Free Practice Questions for IIA IIA-CIA-Part2 Exam

To effectively communicate the acceptance of risk in an organization, a chief audit executive (CAE) must first consider the organization's view on risk tolerance. Understanding the organization’s risk tolerance is crucial because it defines the level of risk the organization is willing to accept in pursuit of its objectives. This perspective guides how risks are communicated and managed across the organization.

IIA Standards: 2120 - Risk Management

IIA Practice Guide: Assessing Organizational Governance in the Public Sector

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

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

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

Nonstatistical sampling allows auditors to use their professional judgment to determine the sample size and select the items to be tested. Unlike statistical sampling, which relies on probabilistic methods to determine the sample size and selection, nonstatistical sampling is more flexible and can be tailored to the specific circumstances of the audit engagement.

IIA References:

IIA Standard 2320: Analysis and Evaluation suggests that internal auditors should apply appropriate methods to analyze data and draw conclusions. Nonstatistical sampling allows for the application of professional judgment, which can be advantageous in certain audit situations where rigid statistical methods may not be practical or necessary.

The Practice Guide on Sampling discusses the differences between statistical and nonstatistical sampling, highlighting that nonstatistical sampling relies more on the auditor’s judgment, which can be beneficial in certain contexts.

Given this, the correct answer is C. Nonstatistical sampling provides for the use of subjective judgment in determining the sample size.

Introduction:

When performing audit testing, internal auditors must consider the risk that their sample may lead to incorrect conclusions about the accuracy of account balances.

Understanding Incorrect Acceptance Risk:

This risk refers to the possibility that the sample used might support the conclusion that the recorded account balance is not materially misstated when, in fact, it is. This is a type of sampling risk that auditors need to mitigate through proper sampling techniques and sufficient sample sizes.

Options Analysis:

Option A: Incorrect rejection risk is the risk that the sample leads to the conclusion that the account balance is materially misstated when it is not.

Option B: Incorrect acceptance risk directly addresses the concern described, where the sample fails to detect a material misstatement.

Option C: Tolerable misstatement risk relates to the maximum error in a population that the auditor is willing to accept.

Option D: Anticipated misstatement risk is not a standard audit term and does not describe the risk in question.

Conclusion:

The auditor’s concern best describes the incorrect acceptance risk, which is the risk of concluding that the account balance is accurate based on a sample when it is actually misstated.

Internal Audit Standards and Practice Guides .

A risk-by-process matrix is a tool that allows users to identify and analyze the associations between various business processes and the risks that affect them. This matrix helps in understanding how risks are distributed across different processes and can be instrumental in prioritizing audit activities based on risk.

IIA References:

IIA Standard 2210: Engagement Objectives suggests that internal auditors should consider risks when setting audit objectives. A risk-by-process matrix is an effective tool for mapping out these risks in relation to processes, providing a clear visual representation of where the most significant risks lie.

The Practice Guide on Risk Assessment outlines the use of matrices, including risk-by-process matrices, to facilitate the identification and prioritization of risks within different processes.

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

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

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

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

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

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

The Institute of Internal Auditors (IIA) Standards

IIA Practice Guide: Formulating and Expressing Internal Audit Opinions

In the context of internal auditing, activities that pose immediate and significant risks to health, safety, the environment, or that conceal inappropriate activities within an organization are of high importance and typically require formal communication to the chief audit executive (CAE). These activities could have severe legal, financial, and reputational consequences for the organization. While acts that favor one party to the detriment of another are concerning and may indicate ethical or procedural issues, they are generally considered less critical compared to the other options, as they do not necessarily imply immediate and severe risks to individuals or the organization as a whole.

The Institute of Internal Auditors (IIA) International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 2060: Reporting to Senior Management and the Board.

IIA Practice Guide on Communicating Unacceptable Risk.

Comprehensive and Detailed Explanation:

The three-way match (A) is the most effective control to ensure that services have been received and align with both requisition and invoicing. For temporary employees, this means verifying that hours worked or services provided match the purchase requisition and that an invoice is only paid if supported by documentation of services received.

Option B (management approval) ensures authorization but not service completion.

Option C provides clarity but is not a control for verifying actual work.

Option D ensures budgetary compliance but does not prevent overpayment for unperformed services.

Thus, the strongest control is Option A, ensuring validity, accuracy, and completeness of vendor payments.

Introduction:

In a vertically centralized organization, decision-making is concentrated among a small management team, potentially leading to various risks.

Risk Analysis:

Option A: Lack of coordination among business units is less likely in a centralized structure as decisions are made by a central authority.

Option B: Inconsistent operational decisions are less common as central management typically ensures alignment with organizational goals.

Option C: Centralized decision-making can lead to suboptimal decisions due to a lack of diverse perspectives and delayed responses to local issues.

Option D: Duplication of business activities is less relevant in a tightly controlled central structure.

Conclusion:

The primary risk in a vertically centralized organization is suboptimal decision-making, as the concentration of authority can result in a lack of responsiveness and consideration of all relevant factors.

Organizational Structure and Internal Control Theory.

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

According to IIA Standard 2600: Communicating the Acceptance of Risks, the CAE must inform senior management and the board if management decides to accept a risk that may exceed the organization’s risk appetite. The branch manager's unilateral decision without consulting senior management constitutes a governance issue. Escalating the matter ensures proper oversight and adherence to the organization’s risk management framework. Options B, C, and D do not fulfill the CAE's responsibility to ensure appropriate communication and accountability at the senior management level.

According to the IIA Standards, particularly in the context of risk management consulting, internal audit activities may provide risk management consulting services under specific conditions. These conditions include:

There is a clear strategy and timeline to migrate risk management responsibility back to management.This condition ensures that the internal audit's involvement in risk management is temporary and transitional, emphasizing the principle that management retains ultimate responsibility for risk management.

The nature of services provided to the organization is documented in the internal audit charter.This condition ensures transparency and clarity about the internal audit's role in risk management, as outlined in the internal audit charter. This documentation is essential for defining the scope and limitations of the internal audit's consulting role.

In contrast, options 2 and 3 are inappropriate under the Standards:

The internal audit activity has the final approval on any risk management decisions (Option 2): This would compromise the independence and objectivity of the internal audit function, as internal auditors should not make management decisions.

The internal audit activity gives objective assurance on all parts of the risk management framework for which it is responsible (Option 3): This creates a conflict of interest because internal auditors cannot objectively audit areas where they have direct responsibility.

IIA References:

IIA Standard 2050: Coordination and Reliance emphasizes that internal audit should not assume management responsibilities, including final risk management decisions, to maintain objectivity and independence.

IIA Standard 1000: Purpose, Authority, and Responsibility and related guidance stress the importance of documenting the internal audit’s role in the audit charter, especially when the internal audit is involved in consulting activities like risk management.

Combining observations into one reported finding can be appropriate when they were noted during the same audit and the action plan has a common owner. In this case, the failure of both the financial reporting function and the AR staff to perform reconciliations regularly is interconnected and points to a systemic issue under the responsibility of the controller. Addressing these issues together can provide a more comprehensive view of the control deficiencies and facilitate more effective remediation. References:

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

The IIA’s Practice Advisory on Communicating Results.

An internal auditor's primary role is to evaluate and improve the effectiveness of risk management, control, and governance processes. To test the reliability of a customer database, the auditor would focus on identifying potential issues that could affect the accuracy and completeness of the data. This involves reviewing records, reports, and conducting data analysis to identify anomalies, inconsistencies, or patterns that suggest problems with the data. This step directly assesses the reliability of the database, which is crucial for ensuring that the information is accurate and reliable.

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

Internal Audit Manual: Data Integrity and Database Auditing Techniques