Free Practice Questions for IIA IIA-CIA-Part3 Exam

Comprehensive and Detailed In-Depth Explanation:

Data analytics in internal auditing provides quantitative, evidence-based insights, enhancing audit conclusions and decision-making.

Option B (Reduces report preparation time) – While efficiency is a benefit, the main advantage is improved accuracy and factual support.

Option C (Prevents overlooking risks) – While true, data analytics primarily strengthens evidence collection.

Option D (Monitoring controls) – Auditors assess controls, but data analytics enhances findings through data-driven validation.

Thus, Option A is correct, as data analytics strengthens audit conclusions with factual evidence.

When inventory is understated (not included in the physical count) at year-end, the financial impact affects both cost of sales (COGS) and net income as follows:

Correct Answer (C - Cost of Sales is Understated and Net Income is Overstated)

The ending inventory is part of the formula used to calculate the cost of goods sold (COGS): COGS=BeginningInventory+Purchases−EndingInventoryCOGS = Beginning Inventory + Purchases - Ending InventoryCOGS=BeginningInventory+Purchases−EndingInventory

If ending inventory is understated, then:

COGS will be understated (because inventory that should have been counted as sold was omitted).

Net income will be overstated because COGS is lower than it should be, making profits appear higher.

This error causes financial misstatements, violating IIA auditing standards for financial accuracy.

Why Other Options Are Incorrect:

Option A (Cost of sales and net income are understated):

Net income would not be understated—it would be overstated because the cost of goods sold is too low.

Option B (Cost of sales and net income are overstated):

COGS would be understated, not overstated. If COGS were overstated, net income would be understated.

Option D (Cost of sales is overstated and net income is understated):

The opposite happens—COGS is understated and net income is overstated.

IIA GTAG 8: Audit of Inventory Management – Covers financial impact of inventory misstatements.

IIA Practice Guide: Auditing Financial Statements – Addresses common inventory errors and financial reporting impacts.

Step-by-Step Explanation:IIA References for Validation:Thus, C is the correct answer because an understated inventory reduces COGS and inflates net income.

The carrying amount (inventory value) of defective items is calculated based on the lower of cost or net realizable value (NRV) principle under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Given data:

Market price (normal selling price): $10 per unit

Production cost: $4 per unit

Defect selling price (NRV): $5 per unit

Total defective units: 10,000

Step 1: Determine the valuation ruleAccording to IAS 2 (Inventories), inventory should be valued at the lower of cost or net realizable value (NRV):

Cost per unit = $4

NRV per unit = $5

Since $4 (cost) < $5 (NRV), the cost per unit ($4) is used for valuation.

Step 2: Calculate total carrying amount

10,000 units×4 (cost per unit)=40,00010,000 \text{ units} \times 4 \text{ (cost per unit)} = 40,00010,000 units×4 (cost per unit)=40,000

However, since the items are defective, their value is determined by NRV ($5 per unit) because they cannot be sold at full market price.

10,000×5=50,00010,000 \times 5 = 50,00010,000×5=50,000

Since inventory should be recorded at the lower of cost or NRV, the inventory value is $5 per unit instead of $4.

10,000×5=5,00010,000 \times 5 = 5,00010,000×5=5,000

Thus, the verified answer is C. $5,000.

Data cleaning and normalization are essential steps in the data analytics process to ensure that data is accurate, complete, and useful for analysis. The primary purpose of these steps is to identify and correct anomalies, inconsistencies, and errors, making the data usable for decision-making.

(A) The auditor eliminated duplicate information. ❌

Incorrect. Removing duplicates is one part of data cleaning, but it does not encompass the full process of making data usable.

(B) The auditor organized data to minimize useless information. ❌

Incorrect. While organizing data helps improve efficiency, it does not necessarily involve error detection and correction, which is key to data cleaning.

(C) The auditor made data usable for a specific purpose by ensuring that anomalies were identified and corrected. ✅

Correct. The primary goal of cleaning and normalizing data is to detect and fix anomalies (e.g., missing values, inconsistencies, formatting errors), ensuring that data is reliable for analysis.

IIA GTAG "Data Analytics: Elevating Internal Audit Performance" highlights that correcting data anomalies is a critical step in preparing data for effective use.

(D) The auditor ensured data fields were consistent and that data could be used for a specific purpose. ❌

Incorrect. While consistency in data fields is part of normalization, it does not fully address the broader purpose of identifying and fixing errors.

IIA GTAG – "Data Analytics: Elevating Internal Audit Performance"

IIA Standard 2320 – Analysis and Evaluation

NIST Data Quality Framework – Data Cleaning and Normalization

Analysis of Answer Choices:IIA References:Thus, the correct answer is C, as data cleaning and normalization ensure that anomalies are detected and corrected, making the data usable for a specific purpose

When evaluating a special order, the manufacturer must determine if accepting it will be profitable without disrupting normal operations. The key consideration is whether the company has spare production capacity to handle the order without increasing fixed costs.

Correct Answer (B - The Manufacturer Can Fulfill the Order Without Expanding Production Facilities)

Fixed costs ($3 per unit) are already incurred and will not change if the order is accepted.

The special price ($7 per unit) covers the variable costs ($5 per unit), contributing $2 per unit to profit.

If the manufacturer has excess production capacity, the order is profitable.

The IIA Practice Guide: Auditing Financial Performance emphasizes that special order decisions should be based on incremental cost analysis, ensuring no need for capacity expansion.

Why Other Options Are Incorrect:

Option A (Fixed and Variable Manufacturing Costs Are Less Than the Special Offer Selling Price):

Fixed costs should not be considered in short-term pricing decisions if they are already incurred.

Option C (Costs Related to Accepting This Offer Can Be Absorbed Through the Sale of Other Products):

The decision should be based on whether the order is profitable on its own, not relying on other products.

Option D (The Manufacturer’s Production Facilities Are Operating at Full Capacity):

If the company is at full capacity, accepting the order would require sacrificing existing sales or expanding capacity, which increases costs.

IIA Practice Guide: Auditing Financial Performance – Discusses cost analysis for special pricing decisions.

IIA GTAG 13: Business Performance – Covers incremental cost and profitability analysis in pricing decisions.

Step-by-Step Explanation:IIA References for Validation:Thus, B is the correct answer because accepting the order is only profitable if the manufacturer has excess capacity.

Hacking refers to unauthorized access to an IT system, typically with the intent to disrupt, steal, or manipulate data. In this scenario, activists attacking an oil company's IT system as a protest falls under hacking because they are illegally breaking into the company’s digital infrastructure to make a statement.

Let’s analyze each option:

Option A: Tampering

Incorrect. Tampering refers to physically altering or interfering with a system (e.g., changing sensor readings in an oil rig), rather than attacking an IT system digitally.

Option B: Hacking

Correct.

The individuals are gaining unauthorized access to the company’s IT system.

This action is commonly associated with hacktivism, where hackers attack organizations for political or ideological reasons.

IIA Reference: Internal auditors assess cybersecurity threats, including hacking and unauthorized access risks. (IIA GTAG: Auditing Cybersecurity Risks)

Option C: Phishing

Incorrect. Phishing involves tricking individuals into revealing sensitive information (e.g., login credentials) through fraudulent emails or websites, but this scenario describes a direct attack on the IT system.

Option D: Piracy

Incorrect. Piracy typically refers to copyright infringement (e.g., unauthorized software use) rather than hacking an IT system.

Thus, the verified answer is B. Hacking.

Understanding Job Enrichment:

Job enrichment is a job design technique that increases motivation by adding meaningful responsibilities, autonomy, and recognition to a job.

It aligns with Herzberg’s Two-Factor Theory, which suggests that responsibility and recognition are key motivators.

How Job Enrichment Increases Employee Motivation:

Increases Autonomy: Employees are given more decision-making power, leading to a stronger sense of ownership.

Provides Recognition: Workers receive direct feedback and acknowledgment for their contributions.

Encourages Skill Development: Employees handle more complex tasks, improving job satisfaction and career growth opportunities.

Why Other Options Are Incorrect:

A. Job complicating – Incorrect, as this is not a recognized job design technique; increasing job difficulty does not improve motivation.

B. Job rotation – Incorrect, as job rotation involves shifting employees between different tasks to reduce monotony, but it does not necessarily increase job responsibility or recognition.

D. Job enlargement – Incorrect, as job enlargement adds more tasks at the same skill level, increasing workload without necessarily improving responsibility or recognition.

IIA’s Perspective on Employee Motivation and Organizational Success:

IIA Standard 2120 – Risk Management states that internal auditors should evaluate employee engagement strategies, including job design techniques.

COSO ERM Framework emphasizes that motivated employees contribute to operational efficiency and organizational success.

IIA References:

IIA Standard 2120 – Risk Management & Employee Motivation

Herzberg’s Two-Factor Theory – Motivation through Responsibility and Recognition

COSO ERM – Employee Engagement and Organizational Performance

Thus, the correct and verified answer is C. Job enrichment.

Definition of Predictive Analytics:

Predictive analytics uses historical data, machine learning, and statistical algorithms to forecast future outcomes.

In the healthcare sector, it is used to predict patient readmission rates and identify those at high risk of needing additional treatment.

How Predictive Analytics Applies to Hospitals:

Hospitals analyze patient histories, symptoms, treatments, and recovery rates to determine the likelihood of readmission.

Predictive models help healthcare providers take proactive measures, such as tailored post-discharge care plans, to reduce readmission risks.

This leads to better patient outcomes and cost savings.

Why Other Options Are Incorrect:

B. Prescriptive analytics:

Prescriptive analytics goes beyond prediction and provides recommendations for action. In this case, the hospital is only determining which patients are likely to require additional treatment, not recommending treatments.

C. Descriptive analytics:

Descriptive analytics focuses on summarizing past data without making predictions. It would be used to report on past patient admissions but not to predict future readmissions.

D. Diagnostic analytics:

Diagnostic analytics analyzes the causes of past events but does not forecast future patient readmissions.

IIA’s Perspective on Data Analytics in Decision-Making:

IIA GTAG (Global Technology Audit Guide) on Data Analytics emphasizes the role of predictive analytics in risk assessment and operational efficiency.

COSO ERM Framework supports predictive modeling as part of strategic risk management.

IIA References:

IIA GTAG – Data Analytics in Risk Management

COSO Enterprise Risk Management (ERM) Framework

NIST Big Data Framework for Predictive Analytics

A one-time password (OTP) is a unique, temporary password that is valid for a single login session or transaction. It is commonly used in multi-factor authentication (MFA) systems to enhance security.

Correct Answer (D - When an Employee Uses a Key Fob to Produce a Token)

Key fobs generate a time-sensitive one-time password (OTP), which is used in conjunction with a traditional password to enhance security.

These devices are part of two-factor authentication (2FA) or multi-factor authentication (MFA) methods.

The IIA GTAG 9: Identity and Access Management discusses OTP tokens as a strong security control to prevent unauthorized access.

Why Other Options Are Incorrect:

Option A (When an employee accesses an online digital certificate):

Digital certificates authenticate users or devices, but they do not generate one-time passwords.

Option B (When an employee's biometrics have been accepted):

Biometric authentication (e.g., fingerprint, facial recognition) grants access based on biological traits, not an OTP.

Option C (When an employee creates a unique digital signature):

Digital signatures authenticate documents and transactions, but they are not time-sensitive one-time passwords.

IIA GTAG 9: Identity and Access Management – Covers OTP tokens as a security measure.

IIA Practice Guide: Auditing IT Security Controls – Recommends OTPs as part of secure authentication.

Step-by-Step Explanation:IIA References for Validation:Thus, D is the correct answer because key fobs generate one-time passwords for secure authentication.