Seminar in Accounting, Midterm Exam MCQs

D) All of the above.

1) The definition of internal auditing, given by the IIA, includes a focus on:
A) Governance.
B) Risk Management.
C) Internal controls.
D) All of the above.

A) A former purchasing assistant performs a review of internal controls over purchasing seven months after being transferred to the internal audit department.

2) In which of the following situations does the internal auditor potentially lack objectivity?
A) A former purchasing assistant performs a review of internal controls over purchasing seven months after being transferred to the internal audit department.
B) An auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major customer before it is implemented.
C) An auditor recommends standards of control and performance measures for a contract with a service organization for the processing of payroll and employee benefits.
D) A payroll accounting employee helps an auditor verify the physical inventory of small motors.
E) An auditor discusses a significant issue with the vice president to whom the auditee reports prior to drafting the audit report.

C) You exclude locations in Asia and Europe because of restrictions on travel budgets.

3) You work for a company with operations in 15 locations around the globe and are assigned to conduct an audit of service contracts (contracts for janitorial services, watercooler services, copy and office equipment maintenance, debt collection, etc.). Which of the following is an example of a potential scope limitation for this engagement?

A) For each type of service, you select the provider who received the largest total payments in the last 12 months and review the contract and test the payments.
B) You select three of the locations to visit and test all services contracts at these three locations.

C) You exclude locations in Asia and Europe because of restrictions on travel budgets.
D) You review all contracts and, based on this review, decide to further test only those involving payments of more than $10,000 per year.
E) You randomly select 10 contracts to test to see if management periodically reviews contractor performance against the measure specified in the contract.

D) Organizational status and objectivity.

1) According to IIA guidance, independence of the internal audit function is achieved through which of the following?
A) Staffing and supervision.
B) Continuing professional development and due professional care.
C) Human relations and communications.
D) Organizational status and objectivity.

D) Exhibits professionalism.

2) The Core Principles for the Professional Practice of Internal Auditing includes all of the following except:
A) Demonstrates integrity.
B) Is objective and free from undue influence (independent).
C) Demonstrates quality and continuous improvement.
D) Exhibits professionalism.

C) Professionalism.

3) Proficiency is a term that includes all of the following except:
A) Knowledge.
B) Skills.
C) Professionalism.
D) Other competencies, including the CIA certification.

D) All of the above.

4) IIA Standard 1320 - Reporting on the Quality Assurance and Improvement Program includes:
A) The scope and frequency of both the internal and external assessments.

B) Conclusions of assessors.
C) Corrective action plans.
D) All of the above.

A) Independence.

5) The IIA’s Code of Ethics does not include as one of its principles:
A) Independence.
B) Objectivity.
C) Competence.
D) Confidentiality.

B) Take action consistent with principles embodied in The IIA’s Code of Ethics.

6) An internal auditor who encounters an ethical dilemma not explicitly addressed by The IIA’s Code of Ethics should always:
A) Seek counsel from an independent attorney to determine the personal consequences of potential actions.
B) Take action consistent with principles embodied in The IIA’s Code of Ethics.

C) Seek the counsel of the audit committee before deciding on an action.
D) Act consistently with the employing organization’s code of ethics even if such action would not be consistent with The IIA’s Code of Ethics.

A) To establish the purpose, authority, and responsibility of the internal audit department.

7) Which of the following best describe the most important objective of an internal audit charter?

A) To establish the purpose, authority, and responsibility of the internal audit department.
B) To help establish criteria by which the work of each audit team may be evaluated.
C) To provide new members of the audit staff with a clear indication of their job duties.
D) To better inform operating management as to what auditors will be doing during an audit.
E) To establish the audit committee’s role in overseeing the internal audit department.

B) Knowing that management was aware of the situation, an internal auditor purposely left a description of an unlawful practice out of the final report.

8) Which of the following situations is a violation of the IIA’s Code of Ethics?
A) An internal auditor shared an analytic audit technique with internal auditors from another organization.
B) Knowing that management was aware of the situation, an internal auditor purposely left a description of an unlawful practice out of the final report.
C) Based upon knowledge of the probable success of the employer’s business, an internal auditor invested into a mutual fund that specializes in the same industry.
D) An auditor discusses a significant issue with the vice president to whom the auditee reports prior to drafting the audit report.

E) An internal auditor, with the knowledge and consent of management, accepted an award from a customer of the organization for suggestions the auditor had made to improve the supply chain process. The award includes a plaque and a gift certificate to a restaurant valued at $100.

D) Assure the employee that you can maintain her anonymity and listen to the information.

9) During an audit, an employee with whom you have developed a good working relationship informs you that she has some information about top management that would be damaging to the organization and may concern illegal activities. The employee does not want her name associated with the release of the information. Which of the following actions would be considered inconsistent with The IIA’s Code of Ethics and Standards?
A) Suggest that she should consider talking to legal counsel.
B) Inform the employee of other methods of communicating this type of information.
C) Inform the individual that you will attempt to keep the source of the information confidential and will look into the matter further.
D) Assure the employee that you can maintain her anonymity and listen to the information.
E) Suggest that she talk with the organization’s compliance officer.

C) Provides risk-based assurance.

10) Which of the following is a Core Principle for the Professional Practice of Internal Auditing? The internal audit function:
A) Maintains confidentiality.
B) Promotes an ethical culture in the internal audit profession.
C) Provides risk-based assurance.
D) Adopts audit methodology consistent with its external auditors.

E) Exhibits professional skepticism.

D) Notify the CAE of the potential conflict of interest.

11) An internal auditor assigned to audit a vendor’s compliance with product quality standards is the brother of the vendor’s controller. The auditor should:
A) Accept the assignment but disclose the relationship in the engagement final communication.
B) Accept the assignment but avoid contact with the controller during fieldwork.
C) Notify the vendor of the potential conflict of interest.
D) Notify the CAE of the potential conflict of interest.

E) Not worry about it and accept the assignment because this is not a significant conflict of interest and not in the controller’s area.

E) Determining the appropriate bonus formula for inclusion in the plan.

12) The COO has requested the internal audit function advise her regarding the new incentive plan being developed for sales representatives. Which of the following tasks should the CAE decline with respect to providing advice to the COO?
A) Determining how to best document the support for amounts paid to provide a sufficient audit trail.
B) Researching and benchmarking incentive plans provided by other companies in the industry.
C) Identifying what new risks the incentive plan introduces to the organization.
D) Recommending monitoring procedures so that appropriate amounts are paid out under the plan.

E) Determining the appropriate bonus formula for inclusion in the plan.

A) Because of a highly developed system of internal control over the cash function, the final engagement communication assures senior management that no irregularities existed.

13) An internal auditor for a university performed an assurance engagement to review the university bookstore’s cash function. Which of the following actions will be deemed lacking in due professional care?
A) Because of a highly developed system of internal control over the cash function, the final engagement communication assures senior management that no irregularities existed.
B) The final engagement communication included a well-supported recommendation for the reduction in staff, although it was known that such a reduction would adversely affect morale.
C) A flowchart of the entire cash function was developed, but only a sample of transactions were tested.
D) Organizational records were reviewed to determine whether all employees who handled cash receipts and disbursements were bonded.

D) All the above.

14) The IIA’s Standards require which of the following?
A) When the CAE concludes that management has accepted a level of risk that may not be acceptable to the organization, the CAE must discuss the matter with senior management.
B) Internal auditors must develop and document work programs that achieve the engagement objectives.
C) The internal audit function’s plan of engagements must be based on a documented risk assessment undertaken at least annually.
D) All the above.

D) All the above.

15) If an internal audit function does not have the competencies necessary to conduct a specific assurance engagement, the CAE could do which of the following to comply with The IIA’s Standards?
A) Co-source the engagement with a CPA or service provider that has the necessary competencies.
B) Send staff to training to acquire the needed competencies.
C) Hire an experienced person with the needed competencies.
D) All the above.

C) Attribute Standards.

16) The critical characteristics that individuals, teams, and organizations must have to provide effective internal audit services are described in:

A) Definition of Internal Auditing.
B) Code of Ethics.
C) Attribute Standards.
D) Implementation Standards.
E) Performance Standards.

B) During an audit, an internal auditor learned that the company was about to introduce a new product that would revolutionize the industry. Because of the probable success of the new product, the product manager suggested that the auditor buy additional stock in the company, which the auditor did.

17) Which of the following would be a violation of IIA’s Code of Ethics?
A) An internal auditor inherited 10,000 shares of company stock when her grandfather died. She has held the stock for more than two years.
B) During an audit, an internal auditor learned that the company was about to introduce a new product that would revolutionize the industry. Because of the probable success of the new product, the product manager suggested that the auditor buy additional stock in the company, which the auditor did.
C) An internal auditor works weekends doing tax returns for a friend who owns a small CPA firm.
D) An internal auditor was subpoenaed in a court case in which a merger partner claimed to have been defrauded by the auditor’s company. The auditor divulged confidential audit information to the court during testimony.

E) Demonstrates quality and continuous improvement.

18) Which of the following is a Core Principle for the professional practice of internal auditing? The internal audit function:
A) Maintains confidentiality.
B) Promotes an ethical culture in the internal audit profession.
C) Exhibits professional skepticism.
D) Adopts audit methodology consistent with its external auditors.
E) Demonstrates quality and continuous improvement.

C) Examine evidence supporting additions during the year.

1) When auditing property, plant, and equipment (PP&E), the internal auditor’s approach is generally to:
A) Tour the plant facilities.
B) Review the depreciation and amortization schedule.
C) Examine evidence supporting additions during the year.
D) Examine evidence of disposals and retirements during the year.

D) Select certain items of equipment from the accounting records and locate them in the plant.

2) A weakness in internal control over recording retirements of equipment may cause an internal auditor to:
A) Increase the sample size of retirements and disposals during the year.
B) Analyze the depreciation schedule for related journal entries.
C) Identify corresponding weaknesses in acquisition and recording of equipment.
D) Select certain items of equipment from the accounting records and locate them in the plant.

D) Rely on observation and inquiry to test cash disbursement control procedures.

3) If cash disbursement control procedures leave no audit trail of documentary evidence, the internal auditor most likely will test the procedures by:

A) Re-counting the cash balances at the end of the day.
B) Interview the cashier to learn how to strengthen such control procedures.
C) Require that appropriate cash disbursement control procedures be instituted.
D) Rely on observation and inquiry to test cash disbursement control procedures.

B) Cutoff.

4) Tracing a sample of purchase requisitions to receiving reports and to the PP&E records is used to test:
A) Classification.
B) Cutoff.
C) Occurrence.
D) Completeness.

D) Receiving reports.

5) In testing for a proper cutoff of purchases and materials, the internal auditor would most likely examine:
A) Vendors’ invoices.
B) Purchase requisitions.
C) Purchase orders.
D) Receiving reports.

B) Reliability.

6) What characteristic of information is satisfied by an original signed document?

A) Sufficiency.
B) Reliability.
C) Relevance.
D) Usefulness.

D) Purpose, procedures, facts, and conclusions/recommendations.

7) Which of the following most completely describes the appropriate content of a workpaper?
A) Audit objectives, procedures, and conclusions.
B) Purpose, criteria, condition, effects, and recommendations.
C) Audit subject, purpose, sampling information, and analysis.
D) Purpose, procedures, facts, and conclusions/recommendations.
E) Date, client, title, preparer’s and reviewer’s initials.

B) Internal audit function.

8) The internal auditor prepares workpapers primarily for the benefit of:
A) External auditor.
B) Internal audit function.
C) Engagement client.
D) Senior management.

B) Represented by inventory tags are included in the listing.

9) After accounting for a sequence of inventory tags, an internal auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:
A) Included in the listing have been counted.
B) Represented by inventory tags are included in the listing.
C) Included in the listing are represented by inventory tags.
D) Represented by inventory tags are bona fide.

B) “I am always absolutely certain about the conclusions I reach based on the evidence I examined.”

10) Which of the following statements regarding audit evidence would be the least appropriate for an internal auditor to make?
A) “I select procedures that will provide both sufficient and appropriate evidence regarding the audit objectives.'“
B) “I am always absolutely certain about the conclusions I reach based on the evidence I examined.”
C) “When I consider documentary evidence, I take into account the effectiveness of the internal controls in the system that produced the documents.”
D) “I consider the level of risk involved when deciding the type of evidence I will gather.”

E) “I corroborate information obtained from management whenever possible.”

D) Evaluating the adequacy and effectiveness of controls.

1) In planning an assurance engagement, a survey could assist with all of the following except:
A) Obtaining engagement client comments and suggestions on control problems.
B) Obtaining preliminary information on controls.
C) Identifying areas for engagement emphasis.
D) Evaluating the adequacy and effectiveness of controls.

A) A systematic process for assessing and integrating professional judgment about probable adverse conditions.

2) A CAE most likely uses risk assessment for audit planning because it provides:

A) A systematic process for assessing and integrating professional judgment about probable adverse conditions.
B) A listing of potentially adverse effects on the organization.
C) A list of auditable activities in the organization.
D) The probability that an event or action may adversely affect the organization.

D) Planning for the internal audit function.

3) An approved audit plan for the internal audit function is an essential part of:
A) Scheduling support for the external audit.
B) Establishing standards for employee performance.
C) Providing senior management with information about the quality of the internal audit function’s performance.
D) Planning for the internal audit function.

A) A flowcharting approach.

4) Which method of evaluating internal controls during the preliminary survey provides the internal auditor with the best visual grasp of a system and a means for analyzing complex operations?

A) A flowcharting approach.
B) A questionnaire approach.
C) A matrix approach.
D) A detailed narrative approach.