CIA P1 (Internal Audit Basics)

CIAA

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Practice Exam
Part I

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Question 1
The internal audit activity (IAA) of an organization has been in existence for 10 years, but the board has not yet
approved its charter. However, the board is chaired by the chief executive officer (CEO) and includes the controller
and one outside board member. The chief audit executive (CAE) reports directly to the controller who approves the
IAA's work schedule. Thus, the IAA has never felt the need to push for a formal approval of the charter. The
organization is publicly held and has nine major divisions. The previous CAE was recently dismissed following a
dispute between the CAE and a major engagement client. A new CAE with significant experience in both public
accounting and internal auditing has just been hired. Within the first month, the new CAE encountered substantial
resistance from an engagement client regarding the nature of the work and the IAA's access to records. Moreover,
the CEO accused the CAE of not operating "in the best interests of the organization."
From the perspective of the internal audit activity, which of the following facts, by themselves, could contribute to a
lack of independence?
I. The CEO accused the new director of not operating "in the best interests of the organization."
II. The majority of audit committee members come from within the organization.

III. The IAA's charter has not been approved by the board.

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A. I only.

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B. II only.
C. I, II, and III.

Question 2

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D. II and III only.

An internal auditor fails to discover an employee fraud during an assurance engagement. The nondiscovery is most
likely to suggest a violation of the Standards if it was the result of a
A. Presumption that the internal controls in the area were adequate and effective.
B. Failure to perform a detailed review of all transactions in the area.
C. Determination that the cost of extending procedures in the area would exceed the potential benefits.
D. Determination that any possible fraud in the area would not involve a material amount.

Question 3
The primary objective of internal auditing is to:
A. Find errors and fraud within the company.
B. Perform the preliminary work of external financial statement audit.
C. Provide an opinion about the accuracy and completeness of the quarterly financial statements.
D. Help the employees of the company to effectively perform their jobs.

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Question 4
Which of the following activities is not presumed to impair the objectivity of an internal auditor?
I. Recommending standards of control for a new information system application
II. Drafting procedures for running a new computer application to ensure that proper controls are installedIII.

Performing reviews of procedures for a new computer application before it is installed

A. I only.
B. I and III.
C. III only.
D. II only.

Question 5

The internal auditing profession is believed to have advanced primarily as a consequence of

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A. The limitation of the external audit's scope.

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B. Increased interest by graduating students and experienced auditors.

C. Job qualification specifications that include added emphasis on background knowledge and skills.

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D. Increased complexity and sophistication of business operations.

Use of outside service providers with expertise in health care benefits is appropriate when the internal audit activity
is
A. Evaluating the organization's estimate of its liability for postretirement benefits, which include health care

benefits.
B. Comparing the cost of the organization's health care program with other programs offered in the industry.
C. Training its staff to conduct an audit of health care costs in a major division of the organization.
D. All of the answers are correct.

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Question 7
An internal audit activity is currently undergoing its first external quality assurance review since its formation three
years ago. From interviews, the review team is informed of certain internal auditor activities over the past year.
Which of the following activities could affect the quality assurance review team's evaluation of the objectivity of the
internal auditors?
One internal auditor told the review team that, during an engagement to review the payroll function, he was
approached by the payroll manager. The manager indicated he was looking for an accountant to prepare his financial
statements for his part-time business. The internal auditor agreed to perform this work for a reduced fee during nonwork hours.
B.
An internal auditor's participation was requested on a task force to reduce the organization's inventory
losses from theft and shrinkage. This is the first consulting assignment undertaken by the internal audit activity. The
internal auditor's role is to advise the task force on appropriate control techniques.
C.
After reviewing the installation of a data processing system, the internal auditor made recommendations on
standards of control. Three months after completion of the engagement, the engagement client requested the
internal auditor's review of certain procedures for adequacy. The internal auditor agreed and performed this review.
D.
During an engagement to review the construction of a building addition to the organization's headquarters,
the vice president of facilities management gave the internal auditor a commemorative mug with the organization's
logo. These mugs were distributed to all employees present at the ground-breaking ceremony.

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A.

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Question 8

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The function of internal auditing, as related to communicating results, is to

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A. Determine whether any employees are expending funds without authorization.

B. Identify inadequate controls that increase the likelihood of unauthorized expenditures.
C. Ensure compliance with reporting procedures.
D. Review the expenditure items and match each item with the expenses incurred.

Question 9
Internal auditors should be prudent in their relationships with persons and organizations external to their employers.
Which of the following activities will most likely not adversely affect internal auditors ethical behavior?
A. Accepting compensation from professional organizations for consulting work.
B. Serving as consultants to competitor organizations.
C. Discussing engagement plans or results with external parties.
D. Serving as consultants to suppliers.

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Question 10
A major reason for establishing an internal audit activity (IAA) is to
A. Ensure the reliability and integrity of financial and operational information.
B. Safeguard resources entrusted to the organization.
C. Relieve overburdened management of the responsibility for establishing effective controls.
D. Evaluate and improve the effectiveness of control processes.

Question 11
Which of the following is the best means of determining if an internal audit activity's goals are
being met?
A. Having the audit committee periodically review the quality of the departments work.

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B. Developing measurement criteria to accompany departmental goals.

C. Having the external auditors review and evaluate the work of the department.

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D. Scheduling an outside peer review of the department every three years.

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Question 12

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The audit committee strengthens the control processes of an organization by

A. Assigning the internal audit activity responsibility for interaction with governmental agencies.
B. Using the chief audit executive as a major resource in selecting the external auditors.
C. Following up on recommendations made by the chief audit executive.
D. Approving internal audit activity policies.

Question 13
An activity appropriately performed by the internal audit activity is
A. Installing systems of control.
B. Reviewing systems of control before implementation.
C. Drafting procedures for systems of control.
D. Designing systems of control.

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Question 14
In complying with The IIA Code of Ethics, an internal auditor should
A. Primarily apply the competency principle in establishing trust.
B. Go beyond the limitation of personal technical skills to advance the interest of the organization.
C. Use individual judgment in the application of the principles set forth in the Code.
D. Respect and contribute to the objectives of the organization even if it is engaged in illegal activities.

Question 15

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The chief audit executive (CAE) of internal auditing of a mid-sized internal auditing organization was concerned that
management might outsource the internal auditing function. Therefore, the CAE adopted a very aggressive program
to promote the internal auditing department within the organization. The CAE planned to present the results to
management and the audit committee and recommend modification of the Internal Audit Charter after using the
new program. The following lists six actions the CAE took to promote a positive image within the organization:
1.
Audit assignments concentrated on economy and efficiency audits. The audits focused solely on cost savings
and each audit report highlighted potential costs to be saved. Negative findings were omitted. The focus on economy
and efficiency audits was new, but the auditees seemed very happy.
Drafts of all audit reports were carefully reviewed with the auditee to get their input. Their comments were
carefully considered when developing the final audit report.

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2.

The EDP auditor participated as part of a development team to review the control procedures to be
incorporated into a major computer application under development.

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3.

Given limited resources, the CAE performed a risk analysis to determine which locations to audit. This was a
marked departure from the previous approach of ensuring that all operations are reviewed on at least a three-year
interval.

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4.

In order to save time, the CAE no longer required that a standard internal control questionnaire be
completed for each audit.
5.

When the auditors found that management and the auditee had not developed specific criteria or data to
evaluate the operations of the auditee, the audit team was instructed to perform research, develop specific criteria,
review the criteria with the auditee, and if acceptable, use it to evaluate the auditees operations. If the auditee
disagreed with the criteria, a negotiation took place until acceptable criteria could be agreed upon. The audit report
commented on the auditees operations in conjunction with the agreed-upon criteria.Is Action 5 a violation of the
Standards?
6.

A. No. Auditors may omit necessary procedures if there is a time constraint. It is a matter of audit judgment.
B. No. Auditors are not required to fill out internal control questionnaires on every audit.
C. Yes. Internal control should be evaluated on every audit engagement and the internal control questionnaire is the

most efficient method to do so.

D. Yes. Internal control should be evaluated on every audit, but the internal control questionnaire is not the

mandated approach to evaluate the controls.

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Question 16
Which of the following is/are true regarding Continuing Professional Education (CPE)?
I. The Standards require internal auditors to obtain 40 hours of professional education each year and a minimum of

80 hours over a 2-year period.

II. Internal auditors are responsible for continuing their education in order to maintain their proficiency.
III. CPEs may be obtained by attending, as an officer or committee member, formal Institute of Internal Auditors (IIA)

meetings.
A. I and II only.
B. I, II and III.
C. I and III only.

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D. II and III only.

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Question 17
The internal audit activity can perform an important role in preventing and detecting significant fraud by being
assigned all but which one of the following tasks?

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A. Review every control feature pertaining to petty cash receipts.

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B. Review contributions by the organization that appear to be unusual.

C. Review large, abnormal, or unexplained expenditures.
D. Review sensitive expenses such as legal fees, consultant fees, and foreign sales commissions.

Question 18
An internal auditing team has made observations and recommendations that should significantly improve a divisions
operating efficiency. Out of appreciation of this work, and because it is the holiday season, the division manager
presents the in-charge internal auditor with a gift of moderate value. Which of the following best describes the
action prescribed by The IIA Code of Ethics?
A. Not accept it, regardless of other circumstances, because its value is significant.
B. Not accept it prior to submission of the final engagement communication.
C. Not accept it if the gift is presumed to impair the internal auditor's judgment.
D. Accept it, regardless of other circumstances, because its value is insignificant.

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Question 19
During the course of an engagement, an internal auditor makes a preliminary determination that a major division has
been inappropriately capitalizing research and development expense. The engagement is not yet completed, and the
internal auditor has not documented the problem or determined that it really is a problem.
However, the internal auditor is informed that the chief audit executive has received the following communication
from the president of the organization:
"The controller of Division B informs me that you have discovered a questionable account classification dealing with
research and development expense. We are aware of the issue. You are directed to discontinue any further
investigation of this matter until informed by me to proceed. Under the confidentiality standard of your profession, I
also direct you not to communicate with the outside auditors regarding this issue."
Which of the following is an appropriate action for the CAE to take regarding the questionable item?
A. Inform the president that this scope limitation will need to be reported to the board.
B. Continue to investigate the area until all the facts are determined and document all the relevant facts in the

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engagement records.
C. Immediately notify the external auditors of the problem to avoid aiding and abetting a potential crime by the
organization.
D. Immediately report the communication to The Institute of Internal Auditors and ask for an ethical interpretation
and guidance.

Question 20
During a regularly scheduled EDP audit of a major division, the EDP auditor discovers a complicated programming
algorithm that adds costs to a cost-plus program billing the government. The amount added accounted for 95
percent of the net income for the division for the most recent year. Upon further investigation, the EDP auditor finds
that only the marketing manager, the divisional manager, and the programmer know of the algorithm. The company
has a separate section to investigate fraud. The auditor communicates with management and the special
investigation section and the investigation is turned over to that group. However, after a month, it becomes
apparent that senior management has instructed the group to "not make waves" and to drop the investigation. The
internal audit department should:
A. Take no further action. The nature of the fraud has been reported to the proper authorities within the company

and the auditor has no power to pursue the investigation further.

B. Immediately report the circumstances and the EDP auditor's findings to the appropriate governmental regulatory
agency because the auditor cannot knowingly be a party to an illegal act.
C. Report the findings to the external auditor because the external auditor should be aware of any material
misstatement of account balances.
D. Immediately report the circumstances and the EDP auditor's findings to the audit committee.

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Question 21
Auditing standards state that "reports may include recommendations for potential improvements. . . ." Which of the
following would be a valid justification for omitting recommendations in an audit report? The auditor
A. May lose independence by being perceived as making operational decisions.
B. Can avoid the confrontation by letting management solve its own problems.
C. Does not have sufficient time to formulate a recommendation due to audit budget pressures.
D. May not always understand the true cause of the finding being reported.

Question 22

Individual objectivity is vital for internal auditors to conduct their work. Under what situations would objectivity not
be perceived impaired?

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A. An internal auditor audited an area for which they will be responsible for in the near future.
B. An internal auditor was given a small token of appreciation from a client after the completion of an audit.

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C. An internal auditor designs some control procedures for an engagement client.

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D. An internal auditor accepted a sizable gift from a client after the successful completion of an audit.

Which of the following actions by an internal auditor is most likely a violation of The IIA Code of Ethics?
A. Accepting payment for teaching auditing at a local university.
B. Having a material ownership interest in a competitor.
C. Allowing use of the Certified Internal Auditor designation in a context not involving his/her employment.
D. Accepting a moderate gift from a customer of his/her organization.

Question 24
It has been established that an internal auditing charter is one of the more important factors positively affecting the
internal auditing department's independence. Which of the following would not be an important element to include
in the Charter?
A. The length of tenure for the chief audit executive.
B. The departmennt's access to personnel within the organization.
C. The scope of internal auditing activities.
D. The department's access to records within the organization.

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Question 25
The internal auditing activity encounters a scope limitation from senior management that will affect its ability to
meet its goals and objectives for a potential engagement client. The nature of the scope limitation should be
A. Noted in the engagement working papers, but the engagement should be carried out as scheduled and the scope

limitation worked around, if possible.

B. Communicated, preferably in writing, to the board.
C. Communicated to management stating that the limitation will not be accepted because it would impair the
internal audit activity's independence.
D. Communicated to the external auditors so they can investigate the area in more detail.

Question 26

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Ordinarily, those conducting internal quality program assessments should report to

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A. The chief audit executive.

B. The internal auditing staff.

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D. Senior management.

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C. The board.

Question 27
The purposes of the Standards include all of the following except
A. Establishing the basis for the measurement of internal audit performance.
B. Delineating basic principles that represent the practice of internal auditing as it should be.
C. Guiding the ethical conduct of internal auditors.
D. Fostering improved organizational processes and operations.

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Question 28
Audit committees are most likely to participate in the approval
of
A. Engagement work schedules.
B. The internal audit report observations and recommendations.
C. Appointment of the chief audit executive.
D. Audit staff promotions and salary increases.

Question 29
An activity appropriately performed by the internal auditing activity (IAA) is
A. Installing systems of control.
B. Drafting procedures for systems of control.

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C. Reviewing systems of control before implementation.

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D. Designing systems of control.

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Question 30

A. A performance appraisal.
B. A strategic control.

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Organizational procedures allow employees to anticipate problems. This type of control is known as

C. A feedforward control.
D. A feedback control.

Question 31
Which of the following controls would most likely minimize defects in finished goods because of poor quality raw
materials?
A. Determination of spoilage at the end of the manufacturing process.
B. Timely follow-up on unfavorable usage variances.
C. Implementation of specifications for purchases.
D. Proper handling of work-in-process inventory to prevent damage.

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Question 32
Bank management suspects that a bank loan officer frequently made loans to fictitious entities, disbursed loan
proceeds to personally established accounts, and then let the loans go into default. Some pertinent facts about the
loan officer include:
A high standard of living, explained as the result of sound investments and not taking vacations,
An expensive personal car obtained through business contacts,
Gasoline and repair bills submitted for a car assigned by the bank that are higher than the organization's
average (mileage logs were submitted on a quarterly basis), and Marked annoyance with questions from
internal auditors.
In this situation, typical indicators of the suspected fraud (red flags) include all of the following except
A. Submitting gasoline and repair bills that are higher than company average.
B. Explaining a high standard of living as the result of investments.
C. Becoming easily annoyed with auditor inquiries about questionable loans.

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D. Not taking an annual vacation.

Question 33

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Which of the following assures that all inventory shipments are billed to customers?

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A. Sales invoices are prenumbered and are independently accounted for and traced to the sales journal.

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B. Customer billing complaints are investigated by the controller's office.

C. Shipping documents are prenumbered and are independently accounted for and matched with sales invoices.
D. Duties for recording sales transactions and maintaining customer account balances are separated.

Question 34
A preliminary survey of the purchasing function indicates that: Department managers initiate purchase requests that
must be approved by the plant superintendent, Purchase orders are typed by the purchasing department using
prenumbered and controlled forms, Buyers regularly update the official vendor listing as new sources of supply
become known, Rush orders can be placed with a vendor by telephone but must be followed by a written purchase
order before delivery can be accepted, and Vendor invoice payment requests must be accompanied by a purchase
order and receiving report. One possible fault of this system is that
A. Payment can be made for supplies received but not ordered by the purchasing department.
B. Payment can be made for supplies not received.
C. Purchases could be made from a vendor controlled by a buyer at prices higher than normal.
D. Unnecessary supplies can be purchased by department managers.

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Question 35
The chief audit executive (CAE) uncovers a significant fraudulent activity that appears to involve the executive vice
president to whom the CAE reports. Which of the following best describes how the CAE should proceed?
A. Interview the executive vice president to obtain essential evidence.
B. Notify regulatory authorities and police.
C. Conduct an investigation to ascertain whether the executive vice president is involved in the fraudulent activity.
D. Report the facts to the chief executive officer and the audit committee.

Question 36

A multinational corporation has an office in a foreign branch with a monetary transfer facility. Effective internal
control requires that

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A. The person making wire transfers not reconcile the bank statement.

B. Foreign currency translation rates be computed separately by two branch employees in the same department.

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C. The hiring of individual branch employees be approved by the headquarters office.

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D. The branch manager not deliver payroll checks to employees.

Red flags are conditions that indicate a higher likelihood of fraud. Which of the following is not considered a red flag?
A. An individual has held the same cash-handling job for an extended period without any rotation of duties.
B. The assignment of responsibility and accountability in the accounts receivable department is not clear.
C. Management has delegated the authority to make purchases under a certain value to subordinates.
D. An individual handling marketable securities is responsible for making the purchases, recording the purchases,

and reporting any discrepancies and gains/losses to senior management.

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Question 38
An auditor noted that the accounts receivable department is separate from other accounting activities. A separate
credit department approves credit. Control accounts and subsidiary ledgers are balanced monthly. Similarly,
accounts are aged monthly. The company's treasurer writes off delinquent accounts after 1 year, or sooner if a
bankruptcy or other unusual circumstances are involved. Credit memoranda are pre-numbered and must be
correlated with receiving reports. Which of the following areas could be viewed as internal control strengths of the
above organization? I. Credit approvals.
II. Write-offs of delinquent accounts.
III. Monthly aging of receivables.
IV. Handling of credit memos.
A. III and IV only.
B. I and IV only.
C. I, II, III and IV.

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D. I, III and IV only.

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Question 39

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Management asserted that the performance standards the internal auditors used to evaluate operating performance
were inappropriate. Written performance standards established by management were vague and had to be
interpreted by the internal auditors. In such cases, internal auditors should

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A. Assure themselves that their interpretations are consistent with industry practices.
B. Establish agreement with engagement clients as to the standards needed to measure performance.
C. Incorporate management's objections in the final engagement communication.
D. Assure themselves that their interpretations are reasonable.

Question 40
Which of the following describes a control weakness?
A. Purchasing procedures are well designed and are followed unless otherwise directed by the purchasing supervisor.
B. The purchasing agent invests in a publicly traded mutual fund that lists the stock of one of the organization's
suppliers in its portfolio.
C. Normal operational purchases fall in the range from $500 to $1,000 with two signatures required for purchases
over $1,000.
D. Prenumbered blank purchase orders are secured within the purchasing department.

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Question 41
Management can best strengthen internal control over the custody of inventory stored in an off-site warehouse by
implementing
A. Increases in insurance coverage.
B. Regular reconciliation of physical inventories to accounting records.
C. Reconciliations of transfer slips to/from the warehouse with inventory records.
D. Regular confirmation of the amount on hand with the custodian of the warehouse.

Question 42
Budgets are a necessary component of financial decision making because they help provide a(n)
A. Efficient allocation of resources.
B. Means to check managerial discretion.

C. Means to use all the firm's resources.

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D. Automatic corrective mechanism for errors.

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Question 43

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One manager has suggested that the audit teams jointly examine the corporate culture and the "tone at the top" to
identify control risks associated with the proposed merger. Which of the following statements is correct?

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A. Although the corporate culture could be considered part of the control environment, the assessment of such an

environment would be highly subjective, and thus not useful.

B. Differences in the corporate culture should be systematically identified since the differences may present major
risks to the success of the merger. However, identifying differences is not an appropriate audit activity because it
is political and subjective.
C. The corporate culture is not a part of the control environment and thus should not be considered for a proposed
audit.
D. None of the above.
Question 44
The cash receipts function should be separated from the related recordkeeping function in an organization in order
to
A. Establish accountability when the cash is first received.
B. Physically safeguard the cash receipts.
C. Minimize undetected losses of cash receipts.
D. Prevent the disbursement of cash from cash receipts.

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Question 45
When considering internal control over securities, the auditor is particularly concerned about
A. Access to stock certificates by the corporate treasurer.
B. Approval of temporary stock investment purchases by the corporate treasurer or company president.
C. Preparation of accrual adjustments on bonds by the corporate controller.
D. Access to stock certificates by the corporate controller.

Question 46
Which one of the following is most likely to be considered a reportable condition?

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inventory a year. The theft probably will never be detected.

A. An inventory control clerk at a manufacturing plant has the ability to steal one completed television set from
B. An accounts receivable clerk, who approves sales returns and allowances, receives customer remittances and

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deposits them in the bank. Limited supervision is maintained over the employee.
C. The petty cash custodian has the ability to steal petty cash. Documentation for all disbursements from the fund
must be submitted with the request for replenishment of the fund.
D. A clerk in the invoice processing department fails to match a vendor's invoice with its related receiving report.
Checks are not signed unless all appropriate documents are attached to a voucher.

Question 47
A proper segregation of duties requires
A. That an individual recording a transaction not compare the accounting record of the asset with the asset itself.
B. That an individual authorizing a transaction records it.
C. That an individual maintaining custody of an asset be entitled to access the accounting records for the asset.
D. That an individual authorizing a transaction maintain custody of the asset that resulted from the transaction.

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Question 48
Which of the following observations, made during the preliminary survey of a local department store's disbursement
cycle, reflects a control strength?
A. The treasurer's office prepares checks for suppliers based on vouchers prepared by the accounts payable

department.
B. Individual department managers are responsible for the movement of merchandise from the receiving dock to

storage or sales areas as appropriate.

C. Individual department managers use prenumbered forms to order merchandise from vendors.
D. The receiving department is given a copy of the purchase order complete with a description of goods, quantity
ordered, and extended price for all merchandise ordered.

Question 49

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To minimize the risk that agents in the purchasing department will use their positions for personal gain, the
organization should
A. Rotate purchasing agent assignments periodically.

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B. Request internal auditors to confirm selected purchases and accounts payable.

C. Specify that all items purchased must pass value-per-unit-of-cost reviews.

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D. Direct the purchasing department to maintain records on purchase prices paid, with review of such being required

Question 50

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each 6 months.

A processing operation has control procedures in place that make ongoing adjustments to the process based upon
the immediate feedback from the system. What type of control is this?
A. Preventive.
B. Feedforward.
C. Feedback.
D. Concurrent.

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Question 51
Preventing someone with sufficient technical skill from circumventing security procedures and making changes to
production programs is best accomplished by
A. Running test data periodically.
B. Reviewing reports of jobs completed.
C. Comparing production programs with independently controlled copies.
D. Providing suitable segregation of duties.

Question 52
Which of the following is a benefit of a well developed and implemented Enterprise Risk Management (ERM)
system?
A. Reliable information for use in decision making.

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B. Higher expected cash flows can be used in capital budgeting analyses because of less uncertainty.
C. Identification and management of cross-enterprise risks.

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D. There is less probability of events occurring that would impact the company's ability to achieve its objectives.

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Question 53

As defined by Statement on Management Accounting: Enterprise Risk Management: Frameworks, Elements and
Integration, the amount of risk that remains after management has taken action to mitigate risk is known as
A. Remaining risk.
B. Assessed risk.
C. Undiversifiable risk.
D. Residual risk.

Question 54
DRP Insurance Company wants to be best in class in terms of Enterprise Risk Management (ERM) implementation.
To achieve this goal, the company plans to identify events that affect the implementation of strategy and
achievement of objectives. Which of the following best reflects an analysis that would help its identification process?
A. Summary of driving records and age.
B. Review of incidents and new market conditions.
C. Analysis of default histories and dispersion.
D. Review of accidents and operational measures.

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Question 55
Maintaining a file of purchase orders in the receiving department for goods ordered but not yet received is a control
meant to ensure that
A. Goods are delivered to the appropriate department in a timely manner.
B. Only authorized shipments are accepted.
C. Goods are not lost after receipt.
D. An accurate count of goods is conducted upon receipt.

Question 56
Internal auditors regularly evaluate controls and control procedures. Which of the following best describes the
concept of control as recognized by internal auditors?

A. Control represents specific procedures that accountants and auditors design to ensure the correctness of

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processing.
B. Management regularly discharges personnel who do not perform up to expectations.
C. Control procedures should be designed from the "bottom up" to ensure attention to detail.
D. Management takes action to enhance the likelihood that established goals and objectives will be achieved.

Which of the following activities represents both an appropriate personnel department function and a deterrent to
payroll fraud?
A. Distribution of paychecks.
B. Authorization of overtime.
C. Authorization of additions and deletions from the payroll.
D. Collection and retention of unclaimed paychecks.

Question 58
Which of the following is an operating control relating to management's directing function?
A. Establishing measurable goals for the department.
B. Supplying buyers with timely, accurate, and useful reports on products received, accepted, or rejected.
C. Prescribing formal procedures for selecting potential suppliers.
D. Informing purchasing personnel of the future need for long lead time products in ample time.

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Question 59
The internal auditors' responsibility for the prevention of fraud includes all of the following except
A. Evaluating the effectiveness of actions taken by management to deter fraud.
B. Ensuring that fraud will not occur.
C. Determining whether the organizational environment fosters control consciousness.
D. Being aware of activities in which fraud is likely to occur.

Question 60
Which of the following is not involved with facility layout and design issues?
A. Line balancing.
B. Cellular manufacturing.
C. Operations sequence analysis.

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D. Program Evaluation and Review Technique (PERT).

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Question 61

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During an audit of a defense contract, the auditor becomes concerned with the possibility of inappropriate charges
to overhead. However, when examining the underlying documentation of expenses, the auditor finds that all
expenditures are properly supported. All billings show total cost and the application of a percentage overhead rate
that appears consistent with previous years.
The auditor calculates a statistical estimate of expenditures by the contractor to determine whether they are in
compliance with the contract. The audit working papers document the following evidence which the auditor is
considering for the audit report: Total expenditures per the contractor books$12.3 million
Total number of items in population
1,500
Sample size
100
Number of items not in compliance
5
Dollar value of items sampled
$700,000
Dollar amount of items not in compliance
$53,000
Which of the following communications would be correct?
A. The best estimate is that five percent of the 1,500 items in the population are not in compliance with the contract.
B. The best estimate is that the incorrect charges to the account equal about $795,000.
C. The average dollar value of items not in compliance is greater than the average dollar value of items in the

population.
D. All of the above.

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Question 62
Two major retail organizations, both publicly traded and operating in the same geographic area, have recently
merged. Both are approximately the same size and have internal audit activities. Organization A has little EDI
experience. Organization B has invested heavily in information technology and has EDI connections with its major
vendors.
The board has asked the internal auditors from both organizations to analyze risk areas that should be addressed
after the merger. The chief audit executive (CAE) of Organization B has suggested that the two internal auditing
activities (IAAs) have a planning meeting to share work programs, scope of engagement coverage, and copies of
engagement communications that were delivered to their boards. Management has also suggested that the internal
auditors review the compatibility of the organizations' two computer systems and control philosophy for individual
store operations.
The two organizations agree to share data on store operations. The data reveal that three stores in company A are
characterized by significantly lower gross margins, higher-than-average sales volume, and higher levels of
employee bonuses. The three stores are part of a set of six that are managed by a relatively new section manager.
In addition, the store managers of the three stores are also relatively new. The most likely cause of the observed
data is

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A. The relative inexperience of the store managers.

B. Problems with employee training and employee ability to meet customer needs.

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C. Fraudulent activity whereby goods are taken from the stores, thus resulting in the lower gross margins.

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D. Promotional activities that offer large discounts coupled with the payment of commissions to employees who

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reach targeted sales goals.

An internal auditor is designing a stratified, mean-per-unit variables sampling plan. To which one of the following
strata should the internal auditor allocate the largest proportion of the overall sample size?
A. Number of Items: 3,100 Expected Mean: $150 Expected Standard Deviation: $1 Total Dollar Value: $465,000
B. Number of Items: 2,000 Expected Mean: $100 Expected Standard Deviation: $9 Total Dollar Value: $200,000
C. Number of Items: 3,000 Expected Mean: $80 Expected Standard Deviation: $2 Total Dollar Value: $240,000
D. Number of Items: 2,250 Expected Mean: $200 Expected Standard Deviation: $4 Total Dollar Value: $450,000

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Question 64
When sampling is used, sufficiency of audit evidence is achieved when
A. There is reasonable assurance that the items selected are representative of the sampled population.
B. Each item in the population has a chance of being selected.
C. The evidence gathered is directly related to the assertion that the auditor is attempting to verify.
D. The standard deviation in the sample is less than or equal to the corresponding statistic for the population.

Question 65
If all other factors in a sampling plan are held constant, changing the measure of tolerable misstatement to a smaller
value will cause the sample size to be
A. Smaller.
B. Indeterminate.

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C. Unchanged.

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D. Larger.

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Question 66

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The internal auditor for a diversified organization is performing a preliminary analytical review of the home building
division. The division accounts for approximately 15% of the organization's revenues and profits. It operates in the
Southwest region of the country and has been growing rapidly. New management took over the division during the
early part of 2009 and has been very aggressive in pushing market share and growth. Management is considering
expanding operations to new regions because of (1) demonstrated growth and profitability potential; and (2) a
potential slowing of growth in the Southwest region. The division views itself as the efficient home builder in the
region. The following data have been compiled for your review. Southwest Housing Division Selected Financial and
Building Data
Year End
Year End
Year End
Year End
Attribute
No. of New Housing Starts in Region
Division Revenue
Net Income as Percent of Revenue
Net Income
Relative Market Share
No. of Houses Built

Sept. 2010 (Unaudited) Sept. 2009

Sept. 2008 Sept. 2007
62,500
57,500
52,800
47,500
$156.3 million
$119.0 million$110.4 million$83.2
million
11.52%
11.34%
9.96%
9.37%
$18 million
$13.5 million $11.0 million $7.8
million
20%
18%
19%
17%
1,250
1,035
1,003
808

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Average Revenue Generated per Home Built.

Housing Price Index for Area
No. of Employees
Home Building Materials Price Index
Jobs in Progress at Year-End
Accrued Revenue per Job in Progress
Goodwill per Balance Sheet
Long Term Debt

$125,000
1.2
233
1.25
80
$100,000
$11.3 million
$50 million

$115,000
1.15
180
1.2
40
$43,750
$0
$10 million

$110,000
1.1
167
1.05
25
$52,500
$0
$10 million

$103,000
1.03
150
1.0
18
$48,000
$0
$5
million
Debt/Equity Ratio
1.25
0.26
0.25
0.15
Which of the following audit procedures should be performed to verify the accrued revenue recorded for the jobs in
progress account at year-end 2010?
Take a sample of jobs listed in progress at year-end and physically observe the construction sites to
determine the jobs are in progress.
I.

Perform detailed tests of the job cost build-up for the jobs in progress to determine that all costs have been
properly assigned.

II.

Inspect a sample of jobs in progress with a consulting engineer to develop an independent estimate of the
percentage completed.

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III.

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A. II only.
B. I, II, and III.

Question 67

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D. I only.

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C. I and III only.

Internal audit reports should contain the purpose, scope, and results. The audit results should contain the criteria,
condition, effect, and cause of the finding. The cause can best be described as
A. Factual evidence that the internal auditor found.
B. Resultant evaluations of the effects of the findings.
C. The risk or exposure because of the condition found.
D. Reason for the difference between the expected and actual conditions.

Question 68
Which of the following represents the most reliable information that a receivable actually exists?
A. A positive confirmation.
B. A bill of lading.
C. A receiving report.
D. A sales invoice.

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Question 69
In a set of audit working papers, an internal auditor notes the following statement:
"The company has 80 remote warehouses and each warehouse contains from 100 to 500 products."
From this note, the internal auditor can conclude
A. The average number of products in the warehouses is 300.
B. There are at least two warehouses with the same number of products.
C. The total number of products contained in all the warehouses is at least 8,400.
D. The majority of the warehouses have more than 250 products.

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Question 70

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An internal auditor used regression analysis to evaluate the relationship between utility costs and machine hours.
The following information was developed using a computer software program:
Constant coefficient - 2,050
Variable coefficient - 0.825
Correlation coefficient - 0.800
Standard error of the estimate - 200
Number of observations - 36
What is the expected utility cost if the company's 10 machines will be used 2,400 hours next month?
A.$3,930.
B.$3,970.
C.$4,050.
D. $4,030.

Question 71
When reviewing working papers, an internal auditing supervisor will be primarily concerned with determining
whether the
A. Working papers adequately support the engagement observations, conclusions, and recommendations.
B. Auditing department's standard formats and tick marks have been used consistently.
C. Working papers reflect adherence to budget constraints.
D. Engagement work programs have been carried out without deviation.

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Question 72
When an internal auditor's sampling objective is to obtain a measurable assurance that a sample will contain at least
one occurrence of a specific critical exception existing in a population, the sampling approach to use is
A. Discovery.
B. Random.
C. Probability-proportional-to-size.
D. Variables.

Question 73
For which of the following sample results is sampling risk the smallest?

A. Sample size: 80; Tolerable deviation rate: 4%; Sample deviation rate: 3%

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B. Sample size: 100; Tolerable deviation rate: 1%; Sample deviation rate: 1%

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C. Sample size: 60; Tolerable deviation rate: 5%; Sample deviation rate: 1%

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D. D. Sample size: 40; Tolerable deviation rate: 5%; Sample deviation rate: 2%

In an attribute sampling application, holding other factors constant, sample size will increase as which of the
following becomes smaller?
A. Expected rate of occurrence.
B. Population.
C. Planned precision.
D. Confidence coefficient.

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Question 75
In auditing computer-based systems, the integrated test facility (ITF)
A. Allows the auditor to assemble test transactions and run them through the computer system to test the integrity

of controls on a sample data base.

B. Uses an audit log to record transactions and data having special audit significance during regular processing runs.
C. Is a concurrent audit technique that establishes a special set of dummy master files and enters transactions to test

the programs using the dummy files during regular processing runs.
D. Is a set of specialized software routines that are designed to perform specialized audit tests and store audit
evidence.

Question 76

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An audit of an international non-profit organization established to finance medical research revealed the following
amounts (in millions):
Current
YearPast
Year
Revenue
$500
$425
Investments (average balances)
$210
$185
Medical research grants made
$418
$325
Investment income
$16
$20
Administrative expense
$10
$8
Before an audit report is issued, a front-page article appears in a newspaper alleging that the president has been
using the organization's funds for personal purposes. The auditor has enough information to confirm the allegations
made in the newspaper article. The auditor is contacted by a reporter for the newspaper to confirm the facts. Which
of the following would be the best response by the auditor?
A. Provide information "off the record" so that the article does not state who gave the information.
B. Respond truthfully and fully since the auditor is able to confirm the facts concerning the president, not the

organization.
C. Direct the inquiry to the audit committee or the board of directors.
D. Respond that the investigation is not complete.

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Question 77
Stan Berry is considering selling peanuts at the Keefer High School football games. The peanuts would cost $.50 per
bag and could be sold for $1.50 per bag. No other costs would be incurred to sell the peanuts. All unsold bags can be
returned to the supplier for $.30 each. Berry estimated the demand for peanuts at each football game and
constructed the payoff table that follows.
Payoffs at each supply
level:

20
.2
30
.4
40
.3
50
.1
Expected value of
action:

$20
$20
$20
$20
$20

30

40

50

$18
$16
$14
$30
$28
$26
$30
$40
$38
$30
$40
$50
$27.60$30.40$29.60

Demand Probability (bags)

20
of Demand

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The optimum number of bags of peanuts to stock is

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A. 20.

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B. 30.

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D. 40.

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C. 50.

Question 78
In preparing for an audit of the retail footwear division of a major retail organization, the internal auditor gathered
the following information about the organization's stores.
All
NortheastSouthwestMid-Central
Stores
Average Sales per Store
Average Cost of Goods Sold per Store
No. of Stores
Avg. Square Foot per Store

Region

Region

Region

$736,000 $840,000 $760,000

$630,000

$375,000 $420,000 $325,000

$395,000

48
1,800

13

18

17

2,200

1,850

1,550

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$137,000 $152,000 $140,000

$122,000

$98,000 $102,000

$112,000

Avg. Sales per Full-time Employee

$82,000

Average Wage Related Expense per Store

$238,000 $285,000 $320,000 $115,000
Avg. Net Profit Contribution per Store
In addition to labor costs, the primary other costs associated with each store are leasing and maintenance expenses.
Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following
would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. Leasing and
maintenance expenses are higher for the Mid-Central Region.
II. Sales employees are not as productive in

generating sales as those in other regions.

III. The Mid-Central Region has a lower gross

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margin.

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A. II only.

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B. I, II and III.

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D. I only

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C. II and III only.

Question 79
The internal auditor is most likely to make working papers available to the engagement client when
A. The internal auditors have recorded specific damaging comments.
B. Engagement client comments are needed to evaluate significance and accuracy.
C. The internal auditor considers the content noncontroversial.
D. Fraud is suspected.

Question 80
The ratio of sales to working capital is a measure of
A. Liquidity.
B. Collectibility.
C. Financial leverage.
D. Profitability.

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Question 81
An internal auditor has taken a large sample from a population that is skewed in the sense that it contains a large
number of small balances and a small number of large balances. Given this, the internal auditor can conclude
A. The sampling distribution is not normal; thus, attribute sampling is the only alternative statistical tool that can

appropriately be used.
B. The sampling distribution is normal; thus, the Z score value can be used in evaluating the sample results.
C. The sampling distribution is not normal; thus, PPS sampling based on the Poisson distribution more accurately
defines the nature of the population.
D. None of the answers are correct.

Question 82

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Which of the following is the most important if working papers are to have the characteristics that will ensure that
they achieve their primary purposes?
A. Working papers must be properly indexed and cross-referenced to the draft final engagement communication.
B. Working papers must provide sufficient, reliable, and useful information to support the final engagement
communication.
C. Working papers must be arranged in logical order following the engagement work program sequence.
D. Working papers must be of standard format and standard content.

Question 83
To determine the operating cycle for a wholesaler, which one of the following pairs of items is needed?
A. Cash turnover and net sales.
B. Accounts receivable turnover and inventory turnover.
C. Days' sales in accounts receivable and average merchandise inventory.
D. Asset turnover and return on sales.

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Question 84
Which of the following is a true statement comparing a horizontal flowchart with a vertical flowchart?
A. It is usually longer.
B. It provides more room for written descriptions that parallel the symbols.
C. It does not provide as broad a picture at a glance.
D. It brings into sharper focus the assignment of duties and independent checks on performance.

Question 85
Which of the following statements are correct regarding internal audit working paper documentation for a fraud
investigation? I.

All incriminating evidence should be included in the working papers.

II. All important testimonial evidence should be reviewed to ensure that it provides sufficient basis for the

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conclusions reached.

III. If interviews are held with a suspected perpetrator, written transcripts or statements should be included

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A. I only.

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B. I, II, and III.

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C. II only.
D. II and III only.

in

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the working papers.

Question 86
A supportive behavior that a listener, such as an auditor or a supervisor, can use to encourage a speaker would be to
A. Stop other activity or work while the person is talking.
B. Look away from the speaker to avoid any intimidation.
C. Not respond verbally until the speaker stops talking.
D. Interject a similar incident or experience.

Question 87
Which one of the following best reflects the basic elements of a data flow diagram?
A. Data flows, data storage, and program flowchart.
B. Data source, data destination, data flows, transformation processes, and data storage.
C. Data flows, program flowchart, and data destination.
D. Data sources, data flows, computer configurations, flowchart, and data storage.

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Question 88
The chief audit executive (CAE) is responsible for engagement supervision. The most important form of supervision
during the fieldwork phase of engagement involves
A. Seeing that the approved engagement work program is carried out unless changes are both justified and

authorized.
B. Making sure that communications are accurate, objective, clear, concise, constructive, and timely.
C. Appraising each internal auditor's performance at least annually.
D. Providing suitable instructions to subordinates at the outset of the engagement and approving the engagement

program.

Question 89

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A chain retailer has outlets in forty non-overlapping though similar local markets. Recently, the retailer conducted its
largest promotional campaign ever. Each outlet was unrestricted in allocating its promotional budget between local
print, radio, or television advertising or in underspending the budget. The internal auditor wishes to evaluate the
effectiveness of these tactics. In this case

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A. Discriminant analysis would be the best tool for discriminating between effective and ineffective promotional
tactics. B. Since the relationships between promotional expenditures and sales is probably non-linear, regression
analysis should not be used. C. Multiple regression analysis may be an effective tool for modeling the relationship
between sales and promotional tactics.
D. Time series analysis should be used since the promotion occurred over time.

Question 90
A good working paper for a bank reconciliation should include (either directly or through cross reference) all of the
following except
A. A legend explaining all tick marks employed.
B. The cash balance per the general ledger as of the reconciliation date.
C. A list of all deposits made during the period in question.
D. A list of outstanding checks.

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Question 91
An internal auditor, testing to determine if a division is shipping goods to customers without making the prescribed
credit check, decides to use attribute sampling. Each sales order in the sample is examined for credit approval. Using
an initial estimate of the occurrence rate of 4%, desired precision of 2.5%, and a confidence level of 95%, the
required sample size is 214. The total population size is 2,305. Sample items are selected and seven sales without the
required credit approval are noted. The sample occurrence rate is closest to
A.3.3%.
B.9.3%.
C.6.5%.
D. 4.0%.

Question 92

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Which of the following can reflect the effectiveness of a firm's personnel department?
A. The ratio of the number of job offers accepted to the number of job offers extended.

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B. A comparison over time of the average number of days from the date the approved vacant position requisition is

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received until the date the new hire starts work.

C. The ratio of total hiring costs to the total number of hires.
D. The ratio of employees hired at entry level in 2008 and still with the firm in 2010 to total employees hired at entry
level in 2008.

Question 93
Which of the following conditions constitutes inappropriate working paper preparation?
A. Engagement observations are cross-referenced to supporting documentation.
B. Tick marks are explained in notes.
C. Flowcharts are included in the working papers.
D. All forms and directives used by the engagement client are included in the working papers.

Question 94
Engagement working papers should include
A. Copies of all procedures that were reviewed during the engagement.
B. Documentation of the examination and evaluation of the adequacy and effectiveness of the system of internal

control.
C. Copies of all source documents examined in the course of the engagement.
D. All working papers prepared during a previous engagement performed in the same area.

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Question 95
Which type of evidence would be most convincing when evaluating the collectibility of accounts receivable?
A. Shipping documents.
B. Aged accounts receivable listings.
C. Negative accounts receivable confirmations.
D. Positive accounts receivable confirmations.

Question 96
The physical examination of the client's inventory is considered to be
A. Both reliable and sufficient.

B. Both reliable and useful.

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C. Both relevant and sufficient.

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Question 97

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D. Both sufficient and useful.

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Which of the following techniques is most likely to result in sufficient information with regard to an engagement to
review the quantity of fixed assets on hand in a particular department?
A. Examination of the account balances contained in general and subsidiary ledgers.
B. Interviews with department management.
C. Analytical review of purchase requests and subsequent invoices.
D. Physical observation.

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Question 98
During a review of a divisions operations, an internal auditor notes that Sales
revenue has remained the same.
Inventory has increased significantly.
Gross margin has increased significantly.
Assume that divisional management stated that the gross margin increase is due to increased efficiency in
manufacturing operations. The internal auditor wishes to investigate this assertion. Which of the following
engagement procedures will be most relevant to the assertion?
A. Take a sample of finished goods inventory and compare raw materials cost with purchase prices in order to

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determine the accuracy of the recorded raw materials price.

B. For a sample of products, compare costs per unit this year with those of last year, test cost buildups, and analyze
standard cost variances.
C. Take a physical inventory of equipment to determine if there were significant changes.
D. Obtain a physical count of inventory.

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Question 99

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Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current
ratio would be increased by
A. The purchase of $100,000 of inventory on account.

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B. Refinancing a $100,000 long-term loan with short-term debt.

C. The collection of $100,000 of accounts receivable.
D. The payment of $100,000 of accounts payable.

Question 100
A high sales-to-working capital ratio could indicate
A. The firm is not susceptible to liquidity problems.
B. The firm is undercapitalized.
C. Unprofitable use of working capital.
D. Sales are not adequate relative to available working capital.

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Question 101
Variability of the dollar amount of individual items in a population affects sample size in which of the following
sampling plans?
A. Discovery sampling.
B. Attribute sampling.
C. Probability-Proportional-to-Size (PPS) sampling.
D. Mean-per-unit sampling.

Question 102
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting
purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction
described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year

in its retained earnings account. The collection of a current accounts receivable of $29,000 would

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A. Decrease the current ratio and the quick ratio.

B. Increase the quick ratio.

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C. Not affect the current or quick ratios.

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Question 103

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D. Increase the current ratio.

Lisa, Inc.
Statement of Financial Position
December 31, 2010
(in thousands)
2010 2009

Assets
Current assets:
Cash

$ 30 $ 25

Trading securities

20

15

Accounts receivable (net)

45

30

Inventories (at lower of cost of market)

60

50

Prepaid items

15

20

Total Current Assets

$170 $140

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Long-term assets:
Long-term investments:
Available-for-sale investments

$ 25 $ 20

Property, plant & equipment:

Land (at cost)

75

75

Building (net)

80

90

Equipment (net)

95 100

Intangible assets:
Patents (net)

35

17

Goodwill (net)

20

13

$330 $315

Total Assets

$500 $455

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Total Long-Term Assets

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Liabilities and Equity

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Current liabilities:

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Notes payable
Accrued interest
Total current liabilities

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Accounts payable

$ 23 $ 12
47

28

$ 15 $ 15
$ 85 $ 55

Long-term liabilities:
Long-term Notes payable 10% due 12/31/2012
Bonds payable 12% due 12/31/2015

$ 10 $ 10
15

15

Total long-term debt

$ 25 $ 25

Total liabilities

$110 $ 80

Shareholders' Equity
Preferred stock - 5% cumulative, $100 par,
nonparticipating
authorized, issued and outstanding, 1,000 shares

$100 $100

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Common stock - $10 par 20,000 shares authorized, 15,000

shares issued and outstanding

150 150

Additional paid-in capital - common

75

75

Retained earnings

65

50

Total Equity

$390 $375

Total Liabilities & Equity

$500 $455
Lisa Inc.'s acid test (quick) ratio at December 31, 2010 was
A. .6 : 1.0
B. 1.8 : 1.0

C. 1.1 :
1.0
D. 2.0 : 1.0

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Question 104

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What evidence is appropriate to determine if completed purchase transactions were valid and at the best price?
A. Purchase requisitions, journal voucher entries, and bid quotes.

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B. Purchase requisitions, purchase orders, and bid quotes.

C. Receiving reports, purchase orders, and purchase requisitions.

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D. Purchase orders, receiving reports, and bid quotes.

Question 105
Depoole Company is a manufacturer of industrial products and employs a calendar year for financial reporting
purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction
described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year
in its retained earnings account.
The early liquidation of a long-term note with cash affects
the A. Quick ratio to a greater degree than the current
ratio.
B. Current ratio but not the quick ratio.
C. Current ratio to a greater degree than the quick ratio.
D. Current and quick ratio to the same degree.

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Question 106
The auditor wants to determine that the program is approving items for payment only when the purchase order,
receiving report, and vendor invoice match within the tolerable 0.5%. Assume all the following suggested audit
procedures would have been implemented to function over the proper time period. Which of the following
computerized audit procedures would provide the most persuasive evidence as to the proper operation of the
program?
A. Implementing an integrated test facility with auditor-submitted test items throughout the period under analysis.
B. Using generalized audit software to take a random sample of purchase orders and tracing the selected items to

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the vendor invoice and receiving document.

C. Using a test data approach at year-end by submitting mock purchase orders, vendor invoices, and receiving
quantities.
D. Implementing a Systems Control and Audit Review File (SCARF) audit technique, which will automatically select all
transactions when the purchase order exceeds a specific dollar limit.

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An adequately documented working paper should

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Question 107

A. Be concise but complete.

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B. Not contain copies of engagement client records.

C. Contain examples of all forms and procedures used by the engagement client.
D. Follow a unique form and arrangement.

Question 108
In developing an engagement work program and communicating engagement results, the internal auditor should be
alert for a condition that might reflect low materiality of an observation but high relative risk to the overall operation
of the organization. Which of the following conditions would reflect such a situation?
A. Levels of approval authority for purchasing personnel are not set forth in the manual of purchasing procedures.
B. Many random clerical errors arise from the desire of employees to meet production quotas.
C. No written quality-assurance procedure exists for a high-volume production line item with low unit cost that has a

15% scrap experience.

D. The cashier is commingling personal funds with a $1,000 imprest cash fund.

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Question 109
An intermediate fact, or group of facts, from which the internal auditor can infer the fairness of an assertion being
reviewed is
A. Corroborative evidence.
B. Circumstantial evidence.
C. Conclusive evidence.
D. Direct evidence

Question 110

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The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the performance of an
engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit
activity (IAA), they will move back to line positions. Each of them has fairly extensive organizational experience and is
on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the
CAE pulls some old engagement working papers, holding back the review notes and clearning comments. The CAE
asks them to indicate the informational criteria that are violated.

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The organization is required to comply with certain specific standards related to environmental issues. One of these
standards requires that certain hazardous chemicals be placed in certified containers for shipment to a governmental
disposal site. The container must bear an inspection seal signed within the last 90 days by a governmental inspector.
Based on the following tests, the internal auditor concluded that the organization was in compliance for the
engagement period:

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I. Determine from each chemical loading supervisor that compliance requirements are understood.
II. Inspect sealed containers for evidence of leakage.
III. Ask chemical loading personnel about procedures performed.

Which of the following informational criteria, if any, is violated?

A. Reliability.
B. Sufficiency.
C. Relevance.
D. No criteria are violated.

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Question 111
An internal auditor is interested in the processing accuracy of a sales invoice preparation system. The monetary
amount of individual invoices is highly variable. The internal auditor has sound reasons for believing that the error
rate in invoice processing is between 3 percent and 10 percent but has no idea of the monetary magnitude of the
errors. In evaluating which specific approach to variables sampling to employ, the internal auditor should be aware
that
A. With error rates in this range, there is little advantage to stratifying the population.
B. Since the error magnitude is uncertain, a stratified mean per unit estimator will perform poorly in this case.
C. Neither a difference or ratio estimator is practical in this case unless an audit value and a book value exist for each

item in the population.

D. Either a difference estimator or a ratio estimator will be more efficient than an unstratified mean-per-unit
estimator in this case.

Question 112

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Which of the following examples of audit evidence is the most persuasive?

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A. Real estate deeds, which were properly recorded with a government agency.
B. Time cards for employees that are stored by a manager.

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C. Canceled checks written by the treasurer and returned from a bank.

Question 113

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D. Vendor invoices filed by the accounting department.

Which of the following is the primary advantage of using an internal control questionnaire?
A. It provides a clear picture of the interrelationships that exist between the various controls.
B. The negative responses indicate the only areas needing further engagement work.
C. It reduces the risk of overlooking important aspects of the system.
D. It forces an internal auditor to acquire a full understanding of the system.

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Question 114
The following information is available from the financial statements of a manufacturing division. The chief audit
executive (CAE) is reviewing the data to identify potential risks as a basis for planning the audit. The division has not
been audited in the past three years by the internal auditing activity (IAA). The division conducts most of its business
autonomously. The division has historically relied on one major product. However, that product is aging and will soon
lose its patent protection.
(2010)
(2009) (2008)
Ratio
Current Previous Prior Industry
Year Average
Year
Year

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Current Ratio
1.94
1.89
2.28
2.13
Quick Ratio
0.66
0.88
1.22
1.4
Days Sales in Receivables
112
93
72
69
Days Sales in Inventory
148
167
92
73
Cost of Goods Sold as % of Sales 0.375
0.402 0.412 0.445
Sales/Tangible Assets
2.89
2.58
2.53
3.01
Sales/Total Assets
1.33
1.31
2.53
2.78
Sales Growth
0.03
0.16
0.02
0.045
Net Income (thousands)
($7,600)
$985 ($1,200) $4,500 Which of the following would not
explain the decrease in cost of goods sold as a percentage of sales ratio? The division

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A. Liquidated inventory in conjunction with a plan to bring its current ratio more in line with the industry average.

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B. Is incorrectly capitalizing certain production costs.

C. Increased the selling price of its products by selling to less credit-worthy customers.

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D. Recorded subsequent year's sales in the current year, but adjusted inventory to actual goods on hand at year-end.

Question 115 - CIA 1194 II.38 - Sampling Fundamentals

In sampling applications, the standard deviation represents a measure of the
A. Extent of precision achieved.
B. Degree of data variability.
C. Expected error rate.
D. Level of confidence desired.

Question 116
The days' sales in receivables ratio will be understated if the company
A. Does not use average receivables in the ratio calculation.
B. Uses a calendar year for its accounting period.
C. Uses a natural business year for its accounting period.
D. Uses average receivables in the ratio calculation.

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Question 117
The best evidence to determine if excess levels of inventory are accumulating is
A. Analyzing last quarter's excess inventory reports.
B. Reviewing purchase orders.
C. Comparing current production requirements with the total of inventory on hand and on order.
D. Counting inventory and comparing quantity to perpetual records.

Question 118
In the standard regression equation y = a + bx, the letter b is best described as a(n)

A. Constant coefficient.

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B. Variable coefficient.
C. Dependent variable.

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Question 119

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D. Independent variable.

The use of probability-proportional-to-size (PPS) sampling is

inefficient if A. Bank accounts are being examined.
B. The number of sampling units is large.
C. Each account is of equal importance.
D. Statistical inferences are to be made.

Question 120
The correlation coefficient that indicates the weakest linear association between two variables is
A. 0.12
B. 0.35
C. -0.11
D. -0.73

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Question 121
Identification of an appropriate population to sample is dependent upon audit objectives. A population of entries in
an asset repairs expense file would be an appropriate population if the audit objective is to determine whether
A. Non-capital repair expenditures have been recorded in the proper period.
B. Expenditures for fixed assets have been recorded in the proper period.
C. Expenditures for fixed assets have been improperly expensed.
D. Non-capital repair expenditures have been properly charged to expense.

Question 122

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Auditors have learned that increased computerization has created more opportunities for computer fraud, but has
also led to the development of computer audit techniques to detect frauds. A type of fraud that has occurred in the
banking industry is a programming fraud where the programmer designs a program to calculate daily interest on
savings accounts to four decimal points. The programmer then truncates the last two digits and adds it to his or her
account balance. Which of the following computer audit techniques would be most effective in detecting this type of
fraud?
A. Snapshot.

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D. Parallel Simulation.

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C. SCARF (Systems Control and Audit Review File).

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B. Generalized audit software which selects account balances for confirmation with the depositor.

Question 123
Studies have shown that the typical manager spends about 9% of a working day reading, 16% writing, 30% talking,
and 45% listening. Listening effectiveness is best increased by
A. Tuning out messages that do not seem to fit the meeting purpose.
B. Waiting to review key concepts until the speaker is through talking.
C. Factoring in biases to evaluate the information being given.
D. Resisting both internal and external distractions.

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Question 124
Identification of an appropriate population to sample is dependent upon audit objectives. A population of entries in
an asset repairs expense file would be an appropriate population if the audit objective is to determine whether
A. Non-capital repair expenditures have been recorded in the proper period.
B. Expenditures for fixed assets have been recorded in the proper period.
C. Expenditures for fixed assets have been improperly expensed.
D. Non-capital repair expenditures have been properly charged to expense.

Question 125
Which of the following does not describe one of the functions of engagement working papers?

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A. Provides the principal support for engagement results.

B. Aids in the professional development of the operating staff.
C. Aids in the planning, performance, and review of engagements.

2.

3.

4.

5.

6.

7.

8.

9.

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1.

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D. Facilitates third-party reviews.

10. D
11. B
12. C
13. B

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14. C
15. B
16. D
17. A
18. C
19. A
20. D
21. D
22. B
23. D
24. A

25. B

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26. A

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27. C

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28. C

31. C

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30. C

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29. C

32. A
33. C
34. C
35. D
36. A
37. C
38. C
39. B
40. A
41. B

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42. A
43. D
44. C
45. D
46. B
47. A
48. A
49. A
50. D
51. D
52. C

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53. D

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54. B

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55. B

58. D

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57. C

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56. D

59. B
60. D
61. D
62. D
63. B
64. A
65. D
66. B
67. D
68. A
69. C

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70. D
71. A
72. A
73. C
74. C
75. C
76. C
77. D
78. C
79. B
80. A

81. B

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82. B

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83. B

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84. D

87. B

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86. A

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85. B

88. A
89. C
90. C
91. A
92. D
93. D
94. B
95. B
96. B
97. D
98. B

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99. A
100. B
101. D
102. C
103. C
104. D
105. A
106. A
107. A
108. C

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109. B
110. B

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111. D

115. B

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114. A

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113. C

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112. A

116. C 117. C 118. B

119. C
120. C
121. C
122. D
123. D
124. C
125. B

Certified Internal Auditor's Academy