendations on compensation. c. The amounts of trading and the potential risks associated with the foreign branch are not material to the overall organization. d. Derivatives are complex, and the auditor should rely on management’s analysis of the extent of the problem. 153. An internal auditor has completed an audit of an organization’s activities and is ready to issue a report. However, the auditee disagrees with the internal auditor’s conclusions. The auditor should a. Withhold the issuance of the audit report until agreement on the issues is obtained. b. Perform more work, with the auditee’s concurrence, to resolve areas of disagreement. Delay the issuance of the report until agreement is reached. c. Issue the audit report and indicate that the auditee has provided a scope limitation that has led to a difference as to the conclusions. d. Issue the audit report and state both the auditor and auditee positions and the reasons for the disagreement. 154. According to the IIA Standards, reported audit findings emerge by a process of comparing “what should be” with “what is.” In determining “what should be” during an audit of a company’s treasury function, which of the following would be the least desirable criteria against which to judge current operations? a. The operations of the treasury function as documented during the last audit. b. Company policies and procedures delegating authority and assigning responsibilities. c. Finance textbook illustrations of generally accepted good treasury function practices. d. Codification of best practices of the treasury function in relevant industries. 155. Which of the following is not a major purpose of an audit report? a. Inform. b. Get results. c. Assign responsibility. d. Persuade. 156. Which of the following would not be included in the statement of scope in an audit report? a. Period covered by the audit. b. Audit objectives. c. Activities not audited. d. Nature and extent of the auditing performed. 157. Providing useful and timely information and promoting improvements in operations are goals of internal auditors. To accomplish this in their reports, auditors should

a. b. c. d.

Provide top management with reports that emphasize the operational details of defective conditions. Provide operating management with reports that emphasize general concerns and risks. Provide information in written form before it is discussed with the auditee. Provide reports that meet the expectations and perceptions of both operational and top management.

Items 158 and 159 are based on the following: An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report: The audit was performed to accomplish several objectives. • Verify the existence of unused machinery being stored in the warehouse. • Determine whether machinery had been damaged during storage. • Review the handling procedures being performed by personnel at the warehouse. • Determine whether proper accounting procedures are being followed for machinery kept in the warehouse. • Calculate the current fair market value of warehouse inventories. • Compare the total value of the machinery to company accounting records. It was confirmed that, of the thirty machines selected from purchasing records for the sample, thirteen were present on the warehouse floor and another five were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of twenty-five machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory. When communicating with auditees, there exist both situational factors and message characteristics that can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics. 158. Which of the following would seem to be a message characteristic that the auditor who prepared the above report overlooked? a. Sequence of message. b. Nature of the audience. c. Noise. d. Prior encounters with the auditee. 159. The following elements are usually included in final audit reports: purpose, scope, results, conclusions, and recommendations. Which of the following describes all of the elements missing from the above report? a. Scope, conclusion, recommendation. b. Purpose, result, recommendation.

1: CONDUCT ENGAGEMENTS c. d.

Result, conclusion, recommendation. Purpose, scope, recommendation.

160. Successful communication between the auditor and the auditee partially depends on achieving appropriate emphasis so both parties are aware of the most important points in their discussion. Which of the following approaches would provide the most emphasis in an audit report? a. Graphics, repetition, and itemization. b. Solid paragraphs and detailed appendices. c. Calm discussion in a conversational tone. d. Key points embedded in discussion. Items 161 through 164 are based on the following: An internal auditor in a retail company reports to the corporate director of internal audit. The auditor is assigned to audit a regional division. The audit reports are to be sent both to the corporate office and the division controller in the region. The auditor has been on location for six months and has submitted monthly reports, each month auditing a part of the operation as assigned by corporate internal auditing. This month, for the first time, the auditor has audited the inventory controls, following procedures established by the corporate internal auditing staff. After seeing the audit report on inventory control, the divisional controller called and requested a meeting with the auditor. At the meeting, the divisional controller loudly and abusively criticized the accuracy of the auditor’s work, the soundness of the auditor’s methods, and the results presented in the reports. In the past, while not always agreeing with the auditor’s conclusions, the divisional controller always had rational discussions and developed appropriate follow-up steps to correct the problems the auditor found. 161. Despite never having said so, the divisional controller had always thought the auditor’s work was substandard. The divisional controller could have handled the situation better by a. Providing training on auditing of inventory controls so the auditor would do a better job the next time. b. Documenting shortcomings regularly and reporting them to the director of internal auditing. c. Discussing the auditor’s work with other internal auditors to compare the auditor’s methods with others used in the company. d. Calling the corporate director of internal audit and insist that the auditor be replaced. 162. The divisional controller could have handled the situation better by a. Accepting the report because the auditor has consistently done good work, and this one report is not that important. b. Accepting the report but informing the director of internal auditing that the report was unsatisfactory. c. Changing the methods used by corporate audit. d. Discussing the objections to the inventory report with the auditor to get agreement on changes and appropriate additional work. 163. If the internal auditor believes the criticism is completely unjustified, the auditor should a. Ask the divisional controller to identify specific areas of disagreement and document them in the management response section of the audit report.

b. c. d.

Confront the divisional controller just as loudly to communicate that the auditor can be just as aggressive and can survive in the corporate environment. Offer to personally rewrite the report and develop the follow-up steps to correct the inventory problems to show the accuracy of the work. Ignore the divisional controller’s response.

164. This particular audit was not the auditor’s best work, and the auditor realizes this. The auditor should a. Defend the work now and try to improve it in the future. b. Ask the divisional controller to identify specific areas in which the report is deficient, and, if the objections are justified, revise the report. c. Explain the personal problems that kept the auditor from working as hard on this report as could be expected. d. Ask for time off for training in the weak areas. Items 165 through 169 are based on the following: The following information is extracted from a draft of an audit report prepared on the completion of an audit of the inventory warehousing procedures for a division. Findings [#5] We performed extensive tests of inventory recordkeeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this be due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in this report, the excess inventory has led to a higher than average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels. [#6] We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out the reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded, or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared. [#7] Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about (1) locating inventory when needed for production and (2) incurring unusually large amounts of inventory write-offs because of obsolescence. [#8] We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for sig-

WILEY CIA EXAM REVIEW: VOLUME 2

nificant cost savings and we are proud to be a part of the process. 165. A major deficiency in paragraph [#5] related to the completeness of the audit report is a. There is no indication of the potential cause of the problem. b. The report does not contain criteria by which the concept of “excessive inventory” is judged. c. The report does not adequately describe the potential effect of the conditions noted. d. The recommendations are not required and are not appropriate given the nature of the problem identified. 166. A major writing problem in paragraph [#5] is a. The use of potentially emotional words such as “conservatism” of local management. b. The presentation of findings before recommendations. The report would have more impact if recommendations were made before the findings are discussed. c. The specific identification of “component parts” may be offensive to the personnel responsible for those parts and may reflect negatively on them. d. The reference to other parts of the audit report citing excessive inventory write-downs for obsolescence is not appropriate. If there is a problem, it should all be discussed within the context of the specific audit finding. 167. A major deficiency in paragraph [#6] related to the completeness of the audit report is a. The factual evidence for the audit finding is not given. b. The cause of the problem is not defined. c. The risk is presented in an “overdramatic” fashion. d. The recommendation is incomplete. 168. A major deficiency in paragraph [#7] related to the completeness of the audit report is a. There is not a separate section adequately discussing the risks associated with the audit finding. b. The recommendation does not follow from the findings. The recommendation could have been reached without any audit findings. c. The condition for the audit finding is not clearly explained. d. The reference to other parts of the audit report citing excessive inventory write-downs for obsolescence is not appropriate. If there is a problem, it should all be discussed within the context of the specific audit finding. 169. A major deficiency in paragraph [#8] is a. The nature of the follow-up action is inappropriate. b. The findings have not been discussed with division management before they are presented to upper management. c. The cost savings mentioned are not supported in the report. d. All of the above. 170. The auditor completed work on a segment of the audit program. It was clear that a problem existed that would require a modification of the organization’s distribution proce-

dures. The auditee agreed and has implemented revised procedures. The internal auditor should a. Research the problem and recommend in the audit report measures that should be taken. b. Jointly develop and report an appropriate recommendation. c. Report the problem and assume that management will take appropriate action. d. Indicate in the audit report that the auditee determined and implemented corrective action. 171. An audit report relating to an audit of a bank categorizes findings into “deficiency findings” for major problems and “other areas for improvement”‘ for less serious problems. Which of the following excerpts would properly be included under “other areas for improvement”? a. Many secured loans did not contain hazard insurance coverage for tangible property collateral. b. Loan officers also prepare the cashier’s checks for disbursement of the loan proceeds. c. The bank is incurring unnecessary postage cost by not combining certain special mailings to checking account customers with the monthly mailing of their statements. d. At one branch a large amount of cash was placed on a portable table behind the teller lines. 172. The following is the complete text of a deficiency finding included in the internal audit report for a bank: The late charges were waived on an excessive number of delinquent installment loan payments at the Spring Street Branch. We were informed that an officer does not approve late charge waivers. Approximately $5,000 per year in revenues is being lost. In order to provide a better control over late charges waived and loss of income, we recommend that a lending officer be responsible for waiving late charges and that this approval be in writing. Which of the following elements of a deficiency finding is not properly addressed? a. Criteria or standards. b. Condition. c. Cause. d. Effect. 173. An auditor for a bank noted a significant deficiency relating to access to cash in the bank’s vault at one of the branch banks. Which of the following is the most satisfactory means of addressing this deficiency? The auditor should a. Discuss the deficiency with the branch manager before drafting the written audit report. If the auditor and branch manager agree on corrective action and the action is initiated before the report is published, the deficiency need not be included in the report. b. Discuss the deficiency with the branch manager before drafting the written audit report. If the auditor and branch manager agree on corrective action, include both the deficiency and corrective action in the audit report. c. Discuss the deficiency with the branch manager only after the audit report is published. d. Not discuss the deficiency with the branch manager before or after the audit report is published; discussion may dilute the impact of the written report.

1: CONDUCT ENGAGEMENTS 174. Several levels of management are interested in the results of the marketing department audit. What is the best method of communicating the results of the audit? a. Write detailed reports for each level of management. b. Write a report to the marketing management and give summary reports to other management levels. c. Discuss results with marketing management and issue a summary report to top management. d. Discuss results with all levels of management. Items 175 through 178 are based on the following: An auditor has submitted a first draft of an audit report to an auditee in preparation for an exit interview. The following is an excerpt from that report: The audit was performed to accomplish several objectives: verify the existence of unused machinery being stored in the warehouse, determine whether machinery had been damaged during storage, review the handling procedures being performed by personnel at the warehouse, determine whether proper accounting procedures are being followed for machinery kept in the warehouse, calculate the current fair market value of warehouse inventories, and compare the total value of the machinery to company accounting records. It was confirmed that of the thirty machines selected from purchasing records for the sample, ten were present on the warehouse floor and another five were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of twenty-five machines was examined for possible damage, and all but one was in good condition. It was confirmed by the auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.

When communicating with auditees, both situational factors and message characteristics can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics. 175. Which of the following would seem to be a message characteristic that the auditor who prepared the above report overlooked? a. Sequence of message. b. Nature of the audience. c. Noise. d. History of prior events leading to the current encounter. 176. The objectives of an audit report are to inform and to influence. Whether these objectives are met depends on the clarity of the writing. Which of the following principles of report clarity was violated in the above audit report? a. Appropriately organize the report. b. Keep most sentences short and simple. c. Use active voice verbs. d. All of the above. 177. The following elements are usually included in final audit reports: purpose, scope, results, conclusions, and recommendations. Which of the following describes all of the elements missing from the above report? a. Scope, conclusion, recommendation. b. Purpose, result, recommendation. c. Result, conclusion, recommendation. d. Purpose, scope, recommendation.

178. The behavioral science literature identifies diffusion as an effective approach to resolving conflict. An auditor effectively using diffusion in working with a confrontational auditee would a. Set aside critical issues temporarily and try to reach agreement on less controversial issues first. b. Emphasize differences between the parties. c. Avoid the conflict situation. d. Identify the sources of conflict and address them directly. 179. An internal audit director has noticed that staff auditors are presenting more oral reports to supplement written reports. The best reason for the increased use of oral reports by the auditors is that they a. Reduce the amount of testing required to support audit findings. b. Can be delivered in an informal manner without preparation. c. Can be prepared using a flexible format thereby increasing overall audit efficiency. d. Permit auditors to counter arguments and provide additional information that the audience may require. 180. When making a presentation to management, the auditor wants to report findings and to stimulate action. These objectives are best accomplished by a. Delivering a lecture on the findings. b. Showing a series of slides or overheads that graphically depict the findings; limit verbal commentary. c. Using slides/overheads to support a discussion of major points. d. Handing out copies of the report, asking the participants to read the report, and asking for questions. 181. In which section of the final report should the internal auditor describe the audit objectives? a. Purpose. b. Scope. c. Criteria. d. Condition. 182. An internal auditor can use oral reports to a. Give immediate information to management and more accurately exchange thoughts with a face-toface discussion. b. Report interim findings more efficiently by eliminating the preparation time for a written report. c. Eliminate the need for a lengthy final report by reaching verbal agreement on the handling of significant findings with the auditee. d. Impress the auditee with a polished presentation using graphics to enhance the credibility of audit findings. 183. Summary written audit reports are generally intended for a. Local operating management. b. Review by other auditors only. c. High-level management and/or the audit committee. d. Midlevel staff management. 184. An oral audit report may be most appropriate when a. A permanent record of the report is needed. b. Emergency action is needed.

WILEY CIA EXAM REVIEW: VOLUME 2 c. d.

Higher-level management needs a summary of individual audits. It is used only for internal reporting within the internal auditing department.

185. An audit report recommendation should address what attribute of an audit finding? a. Cause. b. Statement of condition. c. Criteria. d. Effect. 186. Which of the following is a proper element in an audit results section of a report? a. Status of findings from prior reports. b. Personnel used. c. Significance of deficiencies. d. Engagement plan. 187. After an audit report with adverse findings has been communicated to appropriate auditee personnel, proper action is to a. Schedule a follow-up review. b. Implement corrective action indicated by the findings. c. Examine further the data supporting the findings. d. Assemble new data to support the findings. 188. The scope statement of an audit report should a. Describe the audit objectives and tell the reader why the audit was conducted. b. Identify the audited activities and describe the nature and extent of auditing performed. c. Define the standards, measures, or expectations used in evaluating audit findings. d. Communicate the internal auditor’s evaluation of the effect of the findings on the activities reviewed. 189. In beginning an audit, an internal auditor reviews written procedures that detail segregation of duties adopted by management to strengthen internal controls. These written procedures should be viewed as the following attribute of a finding: a. Criteria. b. Condition. c. Cause. d. Effect. 190. Interim reports are issued during an audit to a. Explain the purpose of the audit. b. Eliminate the need for a final report. c. Communicate information requiring immediate attention. d. Define the scope of the audit so the final report can be brief. 191. A senior member of management who is several organizational levels above the head of the operational area being audited has asked for a report of the findings of the audit. The most appropriate means of communicating audit findings to this senior member of management is by a. Sending a copy of the final audit report. b. Orally communicating the findings. c. Sending copies of interim reports. d. Sending the summary section of the report. 192. Recommendations in audit reports may or may not actually be implemented. Which of the following best describes

internal auditing’s role in follow-up on audit recommendations? Internal auditing a. Has no role; follow-up is management’s responsibility. b. Should be charged with the responsibility for implementing audit recommendations. c. Should follow up to ascertain that appropriate action is taken on audit recommendations. d. Should request that independent auditors follow up on audit recommendations. 193. An internal auditor found that employees in the maintenance department were not signing their time cards. This situation also existed during the last audit. The auditor should a. Include this finding in the current audit report. b. Ask the manager of the maintenance department to assume the resulting risk. c. Withhold conclusions about payroll internal control in the maintenance department. d. Instruct the employees to sign their time cards. 194. Which one of the following elements of an audit report is not always required? a. A statement that describes the audit objectives. b. A statement that identifies the audited activities. c. Pertinent statements of fact. d. An evaluation of the impact of the findings on the activities reviewed. 195. An internal auditing department is conducting an audit of the payroll and accounts receivable departments. Significant problems related to the approval of overtime have been noted. While the audit is still in process, which of the following audit reports is appropriate? a. A summary report. b. A written report. c. A questionnaire-type report. d. An oral report. 196. During an audit of sales representatives’ travel expenses, it was discovered that 152 of 200 travel advances issued to sales representatives in the past year exceeded the prescribed maximum amount allowed. Which of the following statements is a justifiable audit opinion? a. The majority of travel advances in the organization exceed the prescribed maximum. b. Travel advances are not controlled in accordance with existing policy. c. The prescribed maximum travel advance is too low. d. 76% of all travel advances exceed the managementprescribed maximum. Items 197 through 200 are based on the following: The following data was gathered during an internal auditor’s investigation of the reason for a material increase in bad debts expenses. In preparing a report of the finding, each of the items might be classified as criteria, cause, condition, effect, or background information. 1. Very large orders require management’s approval of credit. 2. Audit tests showed that sales personnel regularly disregard credit guidelines when dealing with established customers. 3. A monthly report of write-offs is prepared but distributed only to the accounting department.

1: CONDUCT ENGAGEMENTS 4. Credit reports are used only on new accounts. 5. Accounting department records suggest that uncollectible accounts could increase by 5% for the current year. 6. The bad debts loss increased by $100,000 during the last fiscal year. 7. Even though procedures and criteria were changed to reduce the amount of bad-debt write-offs, the loss of commissions due to written-off accounts has increased for some sales personnel. 8. Credit department policy requires the review of credit references for all new accounts. 9. Current payment records are to be reviewed before extending additional credit to open accounts. 10. To reduce costs, the use of outside credit reports was suspended on several occasions. 11. Since several staff positions in the credit department were eliminated to reduce costs, some new accounts have received only cursory review. 12. According to the new credit manager, strict adherence to established credit policy is not necessary. 197. Criteria are best illustrated by items numbered a. 1, 8, and 9. b. 2, 10, and 11. c. 3, 4, and 12. d. 5, 6, and 7. 198. Cause is best illustrated by items numbered a. 2, 10, and 11. b. 3, 4, and 12. c. 5, 6, and 7. d. 1, 8, and 9. 199. Condition is best illustrated by items numbered a. 5, 6, and 7. b. 1, 8, and 9. c. 2, 10, and 11. d. 3, 4, and 12. 200. Effect is best illustrated by items numbered a. 3, 4, and 12. b. 5, 6, and 7. c. 1, 8, and 9. d. 2, 10, and 11. 201. Audit fieldwork has identified a number of significant findings. Additional audit tests from the original audit program still have to be performed; however, data are not readily available. Evaluate the following and select the best alternative. a. Do not issue the audit report until all testing has been completed. b. Issue an interim report to management regarding the negative findings noted. c. Identify other alternative tests to complete prior to reporting the audit findings. d. Perform audit tests when the final data is available. 202. Upon reviewing the results of the audit report with the audit committee, executive management agreed to accept the risk of not implementing corrective action on certain audit findings. Evaluate the following and select the best alternative for the internal auditing director. a. Notify regulatory authorities of management’s decision.

b. c. d.

Perform additional audit steps to further identify the policy violations. Conduct a follow-up audit to determine whether corrective action was taken. Internal audit responsibility has been discharged, and no further audit action is required.

203. The internal auditing department for a chain of retail stores recently concluded an audit of sales adjustments in all stores in the southeast region. The audit revealed that several stores are costing the company an estimated $85,000 per quarter in duplicate credits to customers’ charge accounts. The audit report, published eight weeks after the audit was concluded, included the internal auditors’ recommendations to store management that should prevent duplicate credits to customers’ accounts. Which of the following standards for reporting has been disregarded in the above case? a. The follow-up actions were not adequate. b. The auditors should have implemented appropriate corrective action as soon as the duplicate credits were discovered. c. Auditor recommendations should not be included in the report. d. The report was not timely. 204. An audit finding is worded as follows: The capital budget includes funds to purchase 11 new vehicles. Review of usage records showed that 10 vehicles in the fleet of 70 had been driven less than 2,500 miles during the past year. Vehicles have been assigned to different groups whose usage rates have varied greatly. There was no policy requiring rotation of vehicles between high- and low-usage groups. Lack of criteria for assigning vehicles and a system for monitoring their usage could lead to purchasing unneeded vehicles. Based on the facts presented in this finding, it would be appropriate to recommend that management a. Establish a minimum of 2,500 miles per quarter as criteria for assigning vehicles to user groups. b. Establish a system to rotate vehicles among users periodically. c. Delay the proposed vehicle purchases until the apparent excess capacity is adequately explained or absorbed. d. Withhold approval of the capital budget until other projects can be reviewed by internal auditing. 205. An audit of a company’s payroll department has revealed various control weaknesses. These weaknesses along with recommendations for corrective actions were addressed in the internal audit report. This report should be most useful to the company’s a. Treasurer. b. Audit committee of the board of directors. c. Payroll manager. d. President. 206. The IIA Standards require that the director of internal auditing or designee decide to whom the final audit report will be distributed. Findings concerning significant internal control weakness are included in an audit report on the accounts payable system of a company whose securities are publicly traded. The director of internal auditing has chosen to send copies of this audit report to the audit committee and the external auditor. Which of the following is the most likely rea-

WILEY CIA EXAM REVIEW: VOLUME 2

son for distributing copies to the audit committee and the external auditor? a. The audit committee and external auditor are normally sent copies of all internal audit reports as a courtesy. b. The audit committee and external auditor will need to take corrective action on the deficiency findings. c. The activities of the audit committee and external auditor may be affected because of the potential for misstated financial statements. d. A regulatory agency’s guidelines require such distribution. 207. An operational audit report that deals with the scrap disposal function in a manufacturing company should address a. The efficiency and effectiveness of the scrap disposal function and include any findings requiring corrective action. b. Whether the scrap material inventory is reported as a current asset. c. Whether the physical inventory count of the scrap material agrees with the recorded amount. d. Whether the scrap material inventory is valued at the lower of cost or market. 208. The internal auditing unit has recently completed an operational audit of its company’s accounts payable function. The audit director decided to issue a summary report in conjunction with the final report. Who would be the most likely recipient(s) of just the summary audit report? a. Accounts payable manager. b. External auditor. c. Controller. d. Audit committee of the board of directors. 209. Which of the following is not an advantage of issuing an interim report? a. Final report-writing time can be minimized. b. An interim report allows information requiring immediate attention to be communicated. c. An interim report can be conducted on an informal basis and may be communicated only verbally. d. A formal, written interim report may negate the need for a final report in certain circumstances. 210. During the course of an audit of cash handling, the auditor notices that considerable cash is stored overnight in a work area that has ready access from a busy street. Furthermore, there is no security system or any armed guard in the vicinity. When discussed with the appropriate manager, the auditor is informed, “We have never experienced a robbery or loss of cash from this fund; why should we spend unnecessary amounts to improve security?” The auditor should a. Make a verbal interim report. In the final report, concentrate on the corrective measures to be taken. b. Explain all the facts but allow management the opportunity to tell their story so that corrective action is more likely to be adopted. c. Since the company has never suffered any losses from the cash-handling procedures, there is no need to report the finding. d. Widely distribute the report; this is a big problem that everyone in the company needs to know about. 211. Certain information may not be appropriate for disclosure to all report recipients because it is privileged, proprie-

tary, or related to improper or illegal acts. If conditions being reported involve improper acts of a senior manager, the report should be distributed to a. The external auditor. b. The board of directors. c. The stockholders. d. Senior management. 212. Which of the following individuals would normally not receive an internal auditing report related to a review of the purchasing cycle? a. The director of purchasing. b. The independent external auditor. c. The general auditor. d. The chairman of the board of directors. Items 213 and 214 are based on the following: An excerpt from an audit finding indicates that travel advances exceeded prescribed maximum amounts. Company policy provides travel funds to authorized employees for travel. Advances are not to exceed forty-five days of anticipated expenses. Company procedures do not require justification for large travel advances. Employees can and do accumulate large, unneeded advances. 213. The cause of the above audit finding is a. Company advance procedures do not require specific justification. b. Company policy provides travel funds to authorized employees. c. Employees accumulate large travel advances. d. Travel advances have not been cleared in timely manner. 214. In the above audit finding, the element of an audit finding known as “condition” is a. Advances are not to exceed estimated expenses for forty-five days. b. Employees accumulate large unneeded advances. c. Procedures do not require justification for large advances. d. Travel advances exceeded prescribed maximum amounts. 215. An internal auditor observed that assembly line personnel without protective clothing were being exposed to dangerous chemicals. The auditor should immediately notify management through the use of a(n) a. Summary written report. b. Formal written report. c. Follow-up report. d. Oral report. 216. An audit report with routine findings in the accounts payable department is being issued. Distribution should include the accounts payable supervisor, manager, and unit general manager. It may also be sent to the a. External auditors and the corporate controller. b. Unit purchasing manager and the operations director. c. Unit receiving manager, the purchasing manager and the operations director. d. External auditors, the corporate controller, and the chairman of the board of directors.

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MULTIPLE-CHOICE ANSWERS AND EXPLANATIONS

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

a b c d d b b c b c a d c a b b a c d c d a b a c d a d b d d b a a c d b b a b a a c a

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.

c d b b c d c b d d b b b d b c c d a d b c c d d c b d c d c c a b b b b d d a c d c a

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89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.

d d a c b b d b d b c c b a d c c d c a d d a b c a b b a c c c c c c d c a c b b b d a

Collect Data and Evaluate Audit Evidence 1. (a) Revenue per representative measures productivity because it relates an output to input. It is better than the other responses as explained below. Choice (b) is incorrect. Choice (a) is better than choice (b) because number of sales calls does not measure output. Choice (c) is incorrect. Choice (a) is better than choice (c) because the higher ratio could be achieved even if unit sales, revenue, and gross profit declined and the number of sales representatives increased. Choice (d) is incorrect. Choice (a) is better than choice (d) because the unit sales increase could be achieved by an uneconomic addition of sales representatives and would not necessarily result in higher revenue. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, II-5.

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __

133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176.

b a b c b b a c d b b d d c a b d c a c d a c b d a a a b d a b b a d c d d c a b b a d

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177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216.

a a d c a a c b a c a b a c d c a d d b a b c b b d d c c c a d d a b d a d d a

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __

1st: __/216 = __% 2nd: __/216 = __%

2. (b) The auditee cannot alter an external document obtained directly from its source. Choice (a) is incorrect. The auditee may alter internal documents. Choice (c) is incorrect. The auditee may alter internal documents, even if internal control procedures are followed. Choice (d) is incorrect. Circulation through an outside party does not mean the document is correct, unless it is received directly by the auditor. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 596, II-4. 3. (c) This would permit the supplier to “increase” his profit without actually raising the price. Choice (a) is incorrect. This is a violation of the purchasing manager’s mandate. Choice (b) is incorrect. This is not a way to circumvent the purchasing manager’s mandate. It follows the choices enumerated by the purchasing manager. Choice (d) is incor-

WILEY CIA EXAM REVIEW: VOLUME 2

rect. This action does not provide enough information to determine if the supplier violated the purchasing manager’s mandate. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 596, II-5. 4. (d) From the information given, none of the conclusions above is correct. Choice (a) is incorrect. The deviation rate applies to errors that were noted in the sample. The 15 items on which loans were not made are not necessarily errors. Choice (b) is incorrect. There is no evidence that there is a problem with the processing. Choice (c) is incorrect. There is no evidence that the loans made (or not made) comply with company procedures. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-1. 5. (d) This is the most comprehensive answer. All of the actions are appropriate. Choice (a) is incorrect. The deviation rate is greater than 4% (4/85), but choice (d) is more comprehensive. Choice (b) is incorrect. The auditor should examine the nature of the loans, but choice (d) is more comprehensive. Choice (c) is incorrect. The item should be reported in the auditor’s report, but choice (d) is more comprehensive. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-2. 6. (b) The loans were not approved in a timely fashion prior to funding according to company policies and procedures. Therefore, it should be reported as a deviation, and the auditor should note that the loan committee subsequently reviewed the loans. Choice (a) is incorrect. The loan was not approved in accordance with company policies; therefore, the four items are still deviations and the rate would not drop to zero. Choice (c) is incorrect. The loans were not processed in accordance with company policy and therefore represent deviations. Choice (d) is incorrect. Items I and III are not correct actions. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-3. 7. (b) This is the least appropriate response per the IIA Standards. Choice (a) is incorrect. This is an appropriate follow-up action. The auditor should attempt to determine the causes of audit findings and, where appropriate, include them in the audit report. Choice (c) is incorrect. This is an appropriate follow-up step to determine the cause of the audit finding. Choice (d) is incorrect. The action is appropriate as long as the auditor has concluded that the amounts are clearly not material and not in violation of governmental regulations and that a rationale for the deviations exist. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-4. 8. (c) Both II and IV are appropriate. The auditor should independently determine the significance of the finding and should consult outside legal services if deemed appropriate. It would also be appropriate to review plans taken by the loan committee and include that analysis in the audit report. Choice (a) is incorrect. Item D represents a violation of good business practice and, statistics not withstanding, should therefore is reported. The need to include an item in an audit report is based on the significance of the finding, not just the tolerable error rate. Further, the upper error rate (although not computed here) would be higher

than the tolerable error rate. Choice (b) is incorrect. This would not be appropriate because it may represent significant violations of both federal regulations and company policy. Waiting a full year for follow-up action without reaching a conclusion on the seriousness of the problem would not be appropriate. Choice (d) is incorrect. Item IV is also an appropriate response. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-5. 9. (b) The auditor should attempt to determine the cause of the deficiencies and include constructive suggestions in the audit report. See Section 430 of the IIA Standards. Choice (a) is incorrect. Even though the loan committee approved the loans, the procedure was not conducted in accordance with company policies. Choice (c) is incorrect. The findings should be included in an audit report with a recommendation that management perform follow-up to determine the causes of the deviations and take corrective action. Choice (d) is incorrect. Response (c) is not correct. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-6. 10. (c) The receiving memorandum indicates that the goods were received; therefore, a purchase transaction has occurred. Choice (a) is incorrect. The canceled check indicates that the goods have been paid for, not received. Choice (b) is incorrect. The supervisor’s signature indicates the ordering of the goods was authorized, not that the goods were received. Choice (d) is incorrect. The invoice indicates the goods have been billed but provides no evidence as to their receipt. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 596, II-14. 11. (a) The conclusion about 95% confidence level is unjustified because the statistical parameters of the account balance are not known. Further, it is incorrect to assume no material differences exist in the account balance just because the bank agreed to adjust the account balances to the errors found. Choice (b) is incorrect. Response II is incorrect. Choice (c) is incorrect. The conclusion reached in Response III is valid. The auditor has examined both internal and external documentation to reach this conclusion. Choice (d) is incorrect. Response III is a valid conclusion. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, II-14. 12. (d) Items I and IV represent external evidence received directly by the auditor, and both have a high degree of reliability. Item IV merits further investigation because customers sometimes make mistakes. Item III is ranked third because it contains a combination of internal evidence (loan contract, payments, etc.) and external evidence (a current payment for the correct amount on the account balance). Item II is the least reliable because, although it comes from an outside party, it was derived in direct response to pressure from management. Choice (a), (b), and (c) are incorrect. See the rationale in choice (d). Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, II-15. 13. (c) Only Item II is a justifiable conclusion. The auditor can conclude that the recorded account balance does exist per the IIA Standard. Choice (a) is incorrect. Item I is not justified because the auditor is aware that a number of

1: CONDUCT ENGAGEMENTS loans are made to holding companies, all controlled by one entity. Until the auditor examines the nature of the holding companies, no conclusion can be made regarding this assertion. Choice (b) is incorrect. Item I is not justified because the auditor is aware that a number of loans are made to holding companies, all controlled by one entity. Until the auditor examines the nature of the holding companies, no conclusion can be made regarding this assertion. Choice (d) is incorrect. Items I and III are not justified. The loans should be valued at net realizable value. The auditor has only gathered information on the gross amount of the loans receivable. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, II-16. 14. (a) An integrated test facility (ITF) only provides assurance about the correctness of processing of the computer portion of the application. It does not provide evidence on existence and valuation. To do so, there must be complementary audit procedures to see that all loans are initially entered into the computer application. Choice (b) is incorrect. The ITF does not provide evidence on existence and valuation. To do so, there must be complementary audit procedures to see that all loans are initially entered into the computer application. Choice (c) is incorrect. Item IV is addressed, but not item I. Choice (d) is incorrect. Items I and II are not addressed. See choice (a) or (b). Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, II-17. 15. (b) This would be the least effective audit procedure. There are two problems with it: (1) It deals with normal processing of account transactions, not with potential write-off or extra collection efforts on the accounts; and (2) there is always the danger that the flowcharts may be out of date per the IIA Standards. Choice (a) is incorrect. The auditor can custom design a questionnaire to gather key information on the processes used in evaluating collectibility and the individuals responsible for actions. Choice (c) is incorrect. Inquiries would be an effective procedure and could easily be documented in a narrative. Choice (d) is incorrect. A flowchart of key decisions and flow of information regarding collectibilty might be useful. Flowcharts need not be limited to the ordinary processing of transactions. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, II-18. 16. (b) This is the most persuasive evidence because the auditor reviews actual documents and finds out what personnel actually do with the documents. Choice (a) is incorrect. This is less persuasive because the systems flowchart might not indicate how processing may have evolved over time. Choice (c) is incorrect. The program flowchart shows only the computer program portion of the application. Choice (d) is incorrect. The manager may not know how the specific clerical processing may have changed. Further, the manager may be biased in presenting a picture of processing that might not reflect actual processing. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, I-6. 17. (a) Employee morale is important and often is a side-benefit of total quality management programs. However, employee morale is not a sufficient reason to implement TQM; there should be some evidence of greater customer satisfaction or reduced costs. Choice (b) is incorrect.

Reduction in scrap should be one of the outcomes as TQM is implemented. Choice (c) is incorrect. TQM should lead to product quality improvements resulting in a lower level of customer returns. Choice (d) is incorrect. TQM is supposed to reduce costs. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, I-9. 18. (c) Item IV. This is the most persuasive because it uses an external source. Inventory should be valued at the lower of cost or market. Thus, it is important to first begin with the establishment of cost. Item I Changes in inventory turnover or a very low level of inventory turnover indicates potential obsolescence of inventory and that the auditor should do more investigation, for example, looking at subsequent sales to determine whether inventory should be written down. Item iii. Calculation of net realizable value is a good indication of a lower of cost or market problem. The only difficulty with this procedure is that the auditor needs to make sure that the sales prices used in the calculation are for sufficient amounts to support the conclusion about existing inventory quantities. This evidence is useful, but it is a form of testimonial evidence from an individual who may have a biased, or vested, interest in persuading the auditor that the goods will be sold at their normal prices in the normal course of business. Item II. In addition, the arbitrary cutoff value of 2.0 may not be justified. The cutoff should be based on the nature of the client’s inventory. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, I-10. 19. (d) The auditor is interested in whether the actual claims paid are properly supported. The most appropriate population from which to sample is the claims-paid file. Choice (a) is incorrect. Sampling from a population of policyholders would be very inefficient for the audit assertion, as many policyholders may not have any activity during the year. Choice (b) is incorrect. A sample of claims filed does provide evidence on the overall processing of claims and thus provides some evidence related to the assertion. However, given the assertion, choice (a) is more efficient because it deals with paid claims. Choice (c) is incorrect. The claims denied filed provides evidence on the claims denied, but the auditor cannot conclude that all claims that were not denied should have been paid. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, I-11. 20. (c) The reader, given this information, may not need to know any of the other details. Choice (a) is incorrect. Although the reader needs to know this negative information, emphasizing it will make the reader unduly concerned about the progress of the project. Choice (b) is incorrect. This news, which may require approval of the reader, is otherwise relatively unimportant. Choice (d) is incorrect. The information is relatively unimportant. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1196, II-4. 21. (d) Both initial placement and active voice are strong ways to emphasize information. Choice (a) is incorrect. Both middle placement and passive voice subordinate information. Choice (b) is incorrect. Middle placement subordinates information. Choice (c) is incorrect. Passive voice subordinates information.

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Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1196, II-5. 22. (a) Choice (a) is the correct answer. This gives the reader a context in which to understand both the magnitude of the request and the reason for it. Choice (b) is incorrect. An unbudgeted expenditure is relevant. Choice (c) is incorrect. The expenditure is not important enough, by itself, to emphasize. Choice (d) is incorrect. Omitting negative information from a report will not avoid criticism when the reader finds out that the writer is hiding things. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1196, II-6. 23. (b) The validity of documentary evidence depends on the internal control system. Choices (a), (c), and (d) are incorrect because each choice is a true statement. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, II-47. 24. (a) Written inquiry/confirmation obtained from outside third parties is more persuasive than internal company documents. Choice (b) is incorrect. Evidence obtained under conditions of strong control is always more persuasive than if controls had been weak. Choice (c) is incorrect. Personal knowledge is generally more persuasive than knowledge obtained from other parties. Choice (d) is incorrect. Generally evidence from outside the organization is more persuasive than evidence obtained from organizational sources. The above justifications are based on the general theory of audit evidence. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-1. 25. (c) Examination of the asset is generally considered one of the most persuasive types of evidence for the “existence” assertion, if not the most persuasive type. Choice (a) is incorrect. Unsubstantiated inquiry of management is generally considered the least persuasive evidence. Choice (b) is incorrect. Observation of procedures for acquisition would not be as persuasive as examination of the asset. Choice (d) is incorrect. Documentation is less relevant for existence than is physical examination of the asset. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-21. 26. (d) Documentation of the purchase provides very persuasive evidence regarding the cost of the asset. Choice (a) is incorrect. Unsubstantiated inquiry of management is generally considered the least persuasive evidence. Choice (b) is incorrect. Observation of procedures for acquisition would not be as persuasive as documents showing the cost of the asset. Choice (c) is incorrect. Physical examination of the asset reveals only limited information as to the asset’s value. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-22. 27. (a) Evidence is arranged in general order of persuasiveness. Choices (b), (c), and (d) are incorrect because inquiry of management is considered one of the least persuasive evidence types, particularly in regard to physical examination. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-23.

28. (d) Aging of receivables lends direct, relevant evidence regarding the valuation of receivables and thus the allowance account. Choice (a) is incorrect. Although some valuation information is implied from the confirmation, aging is more relevant and persuasive. Choice (b) is incorrect. One month’s receipts is too little information on which to base the collectibility of accounts. Choice (c) is incorrect. Controls over write-offs is not relevant to the account’s valuation, but to the authorization of the write-off. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-24. 29. (b) A list prepared from the company’s notes would not include unrecorded notes. Choice (a) is incorrect. Bank confirmations are relevant and a common audit procedure for unrecorded liability tests. Choice (c) is incorrect. Comparison to previous year’s outstanding debt and verifying payment or inclusion on this year’s disclosure is a relevant and common procedure. Choice (d) is incorrect. Analytical tests of interest expense to debt is relevant and a common audit procedure. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-25. 30. (d) A payroll account proof would test for completeness but not for validity of cash flow. Choice (a) is incorrect. Verification that an employee is actually working is a common procedure to test for nonexistent employees. Choice (b) is incorrect. Examining for proper endorsements and comparing to records would possibly detect improper payments. Choice (c) is incorrect. Segregation of payroll authorization from hire/fire would help to eliminate fictitious employees. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 594, I-26. 31. (d) Statement I is relevant. Choice (a) is incorrect. Although relevant, it is neither sufficient nor competent. Choice (b) is incorrect. Statement I is not sufficient or competent. Choice (c) is incorrect. Statement I is not sufficient. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, I-15. 32. (b) Statement II is sufficient (factual, adequate, and convincing), competent (reliable and the best attainable through appropriate audit techniques), and relevant (consistent with audit objectives). Choice (a) is incorrect. Statement II is competent and relevant. Choice (c) is incorrect. Statement II is all three. Choice (d) is incorrect. Statement II is sufficient and competent. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, I-16. 33. (a) The fewer the adjustments, the higher the production quality. Choice (b) is incorrect. Labor efficiency variances relate to inputs of labor and do not relate directly to quality of production. Choice (c) is incorrect. Materials efficiency variances relate to inputs of materials and do not relate directly to quality of production. Choice (d) is incorrect. Production/inventory/sales mix is meaningless. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 591, II-22. 34. (a) A confirmation from a customer is the most reliable evidence that a receivable exists. Choice (b) is incorrect. An invoice is not particularly reliable because it is not developed external to the company. Choice (c) is incorrect.

1: CONDUCT ENGAGEMENTS This is not evidence of a receivable. Choice (d) is incorrect. This is not as reliable as a confirmation. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 591, II-16. 35. (c) A physical inspection provides the best evidence of current condition. Choice (a) is incorrect. Testimonial evidence, standing alone, is not conclusive. Choice (b) is incorrect. The record of repair and maintenance costs is an internal record providing little evidence of current condition. Choice (d) is incorrect. As an internal document, the production department’s downtime report provides little persuasive evidence of current condition. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 591, II-27. 36. (d) The procedure providing the best evidence of the collectibility of notes receivable. Choice (a) is incorrect. Confirmation establishes existence, not collectibility. Choice (b) is incorrect. Inspection helps verify the validity (not collectibility) of the notes. Choice (c) is incorrect. This merely tests bookkeeping procedures. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, II-25. 37. (b) An aging schedule is a primary means of assessing valuation. Choice (a) is incorrect. Positive confirmations primarily indicate existence of the receivable, but not valuation. Choice (c) is incorrect. Analytical procedures provide little direct evidence of valuation. Choice (d) is incorrect. Valuation of the total accounts receivable is determined by probability of collection rather than mathematical correctness of extensions. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, II-15. 38. (b) Competent evidence is reliable. It is the best available. An original document is the prime example of such evidence, per the IIA Standards. Choice (a) is incorrect. Sufficiency has to do with factual, adequate and convincing evidence. The information contained on the document may be none of those things. Choice (c) is incorrect. Relevancy has to do with the relationship of the evidence to some objective of the audit. Since no audit objective is disclosed in the stem of the question, the observer has no way to tell whether the information on the document is or is not relevant to the investigation. Choice (d) is incorrect. Usefulness is achieved if the item of evidence helps the organization (the auditor, in this case) to accomplish predetermined goals. Since no such goals are specified, there is no way to determine whether the information on the document will help the auditor accomplish some goal established for the audit. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, II-18. 39. (a) The observation of people, property and events, which takes graphic form, is “physical evidence.” Choice (b) is incorrect. Interviewing people produces “testimonial evidence.” Choice (c) is incorrect. The examination of records requires “documentary evidence” and produces “analytical evidence.” Choice (d) is incorrect. Computations and verifications lead to “analytical evidence.” Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, II-19.

40. (b) Competent evidence is the best, which is available to the internal auditor. It is also reliable for audit judgments. Choice (a) is incorrect. Sufficient evidence is factual, convincing, and adequate. It would enable a reasonably prudent person to reach the internal auditor’s conclusion. Choice (c) is incorrect. Relevant evidence has a logical connection to its intended use. Choice (d) is incorrect. Documentary evidence is available in written form, such as accounting records and receipts. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, II-20. 41. (a) A sample need only provide reasonable assurance. Because of cost-benefit considerations, absolute assurance is not necessary. Choice (b) is incorrect. The best reasonably obtainable is a test of competence. Choice (c) is incorrect. The logical relationship is a test of relevance. Choice (d) is incorrect. Because of cost-benefit considerations, absolute assurance is not necessary. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, II-21. 42. (a) All graphic evidence is classified as “physical.” This includes such other forms as graphs, charts, and maps. Choice (b) is incorrect. “Testimonial” evidence is restricted to the written response to inquiry or interview. Choice (c) is incorrect. “Documentary” evidence is nongraphical. It takes the form of records, memoranda, correspondence, and related written material. Choice (d) is incorrect. “Analytical” evidence is the result of the division of a complex entity into its constituent parts, with the subsequent review of each subset of the original whole. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, I-19. 43. (c) “Documentary” evidence is any nongraphical item that is already in existence at the time the evidence is sought. Choice (a) is incorrect. All graphical evidence is “physical.” Choice (b) is incorrect. All statements received in response to inquiries or interviews are “testimonial.” Choice (d) is incorrect. All evidence of the process leading to a conclusion is “analytical.” Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, I-20. 44. (a) Physical observation provides evidence that can be given full reliance. Choice (b) is incorrect. Items purchased may no longer reside in the department being audited, even though they were originally purchased for that department. Choice (c) is incorrect. Interviews are useful in gaining insight into operations and understanding exceptions, but are not sufficient by themselves. Choice (d) is incorrect. Ledger balances may not indicate if assets have been moved or stolen. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, I-22. 45. (c) Verification is the process of determining the validity of previously provided information. Choice (a) is incorrect. Analysis is pointed toward the “why” objective. Choice (b) is incorrect. Evaluation involves weighing what has been gathered. It would not be appropriate for the yes and no responses of an ICQ. Choice (d) is incorrect. Observation is a physical exploration process. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, II-14.

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46. (d) This is one of the quoted qualities of sufficiency. Choice (a) is incorrect. This is a mechanical aspect of evidence; it has no specific relationship to any of the characteristics of evidence. Choice (b) is incorrect. This is a quality of competence of evidence. Choice (c) is incorrect. This is a quality of relevance of evidence. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, II-21. 47. (b) Analytical evidence includes comparisons with budgeted amounts, past operations, and similar operations. Choices (a), (c), and (d) are incorrect because these are detailed tests, not a study of relationships. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, II-10. 48. (b) This definition properly implies the inclusion of physical, testimonial, documentary, and analytical evidence per the IIA Standards. Choice (a) is incorrect. This is the definition of working papers, not of evidence. The records of preliminary planning, for example, do not constitute audit evidence. Choice (c) is incorrect. This is a modified definition of circumstantial evidence. It does not leave room for direct evidence, such as counting cash on hand. Choice (d) is incorrect. This is the definition of deficiency findings, not of evidence. Evidence underlies positive, as well as negative, findings. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, II-25. 49. (c) This is the most persuasive form of documentary evidence because it is received directly from a knowledgeable third party. Choice (a) is incorrect. Documentary evidence in the hands of the auditee does not relate directly to the receivable. Choice (b) is incorrect. Documentary evidence which is not original and which is completely controlled by the auditee is not the most persuasive evidence. Choice (d) is incorrect. While such documents are originated by third parties, the auditee has an opportunity to alter them, hence this is not the most persuasive evidence. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, II-26. 50. (d) This is the procedure giving the best evidence of completeness of recorded revenues. Choice (a) and (b) are incorrect because they would fail to detect unrecorded sales, which would result in no entries to the sales journal or accounts receivable. Choice (c) is incorrect because it merely establishes that goods shipped were ordered, not that they were recorded as sales. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, II-13. 51. (c) This would provide personal knowledge of existence of the inventory. This is direct and conclusive evidence, which is the highest form of evidence per the IIA Standards. Choice (a) is incorrect. This would provide a fairly low form of documentary evidence, which is not as good as personal knowledge. Choice (b) is incorrect. This would provide a high form of documentary evidence, but it is not as good as personal knowledge. Choice (d) is incorrect. This would provide a fairly high form of documentary evidence, but it is not as good as personal knowledge. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, I-27.

52. (b) This includes both internal and external evidence. The evidence was generated internally, but it passed through outsiders who did something to confirm it before it went directly to the auditor. This is high-quality evidence, which is very persuasive. Choice (a) is incorrect. The auditee has either initiated or had an opportunity to alter all of this evidence, and this adversely affects its persuasiveness. Choice (c) is incorrect. This is internal evidence. Choice (d) is incorrect. This includes external evidence of debt but not of payment. The evidence concerning payment is internal and not strong at all, that is, it is reference to a check and not the check itself. This is a not very persuasive form of documentary evidence. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, I-28. 53. (d) This evidence can be considered the most persuasive. Choices (a) and (b) are incorrect. This evidence would require corroboration since it is internal. Choice (c) is incorrect. This evidence may attest to the accuracy of vendor shipments but it does not verify that the clerks actually make an independent count. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, II-14. 54. (d) Evidence is not convincing. Choice (a) is incorrect because the firm’s advertising director and the firm’s product marketing director are not objective (competent). Choice (b) is incorrect because the information is relevant, but it is not sufficient. Choice (c) is incorrect because it cannot be conclusive because the information is not competent and relevant. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, II-17. 55. (b) The evidence is sufficient (factual, adequate, and convincing), competent (reliable and the best attainable through appropriate audit techniques), and relevant (consistent with audit objectives). Choice (a) is incorrect. The evidence is competent and relevant. Choice (c) is incorrect. The evidence is sufficient, competent, and relevant. Choice (d) is incorrect. The evidence is sufficient and competent. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, I-6. 56. (b) The purpose of the credit-granting function is to minimize write-offs while at the same time accepting sales likely to result in collection. Reviewing the trend in writeoffs will provide some insight concerning the minimization of write-offs. Choice (a) is incorrect. Observation will provide evidence on whether the credit personnel are following the procedures while being observed. However, since they know they are being watched, they will probably do what they believe they should do, not what they normally do. Choice (c) is incorrect. Responses from the credit manager will lack objectivity, a key attribute of competent evidence. Choice (d) is incorrect. The credit limits may be set too high or not properly revised every six months. The existence of approval will not detect these problems. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, I-23. 57. (b) The only way the quick ratio could be decreasing while the current ratio is increasing is if cash or accounts receivable has decreased (item II). Choice (a) (item I) is incorrect. Sales are constant, but number of days sales in

1: CONDUCT ENGAGEMENTS inventory has increased. Therefore, production or raw materials would have increased. Choice (c) and choice (d)(Item III) are incorrect because there is no information given regarding the gross margin. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-8. 58. (d) Each of the three items is a potential explanation for the increase in gross margin. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-10. 59. (b) An analysis of operations would be relevant in determining the efficiency of operations. Choice (a) is incorrect. This procedure would be useful to determine if the cause was due to overstated inventory. Choice (c) is incorrect. Changes in equipment may signal an improvement in efficiency, but would not be as relevant as choice (b). Choice (d) is incorrect. This procedure would be relevant in determining the correctness of raw material purchases, but would not provide any evidence regarding the efficiency of operations. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-11. 60. (c) A representative sample is more likely to lead to a proper conclusion about a population than a sample that is not representative of the population. Choice (a) is incorrect. Accounts receivable cannot be observed. Choice (b) is incorrect. Purchase orders are evidence of authorization of a purchase, not of the actual receipt of the items ordered. Choice (d) is incorrect. Copies of original documents can be doctored to change information contained on the original document. Therefore, original documents are more reliable. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-14. 61. (c) Both statements I and III are correct. Observation provides a good oversight on the nature of processing. Choice (a) is incorrect. This statement is true, but so is statement III. One of the limitations of observation is that individuals may act differently when observed than they otherwise do normally. Choice (b) is incorrect. Observation is more persuasive for the existence assertion than for the completeness assertion. Choice (d) is incorrect because statement II is not correct. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1196, II-3. 62. (d) Magazines and textbooks are two of many sources of information available to the auditor for the assessment of risks. Choice (a) is incorrect. A reminder list is used in planning an audit, not for data gathering. Reminder lists help organize working papers more methodically and make subsequent audit steps easier (source: Sawyer’s Internal Auditing, IIA). Choice (b) is incorrect. A flowchart is a portrait of a process. Flowcharts can also bring key controls into sharper focus. The flowchart however is not suitable for identifying measures of audit risk (source: Sawyer’s Internal Auditing IIA). Choice (c) is incorrect. Questions (questionnaires) are developed from permanent files, prior audit reports, and management’s charter. A questionnaire might be used to determine if risk is present, but is not suitable for determining a measure of audit risk (source: Sawyer’s Internal Auditing IIA).

Subject Area: Conduct audit engagements—audit evidence. Source: CIA 596, II-7. 63. (a) Ascertaining the completeness of the plan as to all key functions, the needed facilities, and the supporting elements in the organization best meet the audit objective of “adequacy.” Choice (b) is incorrect. Scope is too limited to provide a good indication of adequacy of the plan. Choice (c) is incorrect. Determining the stage of development of the plan is important but is of little help in determining adequacy of the total plan. Choice (d) is incorrect. The role of internal auditing can be helpful in assuring the quality of the plan, but does not assure adequacy. If the role has been fulfilled, then this aspect is potentially of great value in assuring adequacy. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 590, II-13. 64. (d) Shipping records form a link to recorded sales. Choices (a), (b), and (c) are incorrect because they are not connected with recording of revenues. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 590, II-14. 65. (b) This defines competent information. Choice (a) is incorrect. This defines sufficient information. Choice (c) is incorrect. This defines relevant information. Choice (d) is incorrect. This defines useful information. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 590, II-16. 66. (c) Standard bank confirmation inquiries prepared independently of company records is not only compelling in that it was prepared by a party independent of the company but also would lead to the detection of any restrictions on cash. Choice (a) is incorrect. This analytical evidence would be one item reviewed, but it is less compelling than evidence from an external source. Choice (b) is incorrect. Testimonial evidence drawn from company officials is not as strong as external evidence. Choice (d) is incorrect. Analytical computations would be less likely to identify major misstatements in cash than would an independent source such as bank confirmation. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1190, I-19. 67. (c) This is the best evidential matter for an auditor to utilize. It reflects how long the accounts receivable are outstanding and puts overdue accounts in perspective. This is the primary document to work from in utilizing other audit procedures, such as discussions with management and review of confirmation replies. Choice (a) is incorrect. It is a valid audit procedure regarding the validity, not necessarily the collectibility, of accounts receivable. Choice (b) is incorrect. It is a valid audit procedure regarding the validity, not necessarily the collectibility, of accounts receivable. Choice (d) is incorrect. Although discussion with management about the collectibility of accounts receivable is part of the overall process, it cannot be considered as a primary procedure since management’s responses could be selfserving. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1190, I-20. 68. (d) Evidence that the material was ordered (purchase order), valid (receiving reports), and best priced (bid quotes) is cited. Choice (a) is incorrect. Evidence of receipt

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(receiving report) is necessary to confirm validity. Choice (b) is incorrect. Evidence of recording (journal voucher entry) is needed as a starting point. Choice (c) is incorrect. Evidence of best price (bid quotes) is needed. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 590, II-15. 69. (d) Relevant information supports the audit findings and is consistent with the audit objectives. Choice (a) is incorrect. Although an accepted audit procedure, this does not address the basis for information requirements. Choice (b) is incorrect. Being objective and unbiased does not assure that information will be consistent with the audit objectives. Choice (c) is incorrect. Such information is “sufficient” so that a prudent, informed person would reach the same conclusion as the auditor. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1190, II-20. 70. (c) It is not complete—there is no substantive testing. Choice (a) is incorrect. It is just not complete. Choice (b) is incorrect. The work is relevant, just not complete. Choice (d) is incorrect. It is useful, but not sufficient. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1190, II-21. 71. (b) The firm uses magazine advertising and artwork; the agency specialized in newspaper advertising hence it is not relevant. The sampling should relate only to that type of advertising purchased. Choices (a), (c), and (d) are incorrect. They maybe competent, sufficient and reliable for what is being measured, newspaper advertising, and typeset plates. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1190, II-22. 72. (d) Choices (a), (b), and (c) are not true. Choice (a) is incorrect. The firm’s advertising director and the firm’s product marketing director are not objective (competent). Choice (b) is incorrect. The customers are not knowledgeable—the information they provide is not relevant. Choice (c) is incorrect because the evidence cannot be conclusive. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1190, II-23. 73. (c) This is the most comprehensive procedure since it provides evidence on approval as well as additional evidence on how conscientiously the process was carried out (i.e., it provides evidence as to whether any meaningful discussion took place during the committee meetings). Choice (a) is incorrect. The audit emphasis is on the effectiveness of the loan committee. The loan committee acts as a constraint on the lending officers. Thus, while this procedure would provide some evidence, it is not sufficient evidence. Choice (b) is incorrect. Reconciliation controls are important in the banking industry. This reconciliation, however, only provides evidence that all proposed loans are accounted for; it does not present any evidence on the effectiveness of the loan committee review process. Choice (d) is incorrect because choices (a) and (b) do not directly address the audit question. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1195, I-69. 74. (d) Aging of receivables provides direct, relevant evidence regarding the valuation of receivables and thus the allowance account. Choice (a) is incorrect. Although some

valuation information is implied from the confirmation, aging is more relevant and persuasive. Choice (b) is incorrect. One month’s receipts is too little information on which to base the collectibility of accounts. Choice (c) is incorrect. Controls over write-offs are not relevant to the account’s valuation, but to the authorization of the write-off. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1196, II-20. 75. (c) Observation is good in verifying existence, but has limited value in addressing other assertions. Choice (a) is incorrect. Interviews are the most effective method to fill out the questionnaire. The interview results should be supplemented with observations of practice. Choice (b) is incorrect. Observation provides information on how transactions are handled at one particular point in time, not how they are processed throughout the period under audit investigation. Choice (d) is incorrect. The auditor will very seldom be able to observe a fraud; thus, observation is of limited value in documenting a fraud. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 595, I-41. 76. (c) Real estate appraisals are based on estimated resale value and/or future cash flows. A recent, independent appraisal would provide evidence about the borrower’s ability to repay the loan. Choice (a) is incorrect. A confirmation provides evidence about a loan’s existence, not its collectibility. Choice (b) is incorrect. This procedure would provide evidence about the loan’s authorization, not its collectibility. Choice (d) is incorrect. This procedure would not provide evidence about the borrower’s ability to repay the loan. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, I-17. 77. (a) By matching invoices received from vendors with receiving documents prepared by company personnel, the nonreceipt of items billed to the company can be detected. Also, the invoices received may well note the delivery made to an address other than the company’s storage area or a construction site. Choice (b) is incorrect. It is not usually possible because the materials will not be available on any company premises now or ever. Choice (c) is incorrect. Testimonial through confirmation is unlikely to be helpful because the supplier will confirm shipment of goods and the amount of the invoice but will not report the delivery address on the confirmation returned. Choice (d) is incorrect. It is not likely to be effective unless budgets were very carefully drawn up, all conditions remained virtually constant, and the amounts were relatively large. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 593, II-18. 78. (b) Detailed testing of actual credit applications produces direct evidence of the application (or lack of the application) of specific procedures. Choice (a) is incorrect. Such interviews produce testimonial evidence, which is more useful in gaining an understanding of operations or providing insight into the reasons for exceptions. Choice (c) is incorrect. Analytical procedures can be used to isolate unusual or unexplained fluctuations but do not locate the cause. Choice (d) is incorrect. An aged accounts receivable schedule would provide evidence of whether a particular account might be collected, not the application of credit procedures.

1: CONDUCT ENGAGEMENTS Subject Area: Conduct audit engagements—audit evidence. Source: CIA 593, II-19. 79. (b) The aging analysis yields an estimate of the total bad debts, based on the age of the unpaid account balances. This helps the auditor evaluate the adequacy of the company’s credit policies and collection efforts. Choice (a) is incorrect. This would test whether the total balance of all individual accounts equals the balance of the control account. Choice (c) is incorrect. This would test only whether the terms for individual accounts were properly authorized. It does not evaluate the adequacy of the company’s credit policies and collection efforts. Choice (d) is incorrect. This would test whether the credit memos were properly recorded. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, I-17. 80. (b) A comparison of physical inventory counts to perpetual records is required. Choice (a) is incorrect. Applying the retail method of inventory valuation will not identify specific item shortages. Choice (c) is incorrect. Use of the gross profit percentage will not identify specific shortages. Choice (d) is incorrect. Analysis of inventory turnover rates will not identify specific shortages. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, I-23. 81. (b) The documentation underlying purchase orders provides the most reliable evidence that bids are being obtained in situations where required per the IIA Standards. Choice (a) is incorrect. The auditor is searching for possible deviations from the bid procedure. Starting with requests for bids will not turn up instances where the purchasing department should have, but failed to, request bids. Choice (c) is incorrect. Uncorroborated oral statements by a person who is apt to be biased are not a reliable form of evidence. Choice (d) is incorrect. While the executive vice president might be able to estimate the frequency with which waivers are requested, he would not be in a position to identify situations where waivers should have been obtained but were not. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, II-27. 82. (d) When samples are used, they are more apt to provide sufficient evidence when there is reasonable assurance that they are representative of the population from which they were selected. Comparison of the prices by the auditor is a more direct, and therefore more convincing, form of evidence than merely looking for the signature of the accounting clerk who is supposedly performing this function. Choice (a) is incorrect for three reasons. (1) The 20 vouchers do not constitute a representative sample because of the way they were selected.(2) Twenty appears to be too small of a sample from this large of a population. (3) As explained in choice (c) below, the accounting clerk’s signature is not as convincing as directly comparing the invoice and purchase order prices. Choice (b) is incorrect. See reasons 1 and 2 listed in choice (a). Choice (c) is incorrect. It is possible that due to time pressures, temporary distractions, and so on, the accounting clerk signed the voucher without effectively comparing the purchase order and invoice prices. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, II-28.

83. (d) The information is not sufficient because it does not explain why the shortages exist. Choices (a) and (b) are incorrect. The company employs an external inventory service and internal personnel for data entry and balancing. Choice (c) is incorrect. Although the company utilizes both external (the counting service) and internal sources (data entry and balancing) for gathering and validating inventory information, the information is not sufficient to determine the cause. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, II-23. 84. (a) Confirmation is used to verify the physical existence of an item. Obsolete inventory represents a question of value, not physical existence. Choice (b) is incorrect. Scanning is an excellent means of noting unusual relationships, such as very old items with no activity. Choice (c) is incorrect. Recomputation of the value of identified obsolete items is necessary in order to establish current inventory carrying value. Choice (d) is incorrect. Analytical review offers a means to identify part numbers that have a high likelihood of being obsolete. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, II-24. 85. (c) Corroboration occurs whenever evidence collected from two separate sources confirms each other. Choice (a) is incorrect. While this is direct evidence here, the situation is really more than that. Choice (b) is incorrect. Circumstantial evidence is received from secondary sources such as the interviews noted above, but this situation is really more than that. Choice (d) is incorrect. Subjective evidence is generally opinion oriented and is not dependable for reaching audit conclusions. No subjective evidence is present in this situation. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, II-25. 86. (d) Bids should be solicited based on properly approved requests and a sufficient number of vendors should be selected to ensure competition. Choice (a) is incorrect. Although bids should be solicited based on properly approved requests, the incoming bids should first be returned to an independent third party, such as a bid registrar, for recording and control purposes. Choice (b) is incorrect. A sufficient number of vendors should be selected to ensure competition. However, the incoming bids should first be returned to an independent third party, such as a bid registrar, for recording and control purposes. Choice (c) is incorrect. Bids should be solicited based on properly approved requests. Also, a sufficient number of vendors should be selected to ensure competition. However, the incoming bids should first be returned to an independent third party, such as a bid registrar, for recording and control purposes. Subject Area: Conduct audit engagements—audit evidence. Source: Transition Question No.1, IIA 1994. 87. (c) By comparing the vendor invoice due date with the payment date indicated on the canceled check, the auditor would be able to assess whether invoices were being processed timely. Also, the auditor could determine that cash use was being maximized, that is, payments were not being made before their due dates. Choice (a) is incorrect. This interval would represent the number of days required to process an invoice and indicate whether invoices were being processed timely. However, it would not allow the auditor to

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determine whether disbursements were being made to maximize the use of company cash. Choice (b) is incorrect. Discussions with the manager would not provide any documentary evidence regarding the timeliness of process while maximizing the company’s use of cash. Choice (d) is incorrect. The comparison of these dates would provide an indication of whether invoices were being processed timely. However, it would not allow the auditor to assess whether cash use was being maximized. Subject Area: Conduct audit engagements—audit evidence. Source: Transition Question No.2, IIA 1994. 88. (a) This is the definition of framing error. Choice (b) is incorrect. This is the definition of escalation of commitment. Choice (c) is incorrect because it deals with statistical terms, not behavioral terms. Choice (d) is incorrect. Past successes can lead to overconfidence that adversely affects decision making, but overconfidence does not relate to framing error as it has been defined. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1194, II-5. 89. (d) Agreeing on some point can be an opening wedge to more productive discussions. Choice (a) is incorrect. This will only alienate the individual. Choice (b) is incorrect. A tired or distracted person is not a good audience for the auditor’s discussion. Choice (c) is incorrect. A closed mind does not accept logic, an open mind does. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1196, II-23. 90. (d) Complete and timely corrective action is needed, but funds appear not to be available. This situation poses a significant risk to the company, and senior management must participate in the decision. It is unlikely that senior management will choose to accept the risk of noncompliance for an extended period of time; funds may be available from another source not accessible to the environmental manager. Choice (a) is incorrect. Disregarding real constraints does not show consideration for the environmental manager’s situation and will not achieve the goal of improving hazardous-waste management. Choice (b) is incorrect. If the waste is not being stored properly, the company is probably not in compliance with environmental and safety regulations; postponing action is not acceptable. Choice (c) is incorrect. Inadequate corrective action will not make the facility in compliance and may perpetuate an unsafe condition. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-16. 91. (a) It is management’s responsibility to determine policy and set performance goals; the auditor is not necessarily in a position to insist on actions that may be perceived as extraordinary by operations management. Choice (b) is incorrect. Unless senior management is committed to a policy of “environmental excellence” and the auditor is auditing performance toward such a goal, it is inappropriate to raise this issue. Choice (c) is incorrect. This should not be included as part of the audit or audit report. Choice (d) is incorrect because this is inappropriate. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-17. 92. (c) Most companies have a program to receive and address employee concerns. Employees who fortuitously encounter auditors may see an opportunity to bypass the

normal process. Until the process has had a chance to work, internal auditors should encourage its use. It is important that audit management be aware of such contact between auditors and other employees. Choice (a) is incorrect. Potential legal issues are presented whenever an employee complains about working conditions. Unless the internal auditing department is specifically under the guidance of counsel, the auditor should not pursue this information. Choice (b) is incorrect. Although it may not be appropriate for the internal auditing department to investigate such informal allegations or complaints, it is not appropriate simply to disregard employee concerns. Choice (d) is incorrect. Although the legal department may eventually interview the employees, at this stage it is more appropriate to encourage them to use the program in place to address employee concerns. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-18. 93. (b) The risk of having radioactive materials on site that are not accounted for in the facility’s inventory is sufficiently serious that all key controls should be identified and evaluated. The auditor is obliged to note that the risk extends beyond the safety department, and should request resources to finish this important planning. Choice (a) is incorrect. Although a procedure may be comprehensive, controls do not exist if people do not take appropriate action. In this situation, the safe handling of radioactive materials requires actions by outsiders not under the control of the safety department. Choice (c) is incorrect. Planning is the most important part of an audit. If an activity crosses organizational lines, the auditor should endeavor to understand the entire system and identify all key controls before making decisions about which controls are appropriate to test. Choice (d) is incorrect. Although another audit project dealing with one of these other departments might touch on controls over radioactive materials, it is not likely to be comprehensive. A review of purchasing, for example, might not result in testing of controls designed specifically to track radioactive materials. Also, the auditors at that time may not have the same technical expertise. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-19. 94. (b) Indirect questions may allow the auditor to obtain some information without making the clerk feel accused. Choice (a) is incorrect. The auditor has an obligation to obtain information. Unless the weakness is something that compromises the security of the company, the auditor should not simply avoid the issue. Choice (c) is incorrect. Since the auditor believes there is a system weakness, the clerk is not likely to have sufficient knowledge to determine if the finding should be reported immediately. Choice (d) is incorrect. This is probably an inefficient approach. The auditor should learn as much as possible from this interview, speak to others who may have additional information, and return to this clerk only if needed to clarify something specific about this employee’s duties. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-20. 95. (d) This is one approach the auditor can use to maintain focus during a far-ranging discussion. It assumes that the auditor has done some homework and is prepared to listen intelligently. Choice (a) is incorrect. This is a sign of a poor listener, as the auditor will likely miss important things

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in the effort to record everything. The auditor should write down key points or issues and then listen to the support or argument offered. Choice (b) is incorrect. This would waste the auditor’s time. Choice (c) is incorrect. This would be a waste of everyone’s time, and the auditor still may not get the information sought. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-22.

the work in process account to the individual time tickets. Choice (b) is incorrect. To establish this, the auditor would have to verify proper authorization of the time tickets. Choice (d) is incorrect. To establish this, the auditor would also have to reconcile total payroll costs to the payroll cost distribution. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, I-29.

96. (b) The validity of documentary evidence depends on the internal control system. Choices (a), (c), and (d) are incorrect because each one is a true statement. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 597, II-24.

101. (b) For each shipment, there should be a valid sales record or invoice. Choice (a) is incorrect. These records would not include payment information. Choice (c) is incorrect. This would be done by comparing invoices with sales contracts or price lists, noting the propriety of any discounts. Choice (d) is incorrect. All sales might not require shipping. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, II-12.

97. (d) Since the mind can process information three times as fast as most people speak, you should use the extra brain time to sort out the speaker’s important points and integrate the new information with what you already know. After having done this to absorb the information, you are in a better position to respond to the speaker later. Choice (a) is incorrect. If you are planning a reply before you have heard the speaker out, you are likely to miss an important point or assume information the speaker does not say. When you are thinking about a reply, you are not listening. Choice (b) is incorrect. If you are thinking your own thoughts while someone speaks, you are not listening. This is not a productive use of listening time. Choice (c) is incorrect. To listen effectively, you need to sift the main ideas from the details and try to remember the important points. You cannot let yourself be distracted by interesting details, as oral communication is hard to remember. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 596, II-6. 98. (b) If all the invoices in the sample can be correctly matched with shipping documents, then there is some assurance that all or most items billed are also shipped. Choice (a) is incorrect. The tracing procedure originated with a sample of billed sales; thus, all the items in the sample were billed. However, this does not determine if all shipped items were billed. Choice (c) is incorrect. Receivables are not examined at all. Choice (d) is incorrect. Again, receivables are not examined. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 592, I-23. 99. (c) Tracing accounts receivable debit entries to the sales documentation tests whether those debits represent actual sales. Choice (a) is incorrect. This would test whether credit sales were properly recorded in the accounts receivable ledger. It would not ensure that all debit entries to accounts receivable represent valid sales. Choice (b) is incorrect. The auditor would trace accounts receivable credit entries to the cash receipts journal to test whether those entries represent actual payments. Choice (d) is incorrect. Tracing entries from the cash receipts documentation to the accounts receivable ledger tests whether customer payments were credited to accounts receivable. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1192, I-16. 100. (c) An item distributed to an improper work-inprocess account (i.e., one different from that listed on the time ticket) could be discovered by this test. Choice (a) is incorrect. The direction of tracing to establish this is from

102. (a) Tracing the production and handling of replacement parts that were shipped late and comparing the process times to parts that were shipped on time should detect the cause of the late shipments. Choice (b) is incorrect. Tracking the production and handling processes to find average turnaround times will give an overall measure of capacity, but will not determine the cause of late shipments. Choice (c) is incorrect. Computing the production and handling capacities for replacement parts will give an overall measure of capacity, but will not determine the cause of late shipments. Choice (d) is incorrect. Examining the terms and conditions of the delivery commitments to customers will verify the actual delivery terms and conditions, but will not determine the cause of late shipments. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, II-28. 103. (d) The shipping document and invoice provide direct evidence that the sale was made. Choice (a) is incorrect. The customer’s purchase order only proves that the item was requested, not sold. Choice (b) is incorrect. This is hearsay evidence, and it is uncorroborated. Choice (c) is incorrect. This evidence is less direct than the shipping document and invoice and provides only circumstantial evidence regarding the validity of the sale. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, I-21. 104. (c) Payment on vendor invoices represents the culmination of the buying process. The paid invoice would evidence the purchaser’s ownership of inventory. Choice (a) is incorrect. Although informative, this procedure has no bearing on legal ownership. Choice (b) is incorrect. Purchase orders represent a commitment only to purchase, not legal ownership. Choice (d) is incorrect. This type of confirmation would verify the existence of the inventory, not the legal ownership. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1191, I-23. 105. (c) Vendors’ invoices provide an external source of information regarding quantities shipped, which should be equal to quantities added to inventory (after possible adjustment for items returned to the vendor due to damage, etc.). Choice (a) is incorrect. The quantity ordered may not be equal to the quantity shipped by the vendor due to stockouts. Choice (b) is incorrect. The quantity requested per purchase requisition may not be equal to the quantity shipped

WILEY CIA EXAM REVIEW: VOLUME 2

by the vendor due to (1) modification by the purchasing department, or (2) vendor stock-outs. Choice (d) is incorrect. Vendors’ statements normally list only the invoice number, date, and total. They do not list invoice detail such as quantities shipped. Subject Area: Conduct audit engagements—audit evidence. Source: CIA 1193, I-18. Develop and Review Workpapers 106. (d) Every workpaper should contain a descriptive heading. Choice (a) is incorrect. Findings of tests may be documented, but expression of an audit opinion in the working papers is premature and an indication of bias. Choice (b) is incorrect. A tick mark legend is a minor point, although it is helpful to the auditor, Choice (c) is incorrect. A flowchart of internal controls will likely be a working paper at the beginning of a significant audit segment, but each workpaper will not contain a flowchart. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, I-27. 107. (c) Working papers provide the primary support for the internal auditor’s report. Choice (a) is incorrect. Although a copy of the auditee’s responses to audit findings will likely be filed with the working papers, the auditee will normally prepare a formal response to the final audit report or to interim reports. Choice (b) is incorrect. The working papers are not an exhibit appended to the audit report. Choice (d) is incorrect. Overall audit recommendations are properly summarized in the audit report. Individual test conclusions may be documented in the working papers. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, II-25. 108. (a) Documentation concerning the adequacy of internal controls will always be a part of the working papers. Choice (b) is incorrect. Many documents may be examined that prove to be irrelevant to the audit objectives. These documents need not be included in the working papers. Choice (c) is incorrect. In many circumstances the exact wording of a procedure is not needed to support a finding. A reference to the procedure in the working papers is adequate in this situation. Choice (d) is incorrect. Some previous workpapers may be so outdated as to be useless. Parts of previous audit working papers may be included in current working papers subject to updating. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, II-26. 109. (d) The IIA Standards require that appropriate audit supervision include the determination that workpapers adequately support findings, conclusions, and reports. This is of primary importance because nothing reduces the credibility of an internal audit department as much as ineptly developed findings that can collapse under attack. Choice (a) is incorrect. While it is true that a descriptive heading generally should be on each worksheet, it is not of primary importance. Choice (b) is incorrect. Again, while it is desirable that working papers be properly referenced, it is not of primary importance. Choice (c) is incorrect. Although a supervisor would be concerned as to whether departmental procedures are followed, it is not of primary importance. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, II-27.

110. (d) The auditor should know exactly where workpapers are during an audit and who has access to them. Choice (a) is incorrect. Audit workpapers may be shown to the auditee so that the auditors are helped to evaluate significance, perspective, accuracy, and relevance. Choice (b) is incorrect. If company policy permits, external auditors may be permitted access to workpapers to avoid duplicate work. Choice (c) is incorrect. If company policy permits, government auditors may be permitted access to workpapers to avoid duplicate work. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, II-28. 111. (a) The general test in all cases is whether audit working papers reasonably achieve the purposes of the internal auditor. Choice (b) is incorrect. Description of operational procedures is frequently desirable, but is secondary to the need to document completion of audit objectives. Choice (c) is incorrect. Condensation of detail is desirable, but is secondary to meeting the audit objective. Choice (d) is incorrect. Indexing is a matter of form as opposed to substance. Subject Area: Conduct audit engagements—workpapers. Source: CIA 590, II-18. 112. (b) This is the primary reason why the legal department needs to be involved. Choice (a) is incorrect. This is adequate for internal company records but does not address the legal provisions of the contract, particularly if it is a onetime audit. Choice (c) is incorrect. Again this area is more concerned with in-house routine accounting records which have nothing to do with contractor audits. Choice (d) is incorrect. It is best to have one’s own legal department involved in order to make sure the company is adhering to the contract provisions, Contractor’s policies are irrelevant regarding company’s own audit workpapers. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, I-29. 113. (c) Compliance tests are used in reviews for effectiveness of the system. Choice (a) is incorrect. An old compliance test from a former audit might be found in the preliminary survey as background material. A current compliance test would not yet be performed. Choice (b) is incorrect. Compliance tests are not used in reviews for adequacy of the system. Choice (d) is incorrect. Compliance tests are not used in reviews for quality of performance. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, I-21. 114. (a) A checklist that outlines the types of errors and irregularities that can occur in the sales cycle identifies the risks faced in the sales cycle. This is properly a function served by the preliminary survey. Choice (b) is incorrect. The review for adequacy of the system determines whether there are controls that will prevent or detect the errors and irregularities suggested in the preliminary survey. Choice (c) is incorrect. The review for effectiveness of the system determines whether the key controls are applied as designed. Choice (d) is incorrect. The review for quality of performance is designed to determine whether the organization’s objectives and goals are being achieved. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, I-22.

1: CONDUCT ENGAGEMENTS 115. (b) This document indicates: (1) that a control system has been contemplated and (2) the portion covered by the standard sales contract can work. Choice (a) is incorrect. The standard sales contract form might be picked up during the on-site survey portion of the preliminary survey. Its analysis, indicating the existence and adequacy of key controls, could also be performed as part of the preliminary survey. In spite of this, there are three reasons why the audit supervisor should not place this document among those from the preliminary survey: (1) The checklist of possible errors and irregularities fits the preliminary survey criteria only. (2) The stub demands that there be no duplications. (3) The activity outlined is a review for adequacy of the system procedure, regardless when it is accomplished. Choice (c) is incorrect. The form is blank. A completed form would be required to indicate that the system is effective. Choice (d) is incorrect. The form is blank. No data are available for substantive testing. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, I-23. 116. (b) It is not possible for a reviewer to check any of the auditor’s work without obtaining additional copies of the quarterly reports and independently checking the computations. The review would be much more efficient if the auditor included the board reports in the working papers and had used tick marks with explanations to show which computations were checked and to describe what the auditor did to verify the amounts used in the computations. Choice (a) is incorrect. The problem did not state or imply that sampling was used. Four quarters was the population, and it was apparently tested 100%. Choice (c) is incorrect. Scratch papers are generally not suitable for working papers. Unorganized working papers are difficult to review and difficult to understand in the future if it is ever necessary to refer to them. Choice (d) is incorrect. The problem did not state or imply that an objective of the audit was to evaluate efficiency. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1195, II-6. 117. (a) Since there are many differences between organizations (e.g., type, size, location, etc.), the internal auditing manager devises the workpaper indexing method that best suits the organization. A government audit agency, however, audits many different organizations that come under the agency. Therefore, the government audit agency devises one uniform indexing method that is compatible with all of the organizations that it audits so that the review process can be simplified. Choices (b) and (c) are incorrect. The Standards require only that the audit workpapers contain an index number, but they do not discuss or require a particular indexing method. Furthermore, there are no laws that require a particular indexing method to be used by government auditors. Choice (d) is incorrect. The audit committee does not specify any workpaper indexing method. Subject Area: Conduct audit engagements—workpapers. Source: CIA 597, I-8. 118. (c) Chronological organization would be ineffective. Choices (a), (b), and (d) are incorrect because these are examples of good practices. Subject Area: Conduct audit engagements—workpapers. Source: CIA 594, II-41. 119. (c) Bank statement reconciliations do not show a list of all deposits, only deposits in transit. Choices (a), (b), and

(d) are incorrect because each one of them should be present in a bank’s statement reconciliation. Subject Area: Conduct audit engagements—workpapers. Source: CIA 594, II-42. 120. (c) Computer utilities software would be useful during the audit in manipulating and selecting data. However, spreadsheet, word processing, and database software provide flexible options in preparing and editing working papers in a variety of formats, allowing for a combination of narratives, data matrices, graphic presentations, and so on. Choices (a), (b), and (d) are incorrect because each choice would be of great help in preparing audit working papers. In fact, some vendors have developed integrated software that includes spreadsheet, word processing, and database applications. Subject Area: Conduct audit engagements—workpapers. Source: CIA 594, III-9. 121. (c) No characteristic gets to the heart of an internal auditor’s job more than the ability to gather, analyze, and draw conclusions from facts. The internal auditor’s success in implementing well-founded recommendations is most closely tied to his or her ability to communicate. Choice (a) is incorrect. Accounting educational performance is undoubtedly one criterion that must be examined. Reviewing the performance in only one subject area is much too limited a criterion when the broad scope of internal auditing work is considered. Choice (b) is incorrect. The ability to get along well socially is a benefit to any internal auditor but cannot be considered the most important characteristic of a good candidate. Choice (d) is incorrect. Entry-level internal auditors would typically have relatively little detail knowledge of the company. It is desirable for applicants to demonstrate a general knowledge of the company, but this is not the most reliable predictor of successful performance as an internal auditor. Subject Area: Conduct audit engagements—workpapers. Source: CIA 591, I-8. 122. (c) As a minimum, this would be needed to comply with IIA Standards as to having the working papers complete. A standard or norm for efficient operation has to be used to measure how inefficient an operation is before such an opinion can be rendered. Choice (a) is incorrect. While this might become necessary, if the staff auditor has reason to believe inefficiency, an attempt to support that belief is the first priority. Choices (b) and (d) are incorrect. Without support, these statements do not have credibility. They are conjecture and violations of Standard 420. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1191, II-24. 123. (c) This is the primary reason for such summaries. Choice (a) is incorrect because it is not required by the IIA Standards. Choice (b) is incorrect because audit programs do not usually require it. Choice (d) is incorrect because it is too comprehensive. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1191, I-24. 124. (d) This is the objective of each working paper: to support the particular purpose for which the working paper was generated. Choice (a) is incorrect. Format requirements are superficial and indicate only that mechanical requirements have been met. They do not relate to content.

WILEY CIA EXAM REVIEW: VOLUME 2

Choice (b) is incorrect. A working paper may relate to only a part of the finding—one element or several. Choice (c) is incorrect. These items are characteristics of the working paper content. The qualities may be present without the working paper being complete. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1191, I-25. 125. (c) Legal counsel should approve retention policies. Choice (a) is incorrect because minimum retention is for the period of further use, not simply three years. Choice (b) is incorrect because the audit committee should not prepare retention policies. Choice (d) is incorrect because the external auditor need not approve retention policies. Subject Area: Conduct audit engagements—workpapers. Source: CIA 592, II-27. 126. (a) Working papers should include only what is essential. Choice (b) is incorrect. Working papers should be uniform and consistent. Choice (c) is incorrect. Working papers should contain only information related to an audit objective. Choice (d) is incorrect. Copies of auditee records should be used whenever possible. Subject Area: Conduct audit engagements—workpapers. Source: CIA 592, I-25. 127. (c) Because electronic working papers do not bear the initials or signature of the auditor who created them, special rules are needed to protect their integrity. Choice (a) is incorrect. Working papers may be shown to the auditee. Choice (b) is incorrect. Working papers should be retained only until no longer needed. Choice (d) is incorrect. If working papers are only potentially relevant, the courts have held that they must be surrendered. Subject Area: Conduct audit engagements—workpapers. Source: CIA 592, I-27. 128. (b) The IIA Standards specify that for working papers in media other than paper, consideration should be given to generating backup copies. Choice (a) is incorrect. Conversion to a paper media is not specified nor is it necessarily desired. Choice (c) is incorrect. The nature of the audit, and not the media, determines working paper design and content. Choice (d) is incorrect. Retention policies are a function of several factors, including legal guidelines. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, I-19. 129. (b) Reductions in the average time to complete an audit have been shown. Choice (a) is incorrect. Auditors can learn to use the personal computer with a minimum of training. Choice (c) is incorrect. The IIA Standards require comprehensive working papers, and the use of computers should not affect their completeness. Choice (d) is incorrect. Working papers need not be and, in fact, rarely are printed. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, I-20. 130. (b) Working papers do document auditing procedures, information obtained, and the conclusions reached. Choice (a) is incorrect. While working papers are the property of the organization, they should be made available only to authorized personnel. Choice (c) is incorrect. Although it is common practice for internal auditors to grant access to working papers to the independent outside auditors, the internal audit working papers are the property of the organization. Choice (d) is incorrect. Working paper retention should

be consistent with the guidelines of the organization and should satisfy pertinent legal or regulatory requirements. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1190, I-26. 131. (d) Training would be required to effectively use any software package. Choice (a) is incorrect. Only access to a personal computer would be a must. Full allocation to each auditor may not be necessary or economically feasible. Choice (b) is incorrect. If adequate measures are taken to safeguard the working paper disks, paper documentation is redundant. Choice (c) is incorrect. Search capabilities actually ease cross-referencing. Subject Area: Conduct audit engagements—workpapers. Source: CIA 593, I-7. 132. (a) Working papers serve the primary purpose of showing that audit procedures were properly planned and executed. Choice (b) is incorrect. Working papers do not provide the means for preparation of the financial statements. Choice (c) is incorrect. Documentation of control deficiencies is only one example of working paper contents, not their primary purpose. Choice (d) is incorrect. The preparation of adequate working papers is a requirement of the IIA Standards but not the primary purpose of their existence. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1192, II-29. 133. (b) Although working papers pertaining to a fraud audit might be kept apart from other working papers, no working paper will have to be kept indefinitely. Choices (a), (c), and (d) are true statements regarding working paper retention. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1192, II-30. 134. (a) Since there are many differences between organizations (e.g., type, size, location, etc.), the internal auditing manager devises the working paper index method that best suits the organization. A government audit agency, however, audits many different organizations that come under the agency. Therefore, the government audit agency devises one uniform indexing method that is compatible with all of the organizations that it audits so that the review process can be simplified. Choices (b) and (c) are incorrect. The Standards only require that the audit working papers contain an index number, but they do not discuss or require a particular index method. Furthermore, government audit agencies do not require their auditors to follow a specific index method. Furthermore, there are no laws that require government auditors to use a particular index method. Choice (d) is incorrect. The audit committee does not specify any working paper indexing method. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, I-21. 135. (b) This would indeed be a deficiency because the basis for comparing what was, with what should have been would be missing. Choices (a), (c), and (d) are incorrect because each is appropriate to include in working papers. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, I-22. 136. (c) Each set of working papers should be individually considered for disposal. Choice (a) is incorrect. Internal audit working papers are the property of the organization.

1: CONDUCT ENGAGEMENTS Only those dealing with government contracts could be affected by such guidelines. Choice (b) is incorrect. The Standards do not specify a retention period. Choice (d) is incorrect. See choice (c). Some might be destroyed after the next audit. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, I-23. 137. (b) Management may use the internal auditors’ working papers in preparing the insurance claim, as long as the director of internal auditing approves such use. Choice (a) is incorrect because the IIA Standards state: “management and other members of the organization may request access to audit working papers. Such access may be necessary to substantiate or explain audit findings or to utilize audit documentation for other business purposes. The director of internal auditing should approve these requests.” Accordingly, the insurance claim should be considered under “other business purposes,” and management may use the internal auditors’ working papers in preparing the claim. Choice (c) is incorrect. There is nothing in the IIA Standards that precludes management from preparing insurance claims. In fact, management typically has such responsibility. Choice (d) is incorrect. The use of the internal auditor’s working papers requires the approval by the director of internal auditing only. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, II-19. 138. (b) Only those forms and directives that are relevant to the auditor or to the audit findings should be included in the audit working papers. Choice (a) is incorrect. Actual and budgeted audit time is documented in the budget section of the working papers and not on each working paper. Choice (c) is incorrect. Audit conclusions should be documented in the working papers, whether the audit objectives are achieved or not. Choice (d) is incorrect. The cooperation of the auditees during the conduct of an audit is not documented on each working paper. It is typically documented on one working paper, and usually this is done when the auditees were not cooperative. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, II-20. 139. (a) This concept invokes the use of computer-based procedures to ensure the retention and availability of audit records and documentation. Choice (b) is incorrect. Evidential support would be retained and provided on the basis of the nature of the finding and not the media used for working papers. Choice (c) is incorrect. This capability is not an exclusive function of computerized working papers. Choice (d) is incorrect. Although the nature of the preliminary survey may change in some cases, the requirement for this phase of the audit is not eliminated by computerized working papers. Subject Area: Conduct audit engagements—workpapers. Source: CIA 1193, II-23. 140. (c) Cross-referencing aids the factual rebuttal of challenges by clearly identifying source and location of facts. Choice (a) is incorrect. Audit programs are not generally summarized; such summaries are applicable to the working papers. Choice (b) is incorrect. Pro forma working papers save time in the evidence collection process by guiding the auditor to ensure that all significant points are covered. Choice (d) is incorrect. Explicit procedures in the audit program guide the collection of evidence, but appro-

priately cross-referenced facts in the working papers assist in the factual rebuttal to challenges. Subject Area: Conduct audit engagements—workpapers. Source: CIA 592, II-26. Report Engagement Results 141. (d) Long sentences with several ideas will create information overload and disguise the important point. Choice (a) is incorrect. Placing it at the beginning or end of the paragraph best emphasizes the point. Choice (b) is incorrect. Use of the active voice best emphasizes the point. Choice (c) is incorrect. Parallel structure will emphasize the point better. Nonparallel structure will usually detract from the point. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 597, II-1. 142. (b) Using the passive version without placing blame or making the statement personal is more likely to make the reader react positively. Choice (a) is incorrect. Placing the blame and using words such as “failed” will make the individual react negatively. Choice (c) is incorrect. Placing the blame in a manner that seems mean-spirited and using words such as “unfortunately” will make the reader react negatively. Choice (d) is incorrect. Placing the blame on the reader and using words such as “failed” will make the reader react negatively. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 597, II-2. 143. (b) Analysis of elements of cost can point out problem areas. Choice (a) is incorrect. Material is only one element of cost. Choice (c) is incorrect. There is no assurance that the standards are valid. Choice (d) is incorrect. This would only point to one element, production. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 597, II-3. 144. (d) The analysis of these reports should identify where the problem lies. Choice (a) is incorrect. The problem is recent; it was not identified in prior audits. Choice (b) is incorrect. Physical layout and condition of equipment or materials are not likely candidates. Choice (c) is incorrect. It is unlikely that staff would know about the problem. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 597, II-4. 145. (d) Oral reports permit auditors to counter arguments and provide additional information that the audience may require. Since oral reports evoke face-to-face responses, the auditors can provide an immediate response to any auditee objections or provide additional information as appropriate. Choice (a) is incorrect. The amount of testing required to support audit findings is unrelated to the use of oral reports. Whether findings are reported through oral or written reports, they still must be adequately supported. Choice (b) is incorrect. Even though audit reports are delivered orally, they still should be prepared carefully. Poorly planned and delivered oral reports will be difficult for the audience to follow and may create unnecessary misunderstandings. Choice (c) is incorrect. The format of the report will depend on the audience. Factors to consider in delivering reports may include the background and expectations of the audience as well as the time available. This applies to both written and oral reports. Since oral reports do not

WILEY CIA EXAM REVIEW: VOLUME 2

eliminate the need for a final report, overall audit efficiency is not affected. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 597, II-7.

to conduct an audit. Thus, the complexity of the audit should have no bearing on the auditor’s responsibilities. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-8.

146. (c) Both statements should be in the criteria section. Choice (a) is incorrect. This should be reported in the cause section of the report. Choice (b) is incorrect. This is only one of the two statements that should be reported in the criteria section. Choice (d) is incorrect. This should be in the recommendation section of the report. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-66.

153. (d) This would be consistent with the IIA Standards. Choice (a) is incorrect. As long as the auditor is satisfied that the audit is completed, it would be inappropriate to delay the issuance of the audit report. Further, agreement may never be obtained. Choice (b) is incorrect. The auditor is satisfied with the audit conclusions. There would be little justification for expanding the audit work. Choice (c) is incorrect. The disagreement is not caused by a scope limitation. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-10.

147. (a) This belongs in the condition section. Choice (b) is incorrect. This should be in the criteria section. Choice (c) is incorrect. This should be in the effect section. Choice (d) is incorrect. This should not be included in the report. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-67. 148. (b) This belongs in the cause section. Choice (a) is incorrect. This belongs in the condition section. Choice (c) is incorrect. This belongs in the effect section. Choice (d) is incorrect. This should not be included in the report. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-68. 149. (d) This belongs in the effect section. Choice (a) is incorrect. This belongs in the cause section. Choice (b) is incorrect. This belongs in the criteria section. Choice (c) is incorrect. This belongs in the recommendations section. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-69. 150. (c) This belongs in the recommendation section. Choice (a) is incorrect. This belongs in the criteria section. Choice (b) is incorrect. These belong in the criteria section. Choice (d) is incorrect. This belongs in the effect section. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-70.

154. (a) Past practices may or may not have been at the level of “best practices” or may not have been in compliance with company procedures. This would not be an appropriate criterion. Choice (b) is incorrect. Company policies and procedures specify what should be a part of the treasury function’s operations. Choice (c) is incorrect. Generally accepted good practices can usually be found in leading textbooks describing the field. The auditor should look to the finance discipline for a description of good practices. Choice (d) is incorrect. Industry identification of “best practices” can serve as relevant criteria for both the auditor and the organization. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-11. 155. (c) Assigning responsibility is a function of management. Choices (a), (b), and (d) are incorrect because each one is a major purpose. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-14. 156. (b) This should be included in the purpose section. Choices (a), (c), and (d) are incorrect because each one should be included in the scope section. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-15.

151. (a) Compensation systems influence behavior and should be considered an integral part of an organization’s control structure. Thus, they should be considered as an important part of the control structure over derivatives trading. Choices (b) and (c) are incorrect. Although compensation or payroll audits are often conducted independently of the control structure over related activities, the compensation system should be considered whenever the control structure is evaluated. Choice (d) is incorrect. Both statements II and III are incorrect. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-7.

157. (d) The audit report needs to address the expectations and perceptions both of the top management and the operating management. As a result, it needs general concepts as well as details of operations. Choice (a) is incorrect. Top management can best perceive general concepts. Choice (b) is incorrect. Operating management can best perceive details of operations. Choice (c) is incorrect. Do not surprise auditees; discuss the matters with them before they are reported. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-25.

152. (c) The only justification for not reporting the items to the audit committee is the auditor’s judgment that the deficiency and the risks associated with it cannot be considered to be material. Choice (a) is incorrect. Significant deficiencies in control should be reported to the audit committee even if corrective action is planned. Choice (b) is incorrect. The compensation system influences employee behavior and is part of the control environment. The auditor’s reservations about its effect on the organization’s control structure should be communicated to the audit committee. Choice (d) is incorrect. Auditors should ensure they have adequate expertise

158. (a) Complex messages are more understandable if they follow a logical sequence. Thus, the sequence or organization of the message is a characteristic that is within the control of the sender. Choice (b) is incorrect. The nature of an audience is a situational factor that is outside the control of the auditor. Choice (c) is incorrect. Noise is a situational factor that interferes with the effective communication of intended messages. Choice (d) is incorrect. The history of previous encounters is a situational factor that is outside the control of the auditor. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-16.

1: CONDUCT ENGAGEMENTS 159. (a) While a portion of the scope is discussed (30 machines selected), the reader cannot recognize the significance or insignificance of this amount without knowing the total amount of machines that could have been selected. The value of the machinery is not given. Also, the conclusion or auditor’s opinion of the operation is not given, and the report does not make any recommendations. Choices (b), (c), and (d) are incorrect. The purpose or objective of the audit was clearly stated. Results of the audit were also given. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-18. 160. (a) Graphic illustrations, oral and written repetition such as summaries, and itemized lists (bulleted or numbered) are good ways of emphasizing information in a report. Choice (b) is incorrect. Long paragraphs may bury important information, and appendexes hide it because readers may not use them. Choice (c) is incorrect. Vocal emphasis comes from raising or lowering the projection of the voice to attract attention to the idea being stated, not from keeping the voice even. Choice (d) is incorrect. Embedding ideas subordinates them rather than emphasizes them. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1196, II-21. 161. (b) Since the auditor does not report to the divisional controller, the divisional controller can help alleviate the problem by making the director of internal audit aware of the perceived shortcomings. Choice (a) is incorrect. Training on only one part of the job will not improve the rest of the internal audit reports. Choice (c) is incorrect. Good management involves dealing directly with problems, not gossiping about employees within the company. Choice (d) is incorrect. Without awareness of previous problems, the director of internal audit will not fire the auditor and may consider the controller’s demand an unreasonable encroachment on corporate audit’s responsibilities. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1195, II-20. 162. (d) The controller should not let anger create more problems. The controller should identify and solve the actual work problems and retain good relations with the auditor. Choice (a) is incorrect. If the auditor’s work is not acceptable in this case, the auditor needs to know about it and help to find the solution in order to learn from the process. Choice (b) is incorrect. The divisional controller should not go behind the auditor’s back by bringing in someone else. The auditor has done good work so far; the controller should deal directly with the problem. Choice (c) is incorrect. This is a usurpation of authority, and the divisional controller cannot implement such a change. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1195, II-21. 163. (a) Specific comments will both help revise the report and defuse the potentially explosive interpersonal situation. Choice (b) is incorrect. Confrontation will not solve the internal audit problem. The auditor’s personality is not an issue here, but the auditor’s work apparently is; the auditor, therefore, should focus on finding out specifically what is wrong. Choice (c) is incorrect. This response will weaken the auditor’s ability to continue doing audits, because the auditee has intimidated the auditor. Choice (d) is incorrect. Unless the auditor finds out what specifically the divisional controller thinks is wrong, the auditor will not be

able to decide whether the controller’s objections are justified. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1195, II-22. 164. (b) Asking for specific objections will improve both the auditor’s work and the working relationship with the divisional controller by defusing this situation. Choice (a) is incorrect. If the auditor really needs to make changes to the report, they will have to be made eventually, and the divisional controller may ask someone else to make them if the auditor refuses to admit any mistakes. Choice (c) is incorrect. The issue here is work, not personal problems. Choice (d) is incorrect. Again, the issue here is work and getting it done. The auditor should find out what specific areas need work, revise the report, and apply for related training when it is next available. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1195, II-23. 165. (b) An audit report dealing with findings should discuss the criteria, the conditions found, the cause, and the effect of the findings. Recommendations may also be included, where appropriate. Paragraph [#5] is silent on the criteria the auditor used in determining that the division had excessive levels of inventory. Choice (a) is incorrect. There is a brief discussion of the “cause” of the problem as being due to divisional management’s conservative nature in avoiding risks of shutdowns. Choice (c) is incorrect. The report discusses the effect as one leading to unusually large levels of inventory write-downs because of obsolescence. Choice (d) is incorrect. The recommendations are logically derived from the findings and represent an approach that should be considered by management. Recommendations may be included, where appropriate, in audit reports. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 595, II-1. 166. (a) The auditor should avoid using emotionally charged words since doing so might create an unexpected, and negative, reaction from the auditee. The types of actions and attitudes of divisional management could have been adequately described as a cause without the use of the emotionally charged word. Choice (b) is incorrect. The excerpt is from the findings part of the audit report, not the management executive summary. Thus, it is appropriate to present the findings, and the basis for the findings, before presenting the auditor’s recommendations. Choice (c) is incorrect. Given that the auditor has a basis for making the observation about component parts, it is appropriately to do so since it presents specifics on which both management and divisional management can focus action. Choice (d) is incorrect. The problem of excessive inventory has been noted in relationship to this finding. As long as the dollar amounts of excessive write-downs have been noted earlier in the report, it is appropriate to refer to that section for more detail. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 595, II-2. 167. (d) The recommendation given is not complete. Receiving reports are being prepared, but they are not being prepared on a timely basis, or concurrently with the receipt of the goods. The recommendation needs to be more detailed. Choice (a) is incorrect. The factual evidence comes from observation. Choice (b) is incorrect. The cause of the problem (or at least the excuse given by the receiving de-

WILEY CIA EXAM REVIEW: VOLUME 2

partment) is noted. The receiving department does not prepare concurrent receiving reports when it is busy. Choice (c) is incorrect. This is a well-known risk, and the auditor is not “overdramatic” in factually detailing the result that might occur if the control deficiency is not adequately addressed. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 595, II-3. 168. (c) The description used is that inventory is “messy,” but “messy” is a word that does not clearly convey the condition. Choice (a) is incorrect. The risks are pointed out, in some detail, to management. Choice (b) is incorrect. The recommendation is logically presented. The problem is that the author has mixed a finding and a cause. Choice (d) is incorrect. The problem of excessive inventory has been noted in relationship to this finding. As long as the dollar amounts of excessive write-downs have been noted earlier in the report, it is appropriate to refer to that section for more detail. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 595, II-4. 169. (d) All of the choices items are problems with the paragraph as it is currently written. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 595, II-5. 170. (d) Choices (a), (b), and (c) are possible actions. However, choice (d) will appeal to the auditee’s esteem needs by crediting the auditee in the audit report with the determination and implementation of the corrective action. Choice (b) is part of this solution, but the crediting in the report of the auditee’s action responds to the auditee’s needs. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-13. 171. (c) This appears to be more a matter of operating efficiency than an internal control weakness or violation of bank policy. Choice (a) is incorrect. This appears to be a serious violation of a standard bank policy. Destruction of uninsured collateral by fire or other catastrophe could easily result in significant uncollectible loan losses. Choice (b) is incorrect. This is a violation of the fundamental internal control concept of separation of duties and could result in major employee defalcations. Choice (d) is incorrect. This is a violation of the fundamental internal control concepts relating to access to assets and accountability, and could result in cash shortages that would be impossible to pin down. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-14. 172. (a) “Excessive” is a subjective term. The finding would be more complete if it indicated the percentage of late payments on which late charges were waived at the Spring Street Branch compared to a standard percentage, or the average percentage at other locations. Choice (b) is incorrect. The condition is the fact that an excessive number of late charges are being waived. Choice (c) is incorrect. The cause is the fact that approval by an officer is not required. Choice (d) is incorrect. The effect is the annual loss of $5,000 of revenues. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-15. 173. (b) This approach takes nothing away from the auditor, and it builds a problem-solving partnership between the auditor and branch manager. Choice (a) is incorrect. Top

management should be made aware of significant deficiencies that have existed, even though they may have been corrected by the time the audit report is issued. Choices (c) and (d) are incorrect. Discussion prior to issuing the report helps ensure that there have been no misunderstandings or misinterpretations of fact and provides the branch manager the opportunity to clarify specific items. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-16. 174. (b) A written report should be issued after completion of an audit. The report should be addressed to the level of management capable of agreeing to and correcting deficiencies noted in the report. Top management should be aware of internal audit’s activities and any major deficiencies noted. This could be accomplished in a discussion or in a summary report. Choice (a) is incorrect. A written report should be issued after completion of an audit. However, writing detailed reports for each level of management is not an efficient use of an auditor’s time. A summary report for top management could be issued along with a detailed report for the appropriate operational level of management. Choice (c) is incorrect. See choice (b). Choice (d) is incorrect. Conclusions and recommendations should be discussed with the appropriate levels of management, but an audit report should still be issued. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-17. 175. (a) Complex messages are more understandable if they follow a logical sequence. Thus, the sequence or organization of the message is a characteristic that is within the control of the sender. Choice (b) is incorrect. The nature of an audience is a situational factor that is outside the control of the auditor. Choice (c) is incorrect. Noise is a situational factor that interferes with the effective communication of intended messages. Choice (d) is incorrect. The history of previous encounters is a situational factor that is outside the control of the auditor. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-18. 176. (d) All of the listed principles of report clarity were violated in the audit report. Choice (a) is incorrect. The report is not organized in a clear and concise manner. Choice (b) is incorrect. The opening sentence is 73 words, while the next sentence is 37 words. Choice (c) is incorrect. There are at least two passive sentences. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-19. 177. (a) While a portion of the scope is discussed (30 machines selected), the reader cannot recognize the significance or insignificance of this amount without knowing the total amount of machines that could have been selected. The value of the machinery is not given. Also, the conclusion or auditor’s opinion of the operation is not given and the report does not make any recommendations. Choice (b), (c), and (d) are incorrect because the purpose or objective of the audit was clearly stated. Results of the audit were also given. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-20. 178. (a) Diffusion involves setting aside the conflict situation and concentrating on less controversial issues. Choice (b) is incorrect. Under diffusion, differences are

1: CONDUCT ENGAGEMENTS downplayed. Choice (c) is incorrect. Avoiding the conflict situation would be an example of an avoidance approach, not a diffusion approach. Choice (d) is incorrect. Directly addressing the sources of conflict would be an example of a confrontation approach, not a diffusion approach. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-21. 179. (d) Oral reports permit auditors to counter arguments and provide additional information that the audience may require. Since oral reports evoke face-to-face responses, the auditors can provide an immediate response to any auditee objections or provide additional information as appropriate. Choice (a) is incorrect. The amount of testing required to support audit findings is unrelated to the use of oral reports. Whether findings are reported through oral or written reports, they still must be adequately supported. Choice (b) is incorrect. Even though audit reports are delivered orally, they still should be prepared carefully. Poorly planned and delivered oral reports will be difficult for the audience to follow and may create unnecessary misunderstandings. Choice (c) is incorrect. The format of the report will depend on the audience. Factors to consider in delivering reports may include the background and expectations of the audience as well as the time available. This applies to both written and oral reports. Since oral reports do not eliminate the need for a final report, overall audit efficiency is not affected. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-23. 180. (c) This method of “show and tell” results in the most retention of information: 85% of the information is remembered after 3 hours and 65% is remembered after 3 days. Choice (a) is incorrect. According to research, observers will remember only 70% of the information after 3 hours and 10% after 3 days. Choice (b) is incorrect. Research indicates that observers will remember 72% of information after 3 hours and 20% after 3 days. Choice (d) is incorrect. This is the equivalent of choice (c) above— a “show” without the “tell.” Observers can be expected to remember 72% of the information after 3 hours and 20% after 3 days. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1194, II-24.

tion since they provide visual feedback of the auditee’s responses and questions and make immediate two-way communication possible. Choice (b) is incorrect. Oral reports must be presented with the same preparation and care as a written report if the auditor is to have credibility with the auditee. Choice (c) is incorrect. Agreements on significant audit findings should be formalized in the final report. Choice (d) is incorrect. The auditor should focus on oral report on the ideas being presented, not on a flashy presentation, which is excessive for the audience or the subject matter. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, I-38. 183. (c) Summary written reports are generally intended for audit committees of boards of directors and/or higherlevel management. Choice (a) is incorrect. Summary written reports contain insufficient detail for local operating management. Choice (b) is incorrect. No document classified as an “audit report” is restricted to auditors only. Choice (d) is incorrect. Summary written reports contains insufficient detail for mid-level staff management. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1190, I-42. 184. (b) Oral reports allow a response to emergency action needs. Choice (a) is incorrect. Oral reports do not provide a permanent record of the report. Choice (c) is incorrect. A summary of individual audits is best presented in a summary written report. Choice (d) is incorrect. Questionnaire-type reports are normally used for internal reporting within the internal auditing department. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1190, I-43. 185. (a) Cause provides the answer to the question “Why?” and should be the basis for corrective action. Choice (b) is incorrect. Statement of condition simply describes “what is” to serve as a basis for comparison with a given criteria. Choice (c) is incorrect. Criteria describe “what should be” and are compared to the statement of condition. Choice (d) is incorrect. Effect addresses the importance of a finding. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1190, II-42.

181. (a) “Purpose statements should describe the audit objectives” per the IIA Standards. Choice (b) is incorrect. “Scope statements should identify the audited activities and include, where appropriate, supportive information such as time period audited. Related activities not audited should be identified if necessary to delineate the boundaries of the audit. The nature and extent of auditing performed also should be described.” This requirement does not include a statement of audit objectives. Choice (c) is incorrect. “Criteria: The standards, measures or expectations used in making an evaluation and/or verification (what should exist).” This requirement does not include a statement of audit objectives. Choice (d) is incorrect. “Condition: The factual evidence, which the internal auditor found in the course of the examination (what does exist).” This requirement does not include a statement of audit objectives. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, I-33.

187. (a) This is appropriate action, so that lack of followup action, if any, can be noted on the next audit report. Choice (b) is incorrect. It is not ordinarily the responsibility of the auditor to implement corrective action. Choice (c) is incorrect. Data have already been examined. Choice (d) is incorrect. Data have already been assembled. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1190, II-44.

182. (a) Oral reports give immediate response to management and are a more accurate form of communica-

188. (b) Audited activities, time period audited, related activities not audited, and the nature and extent of auditing

186. (c) The significance of deficiencies from prescribed procedures is an audit finding and belongs in the audit findings section of the report. Choice (a) is incorrect. This is not part of audit findings, but instead comes later in the report. Choice (b) is incorrect. This is not an audit finding. Choice (d) is incorrect. The engagement plan precedes the audit findings report. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1190, II-43.

WILEY CIA EXAM REVIEW: VOLUME 2

performed may all be appropriately included in the scope statement. Choice (a) is incorrect. Audit objectives and the reason for conducting the audit are described in the purpose statement. Choice (c) is incorrect. The standards, measures, or expectations used in evaluating audit findings are attributes of findings that emerge during the review of the activities identified in the scope statement. Choice (d) is incorrect. The internal auditor’s evaluation of the effect of the findings on the activities reviewed is properly presented in the conclusion or results section of the audit report. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, II-33.

193. (a) This situation needs corrective action, and management should be made aware that it still exists. Choice (b) is incorrect. This is not within the internal auditor’s authority, and it would not remedy the situation. The auditor would ascertain whether higher-level management has decided to assume the resulting risk, however. Choice (c) is incorrect. The audit report must contain conclusions regarding payroll internal control in the maintenance department. Choice (d) is incorrect. This would place the internal auditor in the position of supervising maintenance department employees. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 591, II-19.

189. (a) The written procedures represent the standard against which audit finding concerning segregation of responsibility would be measured. This standard is the condition that should exist. Choice (b) is incorrect. Condition is the factual evidence that the internal audit gathers in the course of the audit work. It represents what does exist. Choice (c) is incorrect. Cause is the reason why the condition observed is different from the criteria established. Choice (d) is incorrect. Effect measures the impact on the organization of the condition being different from the criteria. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, II-34.

194. (d) The evaluation of the impact of audit findings on audited activities is the statement of conclusions (opinions). A statement of conclusions (opinions) is required only where appropriate. Choice (a) is incorrect. The description of the audit objectives is the statement of purpose. A statement of purpose is always required. Choice (b) is incorrect. The identification of audited activities is the statement of scope. A statement of scope is always required. Choice (c) is incorrect. The listing of pertinent facts is the statement of findings. A statement of findings is always required. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 591, II-41.

190. (c) Interim reports can be used to report significant findings that require immediate attention to management. Choice (a) is incorrect. The purpose of the audit is formally defined in the final report and is discussed with the auditee’s management prior to beginning the audit. Choice (b) is incorrect. The issuance of interim reports does not diminish or eliminate the need for a final report. Choice (d) is incorrect. The scope of the audit cannot be formally defined until the final report since interim findings may alter the scope during the audit. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, II-35. 191. (d) The summary report will serve as a useful tool for the senior management member. This tool will allow him or her to review quickly the major findings of the audit and to delve into more detail on those parts that are of interest. Choice (a) is incorrect. Senior members of management have enormous demands on their time. The final report will almost certainly have more detailed information than a senior management member will want to review. Choice (b) is incorrect. Oral communications will not give a senior manager a written record to use as a basis for further action. Choice (c) is incorrect. Interim reports will typically address specific segments of the audit and will not present the overview needed by a senior manager. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, II-36. 192. (c) This is what the IIA Standards require. Choice (a) is incorrect. Internal auditing has some follow-up responsibility. Choice (b) is incorrect. This would make internal auditing part of management and cause loss of independence. Choice (d) is incorrect. This responsibility cannot be passed to the independent auditor. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 590, II-39.

195. (d) An oral report is appropriate as an interim audit report when significant problems are discovered. Choice (a) is incorrect. A summary report is an abbreviated explanation of major audit findings. It is generally submitted to top management and the audit committee of the board of directors. Choice (b) is incorrect. A written report is required for each audit. However, when a significant problem is discovered, an oral report should be used to get immediate action. Choice (c) is incorrect. A questionnaire-type report is normally used within the internal auditing department. It has a limited range of value. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1191, II-41. 196. (b) This statement puts the findings in perspective based on the overall implications. It provides a capsule comment on the conditions found. Choice (a) is incorrect. The statement is not consistent with an overall opinion. It is a statement of condition. Choice (c) is incorrect. This is a possible cause or explanation for the problem and not legitimately part of the auditor’s opinion. Choice (d) is incorrect. This is information used to prove a point or finding. It is a statement of condition and is not appropriate for an audit opinion. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1191, II-42. 197. (a) These items are the standards, what the credit department is supposed to do. Choice (b),(c) and (d) are incorrect because they are not the standards. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 592, II-44. 198. (b) These items best explain why the deviation from the standards occurred. Choice (a),(c) and (d) are incorrect because they are not the standards. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 592, II-45.

1: CONDUCT ENGAGEMENTS 199. (c) These items show what is occurring and result from the observations, analysis, or verification of the internal auditor. Choice (a),(b) and (d) are incorrect because they do not show what is occurring. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 592, II-46. 200. (b) These items describe the real or potential impact (effect) according to the standards. Choice (a),(c), and (d) are incorrect because they don’t comply with the standards. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 592, II-47. 201. (b) An interim report should be submitted to management. Choice (a) is incorrect. Significant audit findings should be communicated to management. Choice (c) is incorrect. Significant audit findings should be communicated to management with mention of other tests to be performed. Choice (d) is incorrect. Significant audit findings should be reported without delay for final audit testing. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1193, II-41. 202. (d) Audit responsibility has been fulfilled. Choice (a) is incorrect. Regulatory authorities do not need to be notified since management has agreed to accept responsibility and no regulatory violations were mentioned. Choices (b) and (c) are incorrect. No further audit action is required. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1193, II-42. 203. (d) The report, which was not published until eight weeks after the audit was concluded, was not issued in a timely fashion, given the significance of the findings and the need for prompt, effective action. Choice (a) is incorrect. There is not enough information to evaluate the effectiveness of follow-up. Choice (b) is incorrect. Auditors may properly make recommendations for potential improvements but should not implement corrective action. Choice (c) is incorrect. Auditor recommendations are one of the recommended elements of an audit finding. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1191, I-41. 204. (c) This would be an appropriate recommendation. Choice (a) is incorrect. Specific criteria would not be an appropriate recommendation. Choice (b) is incorrect. This would not be an appropriate recommendation; it would require further analysis. Choice (d) is incorrect. This would be excessive given the results of the audit just completed. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, I-8. 205. (c) Control weaknesses over the payroll function should be most useful to the payroll manager because this is the individual who is directly responsible for this department. Choice (a) is incorrect. Control weaknesses in a company’s payroll department would not be most useful to the treasurer because he or she is not responsible for taking corrective action for weaknesses in that department. Choice (b) is incorrect. The audit committee of the board of directors would not have a direct interest in a report dealing with weaknesses over the payroll function, and thus, such a report would not be most useful to such individuals. Choice (d) is incorrect. A company’s president is responsible for the overall operations of the company. Accordingly, control weak-

nesses over payroll would not be most useful to such individual. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, I-36. 206. (c) This is in accordance with the IIA Standards, which state: “Reports may also be distributed to other interested or affected parties such as external auditors or the audit committee.” The potential for misstated financial statements created by the internal control deficiencies should be of interest to the audit committee and the external auditors. Choice (a) is incorrect. Normal distribution is to department heads of units audited and others in a position to take corrective action or ensure that corrective action is taken. Choice (b) is incorrect. Operating management takes corrective action. Choice (d) is incorrect. There is no such requirement. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, I-41. 207. (a) An operational audit report should inform management about the efficiency and effectiveness of the given operations and should discuss findings requiring corrective action. Choice (b) is incorrect. An operational audit report should address the propriety of the function being audited rather than with valuation of item being audited. Choice (c) is incorrect. An operational audit report should address the propriety of the function being audited rather than with the agreement between the records and the items being audited. Choice (d) is incorrect. An operational audit report of the scrap disposal function would not address the valuation of the scrap material inventory at the lower of its cost or market. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, I-37. 208. (d) Choice (d) is the correct answer. According to the IIA Standards, “Summary reports highlighting audit results may be appropriate for levels of management above the head of the audited unit.” Choice (a) is incorrect. The accounts payable manager would be best served by receiving a copy of the full final audit report. Choice (b) is incorrect. External auditor would receive copy of full report. Choice (c) is incorrect. The controller, like the accounts payable manager, would need a copy of the full final report so that details of deficiencies are known and so audit recommendations may be implemented. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, I-39. 209. (d) According to the IIA Standards, the use of interim reports does not diminish or eliminate the need for a final report. Choice (a) is incorrect. The interim report can minimize report writing time. Choice (b) is incorrect. Improved communications is an advantage. Choice (c) is incorrect. Per the IIA Standards, interim reports may be written or oral and may be transmitted formally or informally. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, II-38. 210. (a) Since this is very confidential information that could be detrimental to the welfare of the employer, it is not advisable to include these details in the formal audit report. The final report should concentrate on corrective actions needed and avoid unnecessary details that could expose employees to a robbery. A verbal interim report could effec-

WILEY CIA EXAM REVIEW: VOLUME 2

tively sell the danger and importance of immediate action in this matter. Choice (b) is incorrect. While this is a good approach on most findings, it is not satisfactory here because of the high exposure to theft and danger to employees. Therefore, immediate corrective action and a low profile are dictated. Choice (c) is incorrect. It shows a lack of good judgment bordering on incompetence. The lack of loss is the product of pure luck and not any internal control system. Choice (d) is incorrect. This is unacceptable because it does not react quickly enough to a dangerous situation, and a full disclosure of this weakness could represent real danger to company employees and heighten the chances that a theft would occur. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 593, II-43. 211. (b) The board of directors should receive the report. Choice (a) is incorrect. The report should not go to the external auditor and bypass chain of command. Choice (c) is incorrect. The report should not go to stockholders. Choice (d) is incorrect. The report should not go to senior management since they may be involved. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1192, I-40. 212. (d) The board chairman would not normally receive a copy. Choice (a) is incorrect. The director of purchasing should receive a copy. Choice (b) is incorrect. The external auditors should receive a copy. Choice (c) is incorrect. The general auditor should receive a copy. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1192, II-45. 213. (a) The cause of the finding is that advance procedures do not require specific justification. Choice (b) is incorrect. Policy provides for advances only to authorized employees. Choice (c) is incorrect. Accumulating large travel advances is the effect of the audit finding. Choice (d) is incorrect. Not clearing travel advances in a timely manner is the effect of the audit finding. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1192, II-41. 214. (d) “Travel advances exceeded prescribed maximum amounts” is the condition. Choice (a) is incorrect. “Advances are not to exceed estimated expenses for 45 days” represents criteria. Choice (b) is incorrect. “Employees accumulate large advances” is the effect. Choice (c) is incorrect. The cause of the finding is procedures do not require specific justification. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 1192, II-42. 215. (d) An oral report is appropriate for a situation that requires emergency action. Of course, a written report should follow. Choice (a) is incorrect. A summary written report summarizes various written reports filed in a specific period. Choice (b) is incorrect. A formal written report is issued at the completion of the audit. This hazardous situation requires immediate action, however. Choice (c) is incorrect. The auditor should file a follow-up report on this situation later. However, management must be alerted about the situation now. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 591, I-19.

216. (a) The report may be distributed to other interested or affected parties. Choices (b) and (c) are incorrect. The purchasing manager and operations director would not be interested or affected by a report with only routine findings in another department. Choice (d) is incorrect. A report with routine findings does not warrant being sent to the chairman of the board of directors. Subject Area: Conduct audit engagements—audit reporting. Source: CIA 591, II-43.

Which of the following procedures provides the most relevant information to determine the adequacy of the allowance for doubtful accounts receivable?

Which of the following procedures provides the most relevant information to determine the adequacy of the allowance for doubtful accounts receivable? Analyze the allowance through an aging of receivables and an analysis of current economic data.

Which of the following best describes what should determine the extent of supervision required for a particular internal auditing engagement?

1, 2, and 3. Supervisory review of all engagement work. Which of the following best describes what determines the extent of supervision required for a particular internal audit engagement? The proficiency of the internal auditors and the complexity of the engagement.

Which of the following individuals should normally not receive a final engagement communication related to a review of the purchasing cycle?

Which of the following individuals should normally not receive a final engagement communication related to a review of the purchasing cycle? The chair of the board. Include this observation in the current engagement communication.

Which of the following is an appropriate objective in an engagement to review a personnel department determining whether?

In a review of this function, an appropriate objective is to determine whether the selection process is being properly performed. Thus, a potential employee's references should be checked to determine whether (s)he is truthful and has the desired qualifications.

What are the policies procedures and activities that are part of a control framework designed to ensure that risks are contained within the established risk tolerances?

Which of the following engagement procedures will provide the least relevant information for determining that payroll payments were made to bona fide employees?

Which of the following procedures provides the most relevant information to determine the adequacy of the allowance for doubtful accounts receivable?

Which of the following best describes what should determine the extent of supervision required for a particular internal auditing engagement?

Which of the following individuals should normally not receive a final engagement communication related to a review of the purchasing cycle?

Which of the following is an appropriate objective in an engagement to review a personnel department determining whether?

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Which of the following procedures would an auditor most likely perform when planning an audit?

Which of the following factors most likely would cause a cpa not to accept a new audit engagement?

Who among the following has primary responsibility for the quality and performance of a specific audit engagement?

What audit procedures could auditors perform that might detect unrecorded retirements of property, plant, and equipment?

What are the policies procedures and activities that are part of a control framework designed to ensure that risks are contained within the established risk tolerances?

Which of the following procedures would an auditor most likely perform before the balance sheet?

Which of the following procedures is not usually performed by the accountant in a review engagement of a nonpublic entity?

Which of the following procedures is not usually performed by the accountant during a review engagement of a nonpublic entity?

Which of the following audit procedures is best for identifying and recorded trade accounts payable?

Which of the following control procedures does an auditor expect to find during an engagement to evaluate risk?

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