Which of the following is the most appropriate way to ensure that a newly formed internal audit
activity remains free from undue influence by management?
D
Explanation:
The internal audit charter is a formal document that defines the internal audit activity's purpose,
authority, and responsibility.
Establishing the internal audit activity's position within the organization in an audit charter ensures
independence and objectivity by clearly stating the internal audit’s role and its reporting lines.
The charter should be approved by the board and senior management to reinforce its authority and
protect the internal audit activity from undue influence by management
The internal audit activity plans to assess the effectiveness of management’s self-assessment
activities regarding the risk management process. Which of the following procedures would be most
appropriate to accomplish this objective?
D
Explanation:
To assess the effectiveness of management’s self-assessment activities regarding the risk
management process, internal auditors should directly observe and test the control and monitoring
procedures.
This hands-on approach allows auditors to verify the implementation and functionality of risk
management controls and the accuracy of related reporting.
Direct observation and testing provide the most reliable evidence of the effectiveness of these
procedures
Which of the following statements is true regarding engagement planning?
C
Explanation:
Proper engagement planning is essential to ensure that the internal audit engagement is conducted
effectively and efficiently.
Completing and approving the planning phase before starting the fieldwork ensures that all
objectives, scope, resources, and methodologies are well-defined and agreed upon.
This preparation helps in aligning the engagement with the overall audit strategy and reduces the
risk of scope changes or misalignments during fieldwork
According to IIA guidance, which of the following statements regarding the internal audit charter is
true?
D
Explanation:
The internal audit charter outlines the internal audit activity's purpose, authority, and responsibility
within the organization.
It defines the internal audit activity’s position within the organization, including reporting lines,
independence, and access to records, personnel, and physical properties relevant to the
performance of engagements.
This clarity helps ensure that the internal audit activity can operate independently and effectively
Which of the following would be the most effective fraud prevention control?
C
Explanation:
Training new hires on fraud and employee misconduct is a proactive measure that raises awareness
and educates employees about the organization’s policies and the consequences of fraudulent
behavior.
Such training helps create a culture of integrity and compliance, making employees less likely to
engage in or tolerate fraud.
Continuous education and reinforcement of ethical behavior are essential components of an
effective fraud prevention strategy
While conducting an engagement in the procurement department, the internal auditor noticed that
the department head’s travel reports showed minor travel expenses, and there were no charges for
hotels, meals, or transportation However, the auditor knew that the department head frequently
traveled worldwide to meet with suppliers and visit their production sites. Which of the following
would be the most appropriate next step for the auditor?
C
Explanation:
Identifying the Anomaly: The internal auditor has identified a discrepancy in the travel expenses of
the department head, who frequently travels yet reports minimal expenses. This raises a red flag that
needs further investigation.
Understanding the Context: It is important to determine if there are legitimate reasons for the
discrepancy, such as special arrangements made for senior management travel, which could explain
the absence of typical travel expenses like hotels, meals, and transportation.
Appropriate Next Step: Investigating whether there are any special arrangements for senior
management travel (Option C) is the most logical next step. This helps in understanding the context
and validating whether the discrepancy is justified or indicative of potential issues such as fraud or
misreporting.
Reference: Internal auditing standards emphasize the need for auditors to understand the
environment and context of the organization’s operations when anomalies are detected.
Other Options Considered:
Option A: Making a note for future follow-up is not proactive and delays addressing a potential issue.
Option B: Analyzing supplier trends, while useful, does not directly address the travel expense
anomaly.
Option D: Estimating costs based on destinations can provide insights but does not explain potential
legitimate arrangements made by the organization.
Conclusion: Investigating special arrangements regarding senior management travel (Option C) is the
most appropriate step to understand the discrepancy and ensure there are no irregularities.
Which of the following statements best describes the difference between risk appetite and risk
tolerance?
C
Explanation:
Definition of Risk Appetite: Risk appetite is the amount and type of risk an organization is willing to
pursue or retain to achieve its objectives. It reflects the organization’s overall approach to risk-taking
and is typically articulated at the highest level of the organization.
Reference: COSO’s Enterprise Risk Management Framework.
Definition of Risk Tolerance: Risk tolerance refers to the acceptable variation relative to the
achievement of specific objectives. It is more granular and specific than risk appetite, detailing the
levels of risk that are acceptable within the parameters set by the organization’s risk appetite.
Reference: IIA’s Practice Guide on Risk Management.
Distinguishing the Two Concepts: Risk appetite is broad and sets the overall boundaries for risk-
taking, while risk tolerance is more specific, outlining acceptable risk levels for particular objectives
within the broader risk appetite framework.
Practical Example: An organization may have a high risk appetite, accepting significant risks to
achieve growth, but its risk tolerance for operational risks (such as system failures) may be low,
indicating minimal acceptable deviations from expected performance.
Conclusion: The correct answer is C, as risk appetite represents the organization’s general level of
risk acceptance, whereas risk tolerance is more specific and detailed, falling under the broader scope
of risk appetite.
Which of the following is a true statement regarding whistleblowing?
A
Explanation:
Purpose of Whistleblowing: Whistleblowing is a mechanism that allows employees to report
unethical or illegal activities within the organization. It is a vital part of an organization’s ethical
framework, providing a structured way for concerns to be raised and addressed.
Reference: IIA’s Practice Guide on Whistleblowing Programs.
Encouraging Ethical Behavior: By having a whistleblowing program, an organization encourages
employees to come forward with concerns, which helps in maintaining ethical standards and
preventing misconduct.
Practical Example: Employees who notice financial discrepancies can report these through the
whistleblowing system without fear of retaliation, supporting a culture of transparency and
accountability.
Other Options Considered:
Option B: While whistleblowing programs can support ethical behavior, they are primarily designed
for reporting issues rather than instilling values.
Option C: This is a misconception; whistleblowers often report genuine concerns rather than acting
out of retaliation.
Option D: Whistleblowers can report suspected unethical or illegal activities, which may not always
be criminal but are still significant for organizational integrity.
Conclusion: The correct answer is A, as whistleblowing is one of several ethical structures that
organizations can adopt to encourage reporting of unethical behavior and maintain high ethical
standards.
An internal auditor discovered fraud while performing an audit of an organization's procurement
process. Which of the following describes the greatest benefit of using forensic auditing techniques
in this scenario?
D
Explanation:
Forensic auditing techniques provide a systematic approach to collecting and analyzing evidence
related to fraud. The primary benefit of these techniques is the enhanced ability to gather
comprehensive and detailed evidence, which leads to a greater understanding of how the fraud
occurred and who was involved. This detailed evidence collection supports legal proceedings and
helps in identifying control weaknesses that need to be addressed to prevent future frauds.
Reference:
"Forensic Auditing: Principles and Practices," which outlines the importance of evidence collection in
understanding and combating fraud.
An internal auditor observed that sales staff are able to modify or cancel an order in the system prior
to shipping She wonders whether they can also modify orders after shipping. Which of the following
types of controls should she examine?
B
Explanation:
Application controls are specific to software applications and ensure that transactions are processed
correctly and accurately. They include controls over input, processing, and output. In this scenario,
examining application controls will help determine if sales staff can modify orders after shipping, as
these controls directly impact how data is handled within the system.
Reference:
"Information Technology Auditing," which explains the role of application controls in maintaining
data integrity and security.