IIA IIA-CIA-Part2 Practice Test Questions, Exam Dumps

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IIA-CIA-Part2 IIA Practice Test Questions and Exam Dumps

Question No 1:

Which of the following scenarios should raise red flags for a potential inventory fraud scheme within an organization, particularly based on unusual control behaviors and inconsistencies in supporting documentation?

I. The controller has taken full responsibility for approving all payments to specific vendors.
II. The controller has repeatedly postponed the implementation of a new accounts payable system, despite explicit corporate instructions.
III. Sales commissions do not align with the company’s increased sales performance.
IV. Payments to certain vendors are backed by copies of receiving memos rather than original documents.

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

Correct Answer: C. I, II, and IV only

Explanation:

Inventory fraud can occur through schemes such as falsifying purchase records, overreporting inventory, or manipulating vendor transactions. To detect such fraud, auditors and internal control professionals look for behavioral red flags and procedural anomalies—especially where segregation of duties is violated or documentation is inconsistent.

Statement I is a clear red flag. When a single person, such as the controller, assumes sole authority over vendor payments, it undermines the principle of segregation of duties, creating opportunities to process fraudulent transactions without oversight.

Statement II also indicates potential fraud. Delaying the implementation of a new accounts payable system—especially when it's been mandated by corporate leadership—may suggest an attempt to avoid automation, increased transparency, or enhanced audit trails that could expose fraudulent activities.

Statement IV raises concern about documentation integrity. Supporting vendor payments with copies of receiving memos instead of originals may point to falsified or manipulated documentation. Fraudsters often avoid original documents, which are harder to forge or alter and more likely to be scrutinized during audits.

Statement III, while unusual, is not directly tied to inventory fraud. Discrepancies between sales commissions and reported sales may suggest payroll or revenue manipulation but don’t inherently point to fraudulent inventory practices.

In summary, the most plausible red flags for inventory fraud involve control over vendor payments (I), resistance to system upgrades (II), and suspicious supporting documents (IV). Each of these undermines internal controls and could allow inventory or procurement-related fraud to go undetected.

Thus, the correct answer is:
C. I, II, and IV only

Question No 2:

During an operational audit of a pizza delivery chain, the auditor identified frequent customer complaints about receiving cold pizzas. Upon reviewing oven calibration records from the past six months, the auditor found that over 40 percent of the ovens had required calibration adjustments. Given this information, what is the most appropriate next step for the auditor to take?

A. The auditor has sufficient evidence to conclude that malfunctioning ovens are the direct cause of cold pizzas.
B. The auditor should conduct further analysis and inquiries to assess whether oven calibration issues are significantly impacting pizza temperature.
C. The auditor has sufficient evidence to recommend replacing a portion of the ovens.
D. The auditor should eliminate ovens as a potential cause, since 60 percent did not require adjustments.

Correct Answer: B. The auditor should conduct further analysis and inquiries to assess whether oven calibration issues are significantly impacting pizza temperature.

Explanation:

In audit practice, forming conclusions requires a systematic approach based on sufficient and appropriate evidence. While the discovery that over 40 percent of ovens required calibration is notable, this fact alone does not conclusively prove that oven issues are causing cold pizzas. It suggests a potential link, but not enough to support a definitive conclusion or recommendation.

Option B is the correct answer because it reflects the auditor’s responsibility to dig deeper into the root cause. Further steps may include:

Reviewing temperature logs or product quality checks at the point of delivery.
Interviewing store managers or staff about the oven performance and maintenance practices.
Testing pizzas from ovens with and without calibration adjustments to assess temperature differences.
Examining delivery time logs to see if delays may also be contributing to the issue.

Option A (concluding that ovens are the cause) oversteps the evidence. Correlation is not causation, and without understanding how the calibration affects end-product temperature, the auditor risks drawing a premature conclusion.

Option C (recommending oven replacements) is similarly premature. Calibration needs don’t necessarily imply that the ovens are faulty; they may only need maintenance, not replacement.

Option D (eliminating ovens as a cause because 60% were not adjusted) misinterprets the data. A significant 40% still warrants investigation, especially if those ovens are in high-volume or high-complaint locations.

In conclusion, the auditor must gather more detailed and contextual evidence to understand the true cause of cold pizzas before making any definitive conclusions or recommendations.

Question No 3:

When performing a risk assessment as part of an internal audit engagement, what is the primary responsibility of the internal auditor with regard to the risks identified in the activity being reviewed?

A. Determine how the risk should best be managed
B. Provide assurance on the management of the risk
C. Modify the risk management process based on risk exposures
D. Design controls to mitigate the identified risks

Correct Answer: B. Provide assurance on the management of the risk

Explanation:

The internal auditor’s primary role in risk management is to act as an independent evaluator—not a decision-maker or manager of risk. When assessing the risk associated with an activity, the internal auditor’s responsibility is to provide objective assurance that risks are being properly identified, assessed, and managed by the responsible parties, typically management.

Internal audit functions in accordance with guidance from standards like the International Professional Practices Framework (IPPF) issued by the Institute of Internal Auditors (IIA). According to these standards, auditors are not responsible for managing or owning risk, but rather for evaluating the effectiveness of risk management processes.

Option B is correct because the auditor's role is to evaluate whether risk responses are appropriate and functioning effectively, and then report those findings to stakeholders such as senior management and the audit committee. For example, an auditor might assess whether cybersecurity risks are being appropriately mitigated through access controls and monitoring systems and whether these controls are aligned with company policies and risk appetite.

Option A (Determine how the risk should best be managed) is incorrect because that is the responsibility of management, not the auditor. Recommending improvements is acceptable, but determining the risk response crosses into management’s domain.

Option C (Modify the risk management process) is incorrect because internal auditors may evaluate or suggest enhancements to the process, but they do not modify it themselves.

Option D (Design controls to mitigate risks) is also a management function. While auditors can recommend or assess controls, they should not design or implement them, as this would impair independence.

In summary, the auditor's role is to remain objective and provide assurance that risk management practices are sound and that risks are being effectively managed—not to own or operate those processes.

Question No 4:

Which of the following procedures would provide the most reliable evidence regarding the effectiveness of a company’s credit-granting function in managing risk and ensuring timely collection?

A. Observe the process.
B. Review the trend in receivables write-offs.
C. Ask the credit manager about the effectiveness of the function.
D. Check for evidence of credit approval on a sample of customer orders.

Correct Answer: D. Check for evidence of credit approval on a sample of customer orders.

Explanation:

When evaluating the effectiveness of a credit-granting function, internal auditors or reviewers seek evidence that credit policies are being followed, that credit decisions are being made appropriately, and that risks are being managed in a way that minimizes the likelihood of non-payment or bad debt.

The most reliable and direct procedure for assessing the effectiveness of the credit-granting function is to check for evidence of credit approval on a sample of customer orders (Option D). By reviewing specific customer orders, an auditor can verify whether the company's credit policies are being properly followed. This allows for an actual assessment of whether credit is being granted based on established criteria, such as customer credit history, payment terms, and risk levels. This direct inspection provides concrete, objective evidence that the credit-granting process is functioning as intended.

Option A (Observe the process) is not the most effective method. While observing the process might provide some insight, it doesn’t provide the same level of evidence as a direct examination of documented decisions. The process might be followed in theory but fail to produce the desired results in practice.

Option B (Review the trend in receivables write-offs) provides indirect evidence of credit function effectiveness but is not as reliable for evaluating the approval process itself. Write-offs might indicate that credit was granted to high-risk customers, but they do not show how well the credit approval process is being implemented at the transactional level.

Option C (Ask the credit manager about the effectiveness of the function) involves subjective judgment and does not provide independent or verifiable evidence. It’s helpful as part of an overall understanding of the function but isn’t sufficient on its own for evaluating effectiveness.

In conclusion, Option D is the best procedure because it provides direct, documented evidence of whether credit approval procedures are being followed and whether they align with the company’s established credit policies.

Question No 5:

What is the most effective approach for internal auditors to enhance the reliability of computerized financial and operating information within an organization’s information systems?

A. Determining if controls over record keeping and reporting are adequate and effective.
B. Reviewing data provided by information systems to test compliance with external requirements.
C. Determining if information systems provide management with timely information.
D. Determining if information systems provide complete information.

Correct Answer: A. Determining if controls over record keeping and reporting are adequate and effective.

Explanation:

Internal auditors play a critical role in ensuring the reliability of computerized financial and operating information, which is essential for accurate decision-making, regulatory compliance, and financial reporting. The most effective way to enhance the reliability of this information is by assessing the adequacy and effectiveness of internal controls over record keeping and reporting (Option A).

The reliability of computerized information is largely dependent on the integrity of the underlying controls that govern the recording, processing, and reporting of data. These controls typically include:

Access controls to prevent unauthorized data manipulation.
Data validation to ensure accuracy and completeness of records.
Reconciliation processes to verify that data is consistent across systems and reports.
Audit trails to provide transparency on changes made to records.

By evaluating whether these controls are adequate and effective, internal auditors can ensure that data is properly captured, processed, and reported without errors or manipulation, which enhances the overall reliability of the financial and operational information.

In contrast:

Option B (Reviewing data provided by information systems to test compliance with external requirements) is important for ensuring regulatory compliance, but it does not directly address the reliability of information from an internal control perspective.
Option C (Determining if information systems provide management with timely information) is important for decision-making, but it does not necessarily guarantee the accuracy or reliability of the data itself.
Option D (Determining if information systems provide complete information) is valuable in evaluating whether all necessary data is captured. However, even if the information is complete, it may not be reliable if the controls over data integrity and reporting are not strong.

In conclusion, Option A is the most effective approach because it focuses on the foundation of reliable information: strong internal controls that ensure accurate, consistent, and trustworthy financial and operational data.

Question No 6:

Which of the following situations could create an opportunity for an employee to steal checks sent to an organization and cash them?

A. Checks are not restrictively endorsed when received.
B. Only one signature is required on the organization's checks.
C. One employee handles both accounts receivable and purchase orders.
D. One employee handles both cash deposits and accounts payable.

Correct Answer: A. Checks are not restrictively endorsed when received.

Explanation:

To prevent fraud and theft, organizations must implement strict internal controls over financial transactions, particularly when handling checks. In the scenario described, restrictive endorsement is an essential control measure to prevent employees from stealing checks and cashing them fraudulently.

Option A, where checks are not restrictively endorsed when received, creates a significant vulnerability. A restrictive endorsement, such as “For Deposit Only,” limits how a check can be processed after it is received. Without this endorsement, an employee could potentially endorse the check to themselves and cash it at a bank, as there is no control preventing the check from being misused. This is a basic but critical control that ensures checks are immediately marked for deposit and prevents them from being easily diverted.

Let’s look at the other options:

Option B (Only one signature is required on the organization’s checks) does increase the risk of fraud, particularly if an employee has access to both the checkbook and the signature process. However, this does not directly relate to stealing checks that are already received by the organization. The primary risk here is that checks could be written out fraudulently, rather than stolen from incoming mail.
Option C (One employee handles both accounts receivable and purchase orders) poses a risk of misappropriation or fraudulent transactions, but it is not directly related to stealing or cashing checks. This situation could lead to manipulation of sales or purchase data, but the control weakness is in the segregation of duties, not in the handling of incoming checks.
Option D (One employee handles both cash deposits and accounts payable) creates a risk of embezzlement and mishandling of cash, but it does not directly impact the theft of checks that have been sent to the organization.

In conclusion, Option A is the correct answer because the lack of a restrictive endorsement allows checks to be stolen and cashed with greater ease. Implementing a restrictive endorsement on all incoming checks is a fundamental control to prevent this type of fraud.

Question No 7:

An internal auditor is assigned to conduct a security audit of the local area network (LAN) used by the finance department. This LAN supports sensitive financial operations, including investment decisions involving hedging strategies and financial derivatives, and is also used to download data from the mainframe. Given this, which of the following would fall outside the scope of the security audit engagement?

A. Investigation of the physical security over access to the components of the LAN.
B. The ability of the LAN application to identify data items at the field or record level and implement user access security at that level.
C. Interviews with users to determine their assessment of the level of security in the system and the vulnerability of the system to compromise.
D. The level of security of other LANs in the company which also utilize sensitive data.

Correct Answer: D. The level of security of other LANs in the company which also utilize sensitive data.

Explanation:

When conducting an audit of security for a local area network (LAN) used by the finance department, the auditor’s focus should be on assessing the security posture of the specific LAN that is relevant to the financial operations of the organization. The audit should address risks related to data integrity, confidentiality, access control, and potential threats to financial decision-making. Let’s examine each option:

Option A (Investigation of physical security over access to the components of the LAN) is relevant to the security audit. Physical security is an integral part of overall system security, ensuring that unauthorized individuals cannot gain access to key hardware components, such as servers or routers, that could jeopardize the integrity of financial data. This is an important area for an audit focused on securing sensitive financial operations.
Option B (The ability of the LAN application to identify data items at the field or record level and implement user access security at that level) is also crucial. A proper security audit would assess how well the LAN enforces user access controls and ensures that sensitive data is protected at the field or record level, especially for financial models or data used in investment decisions. This helps mitigate risks like unauthorized access or data manipulation.
Option C (Interviews with users to determine their assessment of the level of security in the system and the vulnerability of the system to compromise) is relevant. User feedback provides insights into the perceived effectiveness of security measures, potential vulnerabilities, and how users experience the system’s security. This could highlight gaps in security from a practical user perspective.
Option D (The level of security of other LANs in the company which also utilize sensitive data) is outside the scope of this engagement. The auditor’s role is to assess the specific LAN in the finance department, not other LANs across the company. The security of other LANs is outside the scope of the audit unless explicitly included in the audit plan.

In summary, the correct answer is Option D, as it addresses a broader concern unrelated to the specific LAN being audited.

Question No 8:

An internal auditor is tasked with auditing management’s quality program, specifically testing the accuracy of the cost-of-quality reports provided to management. Which of the following internal control objectives is primarily the focus of this testing?

A. To ensure compliance with policies, plans, procedures, laws, and regulations.
B. To ensure the accomplishment of established objectives and goals for operations or programs.
C. To ensure the reliability and integrity of information.
D. To ensure the economical and efficient use of resources.

Correct Answer: C. To ensure the reliability and integrity of information.

Explanation:

When an internal auditor tests the accuracy of cost-of-quality reports, the primary objective is to assess the reliability and integrity of the information used by management in making decisions. This objective is central to the accuracy and trustworthiness of the reports, which provide critical insights into the organization’s quality management processes. Let’s break down the options to better understand why Option C is the most appropriate answer.

Option A (To ensure compliance with policies, plans, procedures, laws, and regulations) focuses on legal and regulatory compliance. While compliance is a key area of auditing, testing the accuracy of the cost-of-quality reports does not directly relate to verifying compliance with laws or regulations. The audit is more concerned with information integrity than with ensuring the reports are in line with external rules and regulations.
Option B (To ensure the accomplishment of established objectives and goals for operations or programs) refers to assessing whether the organization has met its strategic or operational goals. While the cost-of-quality reports may be used to track progress toward quality-related goals, the primary focus of this audit is on the accuracy of the data rather than whether the goals have been achieved.
Option C (To ensure the reliability and integrity of information) is the correct answer. The core purpose of auditing the cost-of-quality reports is to verify that the data presented is accurate, complete, and reliable. Reliable and accurate information is essential for effective decision-making and ensuring that the organization has an accurate understanding of the costs associated with quality. By testing the accuracy of the reports, auditors ensure that the information provided to management is trustworthy and serves as a solid basis for decision-making.
Option D (To ensure the economical and efficient use of resources) relates to optimizing the use of resources, which is relevant to overall organizational efficiency. However, the accuracy of cost-of-quality reports is more directly related to ensuring the reliability of the data rather than the efficiency of resource usage.

In summary, the focus of testing the accuracy of the cost-of-quality reports is to ensure the reliability and integrity of the information provided to management, which is crucial for informed decision-making.

Question No 9:

When internal auditors provide consulting services, which of the following primarily determines the scope of the engagement?

A. Internal auditing standards.
B. The audit engagement team.
C. The engagement client.
D. The internal audit activity's charter.

Correct Answer: C. The engagement client.

Explanation:

Internal auditors are sometimes asked to provide consulting services in addition to their traditional role of assurance and audit. Consulting engagements are advisory in nature and typically involve providing recommendations or guidance to help improve an organization's operations. In contrast to assurance engagements, where auditors objectively assess risks and controls, consulting engagements are more collaborative and focus on offering expertise to improve processes, systems, or controls.

The scope of a consulting engagement is primarily determined by the engagement client (Option C). The engagement client is the person or entity requesting the consulting services and typically defines the specific objectives and goals they want the auditor to address. Since consulting services are advisory and collaborative, the client plays a central role in shaping the scope by outlining their needs and the outcomes they expect from the engagement. For example, the client may request help with improving a specific process or enhancing the effectiveness of internal controls, and the internal auditor will then tailor the scope based on these requirements.

Now let’s explore why the other options are not as appropriate:

Option A (Internal auditing standards) provides broad guidance on how internal auditors should perform their work, but it does not dictate the specific scope of consulting engagements. While internal auditing standards do emphasize the importance of independence, objectivity, and risk-based focus, the scope of consulting services is largely determined by the client’s needs and objectives.
Option B (The audit engagement team) may help to define the practical execution of the engagement, but the team doesn’t determine the scope itself. The engagement team’s role is to carry out the work based on the client’s defined scope and objectives.
Option D (The internal audit activity's charter) outlines the overall mandate of the internal audit function, but it is more relevant to the authority and responsibilities of the internal audit department as a whole, rather than the specific scope of a consulting engagement.

In summary, the engagement client defines the scope of the consulting services, as they are the ones requesting specific expertise and recommendations from the internal auditor.

Question No 10:

A manufacturing process has the potential to generate hazardous waste at multiple stages, from raw material handling to finished goods storage. If the objective of a pollution prevention audit engagement is to identify opportunities to minimize waste, in which order should the following opportunities be considered?

A. V, II, IV, I, III.
B. IV, II, I, III, V.
C. I, III, IV, II, V.
D. III, IV, II, V, I.

Correct Answer: B. IV, II, I, III, V.

Explanation:

In the context of a pollution prevention audit for a manufacturing process, the goal is to identify the most effective opportunities to minimize or eliminate the generation of hazardous waste. These opportunities should be considered in a prioritized order based on the hierarchy of pollution prevention principles, which aim to address waste generation at its source first, followed by other strategies for managing waste that has already been produced.

Here is the correct order for considering the opportunities:

Elimination at the source (II) – The most effective way to minimize waste is to prevent it from being created in the first place. Eliminating hazardous materials or processes that create waste should always be the first priority. For example, replacing harmful chemicals or modifying a production process to avoid waste generation at the outset.
Recovery as a usable product treatment (IV) – If waste cannot be eliminated at the source, the next best option is to recover the waste as a usable product or byproduct. This could include recovering scrap materials, chemicals, or energy that can be reused in the process.
Recycling and reuse (I) – After recovering usable products from waste, the next step is to recycle or reuse any remaining materials. This reduces the need for new raw materials, thereby minimizing overall waste generation.
Energy conservation (III) – While energy conservation is an important aspect of sustainability, it is a secondary concern when compared to minimizing waste creation. Energy conservation measures, such as improving efficiency or switching to renewable energy sources, should be considered after waste reduction strategies.

Thus, the correct order is IV, II, I, III, V. This prioritization follows the pollution prevention hierarchy, starting with eliminating the source of the waste and then focusing on recovery, recycling, and conservation.

Why the other options are incorrect:

Option A, C, D present an incorrect order, as they either prioritize energy conservation or recycling before addressing the more impactful strategies of eliminating waste at the source and recovering usable products. The hierarchy emphasizes eliminating waste at the source first, followed by recovery and reuse.

In conclusion, for a pollution prevention audit, the most effective strategy is to start with elimination at the source, followed by recovery, recycling, and energy conservation to minimize waste generation in the manufacturing process.