WileyCIA P2 Unit3 to 5 Q&A

Question: V2C3-0001An internal audit team recently completed an audit of the company’s compliance with its lease-versus-purchase

policy concerning company automobiles. The audit report noted that the basis for several decisions to lease ratherthan purchase automobiles had not been documented and was not auditable. The report contained arecommendation that operating management ensure that such lease agreements not be executed without properdocumentation of the basis for the decision to lease rather than buy. The internal auditors are about to performfollow-up work on this audit report.

The primary purpose for performing a follow-up review is to

Answers

A: Ensure timely consideration of the internal auditors' recommendations.

B: Ascertain that appropriate action was taken on reported findings.

C: Allow the internal auditors to evaluate the effectiveness of their recommendations.

D: Document what management is doing in response to the audit report and close the audit file in a timelymanner.

Answer Explanations

Answer (a) is incorrect because it is not the best answer. It implies that the auditor’s recommendations, not thefindings, are the most important elements of the report.Answer (b) is the correct answer. This is what the IIA Standards require.Answer (c) is incorrect because it is not the best choice. This implies that the auditor’s recommendations, notfindings, are primary.Answer (d) is incorrect because this implies that processes in the internal auditing activity are primary.

Question: V2C3-0002An internal audit team recently completed an audit of the company’s compliance with its lease-versus-purchase

policy concerning company automobiles. The audit report noted that the basis for several decisions to lease ratherthan purchase automobiles had not been documented and was not auditable. The report contained arecommendation that operating management ensure that such lease agreements not be executed without properdocumentation of the basis for the decision to lease rather than buy. The internal auditors are about to performfollow-up work on this audit report.

Assume that senior management has decided to accept the risk involved in failure to document the basis for lease-versus-purchase decisions involving company automobiles. In such a case, what would be the auditors’ reportingobligation?

Answers

A: The auditors have no further reporting responsibility.

B: Management's decision and the auditors' concern should be reported to the company's board ofdirectors.

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C: The auditors should issue a follow-up report to management clearly stating the rationale for therecommendation that the basis for lease-versus-purchase decisions be properly documented.

D: The auditors should inform the external auditor and any responsible regulatory agency that no actionhas been taken on the finding in question.

Answer Explanations

Answer (a) is the correct answer. When senior management has assumed such risk, reporting to the board isrequired only for significant findings. There is no indication that the failure to document several decisions issignificant enough to report to the board.Answer (b) is incorrect because of explanation given in choice (a).Answer (c) is incorrect because senior management has already indicated that it understands and has accepted therelated risk.Answer (d) is incorrect because reporting to anyone outside the organization is not required or appropriate.

Question: V2C3-0003Auditors realize that at times corrective action is not taken even when agreed to by the appropriate parties. Thisshould lead an internal auditor to

Answers

A: Decide the extent of necessary follow-up work.

B: Allow management to decide when to follow-up, since it is management's ultimate responsibility.

C: Decide to conduct follow-up work only if management requests the auditor's assistance.

D: Write a follow-up audit report with all findings and their significance to the operations.

Answer Explanations

Answer (a) is the correct answer. The IIA Standards state that the director of internal auditing should determinethe nature, timing, and extent of follow-up.Answer (b) is incorrect because the IIA Standards state that follow-up work is not management’s responsibility.Answer (c) is incorrect because the IIA Standards state that follow-up work is not management’s responsibility.Answer (d) is incorrect because the auditor has to provide an opinion as to the decision made with regard to lack ofaction.

Question: V2C3-0004Follow-up activity may be required to ensure that corrective action has taken place for certain findings. Theinternal audit department’s responsibility to perform follow-up activities as required should be defined in the

Answers



A: Internal auditing department's written charter.

B: Mission statement of the audit committee.

C: Engagement memo issued prior to each audit assignment.

D: Purpose statement within applicable audit reports.

Answer Explanations

Answer (a) is the correct answer. Responsibility for follow-up should be defined in the internal auditingdepartment’s written charter.Answer (b) is incorrect. Follow-up is not specified in the content of the audit committee’s mission statement.Answer (c) is incorrect. This memo may contain a statement about responsibility for follow-up, but such astatement should be based on the wording and authority of the departmental charter.Answer (d) is incorrect. Follow-up authority and responsibility may be cited in applicable audit reports, but thedefinition should be first contained in the departmental charter.

Question: V2C3-0005Given the acceptance of the cost savings audits and the scarcity of internal audit resources, the audit manager alsodecided that follow-up action was not needed. The manager reasoned that cost savings should be sufficient tomotivate the auditee to implement the auditor’s recommendations. Therefore, follow-up was not scheduled as aregular part of the audit plan. Does the audit manager’s decision violate the IIA Standards?

Answers

A: No. The Standards do not specify whether follow-up is needed.

B: Yes. The Standards require the auditors to determine whether the auditee has appropriatelyimplemented all of the auditor's recommendations.

C: Yes. Scarcity of resources is not a sufficient reason to omit follow-up action.

D: No. When there is evidence of sufficient motivation by the auditee, there is no need for follow-upaction.

Answer Explanations

Answer (a) is incorrect. Follow-up is required.Answer (b) is incorrect. Follow-up is to see that actions are taken, not just that the auditor’s recommendations havebeen implemented.Answer (c) is the correct answer. The IIA Standards require follow-up action. Lack of resources is not a sufficientreason.Answer (d) is incorrect. Follow-up is required.

Question: V2C3-0006



Reporting to senior management and the board is an important part of the auditor’s obligation. Which of the fol-lowing items is not required to be reported to senior management and/or the board?

Answers

A: Subsequent to the completion of an audit, but prior to the issuance of an audit report, the audit seniorin charge of the audit was offered a permanent position in the auditee's department.

B: An annual report summary of the department's audit work schedule and financial budget.

C: Significant interim changes to the approved audit work schedule and financial budget.

D: An audit plan was approved by senior management and the board. Subsequent to the approval, seniormanagement informed the audit director not to perform an audit of a division because the division'sactivities were very sensitive.

Answer Explanations

Answer (a) is the correct answer. This would not have to be communicated. The audit work was done. The directorof internal auditing would have to determine that there was no impairment of the independence of the senior’swork. If there was none, the report could be issued without reporting the personnel change.Answer (b) is incorrect. This is a standard part of the required reporting to senior management and the board.Answer (c) is incorrect. This is a standard part of the required reporting to senior management and the board.Answer (d) is incorrect. Both senior management and the board had approved the audit plan. The change dictatedby senior management should be reported to the board.

Question: V2C3-0007During an audit of purchasing, internal auditors found several violations of company policy concerning competitivebidding. The same condition that had been reported in an audit report last year, and corrective action had not beentaken. Which of the following best describes the appropriate action concerning this repeat finding?

Answers

A: The audit report should note that this same condition had been reported in the prior audit.

B: During the exit interview, management should be made aware that a finding from the prior report hadnot been corrected.

C: The director of internal auditing should determine whether management or the board has assumed therisk of not taking corrective action.

D: The director of internal auditing should determine whether this condition should be reported to theindependent auditor and any regulatory agency.

Answer Explanations

Answer (a) is incorrect because this action is insufficient.Answer (b) is incorrect because this action is insufficient.



Answer (c) is the correct answer. This action meets the requirements of the IIA Standards.Answer (d) is incorrect because this action would be inappropriate.

Question: V2C3-0008Which of the following audit committee activities would be of the greatest benefit to the internal auditing de-partment?

Answers

A: Review and approval of audit programs.

B: Assurance that the external auditor will rely on the work of the internal auditing department wheneverpossible.

C: Review and endorsement of all internal audit reports prior to their release.

D: Support for appropriate follow-up of recommendations made by the internal auditing department.

Answer Explanations

Answer (a) is incorrect. Review and approval of audit programs is the responsibility of internal audit supervision.Answer (b) is incorrect. External audit’s reliance on the work of internal auditing is the subject of an AICPApronouncement.Answer (c) is incorrect. Review and approval of internal audit reports is the responsibility of the director of internalauditing or designee.Answer (d) is the correct answer. The audit committee can lend considerable weight to the recommendations ofinternal auditing.

Question: V2C3-0009An internal auditor reported a suspected fraud to the director of internal auditing. The director turned the entirecase over to the security department. Security failed to investigate or report the case to management. Theperpetrator continued to defraud the organization until being accidentally discovered by a line manager two yearslater. Select the most appropriate action for the audit director.

Answers

A: The director's actions were correct.

B: The director should have periodically checked the status of the case with security.

C: The director should have conducted the investigation.

D: The director should have discharged the perpetrator.



Answer Explanations

Answer (a) is incorrect. According to the Standards, the director should have ensured that the internal auditingdepartment’s responsibilities were met.Answer (b) is the correct answer. The director should have periodically checked the status of the case withsecurity. Follow-up is specified by the IIA Standards.Answer (c) is incorrect. A security department would generally have more expertise in the investigation of a fraud.Answer (d) is incorrect. The fraud was only suspected when reported to the director. Immediate discharge wouldhave violated the suspect’s rights. In addition, the director would not normally have the authority to discharge anemployee in an audited area.

Question: V2C3-0010If an internal auditor finds that no corrective action has been taken on a prior audit finding that is still valid, the IIAStandards states that the internal auditor should

Answers

A: Restate the prior finding along with the findings of the current audit.

B: Determine whether management or the board has assumed the risk of not taking corrective action.

C: Seek the board's approval to initiate corrective action.

D: Schedule a future audit of the specific area involved.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. As per the IIA Standards, and therefore, by definition, choices (a), (c), and (d)will be incorrect.

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.

Question: V2C3-0011Internal auditing is responsible for reporting fraud to senior management or the board when

Answers

A: The incidence of fraud of a material amount has been established to a reasonable certainty.

B: Suspicious activities have been reported to internal auditing.



C: Irregular transactions have been identified and are under investigation.

D: The review of all suspected fraud-related transactions is complete.

Answer Explanations

Answer (a) is the correct answer. If the incidence of significant fraud has been established with reasonablecertainty, the auditor is responsible for reporting such to senior management or the board.Answer (b) is incorrect. No reporting is required when suspicious acts are reported to the auditor.Answer (c) is incorrect. Irregular transactions under investigation would not require reporting until theinvestigation phase is completed.Answer (d) is incorrect. Reporting should occur sooner. See choice (a).

Question: V2C3-0012Why should organizations require auditees to promptly reply and outline the corrective action that has been imple-mented on reported deficiencies?

Answers

A: To close the open audit issues as soon as possible.

B: To effect savings as early as possible.

C: To indicate concurrence with the audit findings.

D: To ensure that the auditor performance is evaluated.

Answer Explanations

Answer (a) is incorrect. This is a mechanical aspect of the audit reporting process.Answer (b) is the correct answer. The objective of the audit is to effect savings resulting from the auditee’scorrective action as early as possible so that the organization will benefit from the action taken.Answer (c) is incorrect. The auditee may not concur with the audit finding all the time.Answer (d) is incorrect. This is an administrative function of the audit department.

Question: V2C3-0013Following a negative performance evaluation by a supervisor, a staff auditor went to the audit director to seek achange in the evaluation. The director was familiar with the auditor’s performance and agreed with the evaluation. The director agreed to meet and discuss the situation. Which of the following is the best course of action for thedirector to take?

Answers

A: Have the supervisor participate in the meeting, so that there is no misunderstanding about the facts.



B: Have a human resources administrator present to ensure that improper statements are not made.

C: Meet privately with the employee. Tell the employee of the director's agreement with the performanceevaluation and express interest in any additional facts the employee may wish to present.

D: Meet privately with the employee. Encourage discussion by asking for the employee's side of the issueand disclaiming any agreement with the supervisor.

Answer Explanations

Answer (a) is incorrect. The supervisor, as author of a critical performance review, will only add to the element ofmanagement intimidation.Answer (b) is incorrect. Again, the presence of a third party would inhibit the director’s listening effectiveness.Unless the director thinks the auditor’s concerns are so serious that the human resources department must beinformed, it is preferable to meet with the employee privately.Answer (c) is the correct answer. Private conversation signals to the employee that the director is interested inwhat he or she has to say and will not be measuring his or her words against those of another. However, thedirector must establish a position and show support for the supervisor. There may be more than one validviewpoint, but that does not necessarily mean that the employee’s is valid.

Answer (d) is incorrect. It is never appropriate to mislead an employee in order to obtain information or todetermine the employee’s view on a matter.

Question: V2C3-0014The requirements for staffing level, education and training, and audit research should be included in

Answers

A: The internal auditing department's charter.

B: The internal auditing department's policies and procedures manual.

C: The annual plan for the internal auditing department.

D: Job descriptions for the various staff positions.

Answer Explanations

Answer (a) is incorrect. The charter outlines the purpose, authority, and responsibilities of the department, not thedetails related to staffing and such.Answer (b) is incorrect. The policies and procedures manual spells out how audits should be conducted. It does notcover areas such as staffing levels.Answer (c) is the correct answer. The annual plan should be comprised of both an audit schedule and a budget and,as such, should include all of these issues.Answer (d) is incorrect. Job descriptions do not reflect staffing level requirements.

Question: V2C3-0015



Which of the following activities is not included in determining the audit schedule?

Answers

A: Developing audit programs.

B: Assessing risk factors.

C: Planning workload requirements.

D: Identifying auditable locations.

Answer Explanations

Answer (a) is the correct answer. The development of audit programs occurs during the planning phase of anindividual audit. It is not included within the scope of developing the audit schedule.Answer (b) is incorrect because it is considered to determine the audit schedule.Answer (c) is incorrect because it is considered to determine the audit schedule.

Answer (d) is incorrect because it is considered to determine the audit schedule.

Question: V2C3-0016The internal audit director of a multinational company must form an audit team to examine a newly acquired sub-sidiary in another country. Consideration should be given to which of the following factors?

I. Local customs.II. Language skills of the auditor.III. Experience of the auditor.IV. Monetary exchange rate.

Answers

A: I, II, III.

B: II, III, IV.

C: I and III.

D: I and II.

Answer Explanations

Answer (a) is the correct answer. In addition to language skills, local customs must be considered. For example,gender and ethnic compatibility may be important in some Middle Eastern countries because religious restrictionsand incompatibilities are relevant. As always, experience levels are relevant in making audit assignments.Answer (b) is incorrect. The monetary exchange rate would not be a factor in determining the needed traits of theteam members.Answer (c) is incorrect. It includes appropriate factors, but does not identify all the acceptable choices.



Answer (d) is incorrect. It includes an incomplete answer. See choice (c).

Question: V2C3-0017A quality assurance program of an internal audit department provides reasonable assurance that audit work con-forms to applicable standards. Which of the following activities are designed to provide feedback on theeffectiveness of an audit department?

I. Proper supervision.II. Proper training.III. Internal reviews.IV. External reviews.

Answers

A: I, II, and III.

B: II, III, and IV.

C: I, III, and IV.

D: I, II, III, and IV.

Answer Explanations

Answer (a) is incorrect. Proper training is an important component of maintaining a current staff, but does notprovide feedback.Answer (b) is incorrect. Proper training is an important component of maintaining a current staff, but does notprovide feedback.

Answer (c) is the correct answer. The purpose of a quality assurance program is to evaluate the operations of theinternal audit department. The IIA Standards note that a program should include supervision, internal reviews, andexternal reviews.Answer (d) is incorrect. Proper training is an important component of maintaining a current staff, but does notprovide feedback.

Question: V2C3-0018If the internal audit staff does not have the skills to perform a particular task, a specialist could be brought in from

I. The organization’s external audit firm.II. An outside consulting firm.III. The department currently being audited.IV. A college or university.

Answers



A: I and II.

B: II and IV.

C: I, II, and III.

D: I, II, and IV.

Answer Explanations

Answer (a) is incorrect. It includes acceptable consultants, but does not identify all the acceptable choices.Answer (b) is incorrect. It includes acceptable consultants, but does not identify all the acceptable choices.

Answer (c) is incorrect. A specialist from the same department is unacceptable since the person would not beindependent or objective.Answer (d) is the correct answer. The key point is independence and objectivity. A specialist from the departmentcurrently being audited would not be independent due to a natural bias toward that department.

Question: V2C3-0019The best rationale for rotating internal auditors so those different individuals are assigned to consecutive audits of agiven auditee is to

Answers

A: Prevent burnout on the part of the internal auditor, which may lead to excessive turnover in theinternal audit department.

B: Promote rapid professional development on the part of internal auditors by exposing them to the fullrange of organizational activities.

C: Increase the diligence exercised by internal auditors who know that the quality of their work will beapparent to the next set of internal auditors.

D: Avoid the development of bias toward a given auditee.

Answer Explanations

Answer (a) is incorrect. It is a secondary reason. For example, auditor burnout can be reduced with less travel.Answer (b) is incorrect. It is a secondary reason. Professional development can be obtained in other ways, such asattending conferences, seminars, and taking the CIA exam.Answer (c) is incorrect. It is a secondary reason. This approach establishes a precedent or standard for others tofollow.Answer (d) is the correct answer. This is the primary reason. The alternatives may be desirable, but they are notthe basis for the rotation preference.

Question: V2C3-0020



Which of the following activities does not constitute audit supervision?

Answers

A: Preparing a preliminary audit program.

B: Providing appropriate instructions to the auditors.

C: Reviewing audit workpapers.

D: Seeing that audit objectives are achieved.

Answer Explanations

Answer (a) is the correct answer. This choice is a planning task.Answer (b) is incorrect because it is a supervisory task.Answer (c) is incorrect because it is a supervisory task.

Answer (d) is incorrect because it is a supervisory task.

Question: V2C3-0021The audit team leader is least likely to have a primary role in

Answers

A: Allocating budget audit hours among assigned staff.

B: Updating the permanent files.

C: Reviewing the working papers.

D: Preparing the critique sheet for the audit.

Answer Explanations

Answer (a) is incorrect because it is a common team leader task.Answer (b) is the correct answer. This is a task most likely performed by the audit staff.Answer (c) is incorrect because it is a common team leader task.

Answer (d) is incorrect because it is a common team leader task.

Question: V2C3-0022In which of the following duties would the audit director least likely have a primary role?



Answers

A: Determine the need for expanded testing.

B: Review the summary findings sheet.

C: Select or approve team members.

D: Organize and draft the audit report.

Answer Explanations

Answer (a) is incorrect because it is a common audit director task.Answer (b) is incorrect because it is a common audit director task.

Answer (c) is incorrect because it is a common audit director task.

Answer (d) is the correct answer. This is a task most likely performed by the team leader.

Question: V2C3-0023An element of authority that should be included in the charter of the internal auditing department is

Answers

A: Identification of the operational departments which the audit department must audit.

B: Identification of the types of disclosures which should be made to the audit committee.

C: Access to records, personnel, and physical properties relevant to the performance of audits.

D: Access to the external auditor's working papers.

Answer Explanations

Answer (a) is incorrect. The internal audit department should not specifically identify what activities will beaudited.Answer (b) is incorrect. The auditor is obligated to make all needed disclosures to the audit committee.Answer (c) is the correct answer. The auditor must have access to all audit evidence in order to fulfill obligationsand responsibilities.Answer (d) is incorrect. Access to the external auditor’s working papers cannot be guaranteed in the charter.

Question: V2C3-0024Having been given the task of developing a performance appraisal system for evaluating the audit performance of alarge internal auditing staff, you should



Answers

A: Provide for an explanation of the appraisal criteria methods at the time the appraisal results arediscussed with the internal auditor.

B: Provide general information concerning the frequency of evaluations and the way evaluations will beperformed without specifying their timing and uses.

C: Provide primarily for the evaluation of criteria such as diligence, initiative, and tact.

D: Provide primarily for the evaluation of specific accomplishments directly related to the performance ofthe audit program.

Answer Explanations

Answer (a) is incorrect. The personnel whose performance is being appraised should be made aware of the criteriaand methods at the time they begin the employment, not at the time of the performance review.Answer (b) is incorrect. The frequency and use of the evaluation are important criteria that should be clearly com-municated.Answer (c) is incorrect. The criteria named are traits, not accomplishments. Although traits are important, aperformance evaluation system for evaluating audit perfor-mance should primarily focus on specificaccomplishments not traits.Answer (d) is the correct answer. The appraisal of audit performance should deal primarily with specificaccomplishments related to audits. This provides a more objective appraisal than focusing on traits, which arelargely subjective.

Question: V2C3-0025The key factor to the success of an audit organization’s human resources program is

Answers

A: An informal program for developing and counseling staff.

B: A compensation plan based on years of experience.

C: A well developed set of selection criteria.

D: A program for recognizing the special interests of individual staff members.

Answer Explanations

Answer (a) is incorrect. The success of any training program will be heavily dependent on the attributes of thosebeing trained.Answer (b) is incorrect. While compensation is an important factor in attracting and retaining staff, it is probablynot the most important in staff development.Answer (c) is the correct answer. Selection of individuals with the attributes and education needed for internalauditing is essential if the staff is to develop properly. A well-developed set of selection criteria is important in anyorganization, whether it is audit or nonaudit function.Answer (d) is incorrect because such a program should be fair and equitable to all staff members.



Question: V2C3-0026Which of the following would be the best source of an internal audit director’s information for planning staffingrequirements?

Answers

A: Discussions of audit needs with executive management and the audit committee.

B: Review of audit staff education and training records.

C: Review audit staff size and composition of similar sized companies in the same industry.

D: Interviews with existing audit staff.

Answer Explanations

Answer (a) is the correct answer. This is a good source of information concerning staff size or skill requirements.Answer (b) is incorrect. It is not the best choice since there is not obvious link with scheduled work.Answer (c) is incorrect. That would not account for the unique needs of a particular organization.Answer (d) is incorrect. It is not the best choice since there is not obvious link with scheduled work.

Question: V2C3-0027Which of the following is most essential for guiding the audit staff in maintaining daily compliance with thedepartment’s standards of performance?

Answers

A: Quality control reviews.

B: Position descriptions.

C: Performance appraisals.

D: Policies and procedures.

Answer Explanations

Answer (a) is incorrect. Quality control reviews would evaluate compliance and not serve as a daily guide to theaudit staff.Answer (b) is incorrect. Position descriptions provide the purpose description and responsibilities of individualpositions but are not effective in the day-to-day management of the function.Answer (c) is incorrect. Performance evaluations are a periodic function and will not be effective on a day-to-daybasis.Answer (d) is the correct answer. Comprehensive policies and procedures provided by the director of internal audit



guide the audit staff on a daily basis to ensure compliance with department’s standards of performance.

Question: V2C3-0028You have been selected to develop an internal auditing department for your company. Your approach would mostlikely be to hire

Answers

A: Internal auditors each of whom possesses all the skills required to handle all audit assignments.

B: Inexperienced personnel and train them the way the company wants them trained.

C: Degreed accountants since most audit work is accounting related.

D: Internal auditors who collectively have the knowledge and skills needed to complete all internal auditassignments.

Answer Explanations

Answer (a) is incorrect. The scope of internal auditing is so broad that it is not possible for one individual to havethe requisite expertise in all areas.Answer (b) is incorrect. It is desirable to have various skill levels to match auditors appropriately with varyingassignment complexities. It is also necessary to have experienced auditors available to train and supervise lessexperienced staff members.Answer (c) is incorrect. Many skills are needed in internal auditing. Computer skills are widely needed incompanies that perform information technology audits. Many industries find it necessary to have the skills ofengineers and other disciplines available on a regular basis.Answer (d) is the correct answer. Having a collective mix of knowledge and skills is an integral part of the IIAStandards. No internal audit department can have a credible program without this mix.

Question: V2C3-0029The director of a newly formed internal auditing department is in the process of drafting a formal written charterfor the department. Which one of the following items, related to the operational effectiveness of the internal auditdepartment, should be included in the charter?

Answers

A: The frequency of the audits to be performed.

B: The manner by which audit findings will be reported.

C: The procedures which the internal auditors will employ in investigating and reporting fraud.

D: The internal auditors' unlimited access to those records, personnel, and physical properties that arerelevant to the performance of the audits.



Answer Explanations

Answer (a) is incorrect. The Standards state that “the charter should (a) establish the department’s position withinthe organization; (b) authorize access to records, personnel, and physical properties relevant to the performance ofaudits; and (c) define the scope of internal auditing activities.” Accordingly, not only is the frequency of audits notincluded in the charter, but also such information is not related to the operational effectiveness of the internal auditdepartment.Answer (b) is incorrect. The manner of reporting audit findings (how it is reported, to whom it will be reported,etc.) is not included in the charter and is not related to operational effectiveness of the internal audit department.Answer (c) is incorrect. The procedures to be employed by internal auditors in investigating and reporting fraud arenot included in the charter.Answer (d) is the correct answer. The IIA Standards state that the charter should include the internal auditors’access to those records, personnel and physical properties that are relevant to their work. Having limitations onsuch access would impact the operational effectiveness of the internal audit department because the internal auditorwould not be able to conduct the audit in the proper approach that he designed it.

Question: V2C3-0030A director of internal auditing has reviewed credentials, checked references, and interviewed a candidate for a staffposition. The director concludes that the candidate has a thorough understanding of internal auditing techniques,accounting, and management. However, the director notes that the candidate has limited knowledge of economicsand computer science. Which of the following actions would be most appropriate?

Answers

A: Reject the candidate because of the lack of knowledge required by the IIA Standards.

B: Offer the candidate a position despite the lack of knowledge in certain essential areas.

C: Encourage the candidate to obtain additional training in economics and computer science and thenreapply.

D: Offer the candidate a position if other staff members possess sufficient knowledge in economics andcomputer science.

Answer Explanations

Answer (a) is incorrect. The IIA Standards state the general subjects that staff should possess knowledge of, butclearly states that every auditor need not possess knowledge of all of them.Answer (b) is incorrect. The department’s needs may be for additional expertise in economics or computer science.Answer (c) is incorrect. This may be good advice, but it does not adequately address the department’s presentneeds.Answer (d) is the correct answer. This is the most realistic way to address the department’s staffing needs.

Question: V2C3-0031Which audit-planning tool is general in nature and is used to ensure adequate audit coverage over time?



Answers

A: The long-range schedule.

B: The audit program.

C: The department budget.

D: The department charter.

Answer Explanations

Answer (a) is the correct answer. The long-range program gives evidence of coverage of key functions at plannedintervals.Answer (b) is incorrect. The audit program is limited in scope to a particular project.Answer (c) is incorrect. The department budget may be used to justify head count, but it is not used to ensureadequate audit coverage over time.Answer (d) is incorrect. The department charter is not an audit-planning tool.

Question: V2C3-0032A professional engineer applied for a position in the internal auditing department of a high-technology firm. Theengineer became interested in the position after observing several internal auditors while they were auditing theengineering department. The director of internal auditing

Answers

A: Should not hire the engineer because of the lack of knowledge of internal auditing standards.

B: May hire the engineer in spite of the lack of knowledge of internal auditing standards.

C: Should not hire the engineer because of the lack of knowledge of accounting and taxes.

D: May hire the engineer because of the knowledge of internal auditing gained in the previous position.

Answer Explanations

Answer (a) is incorrect. Each new employee of an internal auditing department is not required to have knowledgeof internal auditing standards. It is required that the department collectively has this knowledge.Answer (b) is the correct answer. Internal auditing standards are required to be known by the departmentcollectively. Individual internal auditing staff members may, however, bring special skills to the department insteadof specific knowledge of internal auditing standards.Answer (c) is incorrect. Each individual internal auditor is not required to have knowledge of accounting or taxes.Answer (d) is incorrect. What knowledge that was acquired by observing is irrelevant to the skills necessary forinternal auditing.

Question: V2C3-0033



Upon being appointed, a new director of internal auditing found an inexperienced audit staff that was over budgeton most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by auditsupervisors. Additionally, there was no evidence that a quality assurance program existed.

As a means of controlling projects and avoiding time-budget overruns, decisions to revise time budgets for an auditshould normally be made

Answers

A: Immediately after the preliminary survey.

B: When a significant deficiency has been substantiated.

C: When inexperienced audit staff is assigned to an audit.

D: Immediately after expanding tests to establish reliability of findings.

Answer Explanations

Answer (a) is the correct answer. Time budgets should be appraised for revision after the preliminary survey andpreparation of the audit program.Answer (b) is incorrect. When a deficiency has been substantiated, no further audit work is required.Answer (c) is incorrect. The assignment of inexperienced staff should have no effect on the time budget.Answer (d) is incorrect. Expanded tests should have no effect on the time budget; the budget would have alreadybeen expanded as necessary.

Question: V2C3-0034Upon being appointed, a new director of internal auditing found an inexperienced audit staff that was over budgeton most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by auditsupervisors. Additionally, there was no evidence that a quality assurance program existed.

Determining that audit objectives have been met is part of the overall supervision of an audit assignment and is theultimate responsibility of the

Answers

A: Staff internal auditor.

B: Audit committee.

C: Internal auditing supervisor.

D: Director of internal auditing.

Answer Explanations

Answer (a) is incorrect because according to the IIA Standards, the director of internal auditing is responsible forsupervision.Answer (b) is incorrect because according to the IIA Standards, the director of internal auditing is responsible forsupervision.



Answer (c) is incorrect because according to the IIA Standards, the director of internal auditing is responsible forsupervision.

Answer (d) is the correct answer. The director of internal auditing is responsible for supervision, includingdetermining that audit objectives are being met.

Question: V2C3-0035Upon being appointed, a new director of internal auditing found an inexperienced audit staff that was over budgeton most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by auditsupervisors. Additionally, there was no evidence that a quality assurance program existed.

To properly evaluate the operations of an internal auditing department, a quality assurance program should include

Answers

A: Periodic supervision of internal audit work on a sample basis.

B: Internal reviews, by other than the internal audit staff, to appraise the quality of department operations.

C: External reviews at least once every three years by qualified persons who are independent of theorganization.

D: Periodic rotation of audit managers.

Answer Explanations

Answer (a) is incorrect. Supervision should be carried out continually, not just on a periodic test basis..Choice (b) is incorrect. Internal reviews should be conducted by internal auditors and should focus on specificaudit projectsAnswer (c) is the correct answer. External reviews should be conducted at least once every three years.Choice (d) is incorrect. Periodic rotation of audit managers is not required.

Question: V2C3-0036The internal auditing department of a large corporation has established its operating plan and budget for the comingyear. The operating plan is restricted to the following categories: a prioritized listing of all audits, staffing, adetailed expense budget, and the commencement date of each audit. Which of the following best describes themajor deficiency of this operating plan?

Answers

A: Requests by management for special projects are not considered.

B: Opportunities to achieve operating benefits are ignored.

C: Measurability criteria and targeted dates of completion are not provided.



D: Knowledge, skills, and disciplines required to perform work are ignored.

Answer Explanations

Choice (a) is incorrect because prioritizing audits would consider these factors.

Choice (b) is incorrect because prioritizing audits would consider these factors.

Answer (c) is the correct answer. This is a requirement of the IIA Standards.Answer (d) is incorrect. Staffing for each audit would include this consideration.

Question: V2C3-0037The capabilities of individual staff members are key features in the effectiveness of an internal auditing depart-ment. Select the primary consideration used when staffing an internal auditing department.

Answers

A: Background checks.

B: Job descriptions.

C: Continuing education.

D: Organizational orientation.

Answer Explanations

Answer (a) is incorrect. Background checks help ensure that statements made by prospective employees areaccurate. However, they are not the primary requisite.Answer (b) is the correct answer. Properly formulated job descriptions provide a basis for the identifying jobqualifications (including training and experience).Answer (c) is incorrect. Continuing education occurs after the proper people are hired.Answer (d) is incorrect. A thorough orientation helps the new employee become productive more rapidly.However, it will not overcome hiring the wrong person.

Question: V2C3-0038Internal audit staff members should be afforded an appropriate means through which they can discuss problemsand receive updates regarding departmental policies. The most appropriate forum for this objective is

Answers

A: The department's informal communication lines.

B: Intradepartment memoranda.



C: Staff meetings.

D: Employee evaluation conferences.

Answer Explanations

Answer (a) is incorrect. Informal communication is not the most appropriate forum.Answer (b) is incorrect. Memoranda are generally impersonal and do not afford a good opportunity for maximumexchange of ideas.Answer (c) is the correct answer. Formal staff meetings provide the best opportunity for ensuring that issues areaddressed timely and efficiently.Answer (d) is incorrect. The employee evaluation conference is not a timely place to discuss problems and receiveupdates.

Question: V2C3-0039The peer review process can be performed internally or externally. A distinguishing feature of the external reviewis its objective to

Answers

A: Identify tasks that can be performed better.

B: Determine if audit activities meet professional standards.

C: Set forth the recommendations for improvement.

D: Provide an independent evaluation.

Answer Explanations

Answer (a) is incorrect. The internal peer review process will identify things that can be done better.Answer (b) is incorrect. The internal review process will assess if audit activities meet professional standards.Answer (c) is incorrect. The internal review process will set forth recommendations for improvement.Answer (d) is the correct answer. External review process will provide independent evaluation for managementand the audit committee.

Question: V2C3-0040Exit conferences serve to ensure the accuracy of the information used by an internal auditor. A secondary purposeof an exit conference is to

Answers

A: Get immediate action on a recommendation.

B: Improve relations with auditees.



C: Agree to the appropriate distribution of the final report.

D: Brief senior management on the results of the audit.

Answer Explanations

Answer (a) is incorrect. An interim report would have been used to accomplish this.Answer (b) is the correct answer. The exit conference can be used to allow operating management to air theirviews and to present any operational objections to specific recommendations.Answer (c) is incorrect. The distribution of reports is not a secondary purpose of an exit conference.Choice (d) is incorrect. Senior management should be given a greatly condensed view of the results of an audit.

Question: V2C3-0041The advantage attributed to the establishment of internal auditing field offices for work at remote locations is bestdescribed as

Answers

A: The possibility of increased objectivity of personnel assigned to a field office.

B: A reduction of travel time and related travel expense.

C: The increased ease of maintaining uniform company-wide standards.

D: More contact with senior audit personnel leading to an increase in control.

Answer Explanations

Answer (a) is incorrect. Objectivity of field office personnel decreases.Answer (b) is the correct answer. It is an advantage of the field office.Answer (c) is incorrect. It is a disadvantage; it decreases the ease of maintaining standards.Answer (d) is incorrect. Senior audit personnel are expected to be at corporate level.

Question: V2C3-0042The director of internal auditing is preparing the work schedule for the next budget year and has limited audit re-sources. In deciding whether to schedule the purchasing or the personnel department for an audit, which of thefollowing would be the least important factor?

Answers

A: There have been major changes in operations in one of the departments.

B: The audit staff has recently added an individual with expertise in one of the areas.

C: There are more opportunities to achieve operating benefits in one of the departments than in the other.



D: The potential for loss is significantly greater in one department than the other.

Answer Explanations

Answer (a) is incorrect because it is an important factor according to the IIA Standards.Answer (b) is the correct answer. Audit needs, not auditor skill availability, should drive audit schedules.Answer (c) is incorrect because it is an important factor according to the IIA Standards.

Answer (d) is incorrect because it is an important factor according to the IIA Standards.

Question: V2C3-0043According to the IIA Standards, an internal auditing department’s activity reports should

Answers

A: List the material findings of major audits.

B: List unresolved findings.

C: Report the weekly activities of the individual auditors.

D: Compare audits completed with audits planned.

Answer Explanations

Answer (a) is incorrect because it is not an activity report as defined by the IIA Standards.Answer (b) is incorrect because it is not an activity report as defined by the IIA Standards.

Answer (c) is incorrect because it is not an activity report as defined by the IIA Standards.

Answer (d) is the correct answer. This information is a status report to be provided to the audit oversight authority.

Question: V2C3-0044The best means for the internal auditing department to determine whether its goal of implementing broader auditcoverage of functional activities has been met is through

Answers

A: Accumulation of audit findings by auditable area.

B: Comparison of the audit plan to actual audit activity.

C: Surveys of management satisfaction with the internal auditing function.



D: Implementation of a quality assurance program.

Answer Explanations

Answer (a) is incorrect. The number of audit findings is not an indicator of audit breadth or quality.Answer (b) is the correct answer. Comparison of the plan to actual activity will reveal if the planned breadth wasachieved.Answer (c) is incorrect. Management satisfaction does not directly relate to the expressed goal (broader auditcoverage).Answer (d) is incorrect. Implementation of a quality assurance program has no bearing on the stated goal.

Question: V2C3-0045Why should organizations require auditees to promptly reply and outline the corrective action that has been imple-mented on reported deficiencies?

Answers

A: To remove items from the "pending" list as soon as possible.

B: To institute compliance as early as possible.

C: To indicate concurrence with the audit findings.

D: To ensure that the audit schedule is kept up-to-date.

Answer Explanations

Answer (a) is incorrect. This is an immaterial aspect of the audit reporting process.Answer (b) is the correct answer. The objective of the audit is to institute compliance with the auditee’s correctiveaction as early as possible so that the organization will benefit from the action taken.Answer (c) is incorrect. The auditee may not concur with the audit finding at all times.Answer (d) is incorrect. This is an administrative function of the audit department.

Question: V2C3-0046Which of the following factors serves as a direct input to the internal auditing department’s financial budget?

Answers

A: Audit work schedules.

B: Activity reports.

C: Past effectiveness of the internal auditing department in identifying cost savings.

D: Auditing department's charter.



Answer Explanations

Answer (a) is the correct answer. As specified in the IIA Standards, audit work schedules determine both staffingplans and financial budgets.Answer (b) is incorrect. Activity reports compare actual performance with goals and schedules and compare actualexpenditures with financial budgets.Answer (c) is incorrect. While past performance is an indicator of the value of internal auditing, it will not impactthe funds committed to current operations.Answer (d) is incorrect. The charter for an internal auditing department defines the purpose, authority, and re-sponsibility of the department.

Question: V2C3-0047While attending a social function, an internal auditor described to a group of friends the elements of a sensitiveaudit on which he was working. The internal auditing director’s best avenue for proceeding is to

Answers

A: Fire the auditor to set an example for other auditors.

B: Remove the auditor from all audits in that area, or in other sensitive areas.

C: Reprimand the auditor for "talking shop" at a social function.

D: Explain that the act is an ethical violation of the profession and that further such action could result indismissal or other serious effects.

Answer Explanations

Answer (a) is incorrect. There was no intent to do wrong. The sanction is probably too severe. Also, the staff maylose a good auditor.Answer (b) is incorrect. The single occurrence described does not warrant this action.Answer (c) is incorrect. This is partly correct but it has no instructive value.Answer (d) is the correct answer. This is an instructive solution and explains the defect in the actions of theinternal auditor.

Question: V2C3-0048The internal auditing department for a large corporation recently concluded an audit of sales department travel ex-penses. Which of the following groups should receive a copy of the audit report?

Answers

A: Sales director and vice president for marketing.

B: Chairman of the board, chief operating officer, and vice president for marketing.

C: Chairman of the board, controller, and sales director.



D: Chief financial officer, sales director, and chief executive officer.

Answer Explanations

Answer (a) is the correct answer. Audit reports should be distributed to those members of the organization who areable to ensure that audit results are given due consideration. In this case, the sales director and vice president ofmarketing would be sufficient.Answer (b) is incorrect. The distribution should include only that shown in answer (a). The chairman of the boardand chief operating officer need not be involved unless significant problems were revealed.Answer (c) is incorrect. The distribution should include only that shown in answer (a). The chairman of the boardand controller need not be involved unless significant problems were revealed.Answer (d) is incorrect. The distribution should include only that shown in answer (a). Chief financial officer andchief executive officer involvement would not be needed.

Question: V2C3-0049External review of an internal auditing department is not likely to evaluate

Answers

A: Adherence to the internal auditing department's charter.

B: Compliance with the IIA Standards.

C: Detailed cost-benefit analysis of the internal auditing department.

D: Audit planning documents, particularly those submitted to senior management and the auditcommittee.

Answer Explanations

Answer (a) is incorrect. It is included in the evaluation of the performance of an internal auditing department perthe IIA Standards.Answer (b) is incorrect. It is included in the evaluation of the performance of an internal auditing department perthe IIA Standards.

Answer (c) is the correct answer. The cost benefit of internal auditing is neither easily quantifiable nor the subjectof an external review.Answer (d) is incorrect. It is included in the evaluation of the performance of an internal auditing department perthe IIA Standards.

Question: V2C3-0050An internal auditing manager has a small team of employees, but each individual is self-motivated and could betermed a “high achiever.” The audit manager has been given a particularly difficult assignment. Even for a highachiever, the probability that this job can be completed by one individual by the required deadline is low. Selectthe best course for the audit manager.



Answers

A: Assign one individual since high achievers thrive on high risks.

B: Assign two staff members to moderate the risk of failure.

C: Assign the entire staff to ensure the risk of failure is low.

D: Ask company management to cancel the job.

Answer Explanations

Answer (a) is incorrect because high achievers prefer moderate risks. They perform best with moderate risks.Answer (b) is the correct answer. High achievers thrive when the job provides for personal responsibility,feedback, and moderate risks.Answer (c) is incorrect because high achievers prefer moderate risks. They perform best with moderate risks.

Answer (d) is incorrect because high achievers prefer moderate risks. They perform best with moderate risks.

Question: V2C3-0051Recent criticism of an internal auditing department suggested that audit coverage was not providing adequatefeedback to senior management on the processes used in the organization’s key lines of business. The problem wasfurther defined as lack of feedback on the recent implementation of automated support systems. Which twofunctions does the director of internal auditing need to improve?

Answers

A: Staffing and communicating.

B: Staffing and decision making.

C: Planning and organizing.

D: Planning and communicating.

Answer Explanations

Answer (a) is incorrect. There is no indication that there are staffing problems (i.e., insufficient audit personnel) orthat audit personnel lack necessary skills to provide feedback on automated support systems.Answer (b) is incorrect. There is no indication that staffing or decision making is a problem.Answer (c) is incorrect. There is no indication that organizing is a problem.Answer (d) is the correct answer. The problem of lack of feedback indicates the director has problems in planningand allocating audit resources and communicating this need to the audit staff.

Question: V2C3-0052



In some cultures and organizations, managers insist that the internal auditing function is not needed to provide acritical assessment of the organization’s operations. A management attitude such as this will most probably havean adverse affect on the internal auditing department’s

Answers

A: Operating budget variance.

B: Charter.

C: Performance appraisals.

D: Policies and procedures.

Answer Explanations

Answer (a) is incorrect. An operating budget variance report is a control device used to monitor actual performanceversus budget. Management foot-dragging could cause unfavorable variances, but favorable variances could alsooccur if many audits were cut short due to scope impairments.Answer (b) is the correct answer. In this type of situation, management is highly averse to analysis or possiblecriticism of their actions and will not grant the internal auditors an adequate charter.Answer (c) is incorrect. An unbiased evaluation of audit staff would not be affected by lack of cooperation on thepart of nonaudit management.Answer (d) is incorrect. Policies and procedures of the internal audit function are developed by the internal auditdepartment and should not be affected by nonaudit management.

Question: V2C4-0001When an auditor’s sampling objective is to obtain a measurable assurance that a sample will contain at least oneoccurrence of a specific critical exception existing in a population, the sampling approach to use is

Answers

A: Random.

B: Discovery.

C: Probability proportional to size.

D: Variables.

Answer Explanations

Answer (a) is incorrect. Random sampling deals only with the technique used to choose the sample.Answer (b) is the correct answer. Discovery sampling is structured to measure the probability of at least oneexception occurring in a sample if there are a minimum number of errors in the population.Answer (c) is incorrect. Probability-proportional-to-size (PPS) sampling deals with the technique used to selectitems but does not apply when attempting to discover critical occurrences.Answer (d) is incorrect. Variables sampling need not include at least one exception of a critical occurrence.



Question: V2C4-0002Management is legally required to prepare a shipping document for all movement of hazardous materials. Thedocument must be filed with bills of lading. Management expects 100% compliance with the procedure. Which ofthe following sampling approaches would be most appropriate?

Answers

A: Attributes sampling.

B: Discovery sampling.

C: Targeted sampling.

D: Variables sampling.

Answer Explanations

Answer (a) is incorrect. Attributes sampling is too broad.Answer (b) is the correct answer. Discovery sampling is best because this application deals with an attribute that isexpected to be quite rare.Answer (c) is incorrect. Targeted sampling is a nonsense term.Answer (d) is incorrect. Variables sampling deals with monetary amounts.

Question: V2C4-0003The appropriate sampling plan to use to identify at least one irregularity, assuming some number of such irregulari-ties exist in a population, and then to discontinue sampling when one irregularity is observed is

Answers

A: Stop-and-go sampling.


C: Variables sampling.

D: Attributes sampling.

Answer Explanations

Answer (a) is incorrect. It involves discontinuing the sampling when a target error rate is achieved.Answer (b) is the correct answer. Answer (b) involves identifying characteristics that could include “discovering”single instances of suspected special characteristics (irregularities).Answer (c) is incorrect. It involves reducing sample size by separating the population into groups of items withsimilar values.Answer (d) is incorrect. It involves identifying characteristics of the sample and projecting those to the population.



Question: V2C4-0004After partially completing an internal control review of the accounts payable department, the auditor suspects thatsome type of fraud has occurred. To ascertain whether the fraud is present, the best sampling approach would be touse

Answers

A: Simple random sampling to select a sample of vouchers processed by the department during the pastyear.

B: Probability-proportional-to-size sampling to select a sample of vouchers processed by the departmentduring the past year.

C: Discovery sampling to select a sample of vouchers processed by the department during the past year.

D: Judgmental sampling to select a sample of vouchers processed by clerks identified by the departmentmanager as acting suspiciously.

Answer Explanations

Answer (a) is incorrect. This approach would be appropriate if the extent of fraud were to be estimated.Answer (b) is incorrect. This approach would be appropriate if the monetary value of fraud were to be estimated.Answer (c) is the correct answer. The purpose here is to determine whether any fraud has taken place, rather thanto estimate its overall frequency. Discovery sampling is a method designed specifically to do this.Answer (d) is incorrect. It would be difficult to determine what an adequate sample would be in this case, but amore important issue is restricting the population considered to the vouchers processed by workers that thedepartment manager considers suspicious. This presents a significant potential for biasing the sample because ofthe potential conflict of interest of the department manager.

Question: V2C4-0005Because of control weaknesses, it is possible that the individual managers of 122 restaurants could have placedfictitious employees on the payroll. Each restaurant employs between 25 and 30 people. To efficiently determinewhether this fraud exists at less than a 1% level, the auditor should use

Answers


B: Judgment sampling.

C: Directed sampling.

D: Discovery sampling.

Answer Explanations



Answer (a) is incorrect. Attribute sampling could work, but it would not be as efficient as discovery sampling.Answer (b) is incorrect. Judgment sampling cannot provide the needed statistical assurance.Answer (c) is incorrect. Directed sampling focuses on certain transactions or locations that are likely to containerrors. Its use is not indicated.Answer (d) is the correct answer. Discovery sampling is most often interested in the occurrence of fraud. Itefficiently defines a sampling effort that will have a specified probability of containing at least one occurrence ofthe attribute within the population, given that it is expected to occur at a certain rate.

Question: V2C4-0006In the audit of a health insurance claims processing department, a sample is taken to test for the presence of fic-titious payees, although none is suspected. The most appropriate sampling plan would be

Answers



C: Variables sampling.

D: Stop-and-go sampling.

Answer Explanations

Answer (a) is incorrect. Attributes sampling implies a fixed sample size and a need to project a sample occurrencerate.Answer (b) is the correct answer. Discovery sampling is appropriate when a near-zero error rate is expected andthe characteristic under scrutiny is critical.Answer (c) is incorrect. Sampling for attributes not a variable.Answer (d) is incorrect. It is not in accord with the audit objective.

Question: V2C4-0007An auditor applying a discovery sampling plan with a 5% risk of over-reliance may conclude that there is

Answers

A: A 95% probability that the actual rate of occurrence in the population is less than the critical rate ifonly one exception is found.

B: A 95% probability that the actual rate of occurrence in the population is less than the critical rate if noexceptions are found.

C: A 95% probability that the actual rate of occurrence in the population is less than the critical rate if theoccurrence rate in the sample is less than the critical rate.



D: Greater than a 95% probability that the actual rate of occurrence in the population is less than thecritical rate if no exceptions are found.

Answer Explanations

Answer (a) is incorrect. There is a 95% probability that the actual rate of occurrence is equal to or greater than thecritical rate if one exception is found.Answer (b) is the correct answer. If no exceptions are found, the correct conclusion is that the occurrence rate isless than the critical rate at a given probability level.Answer (c) is incorrect. There is a 95% probability that the actual rate is equal to or exceeds the critical rate if anyexceptions are found.Answer (d) is incorrect. The probability does not increase because no exceptions were found.

Question: V2C4-0008An internal auditor suspects fraud. Which of the following sample plans should be used if the purpose is to select asample with a given probability of containing at least one example of the irregularity?

Answers

A: Attributes.

B: Discovery.

C: Stop and go.

D: Probability proportional to size.

Answer Explanations

Answer (a) is incorrect. Attribute sampling is for normal compliance testing. It is not used when very, very fewerrors are expected.Answer (b) is the correct answer. Discovery sampling is used when the internal auditor suspects a rare but materialerror or fraud. The plan seeks to select a sample just large enough to include one example of the error orirregularity a specified percentage of the time.Answer (c) is incorrect. Stop-and-go is a form of attribute sampling.Answer (d) is incorrect. Probability-proportional-to-size (monetary-unit) sampling is used for substantive testing. Itallows the verification of values whose range lies between positive and negative infinity.

Question: V2C4-0009What is a data diddling technique?

Answers

A: Changing data before input to a computer system.

B: Changing data during input to a computer system.



C: Changing data during output from a computer system.

D: Choices a, b, and c.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. Data diddling involves changing data before or during input to computers orduring output from a computer system.

Question: V2C4-0010What is a salami technique?

Answers

A: Taking small amounts of assets.

B: Using "rounding-down" concept.

C: Stealing small amounts of money from bank accounts.

D: Choices a, b, and c.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. A salami technique is a theft of small amounts of assets and money from anumber of sources (e.g., bank accounts, inventory accounts, and accounts payable and receivable accounts). It isalso using the “rounding-down” concept, where a fraction of money is taken from bank accounts.

Question: V2C4-0011Data diddling can be prevented by all of the following except:

Answers

A: Access controls.

B: Program change controls.



C: Rapid correction of data.

D: Integrity checking.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Data diddling can be prevented by limiting access to data and programs andlimiting the methods used to perform modification to such data and programs. Integrity checking also helps inprevention. Rapid detection is needed—the sooner the better—because correcting data diddling is expensive.

This answer is incorrect. Refer to the correct answer explanation.

Question: V2C4-0012A reliable way to detect superzapping work is by

Answers

A: Comparing current data files with previous data files.

B: Examining computer usage logs.

C: Noting discrepancies by those who receive reports.

D: Reviewing undocumented transactions.

Answer Explanations

Answer (a) is the correct answer. Superzapping leaves no evidence of file changes, and the only reliable way todetect this activity is by comparing current data files with previous generations of the same file.Answer (b) is incorrect. Computer usage logs may not capture superzapping activity.Answer (c) is incorrect. Users may not detect changes in their reports.Answer (d) is incorrect. It is very difficult to find, let alone review, the undocumented transactions. Even if thesetransactions are found, there is no assurance that the task is complete.

Question: V2C4-0013With respect to computer security and fraud, a legal liability exists to an organization under which of the followingconditions?

Answers

A: When estimated security costs are greater than estimated losses.



B: When estimated security costs are equal to estimated losses.

C: When estimated security costs are less than estimated losses.

D: When actual security costs are equal to actual losses.

Answer Explanations

Answer (a) is incorrect. This poses no legal liability because costs are greater than losses.Answer (b) is incorrect. This requires judgment and qualitative considerations because costs are equal to losses.Answer (c) is the correct answer. Courts do not expect organizations to spend more money than losses resultingfrom a security flaw, threat, risk, or vulnerability. Implementing countermeasures and safeguards to protectinformation system assets cost money. Losses can result from risks, that is, exploitation of vulnerabilities. Whenestimated costs are less than estimated losses, then a legal liability exists. Courts can argue that the organization’smanagement should have installed safeguards but did not and that management did not exercise due care and duediligence.Answer (d) is incorrect. This is not applicable because actual costs and losses are not known at the time ofimplementing safeguards.

Question: V2C4-0014Are an investigator’s handwritten notes considered valid evidence in court of law?

Answers

A: No.

B: Maybe.

C: Yes.

D: Depends.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. An investigator’s handwritten notes are considered valid evidence as long as theaffected parties can read and understood the notes. Handwritten notes are no different from typed or printedversions.


Question: V2C4-0015A security investigator or law enforcement officer should observe which of the following during a computer crimeinvestigation?



Answers

A: Chain of events.

B: Chain of custody.

C: Chain of computers.

D: Chain of logs.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Chain of custody is required when evidence is collected and handled so thatthere is no dispute about it.


Question: V2C4-0016Which of the following security techniques allow time for response by investigative authorities?

Answers

A: Deter.

B: Detect.

C: Delay.

D: Deny.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. If a system perpetrator can be delayed longer while attacking a computer system,investigative authorities can trace his or her origins and location. Answers (a), (b), and (d) would not allow such atrap.


Question: V2C4-0017



Most of the evidence submitted in a computer crime case is

Answers

A: Legal evidence.

B: Documentary evidence.

C: Secondary evidence.

D: Admissible evidence.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Documentary evidence is created information, such as letters, contracts,accounting records, invoices, and management information reports on performance and production. Legal evidenceis a broad term, and is not be useful here. Secondary evidence is any evidence offered to prove the writing otherthan the writing itself and is a part of the best evidence rule. The best evidence is original. Admissible evidence isevidence that is revealed to the jury or other trier of fact with express or implied permission to use it in decidingdisputed issues of fact.


Question: V2C4-0018When computers and peripheral equipment are seized in relation to a computer crime, it is an example of

Answers

A: Duplicate evidence.

B: Physical evidence.

C: Best evidence.

D: Collateral evidence.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Direct inspection or observation of people, property, or events obtains physicalevidence. Duplicate evidence is a document that is produced by some mechanical process that makes it morereliable evidence of the contents of the original than other forms of secondary evidence (e.g., a photocopy of theoriginal). Modern statutes make duplicates easily substitutable for an original. Duplicate evidence is a part of thebest evidence rule. Best evidence is evidence that is the most natural and reliable. The best evidence is primary.



Collateral evidence is evidence relevant only to some evidential fact and that is not by itself relevant to aconsequential fact.


Question: V2C4-0019From a computer security viewpoint, courts expect what amount of care from organizations?

Answers

A: Super care.

B: Due care.

C: Extraordinary care.

D: Great care.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Courts will find computer owners responsible for their insecure systems. Courtswill not find liability every time a computer is hijacked. Rather, courts will expect organizations to becomereasonably prudent computer owners taking due care (reasonable care) to ensure adequate security. The term “duecare” means having the right policies and procedures, access controls, firewalls, and other reasonable securitymeasures in place. Computer owners need not take super care, great care, or extraordinary care.


Question: V2C4-0020Which of the following is not a criminal activity in most jurisdictions?

Answers

A: Writing a computer virus program.

B: Using a computer virus program.

C: Releasing a computer virus program.

D: Spreading a computer virus program.



Answer Explanations

Answer (a) is the correct answer. It is the intentions of the developer of a computer virus program that matter themost in deciding what is a criminal activity. Simply writing a virus program is not a criminal activity. However,using, releasing, and spreading a virus with bad intentions of destroying computer resources are the basis forcriminal activity.

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.

Question: V2C4-0021Once evidence is seized, a law enforcement officer should follow which of the following?

Answers

A: The chain of command.

B: The chain of control.

C: The chain of custody.

D: The chain of communications.

Answer Explanations

Answer (a) is incorrect. The term “chain of command” refers to relationships between a superior and a subordinatein a workplace setting.Answer (b) is incorrect. The chain of control is a distracter.Answer (c) is the correct answer. The chain of custody or the chain of evidence is a method of authenticating anobject by the testimony of witnesses who can trace possession of the object from hand to hand and from thebeginning to the end.Answer (d) is incorrect. The chain of communication is a distracter.

Question: V2C4-0022The concept of admissibility of evidence does not include which of the following?

Answers

A: Relevance.

B: Competence.

C: Materiality.



D: Sufficiency.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. Laying a proper foundation for evidence is “the practice or requirement ofintroducing evidence of things necessary to make further evidence relevant, material, or competent.” Sufficiency isnot part of the concept of admissibility of evidence. Relevant evidence is evidence that had some logical tendencyto prove or disprove a disputed consequential fact. Competent evidence (i.e., admissible evidence) is evidence thatsatisfied all the rules of evidence except those dealing with relevance. Materiality is the notion that evidence mustbe relevant to a fact that is in dispute between the parties.

Question: V2C4-0023The chain of custody does not ask which of the following questions?

Answers

A: Who damaged the evidence?

B: Who collected the evidence?

C: Who stored the evidence?

D: Who controlled the evidence?

Answer Explanations

Answer (a) is the correct answer. The chain of custody deals with who collected, stored, and controlled theevidence and does not ask who damaged the evidence. It looks at the positive side of the evidence. If the evidenceis damaged, there is nothing to show in the court.


Question: V2C4-0024When large volumes of writing are presented in court, which type of evidence is inapplicable?

Answers

A: Best evidence.



B: Flowchart evidence.

C: Magnetic tapes evidence.

D: Demonstrative evidence.

Answer Explanations

Answer (a) is the correct answer. Best evidence is primary evidence, which is the most natural evidence. Bestevidence gives the most satisfactory proof of the fact under investigation. It is confined to documents, records, andpapers. A recommendation for cases with a large volume of evidence is to assemble a single exhibit bookcontaining all documents, send copies to the defense and to the judge, and introduce it as a single exhibit in court.This saves time in court. Also, prepare a record of exhibits, the counts each is connected with, and the names of thewitnesses who are to testify as to each item. Both flowchart evidence and magnetic tape evidence are proper.Demonstrative evidence or visual aids can be real things (i.e., a gun of the same type used in a homicide) orrepresentation of real things (i.e., a photograph or map).


Question: V2C4-0025Evidence is needed to do which of the following?

Answers

A: Charge a case.

B: Classify a case.

C: Make a case.

D: Prove a case.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. Proper elements of proof and correct types of evidence are needed to prove acase.

Question: V2C4-0026What determines whether a computer crime has been committed?



Answers

A: When the crime is reported.

B: When a computer expert has completed his or her work.

C: When the allegation has been substantiated.

D: When the investigation is completed.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. A computer crime is committed when the allegation is substantiated with properevidence that is relevant, competent, and material.


Question: V2C4-0027The correct sequence of preliminary investigation is

I. Consult with a computer expert.II. Prepare an investigative plan.III. Consult with a prosecutor.IV. Substantiate the allegation.

Answers

A: IV, I, II, and III.

B: III, I, II, and IV.

C: IV, II, III, and I.

D: I, IV, II, and III.

Answer Explanations

Answer (a) is the correct answer. Step 1 is substantiating the allegation. Step 2 is consulting with a computerexpert, as appropriate. Step 3 is preparing an investigation plan that sets forth the scope of the investigation andserves as a guide in determining how much technical assistance will be needed. Step 4 is consulting with aprosecutor, depending on the nature of the allegation and scope of the investigation. Items to discuss with theprosecutor may include the elements of proof, evidence required, and parameters of a prospective search.




Question: V2C4-0028The objective of which of the following team members is similar to that of the information systems security officerinvolved in a computer crime investigation?

Answers

A: An investigator.

B: A district attorney.

C: A computer expert.

D: An internal systems auditor.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. A team approach is desirable when a computer-related crime case is a complexone. Each person has a definite and different role and brings varied capabilities to the team approach. Both theinternal system auditor’s and the security officer’s objectives are the same since they work for the sameorganization. The objectives are to understand system vulnerabilities, to strengthen security controls, and to supportthe investigation. A district attorney’s role is to prove the case while the objective of the investigator is to gatherfacts.

Question: V2C4-0029A search warrant is required

Answers

A: Before the allegation has been substantiated.

B: After establishing the probable cause(s).

C: Before identifying the number of investigators needed.

D: After seizing the computer and related equipment.

Answer Explanations




Answer (b) is the correct answer. Once the allegation has been substantiated, the prosecutor should be contacted todetermine if there is probable cause for a search. Because of the technical orientation of a computer-related crimeinvestigation, presenting a proper technical perspective in establishing probable cause becomes crucial to securinga search warrant.


Question: V2C4-0030In a computer-related crime investigation, computer evidence is

Answers

A: Volatile and invisible.

B: Apparent and magnetic

C: Electronic and inadmissible.

D: Difficult and erasable.

Answer Explanations

Answer (a) is the correct answer. Discovery and recognition is one of the seven considerations involved in the careand handling of evidence. It is the investigator’s capability to discover and to recognize the potential source ofevidence. When a computer is involved, the evidence is probably not apparent or visible. Nevertheless, theinvestigator must recognize that computer storage devices are nothing more than electronic or magnetic filecabinets and should be searched if it would normally be reasonable to search an ordinary file cabinet. The evidenceis highly volatile, that is, subject to change.


Question: V2C4-0031In a computer-related crime investigation, maintenance of evidence is important for which of the followingreasons?

Answers

A: To record the crime.

B: To collect the evidence.

C: To protect the evidence.



D: To avoid problems of proof.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. It is proper to maintain computer-related evidence. Special procedures areneeded to avoid problems of proof caused by improper care and handling of such evidence.

Question: V2C4-0032If a computer or peripheral equipment involved in a computer crime is not covered by a search warrant, whatshould the investigator do?

Answers

A: Seize it before someone takes it away

B: Leave it alone until a warrant can be obtained.

C: Analyze the equipment or its contents, and record it.

D: Store it in a locked cabinet in a secure warehouse.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. If a computer or peripheral equipment involved in a computer crime is notcovered by a search warrant, leave it alone until a warrant can be obtained. The point is that a warrant is requiredfor anything to be collected by the investigator.


Question: V2C4-0033All of the following are proper ways to handle the computer equipment and magnetic media items involved in acomputer crime investigation except:

Answers

A: Seal, store, and tag the items.

B: Seal and store items in a cardboard box.



C: Seal and store items in a paper bag.

D: Seal and store items in a plastic bag.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. After all equipment and magnetic media have been labeled and inventoried, sealand store each item in a paper bag or cardboard box to keep out dust. An additional label should be attached to thebag identifying its contents and noting any identifying numbers, such as the number of the evidence tag. Do not useplastic bags or sandwich bags to store any piece of computer equipment and/or magnetic storage media, sinceplastic material can cause both static electricity and condensation, which can damage electronically stored data andsensitive electronic components.

Question: V2C4-0034Indicate the most objective and relevant evidence in a computer environment involving fraud.

Answers

A: Physical examination.

B: Physical observation.

C: Inquiries of people.

D: Computer logs.

Answer Explanations

Answer (a) is incorrect. Physical examination may not be possible in a computer environment due to automatedrecords.Answer (b) is incorrect. Physical observation may not be possible in a computer environment due to automatedrecords.Answer (c) is incorrect. Inquiries of people may not give in-depth answers due to their lack of specific knowledgeabout how a computer system works.Answer (d) is the correct answer. Relevant evidence is essential for a successful computer fraud examination. Forexample, data usage and access control security logs will identify (1) who has accessed the computer, (2) whatinformation was accessed, (3) where the computer was accessed, and (4) how long the access lasted. These logscan be manually or computer maintained; the latter method is more timely and reliable than the former method.

Question: V2C4-0035Which of the following is needed to produce technical evidence in computer-related crimes?



Answers

A: Audit methodology.

B: System methodology.

C: Forensic methodology.

D: Criminal methodology.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. A forensic methodology is a process for the analysis of electronically stored data.The process must be completely documented to ensure that the integrity of the evidence is not questioned in court.The forensic methodology deals with technical evidence. The audit methodology deals with reviewing businesstransactions and systems and reaching an opinion by an auditor. The phrases system methodology and criminalmethodology are too vague; they have many meanings.


Question: V2C4-0036The final stage of reporting results of computer evidence life cycle is

Answers

A: Return.

B: Receive.

C: Examine.

D: Report.

Answer Explanations

Answer (a) is the correct answer. The first stage is preparing a report documenting what was done and the resultsobtained. The second stage is sending printouts and reports to the contributor or subject matter expert for additionalanalysis. The third stage is repacking the computer and all magnetic disks. The final stage is returning the evidenceto the contributor.




Question: V2C4-0037Which of the following investigative tools is most effective when large volumes of evidence need to be analyzed?

Answers

A: Interviews.

B: Questionnaires.

C: Forensic analysis.

D: Computer.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. Computers can be used to collect and compile large amounts of data and providestatistics, reports, and graphs to assist the investigator in analysis and decision making. Forensic analysis is the artof retrieving computer data in such a way that will make it admissible in court.

Question: V2C4-0038Which of the following methods is acceptable to handle computer equipment seized in a computer crime investiga-tion?

Answers

A: Exposing the magnetic media to radio waves.

B: Laying the magnetic media on top of electronic equipment.

C: Subjecting the magnetic media to forensic testing.

D: Leaving the magnetic media in the trunk of a vehicle containing a radio unit.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Forensic analysis is the art of retrieving computer data in such a way that willmake it admissible in court. Exposing magnetic media to magnetic fields, such as radio waves, may alter or destroydata. Do not carry magnetic media in the trunk of a vehicle containing a radio unit, and do not lay magnetic mediaon top of any electronic equipment.




Question: V2C4-0039Computer fraud is discouraged by

Answers

A: Being willing to prosecute.

B: Ostracizing whistle-blowers.

C: Overlooking inefficiencies in the judicial system.

D: Accepting the lack of integrity in the system.

Answer Explanations

Answer (a) is the correct answer. Situational pressures (e.g., gambling, drugs), opportunities to commit fraud (e.g.,weak system of controls), and personal characteristics (e.g., lack of integrity, honesty) are major causes of fraud,whether computer-related or not. There is nothing new about the act of committing fraud. There is no new way tocommit fraud because someone has already tried it somewhere.Answer (b) is incorrect. This encourages computer fraud whereas choice (a) discourages it. Willingness toprosecute sends a strong message to the potential perpetrators.Answer (c) is incorrect. This encourages computer fraud whereas choice (a) discourages it. Willingness toprosecute sends a strong message to the potential perpetrators.Answer (d) is incorrect. This encourages computer fraud whereas choice (a) discourages it. Willingness toprosecute sends a strong message to the potential perpetrators.

Question: V2C4-0040Identify the computer-related crime and fraud method that involves obtaining information that may be left in oraround a computer system after the execution of a job.

Answers

A: Data diddling.

B: Salami technique.

C: Scavenging.

D: Piggybacking.



Answer Explanations

Answer (a) is incorrect. Data diddling involves changing data before or during input to computers or during outputfrom a computer system.Answer (b) is incorrect. The salami technique is a theft of small amounts of assets (primarily money) from anumber of sources.Answer (c) is the correct answer. Scavenging fits the description.Answer (d) is incorrect. Piggybacking can be done physically and electronically. Both involve gaining access to acontrolled area without authorization.

Question: V2C4-0041Computer fraud is increased when

Answers

A: Employees are not trained.

B: Documentation is not available.

C: Audit trails are not available.

D: Employee performance appraisals are not given.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Audit trails indicate what actions are taken by the system. The fact that thesystem has adequate and clear audit trails will deter fraud perpetrators because they fear getting caught. There is nodirect correlation between computer fraud and the other three things indicated in the three choices.


Question: V2C4-0042Internal auditors would be more likely to detect fraud if they developed/strengthened their ability to

Answers

A: Recognize and question changes which occur in organizations.

B: Interrogate fraud perpetrators to discover why the fraud was committed.

C: Develop internal controls to prevent the occurrence of fraud.



D: Document computerized operating system programs.

Answer Explanations

Answer (a) is the correct answer. The recognition and questioning of change is critical to the detection of fraud.Answer (b) is incorrect. Interrogation of fraud perpetrators occurs after detection.Answer (c) is incorrect. The controls mentioned are preventive, not detective.Answer (d) is incorrect. Documentation of operating systems is not within the scope of internal auditing, andwould do little to enhance fraud detection skills.

Question: V2C4-0043According to the IIA Standards, which of the following best describes the two general categories or types of fraudthat concern most internal auditors?

Answers

A: Improper payments (i.e., bribes and kickbacks) and tax fraud.

B: Fraud designed to benefit the organization and fraud perpetrated to the detriment of the organization.

C: Acceptance of bribes or kickbacks and improper related-party transactions.

D: Acceptance of kickbacks or embezzlement and misappropriation of assets.

Answer Explanations

Answer (a) is incorrect. These are examples of kinds of fraud within the two general categories or types given inthe Standards.Answer (b) is the correct answer. These are the two overall categories or types of fraud given in the IIA Standards.Answer (c) is incorrect. These are examples of kinds of fraud within the two general categories or types given inthe Standards.Answer (d) is incorrect. These are examples of kinds of fraud within the two general categories or types given inthe Standards.

Question: V2C4-0044A company hired a highly qualified accounts payable manager who had been terminated from another company foralleged wrongdoing. Six months later the manager diverted $12,000 by sending duplicate payments of invoices to arelative. A control that might have prevented this situation would be to

Answers

A: Adequately check prior employment backgrounds for all new employees.

B: Not hire individuals who appear overqualified for a job.



C: Verify educational background for all new employees.

D: Check to see if close relatives work for vendors.

Answer Explanations

Answer (a) is the correct answer. This practice might give some leads to previous shortcomings.Answer (b) is incorrect. Individuals in their declining years may be forced to accept jobs below their fullcapabilities.Answer (c) is incorrect. This does not include checking prior employment.Answer (d) is incorrect. This is not an adequate control in this scenario.

Question: V2C4-0045Red flags are conditions that indicate a higher likelihood of fraud. Which of the following would not be considereda red flag?

Answers

A: Management has delegated the authority to make purchases under a certain dollar limit tosubordinates.

B: An individual has held the same cash-handling job for an extended period without any rotation ofduties.

C: An individual handling marketable securities is responsible for making the purchases, recording thepurchases, and reporting any discrepancies and gains/losses to senior management.

D: The assignment of responsibility and accountability in the accounts receivable department is not clear.

Answer Explanations

Answer (a) is the correct answer. This is an acceptable control procedure aimed at limiting risk while promotingefficiency. It is not, by itself, considered a red flag.Answer (b) is incorrect. Lack of rotation of duties or cross-training for sensitive jobs is one of the red-flag listfactors.Answer (c) is incorrect. This would be an example of an inappropriate segregation of duties, which is an identifiedred flag.Answer (d) is incorrect. This is an identified red flag.

Question: V2C4-0046Internal auditors and management have become increasingly concerned about computer fraud. Which of thefollowing control procedures would be least important in preventing computer fraud?

Answers



A: Program change control that requires a distinction between production programs and test programs.

B: Testing of new applications by users during the systems development process.

C: Segregation of duties between the applications programmer and the program librarian function.

D: Segregation of duties between the programmer and systems analyst.

Answer Explanations

Answer (a) is incorrect. This is one of the elements of good program change control.Answer (b) is incorrect. Testing of new applications by users is one of the most important controls to help preventcomputer fraud.Answer (c) is incorrect. An adequate control structure over program changes is one of the most important controlprocedures in a computerized environment.Answer (d) is the correct answer. This would be the least important control procedure. The analyst is responsiblefor communicating the nature of the design to the programmer. There is no control reason not to combine thesefunctions.

Question: V2C4-0047During a regularly scheduled IT audit of a major division, the IT auditor discovers a complicated programmingalgorithm that adds costs to a cost-plus program billing the government. The amount added accounted for 95% ofthe net income for the division for the most recent year. Upon further investigation, the IT auditor finds that onlythe marketing manager, the divisional manager, and the programmer know of the algorithm.

The company has a separate section to investigate fraud. The auditor communicates with management and thespecial investigation section, and the investigation is turned over to that group. However, after a month, it becomesapparent that senior management has instructed the group to “not make waves” and to drop the investigation. Theinternal audit department should

Answers

A: Immediately report the circumstances and the IT auditor's findings to the audit committee.

B: Immediately report the circumstances and the IT auditor's findings to the appropriate governmentalregulatory agency because the auditor cannot knowingly be a party to an illegal act.

C: Take no further action. The nature of the fraud has been reported to the proper authorities within thecompany and the auditor has no power to pursue the investigation further.

D: Report the findings to the external auditor because the external auditor should be aware of anymaterial misstatement of account balances.

Answer Explanations

Answer (a) is the correct answer. The auditor cannot knowingly be a party to any illegal act. If the auditor does notdo anything, he or she might be perceived as a party. The auditor should report the problem directly to the auditcommittee and await its decision as to further action to be taken.Answer (b) is incorrect. Although the action recommended is necessary to ultimately disassociate the auditor from



the fraud, alternatives within the organization should be pursued first. That alternative is represented in response(a).Answer (c) is incorrect. Doing nothing is not acceptable. The auditor could be perceived as a party to the fraud ifno action is taken.Answer (d) is incorrect. The auditor is not required to report the finding to the external auditor, but should be freeto communicate the problem if the external auditor makes an inquiry.

Question: V2C4-0048Which of the following statements correctly characterize(s) the “red flags” literature that has recently developed inthe auditing profession?

I. Red flags are items or actions that have been associated with fraudulent conduct.II. The auditor should document all red flags that may have been noted on an audit engagement.III. Many red flags are “subjective” in nature and might not come to the auditor’s attention during the course of an

audit that is properly planned and conducted in accordance with the Standards.

Answers

A: I and II.

B: I and III.

C: II and III.

D: III only.

Answer Explanations

Answer (a) is incorrect. The auditor is to be alert to red flags and should investigate any situations that mightinclude potential fraud. But the auditor is not required to document all personal red flags, for example, excessivegambling debts or excessive living style. The requirement to document these red flags is pertinent only when theauditor continues a fraud investigation or the item is pertinent to a particular audit finding.Answer (b) is the correct answer. Red flags are associated with fraudulent conduct. However, many red flags arepersonal in nature and would not necessarily come to the attention of the auditor. These would include items suchas excessive living style by a manager, excessive gambling, and so on.Answer (c) is incorrect because Item II is not required.Answer (d) is incorrect because item I is also a correct statement.

Question: V2C4-0049An employee of an insurance company processed a fraudulent policy loan application for an amount less than theestablished level requiring supervisory review. The employee then obtained the check and cashed it by forging theendorsement. To prevent the loan’s appearance on a subsequent policyholder statement, the loan amount was trans-ferred to a “suspense” account. Which of the following should expose this situation at the earliest date?

Answers

A: A computer report identifying unusual entries to the suspense account.



B: The use of prenumbered checks which are periodically accounted for.

C: An annual internal audit.

D: Regular reconciliation of the "suspense" account performed by an independent employee.

Answer Explanations

Answer (a) is the correct answer. A programmed computer output notification identifying unusual entries wouldidentify the write off of the payee’s account to suspense as an unusual item immediately when it occurs.Answer (b) is incorrect because this is a good control procedure.Answer (c) is incorrect. The annual internal audit may detect the fraud, but it is unlikely to do so because of thesmall amount involved. In any case the timing of the internal audit may delay discovery.Answer (d) is incorrect. Regular reconciliation of the suspense account would occur at a date later than thecomputer output notification.

Question: V2C4-0050The primary purpose of operating a fraud hotline within a company is to

Answers

A: Reduce total costs of operating the company.

B: Measure how well organizational units are achieving the organization's goals.

C: Establish channels of communication for people to report suspected improprieties.

D: Concentrate on areas that deserve attention and to place less attention on areas operating as expected.

Answer Explanations

Answer (a) is incorrect. Performance measures focus on reducing the total costs of the company as a whole.Answer (b) is incorrect. Responsibility accounting is concerned with measuring how well organizational membersare achieving the organization’s goals.Answer (c) is the correct answer. Fraud hotlines may identify areas where existing internal controls need to bemodified or enhanced.Answer (d) is incorrect. Management by exception concentrates on areas that deserve attention and places lessattention on areas operating as expected.

Question: V2C4-0051A programmer accumulating round-off errors into one account that is later accessed by the programmer is a type ofcomputer fraud. The best way to prevent this type of fraud is to

Answers



A: Build in judgment with reasonableness tests.

B: Independently test programs during development and limit access to the programs.

C: Segregate duties of systems development and programming.

D: Use control totals and check the results of the computer.

Answer Explanations

Answer (a) is incorrect. Reasonableness tests will not overcome this error, since in this particular type of fraud allthe amounts will balance.Answer (b) is the correct answer. The accumulation of round-off errors into one person’s account is a procedurewritten into the program. Independent testing of a program will lead to discovery of this programmed fraud. Ifaccess to programs was not limited, it would be possible for a programmer to change a program without approval.Answer (c) is incorrect. Segregation of duties between systems development and programming would not generallyprevent this type of error, since programmers possess the skills required to construct the program. Unless thecontrols outlined in choice (b) are present, the fraud would go undetected.Answer (d) is incorrect. Since the particular fraud results in a balanced entry, control totals would not detect thefraud.

Question: V2C4-0052Which of the following statements is(are) correct regarding the deterrence of fraud?

I. The primary means of deterring fraud is through an effective control system initiated by top management.II. Internal auditors are responsible for assisting in the deterrence of fraud by examining and evaluating the

adequacy of the control system.III. Internal auditors should determine whether communication channels provide management with adequate and

reliable information regarding the effectiveness of the control system and the occurrence of unusual transac-tions.

Answers

A: I only.

B: I and II only.

C: II only.

D: I, II, and III.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. All three items are correct statements according to the IIA Standards.



Question: V2C4-0053A significant employee fraud took place shortly after an internal audit. The Internal auditor may not have properlyfulfilled the responsibility for the deterrence of fraud by failing to note and report that

Answers

A: Policies, practices, and procedures to monitor activities and safeguard assets were less extensive inlow-risk areas than in high-risk areas.

B: A system of control that depended on separation of duties could be circumvented by collusion amongthree employees.

C: There were no written policies describing prohibited activities and the action required wheneverviolations are discovered.

D: Divisional employees had not been properly trained to distinguish between bona fide signatures andcleverly forged ones on authorization forms.

Answer Explanations

Answer (a) is incorrect. On a cost/benefit basis, it is entirely reasonable to have more extensive control policies,practices, and procedures in high-risk areas.Answer (b) is incorrect. Even the best of internal control systems can often be circumvented by collusion.Answer (c) is the correct answer. In carrying out its responsibility for the deterrence of fraud, internal auditingshould determine whether such written policy statements exist.Answer (d) is incorrect. Forgeries, like collusion, can circumvent even the best of internal control systems.

Question: V2C4-0054Fraudulent use of corporate credit cards would be minimized by which of the following internal control proce-dures?

Answers

A: Establishing a corporate policy on the issuance of credit cards to authorized employees.

B: Reviewing the validity of credit card need at executive and operating levels on a periodic basis.

C: Reconciling the monthly statement from the credit card company with the submitted copies of thecardholders' charge slips.

D: Subjecting credit card charges to the same expense controls as those used on regular company expenseforms.

Answer Explanations

Answer (a) is incorrect. Establishing a corporate policy on the issuance of credit cards does nothing to prevent



fraudulent usage by those authorized to use company cards.Answer (b) is incorrect. This procedure helps ensure the validity of issuance rather than usage within prescribedlimitations.Answer (c) is incorrect. Reconciling the monthly statement with the cardholders’ charge slips would determine thatthe amount of the separate charge items and the vendor codes were in agreement. However, amounts charged mayexceed authorized limits and amounts incurred may not be business related. The same expense controls should beapplied to charge transactions as those applied to currency.Answer (d) is the correct answer. Subjecting credit card expenses to the same controls used in processing similarexpense reports. In this way, per diems and authorization limits would be reviewed.

Question: V2C4-0055A fraud was perpetrated in a moderate-sized company when the accounting clerk was delegated too much respon-sibility. During the year, the company switched suppliers of a service to a new vendor. The accounting clerkcontinued to submit fraudulent invoices from the “old supplier.” Because contracting for services and approval ofsupplier invoices had been delegated to the clerk, it was possible for her to continue billings from the old supplierand deposit the subsequent checks, which she was responsible to mail, into a new account she opened in the nameof the old supplier. The clerk was considered an excellent employee and eventually was improperly given theadded responsibility of preparing the department budgets. This added responsibility allowed her to actually budgetfor the amount of the fraudulent payments.

Analytical tests can be useful in detecting frauds. Which of the following analytical procedures would most likelyhave signaled the existence of the fraud?

Answers

A: Current production with prior period production.

B: Current and prior period service expenses.

C: Budget to actual service expense.

D: Company cost of goods sold to industry cost of goods sold.

Answer Explanations

Answer (a) is incorrect. Comparison of production totals would not provide information concerning suppliers orthe amount of materials used.Answer (b) is the correct answer. Period-to-period analysis of expenses would have shown a sudden increase inmaterial costs.Answer (c) is incorrect. At the time the fraud was uncovered, the amount taken was included in the organization’sbudget.Answer (d) is incorrect. The service may not have been part of cost of goods sold, but if so, comparison to industryaverages is not as likely to reveal the extra cost as is comparison of company data period to period.

Question: V2C4-0056A fraud was perpetrated in a moderate-sized company when the accounting clerk was delegated too much respon-sibility. During the year, the company switched suppliers of a service to a new vendor. The accounting clerkcontinued to submit fraudulent invoices from the “old supplier.” Because contracting for services and approval of



supplier invoices had been delegated to the clerk, it was possible for her to continue billings from the old supplierand deposit the subsequent checks, which she was responsible to mail, into a new account she opened in the nameof the old supplier. The clerk was considered an excellent employee and eventually was improperly given theadded responsibility of preparing the department budgets. This added responsibility allowed her to actually budgetfor the amount of the fraudulent payments.

Which of the following controls would be least likely to prevent or detect the fraud described above?

Answers

A: Require authorization of payments by someone other than the clerk negotiating the contract.

B: Comparison by person signing checks of invoices to an independent verification of services received.

C: Budget preparation by someone other than person signing contract and approving payment.

D: Mailing of check by someone other than persons responsible for check signing or invoice approval.

Answer Explanations

Answer (a) is incorrect. Separating contracting for service and approval of invoices would have prevented thefraud.Answer (b) is incorrect. An independent verification of services received, reviewed by the check signor, wouldhave prevented payment for services not received.Answer (c) is incorrect. Independent budget preparation would have allowed an actual to budget comparison todetect the payments.Answer (d) is the correct answer. Once invoices have been approved and checks are prepared and signed, themailing of the check by an independent person provides no means of preventing improper payments.

Question: V2C4-0057A fraud was perpetrated in a moderate-sized company when the accounting clerk was delegated too much respon-sibility. During the year, the company switched suppliers of a service to a new vendor. The accounting clerkcontinued to submit fraudulent invoices from the “old supplier.” Because contracting for services and approval ofsupplier invoices had been delegated to the clerk, it was possible for her to continue billings from the old supplierand deposit the subsequent checks, which she was responsible to mail, into a new account she opened in the nameof the old supplier. The clerk was considered an excellent employee and eventually was improperly given theadded responsibility of preparing the department budgets. This added responsibility allowed her to actually budgetfor the amount of the fraudulent payments.

Which of the following audit procedures would most likely lead to the detection of the fraud?

Answers

A: Take a sample of paid invoices and verify receipt of services by departments involved.

B: Trace a sample of checks disbursed to approved invoices for services.

C: Perform bank statement reconciliation and account for all outstanding checks.

D: Trace a sample of receiving documents to invoices and to checks disbursed.



Answer Explanations

Answer (a) is the correct answer. Confirming with the using department the receipt of services that have been paidfor would uncover the fraud.Answer (b) is incorrect. The clerk approved the fraudulent invoices, and an “approved” invoice would thereforesupport each check.Answer (c) is incorrect. Bank statement reconciliations do not test the validity of the cash payments.Answer (d) is incorrect. The test begins with valid receiving reports; the fraudulent payments would not bedetected.

Question: V2C4-0058A production manager for a moderate-sized manufacturing company began ordering excessive raw materials andhad them delivered to a wholesale company he runs as a side business. He falsified receiving documents and ap-proved the invoices for payment. Which of the following audit procedures would most likely detect this fraud?

Answers

A: Take a sample of cash disbursements; compare purchase orders, receiving reports, invoices, and checkcopies.

B: Take a sample and confirm the amount purchased, purchase price, and date of shipment with thevendors.

C: Observe the receiving dock and count material received; compare your counts to receiving reportscompleted by receiving personnel.

D: Prepare analytical tests, comparing production, material purchased, and raw material inventory levelsand investigate differences.

Answer Explanations

Answer (a) is incorrect. Because documents are falsified, all supporting documents would match for each cashdisbursement.Answer (b) is incorrect. Vendors would confirm all transactions, because all have been made.Answer (c) is incorrect. Fraudulent orders are shipped to another location; the receiving dock procedures wouldappear correct.Answer (d) is the correct answer. Because materials are shipped and used in another business, the analyticcomparisons would show an unexplained increase in materials used.

Question: V2C4-0059A purchasing agent acquired items for personal use with company funds. The company allowed designated em-ployees to purchase as much as $250 per day in merchandise under open-ended contracts. Supervisory approval ofthe purchases was required, but that information was not communicated to the vendor. Instead of reviewing andauthorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the monthwithout reviewing any of the supporting documentation. Since purchases of this nature were not subject to normalcompany receiving policies, the dishonest employee picked up the supplies at the vendor’s warehouse. All



purchases were for items routinely ordered by the company. During the past year, the employee amassed enoughmerchandise to start a printing and photography business.

Which of the following internal controls would have been most effective in preventing this fraud?

Answers

A: Allowing purchases only from a list of preapproved vendors.

B: Requiring the use of prenumbered purchase orders for all purchases of merchandise.

C: Canceling supporting documents, such as purchase orders and receiving reports, at the time invoicesare paid.

D: Establishing separation of duties between the ordering and receiving of merchandise.

Answer Explanations

Answer (a) is incorrect. There is nothing suggesting inappropriate actions by the vendor or collusion between thevendor and the dishonest employee.Answer (b) is incorrect. Purchase orders are being issued by the dishonest employee, who has the authority to doso. They may be prenumbered—that would not prevent him from engaging in this fraud.Answer (c) is incorrect. This control is to prevent the same document from being used to support two identicalpayments; that is not the case here.Answer (d) is the correct answer. If the supplies in question had been sent to the company and a receiving reporthad been signed by an employee other than the one ordering them, the fraud could not have occurred.

Question: V2C4-0060A purchasing agent acquired items for personal use with company funds. The company allowed designated em-ployees to purchase as much as $250 per day in merchandise under open-ended contracts. Supervisory approval ofthe purchases was required, but that information was not communicated to the vendor. Instead of reviewing andauthorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the monthwithout reviewing any of the supporting documentation. Since purchases of this nature were not subject to normalcompany receiving policies, the dishonest employee picked up the supplies at the vendor’s warehouse. Allpurchases were for items routinely ordered by the company. During the past year, the employee amassed enoughmerchandise to start a printing and photography business.

Which of the following audit procedures performed by the internal auditor would be most effective in leading tothe discovery of this fraud?

Answers

A: Tracing selected canceled checks to the cash payments journal and to the related vendors' invoices.

B: Performing a trend analysis of printing supplies expenses for a two-year period.

C: Tracing prices and quantities on selected vendors' invoices to the related purchase orders.

D: Recomputing the clerical accuracy of selected vendors' invoices, including discounts and sales taxes.



Answer Explanations

Answer (a) is incorrect. There is a legitimate vendor’s invoice for each cash payment related to this fraud.Answer (b) is the correct answer. Analytical procedures would identify an excess use of supplies.Answer (c) is incorrect. There is nothing in this scenario that would cause the invoice prices or quantities to bedifferent from those on the purchase order prepared by the dishonest employee.Answer (d) is incorrect. Recomputations prove accuracy of invoices, but do not detect fraud.

Question: V2C4-0061A purchasing agent acquired items for personal use with company funds. The company allowed designated em-ployees to purchase as much as $250 per day in merchandise under open-ended contracts. Supervisory approval ofthe purchases was required, but that information was not communicated to the vendor. Instead of reviewing andauthorizing each purchase order, supervisors routinely signed the authorization sheet at the end of the monthwithout reviewing any of the supporting documentation. Since purchases of this nature were not subject to normalcompany receiving policies, the dishonest employee picked up the supplies at the vendor’s warehouse. Allpurchases were for items routinely ordered by the company. During the past year, the employee amassed enoughmerchandise to start a printing and photography business.

Once the internal auditor becomes reasonably certain that this defalcation is taking place, what should the auditordo next?

Answers

A: Immediately report the matter to the appropriate law enforcement official, since a potential felony isinvolved.

B: Say nothing now, but include a description of the suspected defalcation in the audit.

C: Immediately report the matter to the appropriate level of management.

D: Immediately discuss the matter with the employee suspected of the defalcation in order to confirm theaudit findings.

Answer Explanations

Answer (a) is incorrect. The Standards state that “internal auditors are not responsible for notifying outsideauthorities of suspected wrongdoing.”Answer (b) is incorrect. A delay in reporting the suspected defalcation will allow it to continue and/or give thesuspected dishonest employee time to destroy or conceal important evidence.Answer (c) is the correct answer. The IIA Standards state: “When an internal auditor suspects wrongdoing, theappropriate authorities within the organization should be informed.”Answer (d) is incorrect. Once the dishonest employee knows that he or she is suspected, the person has an opportu-nity to destroy or to conceal important evidence or to flee to avoid apprehension.

Question: V2C4-0062Management discovers that a supervisor at one of their restaurant locations removes excess cash and resets salestotals throughout the day on the point-of-sale (POS) system. At closing the supervisor deposits cash equal to the



recorded sales on the POS system and keeps the rest.

The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank depositslip to the company’s revenue accounting department. The revenue accounting department records the sales and thecash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differencesbetween sales and deposits are recorded in an over/short account and, if necessary, followed up with the locationsupervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to seethat they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POSsystem are kept by the supervisor for one week at the location and then destroyed.

Which of the following control procedures allowed the fraud to occur?

Answers

A: The accounting of customer food checks by the supervisor.

B: The deposit of cash receipts by the supervisor.

C: The matching of the bank deposit slips to the bank statement by revenue accounting.

D: The forwarding of the close-of-day POS reports to revenue accounting.

Answer Explanations

Answer (a) is the correct answer. An inappropriate segregation of duties was created when responsibility foraccounting for customer food checks and the depositing of receipts was given to the supervisor.Answer (b) is incorrect. The depositing of receipts by the supervisor by itself is not the problem; it is the access tocash and ability to reset POS totals throughout the day that allowed the fraud.Answer (c) is incorrect. This is an independent verification of the deposits made by the supervisor.Answer (d) is incorrect. This is a step in the process of independently verifying sales.

Question: V2C4-0063Management discovers that a supervisor at one of their restaurant locations removes excess cash and resets salestotals throughout the day on the point-of-sale (POS) system. At closing the supervisor deposits cash equal to therecorded sales on the POS system and keeps the rest.

The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank depositslip to the company’s revenue accounting department. The revenue accounting department records the sales and thecash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differencesbetween sales and deposits are recorded in an over/short account and, if necessary, followed up with the locationsupervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to seethat they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POSsystem are kept by the supervisor for one week at the location and then destroyed.

Which of the following audit procedures would have detected the fraud?

Answers

A: Flowcharting the controls over the verification of bank deposit.

B: Comparing a sample of the close of day POS reports to copies of the bank deposit slips.



C: On a test basis, verifying that the serial-numbered customer food checks are accounted for.

D: For selected days, reconciling the total of customer food checks to daily bank deposits.

Answer Explanations

Answer (a) is incorrect. The fraud involved receipts, not deposits.Answer (b) is incorrect. The fraud involved altering the amounts on the close-of-day POS reports by resetting thePOS system totals to zero.Answer (c) is incorrect. The accounting for individual customer food checks would not have detected the fraudbecause it did not involve manipulation of these devices.Answer (d) is the correct answer. Using the total of the customer food checks as a confirmation of sales wouldhave detected the shortage in the bank deposit.

Question: V2C4-0064The IIA Standards require internal auditors to have knowledge about factors (red flags) that have proven to beassociated with management fraud. Which of the following factors have generally not been associated withmanagement fraud?

Answers

A: Generous performance-based reward systems.

B: A domineering management.

C: Regular comparison of actual results to budgets.

D: A management preoccupation with increased financial performance.

Answer Explanations

Answer (a) is incorrect. Generous reward systems can lead managers to falsify records so that rewards can beachieved.Answer (b) is incorrect. Domineering management cause managers to falsify records so as to meet the demands ofupper management.Answer (c) is the correct answer. Regular actual to budget comparisons encourage performance and detectproblems before they become too large.Answer (d) is incorrect. Preoccupation with increased financial performance can cause management to falsifyrecords to show increased performance.

Question: V2C4-0065A personnel department is responsible for processing placement agency fees for new hires. A recruiter establishedsome bogus placement agencies and, when interviewing walk-in applicants, the recruiter would list one of thebogus agencies as referring the candidate. A possible means of detection or deterrence is to

Answers



A: Process all personnel agency invoices via a purchase order through the purchasing department.

B: Verify new vendors to firms listed in a professional association catalog and/or verify the vendor nameand address through the telephone book.

C: Monitor the closeness of the relationships of recruiters with specific vendors.

D: Require all employees to sign an annual conflict of interest statement.

Answer Explanations

Answer (a) is incorrect. Invoices being processed through purchasing will not add any additional controls.Purchasing would have to make an independent source selection of the vendor.Answer (b) is the correct answer. This type of checking would prove that the agency is a genuine one.Answer (c) is incorrect. This is not practical for all employees. The degree of closeness in itself is not a conflict normight it be subject to scrutiny.Answer (d) is incorrect. If a person was unethical, he or she probably would not disclose any illegal activity thatthe person is processing through the company.

Question: V2C4-0066Experience has shown that certain conditions in an organization are symptoms of possible management fraud.Which of the following conditions would not be considered an indicator of possible fraud?

Answers

A: Managers regularly assume subordinates' duties.

B: Managers dealing in matters outside their profit center's scope.

C: Mangers not complying with corporate directives and procedures.

D: Managers subject to formal performance reviews on a regular basis.

Answer Explanations

Answer (a) is incorrect because it is a symptom of possible fraud.Answer (b) is incorrect because it is a symptom of possible fraud.

Answer (c) is incorrect because it is a symptom of possible fraud.

Answer (d) is the correct answer. This would be an internal control strength.

Question: V2C4-0067Which of the following is an indicator of possible financial reporting fraud being perpetrated by management of amanufacturer?



Answers

A: A trend analysis discloses (1) sales increases of 50% and (2) cost of goods sold increases of 25%.

B: A ratio analysis discloses (1) sales of $50 million and (2) cost of goods sold of $25 million.

C: A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goodssold to sales is 0.4 and (2) the industry average ratio of cost of goods sold to sales is 0.5.

D: A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goodssold to sales is 0.5 and (2) the industry average ratio of cost of goods sold to sales is 0.4.

Answer Explanations

Answer (a) is the correct answer. A 50% increase in sales supported by a 25% increase in cost of goods sold iseither fortuitous or fraudulent. Increases in sales are usually accompanied by close to proportional increases in costof goods sold. Examples of situation in which increases in sales can be disproportionately larger than increases incost of goods sold include: (1) operations within the realm of economies of scale (increasing returns to scale) and(2) the introduction of a highly accepted fashion item. Cases where disproportionately large sales increases indicatefraudulent conduct include: (1) collusion by the host firm’s sales personnel and the buying firm’s purchasing per-sonnel and (2) collusion by members of two departments within the host firm, such as sales and transportation.Since the internal auditor would not know whether the disproportionately large increase in sales is legitimate, theauditor should view this as an indicator of possible fraud.Answer (b) is incorrect. Sales of $50 million and cost of goods sold of $25 million yield a gross profit margin(GPM) of 50%. Manufacturers can expect a range of 40 to 60% on this ratio.Answer (c) is incorrect. These data indicate an industry GPM of 0.5 and host firm GPM of 0.4. The greater GPMrealized by the host firm may result from any number of reasonable causes. These include: (1) greater efficienciesexercised by the host firm, (2) greater sales effort (or a more highly accepted product), and (3) measurement errors.Answer (d) is incorrect. These data indicate an industry GPM of 0.4 and a host firm GPM of 0.5. The lower GPMrealized by the host firm may result from such causes as: (1) host firm inefficiencies, (2) less acceptance of hostfirm product or less sales effort, and (3) measurement errors.

Question: V2C4-0068Which of the following might be considered a red flag indicating possible fraud in a large manufacturing companywith several subsidiaries?

Answers

A: The existence of a financial subsidiary.

B: A consistent record of above average return on investment for all subsidiaries.

C: Complex sales transactions and transfers of funds between affiliated companies.

D: Use of separate bank accounts for payrolls by each subsidiary.

Answer Explanations

Answer (a) is incorrect. Mere existence does not indicate fraud.



Answer (b) is incorrect. A consistent record of above-average return on investment can be an indication of goodmanagement.Answer (c) is the correct answer. Experience shows that such transfers are often used in fraud schemes. This is theonly red flag among the options.Answer (d) is incorrect. Use of separate bank accounts is normal and convenient.

Question: V2C4-0069A subsidiary president terminated a controller and hired a replacement without the required corporate approvals.Sales, cash flow, and profit statistics were then manipulated by the new controller and president via accelerateddepreciation and sale of capital assets to obtain larger performance bonuses for the controller and the subsidiarypresident. An approach that might detect this fraudulent activity would be

Answers

A: Analysis of overall management control for segregation of duties.

B: Required exit interviews for all terminated employees.

C: Periodic changes of outside public accountants.

D: Regular analytical review of operating divisions.

Answer Explanations

Answer (a) is incorrect. Analysis of segregation of duties will not detect fraudulent activity; it only shows areaswhere opportunity exists.Answer (b) is incorrect. Exit interviews are not as effective at the officer level, since most individuals will not wantto compromise severance arrangements.Answer (c) is incorrect. Changing outside auditor’s coverage of divisions will not mandate better due diligencereviews.Answer (d) is the correct answer. Analytical review of the divisions would reveal trends that might indicate fraud.

Question: V2C4-0070Bank management suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loanproceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about theloan officer include

• A high standard of living, explained as the result of sound investments and not taking vacations• An expensive personal car obtained through business contacts• Gasoline and repair bills submitted for an assigned company car that is higher than company average

(mileage logs were submitted on a quarterly basis)• Marked annoyance with questions from auditors

In this situation, typical indicators of the suspected fraud would include all of the following except:

Answers

A: Not taking an annual vacation.



B: Becoming easily annoyed with auditor inquiries about questionable loans.

C: Explaining a high standard of living as the result of investments.

D: Submitting gasoline and repair bills that are higher than company average.

Answer Explanations

Answer (a) is incorrect. Not taking an annual vacation is a fraud indicator.Answer (b) is incorrect. Becoming easily annoyed with auditor questions is a fraud indicator.Answer (c) is incorrect. Explaining a high standard of living is a fraud indicator.Answer (d) is the correct answer. Answer (d) is not correlated to making fraudulent loans.




The most appropriate trend analysis to indicate this potential fraud is

Answers

A: Loan default rates by loan officer.

B: Accumulation of unpaid vacation days.

C: Automobile operating expenses by loan officer.

D: Total dollar volume of loans by loan officer.

Answer Explanations

Answer (a) is the correct answer. Trend analysis would detect an increase in the default rate due to bogus loans.Answer (b) is incorrect. Trend analysis would not detect annual vacation not taken.Answer (c) is incorrect. Although trend analysis could detect higher-than-average expenses for operation of thecompany car, it has no relationship to suspected fraudulent loans.Answer (d) is incorrect. Total dollar value of loans made would not correlate to fraudulent loans.

Question: V2C4-0072Bank management suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loanproceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about the



loan officer include



The extent of loans made to fictitious borrowers by the loan officer could best be determined by

Answers

A: Reviewing a representative sample of the loan officer's transactions for compliance with bank policiesand procedures.

B: Reviewing a representative sample of loan files for properly completed documents, such as loanagreements, credit approvals, and approval of secured collateral.

C: Comparing current loan approval balances with those of prior years.

D: Requesting positive confirmations for all outstanding loans made by the loan officer.

Answer Explanations

Answer (a) is incorrect. A compliance audit would not show which loans were made to fictitious borrowers.Answer (b) is the correct answer. Secured collateral would be difficult to obtain.Answer (c) is incorrect because the loan officer’s level of activity might be higher or lower without regard tofraudulent activity.Answer (d) is incorrect because the perpetrator could easily make positive account confirmations.




The above fraud would least likely be discovered by

Answers

A: Analyses of the number of loans made by each loan officer.

B: Analysis of total dollar volume of loans by loan officer.

C: External or internal audits of loan files.



D: Reconciliation of total loans outstanding to the general ledger balance.

Answer Explanations

Answer (a) is incorrect because this procedure has some possibility of detecting fraud.Answer (b) is incorrect because this procedure has some possibility of detecting fraud.

Answer (c) is incorrect because this procedure has some possibility of detecting fraud.

Answer (d) is the correct answer. Reconciling outstanding loans to the general ledger would be least likely todiscover this fraud.

Question: V2C4-0074Which of the following policies is most likely to result in an environment conducive to the occurrence of fraud?

Answers

A: Budget preparation input by the employees who are responsible for meeting the budget.

B: Unreasonable sales and production goals.

C: The division's hiring process frequently results in the rejection of adequately trained applicants.

D: The application of some accounting controls on a sample basis.

Answer Explanations

Answer (a) is incorrect. Participatory budgeting can reduce antagonism to budgets and reduce the likelihood ofinappropriate means of meeting the budget.Answer (b) is the correct answer. A prod to achieve an unrealistically high sales or production quota can become aprod to falsify the records so that it appears the quota has been met.Answer (c) is incorrect. First, hiring policies should be based on factors other than adequate training—such as theapplicants’ personal integrity. Second, in many labor markets the large number of applicants may make causerejection of qualified ones to be unavoidable.Answer (d) is incorrect. Under the “reasonable assurance” concept, the cost of controls should not exceed theirbenefits. It is quite possible that, in some areas, the additional cost of applying controls to all relevant transactions,rather than just a sample of them, may be greater than the resultant savings.

Question: V2C4-0075Internal auditors must exercise due care if they are to meet their responsibilities for fraud detection. Thus, the ex-istence of certain conditions should raise red flags and arouse auditors’ professional skepticism concerning possiblefraud. Which of the following is most likely to be considered an indication of possible fraud?

Answers

A: A new management team installed as the result of a takeover.



B: Rapid turnover of financial executives.

C: Rapid expansion into new markets.

D: An Internal Revenue Service audit of tax returns.

Answer Explanations

Answer (a) is incorrect. This is not unusual and, in and of itself, is not an indication of possible fraud.Answer (b) is the correct answer. This is considered a red flag that indicates possible fraud.Answer (c) is incorrect. This is not unusual and, in and of itself, is not an indication of possible fraud.

Answer (b) is incorrect. This is not unusual and, in and of itself, is not an indication of possible fraud.

Question: V2C4-0076In order for internal auditors to be able to recognize potential fraud, they must be aware of the basic characteristicsof fraud. Which of the following is not a characteristic of fraud?

Answers

A: Intentional deception.

B: Taking unfair or dishonest advantage.

C: Perpetration for the benefit or detriment of the organization.

D: Negligence on the part of executive management.

Answer Explanations

Answer (a) is incorrect because this is a characteristic of fraud.Answer (b) is incorrect because this is a characteristic of fraud.

Answer (c) is incorrect because this is a characteristic of fraud.

Answer (d) is the correct answer. Negligence is not fraud because it does not involve willful wrongdoing.

Question: V2C4-0077Auditors have been advised to look at red flags to determine whether management is involved in a fraud. Which ofthe following does not represent a difficulty in using the red flags as fraud indicators?

Answers

A: Many common red flags are also associated with situations where no fraud exists.



B: Some red flags are difficult to quantify or to evaluate.

C: Red flag information is not gathered as a normal part of an audit engagement.

D: The red flags literature is not well enough established to have a positive impact on auditing.

Answer Explanations

Answer (a) is incorrect. This is a difficulty in using red flags. Red flags are developed through correlation analysis,not necessarily causation analysis.Answer (b) is incorrect. Many red flags, such as management’s attitude, are difficult to quantify.Answer (c) is incorrect. When performing an audit, internal auditors should be alert to the possibility of intentionalwrongdoing, errors, omissions, inefficiency, waste, ineffectiveness, and conflicts of interest.Answer (d) is the correct answer. This is not a difficulty. The red flags literature is well established. Although redflags will be refined in the future as research is done, this does not preclude their effective use.

Question: V2C4-0078Management of a nonprofit organization has been monitoring spending and is concerned because payments tosome vendors appear to be unusually high. Most purchases are made through the purchasing function, which isorganized around three buyers, each with defined purchasing areas. The purchasing agents place the purchaseorders and receive copies of receiving reports to ensure goods are received. They review the reports and comparethem with the purchase orders before sending the items to accounts payable with their approval for payment. Allvendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasingagents. The organization has a policy of requiring three bids on all purchases that exceed $10,000.

Which of the following, if observed, would not indicate the need to search for other indicators of fraud?

Answers

A: The standard of living of one of the purchasing agents has increased.

B: The internal control structure has significant weaknesses.

C: Management, at the purchasing agents' request, has adopted a policy of paying vendors on a moretimely basis to avoid incurring penalty charges.

D: The cost of goods procured seems to be excessive in comparison with previous years.

Answer Explanations

Answer (a) is incorrect. This is generally considered a red flag, which is most indicative of possible fraud.Answer (b) is incorrect. Significant deficiencies are one of the major factors associated with fraud.Answer (c) is the correct answer. This, by itself, would not be considered a red flag. It represents a valid businessreason for more timely payment.Answer (d) is incorrect. An unexpected, and unusual, increase in costs could be considered a red flag.

Question: V2C4-0079



Management of a nonprofit organization has been monitoring spending and is concerned because payments tosome vendors appear to be unusually high. Most purchases are made through the purchasing function, which isorganized around three buyers, each with defined purchasing areas. The purchasing agents place the purchaseorders and receive copies of receiving reports to ensure goods are received. They review the reports and comparethem with the purchase orders before sending the items to accounts payable with their approval for payment. Allvendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasingagents. The organization has a policy of requiring three bids on all purchases that exceed $10,000.

Which of the following statements regarding the internal auditor’s responsibility for detecting fraud in the envi-ronment described in the scenario above is not correct? The auditor should

Answers

A: Detect fraud if red flags are present in the environment.

B: Have sufficient knowledge to correctly identify indicators that fraud may have been committed.

C: Identify control weaknesses that could allow fraud to occur.

D: Evaluate the indicators of fraud sufficiently to determine if a fraud investigation should take place.

Answer Explanations

Answer (a) is the correct answer. The presence of red flags does not make the auditor responsible for detectingfraud.Answer (b) is incorrect because it is a responsibility identified in the IIA Standards.Answer (c) is incorrect because it is a responsibility identified in the IIA Standards.

Answer (d) is incorrect because it is a responsibility identified in the IIA Standards.

Question: V2C4-0080Management of a nonprofit organization has been monitoring spending and is concerned because payments tosome vendors appear to be unusually high. Most purchases are made through the purchasing function, which isorganized around three buyers, each with defined purchasing areas. The purchasing agents place the purchaseorders and receive copies of receiving reports to ensure goods are received. They review the reports and comparethem with the purchase orders before sending the items to accounts payable with their approval for payment. Allvendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasingagents. The organization has a policy of requiring three bids on all purchases that exceed $10,000.

Management has requested that the auditor investigate the possibility of kickbacks going to a purchasing agent.Which of the following procedures would be least effective in addressing management’s concern?

Answers

A: Confirm all contract terms with vendors.

B: Analyze, by purchasing agent, all increases in cost of procured goods from specific vendors.

C: Take a statistical sample of goods purchased and compare purchase prices for goods with those of



other sources of similar goods, such as other companies or catalogs.

D: Observe any changes in the lifestyles or individual consumption habits of the purchasing agentsinvolved.

Answer Explanations

Answer (a) is the correct answer. This would be the least useful procedure because the contract terms are alreadyknown. The confirmation would have to be expanded to inquire as to whether pressure was brought to bear by thepurchasing agent to generate kickbacks—and that approach would be successful only if the kickbacks wereinitiated by the purchasing agent rather than the vendor.Answer (b) is incorrect. This would be the best procedure to gather more insight as to what products and whichpurchasing agent might be involved. It would be an important first step.Answer (c) is incorrect. This would provide information on excess purchase prices.Answer (d) is incorrect. Most (although not all) frauds are accompanied by changes in lifestyles of thosecommitting the fraud. Although not the best procedure, it provides more information than choice (a).

Question: V2C4-0081An auditor is investigating the performance of a division with an unusually large increase in sales, gross margin,and profit.

Which of the following indicators is least likely to indicate the possibility of sales-related fraud in the division?

Answers

A: A significant portion of divisional management compensation is based on reported divisional profits.

B: There is an unusually large amount of sales returns recorded after year-end.

C: The auditor has taken a random sample of sales invoices, but cannot locate a shipping document for anumber of the sales transactions selected for November and December.

D: One of the division's major competitors went out of business during the year.

Answer Explanations

Answer (a) is incorrect. Significant management compensation tied to reported profits has been identified as a redflag for potential fraud investigation.Answer (b) is incorrect. An unusually large amount of sales returns after year-end could indicate that a largeamount of nonvalid (without substance) sales were recorded near the end of the year.Answer (c) is incorrect. The lack of receiving documents would be a good indicator that nonvalid sales wererecorded during November and December.Answer (d) is the correct answer. A decrease in the number of competitors during the year could be a potentialexplanation for the increase in sales and profits.

Question: V2C4-0082An auditor is investigating the performance of a division with an unusually large increase in sales, gross margin,



and profit.

If the auditor continued to suspect fraudulent recording of transactions to increase reported profits, which of thefollowing audit procedures would be least effective?

Answers

A: Take a physical inventory.

B: Develop a schedule of inventory by month and investigate unusual fluctuations by reference to theperpetual inventory records.

C: Prepare a schedule of sales fluctuations and gross margin by month. Investigate unusually highmonths of sales and gross margin by examining support for sales.

D: Perform year-end sales and purchase cutoff tests.

Answer Explanations

Answer (a) is incorrect. This would be an effective procedure because one way to overstate the gross margin wouldbe to overstate inventory.Answer (b) is the correct answer. This would be the least effective procedure. The auditor would have moreinformation by conducting a year-end physical inventory.Answer (c) is incorrect. Sales and gross margin fluctuation analysis identifying unusual months would be a usefulprocedure to indicate the possibility of fraudulent transactions.Answer (d) is incorrect. Performing year-end cutoff tests would be effective in identifying transactions recorded inthe wrong period.

Question: V2C4-0083An auditor is investigating the performance of a division with an unusually large increase in sales, gross margin,and profit.

Without prejudice to answers on the previous question, assume that the analysis shows unusually high sales andgross margin during the months of November and December and the auditor wishes to investigate further. Whichof the following audit procedures would be most effective in analyzing whether fraudulent sales may have beenrecorded?

Answers

A: Take a sample of shipping documents and trace to related sales invoice, noting that all items wereproperly billed.

B: Confirm accounts receivable with large customers.

C: Perform an analytical review comparing sales and gross margin with the previous 10 months and thefirst month of the following year.

D: Use regression analysis techniques for the first 10 months to estimate the sales and cost of goods soldfor the last 2 months.



Answer Explanations

Answer (a) is incorrect. Selecting a sample of shipping documents only provides evidence that all shipments werebilled. The concern here is that sales have been recorded for shipments not made. A more appropriate procedurewould be to select recorded sales and trace back to the underlying documents.Answer (b) is the correct answer. If fictitious sales were recorded, the most likely corresponding debit would be toaccounts receivable. Thus, confirming accounts receivable would be an effective procedure, assuming that thecustomers are willing to respond to confirmations. The alternative best procedure would be to select recorded salesand trace them back to the underlying documents. However, that procedure was not given as an alternative.Answer (c) is incorrect. Analytical review procedures have already been performed and indicate the possibility of amisstatement. The auditor now needs to perform detailed tests to determine the existence of misstatements.Answer (d) is incorrect. Regression analysis would potentially indicate the existence of misstatements. That hasalready been accomplished by the analytical review techniques.

Question: V2C4-0084The internal auditing department has been assigned to perform an audit of a division. Based on background review,the auditor knows the following about management policies:

• Company policy is to rapidly promote divisional managers who show significant success. Thus, successfulmanagers rarely stay at a division for more than three years.

• A significant portion of division management’s compensation comes in the form of bonuses based on thedivision’s profitability.

The division was identified by senior management as a turnaround opportunity. The division is growing, but is notscheduled for a full audit by the external auditors this year. The division has been growing about 7% per year forthe past three years and uses a standard cost system.

During the preliminary review, the auditor notes the following changes in financial data compared to the prior year:

• Sales have increased by 10%.• Cost of goods sold has increased by 2%.• Inventory has increased by 15%.• Divisional net income has increased by 8%.

Which of the following items might alert the auditor to the possibility of fraud in the division?

Answers

A: The division is not scheduled for an external audit this year.

B: Sales have increased by 10%.

C: A significant portion of management's compensation is directly tied to reported net income of thedivision.

D: All of the above.

Answer Explanations

Answer (a) is incorrect. This factor has not been identified as a significant red flag. In addition, the division isaudited by the internal audit department.Answer (b) is incorrect. Sales have normally been increasing by about 7% at this division. Thus, an increase of10%, by itself, is not unexpected and would not raise a red flag.



Answer (c) is the correct answer. This is one of the most common red flags identified in the lIA Standards.Answer (d) is incorrect because neither choice (b) nor (c) is a red flag.







It is November and the audit manager is finalizing plans for a year-end audit of the division. Based on the abovedata, the audit procedure with highest priority would be to

Answers

A: Select sales transactions and trace shipping documents to entries into cost of goods sold to determineif all shipments were recorded.

B: Schedule a complete count of inventory at year-end and have the auditor observe and test the year-endinventory.

C: Schedule a complete investigation of the standard cost system by preparing cost buildups of a sampleof products.

D: Schedule a year-end sales cutoff test.

Answer Explanations

Answer (a) is incorrect. This would be an appropriate procedure, but the major problem appears to be existence ofinventory, and the auditor should start there.Answer (b) is the correct answer. The data would seem to indicate that inventory is overstated and cost of goodssold is understated. Inventory might be overstated because of either quantity or cost differences. Since we arenearing year-end, the most appropriate procedure would be to begin with a physical observation of inventory andexpand to price tests after establishing the existence of inventory.Answer (c) is incorrect. This would be an appropriate procedure, but the major problem appears to be existence ofinventory, and the auditor should start there.

Answer (d) is incorrect. The problem is occurring during normal operations. Because of the red flags, the auditorshould schedule a cutoff test, but the existing red flags point primarily to a problem with inventory overstatement.









If the auditor decides there are significant problems with the standard cost system, the next audit step to performwould be to

Answers

A: Interview divisional management to determine why the standard cost system has not been updated ona timely basis.

B: Select a random sample of products and review the standard cost buildup by tracing purchases to thestandard cost record.

C: Use generalized audit software to prepare a listing of gross margin by product by comparing standardcost with sales price. Select all high-gross-margin items for further investigation.

D: Schedule all variances and determine their source and their disposition, that is, whether they areallocated to inventory or cost of goods sold.

Answer Explanations

Answer (a) is incorrect. It would be inappropriate to interview management to determine why the standard costshave not been updated when the auditor does not yet have evidence that the standard costs are misstated.Answer (b) is incorrect. This would follow choice (a), and would need to test more than the correct recording ofpurchases. It would also need to test for proper allocation of labor and overhead costs.Answer (c) is incorrect. This procedure may have merit, but there is no indication that higher-gross-marginproducts are the ones with standard cost problems. Again, it would be a supplemental procedure after choice (a) isperformed.Answer (d) is the correct answer. If there is a problem with standard costs, it will show up in variances. Since thisis an analytical procedure, it is not costly and provides the best direction for further detailed testing.

Question: V2C4-0087The internal auditing department has been assigned to perform an audit of a division. Based on background review,



the auditor knows the following about management policies:






Assume the auditor found that there was a plan to overstate inventory and therefore increase reported profits for thedivision. If reported correctly, the division would not have shown an increase in net income. The auditor hassubstantial evidence that the divisional manager was aware of and approved the plan to overstate inventory. Thereis also some evidence that the manager may have been responsible for the implementation of the plan. Theappropriate audit action would be to

Answers

A: Continue to conduct interviews with subordinates until a clear-cut case is made. Then report the caseto the audit committee.

B: Inform management and the audit committee of the findings and discuss proper follow-up actionand/or further investigation with them.

C: Inform the divisional manager of the audit suspicions and obtain the manager's explanation of thefindings before pursuing the matter further.

D: Document the case thoroughly and report the suspicions to the external auditor for further review andexternal reporting.

Answer Explanations

Answer (a) is incorrect. The auditor has sufficient evidence to bring the matter to the attention of management andleave it to them to decide the method of further investigation.Answer (b) is the correct answer. This is the correct response according to the IIA Standards.Answer (c) is incorrect. There is no need to inform divisional management of suspicions. It would be appropriate tointerview divisional management, but primarily as a fact-finding chore.Answer (d) is incorrect. The auditor’s responsibility is for reporting inside the organization. There is no need toreport the item to the external auditor.

Question: V2C4-0088The following are facts about a subsidiary:

I. The subsidiary company has been in business for several years and enjoyed good profit margins although thegeneral economy was in a recession, which affected competitors.



II. The working capital ratio had declined from a healthy 3:1 to 0.9:1.III. Turnover for the last several years has included three controllers, two supervisors of accounts receivable, four

payables supervisors, and numerous staff in other financial positions.IV. Corporate purchasing policy requires three bids. However, the supervisor of purchasing at the subsidiary has

instituted a policy of sole-source procurement to reduce the number of suppliers.

When conducting a financial audit of the subsidiary, the internal auditor would

Answers

A: Be unlikely to detect I, II, or III.

B: Ignore II since the economy had a downturn during this period.

C: Consider III to be normal turnover, but be concerned about II and IV as warning signals of fraud.

D: Consider I, II, III, and IV as warning signals of fraud.

Answer Explanations

Answer (a) is incorrect. The items described can be detected through usual audit procedures in a financial audit.Answer (b) is incorrect. Although the economy had a downturn, the change in working capital is unusual in light ofthe continuing strong profit margins and should be investigated.Answer (c) is incorrect. Items II, III, and IV are all warning signals.Answer (d) is the correct answer. Insufficient working capital may indicate such problems as overexpansion,decreases in revenues, transfer of funds to other companies, insufficient credit, and excessive expenditures. Theauditor should be on the lookout for diversion of funds to personal use through such methods as unrecorded salesand falsified expenditures. Rapid turnover in financial positions may signify existing problems that the individualsfeel uncomfortable with but do not want to disclose. Accountability for funds and other resources should bedetermined upon termination of employment. Use of sole-source procurement is not a practice that encouragescompetition to assure that the organization is obtaining the required materials or equipment at the best price. Sole-source procurement, if not adequately justified, indicates potential favoritism or kickbacks.

Question: V2C4-0089When comparing perpetrators who have embezzled company funds to perpetrators of financial statement fraud(falsified financial statements), those who have falsified financial statements would be less likely to

Answers

A: Have experienced an autocratic management style.

B: Be living beyond their obvious means of support.

C: Rationalize the fraudulent behavior.

D: Use company expectations as justification for the act.

Answer Explanations



Answer (a) is incorrect. Autocratic management styles have been linked to management (financial statement)fraud.Answer (b) is the correct answer. Living beyond one’s means has been linked to employee (embezzlement) fraud,not to financial statement fraud.Answer (c) is incorrect. Rationalization is common to all fraud.Answer (d) is incorrect. High expectations are often given as a motivating factor by those who have committedfinancial statement fraud.

Question: V2C4-0090Randy and John had known each other for many years. They had become best friends in college, where they

both majored in accounting. After graduation, Randy took over the family business from his father. His family hadbeen in the grocery business for several generations. When John had difficulty finding a job, Randy offered him ajob in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randybegan delegating more and more responsibility to him. After a period of time, John was doing all of the generalaccounting and authorization functions for checks, cash, inventories, documents, records, and bank statementreconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work.

Randy decided to expand the business and opened several new stores. (II) Randy was always handling the mosturgent problem . . . crisis management is what his college professors had termed it. John assisted with theproblems when his other duties allowed him time. Although successful at work, John had (III) difficulties withpersonal financial problems.

At first, the amounts stolen by John were small. John did not even worry about making the accounts balance.But he became greedy. “How easy it is to take the money,” he said. He felt that he was a critical member of thebusiness team, (IV) and that he contributed much more to the success of the company than was represented by hissalary. It would take two or three people to replace me, he often thought to himself. As the amounts became largerand larger, (V) he made the books balance. Because of these activities, John was able to purchase an expensive carand take his family on several trips each year. (VI) He also joined an expensive country club. Things werechanging at home, however. (VII) John’s family observed that he was often argumentative and at other times verydepressed.

The fraud continued for six years. Each year the business performed more and more poorly. In the last year thestores lost over $200,000. Randy’s bank required an audit. John confessed when he thought the auditors haddiscovered his embezzlements. When discussing frauds, the pressures, opportunities, and rationalizations thatcause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied.

Identify the numbered and italicized factors (from the case) as being one of the symptoms, pressures,opportunities, or rationalizations given.

Number I, “John was trusted completely . . . “ is an example of a(n)

Answers

A: Document symptom.

B: Situational pressure.

C: Opportunity to commit.

D: Physical symptom.

Answer Explanations




This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Complete trust is an opportunity to commit a fraud. Therefore, by definition,choices (a), (b), and (d) are incorrect.








Number II, “Randy was always handling the most urgent . . . “ is an example of a(n)

Answers

A: Opportunity to commit.

B: Analytical symptom.

C: Situational pressure.

D: Rationalization.

Answer Explanations

Answer (a) is the correct answer. “Crisis management” provides an opportunity to commit a fraud. Therefore, bydefinition, choices (b), (c), and (d) are incorrect.











Number III; “Difficulties with personal financial problems” is an example of a(n)

Answers

A: Behavioral symptom.

B: Situational pressure.

C: Rationalization.

D: Opportunity to commit.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Personal financial problem is a situational pressure to commit a fraud. Therefore,by definition, choices (a), (c), and (d) are incorrect.










Number IV, “and that he contributed much more . . . ” is an example of a

Answers

A: Rationalization.

B: Behavioral symptom.

C: Situational pressure.


Answer Explanations

Answer (a) is the correct answer. Contributing more than paid is a rationalization. Therefore, by definition, choices(b), (c), and (d) are incorrect.





both majored in accounting. After graduation, Randy took over the family business from his father. His family hadbeen in the grocery business for several generations. When John had difficulty finding a job, Randy offered him ajob in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randybegan delegating more and more responsibility to him. After a period of time, John was doing all of the generalaccounting and authorization functions for checks, cash, inventories, documents, rec-ords, and bank statementreconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work.





Number V, “he made the books balance,” is an example of a(n)

Answers

A: Physical symptom.

B: Analytical symptom.

C: Lifestyle symptom.

D: Document symptom.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. To make the “books balance” is an example of a document symptom. Therefore,by definition, choices (a), (b), and (c) are incorrect.

Question: V2C4-0095



Randy and John had known each other for many years. They had become best friends in college, where theyboth majored in accounting. After graduation, Randy took over the family business from his father. His family hadbeen in the grocery business for several generations. When John had difficulty finding a job, Randy offered him ajob in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randybegan delegating more and more responsibility to him. After a period of time, John was doing all of the generalaccounting and authorization functions for checks, cash, inventories, documents, rec-ords, and bank statementreconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work.





Number VI, “He also joined an expensive country club,” is an example of a

Answers

A: Rationalization.

B: Lifestyle symptom.

C: Behavioral symptom.


Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. “Joining an expensive country club” is an example of a lifestyle symptom.Therefore, by definition, choices (a), (c), and (d) are incorrect.



both majored in accounting. After graduation, Randy took over the family business from his father. His family had



been in the grocery business for several generations. When John had difficulty finding a job, Randy offeredhim a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities,Randy began delegating more and more responsibility to him. After a period of time, John was doing all of thegeneral accounting and authorization functions for checks, cash, inventories, documents, rec-ords, and bankstatement reconciliations. (I) John was trusted completely and handled all financial functions. No one checked hiswork.





Number VII, “John’s family observed that he was often argumentative . . . ” is an example of a

Answers

A: Rationalization.

B: Lifestyle symptom.

C: Behavioral symptom.


Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Being “argumentative” is an example of a behavioral symptom. Therefore, bydefinition, choices (a), (b), and (d) are incorrect.


Question: V2C4-0097An internal auditor would be concerned about the possibility of fraud if



Answers

A: Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bankdaily.

B: The same employee who maintains the perpetual inventory records performs the monthly bankstatement reconciliation.

C: The same person maintains the accounts receivable subsidiary ledger and accounts payable subsidiaryledger.

D: One person, acting alone, has sole access to the petty cash fund (except for a provision for occasionalsurprise counts by a supervisor or auditor).

Answer Explanations

Answer (a) is the correct answer. Paying petty cash–type expenditures from cash receipts facilitates theunauthorized removal of cash before deposit. All cash receipts should be deposited intact daily. Petty cash–typeexpenditures should be handled through an imprest fund.Answer (b) is incorrect. The monthly bank reconciliation should not be performed by a person who makes depositsor writes checks, but there is no problem with the inventory clerk doing it.Answer (c) is incorrect. There is no direct relationship between the transactions posted to the accounts receivableand accounts payable subsidiary ledgers; having the same person maintain both does not create a control weakness.Answer (d) is incorrect. In order to pinpoint responsibility for petty cash, it is desirable that only one person hasaccess to the fund.

Question: V2C4-0098When following up on a $200,000 increase in maintenance supplies during the past year, a purchasing agent ex-plained to the auditor that the main reason for the increase was painting services and supplies. The auditor found ablanket purchase order without the normal bid or quote documentation. The blanket purchase order had beensigned by the general manager and named the general manager’s father as the sole contractor for painting serviceson company projects. The auditor also found a number of large invoices authorized for payment by the generalmanager that showed the general manager’s father as the person who signed for receipt of the material at thesupplier.

Which is not a symptom of fraud as described in this situation?

Answers

A: Purchased material is not received by authorized company personnel.

B: Routine controls are suspended for certain transactions.

C: Purchased material is not delivered to a central location on company premises.

D: The use of blanket purchase orders.

Answer Explanations



Answer (a) is incorrect. The receipt of goods or services by noncompany personnel is a symptom of fraud.Answer (b) is incorrect. The scenario refers to normal and appropriate procedures that are suspended for thesetransactions.Answer (c) is incorrect. The receipt of goods or services off-site is a symptom of fraud.Answer (d) is the correct answer. The use of blanket purchase orders is an acceptable business practice.

Question: V2C4-0099When following up on a $200,000 increase in maintenance supplies during the past year, a purchasing agent ex-plained to the auditor that the main reason for the increase was painting services and supplies. The auditor found ablanket purchase order without the normal bid or quote documentation. The blanket purchase order had beensigned by the general manager and named the general manager’s father as the sole contractor for painting serviceson company projects. The auditor also found a number of large invoices authorized for payment by the generalmanager that showed the general manager’s father as the person who signed for receipt of the material at thesupplier.

The common indicator of fraud recognized by the auditor in this scenario is

Answers

A: Analytical procedures revealed an extraordinary increase in account balances.

B: Paint and supplies are being purchased for a contractor.

C: The purchasing agent is selecting the contractor on the basis of a blanket purchase order.

D: Invoices are being authorized for payment by the general manager.

Answer Explanations

Answer (a) is the correct answer. The indicators include an extraordinary change in account balances asdiscovered during analytical review procedures.Answer (b) is incorrect. The provision of paint is not an issue.Answer (c) is incorrect. The purchasing agent is fulfilling this responsibility in accordance with the authority of apurchasing agent’s position.Answer (d) is incorrect. The painting contractor is bound by company procedures in this manner.

Question: V2C4-0100Jane Jackson had been the regional sales manager for a company over ten years. During this time she had become avery close friend with Frank Hansen, an internal audit manager. In addition to being neighbors, Jane and Frank hadmany of the same interests and belonged to the same tennis club. They trusted each other. Frank had helped Janesolve some sales problems, and Jane had given Frank some information that led to significant audit findings duringthe past three audits.

Below are selected analytical data from the company that have led staff auditors to believe that there has been afinancial statement fraud. The perpetrator appears to have falsified sales information for the past two years. Frankis concerned because he recently completed an audit in the area and accepted Jane’s explanation for differences inthe analytical data. Frank is now certain that Jane is involved in the fraud.

Which combination of the following analytical data provides the strongest indication of the possibility of the fraud?



Answers

A: Percent increase in sales and inventory turnover.

B: Gross margin percentage and change in sales returns.

C: Inventory turnover and change in sales returns.

D: Percent increase in sales and gross margin percentage.

Answer Explanations

Answer (a) is incorrect. The increase in percent change in sales is not unreasonable, and given the constantincrease, one might expect increases in inventory that could keep turnover constant.Answer (b) is the correct answer. One would expect rapid increases in gross margin percentage if sales werefictitious; the large increase in returns is also symptomatic of falsified sales.Answer (c) is incorrect. See choice (a) for turnover. The turnover and return figures, when taken together, are notindications of sales overstatements.Answer (d) is incorrect. If the increase in sales was due to a market sales price increase, one might expect theseresults.

Question: V2C4-0101Jane Jackson had been the regional sales manager for a company over ten years. During this time she had become avery close friend with Frank Hansen, an internal audit manager. In addition to being neighbors, Jane and Frank hadmany of the same interests and belonged to the same tennis club. They trusted each other. Frank had helped Janesolve some sales problems, and Jane had given Frank some information that led to significant audit findings duringthe past three audits.

Below are selected analytical data from the company that have led staff auditors to believe that there has been afinancial statement fraud. The perpetrator appears to have falsified sales information for the past two years. Frankis concerned because he recently completed an audit in the area and accepted Jane’s explanation for differences inthe analytical data. Frank is now certain that Jane is involved in the fraud.

The current dilemma in which Frank finds himself was least likely caused by

Answers

A: Not rotating audit assignments every year.

B: Accepting an audit assignment in an area where he was a close personal friend of management.

C: Failure to select the appropriate analytical procedures.

Current year Last year -2 year -3 year -4 yearPercent increase in sales 10% 8% 6% 4% 5%Inventory turnover 5 4 5 3.5 4Gross margin percentage 54 49 42 39 40Percent change in sales returns 8% 6% 3% 2.5% 3%



D: Accepting the response of management without additional audit testing.

Answer Explanations

Answer (a) is incorrect because failure to rotate assignments and close personal friendships seems to havecontributed to Frank’s decision to accept management’s explanation for the analytic findings.Answer (b) is incorrect because failure to rotate assignments and close personal friendships seems to havecontributed to Frank’s decision to accept management’s explanation for the analytic findings.

Answer (c) is the correct answer. From the information given, it appears Frank found the analytic data, butaccepted management’s explanation of the findings.Answer (d) is incorrect because Frank should not accept management’s response on its face value.

Question: V2C5-0001For which of the following sample results is sampling risk the smallest?

Answers

A: a.

B: b.

C: c.

D: d.

Answer Explanations

Answer (a) is incorrect. Sampling risk would be higher for the sample because the sample size is smaller andbecause the 2% error rate is larger than the 1% in answer (b), while the tolerable error rate is the same.Answer (b) is the correct answer. Compared to the other responses, the percentage of error in the sample is smallrelative to the tolerable error rate.Answer (c) is incorrect. Sampling risk would be higher than in answer (b) because the sample error rate is verylarge compared to the tolerable error rate. Although the sample size is larger than that in answer (b), the increase inthe sample size is not large enough to compensate for the size of the sample error rate relative to the tolerable errorrate.Answer (d) is incorrect. Although this is the largest sample, the sampling risk is extremely high because the sampleerror rate equals the tolerable error rate.

Question: V2C5-0002

Samplesize

Tolerableerror rate

Sampleerror rate

a. 40 5% 2%b. 60 5% 1%c. 80 4% 3%d. 100 1% 1%



If an auditor is sampling to test compliance with a particular company policy, which of the following factors shouldnot affect the allowable level of sampling risk?

Answers

A: The experience and knowledge of the auditor.

B: The adverse consequences of noncompliance.

C: The acceptable level of risk of making an incorrect audit conclusion.

D: The cost of performing auditing procedures on sample selections.

Answer Explanations

Answer (a) is the correct answer. The allowable level of sampling risk is the risk an auditor is willing to take that aconclusion based on the sample may be incorrect. The auditor’s experience and knowledge should have no bearingon that decision; however, the auditor’s experience and knowledge may affect his or her decision to use statisticalor nonstatistical sampling and may be a factor in assessing nonsampling risks.Answer (b) is incorrect. As adverse consequences of noncompliance increase, the allowable level of sampling risktends to decrease.Choice (c) is incorrect. The acceptable level of risk of making an incorrect audit conclusion is directly related tothe allowable level of sampling risk.Choice (d) is incorrect. The cost of performing auditing procedures on sample selections is one of the factors anauditor should consider when assessing the allowable level of sampling risk. The cost of performing the auditingprocedures is weighed against the benefit of minimizing the chance of making an incorrect audit decision.

Question: V2C5-0003Which of the following techniques could be used to estimate the standard deviation for a sampling plan?

Answers

A: Difference estimation.

B: Pilot sample.

C: Regression.


Answer Explanations

Answer (a) is incorrect. Difference estimation is a type of variables sampling plan. It is not a technique for esti-mating standard deviation.Answer (b) is the correct answer. Auditors use a pilot sample to estimate the standard deviation in a population.This enables auditors to estimate the confidence interval that would be achieved by the sample and therefore helpsthem decide how large of a sample to select.Answer (c) is incorrect. Auditors use regression to project balances of accounts or other populations.Answer (d) is incorrect. Discovery sampling is a type of sampling plan, not a technique for estimating standard de-



viation.

Question: V2C5-0004Identification of an appropriate population to sample is dependent on audit objectives. A population of entries in anasset repairs expense file would be an appropriate population if the audit objective were to determine whether

Answers

A: Expenditures for fixed assets have been improperly expensed.

B: Noncapital repair expenditures have been properly charged to expense.

C: Noncapital repair expenditures have been recorded in the proper period.

D: Expenditures for fixed assets have been recorded in the proper period.

Answer Explanations

Answer (a) is the correct answer. Sampling of this transaction file would be appropriate to ascertain if the cost offixed assets is improperly expensed.Answer (b) is incorrect. Ascertaining that all noncapital expenditures have been expensed would require testing ofexpense accounts and selected asset accounts in addition to the repair expense account.Answer (c) is incorrect. Ascertaining that noncapital repair expenditures have been recorded in the proper timeperiod would require sampling from more than one time period.Answer (d) is incorrect. Ascertaining that capital fixed assets expenditures were recorded in the proper time periodwould involve sampling from the fixed assets file.

Question: V2C5-0005To test compliance with a policy regarding sales returns recorded during the most recent year, an auditor systemati-cally selected 5% of the actual returns recorded in March and April. Returns during these two busiest months of theyear represented about 25% of total annual returns. Error projections from this sample have limited usefulnessbecause

Answers

A: The small size of the sample relative to the population makes sampling risk unacceptable.

B: The failure to stratify the population according to sales volume results in bias.

C: The systematic selection of returns during the two months is not sufficiently random.

D: The error rates during the two busiest months may not be representative of the whole year.

Answer Explanations



Answer (a) is incorrect. Although sampling risk is related to sample size, it is not related to sample size relative tothe population size. In addition, this problem does not contain sufficient information to evaluate the acceptability ofsampling risk.Answer (b) is incorrect. The objective of stratifying a population is to decrease the sampling risk, not to reducebias. This problem does not give enough information to decide whether stratification might have enabled theauditor to use a smaller sample.Answer (c) is incorrect. Systematic selection with a random start is unbiased if the population is randomlyorganized.Answer (d) is the correct answer. The auditor has selected items from only two months. That sampling plan mayenable the auditor to make conclusions about the overall error rates during those two months, but not about errorrates during the whole year.

Question: V2C5-0006Using random numbers to select a sample

Answers

A: Is required for a variables sampling plan.

B: Is likely to result in an unbiased sample.

C: Results in a representative sample.

D: Allows auditors to use smaller samples.

Answer Explanations

Answer (a) is incorrect. Although random-number sampling may be used for variables sampling plan, it is notrequired. Systematic selection is also acceptable unless the population is not randomly organized.Answer (b) is the correct answer. This is why auditors often use random numbers to select sample items. In arandom sample, each sampling unit and each combination of sampling units has an equal probability of selectionand is therefore likely to be unbiased.Answer (c) is incorrect. The use of random numbers does not always result in a representative sample. Statisticsallow auditors to estimate the probability that a random sample is not representative.Answer (d) is incorrect. The use of random numbers does not affect sample size.

Question: V2C5-0007An auditor tested a population by examining sixty items selected judgmentally and found one error. The mainlimitation of the auditor’s sample is the inability to

Answers

A: Quantify sampling risk.

B: Quantify the acceptable error rate.



C: Project the population's error rate.

D: Determine whether the sample is random.

Answer Explanations

Answer (a) is the correct answer. The limitation of all nonstatistical sampling techniques is the auditor’s inabilityto quantify sampling risk. Based on past experience and intuition, the auditor may believe that sampling risk isacceptable, but the auditor is not able to quantify the risk level without using statistical sampling.Answer (b) is incorrect. The auditor could quantify the acceptable error rate independently of the sample design.Answer (c) is incorrect. The auditor can project an error rate of 1/60, or .0167. The problem is that the auditorcannot quantify the risk that the rate in the sample is significantly different from the rate in the population.Answer (d) is incorrect. A mathematician may be able to determine whether the auditor’s selections are random,although it is unlikely that they are. If the sample is representative, it does not matter whether it is random or not.

Question: V2C5-0008The degree to which the auditor is justified in believing that the estimate based on a random sample will fall withina specified range is called

Answers

A: Sampling risk.

B: Nonsampling risk.

C: Confidence level.

D: Precision.

Answer Explanations

Answer (a) is incorrect. Sampling risk is the complement of the confidence level.Answer (b) is incorrect. Nonsampling risk is the risk of improperly auditing the sampled items and cannot bequantified.Answer (c) is the correct answer. This is the definition of confidence level.Answer (d) is incorrect. Precision is the specified range, not the degree of justification.

Question: V2C5-0009An auditor is designing a sampling plan to test the accuracy of daily production reports over the past three years.All of the reports contain the same information except that Friday reports also contain weekly totals and areprepared by managers rather than by supervisors. Production normally peaks near the end of a month. If the auditorwants to select two reports per month using an interval-sampling plan, which of the following techniques reducesthe likelihood of bias in the sample?

Answers



A: Estimating the error rate in the population.

B: Using multiple random starts.

C: Increasing the confidence level.

D: Increasing the precision.

Answer Explanations

Answer (a) is incorrect. Estimating the error rate has no effect on bias. Bias is related to the selection method.Answer (b) is the correct answer. Using multiple random starts would increase the likelihood that the populationincludes a representative number of reports for each day of the week and for each day of the month.Answer (c) is incorrect. Increasing the confidence level has no effect on bias.Answer (d) is incorrect. Increasing the precision has no effect on bias.

Question: V2C5-0010In a sampling application, the group of items about which the auditor wants to estimate some characteristic iscalled the

Answers

A: Population.

B: Attribute of interest.

C: Sample.

D: Sampling unit.

Answer Explanations

Answer (a) is the correct answer. This is the definition of the population.Answer (b) is incorrect. The attribute is the characteristic the auditor wants to estimate about the population.Answer (c) is incorrect. The sample is a subset of the population used to estimate the characteristic.Answer (d) is incorrect. Sampling unit refers to the item that is actually selected for examination and is a subset ofthe population.

Question: V2C5-0011In a sampling application, the standard deviation represents a measure of the

Answers

A: Expected error rate.



B: Level of confidence desired.

C: Degree of data variability.

D: Extent of precision achieved.

Answer Explanations

Answer (a) is incorrect. Expected error rate is associated with attribute sampling and is not involved with thestandard deviation.Answer (b) is incorrect. Confidence level is determined by auditor judgment.Answer (c) is the correct answer. Standard deviation is a measure of data (item) variability.Answer (d) is incorrect. Achieved precision in variables sampling is computed using the standard deviation.

Question: V2C5-0012An auditor selected a random sample of 100 items from a population of 2,000 items. The total dollars in the samplewere $10,000, and the standard deviation was $10. If the achieved precision based on this sample was plus orminus $4,000, the minimum acceptable value of the population would be

Answers

A: $204,000

B: $196,000

C: $199,000

D: $199,800

Answer Explanations

Answer (a) is incorrect. Precision of $4,000 should be subtracted, not added to the estimate of the population.Answer (b) is the correct answer. $10,000/100 = $100 and $100 (2000) = $200,000 and $200,000 – $4000 =$196,000.Answer (c) is incorrect. This calculation uses standard deviation for determining the precision factor, but theprecision has been given as $4,000. The amount is determined as follows: $10 × 100 = $1,000 and $200,000 –1,000 = $199,000.Answer (d) is incorrect. This calculation uses standard deviation for determining the precision factor, but theprecision has been given as $4,000. The amount is determined as: ($10/100) 2,000 = $200 and 200,000 – 200 =$199,800.

Question: V2C5-0013An auditor prepared a working paper that consisted of a list of employee names and identification numbers as wellas the following statement: By matching random numbers with employee identification numbers, forty employeepersonnel files were selected to verify that they contain all documents required by company policy 501. Noexceptions were noted.



The auditor did not place any tick marks on this working paper. Which one of the following changes wouldimprove the auditor’s working paper the most?

Answers

A: Use of tick marks to show that each file was examined.

B: Removal of the employee names to protect their confidentiality.

C: Justification for the sample size.

D: Listing of the actual documents examined for each employee.

Answer Explanations

Answer (a) is incorrect. It is not necessary to use tick marks in this case because the same procedures were appliedto all sample selections and no exceptions were detected.Answer (b) is incorrect. The audit work papers are themselves kept confidential so it is not necessary to removeemployee names.Answer (c) is the correct answer. The working paper should specify the sampling risk and the confidence level orprecision achieved by the sample or the method of determining size.Answer (d) is incorrect. In this case, reference to the company policy is equivalent to listing the documents thatwere examined.

Question: V2C5-0014The standard deviation of a sample will usually decrease with

Answers

A: A decrease in sample size.

B: The use of stratification.

C: An increase in desired precision.

D: An increase in confidence level.

Answer Explanations

Answer (a) is incorrect. A larger sample might more closely approximate the population standard deviation, butthat could be either higher or lower depending on the point of reference. A smaller sample might go either waywithout the increased reliability.Answer (b) is the correct answer. Because high-value items can be sampled 100%, a large segment of variabilitycan be eliminated.Answers (c) is incorrect. To the extent that sample size is affected, the results might be the same as in the answer(a) above.Answers (d) is incorrect. To the extent that sample size is affected, the results might be the same as in the Answer(a) above.



Question: V2C5-0015Statistical sampling would be appropriate to estimate the value of an auto dealer’s 3,000 line-item inventorybecause statistical sampling is

Answers

A: Reliable and objective.

B: Thorough and complete.

C: Thorough and accurate.

D: Complete and precise.

Answer Explanations

Answer (a) is the correct answer. This fits the definition.Answer (b) is incorrect because it is neither.Answer (c) is incorrect because it is neither.Answer (d) is incorrect because it is precise but not complete.

Question: V2C5-0016An important difference between a statistical sample and a judgmental sample is that with a statistical sample

Answers

A: No judgment is required, everything is by formula.

B: A smaller sample size can be used.

C: More accurate results are obtained.

D: Population estimates with measurable reliability can be made.

Answer Explanations

Answer (a) is incorrect because judgment is needed for sample size.Answer (b) is incorrect because this may need a large sample.Answer (c) is incorrect because there is no way to determine this.Answer (d) is the correct answer. It is the only way to measure reliability.

Question: V2C5-0017Sample size



Answers

A: Increases with the use of higher confidence levels.

B: Decreases with the use of higher confidence levels.

C: Remains unchanged with changes in confidence levels.

D: Increases with the use of lower confidence levels.

Answer Explanations

Answer (a) is the correct answer. In its simplest form, the sample-size formula shows that sample size is equal to[(Confidence level factor squared × Estimated standard deviation squared)/(Precision squared)], thus any increasein confidence level would be accompanied by an increase in sample size.Answer (b) is incorrect by definition.Answer (c) is incorrect by definition.Answer (d) is incorrect by definition.

Question: V2C5-0018Using the following results from a variables sample, compute the standard error of the mean.

Answers

A: $60.00

B: $ 7.00

C: $ 2.30

D: $ 2.00

Answer Explanations

Answer (a) is incorrect by definition.Answer (b) is incorrect by definition.Answer (c) is incorrect by definition.Answer (d) is the correct answer. The standard error of the mean is equal to the sample standard deviation dividedby the square root of sample size. ($24.00/12 = $2.00).

Population size = 10,000Sample size = 144Sample standard deviation = $24.00Confidence level = 90%

(Z=1.65)Mean = $84.00



Question: V2C5-0019During an internal control inspection, an auditor is evaluating the contents of a large warehouse that containsrecords from both the retail and the wholesale divisions of the client company. Upon inspecting the contents of oneparticular randomly selected box, the auditor discovers that the contents do not match the computer-generated labeltaped to the outside of the box. On average, errors of this kind have occurred in 6% of retail boxes and 2% ofwholesale boxes. Unfortunately, some water has leaked onto the label and smeared the part that indicated thedivision of origin. The auditor does know that two-thirds of the boxes in this warehouse come from the wholesaledivision and one-third from the retail division. Which of the following can be concluded?

Answers

A: The box is more likely to have come from the retail division than from the wholesale division.

B: The box is more likely to have come from the wholesale division than from the retail division.

C: The proportion of retail boxes in the warehouse is probably much larger than the auditor thought.

D: The proportion of wholesale boxes in the warehouse is probably much larger than the auditor thought.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Errors are three times as likely in retail boxes as in wholesale boxes, butwholesale boxes are twice as frequent in the warehouse. Thus, the evidence points slightly more toward the retaildivision. Alternatively, by the Bayes theorem, we have: P (Retail/Error) = 0.06 × 1/3)/0.06 × 1/3 + 0.02 × 2/3) =0.60.Answer (c) is incorrect. The contents of any one box are insufficient grounds to conclude anything about the wholewarehouse.Answer (d) is incorrect. See response (c).

Question: V2C5-0020Which one of the following statements about sampling is true?

Answers

A: A larger sample is always more representative of the underlying population than a smaller sample.

B: For very large populations, the absolute size of a sample has more impact on the precision of its resultsthan does its size relative to its population.

C: For a given sample size, a simple random sample always produces the most representative sample.

D: The limitations of an incomplete sample frame can almost always be overcome by careful samplingtechniques.



Answer Explanations

Answer (a) is incorrect. A large sample selected in a biased way leads to less representatives than a smaller butmore carefully selected sample.Answer (b) is the correct answer. When the size of the population is very large, the effect on precision of the finitepopulation correction factor is very limited.Answer (c) is incorrect. The advantage of most variations on simple random sampling is that for a given samplesize, they produce a more representative sample.Answer (d) is incorrect. Things that are not in the sampling frame cannot be put there by an appropriate samplingtechnique.

Question: V2C5-0021Which one of the following is not an important consideration in determining the appropriate sample size?

Answers

A: Whether the sample is designed to estimate a mean or a proportion.

B: The amount of variability in the population under study.

C: The sensitivity of the decision using this sample to errors of estimation.

D: The cost per sample observation.

Answer Explanations

Answer (a) is the correct answer. Sample size considerations are the same for both of these parameters.Answer (b) is incorrect. The greater the variability, the greater the required sample size.Answer (c) is incorrect. The more sensitive the decision is to estimation errors, the greater the appropriate samplesize.Answer (d) is incorrect. The greater the cost per observation, the smaller the appropriate sample size.

Question: V2C5-0022An auditor is considering a sample size of fifty to estimate the average amount per invoice in a large trucking com-pany. How would the precision of the sample results be affected if the sample size were increased to 200?

Answers

A: The larger sample would be about two times as precise as the smaller sample.

B: The larger sample would be about four times as precise as the smaller sample.

C: Although precision would not be increased that much, a possible downward bias in the estimate of theaverage per invoice would be corrected.



D: Since both sample sizes are larger than 30, the increase would not have that much of an effect onprecision.

Answer Explanations

Answer (a) is the correct answer. The precision of sample results is proportional to the square root of the samplesize.Answer (b) is incorrect. The precision of sample results does not increase at the same rate as sample size.Answer (c) is incorrect. The expected value of the sample mean is the same regardless of sample size, and thus no“downward bias” is present.


Question: V2C5-0023A 90% confidence interval for the mean of a population based on the information in a sample always implies thatthere is a 90% chance that the

Answers

A: Estimate is equal to the true population mean.

B: True population mean is no larger than the largest end point of the interval.

C: Standard deviation will not be any greater than 10% of the population mean.

D: True population mean lies within the specified confidence interval.

Answer Explanations

Answer (a) is incorrect. A confidence interval concerns only whether the population parameter is contained insidethe interval and says nothing directly about the exact value of the parameter.Answer (b) is incorrect. This could be true if the confidence interval were one-sided (i.e., all probability bunchedbelow the mean), but it is not true for the more common two-sided confidence intervals, for which the correctchance of exceeding the top of the interval in a 90% confidence interval would be 5%.Answer (c) is incorrect. The confidence interval is based on the standard deviation, but it has no bearing on the sizeof the standard deviation.Answer (d) is the correct answer. This is the definition of a confidence interval.

Question: V2C5-0024The auditor is concerned that a computer program is not properly computing the amount of freight to be added toshipments of merchandise ordered through the catalog. Management considers the occurrence of any freightcosting errors to be critical. The auditor is considering sampling techniques to examine the freight charges oninvoices to customers or considering the use of computer audit tools. Which of the following sampling or auditapproaches would provide the greatest assurance as to the correctness of the freight charge computations at thecurrent time?



Answers

A: Use discovery sampling selecting transactions from invoices, which should have freight charges addedto them.

B: Use either test data or parallel simulation to test the computer application.

C: Use difference estimation by selecting transactions from invoices, which should have freight chargesadded to them.

D: Use generalized audit software to select a monetary unit sample of invoices that have been billed tocustomers.

Answer Explanations

Answer (a) is incorrect. Discovery sampling would not be as comprehensive or as efficient as either of thecomputer audit techniques in answer (b).Answer (b) is the correct answer. The major concern is whether the computer program is properly calculating thefreight charges. Test data or parallel simulation would allow a comprehensive test of the computer program at thisone point in time and would provide more evidence than sampling procedures.Answer (c) is incorrect. Difference estimation is used to estimate the dollar amount of error in a population, not todiscover whether such errors take place. The auditor is more interested in finding whether errors take place.Answer (d) is incorrect. A computer audit tool is used, but the basic technique is a monetary unit sample, which isdesigned to test the hypothesis of material errors in the account balance. The task cited is to determine whethersuch errors are occurring.

Question: V2C5-0025If all other factors specified in an attributes-sampling plan remain constant, decreasing the confidence level from95% to 90% would cause the required sample size to

Answers

A: Increase.

B: Decrease.

C: Change by 5%.

D: Remain the same.

Answer Explanations

Answers (a) is incorrect. Lower confidence level allows smaller sample size.Answer (b) is the correct answer. Lower confidence level allows smaller sample size.Answer (c) is incorrect. The percentage change is not a corresponding percent—only a decrease.Answers (d) is incorrect. Lower confidence level allows smaller sample size.



Question: V2C5-0026In sampling applications, the standard deviation represents a measure of the

Answers

A: Expected error rate.

B: Level of confidence desired.

C: Degree of data variability.

D: Extent of precision achieved.

Answer Explanations

Answer (a) is incorrect. Expected error rate is associated with attribute sampling and is not involved with thestandard deviation.Answer (b) is incorrect. Confidence level is determined by auditor judgment.Answer (c) is the correct answer. Standard deviation is a measure of data (items) variability.Answer (d) is incorrect. Achieved precision in variables sampling is computed using the standard deviation.

Question: V2C5-0027In preparing a sampling plan for an inventory-pricing test, which of the following describes an advantage ofstatistical sampling over nonstatistical sampling?

Answers

A: Requires nonquantitative expression of sample results.

B: Provides a quantitative measure of sampling risk.

C: Minimizes nonsampling risk.

D: Reduces the level of tolerable error.

Answer Explanations

Answer (a) is incorrect. Statistical sampling provides quantified results.Answer (b) is the correct answer. Statistical sampling provides quantifiable risk and results.Answer (c) is incorrect. Nonsampling risk exists in statistical and nonstatistical sampling.Answer (d) is incorrect. Tolerable error is related to materiality and auditor judgment.

Question: V2C5-0028



An internal auditor wishes to determine whether the finished goods perpetual inventory records are being properlyupdated for completed production. To accomplish this, the auditor traces inventory quantity and cost records fromproduction reports to perpetual inventory records, using an appropriate sample size based on a 95% confidencelevel, estimated error rate of 4%, and desired precision of 2%. If the error rate in the sample is, as expected, 4%,and 2,000 production reports were posted to perpetual inventory records during the year, the auditor can be 95%sure that the number incorrectly posted was

Answers

A: At least 100.

B: At least 80.

C: Between 60 and 140.

D: Between 40 and 120.

Answer Explanations

Answer (a) is incorrect. This response (5% × 2,000 items) confuses the confidence level with the estimated errorrate.Answer (b) is incorrect. Although 80 (4% × 2,000) is the best guess as to the number of errors, the actual numberof errors will be fewer than 80 approximately as often as it exceeds 80 (indicated by the stated precision of 2%).Answer (c) is incorrect. This response (5%± 2% × 2,000 items) also confuses the confidence level with theestimated error rate.Answer (d) is the correct answer. There is a 95% probability that the number of errors is between 2% (4% – 2%)and 6% (4% + 2%) of the population of 2,000 items.

Question: V2C5-0029A company with 14,344 customers determines that the mean and median accounts receivable balances for the yearare $15,412 and $10,382, respectively. From this information, the auditor can conclude that the distribution of theaccounts receivable balances is continuous and

Answers

A: Negatively skewed.

B: Positively skewed.

C: Symmetrically skewed.

D: Evenly distributed between the mean and median.

Answer Explanations

Answer (a) is incorrect because the mean is greater than the median and the distribution is continuous.Answer (b) is the correct answer. This answer is correct because the mean is greater than the median and thedistribution is continuous.Answer (c) is incorrect. This answer would be correct for a continuous distribution when the mean, median, and



mode are equal.Answer (d) is incorrect. Distributions spread evenly between two values are uniform distributions.

Question: V2C5-0030The following data relate to a variables-sampling application:

x = $78.50, s = $13.00, s = $1.00, confidence level = 90% (Z = 1.65).

The achieved precision is equal to

Answers

A: $ 1.65

B: $21.45

C: $70.65

D: $80.15

Answer Explanations

Answer (a) is the correct answer. Achieved precision (A) = sxt ; A = $1.00 (1.65) = $1.65.Answer (b) is incorrect by definition.Answer (c) is incorrect by definition.Answer (d) is incorrect by definition.

Question: V2C5-0031The measure of variability most useful in variables sampling is the

Answers

A: Median.

B: Range.

C: Standard deviation.

D: Mean.

Answer Explanations

Answer (a) is incorrect. The median is a measure of central tendency.Answer (b) is incorrect. Although the range is a measure of variability, its use is considerably limited whencompared to the standard deviation.

x



Answer (c) is the correct answer. Use of the standard deviation enables an auditor to extend the results of a sampleto the population.Answer (d) is incorrect. The mean is a measure of central tendency.

Question: V2C5-0032The primary reason for an auditor to use statistical sampling is to

Answers

A: Obtain a smaller sample than would be required by nonstatistical sampling techniques.

B: Obtain a sample more representative of the population than would be obtained by nonstatisticalsampling techniques.

C: Allow the auditor to quantify, and therefore control, the risk of making an incorrect decision based onsample evidence.

D: Meet requirements of the IIA Standards.

Answer Explanations

Answer (a) is incorrect. Statistical sampling will not necessarily prescribe a smaller sample size than nonstatisticalsampling techniques. It will, however, aid the auditor in designing an efficient sample.Answer (b) is incorrect. Statistical sampling does not guarantee that the sample obtained will be morerepresentative than a sample selected by nonstatistical sampling techniques, only that the sampling risk can bequantified.Answer (c) is the correct answer. The primary difference between statistical and nonstatistical sampling is thatstatistical sampling allows sampling risk to be measured and thus controlled.Answer (d) is incorrect. The IIA Standards do not require statistical sampling. Both statistical and nonstatisticalsamples can provide sufficient evidential matter. The auditor chooses between them after considering their relativecost and effectiveness in the circumstances.

Question: V2C5-0033During the audit of inventories, an internal auditor specified a precision of 5% instead of the 4% contained in thepreliminary audit program. What would be the impact of the change in precision?

Answers

A: A decrease in population standard deviation.

B: An increase in population standard deviation.

C: A decrease in required sample size.

D: An increase in required sample size.



Answer Explanations

Answer (a) is incorrect. Population standard deviation is a factor of the variability of data only.Answer (b) is incorrect. Population standard deviation is a factor of the variability of data only.Answer (c) is the correct answer. Sample size is equal to (Standard deviation squared × Confidence-level factorsquared) / Desired precision squared.Answer (d) is incorrect because answer (c) is the correct answer. It was just reversed.

Question: V2C5-0034Based on a random sample, it is estimated that 4%, plus or minus 2%, of a firm’s invoices contain errors. The plusor minus 2% is known as the estimate’s

Answers

A: Precision.

B: Accuracy.


D: Standard error.

Answer Explanations

Answer (a) is the correct answer. Precision refers to the maximum amount, stated at a certain confidence level,that we can expect the estimate from a single sample to deviate from the results obtained by applying the samemeasuring procedures to all the items in the population.Answer (b) is incorrect because it is not used in connection with sampling.Answer (c) is incorrect because it is a probability.Answer (d) is incorrect because it is too general.

Question: V2C5-0035The measure of variability of a statistical sample that serves as an estimate of the population variability is the

Answers

A: Basic precision.

B: Range.


D: Interval.

Answer Explanations



Answer (a) is incorrect. The variance is the square of the standard deviation, which is the measure of variability ofa statistical sample that serves as an estimate of the population variability.Answer (b) is incorrect. The range is the difference between the largest and smallest values of a sample orpopulation.Answer (c) is the correct answer. The standard deviation is the measure of variability of a statistical sample thatserves as an estimate of the population variability.Answer (d) is incorrect. The interval is a set of numbers or observations that consists of all the numbers orobservations between and including the end points.

Question: V2C5-0036Internal auditors employ confidence levels in the context of audit sampling. In a given sample plan, the confidencelevel

Answers

A: Is a decision variable that the internal auditor specifies after considering the economic consequencesof drawing the wrong conclusion as a result of sampling error.

B: Is a characteristic of the audit population and is not under the direct control of the internal auditor.

C: Is essentially a measure of the accuracy of the sample results obtained after the sample has beenselected and tested.

D: Is not normally specified before the sample size is determined. Rather it is computed once the samplehas been selected and tested.

Answer Explanations

Answer (a) is the correct answer. Confidence level is the probability that an estimate based on a random samplefalls within a specified range.Answer (b) is incorrect because confidence is a decision variable, not a population characteristic.Answer (c) is incorrect because precision, not confidence level, is a measure of accuracy.Answer (d) is incorrect because planned confidence must be specified before sample size can be computed.

Question: V2C5-0037Internal auditors employ the concept of precision in audit sampling contexts. In this context, precision is

Answers

A: A characteristic of the population at hand and is not under the direct control of the auditor.

B: A measure of the accuracy with which one has generated sample estimates. Desired precision must beestablished before the sample is obtained and evaluated.

C: Evaluated independently of reliability in a given sample.



D: Important for evaluating variables samples, but not attributes samples.

Answer Explanations

Answer (a) is incorrect because precision is under the auditor’s control.Answer (b) is the correct answer. Precision is the range into which an estimate of a population characteristic isexpected to fall.Answer (c) is incorrect because precision and reliability are dependent on one another.Answer (d) is incorrect because precision applies to attribute samples as well.

Question: V2C5-0038In audit sampling applications there are risks of Type I and Type II errors. These risks

Answers

A: Result directly from the chance that the sample obtained by the internal auditor is unrepresentative ofthe population.

B: Can be decreased by using more reliable, albeit more expensive, audit procedures.

C: Have a magnitude that is based only on the economic consequences of incorrect sample-basedconclusions.

D: Refer respectively to the risks that (1) internal controls will fail and (2) the resultant error will goundetected.

Answer Explanations

Answer (a) is the correct answer. Sampling risk results from the possibility that the sample might not berepresentative in this population.Answer (b) is incorrect because these errors refer to sampling risk, which is independent of the quality of auditprocedures.Answer (c) is incorrect because these risks do not inherently depend on economic consequences.Answer (d) is incorrect because it deals with aspects of audit risk, a different concept.

Question: V2C5-0039The size of a given audit sample is jointly a result of characteristics of the population of interest and decisionsmade by the internal auditor. Everything else being equal, sample size will

Answers

A: Increase if the internal auditor decides to accept more risk of incorrectly concluding that controls areeffective when they are in fact ineffective.

B: Double if the internal auditor finds that the variance of the population is twice as large as was



indicated in the pilot sample.

C: Decrease if the internal auditor increases the amount of tolerable error.

D: Increase as the risk of sampling error increases.

Answer Explanations

Answer (a) is incorrect. This decision will cause sample size to decrease.Answer (b) is incorrect. This will cause the sample size to more that double.Answer (c) is the correct answer. If tolerable error is increased, sample size will decrease.Answer (d) is incorrect. This would cause sample size to decrease.

Question: V2C5-0040The auditor notes an unexpectedly weak correlation between lower interest rates and large mortgages closed andseeks an explanation for the rejection of most large mortgages. The auditor should

Answers

A: Take a judgment sample directed toward applications for large mortgages.

B: Take a random sample of all mortgages closed.

C: Develop a regression model to explain the relationship.

D: Use linear programming to analyze allocation of funds.

Answer Explanations

Answer (a) is the correct answer. A directed nonstatistical (judgment) sample is desirable when reasons exist forfocusing audit attention on specific transactions, as in this case for large mortgage applications.Answer (b) is incorrect. A random sample is inefficient in this case, and the population (mortgages closed) isinappropriate.Answer (c) is incorrect. A regression analysis would not explain the cause of the weak correlation.Answer (d) is incorrect. Linear programming to allocate the funds is irrelevant to the issue at hand.

Question: V2C5-0041Assuming no change in sample standard deviation, how would sample size and achieved precision be affected by achange in confidence level from 95.5% to 99.7%?

Answers

A: Sample size would be smaller, but achieved precision would be larger.

B: Sample size would be larger, but achieved precision would not change.



C: Sample size would be smaller, but achieved precision would not change.

D: Sample size would be larger, but achieved precision would be smaller.

Answer Explanations

Answers (a) is incorrect. Sample size would be larger and achieved precision would not change.Answer (b) is the correct answer. If all other factors remain constant, the sample size will increase to the sizerequired to keep achieved precision constant.Answers (c) is incorrect. Sample size would be larger and achieved precision would not change.Answer (d) is incorrect because precision would not change. It is good to remember that sample size varies directlywith changes in confidence level and inversely with changes in precision.

Question: V2C5-0042In testing payroll transactions, an auditor discovers that 4 out of a statistical sample of 100 selected time cards werenot signed by the appropriate supervisor. To evaluate the materiality or significance of this control deficiency, theauditor should

Answers

A: Compare the tolerable error rate with the expected error rate.

B: Compute an upper precision limit and compare with the tolerable error.

C: Evaluate the dollar amount of the 4 time cards in relation to the financial statements.

D: Report the errors and let management assess the significance because they are in the best position toknow.

Answer Explanations

Answer (a) is incorrect. Both the expected error rate and the tolerable error rate are known before sampling.Answer (b) is the correct answer. An upper precision limit can be calculated based on the size of the sample andthe observed error rate. This should be compared with the maximum tolerable error.Answer (c) is incorrect. Any monetary errors discovered in the sample must first be extrapolated to the populationbefore their materiality can be assessed.Answer (d) is incorrect. It is the responsibility of the auditor to determine the significance of detected errors.

Question: V2C5-0043Each time an internal auditor draws a conclusion based on evidence drawn from a sample, an additional risk—sampling risk—is introduced. An example of sampling risk is

Answers

A: Projecting the results of sampling beyond the population tested.



B: Using an improper audit procedure with a sample.

C: Incorrectly applying an audit procedure to sample data.

D: Drawing an erroneous conclusion from sample data.

Answer Explanations

Answer (a) is incorrect. Drawing a conclusion beyond the population tested is an example of a nonsampling error.Answer (b) is incorrect. Using an improper audit procedure is an example of nonsampling error.Answer (c) is incorrect. Incorrectly applying an audit procedure is another example of a nonsampling error.Answer (d) is the correct answer. Sampling error is the likelihood that sampled items do not reflect the populationfor which conclusions are made.

Question: V2C5-0044A confidence level of 90% means that

Answers

A: The expected error rate is equal to 10%.

B: The point estimate obtained is within 10% of the true population value.

C: There are 90 chances out of 100 that the sample results will not vary from the true characteristics ofthe population by more than a specified amount.

D: A larger sample size is required than if the desired confidence level were equal to 95%.

Answer Explanations

Answer (a) is incorrect. A confidence level of 90% does not necessarily mean that the expected error rate will be10%. If it is, it is only by chance.Answer (b) is incorrect. A confidence level of 90% does not mean that any point estimate obtained is within 10%of the value of the true population value.Answer (c) is the correct answer. A confidence level of 90% does mean that 90 times out of 100, the sampleresults will not vary from the true characteristics of the whole population by more than a specified amount. Tentimes out of 100 they will.Answer (d) is incorrect. A smaller sample size is required if the desired confidence level was equal to 95%.

Question: V2C5-0045Internal auditing is conducting an operational audit of the organization’s mailroom activities to determine whetherthe use of express mail service is limited to cases of necessity. To test cost-effectiveness, the auditor selects the 100most recent express-mail transactions for review. A major limitation of such a sampling technique is that it

Answers



A: Does not allow a statistical generalization about all express-mail transactions.

B: Results in a sample size that is too small to project to the population.

C: Does not evaluate existing controls in this area.

D: Does not describe the population from which it was drawn.

Answer Explanations

Answer (a) is the correct answer. Along with the inability to quantify sampling error, this is a major limitation of ajudgmental sample.Answer (b) is incorrect because the sample size is not the reason for not being able to project; 100 might beenough.Answer (c) is incorrect because the auditor is testing for cost effectiveness.Answer (d) is incorrect because 100 might be enough.

Question: V2C5-0046The supervisor of claims-processing department for a health insurance firm selects all claims processed in the pasttwo days by a particular employee for audit. From this sample, the supervisor can develop

Answers

A: An overall representative view of employee work for the year.

B: A quantification of sampling error.

C: Conclusions about the correctness of processing for the department.

D: Understanding of the details contained in the processing task.

Answer Explanations

Answer (a) is incorrect. It is not representative of the employees’ work for the whole year.Answer (b) is incorrect. This is a judgment sample.Answer (c) is incorrect. Conclusions for the whole department cannot be drawn.Answer (d) is the correct answer. Since the sample is highly limited due to selection of all claims processed in thepast two days, the intention of the supervisor is to gain an understanding of the details of the work performed by aparticular employee. Conclusions cannot be generalized.

Question: V2C5-0047To audit invoices paid over the past year, an auditor selects the two busiest months, which account for 60% of in-voices. Following a random start, every tenth invoice is chosen yielding a sample of 116 invoices. This samplemay not be valid because it is not a



Answers

A: Representative sample.

B: Random sample.

C: Large enough sample.

D: None of the above-sample is valid.

Answer Explanations

Answer (a) is the correct answer. The two busiest months may not be representative of the entire year.Answer (b) is incorrect. The sample is random.Answer (c) is incorrect. There is insufficient information to judge size.


Question: V2C5-0048A sample of 100 items was taken from a population of 5,000 items. The mean value was $200 and the standard de-viation was $30. The computed confidence interval for a 95% confidence level (Z=1.96) is

Answers

A: $970,600 to $1,029,400.

B: $706,000 to $1,294,000.

C: $996,733 to $1,003,267.

D: $997,060 to $1,002,940.

Answer Explanations

Answer (a) is the correct answer. The computed precision is 1.96 × 30 × 5,000/10 = 29,400. This amount added tothe population of 5,000 × mean of $200 equals $1,000,000 plus $29,400 and minus $29,400.Answer (b) is incorrect. If the square root of the sample is incorrectly omitted, the computed precision is 1.96 × 30× 5,000 = 294,000.Answer (c) is incorrect. If the standard deviation and the square root of the sample size are incorrectly reversed, thecomputed precision is 1.96 × 10 × 5,000/30 = 3,267.Answer (d) is incorrect. If the sample size is incorrectly used (not the square root), the computed precision is 1.96× 30 × 5000/100 = 2,940.

Question: V2C5-0049The probability that an estimate based on a random sample falls within a specified range is known as the



Answers

A: Error rate.

B: Lower precision limit.


D: Standard error of the mean.

Answer Explanations

Answer (a) is incorrect. The error rate is the proportion of incorrect items in a population.Answer (b) is incorrect. The lower limit is the bound below which a population value is not expected to fall at aspecified confidence level.Answer (c) is the correct answer. The confidence level is the estimated probability that a value falls within theprecision limits.Answer (d) is incorrect. The standard error of the mean is a value equal to the standard deviation divided by thesquare root of sample size.

Question: V2C5-0050The range into which an estimate of a population characteristic is expected to fall at a stated confidence level isknown as the

Answers

A: Precision.

B: Measure of central tendency.


D: Sampling field.

Answer Explanations

Answer (a) is the correct answer. The precision is the range in which a population parameter is expected to fall, ata specified confidence level.Answer (b) is incorrect. The average or mean is an example of central tendency.Answer (c) is incorrect. Standard deviation is a measure of the variability of the data around the mean.Answer (d) is incorrect. The field is the population.

Question: V2C5-0051One measure of the variability within a sample is the



Answers

A: Median.

B: Standard error of the mean.

C: Upper precision limit.

D: Mean.

Answer Explanations

Answer (a) is incorrect. The median, a form of the average, is the central item in an array.Answer (b) is the correct answer. The standard error is a measure of the sample’s variability. It is computed bydividing sample standard deviation by the square root of sample size.Answer (c) is incorrect. The upper limit is the bound above which a population parameter is not expected to fall, ata specified confidence level.Answer (d) is incorrect. The mean, a form of the average, is the sum of the population values, divided by thenumber of units in the population.

Question: V2C5-0052An internal auditor suspects that the invoices from a small number of vendors contain serious errors and thereforelimits the sample to only those vendors. A major disadvantage of selecting such a directed sample of items toexamine is the

Answers

A: Difficulty in obtaining sample items.

B: Inability to quantify the sampling error related to the total population of vendor invoices.

C: Absence of a normal distribution.

D: Tendency to sample a greater number of units.

Answer Explanations

Answer (a) is incorrect. The stem of this question describes judgmental sampling. Judgmental sampling is oftenused to make sample selection easier.Answer (b) is the correct answer. Sampling error cannot be quantified if judgmental sampling is used. This makesthe auditor’s conclusions difficult to defend.Answer (c) is incorrect. Judgmental sampling does not rely on any statistical concepts, including assumptionsabout the distribution of the population.Answer (d) is incorrect. An auditor who uses judgmental sampling often samples fewer units than a statistical planwould have specified.



Question: V2C5-0053An electronics manufacturer is planning to purchase a large quantity of computer chips, which are available at abargain price. However, before doing so, it would like to know whether these chips are of sufficient quality. Todetermine the number of chips to be tested in order to estimate the quality of these computer chips, themanufacturer should use

Answers

A: Linear programming.

B: Regression analysis.

C: Queuing theory.

D: Statistical sampling.

Answer Explanations

Answer (a) is incorrect. Linear programming is a mathematical technique for maximizing or minimizing a givenobjective subject to certain constraints.Answer (b) is incorrect. Regression analysis is a statistical procedure for estimating the relation between variables.Answer (c) is incorrect. Queuing theory is used to minimize the cost of waiting in line plus the cost of servicingwaiting lines when items arrive randomly at a service point and are serviced sequentially.Answer (d) is the correct answer. Statistical sampling is a procedure for estimating the value of a populationparameter of interest by examining only a few observations from the population.

Question: V2C5-0054The fundamental difference between judgmental sampling and statistical sampling techniques is that

Answers

A: A nonrandom sample will be more representative of the population than a sample chosen by statisticalsampling.

B: Statistical sampling results in smaller sample sizes than judgmental sampling.

C: Judgmental sampling does not permit sampling risk to be measured.

D: Statistical sampling results in more accurate point estimates of the parameters than judgmentalsampling.

Answer Explanations

Answer (a) is incorrect. Representativeness of population is the goal of all sampling. Judgmental and random(statistical) selection both attempt to achieve it. There is no general rule that judgmental will be better thanstatistical in obtaining it.



Answer (b) is incorrect. Statistical sampling may or may not result in a smaller sample size than judgmentalsampling.Answer (c) is the correct answer. The basic difference between judgmental and statistical sampling is that thesampling risk cannot be quantified in judgmental sampling because the behavior of the sample draw cannot bepredicted in terms of the laws of the theory of probability.Answer (d) is incorrect. Judgmental sampling does not necessarily give less accurate point estimates.

Question: V2C5-0055An auditor wishes to obtain substantive evidence concerning a division’s accounts receivable balances. The receiv-ables are of four types.

In which of the following instances would the auditor be precluded from using statistical inferences?

Answers

A: The auditor randomly selects 100 commercial accounts for confirmations.

B: The auditor sends confirmations to 30 of the miscellaneous receivables customers. From a serialnumber of a dollar bill, the auditor takes the first two digits falling between 1 and 30 to determine thestarting point and selects every 30th account to send confirmations.

C: In examining the retail accounts, the auditor decides to confirm all accounts with a balance in excessof $2,000. This results in the selection of 87 accounts. The auditor, using simple random sampling,selects additional 23 accounts with balances less than $2,000 for confirmation.

D: For the accounts with governmental agencies, the auditor decides not to send confirmations but totrace the accounts to subsequent cash collections. The auditor then selects the five largest accounts andfrom each selected account takes the first purchase transaction at least 60 days old to trace to subsequentcollections.

Answer Explanations

Answer (a) is incorrect. Although the sample size is arbitrarily chosen, sampling risk can still be quantified sincethe sample items are selected according to the criteria of probability sampling.Answer (b) is incorrect. Here systematic selection with a random starting point is used. In practice, this is assumedto meet the criteria of probability sampling.Answer (c) is incorrect. Stratification is used here. The upper stratum is examined 100% and those in the lowerstratum are randomly selected. Thus, the criteria of probability sampling are met.Answer (d) is the correct answer. The transactions chosen are judgmental. The selection or the transactions doesnot meet the criteria of probability sampling since all are not available for selection.

Question: V2C5-0056

Type Number of accounts Balance per bookRetail 3,800 $1,500,000Commercial 875 6,700,000Government agencies 34 900,000Miscellaneous receivables 900 375,000



Sampling risk refers to the possibility that

Answers

A: The auditor may use a less than optimal statistical method for the circumstances, for example,difference estimation instead of ratio estimation.

B: The auditor may fail to recognize an error that is included in the sample.

C: Even though a sample is properly chosen, it may not be representative of the population.

D: The confidence level and/or precision established by the auditor are not appropriate.

Answer Explanations

Answer (a) is incorrect. This Answer may result in an inefficient or unnecessarily large sample, but it is not called“sampling risk.”Answer (b) is incorrect. Failure to recognize an error included in a sample is referred to as “nonsampling risk.”Answer (c) is the correct answer. This response gives the correct definition of “sampling risk.” It can be measured,and increasing sample size can reduce it.Answer (d) is incorrect. Confidence level and precision are a matter of auditor judgment; faulty judgment is notcalled “sampling risk.”

Question: V2C5-0057An advantage of statistical over nonstatistical sampling is that statistical sampling

Answers

A: Enables auditors to objectively measure the reliability of their sample results.

B: Permits use of a smaller sample size than would be necessary with nonstatistical sampling.

C: Is compatible with a wider variety of sample selection methods than is nonstatistical sampling.

D: Allows auditors to inject their subjective judgment in determining sample size and selection process inorder to audit items of greatest value and highest risk.

Answer Explanations

Answer (a) is the correct answer. Statistical sampling enables auditors to compute the reliability (confidence) andprecision of their sample results.Answer (b) is incorrect. While statistical sampling may sometimes result in a smaller sample than nonstatisticalsampling, it may at other times require a larger sample.Answer (c) is incorrect. Statistical sampling requires use of a random sample. Nonstatistical sampling permits theuse of nonrandom selection techniques, such as high-value and high-risk items.Answer (d) is incorrect. Statistical sampling results in an objective computation of sample size and, as statedabove, requires a random rather than subjective selection technique.



Question: V2C5-0058An auditor is checking the accuracy of a computer-printed inventory listing to determine whether the total dollarvalue of inventory is significantly overstated. Because there is no time or resources to check all items in thewarehouse, a sample of inventory items must be used. If the sample size were fixed, which one of the followingwould be the most accurate sampling approach in this case?

Answers

A: Select those items that are most easily inspected.

B: Employ simple random sampling.

C: Sample so that the probability of a given inventory item being selected is proportional to the numberof units sold for that item.

D: Sample so that the probability of a given inventory item being selected is proportional to its bookvalue.

Answer Explanations

Answer (a) is incorrect. How easy it is to inspect an item has nothing necessarily to do with its value.Answer (b) is incorrect. The approach described in the answer (d) is more appropriate than simple randomsampling.Answer (c) is incorrect. Although this approach is better than simple random sampling, items with high salesvolumes may have low prices, and thus this method is not as good as that described in the answer (d).Answer (d) is the correct answer. Since the total dollar value is under study, the probability-in-proportion-to-size(book value) approach is most efficient here.

Question: V2C5-0059A distinguishing characteristic of random number sample selection is that each

Answers

A: Item is selected from a stratum having minimum variability.

B: Item's chance for selection is proportional to its dollar value.

C: Item in the population has an equal chance of being selected.

D: Stratum in the population has an equal number of items selected.

Answer Explanations

Answer (a) is incorrect. Stratifying the population is not required for random selection.Answer (b) is incorrect. Dollar values are not used in random selection.Answer (c) is the correct answer. Equal opportunity for selection is a feature of random selection.



Answer (d) is incorrect. Stratifying the population is not required for random selection.

Question: V2C5-0060Which one of the following statements is true regarding two random samples drawn in the same way from the samepopulation, one of size 30 and one of size 300?

Answers

A: The two samples would have the same expected value.

B: The larger sample is more likely to produce a large sample mean.

C: The smaller sample will have a smaller 95% confidence interval for the mean.

D: The smaller sample will, on the average, produce a lower estimate of the variance of the population.

Answer Explanations

Answer (a) is the correct answer. The expected value of a random sample of any size is equal to the populationmean.Answer (b) is incorrect. The smaller sample is less reliable and is therefore more likely to produce unusually large(or small) sample means.Answer (c) is incorrect. The smaller sample is less reliable and therefore will have a wider 95% confidenceinterval.Answer (d) is incorrect. The variance is also a population parameter, and the expected value of the sample variancedoes not change with sample size.

Question: V2C5-0061An auditor is conducting a survey of perceptions and beliefs of employees concerning an organization health careplan. The best approach to selecting a sample would be to

Answers

A: Focus on people who are likely to respond so that a larger sample can be obtained.

B: Focus on managers and supervisors because they can also reflect the opinions of the people in theirdepartments.

C: Use stratified sampling where the strata are defined by marital and family status, age, andsalaried/hourly status.

D: Use monetary unit sampling according to employee salaries.

Answer Explanations



Answer (a) is incorrect. This convenience sample is likely to emphasize people with lots of time on their hands atthe expense of key employees who are too busy with company work to respond.Answer (b) is incorrect. Managers and supervisors often do not have the same needs and perceptions as theirsubordinates and also often misperceive their views.Answer (c) is the correct answer. Because different employees probably have different situations, needs, andexperiences, stratified sampling would best ensure that a representative sample would result.Answer (d) is incorrect. This approach would produce a disproportionate number of highly paid employees whomay not have the same needs as lower-paid employees.

Question: V2C5-0062An internal auditor uses a number of techniques to select samples. A frequently, and appropriately, used techniqueis random selection. In which of the following situations would random selection be least justified? The auditorneeds to

Answers

A: Test sales transactions to determine that they were properly authorized and are supported by shippingdocuments.

B: Confirm accounts receivable and has already selected the 10 largest accounts for confirmation. Theremaining accounts are not numbered. The auditor only has a computer listing of the accounts inalphabetical order approximately 250 pages long with 50 account balances on every page.

C: Obtain evidence on the proper sales cutoff by sampling items from the monthly sales journal todetermine if the items were recorded in the correct time period.

D: Test the perpetual inventory records to ensure that the sample covers the largest dollar value items inthe account.

Answer Explanations

Answer (a) is incorrect. This is an ideal place to use random selection because it could provide evidence on thequality of processing throughout the year.Answer (b) is incorrect. This would be a very appropriate situation in which to use random selection. Individualaccount balances could be selected using dollar-unit (PPS) sampling or could be randomly selected by randomlyselecting a page number and then selecting an account item (1–50) within each page.Answer (c) is the correct answer. This is the least justified situation to use random selection because the auditor isconcerned that the monthly sales journal has been held open to record the next month sales. The auditor shouldselect transactions from the latter part of the month and examine supporting evidence to determine if they wererecorded in the proper time period.Answer (d) is incorrect. This is an ideal place to apply dollar-unit sampling to gain confidence about potentialdollar misstatement of account balances.

Question: V2C5-0063Systematic selection can be expected to produce a representative when



Answers

A: Random number tables are used to determine the items included in the sample.

B: The population is arranged randomly with respect to the audit objective.

C: The sample is determined using multiple random starts and includes more items than required.

D: Judgmental sampling is used by the auditor to offset any sampling bias.

Answer Explanations

Answer (a) is incorrect. This is the description of a random selection procedure where each item in the populationhas an equal chance of being included in the sample.Answer (b) is the correct answer. Samples selected using a systematic sampling procedure and a random start willbehave as if they were a random sample when the population is randomly ordered with respective to the auditobjective. Sampling bias due to the systematic procedure will be small because the population items do not have apattern with respect to the audit objective.Answer (c) is incorrect. The number of items in a sample is not relevant to the procedures used to select thespecific items comprising the sample. The use of multiple random starts might increase the chance that a samplewill behave randomly but only if the population is arranged randomly.Answer (d) is incorrect. Judgmental sampling will not increase the randomness of a sample but will introducesampling bias into the sample. In fact, the use of any judgment by an internal auditor in determining which itemsare included in a sample increases the sampling bias.

Question: V2C5-0064An internal auditor used regression analysis to evaluate the relationship between utility costs and machine hours.The following information was developed using a computer software program:

What is the expected utility cost if the company’s 10 machines will be used 2,400 hours next month?

Answers

A: $4,050

B: $4,030

C: $3,970

D: $3,930

Answer Explanations

Answer (a) is incorrect. $2,050 + 10(200) [incorrectly uses the standard error of the estimate].

Intercept 2,050Regression coefficient .825Correlation coefficient .800Standard error of the estimate 200Number of observations 36



Answer (b) is the correct answer. $2,050 + .825(2,400).Answer (c) is incorrect. [$2,050 + .825(2,400)] – 100 [incorrectly uses the standard error of the estimate].Answer (d) is incorrect. $2,050 + .800(2,400) [incorrectly uses the correlation coefficient instead of the regressioncoefficient].

Question: V2C5-0065An internal auditor wants to select a statistically representative sample from a population of 475 inventory controlsheets. Each sheet lists the description, physical count, bar code, and unit cost for 50 inventory items. The auditoruses a random number table to construct the sample; the first two columns are listed below. The randomly chosenstarting point is 14326; the sample’s first item is found on page 143, line 26. (The route used by the auditor is downColumn A to the top of Column B.)

Where is the fifth item in the sample located?

Answers

A: Page 809, line 38.

B: Page 429, line 04.

C: Page 331, line 50.

D: Page 068, line 52.

Answer Explanations

Answer (a) is incorrect. This answer is the fifth random number but not the fifth usable number. For example, therandom number following the starting point (14326) is 76562, which represents page 765, line 62. However, thereare only 475 sheets and only 50 lines per sheet.Answer (b) is incorrect. This is the fourth usable number.Answer (c) is the correct answer. This is the fifth usable number.Answer (d) is incorrect. This is the fifth usable page number, but the line limitation is exceeded.

Question: V2C5-0066The most appropriate methodology for drawing a sample from 3,000 time cards to check for signatures would be

Answers

Column A Column B75233 0685214326 4290476562 6485428123 0497864227 3315080938 0430122539 4124029452 69521



A: Interval sampling.

B: Cluster sampling.

C: Stratified sampling.


Answer Explanations

Answer (a) is the correct answer. This fits the definition.Answer (b) is incorrect. There are no clusters.Answer (c) is incorrect. There are no strata.Answer (d) is incorrect. It does not allow reliable estimates.

Question: V2C5-0067A car rental agency has branches located throughout the world that are essentially small-scale representations ofthe entire population. What is the appropriate sampling method for determining the average net revenue per vehiclein inventory?

Answers

A: Stratified sampling.


C: Attributes sampling.

D: Systematic sampling.

Answer Explanations

Answer (a) is incorrect. Stratified sampling is used to give special emphasis to certain categories in the population.Skewed or unusual values are not indicated in this case.Answer (b) is the correct answer. In this case savings would occur because the auditor would not have to travel toall sight to draw a representative sample.Answer (c) is incorrect. Attribute sampling is not appropriate for estimating a variable such as dollar amount.Answer (d) is incorrect. Systematic (judgmental) sampling is not appropriate for projecting sample results to apopulation.

Question: V2C5-0068In obtaining a sample for the purpose of reaching a conclusion about the population from which it is drawn, theinternal auditor

Answers



A: Can statistically quantify the sample results only if the sample was selected in such a way that eachpopulation item has an equal or known probability of selection.

B: Should use judgmental sampling and concentrate on high-risk items.

C: Cannot use random sampling procedures unless the items to be sampled are available in machine-readable form.

D: Will usually use random sampling with replacement.

Answer Explanations

Answer (a) is the correct answer. The only way to statistically evaluate a sample is if each item has an equal orknown probability of selection.Answer (b) is incorrect. Judgment sampling is an unsatisfactory alternative for reaching conclusions about apopulation.Answer (c) is incorrect. Random sampling does not require machine-readable data.Answer (d) is incorrect. Sampling without replacement is normal.

Question: V2C5-0069An auditor wishes to sample 200 sales receipts from a population of 5,000 receipts issued during the last year. Thereceipts have preprinted serial numbers and are arranged in chronological (and thus serial number) order. Theauditor randomly chooses a receipt from the first 25 receipts and then selects every 25th receipt thereafter. Thesampling procedure described here is called

Answers

A: Systematic random sampling.

B: Dollar-unit sampling.

C: Judgmental interval sampling.

D: Variables sampling

Answer Explanations

Answer (a) is the correct answer. With systematic random sampling, every nth element is selected from thesample, with the starting point among the first n elements determined at random.Answer (b) is incorrect. With dollar-unit sampling, the probability of an item being chosen is directly proportionateto its dollar value.Answer (c) is incorrect. Judgmental interval sampling is a “nonsense” term, since interval sampling is a statistical,not judgmental, sampling approach.Answer (d) is incorrect. Variables sampling is a sampling methodology, not a sample selection method.

Question: V2C5-0070



In a regional survey of suburban households to obtain data on television viewing habits, a statistical sample of sub-urban areas is first selected. Within the chosen areas, statistical samples of whole blocks are selected, and withinthe selected blocks, random samples of households are selected. This type of sample selection can best bedescribed as

Answers


B: Stratified sampling.

C: Cluster sampling.

D: Interval sampling.

Answer Explanations

Answer (a) is incorrect. Attributes sampling describes a sampling model, not a selection technique.Answer (b) is incorrect. Stratified sampling separates the population into several strata with the elements in eachstratum possessing some common attribute. The sample is then chosen using a statistical sampling approach.Answer (c) is the correct answer. Cluster sampling samples groups of items rather than individual items and ismost appropriate when each aggregate sampling group is representative of the entire population.Answer (d) is incorrect. Interval sampling selects every nth item for sampling with a randomized starting point.

Question: V2C5-0071An internal auditor with an international shipping company needs to sample shipping records over the past sixmonths. To do so, the auditor draws a random sample for ships operating in the Mediterranean and a separatesample for those operating in the North Atlantic. This method of sampling is called

Answers

A: Cluster sampling.

B: Haphazard.

C: Interval sampling.

D: Stratified sampling.

Answer Explanations

Answer (a) is incorrect. Not enough information is given, such as (1) sampling units are not defined and (2) stagesare not defined.Answer (b) is incorrect since it is not a sampling term.Answer (c) is incorrect. Interval sampling involves taking every nth item from a total population.Answer (d) is the correct answer. Two strata are being used—Mediterranean and North Atlantic.



Question: V2C5-0072A sample from a population of over 10,000 bills of lading is needed to estimate an error rate. Since a sample size of250 will satisfy precision and confidence level needs, a sampling interval of 40 is chosen. For ease ofimplementation, the auditor randomly selects a number between 1 and 40, and then selects each succeeding 40thitem. Which of the following is true?

Answers

A: The sample lacks randomness and will not be correct.

B: Interval sampling is not an acceptable statistical method.

C: If the population lacks bias, the sample is statistically valid.

D: Interval sampling eliminates the use of auditor judgment.

Answer Explanations

Answer (a) is incorrect. The sample has a random start.Answer (b) is incorrect. Interval sampling, with a random start, is statistically valid.Answer (c) is the correct answer. If the population contains no systematic bias, interval sampling with a randomstart is valid.Answer (d) is incorrect. Auditor judgment is required when using statistical methods.

Question: V2C5-0073An inventory listing consisting of approximately 2,050 unnumbered items is arranged by category, with 10 items ineach category. Within each category, the most expensive (per unit) items are listed first. An auditor wishes to usean interval-sampling plan to select a representative sample of at least 100 items from this population. The besttechnique is to

Answers

A: Select a random number from 1 to 20 as the starting point and then select every 20th item, movingthrough the entire population.

B: Select a random number from 1 to 15 as the starting point and then select every 15th item until he has100 items.

C: Select 7 random digits from 1 to 135 as the starting points and then select every 135th item per pass,moving through the entire population 7 times.

D: Select the 50 largest items (i.e., extensions with the highest dollar amounts); then, excluding the 50largest items already selected, select a random number from 1 to 37 as the starting point and select every37th item, moving through the entire population.

Answer Explanations



Answer (a) is incorrect. Due to the pattern of this population, this technique could result in a sample consistingalmost entirely of high-value items (starting numbers = 1, 2, 11, or 12) or low-value items (starting numbers = 8, 9,18, or 19).Answer (b) is incorrect. The sample will be complete after he has moved through three-quarters of the population,so items in the last one-quarter/4 of the population will have zero chance of being selected.Answer (c) is the correct answer. The 7 different starting points, plus the fact that the sampling interval (135) isnot an exact multiple of the population pattern interval (10), should result in a representative sample.Answer (d) is incorrect. This is a stratified sample. While it may be a desirable sampling procedure for somepurposes, it might not constitute a representative sample, since the interval, 25, would result in every other itembeing a multiple of 10. Thus, 40 of the items could be from an extreme value.

Question: V2C5-0074You are to audit the timeliness of the payment of vendor invoices based on a representative sample of checkswritten. The sample population consists of a total of 967 consecutively numbered checks that have been issued foraccounts payable.

The most appropriate method for drawing a sample of checks is

Answers


B: Interval sampling.

C: Simple random sampling.


Answer Explanations

Answer (a) is incorrect. It may be misleading.Answer (b) is incorrect. It is not as good as answer (c). There may be a pattern in the way the checks were written.Answer (c) is the correct answer. It is easy to do since checks are numbered consecutively.Answer (d) is incorrect. There is no reason to stratify.

Question: V2C5-0075You are to audit the timeliness of the payment of vendor invoices based on a representative sample of checkswritten. The sample population consists of a total of 967 consecutively numbered checks that have been issued foraccounts payable.

If you know that 40% of the checks were issued to a single vendor who offered unusually large cash discounts, themost appropriate method of sampling would be

Answers




B: Interval sampling.

C: Simple random sampling.


Answer Explanations

Answer (a) is incorrect because there is no basis for this.Answer (b) is incorrect because it would not subdivide the population.Answer (c) is incorrect because it would not subdivide the population.Answer (d) is the correct answer. Two strata could be used, the single vendor and all others.

Question: V2C5-0076An auditor using statistical sampling wishes to select a sample from an aged trial balance of 750 accountsreceivable. There are no account numbers; the accounts are listed in alphabetical order by customer name. Accountbalances range from $50 to $10,000. Which of the following selection schemes is most likely to produce a randomsample of 75 items? (In choices a. and b., you are to assume that the digit “3” was appropriately chosen from arandom number table.)

Answers

A: Select all accounts in which the fourth digit to the left of the decimal point in the account balance (i.e.the thousands digit) is a "3."

B: Select the 3rd account, then the 13th, 23rd, and so on, on through the 743rd.

C: Select the 75 accounts with the largest total balances.

D: Select the 50 accounts with the largest total balances plus the 25 accounts (other than those included inthe first 50) with the largest past due balances.

Answer Explanations

Answer (a) is incorrect. This would provide only accounts with balances in the $3,000 to $3,999 range, and thuswould not be representative of the population.Answer (b) is the correct answer. Since there appears to be no pattern in the sequencing of this population, use ofinterval sampling with a random start gives each account an equal chance of being selected and should provide anunbiased sample.Answer (c) is incorrect. While this scheme will provide the maximum dollar coverage, it is not random becauselarge accounts have a greater chance of being selected than small accounts.Answer (d) is incorrect. This scheme may lead to the selection of accounts most likely to be in error or to invoicecollection problems. However, it is not random because all accounts do not have an equal chance of being selected.

Question: V2C5-0077To use stratified variables sampling to evaluate a large, heterogeneous inventory, an appropriate criterion for classi-



fying inventory items into strata is

Answers

A: Dollar values.

B: Number of items.

C: Turnover volume.

D: Storage locations.

Answer Explanations

Answer (a) is the correct answer. In variables sampling, the objective is to estimate the dollar value of theinventory. Strata based on dollar values are the usual population characteristic.Answer (b) is incorrect. Dollar values are the usual characteristic to create strata in variables sampling, not numberof items.Answer (c) is incorrect. Turnover volume could be a characteristic of interest in attribute sampling but not invariables sampling.Answer (d) is incorrect. Storage location is not a relevant characteristic when creating strata for variables sampling.

Question: V2C5-0078Which of the following would not be appropriate if the auditor expects a built-in pattern in the population?

Answers

A: Dollar-unit sampling.

B: Systematic sampling with multiple random starts.


D: Stratifying the population in anticipation of the pattern.

Answer Explanations

Answer (a) is incorrect. Dollar-unit sampling includes a random start and a selection based on dollar valuesampling increments.Answer (b) is incorrect. Multiple random starts overcome the existence of a pattern by using a number of differentstarting points.Answer (c) is the correct answer. Cluster sampling is a selection method resulting in contiguous sampling unitsand does not overcome patterns.Answer (d) is incorrect. Stratified sampling is dividing the population into two or more strata using the variabilityof values; recognizing a pattern in advance permits appropriate sampling techniques.



Question: V2C5-0079An auditor designed an attribute sample to test the effectiveness of a control procedure. The auditor designed thesample to achieve an upper precision limit of 4% at a confidence level of 95% with a 1% expected error rate. Basedon those factors, the auditor selected 156 items and found three errors. The auditor can conclude that there is

Answers

A: At least a 95% chance that the error rate in the population exceeds 4%.

B: At least a 95% chance that the error rate in the population is less than 4%.

C: Less than a 95% chance that the error rate in the population is less than 4%.

D: More than a 95% chance that the error rate in the population exceeds 1%.

Answer Explanations

Answer (a) is incorrect. The error rate may exceed 4%, but the probability that it does it less than 95%.Answer (b) is incorrect. The error rate may be less than 4%, but that probability is less than 95%.Answer (c) is the correct answer. The auditor knows this because the error rate in the sample was more than 1%. Ifthe error rate was equal to 1%, the auditor would know that the probability was 95% that the error rate in thepopulation was no higher than 4%.Answer (d) is incorrect. The error rate may be higher than 1%, but that probability is less than 95%.

Question: V2C5-0080Which of the following must be known to evaluate the results of an attributes sample?

Answers

A: Estimated dollar value of the population.

B: Standard deviation of the sample values.

C: Actual size of the sample selected.

D: Finite population correction factor.

Answer Explanations

Answer (a) is incorrect. Dollar values are irrelevant to attributes sampling.Answer (b) is incorrect. Standard deviation is irrelevant to attributes sampling.Answer (c) is the correct answer. Sample size is used to evaluate the actual occurrence rate.Answer (d) is incorrect. The finite population correction factor is used to adjust an initial computed sample size.



Question: V2C5-0081In evaluating an attribute sample, the range within which the estimate of the population characteristic is expected tofall is called the

Answers

A: Confidence level.

B: Precision.

C: Upper error limit.

D: Expected error rate.

Answer Explanations

Answer (a) is incorrect. Confidence level is a measure of how reliable the auditor wants the sample results to be.Answer (b) is the correct answer. This is the definition of precision.Answer (c) is incorrect. Precision is the range between the lower and upper error limits.Answer (d) is incorrect. The expected error rate is a measure of how frequently the auditor expects thecharacteristic of interest to exist in the population prior to selecting and evaluating the sample.

Question: V2C5-0082An auditor wishes to determine if the error rate on travel reimbursement claims is within the 5% tolerance level setby management. What sampling plan should the auditor use?

Answers

A: Variable sampling.

B: Attributes sampling.

C: Judgmental sampling.

D: Dollar-unit sampling.

Answer Explanations

Answer (a) is incorrect. Variable sampling is used to estimate how much, such as total dollar amount or totalweight.Answer (b) is the correct answer. Attribute sampling is used to estimate how many, such as the rate of erroneousclaims.Answer (c) is incorrect. Judgmental sampling is not appropriate if inferences are to be made about a population.Answer (d) is incorrect. Dollar-unit sampling, like variable sampling, is used to estimate how much an accountbalance is in error.



Question: V2C5-0083A bank internal auditor wishes to determine if loans that were not funded were rejected using criteria consistentwith that contained in bank policies. A lending officer initially processes all loan requests. Those that the officerdeems appropriate to be funded are forwarded to the lending committee for its approval. The most efficient auditprocedure to address this objective would be to

Answers

A: Select an attribute sample of loans not funded and review the loan applications and the reasons forrejecting them.

B: Select an attribute sample of loans that were funded, review the loan applications, and determine if thefunded loans complied with bank policies.

C: Take a sample of all loan applications, review the applications, and trace them to either a funded orrejected loan to determine if all actions taken were consistent with bank policies.

D: Take a sample of loans presented to the lending committee for approval and determine if committeeactions taken were consistent with bank policies.

Answer Explanations

Answer (a) is the correct answer. This would be the most appropriate audit procedure because the audit objectiveonly asks for a determination that rejected loans have been rejected for proper reasons. It is not concerned withapproval of loans that should not have been made.Answer (b) is incorrect. This only provides information on loans that were funded. The concern is with loans thatmay have been inappropriately rejected.Answer (c) is incorrect. This is an excellent procedure to determine whether all the loans (both funded andunfunded) are being handled consistent with the stated policies and procedures. However, the audit objective onlydealt with loans that were not funded; therefore, this procedure would cause the auditors to review more loans andwould not be as efficient as the procedure noted in answer (a).Answer (d) is incorrect. This uses a sample of loans that were presented to the lending committee. It does notinclude loans that would have already been rejected by an individual lending officer.

Question: V2C5-0084An auditor has taken an attribute sample of a bank’s existing loan portfolio. Out of a sample of sixty loans, theauditor finds

• Four that were not properly collateralized,• Five that are not in compliance with bank policies (other than lack of collateralization), and• Four that were part of a related-party group, but were set up as separate loan entities.

Of the sixty loans selected in the sample, these errors were noted on a total of ten loans. Several loans had multipleproblems. Which of the following conclusions can the auditor reach from these findings?

I. There is sufficient evidence that fraudulent activity is taking place by one or more of the bank’s lending offi-cers.

II. The financial statements will be misstated as a result of these actions.III. There are significant noncompliance audit findings that should be reported.



Answers

A: I and II.

B: I and III.

C: II and III.

D: III only.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. These are significant audit findings (item III). Item I is incorrect. Although thesefindings are significant audit findings, there is not sufficient evidence to conclude fraudulent activity on the part ofthe bank’s lending officers. There must be intent to deceive for some personal gain to infer fraud. Item II isincorrect. The financial statements will not necessarily be incorrect as long as the bank can determine that the loansreceivable are properly classified as to term and are carried at their net realizable value.

Question: V2C5-0085In selecting a sample of items for attributes testing, an auditor must consider the confidence level factor, thedesired precision, and the

Answers

A: Recorded dollar value of the population.

B: Sampling interval.

C: Expected occurrence rate.

D: Standard deviation in the population.

Answer Explanations

Answer (a) is incorrect. The dollar value of the population relates to a variable often involved in sample selectionwhen testing for variables.Answer (b) is incorrect. The sampling interval is used in monetary-unit sampling to select items based onmonetary-unit value distributions.Answer (c) is the correct answer. The expected occurrence rate is one necessary factor in selecting samples forattributes sampling.Answer (d) is incorrect. The standard deviation is not a variable having relevance when selecting samples forattributes sampling.



Question: V2C5-0086An auditor is planning to use attributes sampling to test the effectiveness of a specific internal control related to ap-provals for cash disbursements. In attributes sampling, decreasing the estimated occurrence rate from 5% to 4%while keeping all other sample size planning factors exactly the same would result in a revised sample size whichwould be

Answers

A: Larger.

B: Smaller.

C: Unchanged.

D: Indeterminate.

Answer Explanations

Answer (a) is incorrect because a smaller estimated occurrence rate results in a smaller sample size when allother factors are the same.Answer (b) is the correct answer. A smaller estimated occurrence rate results in a smaller sample size when allother factors are the same.Answer (c) is incorrect because a smaller estimated occurrence rate results in a smaller sample size when allother factors are the same.Answer (d) is incorrect because a smaller estimated occurrence rate results in a smaller sample size when allother factors are the same.

Question: V2C5-0087If all other sample size planning factors were exactly the same in attributes sampling, changing the confidencelevel from 95% to 90% and changing the desired precision from 2% to 5% would result in a revised sample sizewhich would be

Answers

A: Larger.

B: Smaller.

C: Unchanged.

D: Indeterminate.

Answer Explanations

Answer (a) is incorrect because a lower confidence level and a less rigorous precision allow a smaller sample withother factors constant.



Answer (b) is the correct answer. A lower confidence level and a less rigorous precision allow a smaller samplewith other factors constant.Answer (c) is incorrect because a lower confidence level and a less rigorous precision allow a smaller sample withother factors constant.Answer (d) is incorrect because a lower confidence level and a less rigorous precision allow a smaller sample withother factors constant.

Question: V2C5-0088Which of the following must be known to evaluate the results of an attribute sample?

Answers

A: Estimated dollar value of the population.

B: Standard deviation of the sample values.

C: Actual size of the sample selected.

D: Finite population correction factor.

Answer Explanations

Answer (a) is incorrect. Dollar values are irrelevant to attribute sampling.Answer (b) is incorrect. Standard deviation is irrelevant to attribute sampling.Answer (c) is the correct answer. Sample size is used to evaluate the actual occurrence rate.Answer (d) is incorrect. The finite population correction factor is used to adjust an initial computed sample size.

Question: V2C5-0089An auditor has to make a number of decisions when using attribute sampling. The term “efficiency” is used to de-scribe anything that affects sample size. The term “effectiveness” is used to describe the likelihood that thestatistical sample result will be a more accurate estimate of the true population error rate. Assume an auditorexpects a control procedure failure rate of 0.5%. The auditor is making a decision on whether to use a 90% or a95% confidence level and whether to set the tolerable control failure rate at 3% or 4%. Which of the followingstatements regarding efficiency and effectiveness of an attribute sample is true?

Answers

A: Decreasing the confidence level to 90% and decreasing the tolerable control failure rate to 3% willresult in both increased efficiency and effectiveness.

B: Decreasing the tolerable failure rate from 4% to 3% will increase audit efficiency.

C: Increasing the confidence level to 95% and decreasing the tolerable control failure rate to 3% willincrease audit effectiveness.

D: Increasing the confidence level to 95% will increase audit efficiency.



Answer Explanations

Answer (a) is incorrect. Decreasing the confidence level results in a decrease in effectiveness, while decreasing thetolerable failure rate results in a decrease in efficiency.Answer (b) is incorrect. Decreasing the tolerable failure rate will result in a larger sample size, resulting in a de-crease in efficiency as defined in the problem.Answer (c) is the correct answer. Increasing the confidence level and decreasing the tolerable failure rate willresult in a much larger sample size and will give the auditor a more precise estimate of the population parameters.Answer (d) is incorrect. Increasing the confidence level results in a larger sample size, which decreases auditefficiency.

Question: V2C5-0090An auditor is testing on a company’s large, normally distributed accounts receivable file. The objectives of theaudit are to test end-of-period dollar balances and accounts receivable posting exception (error) rates.

The expected population exception rate is 3% for the accounts receivable posting processes. If the auditor has es-tablished a 5% tolerable rate, the auditor would use which sampling plan for testing the actual exception rate?

Answers

A: Difference or mean per unit estimation.

B: Discovery.

C: Stratified.

D: Attribute.

Answer Explanations

Answer (a) is incorrect. Difference or mean estimation is used when sampling for dollar values.Answer (b) is incorrect. Discovery is only used when exception rates are expected to be very low.Answer (c) is incorrect. Stratified sampling arranges populations for more efficient sampling.Answer (d) is the correct answer. Attribute sampling is used to reach conclusions about exception occurrence ratesin populations.


To test the accounts receivable file to compute an estimated dollar total, the auditor could use any one of the fol-lowing sampling techniques except:

Answers

A: Difference or ratio estimation.



B: Unstratified mean-per-unit estimation.


D: Attribute.

Answer Explanations

Answer (a) is incorrect. Difference or ratio estimation can be used to estimate population dollar values.Answer (b) is incorrect. Mean-per-unit estimation can be used to estimate population dollar values.Answer (c) is incorrect. Probability-proportional-to-size (PPS) can be used for estimating population dollar values.Answer (d) is the correct answer. Attribute sampling does not involve dollar-balance estimation.


The accounts receivable file contains a large number of small dollar balances and a small number of large dollarbalances and the auditor expects to find numerous errors in the account balances. The most appropriate samplingtechnique to estimate the dollar amount of errors would be

Answers

A: Difference or ratio estimation.

B: Unstratified mean-per-unit.


D: Attribute.

Answer Explanations

Answer (a) is the correct answer. Difference or ratio estimation is used when estimating dollar amounts of errorsfor normally distributed populations.Answer (b) is incorrect. Mean-per-unit estimation is used to project a total dollar value for a population, but wouldbe inappropriate since there are a large number of small balance account errors.Answer (c) is incorrect. Probability-proportional-to-size (PPS) is used for estimating dollar values of errors whenthe expected error frequency is low.Answer (d) is incorrect. Attribute sampling does not involve dollar-balance estimation.

Question: V2C5-0093An internal auditor planning an attribute sample from a large number of invoices must estimate the tolerable error.Which factor below is the most important for the auditor to consider?

Answers



A: Audit objective.

B: Population size.

C: Desired confidence level.

D: Population variance.

Answer Explanations

Answer (a) is the correct answer. Tolerable error is the specified precision or the maximum sampling error thatwill still permit the results to be useful. Since the precision is under the control of the auditor, the audit objective isthe most important factor to be considered.Answer (b) is incorrect. Knowing the population is large is sufficient.Answer (c) is incorrect. This factor is independent of precision.Answer (d) is incorrect. It is a consideration but not the most important one.

Question: V2C5-0094To use stratified sampling to evaluate a large, heterogeneous inventory, which of the following would least likelybe used as criteria to classify inventory items into strata?

Answers

A: Dollar values.

B: Number of items.

C: Turnover volume.

D: Storage locations.

Answer Explanations

Answer (a) is incorrect. The extent of risk of misstatement is associated with the dollar values of inventory items.Answer (b) is the correct answer. The number of items is not generally associated with the risk of misstatement.Answer (c) is incorrect. Turnover volume could be associated with the risk of misstatement of the items.Answer (d) is incorrect. Storage location may be associated with the risk of misstatement of the items.

Question: V2C5-0095Using company policies to establish when approval is needed, an auditor has sampled accounts receivable balancesexceeding $1,000 to determine whether the credit department is requiring a credit check for credit sales whenappropriate. This is an example of

Answers




B: Mean-per-unit sampling.



Answer Explanations

Answer (a) is incorrect. Dollar-unit sampling is used to estimate dollar amounts.Answer (b) is incorrect. Mean-per-unit sampling is used to estimate dollar amounts.Answer (c) is the correct answer. Attributes sampling typically involve tests of the effectiveness of controls.Answer (d) is incorrect. Variables sampling describes methods used to estimate dollar amounts. The report shouldbe made to management and coordinated with the external auditor.

Question: V2C5-0096An audit of accounts payable was made to determine if the error rate was within the stated policy of 0.5%. Onehundred of the 10,000 accounts payable transactions were randomly selected using a 95% confidence level. Noerrors were found. With 95% certainty, one can conclude that the sample results

Answers

A: Indicate another sample is needed.

B: Prove there are no errors in accounts payable.

C: Indicate the null hypothesis is false.

D: Fail to prove the error rate is above 0.5%.

Answer Explanations

Answer (a) is incorrect. The sample is adequate.Answer (b) is incorrect. No sample could prove this.Answer (c) is incorrect. Null hypothesis is Error Rate <= 0.5%Answer (d) is the correct answer. This is the definition of 95% confidence level.

Question: V2C5-0097What is the chief advantage of stop-or-go sampling?

Answers

A: The error rate in the population can be projected to within certain precision limits.



B: It may reduce the size of the sample that needs to be taken from a population, thus reducing samplingcosts.

C: It allows sampling analysis to be performed on populations that are not homogeneous.

D: It allows the sampler to increase the confidence limits of his analysis without sacrificing precision.

Answer Explanations

Answer (a) is incorrect. Only upper precision limits and statements are made.Answer (b) is the correct answer. Stop-or-go sampling helps prevent oversampling for attributes by permitting thesampler to halt an audit test at the earliest possible moment.Answer (c) is incorrect. The populations must be homogeneous in all attribute-sampling plans.Answer (d) is incorrect. An increase in the confidence limits will result in a loss of precision (assuming contactsample size).

Question: V2C5-0098A statistical sampling technique which will minimize sample size whenever a low rate of noncompliance is ex-pected is called

Answers

A: Ratio-estimation sampling.

B: Difference-estimation sampling.

C: Stratified mean-per-unit sampling.

D: Stop-or-go sampling.

Answer Explanations

Answer (a) is incorrect. Rate of noncompliance is not applicable to ratio-estimation sampling (a variables-samplingtechnique).Answer (b) is incorrect. Difference-estimation sampling is used when we want to obtain a “corrected” estimate of apreviously stated “book” value (a variables-sampling technique).Answer (c) is incorrect. Stratified mean-per-unit sampling is used in substantive testing (a variables-samplingtechnique).Answer (d) is the correct answer. The stop-or-go sampling technique will yield a smaller sample size if the errorrate is low. It is also the only technique listed that is applicable to estimates of rate of compliance (attributessampling).

Question: V2C5-0099In order to estimate the value of 2,500 accounts receivable outstanding, the best sampling method would be

Answers



A: Variables estimation.

B: Stop-and-go sampling.


D: Attributes estimation.

Answer Explanations

Answer (a) is the correct answer. Variables sampling method is good for estimating the dollar value.Answer (b) is incorrect. It is an inappropriate plan for drawing samples.Answer (c) is incorrect. It is an inappropriate plan for drawing samples.Answer (d) is incorrect. It is for estimating discrete characteristics, not values.

Question: V2C5-0100In selecting a sample of items for variables testing, an auditor must consider the desired precision, the standard de-viation, and the

Answers

A: Recorded dollar value of the population.

B: Acceptable risk level.

C: Expected occurrence rate.

D: Sampling interval.

Answer Explanations

Answer (a) is incorrect. The recorded dollar value is not needed for variables testing.Answer (b) is the correct answer. Risk level is a necessary criterion to include in the sample selection process forvariables.Answer (c) is incorrect. The expected occurrence rate is not a criterion in sample selection for variables.Answer (d) is incorrect. The sampling (skip) interval is the monetary-unit interval when selecting samples usingmonetary-unit sampling.

Question: V2C5-0101In a variable-sampling application, if the achieved dollar precision range of the statistical sample at a givenconfidence level is greater than the desired dollar precision range, this is an indication that the

Answers

A: Occurrence rate was smaller than expected.



B: Occurrence rate was greater than expected.

C: Standard deviation was less than expected.

D: Standard deviation was greater than expected.

Answer Explanations

Answer (a) is incorrect. Occurrence rate is irrelevant for computing achieved precision.Answer (b) is incorrect. Occurrence rate is irrelevant for computing achieved precision.Answer (c) is incorrect. A lower actual variability would result in achieved precision being lower than desiredprecision.Answer (d) is the correct answer. Standard deviation (variability) directly affects the computed precision.

Question: V2C5-0102In a variables-sampling application, which of the following factors will vary directly with a change in confidencelevel from 90 to 95%?

Answers

A: Standard error of the mean.

B: Nonsampling error.

C: Achieved precision.

D: Point estimate of the arithmetic mean.

Answer Explanations

Answer (a) is incorrect. The standard error of the mean is dependent on only the standard deviation and samplesize.Answer (b) is incorrect. Nonsampling error is not variable according to sampling criteria; it is the result of such asmisclassifications.Answer (c) is the correct answer. Achieved precision (sampling error) is equal to the confidence level factor timesthe standard error of the mean.Answer (d) is incorrect. The point estimate of the sample mean does not include a confidence interval.

Question: V2C5-0103In determining the sample size for variables sampling, the internal auditor requires some knowledge of thevariability of the population. In obtaining this preliminary information the internal auditor

Answers

A: Can seldom rely on the results of prior years' sample results since they pertain only to the prior years'



populations.

B: Frequently takes a convenience pilot sample of 30 to 50 items and use this to estimate the variabilityof the population.

C: Frequently takes a random pilot sample of 30 to 50 items, applies audit tests to these items, and usesthe variability in these items to estimate the variability in the population of audit values. The pilot sampleis then discarded and the real sample is taken from the remaining population.

D: Will frequently take a random pilot sample of 30 to 50 items, compute the range in this sample, anduse this range as an estimate of the population variability for purposes of computing sample size.

Answer Explanations

Answer (a) is incorrect. This is a common practice.Answer (b) is the correct answer. Pilot samples are often used to estimate variability.Answer (c) is incorrect. It would be inefficient to disregard the audit evidence found in the pilot sample.Answer (d) is incorrect. The sample range is not the correct measure of variability for this purpose.

Question: V2C5-0104An internal auditor wishes to estimate the number of units in a certain class of inventory without counting eachone. Which of the following sample plans would be appropriate?

Answers

A: Attributes.

B: Discovery.

C: Stop-or-go.

D: Variables.

Answer Explanations

Answer (a) is incorrect. Attri-bute sampling is for compliance testing. It calls for yes-or-no, right-or-wronganswers. The range of values is limited to 0 through 1.Answer (b) is incorrect. Discovery sampling is used when the internal auditor suspects a gross error or fraud. Theplan seeks to select a sample just large enough to include one example of the error or irregularity a specifiedpercentage of the time.Answer (c) is incorrect. Stop-or-go sampling is an attribute-sampling plan.Answer (d) is the correct answer. Variables sampling is used for substantive testing. It allows the verification ofvalues whose range lies between positive and negative infinity.

Question: V2C5-0105



Ratio estimation sampling would be inappropriate to use to project the dollar error in a population if

Answers

A: The recorded book values and audited values are approximately proportional.

B: A number of observed differences exist between book values and audited values.

C: Observed differences between book values and audited values are proportional to book values.

D: Subsidiary ledger book balances for some inventory items are unknown.

Answer Explanations

Answer (a) is incorrect. Proportional relationships tend to support the use of ratio estimation.Answer (b) is incorrect. A minimum number of differences must be present to validly use ratio estimation.Answer (c) is incorrect. Ratio estimation is supported by proportional differences.Answer (d) is the correct answer. Individual item amounts must be known to use ratio estimation.

Question: V2C5-0106The auditor wishes to sample the perpetual inventory records to develop an estimate of the dollar amount of mis-statement, if any, in the account balance. The account balance is made up of a large number of small value itemsand a small number of large value items. The auditor has decided to audit all items over $50,000 plus a randomselection of others. This audit decision is made because the auditor expects to find a large amount of errors in theperpetual inventory records, but is not sure that it will be enough to justify taking a complete physical inventory.The auditor expects the errors to vary directly with the value recorded in the perpetual records. The most efficientsampling procedure to accomplish the auditor’s objectives would be

Answers


B: Ratio estimation.

C: Attribute sampling.

D: Stratified mean-per-unit sampling.

Answer Explanations

Answer (a) is incorrect. Dollar-unit sampling becomes less accurate when a large number of errors are expected.Answer (b) is the correct answer. Ratio estimation is the most efficient sampling methodology because the auditorexpects a large number of errors and expects the errors to vary directly with size of the account balance on theperpetual record.Answer (c) is incorrect. Attribute sampling is not used to estimate a dollar amount.Answer (d) is incorrect. Stratified mean-per-unit sampling could be used, but it is not as efficient as ratioestimation when a large number of errors are expected in the account balance.



Question: V2C5-0107Difference estimation sampling would be appropriate to use to project the dollar error in a population if

Answers

A: Subsidiary ledger book balances for some individual inventory items are unknown.

B: Virtually no differences between the individual book values and the audited values exist.

C: A number of nonproportional differences between book values and audited values exist.

D: Observed differences between book values and audited values are proportional to book values.

Answer Explanations

Answer (a) is incorrect. Individual item amounts must be known to use difference estimation.Answer (b) is incorrect. There must be sufficient errors in the population to generate a reliable sample estimate.Answer (c) is the correct answer. There must be a sufficient number of nonproportional errors to generate areliable sample estimate.Answer (d) is incorrect. Ratio estimation is supported by proportional differences.

Question: V2C5-0108An internal auditor is interested in the processing accuracy of a sales invoice preparation system. The monetaryamount of individual invoices is highly variable. The internal auditor has sound reasons for believing that the errorrate in invoice processing is between 3% and 10% but has no idea of the monetary magnitude of the errors. Inevaluating which specific approach to variables sampling to employ, the internal auditor should be aware that

Answers

A: Since the error magnitude is uncertain, a stratified mean per unit estimator will perform poorly in thiscase.

B: With error rates in this range, there is little advantage to stratifying the population.

C: Either a difference estimator or a ratio estimator will be more efficient than an unstratified mean perunit estimator in this case.

D: Neither a difference or ratio estimator is practical in this case unless an audit value and a book valueexist for each item in the population.

Answer Explanations

Answer (a) is incorrect because the stratified mean per unit would work here. The error magnitude is unimportant.Answer (b) is incorrect because the advantage of stratification is not dependent on error rates.Answer (c) is the correct answer. Ratio or difference estimates would be more efficient in this situation.Answer (d) is incorrect because these estimators do not require an audit value for every item in the population. If



such values were available, there would be no need to sample at all.

Question: V2C5-0109An auditor randomly selects 100 items of finished goods perpetual inventory, physically counts them, andcomputes an “audited value” for each (calculated as quantity times unit cost per production reports). The internalauditor then compares the audited value with the “book value” (inventory cost per perpetual inventory records) anduses difference estimation to estimate the correct total for the finished goods inventory. Results of the 100-itemsample are as follows:

The total book value of the entire finished goods inventory (1,100 items) is $6,988,000. On the basis of differenceestimation, the auditor’s best guess (point estimate) as to the correct total is

Answers

A: $6,655,000

B: $6,713,000

C: $6,963,000

D: $7,263,000

Answer Explanations

Answer (a) is incorrect. This answer (1,100 items × the average audited value of $6,050 per item) is based onmean-per-unit estimation, not difference estimation.Answer (b) is the correct answer. The average overstatement error in the sample is $250 per item ($630,000 –$605,000 / 100 items). Thus the projected overstatement is $275,000 (1,100 items × $250), and the estimated totalis $6,988,000 minus $275,000.Answer (c) is incorrect. This response was obtained by subtracting the $25,000 total sample overstatement from thebook value. As explained above, it is the projected overstatement that must be subtracted.Answer (d) is incorrect. This is the book value plus the projected overstatement. Since the difference is anoverstatement, it must be subtracted from, not added to, the book value.

Question: V2C5-0110Using mean-per-unit sampling to estimate the value of inventory, an auditor had the following results:

Total audited value $605,000Total book value (of these 100 items) $630,000Number of items incorrectly stated (out of 100) 17

Projected inventory value $3,000,000Confidence level 95%Confidence interval $2,800,000 to

$3,200,000Standard error

(Standard error = standarddeviation/square root of sample size)

$100,000



The recorded value of inventory was $3,075,000.

Which of the following is a logical conclusion from the sample?

Answers

A: There is a 95% chance that the misstatement of inventory is less than $100,000.

B: There is a 5% chance that $200,000 or more misstates the inventory amount.

C: Inventory is materially misstated.

D: There is a 2.5% chance that the inventory amount is greater than $3,200,000.

Answer Explanations

Answer (a) is incorrect. This conclusion is not supported by the facts given. There is, however, a 95% chance thatthe true value of inventory is more than $2,800,000 and less than $3,200,000.Answer (b) is incorrect. This conclusion is also not supported by the facts given in the problem. Instead, there is a5% chance that the true value of inventory is more than $3,200,000 or less $2,800,000.Answer (c) is incorrect. It is not possible to conclude from the information given that inventory is materiallymisstated.Answer (d) is the correct answer. This is a valid statement about the confidence interval. There is also a 2.5%chance that inventory is less than $2,800,000. There is a 95% chance that the true inventory value falls between$2,800,000 and $3,200,000.



Which of the following changes would result in a narrower confidence interval?

Answers

A: An increase in the confidence level from 95 to 99%.

B: A decrease in the confidence level from 95 to 90%.

Z value (approximately) 2.0Precision $200,000




$100,000




C: A decrease in the allowable risk of incorrect acceptance.

D: An increase in the precision.

Answer Explanations

Answer (a) is incorrect. Increasing the confidence level would result in a wider confidence interval.Answer (b) is the correct answer. The confidence interval = mean ± Z value × standard error. Decreasing theconfidence level would decrease the Z value and that would result in a smaller confidence interval.Answer (c) is incorrect. Decreasing the allowable risk of incorrect acceptance would increase the confidence level,which would result in a wider confidence interval.Answer (d) is incorrect. Increasing the precision would make the confidence interval wider.



The standard error of $100,000 reflects

Answers

A: The projected population error based on errors in the sample.

B: The average rate of error in the sample.

C: The degree of variation in the dollar amount of sample items.

D: The error in the population that the auditor can accept.

Answer Explanations

Answer (a) is incorrect. The standard error is not a projection of error in the population.Answer (b) is incorrect. The standard error is not a measurement of the errors in the sample.Answer (c) is the correct answer. The standard error is a function of the standard deviation, which is ameasurement of the average variation from the mean of the sample. The standard error is used to compute precisionand the confidence interval. The larger the standard error, the wider the interval.Answer (d) is incorrect. The amount of error that the auditor would be willing to accept (the tolerable error) is theauditor’s decision; it is not the result of a statistical calculation. The amount of tolerable error has no effect on thestandard error.




$100,000






If the auditor had used nonstatistical sampling instead of statistical sampling, which of the following would betrue?

Answers

A: The confidence level could not be quantified.

B: The precision would be larger.

C: The projected value of inventory would be less reliable.

D: The risk of incorrect acceptance would be higher.

Answer Explanations

Answer (a) is the correct answer. Statistical sampling enables an auditor to quantify the confidence level or thesampling risk. Nonstatistical sampling does not.Answer (b) is incorrect. Unless the auditor uses statistical sampling, the auditor would not be able to quantifyprecision.Answer (c) is incorrect. The value of inventory could not be projected when nonstatistical sampling is used.Answer (d) is incorrect. The risk of incorrect acceptance could not be quantified when nonstatistical sampling isused.

Question: V2C5-0114The auditor is performing a test to determine whether the gas and electric appliance company should move its ser-vice center from one location to another. The service center houses the service trucks that are used to drive to thecustomers’ locations to service their appliances. The auditor wants to determine the reduction in average milesdriven as a result of moving to the other location. Which of the following statistical sampling methods would bemost appropriate for this test?

Answers




$100,000




A: Attribute sampling.


C: Probability proportional to size (dollar-unit) sampling.

D: Mean-per-unit sampling.

Answer Explanations

Answer (a) is incorrect. Attribute sampling will not produce a quantitative value.Answer (b) is incorrect. Discovery sampling is used to uncover an attribute that exists in the population with a lowrate of occurrence, not to estimate a variable.Answer (c) is incorrect. Individual book values adding up to a total book value is required for this method to beused.Answer (d) is the correct answer. This is the only statistical sampling method designed to estimate a variable forwhich there are not available individual book values making up the value of a population.

Question: V2C5-0115An auditor is designing stratified, mean-per-unit variables sampling plan. To which one of the following stratashould the auditor allocate the largest proportion of the overall sample size?

Answers

A: a.

B: b.

C: c.

D: d.

Answer Explanations

Answer (a) is the correct answer. This stratum has the largest expected standard deviation. Allocating moreselections to strata with larger standard deviations decreases the standard error of the mean, which results in asmaller confidence interval. The objective of stratifying a sample is to reduce variation in order to be able to use asmaller sample than would be required without stratification.Answer (b) is incorrect. Although this stratum has the largest mean, it has a smaller standard deviation than stratumdefined in the answer (a).Answer (c) is incorrect. Although this stratum has the largest number of items, is has the smallest standard

Numberof items

Expectedmean

Expectedstandarddeviation

Total dollarvalue

a. 2,000 $100 $9 $200,000b. 2,250 $200 $4 $450,000c. 3,000 $80 $2 $240,000d. 3,100 $150 $1 $465,000



deviation.Answer (d) is incorrect. The total dollar value is directly related to the mean and number of items in a stratum. Asexplained above, neither of these factors is a normal consideration in allocating sample size to strata.

Question: V2C5-0116An internal auditor has obtained the following data by selecting a random sample from an inventory population.

The estimate of the population dollar value using mean-per-unit sampling would be

Answers

A: $5,000,000

B: $5,420,000

C: $5,500,000

D: $5,720,000

Answer Explanations

Answer (a) is incorrect. This calculation uses the means of the book value of the sample rather than the mean of theaudit sample: $200,000/200 = $1,000; 1,000 × 5,000 = $5,000,000.Answer (b) is incorrect. This calculation added the audit value of the sample to the book value of the population:$220,000 + 5,200,000 = $5,420,000.Answer (c) is the correct answer. Mean-per-unit = $220,000/200 = $1100 and $1100 (5000) = $5,500,000.Answer (d) is incorrect. Ratio estimation = $220,000/$200,000 = 1.1 and 1.1 ($5,200,000) = $5,720,000.


The estimate of the population dollar value using difference estimation sampling would be

Answers

A: $4,700,000

B: $5,500,000

Numberof items

Auditedvalue Book value

Sample 200 $220,000 $ 200,000Population 5,000 $5,200,000

Numberof items





C: $5,680,000

D: $5,700,000

Answer Explanations

Answer (a) is incorrect. Estimated difference of $500,000 per Answer (d) should be added to $5,200,000, notdeducted from $5,200,000.Answer (b) is incorrect. Mean-per-unit = $220,000/200 = $1100 and $1100 (5000) = $5,500,000.Answer (c) is incorrect. This is an incorrect calculation using the difference in units between the population andsample and then adding this incorrect amount to the book value as follows: [(220,000 – 200,000)/200] × (5,000 –200) = 480,000 and $5,200,000 + 480,000 = $5,680,000.Answer (d) is the correct answer. Difference estimation = $220,000 – $200,000 = $20,000 and $20,000/200 =$100 and $100 (5000) = $500,000 and $500,000 + $5,200,000 = $5,700,000.


The estimate of the population dollar value using ratio estimation would be

Answers

A: $4,727,273

B: $5,500,000

C: $5,700,000

D: $5,720,000

Answer Explanations

Answer (a) is incorrect. This calculation reverses the correct ratio estimation as: Ratio estimation = $200,000/$220,000 = .90909091 and .90909091 ($5,200,000) = $4,727,273.Answer (b) is incorrect. Mean-per-unit = $220,000/200 = $1100 and $1100 (5000) = $5,500,000.Answer (c) is incorrect. Difference estimation = $220,000 – $200,000 = $20,000 and $20,000/200 = $100 and $100(5000) = $500,000 and $500,000 + $5,200,000 = $5,700,000.Answer (d) is the correct answer. Ratio estimation = $220,000/$200,000 = 1.1 and 1.1 ($5,200,000) = $5,720,000.

Question: V2C5-0119The internal auditor for an insurance company is conducting an audit of claims processing and wants to assess theaverage length of time that it takes to process automobile claims to determine whether processing is beingcompleted within standards set by company policy.

Numberof items





The auditor plans to take a sample of claims made during the year and perform the needed analysis. The mostappropriate sampling method would be

Answers

A: Mean-per-unit variables sampling.

B: Probability proportion to size.

C: Attribute sampling.


Answer Explanations

Answer (a) is the correct answer. Mean-per-unit variables sampling is the most appropriate sampling procedurebecause it allows the auditor to calculate a mean of the processing time and build confidence levels around themean. The normal sampling distribution will allow the auditor to also estimate the percentage of claims that are notprocessed within the time limit contained in the company’s policy.Answer (b) is incorrect. Probability proportion to size is not appropriate in this situation.Answer (c) is incorrect. Attribute sampling would not lead to an estimate of the average length of time to processthe claims. It could, however, be used to estimate the probability that a claim is not processed within thecompany’s defined standard.Answer (d) is incorrect. Discovery sampling is used to determine if an isolated event is occurring in the population.It would be used here only if exceeding the policy for claims processing was expected to be extremely rare andextremely important.

Question: V2C5-0120What effect does an increase in the standard deviation have on the required sample size of mean-per-unitestimation and probability pro-portion to size sampling? Assume no change in any of the other characteristics ofthe population and no change in desired precision and confidence.

Answers

A: a.

B: b.

Mean-per-unit

Probabilityproportional

to size (PPS)a. Increase in sample size Increase in sample sizeb. No change in sample

sizeDecrease in sample size

c. Increase in sample size No change in samplesize

d. Decrease in sample size No change in samplesize



C: c.

D: d.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is incorrect. A change in the standard deviation has no effect on the required sample size when dollar-unit sampling is used, since the sampling units are homogeneous—the individual dollars.Answer (c) is the correct answer. An increase in the standard deviation represents an increase in the variability ofthe population and therefore the sample size would increase when using mean-per-unit estimation. A change in thestandard deviation has no effect on the required sample size when probability proportional to size sampling is used,since the sampling units are homogeneous.Answer (d) is incorrect. An increase in the standard deviation represents an increase in the variability of thepopulation and therefore requires increasing, not decreasing, the sample size.

Question: V2C5-0121By statistically projecting the population value based on the average value of sampled subsidiary accounts, theauditor has estimated the value of the total equipment account to be $2,800,000. This is an example of

Answers


B: Mean-per-unit sampling.


D: Statistical difference estimation.

Answer Explanations

Answer (a) is incorrect. Dollar-unit sampling uses individual dollars instead of account balances as the samplingunits.Answer (b) is the correct answer. Mean-per-unit sampling uses subsidiary account balances or records as a basisfor projecting total account balances.Answer (c) is incorrect. Attributes sampling estimates the presence of a qualitative characteristic, such as internalcontrol errors.Answer (d) is incorrect. Difference estimation uses differences between audit and book values to project populationvalues.

Question: V2C5-0122An audit of a wholesale company’s inventory was conducted to estimate its value. The inventory contained 20,000items with a book value of $1 million. The audit plan was to estimate inventory value with a precision of plus orminus 2% at a 90% confidence level. The sample results were



Sample Size: 300Sample Mean per unit: $52Sample Standard Deviation per unit: $10.80Sample Precision per unit: $1.03

Based on the sample results, the estimated inventory value is between

Answers

A: $784,000 and $1,216,000.

B: $844,000 and $1,256,000.

C: $1,019,400 and $1,060,600.

D: $979,400 and $1,020,600.

Answer Explanations

Answer (a) is incorrect. It uses book plus or minus value mean and standard deviation rather than sample mean andprecision to compute the confidence interval.Answer (b) is incorrect. It uses standard deviation instead of precision to compute confidence interval.Answer (c) is the correct answer. 20,000 (52 ± 1.03) = $1,040,000 ± 20,600 or $1,019,400 to $1,060,600. Basedon the data given: Precision of sample result = 1.03/52 = 1.98%. This is within the plan goal of ± 2%.Answer (d) is incorrect. It is centered on book value mean.

Question: V2C5-0123An auditor is using the mean-per-unit method of variables sampling to estimate the correct total value of a group ofinventory items. Based on the sample, the auditor estimates, with a precision of plus or minus 4% and confidenceof 90%, that the correct total is $800,000. This means that

Answers

A: There is a 4% chance that the actual correct total is less than $720,000 or more than $880,000.

B: There is a 10% chance that the actual correct total is less than $768,000 or more than $832,000.

C: The probability that the inventory is not significantly overstated is between 6% and 14%.

D: The inventory is not likely to be overstated by more than 4.4% ($35,200) or understated by more than3.6% ($28,800).

Answer Explanations

Answer (a) is incorrect. The computation underlying this response transposes the correct definitions of “precision”and “confidence.”Answer (b) is the correct answer. A 90% confidence level implies that 10% of the time the true population totalwill be outside the computed range. Precision of plus or minus 4% gives the boundaries of the computed range: 4%× $800,000 = $32,000. $800,000 ± $32,000 provides a range of $768,000 to $832,000.



Answer (c) is incorrect. This response improperly uses precision to modify confidence and fails to specify a dollaramount for the range within which the correct total is apt to lie.Answer (d) is incorrect. This response improperly uses confidence to modify precision, and the phrase “not likely”is ambiguous.

Question: V2C5-0124What effect does an increase in the standard deviation have on the required sample size of mean-per-unitestimation and dollar-unit sampling? Assume no change in any of the other characteristics of the population and nochange in desired precision and confidence.

Answers

A: a.

B: b.

C: c.

D: d.

Answer Explanations

Answer (a) is incorrect. An increase in the standard deviation represents an increase in the variability of thepopulation and therefore requires increasing, not decreasing, the sample size.Answer (b) is incorrect. A change in the standard deviation has no effect on the required sample size when dollar-unit sampling is used, since the sampling units are homogeneous—the individual dollars.Answer (c) is the correct answer. In mean-per-unit estimation, an increase in the standard deviation increases thesample size since it is used to estimate unknown values, such as inventory. In dollar-unit sampling, an increase inthe standard deviation has no effect on the sample size since it yields a smaller sampling error.Answer (d) is incorrect. See explanations for answers (a) and (b).

Question: V2C5-0125An auditor applied dollar-unit sampling to select a sample of costs charged by a contractor. The sample design andresults were as follows:

Mean-per-unitestimation

Dollar-unitsampling

a. Decrease in sample size No change in sample sizeb. No change in sample size Decrease in sample sizec. Increase in sample size No change in sample sized. No change in sample size Increase in sample size

Contract costs charged $10,000,000Number of invoices in population 2,000Tolerable error 1%Confidence level 95%Reliability factor 3.0



Which of the following is true about this sample?

Answers

A: The probability of selecting any particular invoice is 15% (300/2000).

B: There is a 1% chance that the contract invoices contain significant errors.

C: The sampling risk is acceptable if errors do not exceed $33,333.

D: There is a 95% chance that the costs are not overstated more than $100,000 (1% of $10,000,000).

Answer Explanations

Answer (a) is incorrect. The probability of selecting any particular invoice is proportional to the dollar amount ofthe invoice.Answer (b) is incorrect. The chance is 5% that errors are more than 1% of $10,000,000.Answer (c) is incorrect. The acceptable level of sampling risk is 5%, which is 100% less 95%. Sampling risk is thecomplement of the confidence level.Answer (d) is the correct answer. No errors were detected in the sample. Therefore, the desired confidence leveland precision were achieved.

Question: V2C5-0126In which of the following situations would monetary-unit sampling be more effective and efficient than ratio esti-mation?

Answers

A: The population contains a large number of differences between the recorded amount and the actualamount.

B: The population is expected to contain few differences between the recorded amount and the actualamount.

C: The population has a high degree of variability in dollar amount.

D: The population has a low degree of variability in dollar amount.

Answer Explanations

Answer (a) is incorrect. Monetary-unit sampling is generally inefficient and less effective than variables samplingwhen there are a larger number of differences. The ratio approach, however, tends to be especially efficient in suchcircumstances.Answer (b) is the correct answer. Monetary-unit sampling is especially efficient and effective when there are a

Sampling interval $33,333Sample size 300Expected error NoneDetected error None



small number of differences. Ratio estimation, however, requires a large number of differences to be effective.Answer (c) is incorrect. A high degree of variability in the dollar amount within the population makes both of thesemethods efficient relative to alternative statistical methods. A high degree of variability in the dollar amount of thepopulation generally has no effect on the effectiveness of these two methods relative to each other.Answer (d) is incorrect. A low degree of variability among the items in the population reduces the relativeefficiency of both of these methods compared to alternative statistical sampling methods. A low degree ofvariability does not affect the effectiveness of these methods.

Question: V2C5-0127An auditor is using dollar-unit sampling with a fixed interval to test an account with a balance of $750,000. Samplesize is 50. The auditor started the selection process with a random start of 04719. Which of the following itemswould be the third sample item selected?

Answers

A: a.

B: b.

C: c.

D: d.

Answer Explanations

Answer (a) is incorrect. The cumulative amount is less than $34,719.Answer (b) is the correct answer. The cumulative amount is the first amount greater than $34,719, which would bethe threshold for the third selection (i.e., $4719 + 15,000 + $15,000). The selection interval is $750,000/50 =$15,000. It contains dollars 31,375 through 35,482, thus it contains 34,719.Answer (c) is incorrect. This item would not be selected because it does not contain the 34,719th dollar.Answer (d) is incorrect. This item would not be selected because it does not contain the 34,719th dollar.

Question: V2C5-0128Monetary-unit sampling is most useful when the internal auditor

Answers

A: Is testing the accounts payable balance.

B: Cannot cumulatively arrange the population items.

Invoice amount Cumulative amounta. $ 7,985 $31,374b. $ 4,108 $35,482c. $12,305 $47,787d. $ 456 $48,243



C: Expects to find several material errors in the sample.

D: Is concerned with overstatements.

Answer Explanations

Answer (a) is incorrect. Monetary-unit sampling is “generally not appropriate for testing understatement ofliabilities since the more a balance is understated, the less its chance of being included in the sample.”Answer (b) is incorrect. This is one of the requirements for using monetary-unit sampling.Answer (c) is incorrect. Again, one of the assumptions for using monetary-unit sampling is the error rate in thepopulation should be small (e.g., less than 10%). The internal auditor should not use this procedure if materialerrors are expected.Answer (d) is the correct answer. Overstated items have a greater chance of being included in the sample.Additionally, samples under this procedure include more of the “higher-dollar” accounts because of the way thesample is conducted. Errors in these accounts are more likely to result in material misstatements and are thus morecritical to the internal auditor.

Question: V2C5-0129The book value of a 3,000th item inventory is $3,000,000. An auditor specifies a maximum tolerable error of$60,000 and a 95% confidence level (reliability factor = 3.0). Assuming that no individual item in the populationexceeds the monetary value of the interval, the expected sample size for monetary-unit sampling would be

Answers

A: Less than 70.

B: From 70 to 140.

C: From 140 to 160.

D: Greater than 160.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. (3) ($3,000,000/$60,000) = 150, which represents the correct sample size.


Question: V2C5-0130An auditor is planning to use monetary-unit sampling for testing the dollar value of a large accounts receivablepopulation. The advantages of using monetary-unit sampling include all of the following except:



Answers

A: It is an efficient model for establishing that a low error rate population is not materially misstated.

B: It does not require the normal distribution approximation required by variable sampling.

C: It can be applied to a group of accounts, since the sampling units are homogenous.

D: It results in a smaller sample size than that required when using classical sampling, as errors increase.

Answer Explanations

Answer (a) is incorrect. Monetary unit sampling is being an efficient model; this is an advantage.Answer (b) is incorrect. Monetary unit sampling does not assume normally distributed populations; this is anadvantage.Answer (c) is incorrect. Monetary unit sampling uses dollar units as the homogenous units; this is an advantage.Answer (d) is the correct answer. Monetary unit sampling would result in a larger sample size, and this is not anadvantage.

Question: V2C5-0131Which of the following factors would most likely preclude the auditor from using monetary unit sampling?

Answers

A: The auditor expects to find a limited number of understatements of individual account balances.

B: The auditor expects to find that a large percentage of items sampled have misstatements.

C: Individual accounts are not assigned a number, but are listed only alphabetically.

D: The auditor expects to find more errors in the larger dollar value items than in the smaller dollar valueitems.

Answer Explanations

Answer (a) is incorrect. Monetary unit sampling can effectively handle a small number of understatement errors.Answer (b) is the correct answer. Monetary unit sampling is not as effective in calculating an upper error estimatewhen a very large number of errors are expected.Answer (c) is incorrect. Account numbers do not have to be assigned to use monetary unit sampling.Answer (d) is incorrect. This would not preclude the use of monetary unit sampling because: (1) most large-dollar-value items are selected and a census of that data is performed; and (2) the probability of any item being selected isproportional to its size. Thus, monetary unit sampling works especially well in the situation described here.

Question: V2C5-0132Many firms are beginning to use the statistical processing control techniques as part of their total quality manage-



ment approach. Which of the following would not constitute a part of statistical processing control techniques?

Answers

A: Acceptance sampling.

B: Dollar-unit sampling.

C: Quality control charts.

D: Continuous monitoring and feedback.

Answer Explanations

Answer (a) is incorrect. Acceptance sampling is a standard statistical process control technique.Answer (b) is the correct answer. Dollar unit is a sampling technique that has been uniquely applied to auditing. Itis not used in statistical processing control.Answer (c) is incorrect. Quality control charts are an integral part of total quality management approaches.Answer (d) is incorrect. Continuous monitoring and frequent feedbacks are two of the important elements ofstatistical quality control.

Question: V2C5-0133Dollar-unit sampling is not efficient if

Answers

A: Computerized account balances are being audited.

B: Statistical inferences are to be made.

C: The audit objective is oriented to understatements.

D: The account contains a large number of transactions.

Answer Explanations

Answer (a) is incorrect. The issue of manual or computerized accounts would not have any impact on samplingefficiency.Answer (b) is incorrect. Dollar-unit sampling is an accepted method of estimating the dollar error of an accountbalance.Answer (c) is the correct answer. Dollar unit sampling, because it samples each individual dollar, automaticallystratifies. If the audit objective is to identify understatements, dollar-unit sampling is not appropriate because thelarger the understatement, the least likely it is to be identified.Answer (d) is incorrect. The number of transactions is not the issue, the number of dollars is.

Question: V2C5-0134



An internal auditor is considering the use of dollar-unit (probability-proportional-to-size, PPS) sampling. This tech-nique is likely to be especially beneficial if

Answers

A: The auditor is interested in testing the proper valuation of accounts payable.

B: The auditor believes that the items to be tested are just as likely to be overstated as understated.

C: The auditor is interested in testing the accuracy and valuation of accounts receivable.

D: The error rate in the population is believed to be quite large.

Answer Explanations

Answer (a) is incorrect because this technique is ineffective at detecting understatements, which are of significantconcern for accounts payable.Answer (b) is incorrect because this technique is ineffective at detecting understatements, which are of significantconcern for accounts payable.Answer (c) is the correct answer. Dollar-unit sampling is often used for these purposes.Answer (d) is incorrect. Dollar-unit sampling performs relatively poorly with very large error rates.

Question: V2C5-0135A sampling plan is needed to test for overstatement of a $3 million accounts payable book balance. The auditordetermines that a $100,000 error is material and a 95% confidence level is appropriate. Based on thesedeterminations, the sample of size 90 is needed. The sampling plan most likely used is

Answers

A: Stop and go.


C: Dollar-unit sampling.

D: Attributes sampling.

Answer Explanations

Answer (a) is incorrect. A quantitative materiality amount cannot apply to stop or go, a form of attributes sampling.Answer (b) is incorrect. It requires a definition of a cluster.Answer (c) is the correct answer. Dollar-unit sampling is the only quantitative method listed.Answer (d) is incorrect. This question involves a variable and, like answer (a), cannot apply to attributes sampling.

Question: V2C5-0136



An internal auditor is preparing to sample accounts receivable for overstatement. A statistical sampling method thatautomatically provides stratification when using systematic selection is

Answers


B: Ratio-estimation sampling.

C: Dollar-unit sampling.

D: Mean-per-unit sampling.

Answer Explanations

Answer (a) is incorrect. It does not automatically stratify.Answer (b) is incorrect. It does not automatically stratify.Answer (c) is the correct answer. It stratifies, in that each dollar is a sampling unit and the larger the accountbalance, the greater the chance of selection.Answer (d) is incorrect. It does not automatically stratify.

Question: V2C5-0137An auditor wishes to select a dollar-unit sample of 100 sales invoices that are included in receivables. Total receiv-ables consist of 1,600 invoices, beginning with invoices number 1781, ranging in value from $25 to $3,000 andtotaling $700,000. A partial list is

Assuming the 4-digit random number 1461 is selected as a starting point, the first two invoice numbers to beincluded in the sample are

Answers

A: 1790 and 1795.

B: 1790 and 1805.

C: 1795 and 1804.

D: 1795 and 1805.

Answer Explanations

Invoice No. Amount Cumulative amount1781 $ 75 $ 751790 1,400 1,4751795 1,500 2,975

. . .

. . .

. . .1804 1,470 8,4501805 30 8,480



Answer (a) is incorrect. The sampling interval is $7,000 (population total of $700,000 / sample size of 100). Thusthe first two dollars to be selected are cumulative amounts $1,461 (the starting point) and $8,461 ($1,461 +$7,000). Invoice number 1795 is obtained by adding 1461 to the initial selection and does not reflect the $7,000interval.Answer (b) is the correct answer. Invoice number 1790 includes cumulative amount $1,461, and invoice number1805 includes cumulative amount $8,461.Answer (c) is incorrect. Invoice number 1795 includes cumulative amounts $1,476 through $2,975, and thus doesnot include the starting point of $1,461; and, as explained in Answer (a) above, invoice number 1804 does notinclude the second cumulative amount of $8,461.Answer (d) is incorrect. See explanation given for the answer (c).

Question: V2C5-0138Management of a property and casualty insurance company is concerned about the efficiency and effectiveness ofthe claims processing activities. It has two major concerns: (1) some claims are being paid that should not be paidor are being paid in amounts in excess of the policy; and (2) many claimants are not being paid on a timely basis.In preparing for an audit of the area, the internal auditor decides to perform a preliminary survey to gather moreinformation about the nature of processing and potential problems.

Which of the following procedures would be the least effective in gathering information about the nature of theprocessing and potential problems?

Answers

A: Interview supervisors in the claims department to find out more about the procedures used and therationale for the procedures, and obtain their observations about the nature and efficiency of processing.

B: Send an electronic mail message to all clerical personnel detailing the alleged problems and requestthem to respond.

C: Interview selected clerical employees in the claims department to find out more about the proceduresused and the rationale for the procedures, and obtain their observations about the nature and efficiency ofprocessing.

D: Distribute a questionnaire to gain a greater understanding of the responsibilities for claims processingand the control procedures utilized.

Answer Explanations

Answer (a) is incorrect. This would be a good method to learn more about the nature of processing and to solicitinput from employees as to the potential cause of the situation being investigated.Answer (b) is the correct answer. This is the least effective communication and information-gathering technique ofthe four responses because it is impersonal and it alleges inefficiencies before there is evidence that the problemsare due to inefficiencies in the processing. The impersonal method may have been applicable if the auditor wishedopen responses, but not enough guidance is given here to lead to that kind of response.Answer (c) is incorrect. This would supplement the supervisor’s perceptions with those from individuals intimatelyinvolved with the processing of transactions. This would be an effective communication technique.Answer (d) is incorrect. This is not as good of a procedure as answers (b) and (c), but would represent an efficientmethod of gathering preliminary information that would be useful in structuring the interviews.




The auditor used a questionnaire during interviews to gather information about the nature of claims processing. Un-fortunately, the questionnaire did not cover a number of pieces of information offered by the person beinginterviewed. Consequently, the auditor did not document the potential problems for further audit investigation. Theprimary deficiency with the above process is that

Answers

A: The auditor failed to consider the importance of the information offered.

B: The use of a questionnaire in a situation where a structured interview should have been used.

C: Questionnaires do not allow for opportunities to document other information.


Answer Explanations

Answer (a) is the correct answer. The major problem is that the auditor was too oriented to the questionnaire andfailed to appropriately consider the other information that was offered. Questionnaires may be limited, but theauditor needs to be flexible enough to gather other information when it is offered.Answer (b) is incorrect. This is not an inappropriate use of a questionnaire. The problem was the auditor did notlisten well enough to expand the information-gathering process.Answer (c) is incorrect. Questionnaires are limited, but the problem is with its application, not necessarily thenature of the questionnaires.Answer (d) is incorrect. Answers (b) and (c) are not appropriate conclusions.


A clerical employee approaches the auditor and indicates that she has important information about a collusionwithin her department to process fraudulent claims and split the proceeds among the members of a small group.She is willing to discuss the matter with the auditor, but wishes to remain anonymous. The auditor should

Answers

A: Request that the conversation be videotaped so that it will be available as evidence should fraud befound.



B: Reply that the matter must be reported to appropriate organizational officials for subsequent follow-up.

C: Document the information and use it to plan the audit. Change the nature of the audit from one ofeconomy and efficiency to one of fraud.

D: Obtain the information and develop procedures that could corroborate the information.

Answer Explanations

Answer (a) is incorrect. The employee has requested anonymity. No formal investigation has yet begun. Theauditor should not require that the interview be videotaped at this time.Answer (b) is incorrect. The information is strictly “hearsay” evidence at this point in time. The auditor shouldgather enough information to determine if there is other evidence available that might corroborate the assertion andprovide a basis for further investigation.Answer (c) is incorrect. The auditor should determine if there are available sources to corroborate the assertionmade by the employee before changing the nature of the investigation. The auditor will focus on the possibility offraud, but should not completely change the direction of the investigation without corroborating evidence.Answer (d) is the correct answer. The auditor should attempt to corroborate the oral information before changingthe nature of the audit or reporting it to company officials.


The auditor conducted an interview with the supervisor. The auditor noted that the supervisor becameuncomfortable and nervous and changed the subject whenever the auditor raised questions about certain types ofclaims. The supervisor’s answers were consistent with company policies and procedures. When documenting theinterview, the auditor should

Answers

A: Document the supervisor's answers, noting the nature of the nonverbal communications.

B: Not document the nonverbal communication because it is subjective and is not corroborated.

C: Conclude that the nonverbal communication is persuasive and that sufficient evidence exists to chargefraud against the group.

D: Ignore the specific answers given in the interview, because they are self-serving.

Answer Explanations

Answer (a) is the correct answer. Auditors frequently encounter and act on nonverbal communication. If thenonverbal communication affects the auditor’s perception of the information gathered, it should be documented sothat it can be considered as the audit proceeds.Answer (b) is incorrect. If the nonverbal communication affects the auditor’s perception of the information



gathered, it should be documented so that it can be considered as the audit proceeds.Answer (c) is incorrect. Nonverbal communication is not sufficient to reach a conclusion that fraud has taken place.However, along with the allegations made by the employee, it may be sufficient to perform a fraud investigation.Answer (d) is incorrect. The answers given should be documented, but the process of only documenting the verbalresponses, especially in a situation like this where nonverbal actions may indicate untruthfulness, would result inincomplete documentation of the auditee’s response.


After informing management, the auditor is directed to go ahead with a fraud investigation. The auditor hasidentified the parties most likely to have been involved in the fraud, if indeed one is taking place. The auditor sendseach potential participant a personal electronic mail message indicating the nature of the investigation and urgesthe individual to come forward and explain the nature of the fraud. The auditor states that this is strictly an auditinvestigation and legal authorities are not involved. A major problem with this particular communication is

Answers

A: The medium. A paper-based document, such as a letter, should have been used instead of electronicmail message.

B: The medium. Personal interviews should have been used instead of electronic mail.

C: The nature of the communication. The auditor should have sent a questionnaire to each employee,rather than seeking an open-ended response.

D: The nature of the message. The auditor should have detailed the specific allegations against eachemployee and allowed them the opportunity to respond. The message, as written, is too general.

Answer Explanations

Answer (a) is incorrect. The major problem is with the impersonal form of the communication, not whether it wasdelivered electronically or on paper.Answer (b) is the correct answer. The nature of the communication is highly sensitive and personal. A morepersonal form of communication, such as the direct interview, should have been used to elicit the response from theauditees.Answer (c) is incorrect. There is a need for personal communication. Questionnaires are used to gain anunderstanding about the nature of processing. The auditor has already obtained most of this information and isinterested in more specific facts as to how a fraud may have taken place and who was involved in the fraud if onehad taken place.Answer (d) is incorrect. The auditor is not in position to detail the allegations against each specific employee. Theauditor wants to gain more information about the nature of the fraud, if it exists. It would not be proper to detailallegations to each individual employee at this point.

Question: V2C5-0143



Management of a property and casualty insurance company is concerned about the efficiency and effectiveness ofthe claims processing activities. It has two major concerns: (1) some claims are being paid that should not be paidor are being paid in amounts in excess of the policy; and (2) many claimants are not being paid on a timely basis.In preparing for an audit of the area, the internal auditor decides to perform a preliminary survey to gather moreinformation about the nature of processing and potential problems.

After pursuing the investigation, two clerical employees corroborate the allegations and indicate that it was a plandeveloped by the supervisor and that they were put under pressure to go along with the scheme. The auditordecides to question the supervisor, who becomes very hostile in responding to the auditor’s questions. The auditorshould

Answers

A: Indicate that if the supervisor will not cooperate, the auditor will turn the matter over to legalauthorities for further investigation.

B: Indicate this is not a fraud audit and that the purpose is to identify the nature of incorrectly processedtransactions and the reason for the problems encountered. Emphasize that the supervisor's cooperationwill be documented in the workpapers.

C: Respond in a like manner and indicate the evidence the auditor has already obtained. Put pressure onthe supervisor to confess to the fraud and to name others involved in the scheme.

D: Describe the purpose of the interview and the nature of the evidence sought. Encourage the supervisorto continue the interview.

Answer Explanations

Answer (a) is incorrect. The auditor’s responsibility is to refer the matter to management and the audit committee.It is up to them to decide whether to turn the investigation over to legal authorities.Answer (b) is incorrect. This would be incorrect communication because the auditor has explicitly embarked on afraud audit.Answer (c) is incorrect. This is a fraud audit, not a fraud interrogation. The auditor should not respond withhostility or threaten the supervisor to get a confession. The auditor should be prepared to turn the investigation overto proper authorities if the supervisor will not cooperate, but should not act as a fraud interrogator.Answer (d) is the correct answer. The auditor should not react adversely to the hostile actions by the supervisor,but should carefully explain the situation and provide an opportunity for the supervisor to calm down and continuethe interview.

Question: V2C5-0144Management of a property and casualty insurance company is concerned about the efficiency and effectiveness

of the claims processing activities. It has two major concerns: (1) some claims are being paid that should not bepaid or are being paid in amounts in excess of the policy; and (2) many claimants are not being paid on a timelybasis. In preparing for an audit of the area, the internal auditor decides to perform a preliminary survey to gathermore information about the nature of processing and potential problems.

The supervisor has a change of heart and indicates the amount of fraud was less than $85,000 out of $85million in claims processed, a clearly immaterial amount in the supervisor’s opinion. The supervisor makes anoffer to: (1) name all employees involved; (2) describe the circumvention of controls that allowed the fraud to takeplace; and (3) implement the necessary controls if the auditor would agree to describe the situation as a controlprocedure breakdown and not report it to management as a fraud. The amounts represent less than 0.1 percent ofthe claims processed. Otherwise, the supervisor will not cooperate in the investigation, will order the others



involved not to cooperate, and will engage legal counsel.The auditor is already well over time budget and is intrigued by the opportunity to negotiate an end to the

investigation and improve the control procedures. Which of the following would represent an appropriate responseto the supervisor?

I. Indicate the situation is open to negotiation, but that more details on the nature of the fraud would be neededand the supervisor would have to sign an agreement as to the compromise reached.

II. Indicate that the auditor has no authority to negotiate.III. Indicate that if the supervisor wishes to negotiate, the matter must be first reported as a fraud and the negotia-

tions would have to take place with management.

Answers

A: I only.

B: II only.

C: III only.

D: II and III only.

Answer Explanations

Answer (a) is incorrect. This would be an inappropriate response for the auditor.Answer (b) is incorrect. This is a correct communication, but response III is also an appropriate communication.Answer (c) is incorrect. This is a correct communication, but response II is also an appropriate communication.Answer (d) is the correct answer. If the supervisor wants to negotiate, the negotiation should be performed withmanagement and the assigned fraud investigation team.

Question: V2C5-0145An audit team has been assigned to review “the customer satisfaction measurement system” that the industrialproducts division implemented two years ago. This system consists of the division’s customer service officeconducting an annual mail survey. A survey is sent to 100 purchasing departments randomly selected from allcustomers who made purchases in the prior 12 months. The survey is three pages long and its 30 questions use amixture of response modes (e.g., some questions are open-ended, some multiple choice, and others use a responsescale). The customer service office mails the survey in September and tabulates the results for questionnaires re-turned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up isconducted. When the survey was last conducted, 45 of the questionnaires were not returned.

Nonresponse bias is often a concern in conducting mail surveys. The main reason that nonresponse bias can causedifficulties in a sample such as the one taken by the customer service office is that

Answers

A: The sample means and standard errors are harder to compute.

B: Those who did not respond may be systematically different from those who did.

C: The questionnaire is too short.



D: Confidence intervals are narrower.

Answer Explanations

Answer (a) is incorrect. Formulas are equally easy to compute with bad as with good data.Answer (b) is the correct answer. This can result because people may choose not to respond for reasons related tothe purpose of the questionnaire.Answer (c) is incorrect. Longer questionnaires actually increase nonresponse bias.Answer (d) is incorrect. Nonresponse decreases sample size, so, if anything, confidence intervals would be widerrather than narrower.


One of the steps of the audit program is to review the quality of the questionnaire’s design. Which of the followingis a common error made in designing multiple-choice questions in a survey questionnaire?

Answers

A: Unipolar rather than bipolar labels are used for the response categories.

B: The alternative response categories for the questions are not mutually exclusive.

C: Likert scaling is used instead of semantic differential scaling.

D: The question itself uses terms that are very familiar to the respondent.

Answer Explanations

Answer (a) is incorrect. This is a valid scaling answers for multiple-answer questions.Answer (b) is the correct answer. Overlapping categories frequently cause respondent difficulty.Answer (a) is incorrect. This is a valid scaling answers for multiple-answer questions.Answer (d) is incorrect. This is a desirable feature of a question.

Question: V2C5-0147An audit team has been assigned to review “the customer satisfaction measurement system” that the industrialproducts division implemented two years ago. This system consists of the division’s customer service officeconducting an annual mail survey. A survey is sent to 100 purchasing departments randomly selected from allcustomers who made purchases in the prior 12 months. The survey is three pages long and its 30 questions use amixture of response modes (e.g., some questions are open-ended, some multiple choice, and others use a response



scale). The customer service office mails the survey in September and tabulates the results for questionnaires re-turned by October 15. Only one mailing is sent. If the customer does not return the questionnaire, no follow-up isconducted. When the survey was last conducted, 45 of the questionnaires were not returned.

Which of the following is not an advantage of face-to-face interviews over mail surveys?

Answers

A: The response rate is typically higher.

B: Interviewers can increase a respondent's comprehension of questions.

C: Survey designers can use a wider variety of types of questions.

D: They are less expensive since mailing costs are avoided.

Answer Explanations

Answer (a) is incorrect. Mail surveys often have notoriously low response rates.Answer (b) is incorrect. The interviewer’s flexibility to interpret responses and rephrase questions increasesresponse quality.Answer (c) is incorrect. Audio-visual aids, complex sequences, and other varieties of questions are made possibleby the interactive nature of interviews.Answer (d) is the correct answer. One of the principal advantages of mail surveys is their cost efficiency becausemailing costs are less than interview labor costs.


Many questionnaires are made up of a series of different questions that use the same response categories (e.g.,strongly agree, agree, neither, disagree, strongly disagree). Some designs will have different groups of respondentsanswer alternative versions of the questionnaire that present the questions in different orders and reverse theorientation of the endpoints of the scale (e.g., agree on the right and disagree on the left or vice versa). The purposeof such questionnaire variations is to

Answers

A: Eliminate intentional misrepresentations.

B: Reduce the effects of pattern response tendencies.

C: Test whether respondents are reading the questionnaire.



D: Make it possible to get information about more than one population parameter using the samequestions.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. There are many known effects of the sequence and format of questions. Onemethod for dealing with these is to use questionnaire variations that cause these biases to average out across thesample.



Several of the audit team members are concerned about the low response rate, the poor quality of the questionnairedesign, and the potentially biased wording of some of the questions. They suggest that the customer service officemight want to supplement the survey with some unobtrusive data collection, such as observing customerinteractions in the office or collecting audiotapes of phone conversations with customers. Which of the following isnot a potential advantage of unobtrusive data collection compared to surveys or interviews?

Answers

A: Interactions with customers can be observed as they occur in their natural setting.

B: It is easier to make precise measurements of the variables under study.

C: Unexpected or unusual events are more likely to be observed.

D: People are less likely to alter their behavior because they are being studied

Answer Explanations

Answer (a) is incorrect. Observing the phenomenon in its natural setting is a principal advantage of unobtrusivemeasures.Answer (b) is the correct answer. Lack of experimental control and measurement precision is the chief weaknessesof unobtrusive measures.Answer (c) is incorrect. Unobtrusive measures are useful for exploratory investigations for this reason.Answer (d) is incorrect. Since people are going about their normal business, they are less likely to do what theythink the researcher wants, censor their comments, and so on.



Question: V2C5-0150An audit team developed a preliminary questionnaire with the following response choices

I. Probably not a problem.II. Possibly a problem.III. Probably a problem.

The questionnaire illustrates the use of

Answers

A: Trend analysis.

B: Ratio analysis.

C: Unobtrusive measures or observations.

D: Rating scales.

Answer Explanations

Answer (a) is incorrect. Trend analysis is a specialized form of analytical review procedure, used primarily to ana-lyze the changes in account balances over time.Answer (b) is incorrect. Ratio analysis is a subset of trend analysis used in analytical review. It is unrelated to thesubject.Answer (c) is incorrect. “Observing means seeing, noticing, not passing over. It implies a careful, knowledgeablelook at people and things. It means a visual examination with a purpose, a mental comparison with standards, anevaluative sighting.” Use of rating scales requires the participant to actively participate, it is not unobtrusive.Answer (d) is the correct answer. The auditors are using a numerical rating for the organization audited (source:Sawyer’s Internal Auditing IIA).

Question: V2C5-0151An audit of the quality control department is being planned. Which of the following would least likely be used inthe preparation of a preliminary survey questionnaire?

Answers

A: An analysis of quality control documents.

B: The permanent audit file.

C: The prior audit report.

D: Management's charter for the quality control department.

Answer Explanations



Answer (a) is the correct answer. Such analysis is a part of fieldwork, which comes after the preliminary survey.Answer (b) is incorrect. This file probably contains information, such as questions used in prior audits andproblems detected in prior years, that will help in the development of appropriate questions to ask this year.Answer (c) is incorrect. The report will identify prior findings and recommendations that should be followed up onthis year.Answer (d) is incorrect. Knowing what the department is supposed to do will help the auditor developknowledgeable questions.

Question: V2C5-0152In advance of a preliminary survey, an audit director sends a memorandum and questionnaire to the supervisors ofthe department to be audited. What is the most likely result of that procedure?

Answers

A: It creates apprehension about the audit.

B: It involves the auditee's supervisory personnel in the audit.

C: It is an uneconomical approach to obtaining information.

D: It is only useful for audits of distant locations.

Answer Explanations

Answer (a) is incorrect. Greater knowledge of the upcoming audit is more likely to remove some of the apprehen-sion about it.Answer (b) is the correct answer. This helps involve the supervisors of the auditee’s department and encourages amore collegial approach to the audit.Answer (c) is incorrect. It will normally be more economical since the legwork will be done by those mostcompetent to do it rapidly.Answer (d) is incorrect. Even though it is very useful for audits of distant locations, it can also be advantageous inother circumstances.

Question: V2C5-0153Management answered “yes” to every question when filling out an internal control questionnaire and stated

that all listed requirements and control activities were part of its procedures. An internal auditor retrieved thisquestionnaire from management during the preliminary survey visit but did not review the responses withmanagement while on site.

The auditor’s supervisor should be critical of the above procedure based on the fact that

Answers

A: Audit information must be corroborated in some way.

B: Internal control questionnaires cannot be relied on.



C: The auditors were not present while the questionnaire was being filled out.

D: The questionnaire was not designed to address accounting operations and controls.

Answer Explanations

Answer (a) is the correct answer. Self-audit questionnaires provide indirect evidence, which must be confirmed.Answer (b) is incorrect. The ability to adapt general-purpose internal control questionnaires (ICQs) to differentorganizational units, personnel, and functional units is one of the strengths of these audit tools.Answer (c) is incorrect. ICQs can be designed so that the auditee can answer the questions without the auditorbeing present.Answer (d) is incorrect. An ICQ does not need to address accounting information to ensure integrity.

Question: V2C5-0154Management answered “yes” to every question when filling out an internal control questionnaire and stated

that all listed requirements and control activities were part of its procedures. An internal auditor retrieved thisquestionnaire from management during the preliminary survey visit but did not review the responses withmanagement while on site.

The auditor’s supervisor is writing the performance assessment for the auditor on this preliminary survey assign-ment. The supervisor cites the need to review management’s responses on the control questionnaire. The auditorshould have interviewed management for additional information because the interview technique

Answers

A: Provides the opportunity to insert questions to probe promising areas.

B: Is the most efficient way to upgrade the information to the level of objective evidence.

C: Is the least costly audit technique when a large amount of information is involved.

D: Is the only audit procedure that does not require confirmation and walk-through of the informationthat is obtained.

Answer Explanations

Answer (a) is the correct answer. During face-to-face contact, a skilled interviewer can react to potential problemsand expand questioning of more relevant subjects.Answer (b) is incorrect. Interviews do not produce objective evidence unless the information corroborates factsalready in evidence.Answer (c) is incorrect. Interviews tend to be more costly in relation to the amount of information that must beincluded because of the preparation and discussion time involved.Answer (d) is incorrect. Critical information obtained during an interview must be followed up and confirmed.

Question: V2C5-0155An auditor is considering developing a questionnaire to research employee attitude toward control procedures.Which of the following represents criteria that should not be considered in designing the questionnaire?



Answers

A: Questions must be worded to ensure a valid interpretation by the respondents.

B: Questions must be reliably worded so that they measure what was intended to be measured.

C: The questionnaire should be short to increase the response rate.

D: Questions should be worded such that a "no" answer indicates a problem.

Answer Explanations

Answer (a) is incorrect. Validity and reliability of this question is extremely important.Answer (b) is incorrect. Validity and reliability of this question is extremely important.Answer (c) is incorrect. When questionnaires are too long, people tend not to fill them out.Answer (d) is the correct answer. Questions can be multiple answer, fill-in-the-blank, essay, Likert scales, and soon.

Question: V2C5-0156Which of the following statements describes an internal control questionnaire? It

Answers

A: Provides detailed evidence regarding the substance of the control system.

B: Takes less of the auditee's time to complete than other control evaluation devices.

C: Requires that the auditor be in attendance to properly administer it.

D: Provides indirect audit evidence that might need corroboration.

Answer Explanations

Answer (a) is incorrect. “Yes” and “no” answers may be very general and not specific as to degree.Answer (b) is incorrect. They are tiring for auditees to complete due to their length.Answer (c) is incorrect. The structured questionnaire asks for specific “yes” or “no” answers plus briefexplanations.Answer (d) is the correct answer. The evidence provided is indirect and therefore could require corroboration insome way.

Question: V2C5-0157Which of the following best describes the major disadvantage of using a questionnaire rather than a flowchart toevaluate internal controls?

Answers



A: Questionnaires usually take more time to complete and are more cumbersome.

B: Responses do not efficiently flag potential internal control weaknesses.

C: It is difficult for auditors to develop or obtain questionnaires that are appropriate for most internalcontrol systems.

D: Auditors may complete questionnaires without really understanding overall operations of internalcontrol systems.

Answer Explanations

Answer (a) is incorrect. The opposite is true.Answer (b) is incorrect. This is an advantage of questionnaires.Answer (c) is incorrect. Such are readily obtained or developed.Answer (d) is the correct answer. This is the major disadvantage of using questionnaires. Developing or reviewingflowcharts is an extremely effective way to gain an overall understanding of the system and pinpoint control pointsand the lack of controls.

Question: V2C5-0158Which of the following is the primary advantage of using an internal control questionnaire?

Answers

A: It provides a clear picture of the interrelationships that exist between the various controls.

B: It reduces the risk of overlooking important aspects of the system.

C: It forces an auditor to acquire a full understanding of the system.

D: The negative responses indicate the only areas needing further audit work.

Answer Explanations

Answer (a) is incorrect because it is an advantage of a flowchart.Answer (b) is the correct answer. It can be prepared in advance and functions very much like a checklist.Answer (c) is incorrect because it is an advantage of a flowchart.Answer (d) is incorrect because positive responses must also be tested to determine compliance.

Question: V2C5-0159An audit manager is conducting the annual meeting with manufacturing division management to discuss proposedaudit plans and activities for the next year. After some discussion about the past year’s audit activity at twelveplants in the division, the divisional vice president agrees that all significant recommendations made by the auditstaff refer to key controls and related operating activities that are correctly described for local management withinthe volume of standard operating procedures for the division. The vice president proposes to transcribe key controlactivities from the division’s extensive written procedures to a self-audit standard operating procedure (SOP)



questionnaire. What significance should the audit manager attach to such SOP questionnaires in relation to theproposed audit schedule for the next year?

Answers

A: The SOP questionnaires should improve control adequacy, but the auditors need to verify that controlsare working as documented in the SOP.

B: Adding this control should eliminate significant audit recommendations in the coming year, so thescope of audit activities can be reduced accordingly.

C: Audit activity can be reduced if the vice president agrees to require internal auditing departmentapproval on all divisional standard operating procedures.

D: SOP questionnaires must be mailed and controlled by the internal auditing department to beconsidered in relation to the proposed audit schedule.

Answer Explanations

Answer (a) is the correct answer. A specific advantage of a SOP questionnaire is that it may be used by localmanagement to periodically ensure that employee practices remain current with relevant, valid, and up-to-datestandard operating procedures; this improves the overall level of control and the control environment when follow-up is included to ensure performance.Answer (b) is incorrect. These SOP questionnaires have no impact on inherent risk, and there is no evidence thatsuch a control would be effective; there is no basis in fact for reducing the proposed scope.Answer (c) is incorrect. Standard operating procedures, as described, are providing directive controls, which appearto be adequate; adding internal auditing department approval does not impact the effectiveness of these controls.Answer (d) is incorrect. Control of SOP questionnaires by the internal auditing department would not affect thelevel of evidence obtained in this manner; information obtained via questionnaires must be verified to be con-sidered objective.

Question: V2C5-0160Checklists used to assess audit risk have been criticized for all of the following reasons except:

Answers

A: Providing a false sense of security that all relevant factors are addressed.

B: Inappropriately implying equal weight to each item on the checklist.

C: Decreasing the uniformity of data acquisition.

D: Being incapable of translating the experience or sound reasoning intended to be captured by each itemon the checklist.

Answer Explanations

Answer (a) is incorrect because this answer is a criticism of checklists.



Answer (b) is incorrect because this answer is a criticism of checklists.Answer (c) is the correct answer. Checklists increase the uniformity of data acquisition.Answer (d) is incorrect because this answer is a criticism of checklists.

Question: V2C5-0161When an internal auditor is interviewing to gain information, the auditor will not be able to remember everythingthat was said in the interview. The most effective way to record interview information for later use is to

Answers

A: Write notes quickly, trying to write down everything in detail, as it is said; then highlight importantpoints after the meeting.

B: Tape-record the interview to capture everything that everyone says; then type everything said into acomputer for documentation.

C: Hire a professional secretary to take notes, allowing complete concentration on the interview; thendelete unimportant points after the meeting.

D: Organize notes around topics on the interview plan and note responses in the appropriate area,reviewing the notes after the meeting to make additions.

Answer Explanations

Answer (a) is incorrect. Extensive note taking may interfere with your communication with your respondent, sinceyou cannot maintain eye contact or notice nonverbal as well when you are occupied with your own notes.Answer (b) is incorrect. Tape recording might be used for controversial material, but generally will not elicitpositive feelings from your respondent. For most organizational purposes, you will not need exact quotes, themajor benefit of a recording.Answer (c) is incorrect. Aside from cost, this option would not work because of confidentiality and negativereaction from your respondent. This interview is your job, not someone else’s.Answer (d) is the correct answer. Organizing note taking ahead of time helps you have time during the interviewto listen and evaluate the responses and the reactions of your respondent.

Question: V2C5-0162As part of the test of the effectiveness of a disaster recovery plan, the auditor plans to interview five employeesfrom each of five different departments (25 employees in all). After the first few interviews, what would be the bestway for the auditor to remain attentive during the remaining interviews?

Answers

A: Make up completely different questions to stay interested.

B: Ask the questions in a slightly different format and in a different sequence.

C: Have the rest of the employees write down their responses.



D: Interview the remaining employees in groups of four or five.

Answer Explanations

Answer (a) is incorrect. The results of the auditor’s test depend on comparing responses to the same questions.Answer (b) is the correct answer. Changing the wording of the questions and the sequence in which they are askedmay eliminate some of the tedium associated with a series of interviews and may also allow the auditor to refinethe technique during the process.Answer (c) is incorrect. Written responses to questions are often very different from verbal responses, and theinterviewer does not have the option of immediately pursuing a particular answer.Answer (d) is incorrect. Employees are less likely to be forthcoming in a group, particularly when their responsesmay be critical of management.

Question: V2C5-0163When conducting interviews during the early stages of an internal audit, it is more effective to

Answers

A: Ask for specific answers that can be quantified.

B: Ask people about their jobs.

C: Ask surprise questions about daily procedures.

D: Take advantage of the fact that fear is an important part of the audit.

Answer Explanations

Answer (a) is incorrect. Later fieldwork will cover information that can be quantified. Building rapport is moreimportant in the early interviews.Answer (b) is the correct answer. Individuals feel more important when they are asked people questions ratherthan control questions. This will improve the important interpersonal part of building the audit relationship.Answer (c) is incorrect. Unless fraud is suspected or the audit deals with cash or negotiable securities, it is moreeffective to defuse the anxiety of anticipating the audit by providing information ahead of time explaining the auditprocess and how to prepare for it.Answer (d) is incorrect. Auditee fear may be a natural part of anticipating the audit, but the auditor should keep itfrom being an important continuing part of the audit by using good interpersonal skills to build a positive partici-pative relationship with auditees.

Question: V2C5-0164The current audit of disbursement activities shows a significant number of errors made during the accounts payablevouchering process that have resulted in lost discounts and an extraordinary number of adjustments and creditmemos. To date the causes have not been fully identified for all types of errors noted. The most appropriate courseof action for the auditor to take related to these problems is to

Answers



A: Interview accounts payable clerks and those involved in processing these transactions.

B: Expand sample sizes for attributes already tested in transactions entered by accounts payable andpurchasing.

C: Concentrate on audit program requirements for cash disbursements testing to discover any relatedinformation from those tests.

D: Describe the transaction-related problems identified to date in a special report to management withoutexpressing a cause or an auditor's conclusion about the situation.

Answer Explanations

Answer (a) is the correct answer. The three methods of gathering feedback include observing, analyzing, andquestioning; questioning the personnel and others affected within the organization represents the remainingmethod.Answer (b) is incorrect. Expanding sample sizes will generate more factual information about error rates in theseattributes, but it will not provide feedback.Answer (c) is incorrect. The cash disbursements testing will show results of transaction processing after thevouchering process has been performed and corrections have been posted to the system; this information will notprovide additional feedback.Answer (d) is incorrect. The auditor is looking to gather feedback.

Question: V2C5-0165Interviewing techniques are used frequently by internal auditors. When considering the potential use ofinterviewing techniques to gather audit evidence, auditors should be aware those interviews

Answers

A: Are more objective than questionnaires in gathering data.

B: Provide a systematic format to ensure audit coverage.

C: Should be corroborated by gathering objective data.

D: Are best suited to reaching audit conclusions.

Answer Explanations

Answer (a) is incorrect. Interviews are not more objective than questionnaires.Answer (b) is incorrect. Interviews do not provide a systematic format.Answer (c) is the correct answer. Evidence obtained by interviews should be corroborated.Answer (d) is incorrect. Evidence from interviews is not conclusive.

Question: V2C5-0166



Management has requested an audit of promotional expenses. The sales department has been giving away expen-sive items in conjunction with new product sales to stimulate demand. The promotion seems successful, butmanagement believes the cost may be too high. Which of the following audit procedures would be the least usefulto determine the effectiveness of the promotion?

Answers

A: A comparison of product sales during the promotion period with sales during a similar nonpromotionperiod.

B: A comparison of the unit cost of the products sold before and during the promotion period.

C: An analysis of marginal revenue and marginal cost for the promotion period, compared to the periodbefore the promotion.

D: A review of the sales department's reasons for believing that the promotion has been successful.

Answer Explanations

Answer (a) is incorrect. This comparison would help highlight the effectiveness of the promotion in increasingsales.Answer (b) is the correct answer. There is no indication that cost of the products sold has changed. The challengeis to address the effectiveness of the promotion.Answer (c) is incorrect. This is the key analysis, as it would show the extent of additional revenue versus cost.Answer (d) is incorrect. This would be helpful because the sales department may have useful information on newcustomers and repeat purchases.

Question: V2C5-0167An internal auditor plans to use an analytical review to verify the correctness of various operating expenses in adivision. The use of an analytical review as a verification technique would not be a preferred approach if

Answers

A: The auditor notes strong indicators of a specific fraud involving this account.

B: The company has relatively stable operations that have not changed much over the past year.

C: The auditor would like to identify large, unusual, or nonrecurring transactions during the year.

D: The operating expenses vary in relation to other operating expenses, but not in relation to revenue.

Answer Explanations

Answer (a) is the correct answer. If the auditor already suspects fraud, a more directed audit approach would beappropriate.Answer (b) is incorrect. Relatively stable operating data are a good scenario for using analytical review.Answer (c) is incorrect. Analytical review would be useful in identifying whether large, nonrecurring, or unusualtransactions occurred.



Answer (d) is incorrect. Analytical review only needs to have accounts related to other accounts or otherindependent data. It does not require that they be related to revenue.

Question: V2C5-0168During an audit, the internal auditor should consider the following factor(s) in determining the extent to whichanalytical procedures should be used:

Answers

A: Adequacy of the system of internal control.

B: Significance of the area being examined.

C: Precision with which the results of analytical audit procedures can be predicted.


Answer Explanations

Answer (a) is incorrect. Adequacy of the system of internal control would be used to determine the extent ofanalytical audit procedures to be completed.Answer (b) is incorrect. The significance of the area being examined would be a factor in determining the extent ofthe analytical audit procedures to be used.Answer (c) is incorrect. The precision of the prediction of the internal audit results would be a factor indetermining the extent of analytical audit procedures to be used.Answer (d) is the correct answer. All of the above factors would be considered in determining the extent ofanalytical audit procedures to be used.

Question: V2C5-0169A restaurant food chain has over 680 restaurants. All food orders for each restaurant are required to be input into anelectronic device that records all orders by food servers and transmits the order to the kitchen for preparation. Allfood servers are responsible for collecting cash for all their orders and must turn in cash at the end of their shiftequal to the sales value of food ordered for their ID number. The manager then reconciles the cash received for theday with the computerized record of food orders generated. All differences are investigated immediately by therestaurant.Corporate headquarters has established monitoring controls to determine when an individual restaurant might notbe recording all its revenue and transmitting the applicable cash to the corporate headquarters. Which one of thefollowing would be the best example of a monitoring control?

Answers

A: The restaurant manager reconciles the cash received with the food orders recorded on the computer.

B: All food orders must be entered on the computer, and there is segregation of duties between the foodservers and the cooks.



C: Management prepares a detailed analysis of gross margin per store and investigates any store thatshows a significantly lower gross margin.

D: Cash is transmitted to corporate headquarters on a daily basis.

Answer Explanations

Answer (a) is incorrect. This is an example of a reconciliation control applied at the store level. Monitoring refersto an overall control, which will tell management whether its other controls are operating effectively.Answer (b) is incorrect. These are operational and segregation controls.Answer (c) is the correct answer. Monitoring is a process that assesses the quality of the internal controlstructure’s performance over time. It involves appropriate personnel assessing the design and operation of controlson a timely basis and taking necessary actions. Monitoring can be done through ongoing activities or separateevaluations. Ongoing monitoring procedures are built into the normal recurring activities of an entity and includeregular management and supervisory activities.Answer (d) is incorrect. This is a daily operational control.

Question: V2C5-0170The auditor of a construction company that builds foundations for bridges and large buildings performed a

review of the expense accounts for equipment (augers) used to drill holes in rocks to set the foundation for thebuildings. During the review, the auditor noted that the expenses related to some of the auger accounts hadincreased dramatically during the year. The auditor spoke to the construction manager, who explained that theaugers last two to three years and are expensed when purchased. Thus, the auditor should see a decrease in theexpense accounts for these augers in the next year, but would expect an increase in the expenses of other augers.The auditor also found out that the construction manager is responsible for the inventorying and receiving of theaugers and is a part owner of a company that supplies augers to the company. To improve the quality of equipment,the president of the company approved the supplier.

Which of the following procedures would be the least appropriate audit procedure to address these analyticalfindings?

Answers

A: Note the explanation in the working papers for investigation during the next audit and perform nofurther work at this time.

B: Develop a comparative analysis of auger expense over the past few years to determine if therelationship held in previous years.

C: Take a sample of debits to the auger expense account and trace to independent shipping documentsand to invoices for the augers.

D: Arrange to take an inventory of augers to determine if the augers purchased this year were on handand would be available for use in the next two years.

Answer Explanations

Answer (a) is the correct answer. This is the least appropriate audit procedure because it just defers theinvestigation to the following year. If a fraud was being conducted, it would not be appropriate to deferinvestigative action to the following year.



Answer (b) is incorrect. This would be an effective procedure to establish the “face validity” of the manager’sexplanation. If the relationship is valid, it should also hold for the previous years.Answer (c) is incorrect. This would be an appropriate attempt to establish some independent evidence as towhether the goods were received, because the construction manager has a conflict of interest. The auditor shouldlook for the existence of receiving reports signed by someone other than the construction manager and shouldverify that the individuals signing the reports exist.Answer (d) is incorrect. This would be a good procedure to determine if the augers exist since they are supposed tobe used over a two- to three-year period.

Question: V2C5-0171The auditor of a construction company that builds foundations for bridges and large buildings performed a reviewof the expense accounts for equipment (augers) used to drill holes in rocks to set the foundation for the buildings.During the review, the auditor noted that the expenses related to some of the auger accounts had increaseddramatically during the year. The auditor spoke to the construction manager, who explained that the augers last twoto three years and are expensed when purchased. Thus, the auditor should see a decrease in the expense accountsfor these augers in the next year, but would expect an increase in the expenses of other augers. The auditor alsofound out that the construction manager is responsible for the inventorying and receiving of the augers and is a partowner of a company that supplies augers to the company. To improve the quality of equipment, the president of thecompany approved the supplier.

Assume the auditor did not find a satisfactory explanation for the results of the analytical procedures performedand has conducted the appropriate follow-up procedures. The audit of the area is otherwise complete. Which of thefollowing would be the most appropriate action to take?

Answers

A: Note the actions and follow-up next year. Defer the reporting to management until a satisfactoryexplanation can be obtained.

B: Expand audit procedures by observing the receipt of all augers during a reasonable period of time andtrace the receipts to the appropriate accounts. Determine causes of any discrepancies.

C: Report the findings, as they are, to management and recommend an investigation for possibleirregularities.

D: Report the findings to the construction manager and insist that appropriate internal controls, such asindependent receiving reports, be implemented. Follow up to see if the controls are properlyimplemented.

Answer Explanations

Answer (a) is incorrect. This would only delay the reporting of an important finding.Answer (b) is incorrect. The results should be reported to management. The suggested audit procedure isincomplete and would not likely answer the question on the causes of the problem.Answer (c) is the correct answer. The IIA Standards states: “Results, or relationships from applying analyticalauditing procedures that are not sufficiently explained should be communicated to the appropriate levels ofmanagement.”Answer (d) is incorrect. The results should be reported to other levels of management because the auditor hasalready noted that the construction manager has a conflict of interest. Further, the auditor cannot insist that controlsbe implemented; the auditor can only recommend.



Question: V2C5-0172An auditor performs an analytical review by comparing the gross margins of various divisional operations withthose of other divisions and with the individual division’s perfor-mance in previous years. The auditor notes asignificant increase in the gross margin at one division. The auditor does some preliminary investigation and alsonotes that there were no changes in products, production methods, or divisional management during the year.Based on the above information, the most likely cause of the increase in gross margin would be

Answers

A: An increase in the number of competitors selling similar products.

B: A decrease in the number of suppliers of the material used in manufacturing the product.

C: An overstatement of year-end inventory.

D: An understatement of year-end accounts receivable.

Answer Explanations

Answer (a) is incorrect. An increase in the number of competitors would result in price competition and a likelydecrease in gross margin.Answer (b) is incorrect. A decrease in the number of suppliers would cause less price competition on the incomingside and, all else being equal, would result in a decreased gross margin.Answer (c) is the correct answer. An overstatement of year-end inventory would result in an increase in the grossmargin.Answer (d) is incorrect. A decrease in accounts receivable would be very unlikely to signal an increase in the grossmargin.

Question: V2C5-0173During an operational audit, an auditor compares the inventory turnover rate of a subsidiary with established indus-try standards in order to

Answers

A: Evaluate the accuracy of the subsidiary's internal financial reports.

B: Test the subsidiary's controls designed to safeguard assets.

C: Determine if the subsidiary is complying with corporate procedures regarding inventory levels.

D: Assess the performance of the subsidiary and indicate where additional audit work may be needed.

Answer Explanations

Answer (a) is incorrect. Comparison with industry standards will not test the accuracy of internal reporting.Answer (b) is incorrect. Comparison with industry standards will not test the controls designed to safeguard the



inventory.Answer (c) is incorrect. Comparison with industry standards will not test compliance.Answer (d) is the correct answer. Such an analytical procedure will provide an indication of the efficiency andeffectiveness of the subsidiary’s management of the inventory.

Question: V2C5-0174During an audit of a smaller division, the auditor notes the following regarding the purchasing function:

• There are three purchasing agents. Agent 1 is responsible for ordering all large component parts, Agent 2 isresponsible for electric motors, and Agent 3 is responsible for smaller parts, such as fasteners.

• There are separate accounts payable and receiving departments.• In order to hold vendors more responsible, all invoices are sent to the purchasing agent placing the order.

The purchasing agent matches the vendor invoice, receiving slip, and purchase order. If all match, thepurchasing agent sends the documents forward to the accounts payable department. The purchasing agentinvestigates differences.

• Only the accounts payable department has the ability to authorize an item for payment.• All recorded receipts are immediately recorded into a perpetual inventory record by the department to which

the goods are transferred after receipt.

The auditor interviewed both management and the purchasing agents. Both groups were very satisfied with thecurrent system because it helped maintain vendor accountability and provided sufficient segregation of duties sinceonly the accounts payable department can authorize an item for payment.

Which of the following audit procedures would be most effective in determining whether material fraud wastaking place?

Answers

A: Take a random sample of cash disbursements and trace to approved purchase orders and receivingslips.

B: Reconcile the perpetual inventory to the general ledger and investigate any differences.

C: Take a random sample of purchase orders. Trace each purchase order to a receiving slip, vendorinvoice, and approval by the accounts payable department.

D: Perform an analytical review of inventory by product line to determine whether a particular productline has increased. Inquire of the purchasing agent as to the reason for the inventory increase.

Answer Explanations

Answer (a) is incorrect. This would not be an effective procedure because, by definition, all cash disbursementswould be accompanied by approved documents.Answer (b) is the correct answer. A fraud would result in an overstatement of inventory in the ledger, but theperpetual inventory would reflect actual purchases.Answer (c) is incorrect. This procedure would only verify that purchase orders were processed. It would notindicate the existence of fictitious purchase orders.Answer (d) is incorrect. This procedure would provide limited evidence on the possibility of fraud, but would notbe as complete as answer (a).



Question: V2C5-0175During an audit of a smaller division, the auditor notes the following regarding the purchasing function:

• There are three purchasing agents. Agent 1 is responsible for ordering all large component parts, Agent 2 isresponsible for electric motors, and Agent 3 is responsible for smaller parts, such as fasteners.

• There are separate accounts payable and receiving departments.• In order to hold vendors more responsible, all invoices are sent to the purchasing agent placing the order.

The purchasing agent matches the vendor invoice, receiving slip, and purchase order. If all match, thepurchasing agent sends the documents forward to the accounts payable department. The purchasing agentinvestigates differences.

• Only the accounts payable department has the ability to authorize an item for payment.• All recorded receipts are immediately recorded into a perpetual inventory record by the department to which

the goods are transferred after receipt.

The auditor interviewed both management and the purchasing agents. Both groups were very satisfied with thecurrent system because it helped maintain vendor accountability and provided sufficient segregation of duties sinceonly the accounts payable department can authorize an item for payment.

The auditor is responsible for evaluating the control structure to determine if the structure would allow forundetected fraud. Based on the above scenario, the most likely undetected fraud, if any, would be

Answers

A: The purchasing agents could be purchasing the majority of products from a favorite vendor sincerotation among purchasing agents is not mandatory.

B: The purchasing agents could be sending fake purchase orders to a dummy vendor, inserting areceiving slip, and having payments made to the dummy vendor.

C: The receiving department could be diverting receipts to different locations and failing to createreceiving reports.

D: The production department could be deflating the price of products purchased and thereby increasingthe reported gross margin of sales.

Answer Explanations

Answer (a) is incorrect. There may be good reason to purchase most goods from a particular vendor. Nothing in thescenario suggests fraudulent activities.Answer (b) is the correct answer. This type of fraud would not be detected by the control system since thepurchasing agent could insert the fictitious receiving slip.Answer (c) is incorrect. This possible fraud would be detected because no receiving report would be available tosupport the vendor’s invoice.Answer (d) is incorrect. This response is unrelated to the purchasing environment described above.

Question: V2C5-0176Which of the following control procedures, if properly implemented, would best decrease the likelihood of fraud inthe environment described above?

Answers



A: Require periodic rotation of purchases among different vendors.

B: Require rotation of duties among the three purchasing agents.

C: Require receiving reports be sent directly to accounts payable.

D: Require that the receiving department make the updates to the perpetual inventory record.

Answer Explanations

Answer (a) is incorrect. This might partially deal with the problem, but the purchasing agent could just developnew dummy vendors. Further, this would be a trend away from establishing long-term relationships with keyvendors as part of many TQM programs.Answer (b) is incorrect. Rotation of duties would not affect the type of fraud that could take place in thisenvironment. The purchasing agent could just develop another dummy vendor for the new product line.Answer (c) is the correct answer. This change in procedures would make it difficult for the purchasing agent toinsert a fictitious receiving report. An even better procedure would be to have both the receiving reports and vendorinvoices be sent to accounts payable.Answer (d) is incorrect. This would just create an additional opportunity for fraud by the receiving department.

Question: V2C5-0177Analytical procedures

Answers

A: Are considered direct evidence of the assertion being evaluated.

B: Are compelling evidence when they involve recomputation.

C: May provide the best available evidence for the completeness assertion.

D: Are not sufficient by themselves for management assertions, but should be used for fraud.

Answer Explanations

Answer (a) is incorrect. Although relevant, analytical evidence is not direct.Answer (b) is incorrect. It is not a recomputation or compelling.Answer (c) is the correct answer. Analytical relationships provide evidence that related transactions have beenrecorded.Answer (d) is incorrect. For assertions and accounts of low materiality, analytical evidence is often consideredsufficient.

Question: V2C5-0178A company makes a practice of investing excess short-term cash in marketable equity securities. A reliable test ofthe valuation of those securities would be a



Answers

A: Comparison of cost data with current market quotations.

B: Confirmation of securities held by the broker.

C: Recalculation of investment carrying value using the equity method.

D: Calculation of premium or discount amortization.

Answer Explanations

Answer (a) is the correct answer. This procedure would provide most competent evidence about value of themarketable equity securities.Answer (b) is incorrect. This procedure would not provide evidence about value.Answer (c) is incorrect. Marketable equity investments held for the short term are not subject to the equity methodof accounting.Answer (d) is incorrect. There is no amortization of premium or discount on equity investments only on bonds andother debtor investments held for long-term purposes.

Question: V2C5-0179Analytical procedures in which current financial statements are compared with budgets or previous statements areprimarily intended to determine

Answers

A: Adequacy of financial statement disclosure.

B: Existence of specific errors or omissions.

C: Overall reasonableness of statement contents.

D: Use of an erroneous cutoff date.

Answer Explanations

Answer (a) is incorrect. Analytical procedures do not generally provide evidence regarding the adequacy ofdisclosure.Answer (b) is incorrect. Analytical procedures do not disclose specific errors or omissions.Answer (c) is the correct answer. A determination of overall reasonableness can be made based on analyticalprocedures.Answer (d) is incorrect. Analytical procedures will not disclose specific errors of cutoff.

Question: V2C5-0180During an internal audit, the auditor experienced difficulty obtaining required information from a specific em-



ployee. When this situation continued for one week, the auditor requested a private meeting with the employee forthe purpose of identifying the problem and resolving the difficulty through open discussion. Which conflictmanagement technique was the auditor applying?

Answers

A: Problem solving.

B: Expansion of resources.

C: Authoritative command.

D: Altering the human variable.

Answer Explanations

Answer (a) is the correct answer. Problem solving involves face-to-face meetings.Answer (b) is incorrect. Expansion or resources requires more resources.Answer (c) is incorrect. The auditor does not use formal authority.Answer (d) is incorrect. The organizational structure has not changed.

Question: V2C5-0181An audit supervisor is preparing the annual evaluation of a senior auditor’s overall performance. For each of thefollowing criteria, select the one statement the supervisor could make that addresses the criterion and is appropriatefor an evaluation.

Problem-solving skills.

Answers

A: You need to further analyze alternatives before selecting a solution.

B: Your ability to communicate ideas clearly is exemplary.

C: You could expedite your problem solving by focusing on logic instead of reasoning activities.

D: You are able to reduce conflict with ease and without putting individuals on the defensive.

Answer Explanations

Answer (a) is the correct answer. These skills are part of the problem-solving process.Answer (b) is incorrect because this is an interpersonal skill.Answer (c) is incorrect because both logic and reasoning skills are critical components of problem solving.Answer (d) is incorrect because this skill falls into the interpersonal category.

Question: V2C5-0182



An audit supervisor is preparing the annual evaluation of a senior auditor’s overall performance. For each of thefollowing criteria, select the one statement the supervisor could make that addresses the criterion and is appropriatefor an evaluation.

Human resources management.

Answers

A: Your ability to effectively socialize within the organization has had a positive impact on thedepartment.

B: You have successfully handled numerous issues that have challenged your decision-making abilities.

C: You have developed quite a strong reputation outside the department thereby increasing yourcredibility.

D: Your motivational skills in the field increased morale within this department.

Answer Explanations

Answer (a) is incorrect because this is an activity found in networking.Answer (b) is incorrect because decision making is an activity associated with traditional management.Answer (c) is incorrect because this activity is found in networking.Answer (d) is the correct answer. This is a primary activity in human resource management.

Question: V2C5-0183An organization’s executive committee, meeting to solve an important problem, spent 30 minutes analyzing dataand debating the cause of the problem. Finally, members agreed and could move on to the next step. Possible stepsin the creative problem-solving process are listed below. Which step should the committee perform next?

Answers

A: Select a solution.

B: Generate alternative solutions.

C: Identify the problem.

D: Consider the reaction of competitors to various courses of action.

Answer Explanations

Answer (a) is incorrect. This is the third step and cannot be taken prior to identifying alternatives.Answer (b) is the correct answer. This is the second step in the process and the one the group should take up next.Answer (c) is incorrect. Identifying the problem includes three parts: what is the actual situation, what is thedesired situation, and, finally, identifying the cause of the problem. The stem describes completion of this step.Answer (d) is incorrect. This would be part of evaluating alternative solutions.



Question: V2C5-0184The president of an organization believes employees should be rewarded for innovative ideas and has established aformal method for employees to submit their ideas for consideration by top management. All employees whosubmit ideas are praised, and those whose ideas increase profits receive cash bonuses. Why do programs like thisoften result in greater innovation?

Answers

A: Innovation is intrinsically rewarding because it results in personal satisfaction and the pleasure derivedfrom a job.

B: The employees have been classically conditioned to be innovative.

C: Employees who do not contribute innovative ideas are essentially punished because they do notreceive praise and bonuses.

D: Positive reinforcements, such as praise and cash bonuses, increase the probability that employees willsubmit innovative ideas.

Answer Explanations

Answer (a) is incorrect due to explanation given for the Answer (d).Answer (b) is incorrect because classical conditioning applies to reflexive behavior. The desired employeebehavior in this problem—innovation—is voluntary.Answer (c) is incorrect because programs like the one described in this problem do not punish anyone. Theymerely reward innovators and encourage all employees to participate voluntarily.Answer (d) is the correct answer. Although innovation is intrinsically rewarding to many people, employees ofmany companies do not believe innovation will be rewarded so they do not try to innovate or they keep their ideasto themselves. Programs like the one described in this problem offer extrinsic rewards.

Question: V2C5-0185An operational audit of your organization’s budget process has revealed that department heads frequentlycircumvent budget controls by actions such as padding their budgets and concealing opportunities to cut costs. Oneof the audit recommendations involves forming a group comprised of department heads to find a solution for thisproblem. Which one of the following methods is likely to generate a high level of commitment to the solutionamong members of the group?

Answers

A: The brainstorming technique in which group members orally identify as many alternatives as possiblewithout criticism from other members.

B: A mandate from top management.

C: The Delphi technique in which a series of questionnaires is used to arrive at a consensus.

D: An open discussion of the problem and potential solutions until a consensus is reached.



Answer Explanations

Answer (a) is incorrect. Brainstorming is a good technique for generating a large number of ideas because it helpsgroup members overcome the pressure to conform while the group is identifying options. It has no predictableeffect, however, on the group’s commitment to the solution.Answer (b) is incorrect. Top management mandates are unlikely to result in a high level of commitment, and theymake group formation pointless.Answer (c) is incorrect. The Delphi technique is effective for generating a large number of ideas and for arriving ata consensus. It is not designed, however, for obtaining a high level of group commitment to the solution.Answer (d) is the correct answer. Open discussion in which the members reach consensus is the most effectivetechnique for obtaining commitment to the solution.

Question: V2C5-0186The auditor has recognized that a problem exists because the organizational unit has been too narrow in its defi-nition of goals. The goals of the unit focus on profits, but the overall organizational goals are much broader. Theauditor also recognizes that the auditee will resist any recommendations about adopting broader goals. The bestcourse of action would be to

Answers

A: Avoid conflict and present only those goals that are consistent with the auditee's views since all otherswill be ignored.

B: Identify the broader organizational goals and present a set of recommendations that attempts to meetboth the organizational and auditee goals.

C: Subtly mix the suggested solution with the problem definition so that the auditee will identify thesolution apparently independently of the auditor.

D: Only report the conditions found and leave the rest of the analysis to the auditees.

Answer Explanations

Answer (a) is incorrect. Organizations cannot avoid conflict. It is now becoming accepted that some levels ofconflict are necessary in order for organizations to grow and adapt to a changing environment.Answer (b) is the correct answer. The auditor is responsible to the organization, not just the auditee, and shouldtherefore report the problem to the auditee.Answer (c) is incorrect. Mixing solutions with problem identification is a frequent problem cited in the managerialliterature, but is not an effective means of dealing with the problem identified.Answer (d) is incorrect. This would be a violation of the Standards, which specify reporting criteria.

Question: V2C5-0187Which of the following problem-solving tools is an idea-generating and consensus-building technique?

Answers



A: Brainstorming.

B: Synectics.

C: Systems analysis.

D: Nominal group technique.

Answer Explanations

Answer (a) is incorrect because brainstorming is a technique to generate a great number of ideas.Answer (b) is incorrect because synectics involves the use of nontraditional activities such as excursions, fantasies,and analogies.Answer (c) is incorrect because systems analysis breaks down a large problem into many smaller problems.Answer (d) is the correct answer. The nominal group technique is an idea-generating and consensus-buildingproblem solving tool. This technique gives everyone an opportunity to express ideas without being interrupted byothers in the group.

Question: V2C5-0188A company has recently introduced total quality management (TQM). The director of internal auditing is facedwith determining a new and innovative approach to auditing in this new environment. The director should

Answers

A: Seek isolation from all distractions in order to think the problem through.

B: Bring the audit team together for a brainstorming session.

C: Rely on the audit supervisor to develop a new approach.

D: Use a disciplined problem-solving approach.

Answer Explanations

Answer (a) is incorrect. Group decisions tend to be more creative than individual decisions because they bringmany points of view to bear on the problem.Answer (b) is the correct answer. Group decisions tend to be more creative than individual decisions.Answer (c) is incorrect. The supervisor is still an individual.Answer (d) is incorrect. The best way to enhance creativity is to involve other people.

Question: V2C5-0189A company has four manufacturing plants spread throughout the country. Major decisions regarding

production, product pricing, and strategic directions are controlled and coordinated through central headquarters.Two manufacturing plants (C and D) serve as suppliers to the other two plants (A and B) that produce thecompany’s two major lines of industrial products. Since there are many interdependencies between the plants, agreat deal of production, sales, and intracompany product transfers are controlled through central headquarters.



Each plant is responsible for its own computer systems and for making purchases to support production. Salesorders come from sales representatives located throughout the country and can be transmitted directly to theproduction plant for processing or can be transmitted through central headquarters to the production plant forshipping and billing. All sales prices are determined at central headquarters.

During the preliminary survey in conjunction with an upcoming audit of plant B, the auditor discovers that theplant has experienced production problems with costs far in excess of what management had planned and withfinished goods inventory levels that are clearly excessive. Which of the following management control procedureswould have best brought the problems to management’s attention earlier?

Answers

A: Standard costing procedures are implemented at each plant with a summary of variances reported tocentral headquarters on a weekly basis.

B: Perpetual inventory control procedures are implemented at each plant. A report is prepared detailingany inventory items with levels in excess of two weeks' production. The report goes to plant managementand central headquarters.

C: Production plans based on management forecasts are sent to the plants on a monthly basis. A weeklyreport compares actual production with forecasted production and weekly costs with budgeted costs.

D: A weekly report is prepared which compares actual sales with forecasted sales and budgeted grossmargin with actual gross margins. Inventory costs going into cost of goods sold should be computed on alast in, first out basis to be the most up-to-date.

Answer Explanations

Answer (a) is incorrect. A good standard cost system would assist management in identifying the causes of the costoverruns, but a report on variances, by itself, would not totally address the cost overruns or the excess productionproblems.Answer (b) is incorrect. Perpetual inventory records would be useful but not sufficient to address the cost overrunand the excessive inventory level. There is no rationale given for the criteria to be used in developing themanagement report. The Answer of two weeks of production in inventory may be low, or it may be excessive. Itappears to be an arbitrary judgment that should be better justified.Answer (c) is the correct answer. This is a type of management control that, if implemented correctly, should havebrought the problem to management’s attention much sooner. Since there is a great deal of central coordinationneeded, it is important that management establish a reporting and control system to compare actual performancewith budgeted performance.Answer (d) is incorrect. The problem is with production levels and production costs. Data on sales and grossmargin do not provide timely input into the nature of the problem.



Each plant is responsible for its own computer systems and for making purchases to support production. Salesorders come from sales representatives located throughout the country and can be transmitted directly to theproduction plant for processing or can be transmitted through central headquarters to the production plant for



shipping and billing. All sales prices are determined at central headquarters.All sales prices are determined centrally and are electronically sent to the plant to update their sales price table

(file). All sales transactions should be based on the prices in the computerized table. Any pricing deviations mustbe approved by the plant-marketing manager and by a manager in the marketing department at central headquartersfor updating the tables. The internal auditor wishes to know how this processing is functioning. The mostappropriate audit procedure and audit tools to use would be to

Answers

A: Document the flow of sales price information from headquarters to the plant, how the table is accessedand updated, and the use of the table in the billing program.

B: Develop a flowchart of the sales order process to determine how orders are taken and priced.

C: Use a questionnaire to identify who approves the shipment of goods and how the goods are priced.

D: Obtain a copy of the existing program flowchart from the plant to determine how price data areaccessed.

Answer Explanations

Answer (a) is the correct answer. This is the most complete answer. There are three potential problems: (1) thecorrect transfer of the data to the plants; (2) the ability to access and/or change the price data that are used by thecomputer program to develop sales invoices; and (3) the use of the tables in the billing program. This proceduredevelops information on all aspects of the process.Answer (b) is incorrect. This procedure provides information on the sales order process, but only limited infor-mation on how individual invoices are priced. It does not gather as much information as Answer (a).Answer (c) is incorrect. This is a limited procedure.Answer (d) is incorrect. This procedure would provide information about how the computer program is supposedto work, but may not be up-to-date and does not provide information on how the data are entered into the pricetables.



Each plant is responsible for its own computer systems and for making purchases to support production. Salesorders come from sales representatives located throughout the country and can be transmitted directly to theproduction plant for processing or can be transmitted through central headquarters to the production plant forshipping and billing. All sales prices are determined at central headquarters.

The auditor wishes to develop a flowchart of (1) the process of receiving sales order information atheadquarters; (2) the transmission of the data to the plants to generate the shipment; and (3) the plants processingof the information for shipment. The auditor should

Answers

A: Start with management's decisions to set sales prices. Gather internal documentation on the approvalprocess for changing sales prices. Complement documentation with a copy of the program flowchart.



Prepare an overview flowchart that links these details.

B: Start with a shipment of goods and trace the transaction back through the origination of the sales orderas received from the sales representative.

C: Start with the receipt of a sales order from a sales representative and walk-through both the manualand computerized processing at headquarters and the plant until the goods are shipped and billed.

D: Obtain a copy of the plant's systems flowchart for the sales process, interview relevant personnel todetermine if any changes have been made, then develop an overview flowchart that will highlight thebasic process.

Answer Explanations

Answer (a) is incorrect. This is a good procedure to understand the process of making changes to the sales pricedata, but does not cover the processing of sales orders.Answer (b) is incorrect. Starting with the completed transaction does not provide as complete an understanding thefull process. It will not identify flows where documents or data were “peeled off” and processed separately.Answer (c) is the correct answer. This provides the most complete description of the total process. Additionally,starting with the initiation of the transaction and tracing it through to the completion of the transaction allows theauditor to “walk through” and define both the processing and the relevant control procedures.Answer (d) is incorrect. This is a good procedure, but focuses only on the part of the processing that takes place atthe plant level.

Question: V2C5-0192A manager recently transferred from a manufacturing company to a service-oriented affiliate. When the managerunexpectedly announced a set of production standards, two employees quit on the spot, three others transferred outwithin a week, and the remaining employees were openly hostile. Select the best method for resolving thisdysfunctional conflict situation.

Answers

A: Conflict triggering.

B: Forcing.

C: Smoothing.

D: Problem solving.

Answer Explanations

Answer (a) is incorrect. A conflict trigger is a means of stimulating conflict.Answer (b) is incorrect. This method may submerge the conflict for a period of time, but it will not resolve the hurtfeelings and mistrust.Answer (c) is incorrect. This is a stopgap measure and, like forcing, will not get to the root of the problem.Answer (d) is the correct answer. Problem solving is the only method that can remove the source of the conflict.However, it does require time.



Question: V2C5-0193A chief executive officer (CEO) believes that a major competitor may be planning a new campaign. The CEOsends a questionnaire to key personnel asking for original thinking concerning what the new campaign may be. TheCEO selects the best possibilities then sends another questionnaire asking for the most likely option. The processemployed by the CEO is called the

Answers

A: Least squares technique.

B: Delphi technique.

C: Maximum likelihood technique.

D: Optimizing of expected payoffs.

Answer Explanations

Answer (a) is incorrect. The least squares method refers to regression analysis and involves specified variables.Answer (b) is the correct answer. The Delphi approach seeks to obtain group consensus on a relatively narrow setof alternatives through a series of iterations such as those described in the stem.Answer (c) is incorrect. The maximum likelihood technique is a complex alternative to least squares.Answer (d) is incorrect. Optimizing expected payoffs is used in decision-making alternatives, which relies onhistorical information.

Question: V2C5-0194Listed below are situations and techniques for generating creative alternatives in solving problems. For eachquestion, identify the technique most appropriate for each situation. (Answers are only used once.)

A company wishes to determine what advertising mix among radio, television, and newspapers offers the optimaldesired result in increased sales and improved public image.

Answers

A: Synectics.

B: Value analysis.

C: Brainstorming.

D: Forced relationship.

Answer Explanations

Answer (a) is incorrect. Synectics is a highly structured approach to problem solving. It uses excursions, fantasies,and analogies.Answer (b) is the correct answer. Value analysis is primarily designed to optimize performance at a minimum



cost.Answer (c) is incorrect. The purpose of brainstorming is to generate a great number of ideas.Answer (d) is incorrect. Forced relationship involves the identification of a problem, the factors or forcescontributing to making it a problem, and steps for generating solutions.


A company cannot identify why production has been decreasing at a particular plant. All efforts to isolate the causewith conventional accounting and administrative systems have failed. As a final effort before closing the plant, youneed to gain the cooperation of selected employees from all levels. A small group will be formed to identify andsolve this significant problem. All group-member suggestions will be evaluated equally, regardless of theirposition.

Answers

A: Brainstorming.

B: Synectics.

C: Blast then refine.

D: Operations research.

Answer Explanations

Answer (a) is the correct answer. Brainstorming is a group approach to breaking down broadly based problemsinto essential elements.Answer (b) is incorrect. Synectics is a highly structured approach to problem solving. It uses excursions, fantasies,and analogies.Answer (c) is incorrect. Blasting, creating, and refining are used when a completely new way of thinking orspeculation is required or when answering a question such as “What else will do the job”?Answer (d) is incorrect. Operations research is a management science discipline attempting to find optimalsolutions to business problems.


Costs of a specific department must be cut by 40% and quality must improve or it cannot compete in themarketplace. This drastic charge was recently given to your department. You do not have time for more traditionaltechniques. You must come up with something quickly. Conventional cost-cutting techniques have been attemptedbut to no avail. You decide to employ a radical new production arrangement.

Answers

A: Blast then refine.



B: Edisonian.

C: Morphological matrix analysis.

D: Operations research.

Answer Explanations

Answer (a) is the correct answer. Blast then refine is the technique being utilized. The old ways were completelydisregarded and an entirely new approach was devised to meet the objectives of cost cutting and improved quality.Answer (b) is incorrect. Edisonian technique involves trial-and-error experimentation toward reaching a solution.Answer (c) is incorrect. Morphological matrix analysis is a system involving the methodical interrelating of allelements of a problem in order to discover new approaches to a solution.Answer (d) is incorrect. Operations research is a management science discipline attempting to find optimalsolutions to business problems.


All attempts to solve a problem based on affirmative action program goals have failed. A very structured group toview the problem from management and various minority group perspectives has been created. All group memberswill be required to study the complaints and slogans of the various minority groups in order to produce a newprogram.

Answers

A: Synectics.

B: Forced relationship.

C: Brainstorming.

D: Attribute listing.

Answer Explanations

Answer (a) is the correct answer. Synectics is a highly structured group approach utilizing various analogies andmetaphors to assist in viewing problems from widely divergent viewpoints.Answer (b) is incorrect. Forced relationship involves the identification of a problem, the factors or forcescontributing to making it a problem, and steps for generating solutions.Answer (c) is incorrect. The purpose of brainstorming is to generate a great number of ideas.Answer (d) is incorrect. Attribute listing emphasizes the detailed observation of each particular characteristic orquality of an item or situation.

Question: V2C5-0198Listed below are situations and techniques for generating creative alternatives in solving problems. For each



question, identify the technique most appropriate for each situation. (Answers are only used once.)

A company is about to introduce a new service and wishes to develop a new slogan and logo to be utilized in ad-vertising and on company publications. You have been chosen to participate in this process and to look at pastslogans, logos, and suggestions given by the advertising agency. You are not limited to the suggested ideas andhave been encouraged to suggest original ideas of your own.

Answers

A: Brainstorming.

B: Value analysis.

C: Free association.

D: Attribute listing.

Answer Explanations

Answer (a) is incorrect. The purpose of brainstorming is to generate a great number of ideas.Answer (b) is incorrect. Value analysis is primarily designed to optimize performance at a minimum cost.Answer (c) is the correct answer. Free association is the approach to idea stimulation whereby other symbols andideas are to be freely associated with a problem.Answer (d) is incorrect. Attribute listing emphasizes the detailed observation of each particular characteristic orquality of an item or situation.


A company has a computer that it no longer needs because of a discontinued operation. Currently there are severalcomputer projects that may be able to utilize the machine, but some modification will be necessary if such newapplication is to be successful.

Answers

A: Attribute listing.

B: Operations research.

C: Morphological matrix analysis.

D: Synectics.

Answer Explanations

Answer (a) is the correct answer. Attribute listing is applied primarily to improve tangible objects by listing theparts and essential features of the object and systematically analyzing modifications to improve the object.Answer (b) is incorrect. Operations research is a management science discipline attempting to find optimalsolutions to business problems.



Answer (c) is incorrect. Morphological matrix analysis is a system involving the methodical interrelating of allelements of a problem in order to discover new approaches to a solution.Answer (d) is incorrect. Synectics is a highly structured approach to problem solving. It uses excursions, fantasies,and analogies.


A company has experienced numerous complaints because a passenger door has not opened smoothly. All attemptsto repair the door have failed. The item is no longer under warranty and the manufacturer has informed thecompany that a very expensive new door must be purchased and installed to solve the problem. You have beenasked to supervise an attempt by your engineering department to come up with less expensive alternative solutions.

Answers

A: Free association.

B: Operations research.

C: Blast then refine.

D: Edisonian.

Answer Explanations

Answer (a) is incorrect. Free association is the approach to idea stimulation whereby other symbols and ideas are tobe freely associated with a problem.Answer (b) is incorrect. Operations research is a management science discipline attempting to find optimalsolutions to business problems.Answer (c) is incorrect. Blasting, creating, and refining are used when a completely new way of thinking orspeculation is required or when answering a question such as “What else will do the job?”Answer (d) is the correct answer. The Edisonian approach has been chosen here. Edisonian technique involvestrial-and-error experimentation toward reaching a solution.


A company is concerned that spare parts inventories are too large. It has attempted to keep critical parts for its fleetin stock so that equipment will have minimal downtime. Management wants to know what the optimal spare partsinventory should be if downtime is estimated to cost $150 per day. Carrying cost and order cost have not beenmeasured. You have been asked to make a formal recommendation on spare parts stocking levels.

Answers



A: Operations research.

B: Value analysis.

C: Attribute listing.

D: Brainstorming.

Answer Explanations

Answer (a) is the correct answer. Operations research attempts to find optimal solutions utilizing classicalconcepts such as statistics, simulation, and logical thinking to develop and test hypothesis. This application closelyfits the problem and charge given.Answer (b) is incorrect. Value analysis is primarily designed to optimize performance at a minimum cost.Answer (c) is incorrect. Attribute listing emphasizes the detailed observation of each particular characteristic orquality of an item or situation.Answer (d) is incorrect. The purpose of brainstorming is to generate a great number of ideas.

Question: V2C5-0202Management activities can be classified in three levels: strategic planning, management control, and operationalcontrol. Information requirements vary with the level of management activity. Which of the following bestdescribes the information requirements for strategic planning?

Answers

A: Frequent use, external, aggregate information.

B: Future-oriented, outdated, detailed information.

C: Highly current, accurate, largely internal information.

D: Wide scope, aggregate, future-oriented information.

Answer Explanations

Answer (a) is incorrect. It is not a frequent use.Answer (b) is incorrect. It is not detailed or necessarily outdated.Answer (c) is incorrect. None applies.Answer (d) is the correct answer. The focus of a strategic planning is on broad issues dealing with a time horizonof five to ten years and looking at a macro level.

Question: V2C5-0203The control self-assessment (CSA) is a

Answers



A: Directive auditing tool.

B: Preventive auditing tool.

C: Detective auditing tool.

D: Corrective auditing tool.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. The CSA is a preventive auditing tool in that it identifies issues and problemsearlier before they get bigger.


Question: V2C5-0204The control self-assessment (CSA) is a

Answers

A: Compliance audit engagement.

B: Consulting engagement.

C: Financial audit engagement.

D: Operational audit engagement.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. The CSA is not a traditional audit engagement applied to financial, operational,and compliance areas. It is a consulting engagement in identifying problems and solving them for the benefit of theorganization.


Question: V2C5-0205The most popular approach to control self-assessment (CSA) is the



Answers

A: Workshop approach.

B: Questionnaire approach.

C: Survey approach.

D: "Wall-writing" approach.

Answer Explanations

Answer (a) is the correct answer. The workshop is the most popular approach to CSA in assessing risks andevaluating controls for a given objective or process. In the “wall-writing” approach, meeting participants respondto questions posed by the facilitator of the workshop (meeting). The questionnaire approach and the surveyapproach are the same.


Question: V2C5-0206When the culture of an organization is supportive of candid employee responses in a control self-assessment work-shop, which of the following is favored by most organizations?

Answers

A: Audit-facilitated workshops.

B: Client-facilitated workshops.

C: Questionnaire approach.

D: Management-produced analyses.

Answer Explanations

Answer (a) is the correct answer. A CSA approach using facilitated workshops (meetings) with the internalauditors as facilitators is favored by most organizations. This approach is especially good when the culture of theorganization is supportive of candid participant responses in the workshops. Self-certification is an output ofmanagement-produced analyses.




Question: V2C5-0207When the culture of an organization is not supportive of candid employee responses in a control self-assessmentworkshop, which of the following can be suggested to organizations?

Answers

A: Audit-facilitated workshops.

B: Client-facilitated workshops.

C: Questionnaire approach.

D: Meeting approach.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. When an organization’s culture does not support a participative approach likefacilitated workshops, questionnaires and management-produced analyses of controls can be used. The meetingapproach is the facilitated workshop approach, whether it is an audit or client facilitated.


Question: V2C5-0208Which of the following is used when an organization wants to investigate a control breakdown?

Answers

A: Management-produced analyses.

B: Surveys.

C: Questionnaires.

D: Workshops.

Answer Explanations

Answer (a) is the correct answer. Management-produced analysis is a special type of self-assessment and used inself-certification of internal controls, annual representation letter required by external auditors, during a newcomputer system development project, during business combinations, or during an investigation into the reasonswhy a particular control breakdown or fraud occurred.





Question: V2C5-0209Which of the following control self-assessment (CSA) approaches or formats are used about 70% of the time? I. Workshops.II. Surveys.III. Questionnaires.IV. Interviews.

Answers

A: I or II.

B: II or III.

C: I or IV.

D: III or IV.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Workshops or interviews are used in about 70% of CSA efforts; surveys orquestionnaires are used about 30% of the time.


Question: V2C5-0210The work flow in the control self-assessment (CSA) workshops “objectives-risks-controls-residual risks-assessment” is referred to as

Answers

A: Objective-based approach.

B: Risk-based approach.

C: Control-based approach.

D: Process-based approach.



Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. The risk-based approach examines risks first in achieving an objective, looks atcontrols next, and finally identifies any significant residual risks. The risk-based workshop takes the participantsthrough the entire sequence of objectives-risks-controls. The work flow in the objective-based approach isobjectives-controls-residual risks-assessment. The work flow in the control-based approach is objectives-risks-controls-assessment. The work flow in the process-based approach is overall objectives-activity-level objectives-risks-controls-assessment.


Question: V2C5-0211Which of the following components of the enterprise risk management (ERM) framework addresses processes andpeople in an organization?

Answers

A: Strategic risks.

B: Operational risks.

C: Financial risks.

D: Hazard risks.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. The operational risk is related to the organization’s internal systems, products,services, processes, technology, and people. The strategic risks include risks related to strategy, political,economic, regulatory, and global market conditions. It also includes reputation risks, leadership risks, brandmanagement risks, and customer risks. The financial risk includes risks from volatility in foreign currencies, inter-est rates, and commodities. It also includes credit risk, liquidity risk, and market risk. The hazard risk includes risksthat are insurable, such as natural disasters, various insurable liabilities, impairment of physical assets and property,and terrorism. The ERM includes both upside and downside risks.


Question: V2C5-0212Which of the following is not the goal of enterprise risk management (ERM) initiatives?



Answers

A: Integrating risks.

B: Creating shareholder value.

C: Protecting shareholder value.

D: Enhancing shareholder value.

Answer Explanations

Answer (a) is the correct answer. The ERM approach is more than just integrating risks, where risks are a part ofuncertainty. The goal of an ERM initiative is to create, protect, and enhance shareholder value by managing theuncertainties that could influence in achieving the organization’s objectives.


Question: V2C5-0213The scope of enterprise risk management (ERM) encompasses which of the following?

I. Creating opportunities.II. De-risking opportunities.III. Analyzing strengths.IV. Focusing on weaknesses.

Answers

A: I and II.

B: I and III.

C: III and IV.

D: I, III, and IV.

Answer Explanations

Answer (a) is the correct answer. According to the IIA Research Foundation, ERM defines risk as any event oraction that could adversely influence an organization’s ability to achieve its objectives. ERM encompasses themore traditional view of potential hazards (threats) as well as opportunities. Management must consider deriskingthe opportunities when creating and evaluating new opportunities. Risks and opportunities move together, and thekey is to determine if the potential of a given opportunity exceed the risks. Items III and IV are part of the strength,weaknesses, opportunity, and threat (SWOT) analysis used in strategic management. When companies fail tomanage risks, opportunities are missed, and shareholder value can be lost, which creates great pressure onmanagement to improve corporate governance.




Question: V2C5-0214The enterprise risk management (ERM) focuses on which of the following?

Answers

A: Value-added potential.

B: Risk management process.

C: Asset management principles.

D: Management accountability.

Answer Explanations

Answer (a) is the correct answer. According to the IIA Research Foundation, the chief audit executives (CAEs) ofthe study companies understand the value-added potential of ERM, which made them very effective ERMchampions. ERM adds value because it is both inward-looking and forward-thinking. The other three Answers arepart of the value-added potential.


Question: V2C5-0215The role and focus of the internal audit function in enterprise risk management (ERM) with the objective of im-proving corporate governance includes which of the following?

I. Follow-up on ERM scorecards.II. Internal controls for ERM.III. The IIA’s Standards on ERM.IV. Follow-up on ERM metrics.

Answers

A: I and II.

B: II and III.

C: I and IV.

D: III and IV.



Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Traditionally, the internal audit’s role has been to provide reliable, overallassessment of risks and internal control effectiveness. In light of ERM implementation in improving corporategovernance, internal auditors now (1) take a more business-oriented approach to audit company’s operations, (2)change their audit approach to focus on business risk, (3) perform more effective follow-up on open ERMscorecards and metrics to increase management accountability, and (4) review formal action plans developed bymanagement as part of the ERM implementation. Scorecards, metrics, and formal action plans are key part of theERM infrastructure.


Question: V2C5-0216Which of the following attributes of the internal audit department can hinder the implementation of enterprise riskmanagement (ERM) in the auditor’s organization?

I. Control-based audit approach.II. Use of traditional auditing tools.III. Consultant role.IV. Facilitation skills.

Answers

A: I and II.

B: II and III.

C: I and IV.

D: III and IV.

Answer Explanations

Answer (a) is the correct answer. In order to meet the ERM implementation challenge, the internal auditor should(1) use a risk-based audit approach (not a control-based approach), (2) be a consultant to the ERM implementationteam (not as a policeman), (3) focus on future events (not past events), and (4) acquire competent skills to becomean ERM facilitator (not use traditional accounting and auditing tools and skills).


Question: V2C5-0217



According to the control self-assessment (CSA) approach, which of the following address soft controls?

Answers

A: Control self-assessment techniques.

B: Dual controls.

C: Authorization techniques.

D: Traditional audit techniques.

Answer Explanations

Answer (a) is the correct answer. Control self-assessment (CSA) is a management technique where anorganization’s members identify and analyze controls and risks within business processes for continuousimprovement. CSA techniques address soft controls while traditional audit techniques focus on hard controls. Softcontrols are informal while hard controls are formal. Soft controls are more difficult to assess than hard controls.An example of a hard control is: Is there a code of ethics in place? An example of a soft control is: Are theemployees willing to follow it?


Question: V2C5-0218The role of an internal auditor in introducing a control self-assessment (CSA) program into the organization is thatof a(n)

Answers

A: Enabler.

B: Reviewer.

C: Evaluator.

D: Enforcer.

Answer Explanations

Answer (a) is the correct answer. The internal auditor is an enabler (facilitator) in introducing the control self-assessment program into his or her organization. The roles mentioned in the other answers reflect the various rolesin traditional audits.




Question: V2C5-0219In the implementation of control self-assessment (CSA), which of the following examines a given business processin depth?

Answers

A: Horizontal sessions.

B: Diagonal sessions.

C: Vertical sessions.

D: Individual sessions.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. The implementation of the CSA program is categorized as either “vertical” or“horizontal.” Vertical sessions are process-specific sessions that examine a given business process in depth.Horizontal sessions are organization-wide (or division-wide) sessions that cut across departmental responsibilitiesto identify and control risks that have a broader effect. Diagonal and individual sessions are distracters.


Question: V2C5-0220The major purpose of control self-assessment (CSA) is

Answers

A: Control.

B: Improvement.

C: Documentation.

D: Auditing.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Most people react badly to the concept of being controlled and audited. The



chore of documentation is not exciting to many either. Improvement resulting from a self-assessment exercisewhere interested parties in the organization are involved from the beginning in the evaluation process will lead toeffective results and outcomes.


Question: V2C5-0221Control self-assessment (CSA) is a process that involves employees in assessing the adequacy of controls andidentifying opportunities for improvement within an organization. Which of the following are reasons to involveemployees in this process?

I. Employees become more motivated to do their jobs right.II. Employees are objective about their jobs.III. Employees can provide an independent assessment of internal controls.IV. Managers want feedback from their employees.

Answers

A: I and II.

B: III and IV.

C: I and IV.

D: II and IV.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Items I and IV are the reasons for involving employees in the process. Item II isincorrect. Employees in general are not felt to be objective about their jobs and/or performance. Item III isincorrect. Although employees can be involved in assessing internal controls, these would not be consideredindependent assessments.


Question: V2C5-0222An auditor becomes concerned that fraud in the form of payments to bogus companies may exist. Buyers, who areresponsible for all purchases for specific product lines, are able to approve expenditures up to $50,000 without anyother approval. Which of the following audit procedures would be most effective in addressing the auditor’sconcerns?

Answers



A: Use generalized audit software to list all purchases over $50,000 to determine whether they wereproperly approved.

B: Develop a "snapshot" technique to trace all transactions by suspected buyers.

C: Use generalized audit software to take a random sample of all expenditures under $50,000 todetermine whether they were properly approved.

D: Use generalized audit software to list all major vendors by product line; select a sample of paidinvoices to new vendors and examine evidence which shows that services or goods were received.

Answer Explanations

Answer (a) is incorrect. This would provide evidence only on purchases above $50,000, which must be approvedby someone other than the buyer.Answer (b) is incorrect. This would only provide information on whether the transactions that were authorized bythe buyer were properly processed. It does not provide evidence on whether the transaction should have been pro-cessed.Answer (c) is incorrect. This would provide information on whether transactions under $50,000 contained thebuyer’s authorization. That is not the question here; the question is whether there is support for the expenditure.Further, this procedure is limited because it is not directed to the specific indicators that a fraud might exist.Answer (d) is the correct answer. This is the most comprehensive procedure because it identifies major vendors,concentrates on new vendors, and searches for underlying support that goods or services were provided by thevendor.

Question: V2C5-0223An auditor wishes to determine the extent to which invalid data could be contained in a human resources computersystem. Examples would be an invalid job classification, age in excess of retirement age, or an invalid ethnicclassification. The best approach to determine the extent of the potential problem would be to

Answers

A: Submit test data to test the effectiveness of edit controls over the input of data.

B: Review and test access controls to ensure that access is limited to authorized individuals.

C: Use generalized audit software to develop a detailed report of all data outside specified parameters.

D: Use generalized audit software to select a sample of employees. Use the sample to determine thevalidity of data items and project the result to the population as a whole.

Answer Explanations

Answer (a) is incorrect. Test data would provide evidence on whether the edit controls are currently working. Theconcern, however, is that data may have entered the system earlier and may be corrupted.Answer (b) is incorrect. Access controls are important, but they do not address the auditor’s major concern, whichis to determine the extent of the potential problem as a precursor for planning the extent to which additional auditwork is necessary.Answer (c) is the correct answer. This is both the most effective and the most efficient procedure as it provides a



comprehensive analysis of the extent that obviously incorrect data is included in the database.Answer (d) is incorrect. This is a valid procedure, but given the auditor’s more limited objective, answer (c)provides more comprehensive and efficient evidence.

Question: V2C5-0224A bank internal auditor wishes to determine whether all loans are backed by sufficient collateral, properly aged asto current payments, and properly categorized as current or noncurrent. The best audit procedure to accomplish thisobjective would be to

Answers

A: Use generalized audit software to read the total loan file, age the file by last payment due, and take astatistical sample stratified by the current and aged population. Examine each loan selected for propercollateralization and aging.

B: Take a block sample of all loans in excess of a specified dollar limit and determine if they are currentand properly categorized. For each loan approved, verify aging and categorization.

C: Take a discovery sample of all loan applications to determine whether each application contains astatement of collateral.

D: Take a sample of payments made on the loan portfolio and trace them to loans to see that thepayments are properly applied. For each loan identified, examine the loan application to determine thatthe loan has proper collateralization.

Answer Explanations

Answer (a) is the correct answer. This is the best procedure because it takes a sample from the total loan file andtests to determine that the loan is properly categorized as well as properly collateralized.Answer (b) is incorrect. This sample only deals with large-dollar items and does not test for propercollateralization.Answer (c) is incorrect. This is an inefficient audit procedure because it samples from loan applications, not loansapproved.Answer (d) is incorrect. This would be an ineffective procedure because it is based only on loans in whichpayments are currently being made—it does not include loans that should have been categorized differentlybecause payments are not being made.

Question: V2C5-0225A retail company uses electronic data interchange (EDI) to order all of its merchandise. The goods are received at acentral warehouse, where they are electronically scanned into the computer to determine that a purchase order hadbeen issued and to record the goods. The goods are price-marked at the warehouse and shipped to individual storeswithin twenty-four to forty-eight hours. Inventory and accounts payable is updated when the goods are received.The company receives an invoice electronically from the vendor. A computer program matches the invoice withthe applicable purchase order and receiving information. If the items match, the invoice is scheduled for paymentand a report is made to the treasurer. If the invoice does not match the other items within predefined ranges, areport is generated and sent to accounts payable for further investigation. All the applicable documents are elec-tronically marked, cross-referenced, and retained in open files.



The auditor wants to determine whether the computer program is appropriately matching the purchase receipts andvendor invoices throughout the year. Which one of the following computerized audit techniques would be mostefficient and effective in accomplishing this objective?

Answers

A: Use the test data method during the last quarter.

B: Use an integrated test facility throughout the year.

C: Use "parallel simulation" technique and apply on a monthly basis.

D: Use the SCARF (systems control audit review file) on a daily basis.

Answer Explanations

Answer (a) is incorrect. The test data method is limited to a point in time in which the testing is accomplished.Using it only during the last quarter of the year would not be effective unless there was also a test of programchanges.Answer (b) is the correct answer. The integrated test facility would allow the auditor to submit data periodicallyduring the year to determine how well the program worked throughout the year.Answer (c) is incorrect. Parallel simulation would not be an efficient technique because it would cause the auditorto develop a massive parallel system.Answer (d) is incorrect. The SCARF method is used to identify outliers (transactions with unusual characteristicsor transactions that are processed when they do not pass normal edit controls). It simply writes these transactionsout to a file for further audit investigation. It would not be a good technique for addressing the audit objective.

Question: V2C5-0226A retail company uses electronic data interchange (EDI) to order all of its merchandise. The goods are received at acentral warehouse, where they are electronically scanned into the computer to determine that a purchase order hadbeen issued and to record the goods. The goods are price-marked at the warehouse and shipped to individual storeswithin twenty-four to forty-eight hours. Inventory and accounts payable is updated when the goods are received.The company receives an invoice electronically from the vendor. A computer program matches the invoice withthe applicable purchase order and receiving information. If the items match, the invoice is scheduled for paymentand a report is made to the treasurer. If the invoice does not match the other items within predefined ranges, areport is generated and sent to accounts payable for further investigation. All the applicable documents are elec-tronically marked, cross-referenced, and retained in open files.

The auditor wants to determine the extent to which items are not matched at year-end and investigate the potentialcause of the nonmatching items. Which one of the following audit procedures would be most effective indetermining the items to investigate?

Answers

A: Submit test data to identify attributes of nonmatching items. Follow up by investigating the attributesidentified.

B: Use generalized audit software to read the purchase order file for the year. Select a statistical sampleof purchase orders and trace to applicable receiving and vendor invoice files.



C: Use SCARF to identify unusual items. Take an attribute sample and trace to the underlying paperdocuments.

D: Use generalized audit software to read the electronically marked unmatched items.

Answer Explanations

Answer (a) is incorrect. The test data method would only tell us whether the computer program is workingcorrectly at one point in time. It would not identify all the problems encountered during the year.Answer (b) is incorrect. Generalized audit software is a good tool, but it would not be used efficiently here since itis reading the purchase order file only. Many of the items selected may have been appropriately matched and somemay not have been filled. Answer (d) is more efficient.Answer (c) is incorrect. SCARF would not be an effective audit tool because the auditor wishes to identifynonmatched items. Answer (d) is a more encompassing solution.Answer (d) is the correct answer. This would be the best method because it would sample from a population thathas been explicitly identified as nonmatching. It allows the auditor to analyze the potential problems beforeinvestigating further.

Question: V2C5-0227Governmental auditors have been increasingly called on to perform audits to determine whether individuals aregetting extra social welfare payments. One common type of welfare fraud is individuals receiving more than onesocial welfare payment. This is often accomplished by filing multiple claims under multiple names, but using thesame address. Which of the following computer audit tools and techniques would be most helpful in identifyingthe existence of this type of fraud?

Answers

A: Tagging and tracing.

B: Generalized audit software.

C: Integrated test facility.

D: Spreadsheet analysis.

Answer Explanations

Answer (a) is incorrect. Tagging and tracing is most effective to determine that items properly submitted areprocessed correctly.Answer (b) is the correct answer. Generalized audit software could be used to develop a list of multiple recipientsat one address. The list could then be investigated further to determine the possibility of fraud.Answer (c) is incorrect. The ITF is most effective to determine that items properly submitted are processedcorrectly.Answer (d) is incorrect. This would not be the most effective technique.

Question: V2C5-0228



The auditor determines that a major user application is implemented on a spreadsheet. The spreadsheet takes inputregarding projected freight deliveries from the mainframe computer and develops an optimal freight-dispatchingplan. When first used two years ago, the spreadsheet helped reduce costs dramatically. However, freight costs havebeen increasing, and no one, other than the developer, has reviewed the spreadsheet. The freight-dispatchingalgorithm is complicated, but the auditor has researched the area and understands the algorithm and its correctcomputation.

The auditor wishes to gain assurance on whether the spreadsheet has properly implemented the freight-dispatchingalgorithm. Which of the following audit procedures would accomplish the task?

I. Develop an independent spreadsheet and run test data through it and through the user’s spreadsheet. Comparethe results.

II. Use a product to print out the logic of the user spreadsheet. Examine the logic to determine if it has been cor-rectly incorporated into the spreadsheet.

III. Develop a set of test data and manually calculate the expected results. Run the test data through the user appli-cation.

Answers

A: II only.

B: I and III.

C: I, II, and III.

D: I only.

Answer Explanations

Answer (a) is incorrect because all three of the procedures would work.Answer (b) is incorrect because all three of the procedures would work.Answer (c) is the correct answer. All three audit approaches would work. If we were to rank order theeffectiveness, it would be I, III, then II. However, if properly implemented, procedure II would work.Answer (d) is incorrect because all three of the procedures would work.

Question: V2C5-0229The auditor determines that a major user application is implemented on a spreadsheet. The spreadsheet takes inputregarding projected freight deliveries from the mainframe computer and develops an optimal freight-dispatchingplan. When first used two years ago, the spreadsheet helped reduce costs dramatically. However, freight costs havebeen increasing, and no one, other than the developer, has reviewed the spreadsheet. The freight-dispatchingalgorithm is complicated, but the auditor has researched the area and understands the algorithm and its correctcomputation.

Assume the audit testing performed in the previous question indicates that the spreadsheet has correctly imple-mented the freight-dispatching algorithm. Which of the following conclusions is(are) justified from the auditevidence?

I. The spreadsheet must be obtaining incorrect data when it is downloaded from the mainframe.II. Although the algorithm is correctly implemented, it is not the most efficient algorithm.III. The increased freight costs must be due to some other cause than the spreadsheet calculation.

Answers



A: III only.

B: I, II, and III.

C: I and II.

D: II only.

Answer Explanations

Answer (a) is the correct answer. The only justifiable conclusion that can be reached based on the audit tests is thatsomething other than the calculation is causing the increase in freight costs.Answer (b) is incorrect. Although hypotheses I and II may be potential explanations, they would need to be tested.They represent hypotheses, not conclusions.Answer (c) is incorrect. Although hypotheses I and II may be potential explanations, they would need to be tested.They represent hypotheses, not conclusions.Answer (d) is Incorrect because the auditor has researched the potential algorithms and did not conclude that theone implemented is not sufficient. There is not enough evidence to justify this conclusion.

Question: V2C5-0230The auditor wishes to test controls over computer program changes. The specific objective to be addressed in thefollowing audit step is that only authorized changes have been made to computer programs (i.e., there are nounauthorized program changes). The organization uses an automated program library system, and the auditorobtains copies of the table of contents of the program library system at various periods of time. The table ofcontents indicates the date a change was last made to the program, the version number of the program, and thelength of the program. Which of the following audit procedures would best address the stated objective?

Answers

A: Use generalized audit software to randomly select a sample of current applications. Trace thoseselected to program change authorization forms.

B: Take a sample of all program change requests. Trace the requests to proper authorization and tochanges in the program library.

C: Use generalized audit software to compare the table of contents of the program library currently withan auditor copy made previously. Compare and identify differences. Select a sample of the differences forfurther investigation.

D: Obtain a list of programming projects implemented by the data processing manager during the last sixmonths. Take a sample from the list and trace to program change authorization forms.

Answer Explanations

Answer (a) is incorrect. This would be an inefficient procedure. Many programs will not have changes made tothem during the applicable time period. Thus, there will not be program change request forms for many itemsselected.Answer (b) is incorrect. Sampling from authorized changes will tell the auditor only that authorized changes hadbeen made. The auditor is searching for unauthorized changes.



Answer (c) is the correct answer. This would be the best procedure. Since the auditor is looking for unauthorizedchanges, the auditor must first identify all changes that have taken place. The auditor then investigates the changesto see if they had been authorized.Answer (d) is incorrect. Similar to response (b), the population only identifies those projects that have beenauthorized. The auditor is concerned with unauthorized changes.

Question: V2C5-0231Auditors have learned that increased computerization has created more opportunities for computer fraud, but hasalso led to the development of computer audit techniques to detect frauds. A type of fraud that has occurred in thebanking industry is a programming fraud where the programmer designs a program to calculate daily interest onsavings accounts to four decimal points. The programmer then truncates the last two digits and adds it to his or heraccount balance. Which of the following computer audit techniques would be most effective in detecting this typeof fraud?

Answers

A: Parallel simulation.

B: Generalized audit software that selects account balances for confirmation with the depositor.

C: Snapshot.

D: SCARF (systems control and audit review file).

Answer Explanations

Answer (a) is the correct answer. This method would work best because the amounts credited to each accountwould be compared to that calculated by the auditor’s parallel program.Answer (b) is incorrect. It is doubtful that confirmation of an account balance would detect errors less than 1 centmade on a daily basis.Answer (c) is incorrect. Snapshot is a technique for tracing the processing of transactions through a system. Itwould not be applicable here.Answer (d) is incorrect. SCARF is an audit technique that captures unusual transactions (or transactions in excessof edit checks) that have been submitted for processing. The auditor can later evaluate the items. It is not applicablehere.

Question: V2C5-0232While performing analytical procedures related to an audit of a social services agency of a government entity, theauditor noted that there was an unusually large increase in payments to individual recipients who are under thedirection of a particular social worker in the agency.

Which of the following audit procedures would be the best procedure to investigate this observation?

Answers

A: Use generalized audit software to sort payments to recipients by social worker. Then sort the paymentsby common addresses and names.



B: Implement an integrated test facility and monitor transactions throughout the year to identify unusualitems.

C: Implement the snapshot approach and tag transactions that are related to the social worker identifiedwith the unusually large increases.

D: Use generalized audit software to take a random sample of recipients and investigate by sendingconfirmations to each recipient to determine if they had received proper payments.

Answer Explanations

Answer (a) is the correct answer. This would be the best procedure because it would be an efficient manner todetermine if there were any easily seen fraudulent pattern associated with the payments under the control of thesocial worker.Answer (b) is incorrect. The integrated test facility is designed to test the correctness of processing, not whetheronly valid recipients are receiving payment.Answer (c) is incorrect. This is a future-oriented approach and would not provide much information about thepossibility of fraudulent items currently contained in the file. Like the ITF, snapshot concentrates on the processingof data, not the addition of new recipients to the files.Answer (d) is incorrect. Sending confirmations to the recipients listed on the file would not be the first approachthat is being used for two reasons: (1) response (a) better establishes whether there is a defined pattern of potentialfraud; (2) if the recipients are indeed fraudulent, the social worker will receive the confirmation (all sent to acommon address) and will be able to respond positively.

Question: V2C5-0233While performing analytical procedures related to an audit of a social services agency of a government entity,

the auditor noted that there was an unusually large increase in payments to individual recipients who are under thedirection of a particular social worker in the agency.

The auditor is considering making a recommendation on appropriate controls to address a potential problem offictitious recipients. The auditor has identified the following control procedures as potential items to include in therecommendation.

I. Require that all additions to the recipient file be independently investigated and approved by a supervisor of thesocial workers.

II. Require the use of self-checking digits on the account numbers of all recipients so that any duplicates will beimmediately noted by the system.

III. Incorporate a code into the computer program to search for duplicate names and addresses. Develop an excep-tion report that will go the section supervisor whenever duplicates are noted.

IV. Require social workers to be rotated among recipients.

Which of the following control combinations would effectively address the auditor’s concerns and improvecontrol over valid recipients?

Answers

A: I, II, III, and IV.

B: I, II, and III.

C: I and IV.



D: I, III, and IV.

Answer Explanations

Answer (a) is incorrect. Item II would not add to the control.Answer (b) is incorrect. The self-checking digit would not improve the control procedure. Each recipient set up inthe system would have a unique self-checking digit. The concern is over the process of setting up valid recipients.Answer (c) is incorrect. Item III would also contribute.Answer (d) is the correct answer. All three of these responses would be effective in dealing with the audit andcontrol concern identified by the auditor: Item I segregates duties, Item III incorporates an important computercheck, and Item IV rotates duties so that a new worker will find that some recipients are not valid.

Question: V2C5-0234Many public utility companies operate complex customer service systems (CSS) to manage their customer servicefunction. CSS operate in an online, real-time environment, which allows customer service data to be directlyentered online from customer telephone calls. Which of the following IT auditing techniques provides the auditorwith the capability to continuously monitor customer service data that are collected from telephone calls in CSS?

Answers

A: Generalized audit software.

B: Control flowcharting.

C: Embedded audit data collection.

D: Integrated test facility (ITF).

Answer Explanations

Answer (a) is incorrect because generalized audit software can be used for data collection, but operatesindependently—and thus not continuously—from an application.Answer (b) is incorrect because control flowcharting is developed to document and/or review the controls in anapplication system.Answer (c) is the correct answer. Embedded audit data collection provides the auditor with the capability tocontinuously monitor the operation of an application.Answer (d) is incorrect because ITF is used to test programs, not to collect data.

Question: V2C5-0235Which of the following information systems auditing techniques processes real transaction data (or a copy of thereal data) through auditor-developed test programs?

Answers

A: Integrated test facility.



B: Tracing.

C: Parallel simulation.

D: Mapping.

Answer Explanations

Answer (a) is incorrect. The integrated test facility involves the use of test data and also the creation of fictitiousentities (e.g., vendors and employees) on master files.Answer (b) is incorrect. Tracing provides a detailed listing of the sequence of program statement execution.Answer (c) is the correct answer. Parallel simulation processes real transaction data through auditor-developed testprograms.Answer (d) is incorrect. Mapping is a procedure for reporting code usage within a program.

Question: V2C5-0236To determine if there have been any unauthorized program changes since the last authorized program update, thebest IT audit technique is for the auditor to conduct a(n)

Answers

A: Code comparison.

B: Code review.

C: Test date run.

D: Analytical review.

Answer Explanations

Answer (a) is the correct answer. Code comparison is the process of comparing two versions of the same programto determine whether the two correspond. It is an efficient technique because it is performed by software.Answer (b) is incorrect. Code review is the process of reading program source code listings to determine whetherthe code contains potential errors or inefficient statements. Code review can be used as a means of code compari-son but is inefficient.Answer (c) is incorrect. Test data runs permit the auditor to verify the processing of preselected transactions. Itgives no evidence about unexercised portions of the program.Answer (d) is incorrect. Analytical review is the process of creating and evaluating ratios between numbers, oftenin the context of financial statements.

Question: V2C5-0237In auditing an online perpetual inventory system, an auditor selected certain file-updating transactions for detailedtesting. The audit technique that will provide a computer trail of all relevant processing steps applied to a specifictransaction is described as



Answers

A: Simulation.

B: Snapshot.

C: Code comparison.

D: Tagging and tracing.

Answer Explanations

Answer (a) is incorrect. Simulation permits comparisons of live data processing but does not produce a trail ofprocessing steps.Answer (b) is incorrect. Snapshot is a technique for taking a picture of computer memory to aid in verifying adecision process.Answer (c) is incorrect. Code comparison verifies that program changes and maintenance are correctly followed.Answer (d) is the correct answer. Tagging is an audit technique to obtain a computer trail of processing stepsrelevant to a given transaction.

Question: V2C5-0238Which of the following statements is not true concerning the tasks that generalized audit software is able to per-form?

Answers

A: Provide totals of unusual items.

B: Check for duplications, missing information, or ranges of values.

C: Specify which data elements will be tested and the criteria to be used.

D: Verify calculation totals and analyses produced.

Answer Explanations

Answer (a) is incorrect because it is an example of functions that generalized audit software is able to perform.Answer (b) is incorrect because it is an example of functions that generalized audit software is able to perform.Answer (c) is the correct answer. This is a manual function that must be performed by the auditor.Answer (d) is incorrect because it is an example of functions that generalized audit software is able to perform.

Question: V2C5-0239Generalized audit software can be used to

Answers



A: Examine the existence and consistency of data maintained on files.

B: Perform concurrent auditing of data files.

C: Verify processing logic of operating systems software.

D: Access complex data structures without using host language extensions.

Answer Explanations

Answer (a) is the correct answer. The software compares two files for data consistency.Answer (b) is incorrect. Generalized audit software only permits ex-post (after the fact) auditing.Answer (c) is incorrect. Generalized audit software cannot verify operating system logic.Answer (d) is incorrect. Using a host language extension, an auditor can gain direct access to the database.

Question: V2C5-0240A primary reason auditors are reluctant to use integrated test facility (ITF) is that it requires them to

Answers

A: Reserve specific master file records and process them at regular intervals.

B: Collect transaction and master file records in a separate file.

C: Notify user personnel so they can make manual adjustments to output.

D: Identify and reverse the fictitious entries to avoid contamination of the master file.

Answer Explanations

Answer (a) is incorrect. Reserving specific master file records and processing them at regular intervals pertains tobase case system evaluation instead of ITF.Answer (b) is incorrect. Collecting transaction and master file records in a separate file is a feature of embeddedaudit data collection, not ITF.Answer (c) is incorrect. Making manual adjustments to output does not reverse the fictitious entries in the masterfile.Answer (d) is the correct answer. This is the major reason for not using ITF.

Question: V2C5-0241Embedded audit modules

Answers

A: Identify unexecuted computer code.



B: Aid in debugging application systems.

C: Analyze the efficiency of programming.

D: Enable continuous monitoring of transaction processing.

Answer Explanations

Answer (a) is incorrect because it is a characteristic of snapshot.Answer (b) is incorrect because it is a characteristic of tracing.Answer (c) is incorrect because it is a characteristic of mapping.Answer (d) is the correct answer. They can be continuously monitored or specifically activated.

Question: V2C5-0242An internal auditing department implemented an integrated test facility (ITF) to test its payroll processing. Theauditing department identified the key controls, processing steps built into the computer program, and developedtest data to test them. The department submitted test transactions throughout the year. Assuming the auditors didnot find any differences in their test results, the auditors can conclude

Answers

A: The system is properly capturing the hours worked by employees during the year and the hours havebeen properly submitted to payroll and processed correctly.

B: All employees were correctly paid during the year and their pay was correctly computed.

C: The computer application and its control procedures were processing payroll transactions correctlyduring the past year.


Answer Explanations

Answer (a) is incorrect. The ITF only provides audit evidence on the correctness of processing of data that hasbeen submitted to the computer application. Thus, it does not provide evidence that all hours worked have beenentered into the system for processing.Answer (b) is incorrect. The auditor cannot conclude that all employees were paid correctly and that their pay wascorrectly recorded because to do so the auditor would need evidence that all employees were correctly classified asto pay rate and that all their time was correctly submitted to the computer program.Answer (c) is the correct answer. The auditor’s inference can only be to the operation of computerized controlsand the correctness of computer processing during the year because the integrated test facility tests only tests thecomputerized portion of the application, not that all data have been entered correctly.Answer (d) is incorrect. Response (b) and (c) are not correct.

Question: V2C5-0243The greatest impact information technology has had on the audit process is



Answers

A: Its use to track personnel performance and development of audit staff.

B: Its use in the audit reporting process, such as automated working paper packages.

C: Its use to conduct audits utilizing various computer-assisted techniques.

D: Its use as a strategic tool to develop the audit plan.

Answer Explanations

Answer (a) is incorrect. This task can be performed manually without the use of information technology.Answer (b) is incorrect. While it has changed audit documentation, it has not impacted the audit scope or testprocedures.Answer (c) is the correct answer. Computer-assisted techniques have had the greatest impact on the audit process.They have changed the audit scope and test procedures, and so on.Answer (d) is incorrect. Whether using information technology or not, the audit risk is the same.

Question: V2C5-0244Generalized audit software is designed to allow auditors to

Answers

A: Monitor the execution of application programs.

B: Process test data against master files that contain real and fictitious entities.

C: Select sample data from files and check computations.

D: Insert special audit routines into regular application programs.

Answer Explanations

Answer (a) is incorrect. This is a function of mapping.Answer (b) is incorrect. This is a function of an integrated test facility.Answer (c) is the correct answer. This is a function of generalized audit software.Answer (d) is incorrect. This is a function of an embedded audit routine.

Question: V2C5-0245An internal auditor was assigned to confirm whether operating personnel had corrected several errors in transactionfiles that were discovered during a recent audit. Which of the following automated tools is the auditor most likelyto use?

Answers



A: Online inquiry.

B: Parallel simulation.

C: Mapping.

D: Tracing.

Answer Explanations

Answer (a) is the correct answer. Online inquiry is an interactive procedure that allows an auditor or otherauthorized personnel to select and view individual records or transactions.Answer (b) is incorrect. Parallel simulation processes real data through audit programs so simulated output andregular output can be compared.Answer (c) is incorrect. Mapping monitors the execution of a program.Answer (d) is incorrect. Tracing provides an audit trail of the instructions that are executed when a program is run.

Question: V2C5-0246An audit test to substantiate that a company is complying with software copyright requirements is to

Answers

A: Review the corporate policy on copyrights.

B: Compare the software on a sample of microcomputers with the purchase documentation.

C: Inventory all the software that is being run on microcomputers.

D: Review the minutes of the MIS steering committee or similar body.

Answer Explanations

Answer (a) is incorrect. Reviewing the policy will not determine compliance with copyright limitations.Answer (b) is the correct answer. Comparing a sample of software being run on personal computers with purchasedocumentation will establish a basis for determining compliance.Answer (c) is incorrect. An inventory of software alone cannot determine compliance without comparing it tosupporting purchase documentation.Answer (d) is incorrect. Reviewing the minutes may determine the intent to comply with copyright laws but cannotestablish compliance.

Question: V2C5-0247A principal disadvantage of auditing around rather than through the computer is

Answers



A: The time involved in testing controls for simulation programs is extensive.

B: The costs involved in testing controls over computer processing are high.

C: The integrity of the audit trail through the computer is not tested.

D: The technical expertise to compensate for auditing around the computer is extensive.

Answer Explanations

Answer (a) is incorrect. Simulation programs involve computer applications and require auditing through thecomputer.Answer (b) is incorrect. High costs are not involved with testing controls when auditing around the computer.Answer (c) is the correct answer. Auditing around the computer does not involve testing the transaction (audit)trail.Answer (d) is incorrect. A high level of technical expertise is a disadvantage of auditing through the computer—not around the computer.

Question: V2C5-0248An accounting clerk developed a scheme to input fraudulent invoices for nonexistent vendors. All the paymentswere sent to the same address. The auditor suspects a possible fraud. The most effective computer audit techniqueto investigate the fraud would be to

Answers

A: Use test-data for multiple vendors and investigate unexpected results.

B: Perform a complete audit of computer program changes.

C: Use generalized audit software to compare addresses across multiple files and print out duplicates forinvestigation.

D: Test application controls through an integrated test facility and investigate unexpected results.

Answer Explanations

Answer (a) is incorrect. Test data would check the processing of information, not the validity of the inputinformation.Answer (b) is incorrect. The fraud did not involve a program change.Answer (c) is the correct answer. This software could check the mailing addresses of vendors and detect commonaddress, or other commonalities of the billings.Answer (d) is incorrect. This test is not designed to test for the processing of invalid information.

Question: V2C5-0249In the audit example described in the previous question, the auditor would test all of the vendor information ratherthan a sample of the vendor transactions because



Answers

A: Although nonsampling error is reduced, sampling error is larger when computers are used to draw thesample.

B: The audit procedures used to compare vendor information require the reading of all records.

C: Audit standards prohibit the use of sampling if fraud is expected.

D: The only effective procedures require auditing through the computer.

Answer Explanations

Answer (a) is incorrect. Sampling error is not larger when computers are used to draw the sample.Answer (b) is the correct answer. The audit procedure to be applied in this case requires a matching of all recordsto identify vendor addresses that are the same.Answer (c) is incorrect. Standards do not prohibit the use of sampling.Answer (d) is incorrect. This is not an example of “auditing through the computer.” The test uses audit software toextract and compare data.

Question: V2C5-0250To achieve cost-effective audits of computer-based systems where similar audit tasks are required to meet a varietyof objectives, the auditor should use

Answers

A: Comparison programs.

B: Custom audit software.

C: Query functions and report writers.

D: Generalized audit software.

Answer Explanations

Answer (a) is incorrect. Comparison programs compare source versions of operational programs with authorizedcopies and identify only changes or deviations in logic.Answer (b) is incorrect. Custom audit software is written for a specific audit and cannot be used on differentsystems.Answer (c) is incorrect. It requires the auditor to learn rules of each environment—usually limited to retrieval.Answer (d) is the correct answer. Generalized audit software allows many different audits to be done wheresimilar audit tasks are required. It is cost effective.

Question: V2C5-0251



Which of the following is an appropriate audit procedure that may be used to test the adequacy of applicationcontrols over computer-based accounts payable?

Answers

A: Observing the computer library and operations area to obtain evidence to support an opinion about thesecurity of accounts payable data files.

B: Manually comparing vendor invoice numbers with those listed on computer-generated lists ofaccounts payable to assess the effectiveness of computer-based sequence checks.

C: Testing purchase transactions using a test-data approach.

D: Using a computer-generated questionnaire to obtain reliable information about the accuracy andcompleteness of input and update of accounts payable data from the organization's computer managementpersonnel.

Answer Explanations

Answer (a) is incorrect. Data file security is a general control concern. The question deals with applicationcontrols.Answer (b) is incorrect. Computer-based sequence checks are applications controls. It is appropriate for an internalauditor to seek to determine whether the checks are working. However, this question involves the document num-bers on vendor invoices. Since the vendors generate these document numbers, the purchasing firm has no access toa sequencing of such invoices.Answer (c) is the correct answer. The use of test data is a useful audit procedure to test application controls.Answer (d) is incorrect. It is never acceptable for an internal auditor to rely on the representations of an auditee.

Question: V2C5-0252The internal auditing department has begun an audit of an automated payroll system. Audit staff members havebeen trained in the use of an audit software package and have a working knowledge of the database employed forthis system but do not have programming experience. In the system being audited, employees report their hours ontime sheets, which are keyed each week by an assigned individual in each department.

The transaction file of payroll hours is maintained by the system as a primary source of payroll input. After thedepartment manager reviews the gross hours, the information is released to the online payroll system. The payrollis then processed and pay stubs are printed and distributed to the employees. All payments are through directdeposit. In order to preserve the confidentiality of the payroll information of employees, detailed reports thatreconcile payroll expenses charged to the department are not generated. Management wants to know whether thepayroll program is reliable. Given the skill level of the assigned staff, which of the following methods will mostlikely be applied to test the accuracy of the payroll calculation?

Answers

A: Parallel simulation.

B: Integrated test facility.

C: Tagging and tracing.



D: Mapping and program analysis.

Answer Explanations

Answer (a) is the correct answer. Use of audit software to perform parallel simulation is an acceptable auditapplication.Answer (b) is incorrect. Use of an integrated facility usually requires advanced planning before a system isimplemented. Installing an integrated test facility after the fact can be quite costly and time consuming.Answer (c) is incorrect. Tagging and tracing is more difficult to employ than parallel simulation.Answer (d) is incorrect. Mapping and program analysis requires a strong programming background, something notavailable on this audit team.

Question: V2C5-0253To identify lost or incomplete sales accounting record updates using the computer, the most appropriate approachis

Answers

A: Test data.

B: Parallel simulation.

C: Controlled reprocessing.

D: Integrated test facility.

Answer Explanations

Answer (a) is incorrect. Test data checks specific controls, but would not allow identification of lost or incompleteupdates.Answer (b) is incorrect. Parallel simulation is quite expensive and is inappropriate for a one-time identification oflost or incomplete updates.Answer (c) is the correct answer. Controlled reprocessing allows update inputs to be inexpensively reprocessedand compared to original update results.Answer (d) is incorrect. An integrated test facility tests the system on a continuous basis, but may contaminateactual transaction data.

Question: V2C5-0254You have been assigned to review the propriety of the duplicate payments edit control in the accounts payable sys-tem of a public agency. The agency purchases spare parts from approximately 2,000 vendors. In addition, theagency is building a heavy rail system and makes payments to contractors and subcontractors for this $2 billionproject. You have been told that vendors have recently reported several duplicate payments.

Management believes that some unreported duplicate payments may exist for which the agency should seek refund.The director of management information systems (MIS) stated that the duplicate payments were isolated instancesthat would eventually have been discovered by controls outside of the computer system. All payments are matchedagainst a 60-day payment history file. Whenever there is a match on amount, invoice number, and vendor number,



duplicate payments warning is sent to the accounts payable clerk. Only the manager of accounts payable is capableof overriding this edit. Which of the following is the best computer-assisted audit technique or tool to use in thissituation?

Answers

A: Statistical sampling.

B: Source code desk checking.

C: Integrated test facility.

D: Generalized audit software.

Answer Explanations

Answer (a) is incorrect. Statistical sampling is most useful in estimating the size of a population (variablessampling) or the degree of error (attribute sampling). Specific identification of duplicate payments is the problemhere.Answer (b) is incorrect. While desk checking the source code might detect a program error, it is not the solution tothe problem at hand.Answer (c) is incorrect. An integrated test facility is useful for passing test data through a production system, but itdoes not address the duplicate payments problem.Answer (d) is the correct answer. Generalized audit software can be utilized to review 100% of the file forduplicate payments using any matching requirements and thus help identify potential duplicate payments claims.

Question: V2C5-0255When concerned with the validity of certain recurring transactions, which of the following computer-assisted audittechniques would allow the auditor to select predefined transactions for audit during normal processing?

Answers

A: Extended records.

B: Tracing.

C: Mapping.

D: Embedded audit data collection.

Answer Explanations

Answer (a) is incorrect. Extended records combine elements from different files into a single record.Answer (b) is incorrect. Tracing is used to identify the execution and sequence of computer instructions.Answer (c) is incorrect. Mapping is used to determine if any unexecuted code exists.Answer (d) is the correct answer. Embedded audit data collection requires screening routines be inserted withinproduction runs and thus allows identification and selection of transactions meeting predefined criteria.



Question: V2C5-0256To test that all inventory shipments are billed to customers, an auditor would compare computer-generated

Answers

A: Receivables ledger updates with detailed sales invoices.

B: Shipping records with detailed sales invoices.

C: Shipping records with original customer orders.

D: Shipping records with customer credit limits.

Answer Explanations

Answer (a) is incorrect. Comparing entries in the receivable ledger with sales invoices only demonstrates that theprepared invoices were posted.Answer (b) is the correct answer. Comparing shipping records with sales invoices would disclose any shipmentsthat were not billed.Answer (c) is incorrect. Comparing shipping records with original customer orders only demonstrates thatshipments were made to customers—not those customers were billed.Answer (d) is incorrect. Comparing shipping records with credit limits demonstrates only that credit limits mightnot have been exceeded.

Question: V2C5-0257Which of the following best describes the operation of an integrated test facility (ITF)?

Answers

A: Establishing a dummy entity against which test data are processed and stored.

B: Developing a simulation program to compare actual data and test data.

C: Using specially coded inputs to trace test data through the transaction trail.

D: Translating business transactions into a format that the operating system processes.

Answer Explanations

Answer (a) is the correct answer. An integrated test facility uses a fictitious or dummy entity against which dataare processed and stored.Answer (b) is incorrect. Simulation programs are techniques using separate programs to process actual data andthen compare results.Answer (c) is incorrect. Snapshot is a technique using specially coded inputs to trace the transaction trail.Answer (d) is incorrect. Data conversion is the process of translating transactions into a form compatible with anoperating system.



Question: V2C5-0258An internal auditor identifies a situation where there is doubt whether all overhead is completely allocated to costcenters by the computer program. The best procedure to test the completeness of the allocation by the program is

Answers

A: Use of control flowcharting.

B: Inquiry of the systems programmers.

C: Use of extended records and mapping.

D: The test-data approach.

Answer Explanations

Answer (a) is incorrect. Control flowcharting is generally at the systems level rather than the program level.Answer (b) is incorrect. Inquiry of the systems programmer would be of little help in relation to specific programlogic problems.Answer (c) is incorrect. Extended records are used to capture an audit trail through a system.Answer (d) is the correct answer. The test data approach inputs data into the application and allows output to becompared to predetermined results, thus identifying the degree of completeness of the allocation.

Question: V2C5-0259Modern computer technology makes it possible to perform “paperless audits.” For example, in an audit ofcomputer-processed customer accounts receivable balances, an auditor might utilize a microcomputer to directlyaccess the accounts receivable files and copy selected customer records into the microcomputer for audit analysis.Which of the following is an advantage of this type of “paperless audit” of accounts receivable balances?

Answers

A: It reduces the amount of substantive testing required.

B: It allows immediate processing of audit data on a spreadsheet working paper.

C: It increases the amount of technical skill required of the auditor.

D: It allows direct confirmation of customer account balances.

Answer Explanations

Answer (a) is incorrect. Audit technology has no direct effect on the amount of substantive testing required.Answer (b) is the correct answer. A major advantage of this type of auditing is the ability to immediately processdata using microcomputer software without first having to manually enter the data into the microcomputer.



Answer (c) is incorrect. While this is true, it is not an advantage.Answer (d) is incorrect. Processing computer files does not in itself provide confirmation of customer accountbalances.

Question: V2C5-0260To ensure that goods received are the same as those shown on the purchase invoice, a computerized system should

Answers

A: Match selected fields of the purchase invoice to goods received.

B: Maintain control totals of inventory value.

C: Calculate batch totals for each input.

D: Use check digits in account numbers.

Answer Explanations

Answer (a) is the correct answer. Computer matching of fields such as goods received number, productcode, supplier code, and quantity assures agreement between goods received and goods invoiced.Answer (b) is incorrect. Control totals do not identify specific item-by-item differences.Answer (c) is incorrect. Batch totals only provide a total value for a field and do not allow for detail matching.Answer (d) is incorrect. Check digits only provide for validation of predefined account numbers.

Question: V2C5-0261Which of the following is a disadvantage of using an integrated test facility (ITF) when auditing a computer appli-cation?

Answers

A: The ITF may be useful in verifying the correctness of account balances, but not in determining thepresence of processing controls.

B: The test transactions could enter the live data environment.

C: The ITF technique cannot be used with simulated master file records, during application testing.

D: The test data must be processed by IT staff with substantial technical skills.

Answer Explanations

Answer (a) is incorrect. The ITF is utilized to test programs in operation, including the presence of processingcontrols.Answer (b) is the correct answer. An acknowledged risk of using the ITF is the contamination of live master files.



Answer (c) is incorrect. The ITF technique can be used for both system development and application testing.Answer (d) is incorrect. Minimal technical skill is required to process test data when using an ITF.

Question: V2C5-0262Which of the following is one purpose of an embedded audit module?

Answers

A: Enable continuous monitoring of transaction processing.

B: Identify program code that may have been inserted for unauthorized purposes.

C: Verify the correctness of account balances on a master file.

D: Review the contents of a specific portion of computer memory.

Answer Explanations

Answer (a) is the correct answer. An embedded audit module enables continuous monitoring and analysistransaction processing, including the functioning of processing controls.Answer (b) is incorrect. Mapping is a technique for determining whether a computer program contains anyunexecuted code that should be examined.Answer (c) is incorrect. Retrieval and analysis programs such as generalized audit software offer the features andflexibility suitable for verifying the correctness of information on a computer file.Answer (d) is incorrect. The snapshot method is a technique utilized to capture and print all data pertinent to theanalysis of a specific moment in the processing cycle.

Question: V2C5-0263Which of the following is true of a horizontal flowchart as compared to a vertical flowchart?

Answers

A: It provides more room for written descriptions that parallel the symbols.

B: It brings into sharper focus the assignment of duties and independent checks on performance.

C: It is usually longer.

D: It does not provide as broad a picture at a glance.

Answer Explanations

Answer (a) is incorrect. A vertical flowchart is usually designed to provide for written descriptions.Answer (b) is the correct answer. By emphasizing the flow of processing between departments and/or people, itmore clearly shows any inappropriate separation of duties and lack of independent checks on performance.



Answer (c) is incorrect. It is usually shorter because space for written descriptions is not provided.Answer (d) is incorrect. More of the flow of processing can be depicted on one page than in a vertical flowchartwith written descriptions.

Question: V2C5-0264Of the following, which is the most efficient source for an auditor to use to evaluate a company’s overall controlsystem?

Answers

A: Control flowcharts.

B: Copies of standard operating procedures.

C: A narrative describing departmental history, activities, and forms usage.

D: Copies of industry operating standards.

Answer Explanations

Answer (a) is the correct answer. Control flowcharting provides an efficient and comprehensive method ofdescribing relatively complex activities, especially those involving several departments.Answer (b) is incorrect. Copies of procedures and related forms do not provide an efficient method of reviewingthe processing activities.Answer (c) is incorrect. A narrative review covering the history and forms’ usage of the department is not asefficient or comprehensive as flowcharting for communicating relevant information about controls.Answer (d) is incorrect. Industry standards do not provide a picture of existing practice for subsequent auditactivity.

Question: V2C5-0265Which of the following tools would best give a graphical representation of a sequence of activities and decisions?

Answers

A: Flowchart.

B: Control chart.

C: Histogram.

D: Run chart.

Answer Explanations

Answer (a) is the correct answer. The definition of a flowchart is that it is a graphical representation of a sequence



of activities and decisions.Answer (b) is incorrect. A control chart is used to monitor actual versus desired quality measurements duringrepetition operation.Answer (c) is incorrect. A histogram is a bar chart showing conformance to a standard bell curve.Answer (d) is incorrect. A run chart tracks the frequency or amount of a given variable over time.

Question: V2C5-0266Of the techniques available to an auditor, which is the most valuable in providing a summary outline and overalldescription of the process of transactions in an information system?

Answers

A: Flowcharts.

B: Transaction retrievals.

C: Test decks.

D: Software code comparisons.

Answer Explanations

Answer (a) is the correct answer. A flowchart is most valuable in providing a summary outline and description oftransaction flows.Answer (b) is incorrect. Transaction retrievals are used to select items for testing and review.Answer (c) is incorrect. Test decks are used to verify processing accuracy.Answer (d) is incorrect. Software code comparisons are used to validate that programs in production correspond toan authorized copy of the software.

Question: V2C5-0267An auditor reviews and adapts a systems flowchart to understand the flow of information in the processing of cashreceipts. Which of the following statements is true regarding the use of such flowcharts? The flowcharts

Answers

A: Show specific control procedures used, such as edit tests that are implemented and batch controlreconciliations.

B: Are good guides to potential segregation of duties.

C: Are generally kept up to date for systems changes.

D: Show only computer processing, not manual processing.

Answer Explanations



Answer (a) is incorrect. The systems flowchart shows the overall flow, but would not identify the specific edit testsimplemented. Those would be found in a programming flowchart.Answer (b) is the correct answer. Systems flowcharts show segregation of duties and the transfer of data betweendifferent segments in the organization.Answer (c) is incorrect. The flowcharts are generally not kept up-to-date for changes. Therefore, the auditor willhave to interview key personnel to determine changes in processing since the flowchart was developed.Answer (d) is incorrect. A systems flowchart should show both the manual processing and the computerprocessing.

Question: V2C5-0268In documenting the procedures used by several interacting departments, the internal auditor will most likely use

Answers

A: A horizontal (or systems) flowchart.

B: A vertical flowchart.

C: A Gantt chart.

D: An internal control questionnaire.

Answer Explanations

Answer (a) is the correct answer. It highlights the interaction between departments.Answer (b) is incorrect because it does not highlight the interaction of departments.Answer (c) is incorrect because it is not a procedure-oriented documenting tool.Answer (d) is incorrect because it does not highlight the interaction of departments.

Question: V2C5-0269Which method of evaluating internal controls during the preliminary review provides the auditor with the bestvisual grasp of a system and a means for analyzing complex operations?

Answers

A: A flowcharting approach.

B: A questionnaire approach.

C: A matrix approach.

D: A detailed narrative approach.

Answer Explanations



Answer (a) is the correct answer. A flowchart provides a visual grasp of the system and a means of analysis thatcannot be achieved by other methods.Answer (b) is incorrect. A questionnaire approach provides only an agenda for evaluation.Answer (c) is incorrect. A matrix approach does not provide the visual grasp of the system that a flowchart does.Answer (d) is incorrect. A detailed narrative does not provide the means of evaluating complex operations that aflowchart does.

Question: V2C5-0270From enterprise risk management (ERM) viewpoint, control processes are implemented in which of the following?

Answers

A: Risk assessment.

B: Risk mitigation.

C: Risk financing.

D: Risk monitoring.

Answer Explanations

Answer (a) is incorrect. Risk assessment includes identification, analysis, measurement, and prioritization of risksAnswer (b) is the correct answer. Controls are implemented in the risk mitigation phase in order to reduce theeffects of risks.Answer (c) is incorrect. Risk financing deals with internal funding and external transfer of riskAnswer (d) is incorrect. Risk monitoring addresses internal and external reporting and feedback into riskassessment

Question: V2C5-0271From enterprise risk management (ERM) viewpoint, the scope of traditional risk management includes which ofthe following?

Answers

A: Insurance.

B: Earnings growth.

C: Revenue growth.

D: Corporate governance.

Answer Explanations



Answer (a) is the correct answer. Traditionally, risk management has been focused more narrowly in terms ofscope of risks, types of risk management strategies, and the impact and nature of risk. The strategies haveconcentrated on insurance solutions primarily. Now the focus of ERM is broad, covering areas such as earningsgrowth, revenue growth, and corporate governance.


Question: V2C5-0272In implementing enterprise risk management (ERM), most organizations are following a(n)

Answers

A: Layered approach.

B: Total risk approach.

C: Early wins approach.

D: Pilot project approach.

Answer Explanations

Answer (a) is incorrect. Some organizations are using a layered approach of risk, one at a time, into their risk as-sessment and risk mitigation processes.Answer (b) is incorrect. Some organizations are embracing all sources of risk at the outset, but are tackling theprocesses one at a time, with most starting with risk assessment.Answer (c) is the correct answer. Most organizations are seeking early wins that will help build momentum andpromote further development toward their ideal ERM process.Answer (d) is incorrect. Other organizations taking on all risk sources and all processes, but on a small, manage-able subset of their operations as a pilot project.

Question: V2C5-0273From enterprise risk management (ERM) viewpoint, all of the following can oversee risk management activitiesexcept

Answers

A: Chief financial officer.

B: Chief executive officer.

C: Chief audit executive.



D: Chief risk officer.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. According to the IIA survey respondents, 30% felt that chief audit executive isresponsible for overseeing enterprise risk management or compliance activities. The chief financial officer wassecond with 24% and the chief risk officer was third with 21%. Chief executive officer was not involved in thisactivity.


Question: V2C5-0274Organizations do not view enterprise risk management (ERM) as a(n)

Answers

A: Analytical tool.

B: Risk mapping tool.

C: Optimization software tool.

D: Performance management system tool.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. The IIA survey indicated that some organizations see ERM as an analytical toolrather than as a performance management system. Other tools of importance include risk mapping or optimizationsoftware.

Question: V2C5-0275Which of the following is the primary driver for enterprise risk management (ERM) activity?

Answers

A: Corporate governance guidelines.

B: Desire for a unifying framework.



C: Competitive pressure.

D: Desire for earnings stability.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. More than half of the IIA survey respondents cited the desire for a unifyingframework is the primary driver for ERM, and 38% cited corporate governance guidelines as another importantdriver.


Question: V2C5-0276According to the IIA survey regarding enterprise risk management (ERM), which of the following is ranked as thehighest business issue today?

Answers

A: Earnings consistency.

B: Expense control.

C: Earnings growth.

D: Revenue growth.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Earnings growth received the highest rating. Similarly, revenue growth was thesecond highest ranked business issue. Expense control or reduction was ranked as the third most important issuetoday; however, few years from now earnings consistency will be viewed to be the third most important issue.


Question: V2C5-0277Enterprise resource management (ERM) is seen as providing immediate value in which of the following areas?

I. Capital management.II. Earnings consistency.III. Contingency planning.



IV. Expense control.

Answers

A: I only.

B: II only.

C: I and III.

D: II and IV.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. The IIA survey respondents indicated that capital management and contingencyplans provide significant and immediate value. They also believed that ERM could assist with earnings consistencyand expense control.


Question: V2C5-0278Which of the following is the major barrier to implementing enterprise risk management (ERM) program?

Answers

A: Unclear benefits.

B: Lack of tools.

C: Organizational turf battles.

D: Organizational culture.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. The IIA survey respondents indicated that organizational culture is the topbarrier followed by unclear benefits to senior management, lack of formalized process, organizational turf battles,and lack of tools.



Question: V2C5-0279Comprehensive risk assessment does not exist in which of the following functions?

Answers

A: Human resources.

B: Finance.

C: Operations.

D: Internal audit.

Answer Explanations

Answer (a) is the correct answer. The IIA survey respondents reported that most internal auditing, finance, andoperations functions have a formal, comprehensive risk assessment process in place. In contrast, only 21% ofrespondents reported that risk assessment activity related to the human resource function.


Question: V2C5-0280Risk management has evolved from which of the following?

Answers

A: Operations research.

B: Decision theory.

C: Insurance management.

D: Management science.

Answer Explanations

Answer (a) uses a scientific approach to decision making. Decision theory provides a basis for judging thegoodness or badness of decisions before the outcome is known. Decision theory has its roots in operations researchand management science.Answer (b) uses a scientific approach to decision making. Decision theory provides a basis for judging thegoodness or badness of decisions before the outcome is known. Decision theory has its roots in operations researchand management science.Answer (c) is the correct answer. Risk management has evolved from insurance management. The strategic factorin the transition from insurance management to risk management was the evolution of decision theory, operations



research, and management science disciplines.Answer (d) uses a scientific approach to decision making. Decision theory provides a basis for judging thegoodness or badness of decisions before the outcome is known. Decision theory has its roots in operations researchand management science.

Question: V2C5-0281Risk management is concerned primarily with

Answers

A: Dynamic risks.

B: Pure risks.

C: Speculative risks.

D: Fundamental risks.

Answer Explanations

Answer (a) is incorrect. Dynamic risks are those that arise from changes in the economy (e.g., unemployment, highinterest rates, and high inflation rates).Answer (b) is the correct answer. Pure risks are those in which there is a chance of loss or no loss only. Pure risksare of several types, including personal risks, property risks, liability risks, and performance risks. Examplesinclude personal risks (death, sickness, or disability), property risks (damage to or destruction of property, and theloss of use of property that has been damaged), liability risks (liability suits arising out of automobiles), per-formance risks (risks resulting from human failure of a contractor to complete a project, default of a debtor). Riskmanagement deals with both insurable and uninsurable risks. Although the major focus of most risk managers is oninsurable risks, the more appropriate realm of risk management is pure risk. The risk manager cannot ignore thosepure risks that are not insurable (e.g., shoplifting losses in a retail store that are rarely insurable).Answer (c) is incorrect. Speculative risks involve the chance of loss or gain (e.g., hedging, options, andderivatives).Answer (d) is incorrect. Fundamental risks are those that are impersonal in origin and consequences—they aregenerally beyond the control of the individual. They are group risks, caused for the most part by economic, social,and political phenomena, although they may also result from physical occurrences.

Question: V2C5-0282A business firm with an inventory of obsolete stock that is overinsured might represent which of the following?

Answers

A: A moral hazard.

B: A morale hazard.

C: A physical hazard.



D: A legal hazard.

Answer Explanations

Answer (a) is the correct answer. A hazard is a condition that increases the probability of loss from a peril.Examples include faulty wiring and improper storage of flammables. Moral hazard is a dishonest tendency, andexamples include businesses that are losing money, obsolete inventory that is overinsured, and false claims todefraud an insurer.Answer (b) is incorrect. Morale hazard is reflected in a careless attitude that may accompany the existence ofinsurance, or the inflated losses that occur simply because the loss is insured.Answer (c) is incorrect. Physical hazards include conditions such as faulty housekeeping, defective wiring, storageof flammables, and road conditions.Answer (d) is incorrect. Legal hazards include statutes, court decisions, and the legal environment that caninfluence the probability of loss.

Question: V2C5-0283Which of the following techniques for dealing with risk may represent a special variation of other techniques?

Answers

A: Risk financing.

B: Risk retention.

C: Risk sharing.

D: Risk transfer.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Risk sharing is viewed as a special case of risk transfer, in which the risk istransferred from the individual to the group. It may also be a form of risk retention, depending on the success of therisk-sharing arrangement. Both risk retention and risk transfer and part of risk financing.


Question: V2C5-0284Risk avoidance should be used in those instances in which

Answers

A: The severity of loss is high.



B: The exposure has catastrophic potential and the risk cannot be reduced or transferred.

C: The frequency of loss is high.

D: The frequency or severity cannot be determined.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Risk situations that have high severity and high frequency should be eitheravoided or reduced. Reduction is appropriate when it is possible to reduce either the severity or the frequency to amanageable level. Otherwise, the risk should be avoided or transferred.


Question: V2C5-0285The term “enterprise risk management” (ERM) refers to which of the following?

Answers

A: Risks related to financial derivatives and futures.

B: Market risk, financial risk, and operational risks.

C: Pure, financial, operational, strategic, and speculative risks.

D: Dynamic risks, static risks, and pure risks.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. ERM is a broad concept that includes many areas, such as pure risks, financialrisks, operational risks, strategic risks, and speculative risks. Pure risks are those in which there is a chance of lossor no loss only (e.g., default of a debtor, disability). Financial risks include credit risk and interest rate risk.Operational risks include risks related to systems, processes, technology, and people. Strategic risks include reputa-tion risk and leadership risk. Speculative risks involve the chance of loss or gain (e.g., hedging, options, andderivatives).


Question: V2C5-0286



The two broad approaches to dealing with risk management are

Answers

A: Risk retention and risk transfer.

B: Risk avoidance and risk transfer.

C: Risk avoidance and risk reduction.

D: Risk control and risk financing.

Answer Explanations

Answer (a) is incorrect. Risk financing includes risk retention and risk transfer.Answer (b) is incorrect. It is meaningless in that it combines parts of the two categories.Answer (c) is incorrect. Risk control includes risk avoidance and risk reduction.Answer (d) is the correct answer. Risk management is broken down into two major categories: risk control andrisk financing. Risk control focuses on minimizing the risk of loss to which the organization is exposed. Riskfinancing concentrates on arranging the availability of funds to meet the losses that do occur.

Question: V2C5-0287Which of the following steps in the risk management process is most likely to be overlooked?

Answers

A: Evaluation of risks.

B: Determination of objectives.

C: Identification of risks.

D: Selection of risk treatments.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Despite its importance, determining the objectives of the program is the first stepin the risk management process that is most likely to be overlooked. Consequently, the risk management efforts ofmany firms are fragmented and inconsistent. The risk management process properly handles the other answers.


Question: V2C5-0288



The ultimate goal of risk management is to

Answers

A: Minimize insurance expenditures.

B: Minimize uninsured losses.

C: Minimize the adverse effects of losses and uncertainty connected with pure risks.

D: Eliminate financial and operational losses.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Risk management is concerned with pure risk. Minimizing the adverse effects oflosses and uncertainty connected with pure risks is necessary. Risk management is a process that involvesmanaging the pure risks.


Question: V2C5-0289Risk retention is most appropriate for situations in which there is a

Answers

A: Low frequency and a high severity.

B: High frequency and a high severity.

C: Low frequency and a low severity.

D: High frequency and a low severity.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Risk retention is most appropriate for situations in which there is a lowprobability of occurrence (frequency) with a low potential severity. Severity dictates whether a risk should beretained. If the potential severity is more than the organization can afford, retention is not recommended. Fre-quency determines whether the risk is economically insurable. The higher the probabilities of loss, the higher theexpected value of loss and the higher the cost of transfer.




Question: V2C5-0290Insurance is most appropriate for situations in which there is a

Answers

A: Low frequency and a high severity.

B: High frequency and a high severity.

C: Low frequency and a low severity.

D: High frequency and a low severity.

Answer Explanations

Answer (a) is the correct answer. Insurance is most appropriate for situations in which there is a low frequency anda high severity. The high severity implies a catastrophic impact if the loss should occur, and a low probability(frequency) implies a low expected value and a low cost of transfer.


Question: V2C5-0291Regarding enterprise resource management (ERM) framework, the cost of financing risk is a(n)

Answers

A: Marginal cost.

B: Opportunity cost.

C: Average cost.

D: Interest cost.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.Answer (b) is the correct answer. Financing involves paying for the losses out of current income or existing assets,by earmarking funds or by the purchase of insurance. The cost of financing losses is the amount of funds that ispaid for the losses that occur. The cost of risk for retained risks is the opportunity cost on the funds that must beearmarked and that cannot be used for other purposes.




Question: V2C5-0292From an enterprise risk management (ERM) viewpoint, the term “hazard” refers to

Answers

A: The same thing as risk.

B: The same thing as exposure.

C: A condition that increases the chance of loss.

D: Uncertainty regarding loss.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. A hazard is a condition that increases the probability (chance) of loss from aperil. Perils are causes of loss, and examples include fire and flood. Uncertainty can exist where there is no risk.Risk or exposure is the possibility of loss.


Question: V2C5-0293When creating new businesses, organizations must consider

Answers

A: Delinking opportunities.

B: Desizing opportunities.

C: Derisking opportunities.

D: Desourcing opportunities.

Answer Explanations



This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. As organizations think about the future and actually create the future of theirbusiness, they must consider derisking opportunities. In capitalizing on opportunities, the goal is to be a marketleader but yet reduce risk.


Question: V2C5-0294Which of the following enterprise risk management (ERM) frameworks address market risk?

Answers

A: Strategic risks.

B: Operational risks.

C: Financial risks.

D: Hazard risks.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. Financial risk includes risks from volatility in foreign currencies, interest rates,and commodities. It also includes credit risk, liquidity risk, and market risk.


Question: V2C5-0295Regarding enterprise risk management (ERM), which of the following are more difficult to identify and assess?

I. Hazard risks.II. Financial risks.III. Strategic risks.IV. Operational risks.

Answers

A: I only.

B: II only.

C: I and II.



D: III and IV.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (d) is the correct answer. ERM integrates the management of all risks, including the more traditionalhazard and financial risks, with operational and strategic risks. The latter two risks are new and are more difficultto identify, assess, and evaluate.

Question: V2C5-0296Enterprise risk management (ERM) should encompass which of the following?

I. Hazards.II. Opportunities.III. Strengths.IV. Weaknesses.

Answers

A: I only.

B: II only.

C: I and II.

D: III and IV.

Answer Explanations

This answer is incorrect. Refer to the correct answer explanation.This answer is incorrect. Refer to the correct answer explanation.Answer (c) is the correct answer. It is important to emphasize that the uncertainties could have a potential upsideor downside so that ERM encompasses the more traditional view of potential hazards as well as opportunities.Hazard risks include both insurable and uninsurable risks.


Wiley CIA Examination Review, 1.0, John Wiley & Sons, Inc. © 2006



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