IIA-CIA-Part2 Sample Questions Answers

In internal auditing, the engagement workpapers typically contain more detailed descriptions of observations than the preliminary observation document because workpapers serve as the primary evidence and record of the audit procedures and findings. Similarly, a preliminary observation document generally contains more detail than the final audit report, as it serves as an initial, comprehensive documentation of the findings before they are summarized for final reporting.

References:

The Institute of Internal Auditors (IIA) Standards

Internal Audit Documentation and Reporting Standards

The frequency and approach to assessing residual risk are primarily influenced by the expectations set by the board and senior management. These expectations shape the internal audit function's priorities, including how often residual risk should be assessed and the methods used to evaluate it. This ensures that the internal audit activities are aligned with the strategic objectives and risk appetite of the organization, as defined by its senior leadership.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2120 - Risk Management

If senior management decides to accept risks, such as doing business with a questionable vendor, and the chief audit executive (CAE) believes this poses a significant risk to the organization, the CAE should escalate the issue to the board. The board has the ultimate responsibility for overseeing risk management and can decide on the appropriate action to take in response to the risk.

IIA References:

IIA Standard 2600: Communicating the Acceptance of Risks states that when the CAE believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the CAE must discuss the matter with senior management. If the decision regarding risk remains unchanged, the CAE must inform the board.

The Practice Guide on Risk Management highlights the importance of the CAE keeping the board informed of significant risks that management has chosen to accept, particularly when these risks could have a material impact on the organization.

According to IIA guidance, an internal audit activity that provides overall assurance on governance, risk, and control, advises and influences senior management, and leverages the organization's management of risk is best described as being in the "Managed" stage of internal audit maturity. This stage indicates a well-established internal audit function that is integrated into the organization's governance framework and plays a proactive role in risk management and strategic decision-making. References:

The IIA’s Maturity Model for the Internal Audit Activity.

The IIA’s Practice Guide on Internal Audit’s Role in Governance, Risk, and Control.

After management responds to audit findings and provides an action plan, it is crucial for the internal audit activity to follow up to validate that the promised changes have been implemented and are effective. This follow-up ensures that the issues identified, such as those related to segregation of duties in accounts payable, have been appropriately addressed.

IIA Standard 2500 – Monitoring Progress:

This standard requires the internal audit activity to monitor the implementation of management’s corrective actions. Following up on audit findings is essential to ensure that the actions taken effectively mitigate the identified risks.

Validation of Corrective Actions:

By conducting a follow-up review, the internal audit activity can verify that the changes have been made as planned and assess whether these changes are sufficient to resolve the issues. This process helps maintain the integrity and effectiveness of the internal audit function.

IIA Practice Advisory 2500-1:

The advisory emphasizes the importance of follow-up activities to confirm that management’s responses to audit recommendations have been implemented as intended.

Option B (Include in the next scheduled audit): While this is a backup plan, it may delay the validation of corrective actions, allowing potential risks to persist.

Option C (No further action): This approach is inappropriate because it assumes the problem is resolved without verification, which could lead to unmitigated risks.

Option D (Placing an auditor in the department): This could compromise the independence of the internal audit function and is not a standard practice.

Detailed Explanation:Why Not Other Options?Conclusion: Option A is correct because it ensures that the internal audit activity fulfills its responsibility to validate that management’s corrective actions have been implemented and are effective, aligning with IIA standards on monitoring progress.

During the design evaluation phase of an audit, the internal auditor's primary role is to assess whether the controls in place are appropriately designed to mitigate risks. This includes identifying key controls such as those over segregation of duties, which is a fundamental control to prevent fraud and errors by ensuring that no single individual has control over all aspects of a transaction.

IIA References:

IIA Standard 2201: Planning Considerations highlights the importance of evaluating the adequacy of controls during the design phase. Identifying controls over segregation of duties is a critical step in this process as it ensures that the design is robust and capable of mitigating risks.

The step that would accomplish the objective of testing management's identification and prioritization of critical data collected by the organization is to document and test a data inventory and classification program by determining the data classification levels and framework. This involves verifying that management has established a comprehensive data inventory and that data classification processes are in place and effectively implemented. It ensures that data is appropriately categorized based on its criticality and sensitivity, aligning with the organization’s risk management framework and data governance policies.References: IIA's Global Technology Audit Guide (GTAG) on Data Privacy and Protection, which outlines best practices for data classification and management.

According to IIA guidance, the focus of a review of controls to prevent fraud should be on the effectiveness rather than the efficiency of the controls. Effectiveness pertains to whether the controls adequately mitigate fraud risks and prevent fraudulent activities, while efficiency focuses on the performance and cost-effectiveness of the controls, which is not the primary concern in preventing fraud. This makes statement A false in the context of IIA guidance.

References:

IIA Standards: 1220.A1 - Due Professional Care

IIA Practice Guide: Fraud Prevention and Detection in an Automated World

According to the IIA guidance, engagement supervisors' review notes are used during the audit process to ensure thoroughness and accuracy. Once these review notes have been addressed, they can be removed from the final documentation. This practice ensures that the final audit report is clear and concise, containing only the necessary documentation to support audit findings and conclusions. The review notes are considered part of the working papers during the review process but do not need to be retained in the final audit documentation once all issues have been resolved.

References:

The Institute of Internal Auditors (IIA) Standard 2330 – Documenting Information: "Internal auditors must document relevant information to support the conclusions and engagement results."

IIA Practice Guide on "Audit Documentation"

According to the IIA Standards, particularly Standard 2500 - Monitoring Progress, internal auditors are responsible for monitoring the disposition of results communicated to management. They need to assess whether management has taken appropriate action to address audit findings or has consciously accepted the risk of not taking action. The follow-up process is crucial to ensure that identified risks are managed effectively. References: = IIA’s Standard 2500 - Monitoring Progress and Practice Guide on Follow-up Processes.

The most appropriate approach for internal audit activity to follow up on management action plans is to create a tracking system. This ensures that follow-up activities are systematically monitored and documented. Such a system can track the status of action plans, provide reminders for due dates, and record progress updates, thus ensuring that management's corrective actions are implemented and effective. Regular monitoring and tracking are essential to verify that issues identified in audits are addressed in a timely manner.

References:

Institute of Internal Auditors (IIA) Standards: Implementation Standards 2500 – Monitoring Progress

COSO Framework: Monitoring Activities Component

The appropriate conclusion that can be drawn from the findings is that the internal controls guiding contract management are not operating effectively. The listed findings, such as noncompliance with contract provisions, lack of monitoring compliance with contract obligations and deliverables, and absence of contract agreements with key vendors, indicate significant control deficiencies in the contract management process. These deficiencies suggest that the controls intended to ensure compliance and effective management of contracts are either inadequate or not functioning as intended.References: IIA's Guide on Internal Controls and Audit Findings.

According to IIA guidance, monitoring customer quality complaints compared to the prior period to identify vendor issues is least likely to be a key financial control in an organization's accounts payable process. Key financial controls in accounts payable typically focus on preventing and detecting fraud and errors in the payment process, such as requiring approval for vendor changes, monitoring payment amounts, and comparing employee and vendor addresses to prevent fraud. Monitoring customer quality complaints is more relevant to quality control and vendor management rather than financial control.

References:

IIA Standards: 2130 - Control

IIA Practice Guide: Auditing the Accounts Payable Process

To identify a personal conflict-of-interest situation affecting an organization’s procurement function, inspecting documents is the most effective engagement technique. This involves reviewing relevant documentation such as procurement records, conflict of interest disclosures, vendor contracts, and employee relationships with vendors. This technique provides concrete evidence and can reveal discrepancies or relationships that suggest a conflict of interest, offering a clear and objective basis for any findings.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2310 - Identifying Information

Strengthening password policies and ensuring unique passwords are used within a specified period are key measures in preventing unauthorized access and reducing the risk of fraud. Password management is a critical aspect of IT security and can significantly mitigate the risk of cyber fraud. The other recommendations (Options B, C, and D) address operational issues but do not directly impact fraud prevention as effectively as enhancing password security does.References:

IIA Standard 2110: Governance.

IIA Practice Guide on IT Controls and Cybersecurity.

When estimating the impact of an inherent risk, internal auditors should consider both financial and nonfinancial factors. Financial factors include direct monetary impacts, while nonfinancial factors may include reputational damage, operational disruptions, and compliance issues. Considering a broad range of factors provides a comprehensive understanding of the potential impact of the risk, which is essential for effective risk assessment and management.

References:

Institute of Internal Auditors (IIA) Standards: Performance Standards 2120: Risk Management

COSO Enterprise Risk Management (ERM) Framework: Risk Assessment and Risk Response Components

According to IIA guidance on due professional care, internal auditors should perform thorough and adequate steps to verify the accuracy and legitimacy of transactions. When reviewing cash disbursements, it is essential to check the three-way match among the invoice, purchase order, and receiving report. This ensures that the payment is valid, authorized, and that the goods or services were actually received as ordered. This step is crucial in preventing and detecting errors and fraud, thereby ensuring that the audit findings are reliable and accurate.References:

IIA Standard 1220: Due Professional Care

IIA Practice Guide: Auditing Accounts Payable and Disbursements

When identifying specific processes to include in the scope of an assurance engagement, the most useful information for an internal auditor is recent area performance indicators against productivity metrics. This data helps the auditor identify areas with potential risks or inefficiencies that might warrant further examination.

IIA Standard 2200 – Engagement Planning:

This standard requires auditors to develop a plan for each engagement, including objectives and scope, based on a thorough understanding of the area under review. Performance indicators provide valuable insights into areas that may not be meeting productivity or efficiency targets.

Use of Performance Indicators:

Performance indicators allow the auditor to identify processes that may be underperforming or where there may be significant variances from expected outcomes. This helps in focusing the audit on areas with the greatest potential for improvement or risk.

IIA Practice Advisory 2201-2:

The advisory suggests that auditors should consider using performance data, such as productivity metrics, to determine where to focus their audit efforts. This data-driven approach ensures that the audit is relevant and adds value.

Option A (Recognition awards): Awards do not provide insight into risks or underperformance that might require audit attention.

Option B (Timing of the last audit): While useful, the timing alone does not indicate current risks or issues.

Option C (Management's presentation): This may provide some insights, but it is often more narrative and less data-driven than performance indicators.

Detailed Explanation:Why Not Other Options?Conclusion: Option D is correct because recent performance indicators against productivity metrics provide the most relevant information for identifying processes to include in the scope of an assurance engagement, ensuring that the audit is focused on areas of significant risk or opportunity for improvement, in line with IIA standards.

The most critical factor in determining which engagements should be included in the annual internal audit plan is the organization's annual risk management strategy. This strategy identifies the key risks facing the organization and ensures that the internal audit plan aligns with the areas of highest risk. This prioritization helps ensure that internal audit resources are focused on areas that could have the most significant impact on the organization. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"Risk-Based Internal Auditing" (IIA Practice Guide)

A. Book value per common share ratio is lower than that of the prior year:This represents year-over-year comparison, which is an example of historical benchmarking, not internal benchmarking.

B. Staff turnover ratio is higher than the comparable organization in the same industry:This represents external benchmarking, as it involves comparing against a peer organization.

C. Utilities expense of the sales unit is higher than that of the customer service unit:Correct. This is internal benchmarking, as it compares performance metrics within the same organization.

D. Sales are significantly higher than the industry’s average for five years:This is an example of external benchmarking against the industry standard.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Benchmarking Techniques.

When the chief audit executive (CAE) is uncertain whether the internal audit team has the necessary knowledge to conduct a specific engagement, such as reviewing testing procedures for a large information system, the most appropriate course of action is to engage an external service provider with the required expertise. This option helps to preserve the independence and objectivity of the internal audit activity.

IIA Standard 1210 – Proficiency:

This standard requires that internal auditors possess the knowledge, skills, and other competencies needed to perform their responsibilities. If the current team lacks the necessary skills, the CAE must seek external expertise.

Preserving Independence:

Engaging an external service provider helps maintain the independence of the internal audit function, as the expertise is sourced from an independent party. This prevents potential conflicts of interest that might arise if resources are borrowed from within the organization (e.g., from the IT department).

IIA Practice Advisory 1210.A1-1:

This advisory suggests that the CAE may employ external experts to provide specialized knowledge for certain audit engagements, ensuring the audit activity remains independent and objective.

Option A (Contract with the software vendor): This could compromise independence, as the vendor may have a vested interest in the outcome of the audit.

Option B (Ask for a knowledgeable resource from IT): Using internal resources, especially from the IT department being audited, could impair independence and objectivity.

Option D (Request resources through the external auditor): This might be appropriate in some cases, but it is not as direct and effective as hiring an external provider with specialized skills for this specific engagement.

Detailed Explanation:Why Not Other Options?Conclusion: Option C is correct as it ensures the internal audit function maintains its independence while acquiring the necessary expertise to conduct the engagement effectively, in line with IIA standards.

To improve collaboration with audit clients during an engagement, it is effective for internal auditors to discuss the engagement plan with the client so they understand the reasoning behind the approach (2), and to review test criteria and procedures where the client expresses concerns about the type of tests to be conducted (3). This approach fosters transparency, helps manage client expectations, and builds trust. Obtaining control concerns before the audit (1) is also useful but less directly related to collaboration during the engagement. Providing all observations at the end of the audit (4) might not facilitate ongoing collaboration during the audit process. References: IIA Standard 2200 – Engagement Planning, IIA Standard 2400 – Communicating Results

When developing the objectives for an assurance engagement in a newly acquired subsidiary, the most critical items to consider are the organizational strategy, objectives, risks, control framework, and the expectations of stakeholders regarding the audit. This holistic approach ensures that the internal audit aligns with the broader goals and risk management processes of the organization, providing a comprehensive evaluation of the subsidiary's operations within the context of the entire entity.

Organizational Strategy and Objectives: Understanding the overarching goals and strategic direction of the organization helps to align the audit objectives with business priorities and ensures that the subsidiary’s operations are evaluated in the context of their contribution to these goals.

Risks: Identifying and assessing the risks associated with the subsidiary is essential for focusing audit efforts on areas that could significantly impact the organization. This involves understanding both inherent and residual risks.

Control Framework: Evaluating the existing control framework within the subsidiary helps determine the adequacy and effectiveness of controls in mitigating identified risks.

Stakeholder Expectations: Considering what stakeholders expect from the audit helps in shaping objectives that address key concerns and provide valuable insights, fostering greater acceptance and implementation of audit recommendations.

This comprehensive approach ensures the audit is relevant, targeted, and capable of adding significant value to the organization by addressing key risk areas and strategic objectives.

References:

The Institute of Internal Auditors (IIA) Standards

IIA Practice Guide: Formulating and Expressing Internal Audit Opinions

To confirm the existence of a specific vehicle selected from the fixed asset register, the best indirect evidence would be to compare the registered details of the vehicle with a date-stamped photograph. This method provides a verifiable form of evidence that the vehicle exists and matches the details recorded in the asset register. It ensures that the vehicle is still in possession of the organization and can be indirectly verified without the need for physical presence at an off-site location.

References:

IIA Practice Guide: "Auditing Fixed Assets"

COSO Internal Control – Integrated Framework

The most likely reason the Chief Audit Executive (CAE) decided to prepare an audit memorandum for management of the logistics department is to allow management to address the identified weakness timely. An audit memorandum serves as a formal communication that highlights the issue and provides management with the necessary details to understand and address the control weakness promptly. This approach facilitates immediate corrective action, thereby reducing the risk associated with the identified weakness.

References:

The Institute of Internal Auditors (IIA) Standard 2420 – Quality of Communications: "Communications must be accurate, objective, clear, concise, constructive, complete, and timely."

IIA Practice Guide on "Engagement Communication"

To identify opportunities to improve the efficiency of the organization's procurement process, the internal auditor needs to understand the current state of the process and gather detailed insights from those directly involved. Reviewing the procurement process map with employees who carry out key activities allows the auditor to understand the practical aspects of the process, identify any inefficiencies or bottlenecks, and obtain valuable suggestions for improvements from those who are most familiar with the daily operations. This approach ensures that the information gathered is relevant, practical, and actionable.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Business Process Improvement

Before developing the audit work program, it is essential to review the contract for evidence of authorization. This step ensures that the contract is valid and approved by the appropriate parties, forming a critical basis for the compliance audit. By confirming authorization, the auditor can ascertain that the contract is legitimate and enforceable, and understand its key terms and conditions, which is necessary for planning and executing the audit effectively. Other steps, such as selecting a sample or assessing risks, are important but should follow after understanding the contract’s validity and scope.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2201 – Planning Considerations.

Data analytics is the most efficient technique to identify patterns and anomalies that may indicate the splitting of planned purchases to avoid the approval process. By applying data analytics, the internal auditor can analyze the entire dataset to detect unusual patterns, such as multiple purchases just below the approval threshold made within a short timeframe. This method is more effective than random sampling or manual examination as it can quickly and accurately identify instances of potential malpractice across large volumes of transactions.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Data Analytics

Residual risk is the risk that remains after management has taken steps to mitigate or control the inherent risks. The chief audit executive (CAE) performs residual risk assessment to determine the effectiveness of management’s actions and whether the remaining risk is acceptable.

IIA Standard 2120 – Risk Management:

The standard emphasizes that the CAE should evaluate the residual risks faced by the organization. This involves assessing whether management’s risk responses are adequate and whether any unmitigated risks (residual risks) remain within the organization’s risk tolerance.

Cost-Benefit Analysis:

Conducting a cost-benefit analysis of management’s decision not to implement a recommendation directly relates to assessing residual risk. This analysis helps determine whether the residual risk is acceptable compared to the cost of implementing the recommendation.

IIA Practice Guide on Assessing Residual Risk:

This guide outlines that assessing residual risk involves evaluating the impact of management’s controls and the risks that remain. A cost-benefit analysis is a method to quantify the impact of not addressing a recommendation, thereby evaluating the residual risk.

Option B (Inquiry of corrective action to be completed): This is more about monitoring follow-up actions rather than assessing residual risk.

Option C (Reporting status of every observation): While important, this is related to tracking audit issues, not specifically assessing residual risk.

Option D (Soliciting management’s feedback): While valuable for engagement quality, this does not directly relate to residual risk assessment.

Detailed Explanation:Why Not Other Options?Conclusion: Option A is correct as it reflects the CAE’s role in assessing residual risk through cost-benefit analysis, in line with IIA standards.

Outsourcing the whistleblowing process is acceptable if proper controls are established to maintain confidentiality and effectiveness. IIA Standard 2600 requires auditors to monitor the implementation of recommendations and assess changes. Reviewing the third-party agreement ensures compliance with the original recommendation's intent. Insisting on an internal process (Option A) or escalating the issue (Option C) may not be necessary if outsourcing meets objectives. Taking no action (Option D) overlooks the auditor’s responsibility for follow-up.

The IIA Standards emphasize that the chief audit executive (CAE) should develop the internal audit plan based on a thorough assessment of risks facing the organization. This risk-based approach ensures that the most significant and relevant areas are prioritized. While input from senior management and regulatory requirements are also important, the primary driver should be the most recent and comprehensive risk assessment. References:

IIA Standards - 2010: Planning

IIA Practice Guide - Developing the Risk-based Internal Audit Plan

The focus of the effect section of the preliminary observations document should be on residual risk. Residual risk is the remaining risk after management has taken action to mitigate the inherent risk with controls and other risk responses. Documenting the effect in terms of residual risk helps in understanding the potential impact of the observed issues on the organization if not addressed.

References:

IIA Standards: 2310 - Identifying Information

IIA Practice Guide: Communicating the Results of an Audit

According to IIA guidance, the audit objective for an assurance engagement must consider the possibility of fraud and noncompliance. This consideration is essential for ensuring that the audit adequately addresses potential risks that could impact the organization. Assessing the possibility of fraud and noncompliance helps in identifying areas where controls might be deficient and where significant risks might be present, thus enabling the internal audit activity to provide meaningful and relevant recommendations.

References:

The Institute of Internal Auditors (IIA) Standard 2120 – Risk Management: "The internal audit activity must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk."

IIA Practice Guide on "Fraud Risk Assessment"

The chief audit executive (CAE) is responsible for the approval of the engagement objectives and scope. While the head of customer service and other stakeholders may provide input, it is ultimately the CAE's responsibility to ensure that the engagement aligns with the internal audit plan and meets the organization's overall objectives. The CAE's approval ensures the independence and objectivity of the internal audit function.

References:

The Institute of Internal Auditors (IIA) Standard 2010 - Planning

IIA Standard 2200 - Engagement Planning

Improper segregation of duties is a fundamental control weakness that significantly increases the risk of fraud. When one individual has control over multiple stages of a financial transaction or operational process, it creates opportunities for fraudulent activities to occur and remain undetected. While incentives and bonus programs (Option B), employee concerns (Option C), and lack of an ethics policy (Option D) are also important indicators of potential fraud risk, they do not present as direct and immediate a vulnerability as improper segregation of duties.References:

IIA Practice Guide on Fraud Prevention and Detection in an Automated World.

IIA Standard 2120: Risk Management.

Direct observation by the auditor provides the strongest and most reliable evidence of inventory existence, per IIA Standard 2310: Identifying Information. Observational evidence is primary and directly verifiable, whereas third-party confirmations (Option B) or photographs (Option D) may be manipulated. Interviews with personnel (Option C) provide insight but lack objectivity and reliability compared to physical observation. This aligns with the CIA syllabus emphasis on collecting sufficient and appropriate audit evidence (Part 2: Section II).

The recognition element of a typical internal audit report should describe a brief synopsis of the process or area under review. This section provides context and background information about the scope and focus of the audit, helping readers understand the subject matter of the audit and its significance within the organization. It sets the stage for the detailed findings and recommendations that follow in the report.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2410 – Criteria for Communicating.

A limitation of a heat map is that it can be challenging to differentiate between impact and likelihood as to which is more important. Heat maps visually represent risks based on their impact and likelihood, but they do not inherently provide a mechanism to weigh these factors against each other, which can make prioritizing risks difficult in some cases.

IIA References:

The IIA’s Practice Guide on Risk Assessment discusses the use of heat maps in visualizing risks but also highlights their limitations, particularly in how impact and likelihood are presented. While heat maps are useful for a high-level overview, they may not provide the nuanced understanding needed for decision-making when both factors are critical.

Matching invoices to receiving reports ensures the organization only pays for goods it has actually received, addressing completeness and accuracy in financial transactions. This procedure aligns with the COSO Internal Control Framework's principles regarding transaction processing and control activities. It mitigates risks of paying for unordered or unreceived goods, a common source of errors and potential fraud in the accounts payable process. The IIA's CIA Part 2 syllabus emphasizes testing of key controls in financial systems, including those preventing overpayments (Section II: Audit Engagements).

Bank confirmations are the most reliable source for verifying the current year-end bank balances. These confirmations are direct responses from the bank to the auditor, providing independent verification of the account balances as of the end of the year. This external confirmation is considered more reliable than internal documents like bank statements, reconciliations, or general ledger balances because it comes directly from a third-party source, ensuring its accuracy and completeness.References:

The Institute of Internal Auditors (IIA) - Practice Guide: External Confirmations

Auditing Standards (e.g., ISA 505 - External Confirmations)

According to IIA guidance, the internal audit plan should be based on an assessment of risks to the organization (1), designed to determine the effectiveness of the organization's risk management process (2), and aligned with the organization's goals (4). The development of the audit plan is typically the responsibility of the chief audit executive, often with input from senior management and the audit committee, rather than being solely developed by senior management (3). References: IIA Standard 2010 – Planning, IIA Practice Guide – Developing the Internal Audit Plan

When a manager reviews a staff auditor's workpapers, the primary goal is to ensure the accuracy and completeness of the audit documentation and to provide feedback for professional development. Discussing the workpaper review results with the staff auditor helps identify any areas for improvement and reinforces best practices, making it a valuable learning opportunity. This collaborative approach promotes continuous improvement and skill development within the audit team.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2340 - Engagement Supervision

Consulting engagements involve advisory and value-adding activities requested by management, as outlined in IIA Standard 1000. Helping design the risk management program aligns with this definition, as it supports management's efforts without direct assurance. Options A, C, and D are assurance engagements, as they involve evaluations of process effectiveness or control adequacy. The CIA Part 2 syllabus emphasizes the importance of distinguishing between assurance and consulting engagements (Section II: Types of Engagements).

The most appropriate course of action for the CAE is to evaluate the robustness and feasibility of the management's action plan to address the identified weaknesses. The CAE should monitor the implementation progress, key dates, and deliverables to ensure that corrective actions are on track and will effectively mitigate the risks within the stipulated timeline. References: = IIA Standard 2500 - Monitoring Progress.

Facilitated team workshops are a risk assessment approach that involves gathering data from work teams representing different levels of an organization. This method encourages collaboration and open discussion among team members, allowing for a comprehensive identification and evaluation of risks from various perspectives within the organization. It helps in capturing a wide range of insights and facilitates consensus on risk priorities, making it a valuable tool for effective risk assessment.

References:

The Institute of Internal Auditors (IIA) Practice Guide on "Risk Assessment in Audit Planning"

COSO Enterprise Risk Management Framework

In internal auditing, evidence must meet certain criteria to support conclusions and recommendations. According to IIA guidance, evidence should be sufficient, reliable, relevant, and useful. In this scenario, the internal auditor concludes that additional staff are needed to fully utilize a fraud surveillance system based on an employee’s statement. However, the conclusion may lack sufficient evidence to support it.

IIA Standard 2310 – Identifying Information:

This standard requires that internal auditors identify sufficient, reliable, relevant, and useful information to achieve the engagement’s objectives. "Sufficiency" refers to the quantity of evidence necessary to convince an informed person of the validity of the auditor’s findings and recommendations.

Sufficiency of Evidence:

The auditor's conclusion about the need for additional staff is based on a single employee’s remark, which is not sufficient evidence. The auditor would need to gather more evidence, such as analyzing workload data, reviewing system logs, or assessing staff capacity, to support the conclusion fully.

IIA Practice Advisory 2310-1:

This advisory emphasizes the need for auditors to obtain enough factual evidence to support their findings. Relying solely on anecdotal evidence from one employee does not meet the standard for sufficiency.

Option B (Reliability): Reliability refers to the accuracy and credibility of the evidence. The employee's statement might be credible but still insufficient in quantity.

Option C (Relevancy): The employee’s comment is relevant to the issue, but relevancy alone does not make the evidence sufficient.

Option D (Usefulness): The information could be useful, but it lacks the sufficiency needed to justify the auditor’s conclusion.

Detailed Explanation:Why Not Other Options?

In the "Define IT Universe" stage of the IT audit plan development process, the primary action is to identify significant applications that support the business operations. This step involves mapping out the IT environment, including key systems, applications, and infrastructure components that are critical to achieving business objectives. By identifying these significant applications, auditors can focus on areas that have the greatest impact on the organization's performance and risk profile. This stage sets the groundwork for subsequent steps such as risk assessment, ranking subjects, and selecting audit engagements.

References:

IIA Global Technology Audit Guide (GTAG): "Developing the IT Audit Plan"

ISACA’s COBIT Framework for IT Governance and Management

A. Vouching vendor invoices to payments made:This verifies payment accuracy but does not confirm whether purchases were authorized.

B. Sorting invoices by purchase orders and comparing for successive duplicate invoices:This approach focuses on detecting duplicate invoices, not authorization.

C. Comparing a random sample of vendor invoices to purchase orders:Correct. This method directly matches invoices to purchase orders, confirming that purchases were authorized and appropriately documented.

D. Sorting payments by invoice to detect successive duplicate invoices:Similar to option B, this approach focuses on detecting duplicates rather than verifying authorization.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Testing for Authorization and Validity.

When an internal auditor identifies a potential control deficiency based on a preliminary survey, such as the lack of established procedures for adding and approving new vendors, the next appropriate step is to gather more detailed information. Interviewing personnel involved in the accounts payable function allows the auditor to understand the context, confirm the accuracy of the questionnaire responses, and gain insights into the potential risks and impacts associated with the observed deficiency. This step is crucial before documenting the issue or planning further audit procedures to ensure the information is accurate and complete.References: The IIA's International Standards for the Professional Practice of Internal Auditing, Standard 2201 - Planning Considerations.

The purpose of a planning memorandum for an audit engagement, according to IIA guidance, is to document preliminary information that will be useful to the audit team. This includes background information on the area being audited, key risks identified, the scope of the audit, and any initial observations that might impact the audit's focus. The planning memorandum serves as a foundational document that guides the audit team's efforts and ensures that everyone involved in the engagement has a clear understanding of the audit's objectives and context.

IIA References:

IIA Standard 2200: Engagement Planning and IIA Standard 2201: Planning Considerations require the preparation of documents that summarize the preliminary planning steps, which are critical to ensuring that the audit is well-focused and aligned with the organization's risks and objectives. The planning memorandum is a key output of this process.

Valid closure of an audit observation requires evidence that the corrected process will function as expected in the future. This involves not just addressing the immediate condition but also ensuring that the root cause has been addressed and that the implemented corrective actions are sustainable and effective in preventing recurrence. This ensures that the underlying issue has been resolved comprehensively. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2500 - Monitoring Progress.

The IIA’s Practice Guide on Audit Follow-up.

The greatest assurance over management's assertions would be provided by evaluating the completeness of the report and management's responses to identified deficiencies. This involves ensuring that all relevant control processes and deficiencies have been identified, and that management has provided appropriate and comprehensive responses to each issue. This step ensures that the internal control assessment is thorough and that management is actively addressing any weaknesses. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 2130 - Control.

The IIA’s Practice Guide on Assessing the Adequacy of Internal Controls.

According to IIA Standards, acceptable practices for testing conformance through a quality assurance review include conducting a self-assessment with independent validation (2) and arranging for reciprocal peer review with another CAE (4). These methods provide a cost-effective and practical approach to ensuring compliance with professional standards, especially for small internal audit activities. Using an external service provider (1) and arranging for a review by qualified employees outside of the IAA (3) are also valid, but self-assessment with independent validation and peer review are specifically highlighted for smaller IAAs. References: IIA Standard 1312 – External Assessments, IIA Practice Guide – Quality Assurance and Improvement Program

According to IIA guidance, a newly promoted chief audit executive (CAE) should prioritize the review of audit reports based on the significance of the findings indicated by the opinion statements. A graded positive opinion (1) suggests that the audit found strong controls with no significant issues, while a third-party opinion (4) typically involves external assessments that may not require immediate internal action. Therefore, these opinions would receive the lowest review priority. In contrast, negative assurance opinions (2) and limited assurance opinions (3) indicate potential issues or limitations in the effectiveness of controls, necessitating higher priority review to address any significant concerns promptly. References: IIA Standard 2410 – Criteria for Communicating, IIA Practice Advisory 2410-1

The chief audit executive should give the most consideration to the organization's risk management policy when communicating an identified unacceptable risk to management. The risk management policy outlines the organization's approach to managing risk, including risk tolerance levels, risk appetite, and the procedures for identifying, assessing, and mitigating risks. By aligning the communication with the risk management policy, the CAE ensures that the discussion about unacceptable risk is framed within the context of the organization's established risk management framework, facilitating a more structured and effective response from management.References: The IIA's International Standards for the Professional Practice of Internal Auditing, Standard 2010 - Planning and COSO's Enterprise Risk Management Framework.

A. Decline the audit engagement, because the Standards prohibit internal auditors from performing engagements where they lack the necessary competencies:The Standards allow for outsourcing or co-sourcing to meet competency gaps. Declining outright is not necessary.

B. Accept the audit engagement and use the engagement as an opportunity to develop the audit team’s IT expertise while performing the audit work:This approach risks compromising audit quality as the team lacks expertise.

C. Temporarily hire an experienced and knowledgeable IT analyst from the organization's IT department to lead the audit:This could create independence issues, as the IT analyst is part of the auditee’s function.

D. Outsource the audit engagement to a reputable IT audit consulting firm:Correct. Outsourcing ensures that the engagement is performed by qualified professionals, maintaining quality and adherence to the Standards.

CIA Exam Syllabus Reference:

Domain IV: Managing the Internal Audit Function – Resourcing and Competency Management.

Probability-proportional-to-size (PPS) sampling is a technique used to reach conclusions regarding monetary amounts in a population. It is designed to handle variable sampling by focusing on monetary units, making it appropriate for testing account balances. On the other hand, attribute sampling is used to assess the rate of occurrence of a specific characteristic or attribute in a population, such as compliance with a control procedure, and does not focus on monetary amounts.

References:

The Institute of Internal Auditors (IIA) Practice Guide on "Audit Sampling"

Generally Accepted Auditing Standards (GAAS)

When a significant risk is identified during a consulting engagement, the most appropriate response is to report the risk to senior management. Even if the engagement is consulting in nature, it is still crucial for the internal audit activity to ensure that significant risks are communicated to those responsible for managing them.

IIA References:

IIA Standard 2120: Risk Management requires that internal auditors evaluate the effectiveness of risk management processes and communicate significant risks to senior management. This applies regardless of whether the engagement is assurance or consulting.

The Practice Guide on Consulting Services advises that internal auditors must ensure that significant risks identified during consulting engagements are brought to the attention of senior management so that they can take appropriate action.

Proper engagement supervision is documented through formal records that show a systematic review and oversight process. A completed engagement workpaper review checklist provides evidence that the supervisor has reviewed and approved the work done by the audit team. This formal checklist ensures all critical aspects of the engagement are reviewed systematically, meeting the standards for proper supervision documentation. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"International Standards for the Professional Practice of Internal Auditing" (IIA)

When developing a talent management strategy, a chief audit executive would find a gap analysis most helpful. A gap analysis identifies the differences between the current skills and competencies of the internal audit staff and the skills and competencies needed to achieve the audit function's objectives. This analysis helps in understanding the specific areas where training, recruitment, or other talent development efforts are necessary, thus enabling the development of a targeted and effective talent management strategy.

References:

IIA Practice Guide: "Talent Management for Internal Auditors"

IIA Standard 2030: "Resource Management"

The efficiency of an audit is greatly influenced by the adequacy of preliminary survey information. Thorough preliminary surveys help auditors understand the audit scope, identify potential issues early, and plan their work efficiently, thereby increasing overall audit efficiency. References: = IIA Practice Guide: “Engagement Planning: Establishing Objectives and Scope” and IIA Standard 2201 - Planning Considerations.

Control self-assessment (CSA) processes typically emphasize the inclusion and evaluation of both formal (hard) and informal (soft) controls. The exclusion of informal, soft controls is not an outcome of an effective CSA process. Instead, CSA encourages a comprehensive review of all control types to enhance risk management and control effectiveness. References: = IIA’s Practice Guide on Control Self-assessment.

When performing a consulting project to assist in making a decision on a new software system, the engagement objectives would be determined by understanding the engagement client's expectations. This ensures that the consulting engagement is aligned with what the client needs and expects, leading to more relevant and useful recommendations.

References:

IIA Standards: 2010 - Planning

IIA Practice Guide: Consulting Services

The data extracted by the internal auditor includes human resources data with employment conditions, payroll data, and entrance logs. With this information, the auditor can identify employees who are getting paid even though their employment has expired. By comparing the employment conditions and expiration dates in the HR data with the payroll data, the auditor can detect discrepancies where individuals continue to receive payments beyond their employment period. Entrance logs can help corroborate these findings by showing the lack of physical presence of these employees, further supporting the identification of ghost employees who no longer work for the organization but still appear on the payroll.

References:

IIA Practice Guide: "Auditing Employee Benefits"

COSO Internal Control – Integrated Framework

The chief audit executive (CAE) should meet with the chief IT officer to discuss the incident, the investigation, and any control improvements that will be implemented (1). Additionally, developing an appropriate audit program with the IT auditor to review the organization’s Internet-based sales process and key controls (3) is a proactive approach to ensure future incidents are prevented and to enhance the organization's security posture. References: = IIA Standard 2120 - Risk Management and IIA Standard 2201 - Planning Considerations.

The engagement scope outlines the specific boundaries, focus areas, and activities that the internal audit will examine. The analysis of wire transfers exceeding $10,000 within a specified timeframe is a clear, specific task that defines what will be reviewed during the engagement, making it a typical element of an engagement scope.

IIA References:

IIA Standard 2220: Engagement Scope states that the scope must be sufficient to satisfy the engagement's objectives and should outline specific areas and processes to be reviewed. Analyzing transactions over a certain threshold, like wire transfers exceeding $10,000, is a well-defined aspect of what the audit will cover.

A. To better understand and influence executives' planning:Influencing planning is not a primary purpose of networking.

B. To make executives aware of the benefits that the internal audit activity can provide:Correct. Networking ensures executives understand how internal audit can add value.

C. To assist executives in setting the organization’s risk appetite:Risk appetite is primarily a management responsibility.

D. To have a better understanding of the training needed for the audit team:Training needs can be assessed through other means.

CIA Exam Syllabus Reference:

Domain IV: Managing the Internal Audit Function – Stakeholder Engagement.

Generalized audit software (GAS) is specifically designed to assist auditors in performing various audit tasks, including extracting specific files and records from databases. GAS tools, such as ACL and IDEA, allow auditors to import data from various systems, query databases, perform data analysis, and generate reports. This makes them ideal for tasks that require the extraction and examination of specific records or data sets within a database. Other options, such as expert systems or system utility programs, do not offer the same targeted capabilities for data extraction relevant to auditing tasks.References:

Institute of Internal Auditors (IIA), Global Technology Audit Guide (GTAG) – Generalized Audit Software (GAS).

Judgmental sampling, also known as non-statistical sampling, is a technique where the internal auditor uses their professional judgment to select a sample that they believe is most representative of the population. In this scenario, the internal auditors are choosing to review a sample of complaints from the last three months based on their professional judgment that these complaints are reflective of current marketing practices. This method is particularly useful when the auditor has specific knowledge about the population that allows them to make informed selections.

References:

Institute of Internal Auditors (IIA) Standards: Performance Standards 2320: Analysis and Evaluation

Internal Audit Manual: Sampling Techniques and Methodologies

Entity-level controls set the tone and establish the framework for the overall control environment within an organization. If these controls are poorly designed or deficient, they can undermine the effectiveness of process-level controls, even if those controls are well-designed. Entity-level controls include governance, risk management, and compliance controls that influence the entire organization. Therefore, deficiencies at this level can have a widespread impact, preventing lower-level controls from functioning properly.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2130 – Control.

In the context of restructuring and consolidating divisions, providing consulting services that focus on operational efficiency is highly valuable. Internal auditors can leverage their understanding of the organization's processes and controls to advise division managers on streamlining operations. This includes identifying redundant processes, recommending best practices, and suggesting ways to optimize resource use. Such guidance helps the organization achieve a smoother transition and enhances overall efficiency, supporting the strategic objectives of the restructuring effort.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2120 - Risk Management and Standard 2130 - Control

Upon discovering a potential conflict of interest, the most appropriate action for the internal auditor is to inform the audit supervisor. This ensures that the issue is properly addressed and investigated according to the organization's policies and procedures. The audit supervisor can then decide on the appropriate course of action, including whether further investigation is warranted. References: = IIA Standard 2440 - Disseminating Results and IIA Standard 2600 - Resolution of Senior Management’s Acceptance of Risks.

According to the Institute of Internal Auditors (IIA) guidance, the chief audit executive (CAE) should develop a risk-based audit plan that takes into account the organization's risk management framework, including its risk appetite levels. This aligns with Standard 2010 – Planning, which states that the CAE must establish a risk-based plan to determine the priorities of the internal audit activity, consistent with the organization’s goals. Risk appetite levels from management are a critical component of understanding the organization’s risk profile and should be incorporated into the audit plan. Thus, the CAE may incorporate risk information, including risk appetite levels from management, at her discretion.References: IIA's International Standards for the Professional Practice of Internal Auditing, Standard 2010 – Planning.

A. The sample rate of occurrence plus the precision exceeds the acceptable error rate:Correct. If the sample rate of occurrence (estimated error rate in the sample) plus the margin of error exceeds the acceptable error rate, it indicates a potential issue. To refine the estimate and maintain the desired confidence level and precision, the sample size needs to be increased.

B. The sample rate of occurrence is less than the acceptable error rate:If the sample rate is below the acceptable error rate, there is no immediate need to adjust the sample size.

C. The acceptable rate of occurrence less the precision exceeds the sample rate of occurrence:This condition does not imply the need to increase sample size but rather suggests acceptable results.

D. The sample rate of occurrence plus the precision equals the acceptable error rate:This indicates the estimate is at the threshold, but it does not necessitate increasing the sample size unless more precision is required.

CIA Exam Syllabus Reference:

Domain II: Risk Management and Control – Sampling and Error Analysis.

When recalculating exchange losses from foreign currency purchases, the internal auditor needs to validate the spot exchange rate on the transaction date (2) and the terms of the forward contract (3). These details are crucial to accurately assess the financial impact and ensure that the hedge is effectively mitigating the exchange rate risk. References: = IIA’s Practice Guide: “Auditing Derivatives” and IIA Standard 1220 - Due Professional Care.

Sorting the customer information is the most effective method for identifying duplicate accounts in a database of 100,000 customers. By sorting the database based on key identifiers such as customer name, address, or email, an internal auditor can quickly identify and review records that appear consecutively and have similar details, which is indicative of potential duplicates. This method is efficient and practical for handling large datasets.

References:

Internal Audit Data Analytics Techniques

Database Management Best Practices

To ensure that the company is not taking any unwanted credit risks, the internal auditor should test controls that ensure construction orders are initiated only after the second invoice, which represents 70% of the payment, is paid. This control is critical because it minimizes the financial risk to the company by ensuring that a significant portion of the payment is received before the majority of the work is undertaken. This practice helps protect the company from potential non-payment issues and reduces the financial exposure associated with the project.

References:

COSO Framework

The Institute of Internal Auditors (IIA) Standard 2130: Control

Reperformance is a CAATs approach that involves independently executing the same procedures as the original process to verify the accuracy of the application’s calculations. This approach maximizes the use of CAATs because it directly tests the functionality and reliability of the system by ensuring that the system processes transactions and calculations correctly, as intended by management.

IIA References:

IIA Standard 1220: Due Professional Care suggests that internal auditors should apply appropriate techniques, such as CAATs, to obtain sufficient evidence. Reperformance as a CAATs method is particularly effective in verifying the integrity of system calculations.

The Practice Guide on Using CAATs highlights that reperformance is one of the most powerful techniques for validating that a system operates as intended and that transactions are processed correctly.

When a client decides not to implement recommended process improvements from a consulting engagement, the internal audit activity should confirm the decision with management and document it in the audit file. This approach ensures that the audit trail is complete and that there is a record of management’s acceptance of the associated risks. Escalating the issue to the board (Option A) or initiating an assurance engagement (Option D) might be necessary if the risks are significant, but these actions are not the immediate next steps. Continuous follow-up (Option C) is more relevant to assurance engagements rather than consulting engagements.References:

IIA Standard 2500: Monitoring Progress.

IIA Practice Guide on Consulting Engagements.

When senior management is challenging regulatory fines that could adversely affect the organization's ability to continue business, the chief audit executive (CAE) should assess the level of financial risks that may affect the organization’s stability. This approach allows the CAE to evaluate the potential impact of the fines on the organization’s financial health and ensure that appropriate risk management strategies are in place.

IIA References:

IIA Standard 2120: Risk Management requires internal auditors to evaluate the effectiveness and contribute to the improvement of risk management processes. In this scenario, assessing the financial risks helps ensure that the organization is adequately prepared to address the consequences of the fines.

The Practice Guide on Risk Management suggests that when facing significant risks, such as regulatory fines, the internal audit activity should assess the potential impact on the organization’s financial stability and provide insights for management to consider in their decision-making process.

Internal auditors generally determine the priority of the areas within the engagement scope by assessing the risk of those areas. This involves estimating the likelihood of a risk occurring and the potential impact of that risk on the organization. High-risk areas with a high likelihood of occurrence and significant impact are prioritized to ensure that critical risks are addressed promptly. This risk-based approach to prioritization helps ensure that the audit resources are focused on the most significant areas, enhancing the effectiveness and efficiency of the audit.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2010 - Planning

An internal auditor's decision to issue a preliminary audit report is best justified when the internal audit team expects management to address certain issues immediately due to their severe impact. Preliminary reports are issued to promptly communicate critical findings that require urgent attention, ensuring that management is aware of and can take corrective action on significant issues without waiting for the final report.

References:

IIA Standards: 2410 - Criteria for Communicating

IIA Practice Guide: Reporting Results

According to IIA guidance, mentoring relationships can significantly enhance professional development for internal auditors. Informal meetings between the mentor and the mentee allow for more open and flexible interactions, fostering a supportive environment for learning and development. While formal documentation can be useful, the primary value of mentoring often comes from the informal, ongoing dialogue and relationship that supports continuous learning and professional growth.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Talent Management

The primary purposes of a walk-through during the initial stages of an assurance engagement are to help develop process maps (A), determine segregation of duties (B), and identify residual risks (C). Testing the adequacy of controls (D) is generally performed after these initial steps to ensure a thorough understanding of the process and risks involved. References: = IIA Standard 2201 - Planning Considerations and IIA Practice Guide: “Walkthroughs for Internal Auditors”.

An internal control questionnaire (ICQ) is a tool used by auditors to gather detailed information about the internal control system of an audited area. The primary purpose of an ICQ is to identify and assess risks that could prevent the area from achieving its objectives. By systematically covering various control points, the questionnaire helps the auditor evaluate the adequacy and effectiveness of controls in place and identify areas where controls may be lacking or need improvement.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Internal Control Questionnaire

An internal control questionnaire (ICQ) is designed to gather detailed information about the operation of specific controls within an organization. It is particularly useful for understanding whether controls, such as adherence to approval matrices, are being followed consistently across different units. ICQs provide a structured way to collect this information from respondents, ensuring that all relevant aspects of the control environment are considered. This method is effective for assessing compliance with established procedures and identifying areas for improvement.References:

Institute of Internal Auditors (IIA), Practice Guide – Internal Control Questionnaire.

According to IIA guidance, if the internal audit team lacks the necessary skills and knowledge to perform an audit, the CAE should consider obtaining external expertise. Accepting the engagement and hiring an external expert allows the internal audit activity to leverage specialized knowledge while fulfilling the audit request. This approach ensures that the audit is conducted effectively and meets the required standards, while also addressing any competency gaps within the internal audit team.

References:

Institute of Internal Auditors (IIA) Standards: Attribute Standards 1210: Proficiency

IIA Practice Guide: Obtaining External Assistance in the Conduct of Internal Auditing

According to IIA guidance, the internal audit activity (IAA) can evaluate risk management processes without the need for safeguards. This activity aligns with the internal auditors' role in providing assurance on the effectiveness of the risk management process. Coaching management (Option A) and developing risk management strategies (Option B) involve direct participation in management functions, which could impair objectivity and require safeguards. Facilitating the identification and evaluation of risks (Option C) might also involve a degree of management participation that could compromise independence without proper safeguards. References: IIA Standard 2120 – Risk Management, IIA Practice Guide – Assessing the Adequacy of Risk Management Processes

If operational management has not implemented effective actions to address a significant control breach, the most appropriate next step for the chief audit executive is to discuss the matter with senior management. This step involves escalating the issue to a higher level of authority to ensure that the risks associated with the control breach are properly understood and addressed. If senior management fails to take appropriate action, the CAE may then escalate the issue to the board.References:

IIA Standard 2500: Monitoring Progress

IIA Practice Guide: Auditing Organizational Governance

The primary purpose of creating a preliminary draft audit report is to facilitate communication with management of the area under review. This draft allows for discussion and feedback on the findings, recommendations, and any potential misunderstandings or disagreements before the final report is issued. It helps ensure that the final report is accurate, fair, and reflects the input of both the auditors and management. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 2410 - Criteria for Communicating.

The IIA’s Practice Guide on Communicating Results.

When determining the level of staff and resources for an assurance engagement, the most relevant factor for the chief audit executive (CAE) is the availability of resources with the specific skill set required for that particular engagement. This is because assurance engagements often involve complex and specialized areas that necessitate specific expertise to effectively evaluate controls, risks, and processes.

IIA References:

IIA Standard 2230: Engagement Resource Allocation states that internal auditors must determine appropriate and sufficient resources to achieve engagement objectives based on an evaluation of the nature and complexity of each engagement, time constraints, and available resources. The emphasis is on ensuring that the team assigned to the engagement possesses the necessary skills and knowledge.

The Practice Advisory 2230-1 further suggests that the CAE should consider the complexity and risks associated with the engagement and ensure that the assigned team has the appropriate experience and technical skills.

Management action plans should include, at a minimum, an owner of the action plan. The owner is responsible for ensuring that the action plan is implemented and for overseeing the corrective measures. This accountability is crucial for effective follow-up and resolution of audit findings.

References:

IIA Standards: 2500 - Monitoring Progress

IIA Practice Guide: Follow-up Process in the Internal Audit Activity

According to the IIA Standards, the primary factors in determining the adequacy of an annual audit plan include sufficiency, appropriateness, and effective deployment of resources. These elements ensure that the internal audit activity can effectively cover key risk areas, provide relevant assurance, and utilize resources efficiently. While cost-effectiveness is important, it is considered less critical compared to ensuring the audit plan is comprehensive and appropriately targeted. References: = IIA Standard 2010 - Planning.

A quality assurance and improvement program (QAIP) established by the chief audit executive (CAE) should ensure that the internal audit activity (IAA) adheres to the International Standards for the Professional Practice of Internal Auditing (Standards) and the IIA Code of Ethics. It should also aim to add value and improve the organization's operations. This comprehensive approach ensures that the internal audit function is not only compliant but also effective in enhancing the overall governance, risk management, and control processes within the organization.References:

IIA Standard 1300: Quality Assurance and Improvement Program.

IIA Standard 1320: Reporting on the Quality Assurance and Improvement Program.

The Chief Audit Executive (CAE) would be justified in reporting the situation to the organization's board if, in the opinion of the CAE, the level of residual risk assumed by senior management is too high (1). Even though the new process of obtaining written approval by the vice president of sales addresses the issue, if the CAE believes that the residual risk remains too high, it is their duty to report it to the board. The cost of implementing a preventive control or the compliance with the new process does not change the responsibility of the CAE to report significant residual risks to the board.

References:

The Institute of Internal Auditors (IIA) Standard 2600 – Communicating the Acceptance of Risks: "When the chief audit executive believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the chief audit executive must discuss the matter with senior management. If the decision regarding residual risk is not resolved, the chief audit executive must report the matter to the board for resolution."

IIA Practice Guide on "Communicating Risk Acceptance to the Board"

According to IIA guidance, internal auditors should use relevant information obtained during a consulting engagement to inform and enhance their evaluation of internal controls during related audit engagements. This is because the knowledge gained from consulting activities can provide valuable insights into the functioning of controls and processes, which can be applied when assessing their effectiveness in a subsequent audit.

IIA References:

IIA Standard 1220: Due Professional Care indicates that internal auditors should consider all relevant information available to them when making judgments and recommendations. This includes information obtained from consulting engagements.

The IIA’s Practice Guide on Consulting Engagements advises that while internal auditors must maintain objectivity, they can and should use knowledge gained from consulting engagements to enhance the value and accuracy of their assurance work.

When an internal auditor conducts a walk-through to evaluate the control design of a process, the techniques most likely to be used are inquiry and observation. These techniques allow the auditor to understand how the process is designed and how controls are implemented and followed in practice.

IIA Standard 2320 – Analysis and Evaluation:

This standard requires internal auditors to analyze and evaluate the information gathered during the engagement to ensure that it is sufficient, relevant, and reliable. During a walk-through, inquiry and observation are key techniques for gathering this information.

Inquiry:

Inquiry involves asking questions of personnel involved in the process to understand the control design, its purpose, and how it is intended to work. This helps the auditor gain insight into the process and identify any potential gaps or weaknesses in control design.

Observation:

Observation allows the auditor to see the process in action. By watching how the process is carried out, the auditor can verify whether the controls are being applied as designed and whether they are effective in practice.

IIA Practice Advisory 2320-1:

The advisory supports the use of inquiry and observation as primary techniques for understanding and evaluating the design and operation of controls during a walk-through.

Option A (Observation and inspection): While useful, inspection is more about examining documents or physical evidence rather than understanding process design.

Option C (Inspection and reperformance): Reperformance involves independently executing a control, which is more relevant for testing control effectiveness rather than evaluating design.

Option D (Inquiry and reperformance): Reperformance is not typically used in a walk-through focused on control design evaluation.

Detailed Explanation:Why Not Other Options?Conclusion: Option B is correct because inquiry and observation are the most appropriate techniques for conducting a walk-through to evaluate the design of a control, as they provide direct insight into how the process and controls are intended to work, in line with IIA standards.

According to IIA guidance, the most important objectives for ensuring the appropriate completion of an engagement include coordinating audit team members to ensure efficient execution, confirming that engagement workpapers properly support the observations, recommendations, and conclusions, and ensuring that engagement objectives are reviewed for satisfactory achievement and are documented properly. These objectives focus on the quality and thoroughness of the audit work, which are critical for the engagement's success. References:

IIA Standards - 2300: Performing the Engagement

IIA Practice Guide - Audit Documentation

According to IIA guidance, a request for an increase in the Chief Audit Executive's (CAE) salary for the next fiscal year should be submitted only to the CEO. Compensation matters typically fall under the purview of executive management rather than the board, as the board focuses on broader governance issues, including risk assessment, audit plans, and resource allocation. References: IIA Standard 1100 – Independence and Objectivity, IIA Practice Advisory 1110-1 – Organizational Independence

According to IIA guidance, there is no specific frequency mandated for conducting organization-wide risk assessments. Instead, the internal audit activity should perform risk assessments as necessary to reflect significant changes in the organization's business environment, risk profile, and operations. This flexibility allows the internal audit activity to remain responsive and relevant in a dynamic risk landscape.

IIA References:

IIA Standard 2010: Planning requires the CAE to establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organization’s goals. The frequency and timing of risk assessments should be adapted to the organization’s changing conditions.

The IIA Practice Guide on Risk Assessment in Audit Planning emphasizes that risk assessments should be updated as needed, particularly when there are significant changes in the organization or external environment.

When auditing an organization's cash-handling activities, the most reliable form of testimonial evidence comes from a knowledgeable person who is independent of the cashiering duty. This independence ensures that the testimonial evidence is unbiased and not influenced by those directly involved in the processes being reviewed. Such evidence is considered more reliable as it is less likely to be affected by personal interests or biases.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Evaluating Evidence

IIA Standard 2310 - Identifying Information

During the planning phase of a new engagement, an engagement supervisor is responsible for ensuring that the engagement is designed effectively to meet its objectives. One of the critical tasks involves approving the engagement work program. The work program outlines the detailed steps and procedures that the audit team will follow during the engagement. By approving this program, the supervisor ensures that it is comprehensive, aligned with the engagement objectives, and capable of addressing identified risks and controls effectively. This step is essential to ensure that the engagement is conducted systematically and covers all necessary areas.

References:

The Institute of Internal Auditors (IIA) Standard 2200: Engagement Planning

IIA Practice Advisory 2200-1: Engagement Planning Considerations

Management testimony of improper segregation of duties in the cash receipt process can be considered relevant. Relevant evidence directly relates to the matter being examined, which in this case is the proper segregation of duties in the cash receipt process. Testimony from management can provide insights and context that are pertinent to understanding and assessing this specific control issue.

References:

IIA Standards: 2310 - Identifying Information

IIA Practice Guide: Evaluating Relevance and Reliability of Evidence

A. The decision affects the test procedures performed:Correct. The choice between statistical and nonstatistical sampling affects the design of the sample selection, execution of audit procedures, and the nature of conclusions drawn. Statistical sampling involves probabilistic techniques that influence sample size and evaluation, whereas nonstatistical sampling relies on auditor judgment.

B. The auditor's response to errors detected will be influenced:While error response is critical, it is influenced more by the nature and materiality of the errors than by the sampling approach.

C. The competence of the evidence obtained is greater with statistical sampling:This is incorrect because the competence of evidence depends on the procedure itself, not the sampling method used. Both methods can yield competent evidence if applied correctly.

D. Nonstatistical sampling may be more cost effective:While this can sometimes be true, it is context-dependent and not universally applicable, so it is not the best answer.

CIA Exam Syllabus Reference:

Domain II: Risk Management and Control – Sampling Techniques and Audit Evidence.

A draft internal audit report citing deficient conditions should be reviewed with relevant stakeholders to ensure accuracy, address concerns, and plan corrective actions. This includes the client manager and her superior (Option 1) to inform them of the findings and obtain their perspective. It should also be reviewed with anyone who may object to the report’s validity (Option 2) to address potential disagreements or misunderstandings early in the process. Finally, it should include anyone required to take action (Option 3) so they are aware of their responsibilities and can begin planning remediation efforts. While it may be beneficial to review with those who receive the final report (Option 4), it is not essential for the draft stage. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2440 - Disseminating Results.

Verifying that recipients are valid employees is crucial in preventing payroll fraud. This audit objective ensures that only legitimate employees receive payments, thereby mitigating the risk of ghost employees or payments to terminated employees. While verifying amounts, payment timeliness, and benefit deductions are important, ensuring the validity of recipients directly addresses the potential for fraudulent activities in the payroll process.References:

IIA Practice Guide on Auditing Employee Compensation and Benefits.

IIA Standard 1220: Due Professional Care.

To obtain a responsive action plan from management, the auditor is most likely to achieve this when both parties agree on the "Effect" attribute of the audit finding. The "Effect" refers to the impact or potential impact of the identified issue on the organization's operations, objectives, or risk profile. When management and the auditor agree on the significance and consequences of the finding, there is a shared understanding of the urgency and importance of addressing the issue. This alignment increases the likelihood that management will develop and commit to an effective action plan to remediate the finding.

References:

IIA Practice Guide: "Formulating and Expressing Internal Audit Opinions"

COSO Internal Control – Integrated Framework

According to IIA guidance, the chief audit executive (CAE) has several appropriate options when the audit objectives are not complete despite the auditor having worked the full amount of budgeted hours. The CAE should determine if the work already completed is sufficient to conclude the engagement (2). The CAE should also provide feedback on areas of improvement for future engagements (3) and give instructions and directions to complete the audit (4). Allowing the auditor to decide whether to extend the audit engagement (1) is not typically an appropriate option as this decision should involve senior management or the CAE to ensure alignment with organizational priorities and resource allocation. References: = IIA Standard 2010 - Planning, IIA Standard 2020 - Communication and Approval, IIA Standard 2040 - Policies and Procedures.

When reviewing the board of directors, internal auditors should consider testing the presence of an independent critical mass. This refers to the existence of a sufficient number of independent directors who can provide unbiased judgment and oversight. Independence is a cornerstone of effective governance, ensuring that decisions are made in the best interest of the organization without undue influence from management. This attribute is crucial for maintaining the integrity and objectivity of the board's decisions and actions.References: IIA's Practice Guide on Assessing Organizational Governance.

Stratified sampling is a technique that involves dividing a population into subgroups (strata) that share similar characteristics and then taking a sample from each subgroup. In the context of testing purchase transactions by different procurement officers, the transactions can be stratified based on the officers, ensuring that the audit team selects a sample that represents each officer's transactions. This method helps in achieving a more accurate and reliable assessment of the procurement process across all officers.References:

The Institute of Internal Auditors (IIA), Practice Guide on Sampling

"Auditing and Assurance Services: An Integrated Approach" by Alvin A. Arens, Randal J. Elder, Mark S. Beasley

A risk that is deemed "unacceptable" to the organization is one where the residual risk (the remaining risk after controls are applied) exceeds the organization's risk tolerance level. This means that despite controls in place, the level of risk remains higher than what the organization is willing to accept. Identifying such risks is critical for ensuring appropriate management action to mitigate them further. References:

The IIA’s Practice Guide on Risk Management.

COSO’s Enterprise Risk Management – Integrating with Strategy and Performance.

Trend analysis is the analytics procedure that an internal auditor would use to compare performance information from one quarter to another. This technique involves analyzing data over a specific period to identify patterns, trends, and changes in performance metrics. Trend analysis helps auditors understand the direction of key performance indicators and assess whether performance is improving, declining, or remaining stable.

References:

The Institute of Internal Auditors (IIA) Standards

Data Analytics Techniques in Internal Auditing

Issuing an opinion on the overall effectiveness of internal control inherently carries the risk of increased audit risk and associated legal implications. This is because the opinion represents a high level of assurance, and any errors or omissions in the underlying audit work can lead to significant consequences, including potential legal liability. Therefore, auditors must be thorough and ensure that their conclusions are well-supported by the evidence obtained during the audit process.

References:

The Institute of Internal Auditors (IIA) Practice Guide: Forming an Opinion on the Overall Adequacy and Effectiveness of Internal Controls

IIA Standard 2400 - Communicating Results

When an internal auditor finds that there are no written policies regarding the treatment of suspense accounts, the most appropriate first response is to inquire with management about any undocumented policies or procedures that may be in place. This approach helps the auditor understand the existing practices and assess their adequacy. Jumping to conclusions without this understanding could lead to inaccurate audit findings. Ensuring that the auditor comprehensively understands all relevant practices is crucial before evaluating their effectiveness or making recommendations.References:

IIA Standard 2210: Engagement Objectives

IIA Practice Guide: Auditing the Management of Internal Controls

The five-attribute approach to documenting deficiencies typically includes the following attributes: condition (the current state or issue identified), cause (the reason for the condition), effect (the impact or potential impact of the condition), and recommendation (suggested actions to address the deficiency). These attributes provide a comprehensive framework for understanding the deficiency, its implications, and the steps needed to rectify it, ensuring clear and actionable audit findings.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Documenting Information

According to the International Standards for the Professional Practice of Internal Auditing (Standards) set by the Institute of Internal Auditors (IIA), internal audit functions are allowed flexibility in including consulting engagements in their annual plans. Standard 2010 – Planning states that "the chief audit executive must establish a risk-based plan to determine the priorities of the internal audit activity, consistent with the organization’s goals." This risk-based plan should consider the potential value-add of consulting engagements. Consulting engagements that are expected to add significant value or align with strategic objectives are often included, but not all requests need to be automatically included unless they meet these criteria.References:

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2010 – Planning.

After considering fraud scenarios and identifying and prioritizing fraud risks, the next immediate action for the internal auditor is to determine which controls are in place to mitigate those risks. This step involves assessing the effectiveness of existing controls and identifying any gaps where controls may be insufficient or absent. Understanding the control environment is crucial for developing a comprehensive fraud risk assessment and ensuring that appropriate measures are in place to prevent and detect fraud.References:

Institute of Internal Auditors (IIA), Practice Guide – Internal Auditing and Fraud.

The primary reason for conducting a preliminary risk assessment during engagement planning is to ensure that significant risks are included in the engagement scope. This assessment helps the internal auditor focus on areas of highest risk, ensuring that the audit provides the most value by addressing the most critical issues that could impact the organization's objectives.

References:

IIA Standards: 2201 - Planning Considerations

IIA Practice Guide: Engagement Planning

Ensuring that risks to the timely completion of the engagement are assessed should be performed first during engagement supervision activities. This initial step is crucial as it sets the foundation for the entire audit process. By identifying and assessing risks early, the audit supervisor can develop appropriate plans and strategies to mitigate these risks, ensuring that the engagement stays on track and is completed within the allocated time frame. Addressing this aspect first helps in prioritizing tasks, allocating resources effectively, and managing any potential obstacles that might delay the audit process.

References:

The Institute of Internal Auditors (IIA) Standards

Internal Audit Engagement Planning and Risk Assessment Procedures

The primary reason for internal auditors to conduct interim communications with management of the area under review is to provide timely discussion of results. This allows management to be informed of preliminary findings and issues as they arise, enabling quicker corrective actions and avoiding surprises in the final report. Interim communications help ensure that audit results are relevant and actionable. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2410 - Criteria for Communicating.

The IIA’s Practice Guide on Communicating Results.

For a consulting engagement, planning typically occurs after the engagement objectives and scope have already been determined. In consulting engagements, the objectives and scope are usually agreed upon with the client at the outset, and planning activities then focus on how to achieve these objectives within the defined scope.

References:

IIA Standards: 2010 - Planning

IIA Practice Guide: Consulting Services

A. Vendor contracts:While vendor contracts may reveal terms, they do not directly identify potential conflicts of interest.

B. Employee master list:Correct. Comparing the employee master list with vendor information can help identify conflicts of interest, such as vendor ownership or employee relationships.

C. Payment records:Useful for verifying transactions but not for identifying conflicts of interest.

D. Purchasing policy:Provides guidelines but does not assist directly in identifying conflicts.

CIA Exam Syllabus Reference:

Domain II: Risk Management and Control – Identifying and Mitigating Conflicts of Interest.

Facilitated team workshops are the method of examining entity-level controls that involve gathering information from work groups that represent different levels in an organization. These workshops encourage interactive discussion and collaboration among participants from various departments and hierarchical levels, providing a comprehensive view of entity-level controls and promoting a better understanding of control processes and issues.

References:

IIA Standards: 2210 - Engagement Objectives

IIA Practice Guide: Assessing the Adequacy of Risk Management Processes

Nonsampling risk refers to the risk that the auditor reaches an incorrect conclusion due to errors not related to the sample itself but to other factors such as misinterpretation of data, incorrect application of procedures, or human error.

IIA Practice Advisory 2320-3:

This advisory explains that nonsampling risk occurs when an auditor misinterprets results or applies the wrong audit procedure. It differs from sampling risk, which is the risk that a sample is not representative of the population.

Misinterpretation of Sampling Results:

In this case, the senior IT auditor misinterprets the sampling results during the audit of inventory valuation. This is a classic example of nonsampling risk, where the error is due to the auditor’s misunderstanding or misapplication of the data, rather than an issue with the sampling process itself.

IIA Standard 2320 – Analysis and Evaluation:

This standard requires that auditors apply sufficient care and skill in analyzing and interpreting audit evidence. Nonsampling risk can occur if this standard is not met, resulting in incorrect conclusions.

Option A (Sampling risk): This refers to the risk that the sample does not accurately represent the population, which is not the issue here.

Option B (Control risk): This refers to the risk that a control will fail to prevent or detect errors or fraud, unrelated to this situation.

Option D (Residual risk): This refers to the risk that remains after controls are implemented, also unrelated to this scenario.

Detailed Explanation:Why Not Other Options?Conclusion: Option C is correct as it accurately describes the situation where the auditor misinterprets the sampling results, which is a form of nonsampling risk, according to IIA guidance.

Given the time constraint and the need for specialized knowledge in financial markets, inviting a guest auditor from one of the organization's affiliates who has the required expertise is the most appropriate solution. This approach leverages existing internal resources with the necessary skills, which can be more efficient and cost-effective than hiring new staff or outsourcing the engagement. Additionally, it facilitates knowledge sharing and can help build internal audit capacity for future engagements.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 1210 - Proficiency

When the internal audit activity lacks the necessary IT expertise to review the information security function, the chief audit executive (CAE) should contract an external service provider with the required experience. This ensures that the audit is conducted effectively and in accordance with the Standards, which require internal auditors to have or acquire the necessary skills to perform their work.

IIA References:

IIA Standard 1210: Proficiency requires internal auditors to possess the knowledge, skills, and other competencies needed to perform their responsibilities. When the necessary expertise is not available within the internal audit activity, the CAE must obtain competent advice and assistance by either contracting external experts or outsourcing the audit.

The Practice Guide on Engaging External Service Providers suggests that when specialized skills are required, engaging an external service provider is a practical solution to ensure the audit's quality and effectiveness.

The sections of the workpapers most likely to require changes after considering an important compensating control would include the effect of the control weakness, the conclusion on the control weakness, and the recommendation for the control weakness. The effect might be mitigated by the compensating control, leading to a different conclusion and potentially altering the recommendation.

IIA References:

IIA Standard 2310: Identifying Information requires that sufficient, reliable, relevant, and useful information must be obtained to support the engagement results. If a compensating control was not adequately considered, the conclusion and recommendations related to the control weakness might need to be revised to reflect a more accurate assessment.

The Practice Guide on Evaluating Internal Controls suggests that all relevant controls, including compensating controls, should be considered when forming conclusions and making recommendations.

When employees continue to violate segregation-of-duty controls despite previous recommendations, the most effective approach is to recommend appropriate awareness training. This training can help employees understand the importance of these controls and how to comply with them, addressing the root cause of the violations. References: = IIA Standard 2130 - Control and IIA Practice Guide: “Auditing Segregation of Duties”.

When identifying audit resource requirements, the chief audit executive (CAE) should consider approaching an external service provider to conduct internal audits in areas where the organization lacks the necessary skills (2). This ensures that audits are conducted by individuals with the appropriate expertise. Additionally, communicating to senior management a summary report on the status and adequacy of audit resources (4) keeps them informed about the internal audit activity's capacity and any resource constraints. Considering employees from other operational areas as audit resources (1) could compromise objectivity and independence, while suggesting deferral of audits (3) is generally not advisable as it might leave significant risks unaddressed. References: IIA Standard 2030 – Resource Management, IIA Practice Advisory 2030-1

Non-assurance engagements, such as consulting activities, involve providing advisory services that add value to management without the auditor expressing a formal opinion or providing assurance on the effectiveness of controls or processes.

IIA Definition of Non-Assurance (Consulting) Services:

Non-assurance services, as defined by the IIA, are advisory and related client service activities. These activities are intended to provide advice and insight into specific issues, such as potential risks in new initiatives, without the internal audit function expressing an assurance opinion.

Consulting Engagements:

In a consulting engagement, the internal audit activity provides information and recommendations to management, allowing them to make informed decisions. In this case, informing management about potential risks of moving the data warehouse to a cloud server is an advisory role, typical of a non-assurance engagement.

IIA Standard 2120 – Risk Management:

While this standard relates to risk management assurance, in a consulting role, the internal audit activity would inform management of risks, allowing them to manage these risks proactively.

Option A (Assessing effects of changes in maintenance strategy): This is more aligned with an assurance engagement where the auditor evaluates the impact of changes.

Option C (Ascertaining data center security compliance): This is an assurance activity focused on compliance.

Option D (Ensuring equipment downtime risks are managed): This implies an assurance role, as it involves verifying compliance with internal policy.

Detailed Explanation:Why Not Other Options?Conclusion: Option B is correct as it reflects a typical non-assurance engagement where the internal audit function provides advisory services on risk without providing formal assurance.

Preliminary communication with HR management is essential to ensure a smooth audit process. According to IIA guidance, the auditor in charge (AIC) should notify HR management before the planning stage begins to facilitate cooperation and alignment. Additionally, scheduling formal status meetings at the start of the engagement helps in setting expectations, clarifying the scope, and ensuring ongoing communication throughout the audit process. These steps foster transparency and collaboration. References:

IIA Standards - 2200: Engagement Planning

IIA Practice Advisory - 2200-1: Engagement Planning

When an internal auditor finds that the incidents of noncompliance exceed the organization's acceptable tolerance level, this should be included in the final engagement report. In this case, the 8 out of 90 desks found with sensitive information represent an 8.9% noncompliance rate, which exceeds the organization's tolerance limit of 4%. Reporting this observation in the final engagement report ensures that management is informed and can take necessary corrective actions to address the noncompliance.

References:

IIA Standards: 2410 - Criteria for Communicating

IIA Practice Guide: Reporting and Monitoring

According to IIA guidance, to maximize the value of the current internal audit activity (IAA) resources, it is appropriate to hire external resources to provide subject-matter expertise while ensuring they are supervised (3). Additionally, assigning auditors to complex audits for learning opportunities helps in skill development and enhances the overall capability of the IAA (4). These strategies ensure that the IAA can address complex and high-risk areas effectively while also fostering professional growth among internal auditors. References: IIA Practice Guide – Staffing the Internal Audit Activity, IIA Standard 2030 – Resource Management

The observation in question includes the condition ("no approved credit risk management policy" and "17 out of 50 contacts showed clients with a poor credit history") and the cause (the subsidiary concluding contacts with high-risk clients). However, it lacks the effect, which should explain the potential or actual impact of this deficiency on the organization (e.g., financial losses, increased credit risk). Additionally, it is missing the criteria, which should reference the specific rules or policies that are not being followed (e.g., the organization’s credit risk management policy requirements). Including these components would provide a complete and actionable observation.References:

The Institute of Internal Auditors (IIA) - Practice Guide: Audit Reports and Working Papers

Physically inspecting a sample of completed processing cycles for defective products provides direct evidence of the effectiveness of the quality control process. This method allows the internal auditor to observe firsthand whether defective products are being identified and removed prior to shipment, ensuring that the process operates as intended. This approach is more reliable than survey results or management reports, which may be subject to bias or inaccuracies.References:

The Institute of Internal Auditors (IIA) - Standards for the Professional Practice of Internal Auditing, Standard 2320 - Analysis and Evaluation

If management accepts the issue identified by the internal audit team but takes no remedial action, the next step for the chief audit executive (CAE) is to escalate the issue to senior management. This ensures that senior management is aware of the unresolved significant issue and can take appropriate action to address it. Escalation is a critical step in ensuring that risks are managed effectively and that necessary corrective actions are implemented.

References:

The Institute of Internal Auditors (IIA) Standard 2600

The statement that "Senior management is charged with overseeing the establishment risk management and control processes" is false. Senior management is typically responsible for establishing risk management and control processes, not just overseeing them. The board or its committees usually have the oversight role.

When planning the first audit of IT shared services, it is typical to evaluate entity-level controls first. Entity-level controls are overarching controls that affect the entire organization and are foundational for ensuring that specific application and transaction controls operate effectively. These controls include the organization's governance, risk management processes, and the overall control environment. Assessing entity-level controls provides a broad understanding of the control environment and highlights any pervasive issues that might impact more detailed areas of the audit.References: The IIA's Global Technology Audit Guide (GTAG) and COSO's Internal Control - Integrated Framework.

When developing the scope of an audit engagement, the internal auditor typically considers factors that directly impact the audit’s objectives, risks, and execution. This includes the potential impact of key risks (Option B), the expected outcomes and deliverables (Option C), and the operational and geographic boundaries (Option D). While the need and availability of automated support (Option A) may be a practical consideration for how the audit is conducted, it is not fundamental to defining the scope of the audit engagement itself. The scope is primarily concerned with what is to be audited and why, rather than how the audit will be performed.References:

IIA Standard 2200: Engagement Planning.

IIA Practice Guide on Audit Engagement Planning.

According to the IIA’s Fraud and Internal Audit position paper1, internal auditors should not investigate fraud unless they have the specific experience and expertise required to do so. Therefore, the most appropriate option for the chief audit executive is to appoint an independent fraud investigation specialist to work with the selected internal auditors. This will ensure that the investigation is conducted in a professional and ethical manner, and that the evidence is not compromised or tainted. The other options are not suitable because they do not address the immediate need for fraud investigation expertise, and they may expose the organization to legal or reputational risks.

Entity-level controls provide the foundation for effective process controls. If these controls are poorly designed, they can undermine the effectiveness of process-level controls (COSO Framework, 2013). Internal auditors assess entity-level controls during risk assessments, as emphasized in CIA Part 2 (Section II). Option A is incorrect as auditors prioritize high-risk controls rather than all controls. Options C and D contradict best practices in engagement planning (Standard 2200), which encourage transparency and comprehensive evaluation of key risks.

The primary advantage of using internal control questionnaires (ICQs) as part of a preliminary survey for an engagement is their efficiency. ICQs allow auditors to quickly gather a large amount of information about the control environment by asking structured questions that cover key areas of interest. This helps in identifying areas that require further investigation or where controls may need improvement.

IIA References:

The IIA’s Practice Guide on Evaluating Internal Controls mentions that ICQs are useful for obtaining an initial understanding of controls and are particularly efficient when time or resources are limited. They allow auditors to systematically cover a wide range of control-related topics in a relatively short period.