Practice Free IIA-CIA-Part1 Exam Online Questions
Question #61
Which of the following risk management techniques best describes the strategy of obtaining insurance to protect against losses due to bad weather conditions?
- A . Risk avoidance
- B . Risk reduction
- C . Risk acceptance
- D . Risk sharing
Correct Answer: D
D
Explanation:
Obtaining insurance to protect against losses due to bad weather conditions is a strategy of risk sharing. Risk sharing involves transferring a portion of the risk to another party, often through mechanisms like insurance, hedging, or outsourcing. By obtaining insurance, an organization transfers the financial impact of adverse weather conditions to the insurer, thereby sharing the risk.
Risk avoidance (A) involves eliminating the risk entirely by not engaging in the activity that generates the risk. Risk reduction (B) refers to actions taken to decrease the likelihood or impact of the risk.
Risk acceptance (C) means acknowledging the risk and deciding to bear the consequences without taking steps to mitigate it.
Reference: ISO 31000:2018 Risk Management C Guidelines
COSO Enterprise Risk Management Framework
D
Explanation:
Obtaining insurance to protect against losses due to bad weather conditions is a strategy of risk sharing. Risk sharing involves transferring a portion of the risk to another party, often through mechanisms like insurance, hedging, or outsourcing. By obtaining insurance, an organization transfers the financial impact of adverse weather conditions to the insurer, thereby sharing the risk.
Risk avoidance (A) involves eliminating the risk entirely by not engaging in the activity that generates the risk. Risk reduction (B) refers to actions taken to decrease the likelihood or impact of the risk.
Risk acceptance (C) means acknowledging the risk and deciding to bear the consequences without taking steps to mitigate it.
Reference: ISO 31000:2018 Risk Management C Guidelines
COSO Enterprise Risk Management Framework
Question #62
A multinational organization has asked the internal audit activity to assist in setting up the organization’s risk management system. The chief audit executive (CAE) agrees to take on the engagement as a consultant.
Which of the following tasks is appropriate for the CAE to undertake?
- A . Coordinate and facilitate risk workshops for management to attend.
- B . Establish the degree of risk appetite for management to accept.
- C . Set risk indicators and mitigation plans for management to implement
- D . Determine the number of significant risks for management to report to the board.
Correct Answer: A
A
Explanation:
The chief audit executive (CAE) taking on a consultative role can appropriately coordinate and facilitate risk workshops for management. This task aligns with the advisory function of internal audit, where they support and facilitate the risk management process without directly setting the risk appetite or determining risk mitigation strategies, thereby maintaining their advisory and facilitative role without assuming management responsibilities.
Reference: International Standards for the Professional Practice of Internal Auditing; guidance on internal audit’s role in consulting.
A
Explanation:
The chief audit executive (CAE) taking on a consultative role can appropriately coordinate and facilitate risk workshops for management. This task aligns with the advisory function of internal audit, where they support and facilitate the risk management process without directly setting the risk appetite or determining risk mitigation strategies, thereby maintaining their advisory and facilitative role without assuming management responsibilities.
Reference: International Standards for the Professional Practice of Internal Auditing; guidance on internal audit’s role in consulting.
Question #63
Which of the following actions would an internal auditor perform primarily during a consulting engagement of a debt collections process?
- A . Reviewing journal entries for accuracy and completeness.
- B . Comparing the policies and procedures to regulatory collections guidance.
- C . Advising management on streamlining the recording of accounts receivable.
- D . Performing a walk-through of the debt collections process to determine whether proper segregation of duties exists
Correct Answer: C
C
Explanation:
In a consulting engagement regarding a debt collections process, an internal auditor would primarily focus on advising management on streamlining the recording of accounts receivable. This action aims to add value by providing expert advice to improve the efficiency and effectiveness of the process, consistent with the IIA’s guidelines on the role of internal auditors in consulting activities.
Reference: IIA Standard 1000 – Purpose, Authority, and Responsibility
C
Explanation:
In a consulting engagement regarding a debt collections process, an internal auditor would primarily focus on advising management on streamlining the recording of accounts receivable. This action aims to add value by providing expert advice to improve the efficiency and effectiveness of the process, consistent with the IIA’s guidelines on the role of internal auditors in consulting activities.
Reference: IIA Standard 1000 – Purpose, Authority, and Responsibility
Question #64
A large commercial bank was fined by regulators for fraudulent practices when employees, over a period of time, opened thousands of new accounts for existing clients without the clients’ consent. It was later found that employees were given unrealistic new account targets and were aggressively monitored by management on a daily basis.
Which of the following controls would have most likely reduced the likelihood of the fraudulent practice from occurring?
- A . An evaluation of the current performance and compensation program.
- B . The performance of background investigations on all existing employees.
- C . The availability of fraud training to all employees.
- D . The availability of an employee whistleblower hotline
Correct Answer: A
A
Explanation:
An evaluation of the current performance and compensation program would be the most effective control to address the underlying cause of fraudulent behavior described. The pressures from unrealistic targets and aggressive monitoring likely encouraged employees to engage in fraudulent account openings. By evaluating and potentially revising these targets and the associated compensation schemes, the bank could mitigate the pressures that lead to such unethical behaviors.
Reference: Standards on the role of internal control systems in preventing and detecting fraud, including guidance on managing performance and compensation to align with ethical standards.
A
Explanation:
An evaluation of the current performance and compensation program would be the most effective control to address the underlying cause of fraudulent behavior described. The pressures from unrealistic targets and aggressive monitoring likely encouraged employees to engage in fraudulent account openings. By evaluating and potentially revising these targets and the associated compensation schemes, the bank could mitigate the pressures that lead to such unethical behaviors.
Reference: Standards on the role of internal control systems in preventing and detecting fraud, including guidance on managing performance and compensation to align with ethical standards.
Question #65
An internal auditor has documented several instances in which management asked employees to ad against the policies and procedures.
Which of the following is the most appropriate next step?
- A . Report the non-compliance cases to the board of directors.
- B . Recommend that management update its policies and procedures based on the circumstances.
- C . Investigate the rationale for management’s actions.
- D . Recommend those employees to report the cases through the designed whistleblowing channel for the appropriate treatment.
Correct Answer: C
C
Explanation:
Before taking further action, the internal auditor should understand why management asked employees to act against policies and procedures. This could reveal underlying issues or misunderstandings that need to be addressed.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing.
COSO Framework on Monitoring and Risk Assessment.
C
Explanation:
Before taking further action, the internal auditor should understand why management asked employees to act against policies and procedures. This could reveal underlying issues or misunderstandings that need to be addressed.
Reference: IIA’s International Standards for the Professional Practice of Internal Auditing.
COSO Framework on Monitoring and Risk Assessment.
Question #66
The internal auditor of a small manufacturer noted that the accounting department has insufficient staff to achieve proper segregation of duties.
What type of controls would the auditor likely recommend to management to specifically address this problem?
- A . Entity-level.
- B . Preventive.
- C . Directive.
- D . Compensating.
Correct Answer: D
D
Explanation:
In situations where proper segregation of duties is not achievable due to insufficient staffing, internal auditors recommend the implementation of compensating controls. Compensating controls are additional procedures or safeguards designed to reduce the risk associated with insufficient segregation of duties. These controls do not prevent errors or fraud from occurring but aim to detect them in a timely manner if they do occur.
For instance, in a small manufacturer where the accounting department cannot separate tasks adequately due to limited staff, the auditor might suggest:
Enhanced supervisory reviews: Managers or supervisors closely review and approve transactions and reconciliations performed by the staff.
Periodic independent reviews: Regular audits or reviews by internal auditors or third-party auditors to ensure transactions are proper and in compliance with company policies.
Use of technology: Implementing automated controls that require multiple approvals for significant transactions.
Rotation of duties: Regularly rotating employees’ responsibilities to prevent familiarity and collusion.
These measures help mitigate the risks that arise from the lack of segregation of duties, providing
reasonable assurance that financial records are accurate and that fraud or errors are detected
promptly.
Reference: The Institute of Internal Auditors (IIA) Standards and Practice Advisories.
COSO Internal Control C Integrated Framework.
"Internal Auditing: Assurance & Advisory Services" by IIA, Chapter on Control Activities and Segregation of Duties.
D
Explanation:
In situations where proper segregation of duties is not achievable due to insufficient staffing, internal auditors recommend the implementation of compensating controls. Compensating controls are additional procedures or safeguards designed to reduce the risk associated with insufficient segregation of duties. These controls do not prevent errors or fraud from occurring but aim to detect them in a timely manner if they do occur.
For instance, in a small manufacturer where the accounting department cannot separate tasks adequately due to limited staff, the auditor might suggest:
Enhanced supervisory reviews: Managers or supervisors closely review and approve transactions and reconciliations performed by the staff.
Periodic independent reviews: Regular audits or reviews by internal auditors or third-party auditors to ensure transactions are proper and in compliance with company policies.
Use of technology: Implementing automated controls that require multiple approvals for significant transactions.
Rotation of duties: Regularly rotating employees’ responsibilities to prevent familiarity and collusion.
These measures help mitigate the risks that arise from the lack of segregation of duties, providing
reasonable assurance that financial records are accurate and that fraud or errors are detected
promptly.
Reference: The Institute of Internal Auditors (IIA) Standards and Practice Advisories.
COSO Internal Control C Integrated Framework.
"Internal Auditing: Assurance & Advisory Services" by IIA, Chapter on Control Activities and Segregation of Duties.
Question #66
The internal auditor of a small manufacturer noted that the accounting department has insufficient staff to achieve proper segregation of duties.
What type of controls would the auditor likely recommend to management to specifically address this problem?
- A . Entity-level.
- B . Preventive.
- C . Directive.
- D . Compensating.
Correct Answer: D
D
Explanation:
In situations where proper segregation of duties is not achievable due to insufficient staffing, internal auditors recommend the implementation of compensating controls. Compensating controls are additional procedures or safeguards designed to reduce the risk associated with insufficient segregation of duties. These controls do not prevent errors or fraud from occurring but aim to detect them in a timely manner if they do occur.
For instance, in a small manufacturer where the accounting department cannot separate tasks adequately due to limited staff, the auditor might suggest:
Enhanced supervisory reviews: Managers or supervisors closely review and approve transactions and reconciliations performed by the staff.
Periodic independent reviews: Regular audits or reviews by internal auditors or third-party auditors to ensure transactions are proper and in compliance with company policies.
Use of technology: Implementing automated controls that require multiple approvals for significant transactions.
Rotation of duties: Regularly rotating employees’ responsibilities to prevent familiarity and collusion.
These measures help mitigate the risks that arise from the lack of segregation of duties, providing
reasonable assurance that financial records are accurate and that fraud or errors are detected
promptly.
Reference: The Institute of Internal Auditors (IIA) Standards and Practice Advisories.
COSO Internal Control C Integrated Framework.
"Internal Auditing: Assurance & Advisory Services" by IIA, Chapter on Control Activities and Segregation of Duties.
D
Explanation:
In situations where proper segregation of duties is not achievable due to insufficient staffing, internal auditors recommend the implementation of compensating controls. Compensating controls are additional procedures or safeguards designed to reduce the risk associated with insufficient segregation of duties. These controls do not prevent errors or fraud from occurring but aim to detect them in a timely manner if they do occur.
For instance, in a small manufacturer where the accounting department cannot separate tasks adequately due to limited staff, the auditor might suggest:
Enhanced supervisory reviews: Managers or supervisors closely review and approve transactions and reconciliations performed by the staff.
Periodic independent reviews: Regular audits or reviews by internal auditors or third-party auditors to ensure transactions are proper and in compliance with company policies.
Use of technology: Implementing automated controls that require multiple approvals for significant transactions.
Rotation of duties: Regularly rotating employees’ responsibilities to prevent familiarity and collusion.
These measures help mitigate the risks that arise from the lack of segregation of duties, providing
reasonable assurance that financial records are accurate and that fraud or errors are detected
promptly.
Reference: The Institute of Internal Auditors (IIA) Standards and Practice Advisories.
COSO Internal Control C Integrated Framework.
"Internal Auditing: Assurance & Advisory Services" by IIA, Chapter on Control Activities and Segregation of Duties.
Question #68
Which of the following is an example of a management control technique?
- A . A budget.
- B . A risk assessment.
- C . The board of directors.
- D . The control environment
Correct Answer: A
A
Explanation:
A budget is an example of a management control technique. It is used by management to plan for, monitor, and control the financial resources of the organization, ensuring that spending aligns with the organization’s strategic objectives and financial constraints.
Reference: Management control systems and techniques in organizational management literature.
A
Explanation:
A budget is an example of a management control technique. It is used by management to plan for, monitor, and control the financial resources of the organization, ensuring that spending aligns with the organization’s strategic objectives and financial constraints.
Reference: Management control systems and techniques in organizational management literature.
Question #69
An internal audit team analyzed the organization’s value-at-risk model during an assurance engagement and suggested several useful improvements. Management was impressed by the internal audit team’s work and requested additional actions.
Which of the following requested actions would impact internal audit independence most severely if fulfilled?
- A . Assess the effectiveness of the model at least semi-annually.
- B . Modify model inputs and suggest courses of action based on outcomes.
- C . Employ acquired experience to test other models used by the company.
- D . Validate whether model outputs serve the purpose stated by the model.
Correct Answer: B
B
Explanation:
Modifying model inputs and suggesting courses of action based on outcomes would most severely impact the internal audit team’s independence. This task crosses into management responsibilities, creating a conflict where auditors are effectively taking part in operations. This could compromise their ability to audit these areas impartially in the future.
Reference: IIA standards and guidelines on maintaining independence and objectivity in internal audit activities.
B
Explanation:
Modifying model inputs and suggesting courses of action based on outcomes would most severely impact the internal audit team’s independence. This task crosses into management responsibilities, creating a conflict where auditors are effectively taking part in operations. This could compromise their ability to audit these areas impartially in the future.
Reference: IIA standards and guidelines on maintaining independence and objectivity in internal audit activities.
Question #70
While preparing the audit plan for an automobile manufacturing company, the chief audit executive (CAE) noted that the company’s engineering department received a high risk ranking. However, the internal audit activity is understaffed, and current staff do not possess the necessary skills to adequately assess the effectiveness of the engineering department.
What is the most appropriate course of action for the CAE to take?
- A . Include the engineering department on the audit plan, use the available internal audit resources to conduct the review, and exclude procedures that cannot be adequately assessed.
- B . Advise management to accept the assessed risk until the internal auditors are able to review the area adequately.
- C . Recruit internal auditors with the required competencies and wait until they are employed before including this audit on the internal audit plan.
- D . Proceed with a review of the engineering department but supplement the internal audit team with nonauditors from an external engineering company who have the required skills to assist
Correct Answer: D
D
Explanation:
The most appropriate course of action for the CAE when facing a lack of internal audit staff with necessary skills to audit a high-risk area, like the engineering department, is to supplement the internal audit team with external experts who possess the required competencies. This approach ensures that the audit can be conducted effectively and comprehensively, allowing for an accurate assessment of risks and controls in the engineering department without delaying the review until new auditors can be hired and trained.
Reference: Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF)
D
Explanation:
The most appropriate course of action for the CAE when facing a lack of internal audit staff with necessary skills to audit a high-risk area, like the engineering department, is to supplement the internal audit team with external experts who possess the required competencies. This approach ensures that the audit can be conducted effectively and comprehensively, allowing for an accurate assessment of risks and controls in the engineering department without delaying the review until new auditors can be hired and trained.
Reference: Institute of Internal Auditors (IIA) – International Professional Practices Framework (IPPF)