Question 1 - CIA 596 II-22 - Organizational Structure As a conflict resolution strategy, optimizing (or a win-win strategy) is most appropriate when A. Time is scarce and the manager's patience is wearing thin. B. The benefits being contested cannot be changed. C. The relationship between the parties is likely to continue. D. People are deeply committed to established habits and patterns. A. Optimizing can require more patience, time and energy than other conflict resolution strategies. B. Optimizing is a win-win strategy that creates benefits to all parties. C. A win-win strategy, or optimizing, entails addressing the source of conflict and developing alternative strategies that are beneficial to both parties. This type of problem solving creates cooperation and positive attitudes that transfer to future organizational behaviors; therefore the company may gain by leveraging more resources to using this type of strategy. D. To optimize, people need to think beyond established habits and patterns to find new benefits to divide. Question 2 - CIA 1191 III-11 - Internal Control and Control Processes The operations manager of a company notified the treasurer of that organization 60 days in advance that a new, expensive piece of machinery was going to be purchased. This notification allowed the treasurer to make an orderly liquidation of some of the company's investment portfolio on favorable terms. What type of control was involved? A. Concurrent. B. Strategic. C. Feedback. D. Feedforward. A. Concurrent controls are in operation at the same time as the production process itself and these will make ongoing adjustments to the process based upon the immediate feedback from the system. B. Strategic controls are used to measure long-term performance (i.e., Research and Development, quality performance, etc.). C. Feedback controls are used to review past performance when something has already gone wrong. D. Feedforward controls are control activities that detect the problem before it occurs. Notifying the treasurer 60 days in advance allows the treasurer time to liquidate the company's investments on favorable terms so payment for the equipment can be made.

Question 3 - CMA 1288 3-25 - Internal Control and Control Processes The primary responsibility for establishing and maintaining internal control rests with A. The controller. B. Management. C. The treasurer. D. The internal auditor. A. The controller does not have the primary responsibility for establishing and maintaining internal control. B. Internal control is a method, or process, that is carried out by an entity's board of directors, management, and other personnel, and designed to provide reasonable assurance that the company's objectives will be achieved. C. The treasurer does not have the primary responsibility for establishing and maintaining internal control. D. Though the internal auditor does a lot of work in respect to the internal control system, the internal auditor is not responsible for establishing and maintaining internal control. Question 4 - CIA 596 I-5 - Internal Control and Control Processes Management often requires the internal audit activity's involvement with quarterly financial statements that are made public or used internally. Which one of the following is generally not a reason for such involvement? A. Management may perceive that having quarterly financial information examined by the internal auditors enhances its value for internal decision-making. B. The Standards state that internal auditors should be involved with reviewing quarterly financial statements. C. Management may be concerned about potential penalties that could occur if quarterly financial statements that are made public are misstated. D. Management may be concerned about its reputation in the financial markets. A. The function of internal auditors is not to perform the job of the external auditors, but their work extends to evaluating the reliability of the financial and operational information. B. The Standards do not specifically mention that internal auditors should be involved in the review of the quarterly financial statements (PA 2120.A1-3). C. Misstated financials made public can damage the company's reputation and expose it to liability. D. Management is very concerned about its reputation in the financial markets. Misstated financials can damage the company's reputation and expose it to liability.

Question 5 - CIA QZP1D-10 - Organizational Structure Which of the following is generally true regarding a managers span of control? A. Wider spans of control help ensure good internal controls and policy compliance throughout an organization. B. An organization with narrow spans of control needs more managers than those with wide spans. C. Wider spans of control mean higher administrative expense and less self-management. D. Narrow spans of control are typically found in flat organizations, those with few hierarchical levels. A. Wider spans of control means that subordinates are less supervised, thus, it does not help to ensure good internal controls and policy compliance. B. The span of control is the upper limit of the number of subordinates that a manager can effectively supervise. A narrow span of control means that more managers are required. C. Wider spans of control mean less administrative expenses and more self-management. D. Flat organizations will generally have a wider span of control. Question 6 - CIA 587 III-22 - Internal Control and Control Processes Which of the following are elements of a feedback control system? A. Sender, medium, and receiver. B. Planning, organizing, and directing. C. Detectors, comparators, and activators. D. Achievement, recognition, and aptitude. A. Sender, medium, and receiver are part of the communication network. B. Planning, organizing, and directing are part of management's functions in operating a business other than control. C. Feedback control systems identify when something has already gone wrong. Detectors, comparators and activators are elements of a feedback control system. Detectors measures what is happening in the control object (variable being controlled). Comparators (analyzer) is a devise for assessing the significance of what is happening, usually by comparing information supplied by the detector (what is actually happening) with the established reference points (what should be happening). Activators is a decision maker. D. Achievement, recognition, and aptitude are behavior motivators.

Question 7 - CIA 1188 II-24 - Internal Control and Control Processes One payroll audit objective is to determine if there is proper segregation of duties. Which of the following activities is incompatible? A. Preparing the payroll and filing payroll tax forms. B. Signing and distributing payroll checks. C. Preparing attendance data and preparing the payroll. D. Hiring employees and authorizing changes to pay rates. A. The person who prepares the payroll is in the best position to file payroll taxes, and there is no incompatibility between those two functions that would violate proper segregation of duties. B. Signing payroll checks and distributing them may be performed by the same person with no concerns for internal control objectives. C. The person who prepares attendance data should not be the same person who also prepares the payroll, because of the opportunity to create a fictitious employee and then pay that fictitious employee without it being noticed. D. A manager who has the authority to hire a person usually also has the authority to determine changes to the person's rate of pay, within company guidelines. Question 8 - CIA 1192 II-18 - Internal Control and Control Processes Which of the following controls would help prevent overpaying a vendor? A. Requiring the check signer to mail the check directly to the vendor. B. Reviewing the accounting distribution for the expenditure. C. Reviewing and canceling supporting documents when a check is issued. D. Approving the purchase before ordering from the vendor. A. Requiring the check signer to mail the check to directly to the vendor would ensure the check is not misappropriated, but would not necessarily prevent overpaying the vendor. B. Reviewing the accounting distribution of the expense would only ensure the proper accounting of the expense, but not necessarily prevent the overpaying of the vendor. C. Reviewing and canceling supporting documents would prevent paying the vendor twice. D. Approving the purchase before ordering the merchandise would ensure only the proper authorization of the merchandise, but not necessarily prevent the overpaying of the vendor. Question 9 - CIA 1195 II-16 - Organizational Structure Which one of the following techniques is not generally recognized as an effective conflict resolution technique for management to use in a dispute between employees?

A. Accommodation - management encourages a high degree of cooperation and a low degree of assertiveness. B. Compromise - management persuades each party to make concessions. C. Competition - management encourages the parties to seek their own interests, regardless of the effect on each other. D. Reorganization - management transfers one of the disputants to another department. A. Accommodation is recognized as an effective conflict resolution technique. B. Compromise is recognized as an effective conflict resolution technique. C. Encouraging the employees to seek their own interests, or competition, can stimulate conflict. Competition is a conflict-handling intention with substantial assertiveness (the degree to which a party seeks to achieve his/her goals) and a low degree of cooperativeness (the degree to which a party attempts to satisfy the concerns of others). D. Reorganization is recognized as an effective conflict resolution technique. Question 10 - CIA 598 3-24 - Internal Control and Control Processes Appropriate internal control for a multinational corporations branch office that has a monetary transfer unit requires that: A. Foreign currency rates be computed separately by two different employees. B. Corporate management approve the hiring of monetary transfer unit employees. C. The branch manager receive all wire transfers. D. The individual who initiates wire transfers not reconcile the bank statement. A. Foreign currency translation rates are not computed, but instead verified. Having two employees in the same department perform the same task will not significantly enhance internal control. B. This is not an important internal control consideration. C. This is not an important internal control consideration. D. Independent reconciliation of bank accounts is necessary for good internal control. Question 11 - CIA 594 II-50 - Internal Control and Control Processes An internal auditor is conducting interviews of three employees who had access to a valuable asset that has disappeared. In conducting the interviews the internal auditor should: A. Not indicate that management will forgo prosecution if restitution is made. B. Respond to noncooperation by threatening adverse consequences of such behavior. C. Allow a suspect to return to work after the interview so as not to arouse suspicions. D. Conduct the interviews in a group.

A. An internal auditor should not indicate that management will forgo prosecution if restitution is made. B. Threats are not productive. An attitude of seeking the truth is appropriate. C. An internal auditor should not allow a suspect to return to work, because doing so could give the suspect an opportunity to destroy evidence. A suspect should be suspended pending an investigation. D. People should be interviewed individually in order to obtain their independent statements. Question 12 - CIA 1193 II-11 - Internal Control and Control Processes In an audit of a purchasing department, which of the following ordinarily would be considered a risk factor? A. There is a failure to rotate purchases among suppliers included on an approved vendor list. B. Purchase specifications are developed by the department requesting the material. C. Purchases are made against blanket or open purchase orders for certain types of items. D. Purchases are made from parties related to buyers or other company officials. A. Rotating purchases among approved suppliers is not a usual control procedure, and therefore failure to rotate suppliers is not a control risk. However, the use of an approved list of vendors is appropriate because it helps to ensure quality of materials and reliability of supplies. B. The department requesting the material would be expected to develop the purchase specifications, and thus this does not represent a control risk. C. When appropriate to do so, making purchases against blanket or open purchase orders is not a control risk. D. Making purchases from related parties is a control risk because the purchasing agent may have a conflict of interest. Question 13 - CIA 595 III-15 - Internal Control and Control Processes The internal audit activity of an organization is an integral part of the organization's risk management, control, and governance processes because it evaluates and contributes to the improvement of those processes. Select the type of control provided when the IAA conducts a systems development review. A. Feedback control. B. Feedforward control. C. Strategic plans. D. Policies and procedures. A. Feedback control will provide information on a system that has already been installed.

B. Feedforward controls are control activities that detect the problem before it occurs. C. Strategic plans provide long-term guidance to the company. D. Policies and procedures are developed and implemented by management, not by the IAA. Question 14 - CIA 582 I-4 - Internal Control and Control Processes Effective internal control A. Reduces the need for management to review exception reports on a day-to-day basis. B. Eliminates risk and potential loss to the organization. C. Is unaffected by changing circumstances and conditions encountered by the organization. D. Cannot be circumvented by management. A. An effective internal control structure should prevent exceptions as well as detect exceptions after the fact. Thus, with an effective internal control structure, management's need to review exception reports daily should be reduced. B. No internal control structure, no matter how effective, can guarantee the complete elimination of risk and potential loss to the organization. C. As circumstances and conditions change, changes in internal controls are required. D. Internal controls can be overridden by managers. Question 15 - CMA 1283 3-14 - Internal Control and Control Processes 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 maintaining custody of an asset be entitled to access the accounting records for the asset. C. That an individual authorizing a transaction records it. D. That an individual authorizing a transaction maintain custody of the asset that resulted from the transaction. A. An individual performing the recordkeeping function should not be able to compare the accounting record of the asset with the asset itself, because this is a reconciliation function and the reconciliation function should be separate from the recordkeeping function. B. The person who maintains custody of an asset should not be entitled to access the accounting records for the asset. Accessing the accounting records for the asset would be a reconciliation function or a recordkeeping function, and both of these should be separate from the custody function.

C. Segregation of duties requires just the opposite: an individual authorizing a transaction should not be the same person who records it. D. Segregation of duties requires just the opposite: an individual authorizing a transaction should not be the same person who maintains custody of assets. Question 16 - CIA 597 III-15 - Internal Control and Control Processes A major corporation is considering significant organizational changes. Which of the following groups will not be responsible for implementing these changes? A. Employees. B. Top management. C. Outside consultants. D. Common shareholders. A. Employees may be part of the group that is responsible to implement organizational change. B. It is highly likely that top management will be part of the group that is responsible to implement organizational change. C. Outside consultants may be part of the group that is responsible to implement organizational change. Outside consultants can give an independent, unbiased view of the situation. D. Common shareholders are not responsible for implementing organizational change. Question 17 - CIA QZP1D-5 - Internal Control and Control Processes 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. Concurrent. B. Feedforward. C. Preventive. D. Feedback. A. Concurrent controls are in operation at the same time as the production process itself. B. Feedforward controls are control activities that detect the problem before it occurs. C. Preventive controls deter undesirable events from occurring. D. Feedback controls are used to review past performance when something has already gone wrong.

Question 18 - CIA 1196 III-27 - Internal Control and Control Processes Quality control circles are now used all over the world. They typically consist of a group of five to ten employees who meet regularly. The primary goal of these circles is A. To tap the creative problem-solving potential of every employee. B. To improve the quality of leadership in the organization. C. To improve communications between employees and managers by providing a formal communication channel. D. To allow for the emergence of team leaders who can be targeted for further leadership development. A. Quality control circles are used because it offers management opportunity to tap the creative problem-solving potential of the employees. The upside to quality control circles is the potential to lower costs, improved employer-employee relations, and increased employee commitment. B. Improving the quality of leadership is not the primary goal of quality control circles. C. Improving communication between employees and managers can be a consequence of the quality control circles. D. Identifying potential candidates for further leadership development can be a consequence of the quality control circles. Question 19 - CIA 1195 I-16 - Internal Control and Control Processes A restaurant food chain has over 680 restaurants. All food orders for each restaurant are required to be input into an electronic device which records all food orders by food servers and transmits the order to the kitchen for preparation. All food servers are responsible for collecting cash for all their orders and must turn in cash at the end of their shift equal to the sales value of food ordered for their I.D. number. The manager then reconciles the cash received for the day with the computerized record of food orders generated. All differences are investigated immediately by the restaurant. Corporate headquarters has established monitoring controls to determine when an individual restaurant might not be recording all its revenue and transmitting the applicable cash to the corporate headquarters. Which one of the following would be the best example of a monitoring control? A. The restaurant manager reconciles the cash received with the food orders recorded on the computer. B. Cash is transmitted to corporate headquarters on a daily basis. C. All food orders must be entered on the computer, and segregation of duties is maintained between the food servers and the cooks. D. Management prepares a detailed analysis of gross margin per store and investigates any store that shows a significantly lower gross margin. A. There are five interrelated components that comprise internal control. They are: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication,

and (5) monitoring. Monitoring is an activity of management. Monitoring assesses the quality of the internal control system's performance over time. Monitoring can be done in two ways: (1) through ongoing monitoring during normal operations, and (2) separate evaluations by management with the assistance of the internal audit function. If monitoring is done regularly during normal operations, it lessens the need for separate evaluations. The manager's reconciliation of cash received with food orders entered is a control activity. A reconciliation is a detective control activity, because it is intended to detect the occurrence of an unwanted event. However, it does not represent a monitoring activity of management. B. There are five interrelated components that comprise internal control. They are: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Monitoring is an activity of management. Monitoring assesses the quality of the internal control system's performance over time. Monitoring can be done in two ways: (1) through ongoing monitoring during normal operations, and (2) separate evaluations by management with the assistance of the internal audit function. If monitoring is done regularly during normal operations, it lessens the need for separate evaluations. Daily transmission of cash to corporate headquarters is a control activity which serves as an operational control. C. There are five interrelated components that comprise internal control. They are: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Monitoring is an activity of management. Monitoring assesses the quality of the internal control system's performance over time. Monitoring can be done in two ways: (1) through ongoing monitoring during normal operations, and (2) separate evaluations by management with the assistance of the internal audit function. If monitoring is done regularly during normal operations, it lessens the need for separate evaluations. Segregation of duties is a control activity which serves as a preventive control, because it is intended to prevent the occurrence of an unwanted event. Therefore, it does not represent a monitoring activity of management. D. There are five interrelated components that comprise internal control. They are: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Monitoring is an activity of management. Monitoring assesses the quality of the internal control system's performance over time. Monitoring can be done in two ways: (1) through ongoing monitoring during normal operations, and (2) separate evaluations by management with the assistance of the internal audit function. If monitoring is done regularly during normal operations, it lessens the need for separate evaluations. When management prepares a detailed analysis of gross margin per store and investigates any store that shows a significantly lower gross margin, it is performing a monitoring activity. Question 20 - CMA 684 3-29 - Internal Control and Control Processes Which one of the following is most likely to be considered a reportable condition? A. An accounts receivable clerk, who approves sales returns and allowances, receives customer remittances and deposits them in the bank. Limited supervision is maintained over the employee.

B. 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. C. 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. D. An inventory control clerk at a manufacturing plant has the ability to steal one completed television set from inventory a year. The theft probably will never be detected. A. An accounts receivable clerk who receives customer remittances, deposits funds in the bank, and who has the authority to approve sales returns and allowance is a reportable condition. The clerk could steal a customer remittance and cover up the theft by approving a credit memo to the customer's account. B. If the requirement for documentation of disbursements from the fund includes the requirement that the documentation be approved, and if the approving signature is matched against specimen signatures on file, and if the petty cash fund is reconciled regularly, any theft from the fund will be detected. C. If the receiving report is not included with the backup to the check, the check will not be signed. This is a detective control as well as a preventive control. It would detect the oversight and prevent a check from being sent out that might possibly not be legitimate. Thus, this would not be a reportable condition. D. This would probably not be a reportable condition, because the amount of potential theft is probably not material. Question 21 - CIA 1195 3-27 - Internal Control and Control Processes In an effort to reduce long-term overhead expenses, an organization wants to cut its workforce through early retirements. The best alternative to reduce the workforce would be to: A. Provide monetary incentives to individuals meeting certain criteria to retire. B. Conduct negotiations with labor unions in the organization. C. Threaten the most senior employees with discharge if they do not voluntarily retire. D. Provide individual counseling on how to handle retirement or training for a new job. A. This may be the most effective incentive for individuals to retire. B. Retirement is an individual decision. C. This could easily lead to age-discrimination lawsuits. D. This will probably not be sufficient to persuade employees who feel they cannot afford to retire early. Question 22 - CIA 592 II-17 - Internal Control and Control Processes An adequate system of internal controls is most likely to detect a fraud perpetrated by a

A. Single employee. B. Single manager. C. Group of managers in collusion. D. Group of employees in collusion. A. An adequate system of internal controls is most likely to detect a fraud perpetrated by a single employee. Because of segregation of duties, one employee acting alone may not have the ability to commit a fraud; or if one employee were to commit a fraud, the chances would be greater that other employees would detect it. B. Managers have the authority to override controls, and so the chances of a fraud being detected are less if it is perpetrated by a single manager than if perpetrated by a single employee. C. Managers have the authority to override controls, and so the chances of a fraud being detected are less if it is perpetrated by a group of managers than if perpetrated by a single employee. D. A group of employees acting in collusion is more likely to be able to commit a fraud than a single employee would be. Question 23 - CIA 595 III-9 - Organizational Structure In what form of organization does an employee report to multiple managers? A. Departmental. B. Bureaucracy. C. Matrix. D. Mechanistic. A. In a departmental organization, a subordinate will report only to one manager. B. In a bureaucracy, a subordinate will report only to one manager. C. A matrix organization is characterized with a subordinate reporting to more than one manager at a time. D. In a mechanistic organization (same as bureaucracy), a subordinate will report only to one manager. Question 24 - CIA 1192 II-20 - Internal Control and Control Processes An audit of the payroll function revealed several instances in which a payroll clerk had added fictitious employees to the payroll and deposited the checks in accounts of close relatives. What control should have prevented such actions? A. Using time cards and attendance records in the computation of employee gross earnings. B. Establishing a policy to deal with close relatives working in the same department. C. Having the treasurer's office sign payroll checks.

D. Allowing changes to the payroll to be authorized only by the personnel department. A. Using time cards and attendance records would not prevent a payroll clerk from adding fictitious employees to the payroll and keeping and depositing their paychecks. B. Establishing a policy for the hiring of close relatives would not prevent a payroll clerk from adding fictitious employees to the payroll and keeping and depositing their paychecks. C. Having the treasurer's office sign payroll checks would not prevent a payroll clerk from adding fictitious employees to the payroll and keeping and depositing their paychecks. D. Only the personnel department should be authorized to make changes to the payroll, while only the payroll department should process payroll checks. Furthermore, to prevent an unauthorized person from adding a name of a fictitious employee to the payroll, payroll records should be reconciled with the active employee list from the personnel department each payday. Question 25 - CIA 593 I-18 - Internal Control and Control Processes During the preliminary survey phase of an audit of the organization's production cycle, management stated that the sale of scrap was well controlled. Evidence to verify that assertion can best be gained by A. Comparing current revenue from scrap sales with that of prior periods. B. Comparing the quantities of scrap expected from the production process with the quantities sold. C. Comparing current revenue from scrap sales with industry norms. D. Interviewing persons responsible for collecting and storing the scrap. A. Comparing current revenue from scrap sales with that of prior periods will not verify that sale of scrap is well controlled. B. Comparing the quantities of scrap expected from the production process with quantities sold should verify whether sale of scrap is well controlled. If the quantities of scrap sold are approximately the same as quantities produced, the sale of the scrap is well controlled. C. Comparing current revenue from scrap sales with industry norms will not verify that sale of scrap is well controlled. D. Interviewing persons responsible for collecting and storing scrap will not verify that sale of scrap is well controlled, only that handling of scrap prior to its sale is well controlled. Question 26 - CIA 585 II-13 - Internal Control and Control Processes 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. Many random clerical errors arise from the desire of employees to meet production quotas. B. The cashier is commingling personal funds with a $1,000 imprest cash fund. C. Levels of approval authority for purchasing personnel are not set forth in the manual of purchasing procedures. D. No written quality-assurance procedure exists for a high-volume production line item with low unit cost that has a 15% scrap experience. A. This condition would have a fairly low relative risk. B. This condition would be considered qualitatively material given the high probability of fraud. C. This condition is would be considered qualitatively material given the absence of proper authorization of transactions. D. Materially concerns the qualitative and quantitative significance of an item. A 15% scrap experience for a high-volume, low unit cost is probability not that material. But, the lack of quality-assurance procedures would seem to indicate the high probability of error. Question 27 - CIA 595 I-14 - Internal Control and Control Processes ABC is a major retailer with over 52 department stores. The marketing department is responsible for Conducting marketing surveys Recommending locations for new store openings Ordering products and determining retail prices for the products Developing promotion and advertising for each line of products Determining the pricing of special sale items

The marketing department has separate product managers for each product line. Each product manager is given a purchasing budget by the marketing manager. Product managers are not rotated among product lines because of the need to acquire product knowledge and to build relationships with vendors. A subsection of the department does marketing surveys. In addition to ordering and pricing, the product managers also determine the timing and method of product delivery. Products are delivered to a central distribution center where goods are received, retail prices are marked on the product, and the goods are segregated for distribution to stores. Receiving documents are created by scanning in receipts; the number of items scanned in are reconciled with the price tags generated and attached to products. The average product spends between 12 and 72 hours in the distribution center before being loaded on trucks for delivery to each store. Receipts are recorded at the distribution center, thus the company has not found the need to maintain a receiving function at each store.

Each product manager is evaluated on a combination of sales and gross profit generated from their product line. Many products are seasonal and individual store managers can require that seasonal products be "cleared out" to make space for the next season's products. Requests for purchases beyond those initially budgeted by the marketing manager must be approved by the marketing manager. Which of the following statements regarding this control procedure is correct? The procedureI. II. III.

Should provide for the most efficient allocation of scarce organizational resources Is a detective control procedure Is not necessary because each product manager is evaluated on profit generated, thus this control is redundant

A. I only. B. II and III. C. I, II, and III. D. III only. A. The company must keep purchases within the limits of available financing, and it must allocate its limited warehouse and display space among its various merchandise lines. Having the product manager approve additional purchases beyond those initially budgeted provides a means to allocate the company's resources in order to maximize the organization's total return. B. Approval of requests for purchases beyond those initially budgeted by the marketing manager is not a detective control; it is a preventive control. The company must keep purchases within the limits of available financing, and it must allocate its limited warehouse and display space among its various merchandise lines. This control is not redundant because the evaluation of managers on profit generated does nothing to control the allocation of these two resources. C. Approval of requests for purchases beyond those initially budgeted by the marketing manager is not a detective control; it is a preventive control. The company must keep purchases within the limits of available financing, and it must allocate its limited warehouse and display space among its various merchandise lines. This control is not redundant because the evaluation of managers on profit generated does nothing to control the allocation of these two resources. D. The company must keep purchases within the limits of available financing, and it must allocate its limited warehouse and display space among its various merchandise lines. This control is not redundant because the evaluation of managers on profit generated does nothing to control the allocation of these two resources. Question 28 - CIA 1194 I-45 - Internal Control and Control Processes A retailer of high-priced durable goods operates a catalog-ordering division that accepts customer orders by telephone. The retailer runs frequent price promotions. During these times, the telephone operators enter the promotional prices. The risk of this practice is that

A. Customers could systematically be charged lower prices. B. Frequent price changes could overload the order entry system. C. Operators could collude with outsiders for unauthorized prices. D. Operators could give competitors notice of the promotional prices. A. There is nothing in this arrangement that would cause systematic undercharges. If the operators failed to enter a promotional price or failed to change the promotional price back to the regular price, a systematic overcharge or undercharge could occur. However, that would not be unique to the practice of using operators to change prices, as it could occur regardless of who was responsible for the job. B. When orders are entered into a system, the price charged is whatever price is in effect at that time. Frequent price changes will not overload the order entry system. C. If an operator who makes sales has the authority to also change prices in the system, that operator could temporarily change a price without authorization and then make a prearranged sale of the item to a friend. This would be of concern with any inventory item, but it is even more of a concern when the product being sold is a highpriced consumer item. This is an example of the importance of segregation of duties. D. Having operators enter price changes into the system would not give operators any advantage if they wanted to give competitors notice of the promotional prices. Question 29 - CIA 1185 III-10 - Internal Control and Control Processes The use of financial statement analysis, quality control procedures, and employee performance evaluations are all examples of A. Preliminary controls. B. Feedback controls. C. Concurrent controls. D. Feedforward controls. A. Preliminary controls, also known as feedforward controls detect the problem before it occurs, i.e., policies and procedures, preventative maintenance, budgets, etc. B. Feedback controls identify when something has already gone wrong. This is the least efficient and effective means of control. Examples of feedback controls are financial statement analysis, quality control procedures, and employee performance evaluations. C. Concurrent controls are in operation at the same time as the production process. There is immediate feedback. Examples of concurrent controls are inspectors on the assembly line, close supervision, etc. D. Feedforward controls detect the problem before it occurs, i.e., policies and procedures, preventative maintenance, budgets, etc.

Question 30 - CIA 1188 III-8 - Organizational Structure A claimed advantage of decentralizing is A. Elimination of duplication of effort. B. Manager development. C. Departmentalization. D. Concentration of authority. A. Efforts are typically and unavoidably duplicated under decentralization. B. As the organization migrates from a centralized to a decentralized structure, senior managers delegate down more authority, so that managers at middle and lower levels can develop - more rapidly than development in the centralized structure. C. Departmentalization is characteristic of both centralized and decentralized organizations because departments are created when a manager can no longer supervise an entire organization by him/herself. D. Authority is actually more concentrated in centralized organizations. Question 31 - CIA 596 3-25 - Internal Control and Control Processes Internal auditors can evaluate the management function of controlling by determining if: A. Anticipated problems are discussed, identified, and evaluated with possible solutions provided. B. Employee turnover rates are analyzed for trends and investigations are made for adverse trends. C. The grouping of activities in a department meets departmental objectives. D. Management is provided with prompt feedback on performance variances. A. This relates to the management function of planning. B. This relates to the management function of directing. C. This relates to the management function of organizing. D. Verifying that the prompt feedback on variances is provided to management is one way internal auditors facilitate the management function of controlling. Question 32 - CIA 597 1-39 - Internal Control and Control Processes If an engagement client's operating standards are vague and thus subject to interpretation, the internal auditor should A. Omit any comments on standards and the engagement client's performance in relationship to those standards because such an analysis would be meaningless. B. Determine best practices in this area and use them as the standard.

C. Interpret the standards in their strictest sense because standards are otherwise only minimum measures of acceptance. D. Seek agreement with the engagement client as to the criteria to be used to measure operating performance. A. If operating standards are vague then the internal auditors should work with management to develop appropriate evaluation criteria. B. If operating standards are vague then the internal auditors should work with management to develop appropriate evaluation criteria. C. If operating standards are vague then the internal auditors should work with management to develop appropriate evaluation criteria. D. The internal auditor evaluates the effectiveness and efficiency of operations. In addition, the internal auditor will ascertain the extent to which management has established the adequate criteria to determine whether objectives and goals have been accomplished. If adequate, internal auditors should use such criteria in their evaluation. If inadequate, internal auditors should work with management to develop appropriate evaluation criteria (Standard 2120.A4). Question 33 - CIA 591 I-25 - Internal Control and Control Processes The most appropriate method to control the frequent movement of trailers loaded with valuable metal scrap from the manufacturing plant to the organization's scrap yard about 10 miles away would be to A. Use armed guards to escort the movement of the trailers from the plant to the scrap yard. B. Require existing security guards to log the time of plant departure and scrap yard arrival. The elapsed time should be reviewed by a supervisor for fraud. C. Contract with an independent hauler for the removal of scrap. D. Perform complete physical inventory of the scrap trailers before leaving the plant and upon arrival at the scrap yard. A. Hiring armed guards to escort the movement of the trailers from the plant to the scrap yard would seem to excessive. B. Requiring existing security guards to log in and out the times of plan departure and scrap yard arrival would seem to be logical since it would add no additional cost to the organization. C. Contracting with an independent hauler for the removal of scrap would not give any additional assurance that fraud was not being committed. D. Conducting a complete physical inventory of the scrap trailers before leaving the plant and upon arrival at the scrap yard would seem to be excessive.

Question 34 - CIA 1188 II-3 - Internal Control and Control Processes In evaluating the effectiveness and efficiency with which resources are employed, an internal auditor is responsible for A. Reviewing the reliability of operating information. B. Determining the extent to which adequate operating criteria have been established. C. Verifying the existence of assets. D. Verifying the accuracy of asset valuation. A. Reviewing the reliability of operating information relates to the integrity of information. B. The internal auditor evaluates the effectiveness and efficiency of operations. In addition, the internal auditor will ascertain the extent to which management has established the adequate criteria to determine whether objectives and goals have been accomplished. If adequate, internal auditors should use such criteria in their evaluation (Standard 2120.A4). C. Verifying the existence of assets relates to safeguarding assets. D. Verifying the accuracy of asset valuation relates to the integrity of information. Question 35 - CIA 587 I-21 - Internal Control and Control Processes Checks from customers are received in the organization's mailroom each day. What controls should be in place to safeguard them? A. Providing bonding protection for mail clerks. B. Establishing a separate post office box for customer payments. C. Requiring a specific mail clerk to list and restrictively endorse each check. D. Forwarding all checks to the cashier upon receipt. A. Bonding is not a control function. B. Segregation of duties is the best control to safe guard the customer checks. C. Segregation of duties is the best control to safe guard the customer checks. In this case the mail clerk does not have access to any other records. D. Segregation of duties is the best control to safe guard the customer checks. The same person should not receive and deposit the checks. Question 36 - CIA 593 I-36 - Internal Control and Control Processes An engagement performed at an organization's payroll department has revealed various control weaknesses. These weaknesses along with recommendations for corrective actions were addressed in the final engagement communication. This communication should be most useful to the organization's

A. Audit committee of the board of directors. B. Payroll manager. C. Treasurer. D. President. A. The full audit report should be distributed to everyone who has a direct interest in the audit. This includes the executive or executives to whom internal audit reports, the person to whom people will reply about the report, persons responsible for the activities or operations audited, and people who will need to take corrective action as a result of the audit. The audit committee of the board of directors is not responsible for the payroll function. B. The full audit report should be distributed to everyone who has a direct interest in the audit. This includes the executive or executives to whom internal audit reports, the person to whom people will reply about the report, persons responsible for the activities or operations audited, and people who will need to take corrective action as a result of the audit. The payroll manager has responsibility for the payroll function and thus this communication should be most useful to that person. C. The full audit report should be distributed to everyone who has a direct interest in the audit. This includes the executive or executives to whom internal audit reports, the person to whom people will reply about the report, persons responsible for the activities or operations audited, and people who will need to take corrective action as a result of the audit. The treasurer is not responsible for the payroll function. D. The full audit report should be distributed to everyone who has a direct interest in the audit. This includes the executive or executives to whom internal audit reports, the person to whom people will reply about the report, persons responsible for the activities or operations audited, and people who will need to take corrective action as a result of the audit. The president is not responsible for the payroll function. Question 37 - CIA 1191 III-4 - Organizational Structure A vertically integrated organization is best described as one that A. Manufactures the component parts used in its product. B. Fosters very narrow span of control. C. Owns all of its production facilities. D. Is departmentalized by product or service. A. A vertically integrated organization manufactures the component parts used in its products and then markets these products. B. A narrow span of control implies that a manager supervises a few subordinates. C. Even a vertically integrated company may have to source some of its component parts.

D. Departmentation is the process of grouping related activities together into significant organizational subsystems. Question 38 - CIA 589 II-10 - Internal Control and Control Processes Which of the following observations, made during the preliminary survey of a local department store's disbursement cycle, reflects a control strength? A. 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. B. The treasurer's office prepares checks for suppliers based on vouchers prepared by the accounts payable department. C. Individual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales areas as appropriate. D. Individual department managers use prenumbered forms to order merchandise from vendors. A. The copy of the purchase order that the receiving department has should not include the quantity ordered or the unit or extended prices. This enhances the probability that the receiving department will submit the correct count. B. The treasurer's office should prepare vendor checks (the custody function), while accounting for payables is a recording function. C. Individual managers should not be responsible for the movement of merchandise because the receiving department should move the merchandise to a storage area. D. Purchasing should not be done by individual department managers. The individual department managers should instead prepare purchase requisitions and send them to the purchasing department, which should be responsible for issuing a purchase order. Question 39 - CIA 598 3-19 - Internal Control and Control Processes The cash-receipts function should be separated from the related record-keeping function in an organization in order to: A. Physically safeguard the cash receipts. B. Establish accountability when the cash is first received. C. Prevent the disbursement of cash from cash receipts. D. Minimize undetected losses of cash receipts. A. The cash receipts may be physically safeguarded by such measures as a secure cash receiving point. B. Initial accountability may be fixed by issuing a source document (a receipt) when the cash is received.

C. The cash-receipts and disbursements functions should be separated in order to prevent paying cash disbursements directly from cash receipts. D. Separating the cash-receipts and record-keeping functions prevents an employee from misappropriating cash and altering the records to conceal it. Question 40 - CIA 1188 I-20 - Internal Control and Control Processes Which of the following activities performed by a payroll clerk is a control weakness rather than a control strength? A. Draws the paychecks on a separate payroll checking account. B. Forwards the payroll register to the chief accountant for approval. C. Has custody of the check signature stamp machine. D. Prepares the payroll register. A. Drawing paychecks on a separate payroll checking account is a control strength rather than a weakness. B. The payroll clerk giving the payroll register to the chief accountant for approval is an appropriate control. Thus it is a control strength rather than a weakness. C. A payroll clerk is involved in payroll preparation. The payroll checks should be signed by someone else who has the authority to do so. Therefore, the payroll clerk having custody of the check signature stamp is a control weakness. D. Preparation of the payroll register is an appropriate duty for a payroll clerk. Question 41 - CIA 595 II-31 - Organizational Structure Upon completing an audit of a major operation of the company, the auditor is certain that a proposed recommendation should be made in the audit report. However, the auditor also understands that the recommendation will result in conflict between the auditee department and the accounting department. The organization is not bureaucratic and encourages the development of informal relationships across departments. Which of the following statements is correct regarding the nature of conflict in organizations? A. Conflict is more likely to be functional in a bureaucratic organization than in a less formal (organic type) organization. B. Conflict should be viewed as a healthy way to facilitate growth in an organization; thus the auditor should accept conflict that may result from normal audit recommendations. C. Conflict reduces the likelihood that an acceptable solution can be implemented in highly structured organizations; thus the auditor should consider revising the recommendation in order to avoid conflict. D. Conflict is healthy unless it clearly points out differences in the goals and objectives of the organization's operating units.

A. Whether the nature of conflict is functional depends on many variables, so generalizations about the effect of organizational structure are unsustainable. B. Functional or constructive conflict can be necessary for an organization to perform well because it generates self-criticism, innovation and the capability of responding well to changing situations. This is the "interactionist" view and it should be encouraged rather than suppressed. C. Avoiding conflict can be required in the short run but does not resolve the long-term, underlying problem. D. Internal conflict that illustrates differences in goals and objectives can facilitate discussion and eventually positive growth. Question 42 - CIA 596 I-20 - Internal Control and Control Processes If a manufacturer has established a limit on the number of defects that are tolerable in the final assembly of its product, which of the following quality control procedures should be employed? I. Inspect completed goods for compliance with established tolerances. II. Review sales returns for defects not detected during the final inspection process. III. Compare materials and machinery specifications with original product designs. IV. Establish a quality circle that includes management and subordinates to discuss labor efficiency. A. I, II, and III. B. III and IV only. C. II and III only. D. I, III, and IV. A. The establishment of quality control procedures is intended to help an organization minimize defects. In order to minimize defects the organization to should institute preventive controls, e.g., by reviewing equipment design and materials requirements. The organization should also review sales returns for defects not detected during the final inspection process. B. Establishing a quality circle is not a quality control procedure. But, the quality circle could lead to improvement in the procedures. C. Inspecting completed goods for compliance is also necessary procedure to include. D. Establishing a quality circle is not a quality control procedure. But, the quality circle could lead to improvement in the procedures.

Question 43 - CIA 598 1-5 - Internal Control and Control Processes An activity appropriately performed by the internal auditing department is: A. Reviewing systems of control before implementation. B. Designing systems of control. C. Installing systems of control. D. Drafting procedures for systems of control. A. Reviewing systems, even before implementation, is an activity appropriately performed by the internal auditing department and does not impair objectivity. B. Designing systems is presumed to impair audit objectivity. C. Installing systems of controls is presumed to impair independence. D. Drafting procedures for systems is presumed to impair independence. Question 44 - CMA 693 4-4 - Internal Control and Control Processes Accounting controls are concerned with the safeguarding of assets and the reliability of financial records. Consequently, these controls are designed to provide reasonable assurance that all of the following take place except A. Permitting access to assets in accordance with management's authorization. B. Comparing recorded assets with existing assets at periodic intervals and taking appropriate action with respect to differences. C. Compliance with methods and procedures ensuring operational efficiency and adherence to managerial policies. D. Executing transactions in accordance with management's general or specific authorization. A. The safeguarding of assets and reliability of financial records requires that management control who can have access to the assets to be safeguarded. B. The safeguarding of assets and reliability of financial records requires that physical assets be compared with recorded assets at periodic intervals, and that action be taken to resolve any differences. C. Compliance with methods and procedures ensuring operational efficiency and adherence to managerial policies is an objective of operational control, not accounting control. D. The safeguarding of assets and reliability of financial records requires that transactions be executed in accordance with management's general or specific authorization. Question 45 - CIA 589 II-16 - Internal Control and Control Processes An organization manufactures mirror frames. Scrap is adequately accounted for at the point of generation. The scrap is sorted and sold frequently to the organization's regular buyer at a

price negotiated between the scrap manager and buyer. An exposure caused by these procedures is that A. The collection of amounts receivable from the scrap buyer is questionable. B. Excessive scrap has been generated. C. The price received for scrap may be inadequate. D. The production of scrap indicates inefficiencies in production. A. There is nothing that indicates that the scrap buyer is unreliable. B. There is nothing that indicates that the production process is inefficient. C. There are various problems that arise from this situation. For example, there may be collusion between the scrap manager and buyer to establish an inadequate price, or the scrap manager may not be an expert negotiator, or some other factors that lead to an inadequate price. D. There is nothing that indicates that the production process in inefficient. Question 46 - CIA 1193 I-11 - Internal Control and Control Processes Select the appropriate population from which to draw a sample when the engagement objective is to evaluate compliance with controls designed to ensure that all shipments are billed. A. Customer accounts receivable. B. Prenumbered shipping documents. C. Cash receipts records. D. Prenumbered customer invoices. A. Drawing a sample of customer accounts receivable would not show shipments that were not invoiced. B. This would be the proper test to conduct. Tracing the shipping documents to the customer invoices would detect whether the recorded shipments had been billed. C. Drawing a sample of cash receipts would not show shipments that were not invoiced. D. Drawing a sample of customer invoices would not show shipments that were not invoiced. Question 47 - CIA 1192 I-11 - Internal Control and Control Processes Which of the following aspects of the administration of a compensation program is the most important control in the long run? A. A wage and salary review plan for individual employee compensation. B. A plan of job classifications based on predefined evaluation criteria. C. An informal wage and salary policy to be competitive with the industry average. D. A level of general compensation that is reasonably competitive.

A. A wage and salary review plan for individual employee compensation will first be based on job classification. B. Compensation programs are ways for companies to attract needed personnel. A compensation program needs to high enough to attract these needed personnel, but not too high as to be excessive. In the long-term the best way for an organization to control this program is for it to be based on predefined evaluation criteria. C. This practice would add little to the administration of a compensation program. D. A reasonably competitive compensation plan is based on job classification. Question 48 - CIA 587 II-25 - Internal Control and Control Processes Which of the following is an operating control for a research and development department? A. The research and development budget is properly allocated between new products, product maintenance, and cost reduction programs. B. All research and development costs are charged to expense in accordance with the applicable accounting principles. C. Research and development personnel are hired by the payroll department. D. Research and development expenditures are reviewed by an independent person. A. Operating controls are non-financial. The proper allocation (budgeting) of resources is one aspect of operating control. Thus, properly allocating new products, product maintenance, and cost reduction programs would be an operating control for the R&D department. B. Properly charging R&D expenses is an accounting principle, not a control. C. R&D personnel would be hired by the personnel department, not by the payroll department. D. Review of R&D expenditures is a financial control, not an operating control. Question 49 - CIA 598 1-68 - Internal Control and Control Processes An adequate system of internal controls is most likely to detect an irregularity perpetrated by a: A. Group of employees in collusion. B. Single manager. C. Group of managers in collusion. D. Single employee. A. A group has a better chance of successfully perpetrating an irregularity than does an individual employee. B. Management can often override controls, singularly or in groups.

C. Management can often override controls, singularly or in groups. D. A good system of internal controls is likely to expose an irregularity if it is perpetrated by one employee, without the aid of others. Question 50 - CIA 594 3-85 - Internal Control and Control Processes The process of organizational change can be impeded if the organization has a strong culture in place. Which of the following is not an effective step for changing a strong organizational culture? A. Create an awareness that the organization is faced with a serious crisis. B. Provide assurance to existing executives that their positions and prospects are secure. C. Prepare a comprehensive cultural "audit" to identify the existing dimensions of the organization's culture. D. Revamp selection and reward criteria to pro-mote a different set of organization values. A. See the correct answer for the explanation. B. This step would tend to further entrench the existing culture. C. Would be helpful in changing the existing organizational culture. D. See the correct answer for the explanation. Question 51 - CIA 1186 I-9 - Internal Control and Control Processes Management wishes to include in its internal controls over factory payroll a procedure to ensure that employees are paid only for work actually performed. To meet this objective, which of the following internal control actions would be most appropriate? A. Have supervisors distribute paychecks to employees in their sections. B. Compare piecework records with inventory additions from production. C. Use time cards. D. Keep unclaimed paychecks in a vault. A. Having supervisors distribute paychecks to their employees will not ensure that employees are paid only for work actually performed. B. Comparing piecework records with inventory additions is a cross-check on factory production performed. If employees are being paid on a piece-work basis, this could be used to ensure that payments are made only for work performed. C. A time card may be falsified by having another employee punch it. D. Keeping unclaimed paychecks in a vault will not ensure that employees are paid only for work actually performed. Furthermore, if the paychecks are legitimate and are truly unclaimed, most states have escheat laws that require unclaimed property to be turned over the state after a period of time.

Question 52 - CIA 1192 III-9 - Organizational Structure The optimal span-of-control of a manager is contingent upon several situational variables. For instance, a manager supervising workers within the same work area who are performing identical tasks that are simple and repetitive would best be able to supervise A. Only a few workers (a narrow span-of-control). B. Fewer workers than if the workers were geographically dispersed. C. An unlimited number of employees. D. A relatively large number of employees (a wide span-of-control). A. These conditions support a wide, not a narrow span-of-control. B. Geographical dispersion decreases the span-of-control. C. A limit must still be set on how many employees a manager can supervise, even though in these conditions the manager could control a large number of employees. D. Many underlying variable influence how many workers a manager can supervise in any situation. However, when jobs are similar, procedures are standardized, and geographic dispersion is minimized, a wide span-of control is ideal. Question 53 - CIA 1196 I-15 - Internal Control and Control Processes Two organizations have recently merged. The audit committee has asked the internal auditors from both organizations to assess risks that should be addressed after the merger. One manager has suggested that the engagement teams jointly examine the organizational culture and the "tone at the top" to identify control risks associated with the proposed merger. Which of the following statements is true? A. Differences in the organizational culture should be systematically identified because the differences may present major risks to the success of the merger. However, identifying differences is not an appropriate activity because it is political and subjective. B. Although the organizational culture could be considered part of the control environment, the assessment of such an environment would be highly subjective and therefore not useful. C. The organizational culture is not a part of the control environment and therefore should not be considered for a proposed engagement. D. None of the answers are correct. A. Even though the assessment of organizational culture is subjective, identifying differences would be an appropriate activity. B. Even though the assessment of organizational culture is subjective, it is considered is significant factor in engagements. C. Organizational culture is an integral part of the control environment.

D. The control environment influences the control consciousness of all the people in the organization. It sets the tone for the entire organization. Control environment factors include: (1) The integrity, ethical values and competence of the entity's people; (2) Management's philosophy and operating style; (3) The way management assigns authority and responsibility and organizes and develops its people; (4) The attention and direction provided by the board of directors. Question 54 - CIA 1189 I-10 - Internal Control and Control Processes Which of the following describes the most effective preventive control to ensure proper handling of cash receipt transactions? A. One employee issues a prenumbered receipt for all cash collections; another employee reconciles the daily total of prenumbered receipts to the bank deposits. B. The employee who receives customer mail receipts prepares the daily bank deposit, which is then deposited by another employee. C. Bank reconciliations are prepared by an employee not involved with cash collections and then are reviewed by a supervisor. D. Predetermined totals (hash totals) of cash receipts are used to control posting routines. A. It is important to establish accountability for cash received at the earliest possible point. Use of prenumbered receipts assures that all receipts are accounted for, and having a different employee do the reconciliation is an additional control against misappropriation of funds. B. The person who receives customer receipts should prepare a list of them. The person who prepares the bank deposit should be a different person, and that person should prepare an independent list. C. A bank reconciliation is a detective control, not a preventive control. D. Hash totals are control totals used in processing to ensure that data has not been changed during the processing, not cash custody controls. Question 55 - CIA 598 3-18 - Internal Control and Control Processes 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. An accurate count of goods is conducted upon receipt. B. Goods are delivered to the appropriate department in a timely manner. C. Goods are not lost after receipt. D. Only authorized shipments are accepted. A. The company should require such a count to be made when the goods arrive. However, maintenance of the file of purchase orders is not meant to ensure that a count is made.

B. This would be accomplished by inspecting the goods in a timely manner so they can be released to the appropriate department. C. This is accomplished by adequate security over the receiving activities. D. A shipment should be rejected if it is not documented by a purchase order in the open file. Question 56 - CIA 593 I-11 - Internal Control and Control Processes Shipments are made from the warehouse based on customer purchase orders. The matched shipping documents and purchase orders are then forwarded to the billing department for sales invoice preparation. The shipping documents are neither accounted for nor prenumbered. Which of the following substantive tests should be extended as a result of this control weakness? A. Foot the sales register and trace the total to the general ledger. B. Trace quantities and prices on the sales invoice to the customer purchase order and test extensions and footings. C. Trace a sample of purchase orders to the related sales invoices. D. Select bills of lading from the warehouse and trace the shipments to the related sales invoices. A. Footing the sales register and tracing the total to the general ledger would not test to see whether all shipments are being billed. B. Tracing quantities and prices on the sales invoice to the customer purchase order and testing extensions and footings would not test to see whether all shipments are being billed. C. Tracing a sample of purchase orders to the related sales invoices would not test to see whether all shipments are being billed. D. Since shipping documents are neither accounted for nor prenumbered, it is likely that some shipments will leave the warehouse without being billed. Selecting bills of lading from the warehouse and tracing the shipments to the related customer invoices is a test to see whether all shipments are being billed. Question 57 - CIA 1191 II-13 - Internal Control and Control Processes Factors that should be considered when assessing risk in a functional area include 1. Volume of transactions. 2. Degree of system integration. 3. Years since last engagement. 4. Significant management turnover.

5. Value of assets at risk. 6. Average value per transaction. 7. Results of last engagement. Factors that best define the significance of risk are A. 3, 4, and 6. B. 1, 5, and 6. C. 1 through 7. D. 2, 4, and 7. A. Factors 3 and 4 do not help in measuring risk. B. Factors 1, 5 and 6 are the best measures of risk. These factors can be quantified, whereas the others cannot be. C. Factors 2,3,4 and 7 do not measure risk. D. Factors 2, 4 and 7 do not measure risk. Question 58 - CIA 1196 III-16 - Organizational Structure Lack of skills, threats to job status and security, and fear of failure have all been identified as reasons that employees often A. Are unable to perform their jobs. B. Are dissatisfied with the structure of their organization. C. Want to change the culture of their organization. D. Resist organizational change. A. These are not factors that dictate whether employees are able to perform their jobs. B. The stated factors do mean that the employees are dissatisfied with the structure of the organization. C. The stated factors will not change the culture of the organization. D. These are the factors that are commonly linked to resistance in organizational change. Resistance to change needs to addressed and minimized by management, i.e., communicate the nature, extent and reasons for the change; make sure there is sufficient notice before the change is made; allow the participation of those who will be affected by the change in the process of implementation; and have formal and informal conferences about the change. Question 59 - CPA 1194 A-26 - Internal Control and Control Processes Proper segregation of duties reduces the opportunities for persons to be in positions to both

A. Establish internal control and authorize transactions. B. Perpetrate and conceal errors or fraud. C. Journalize entries and prepare financial statements. D. Record cash receipts and cash disbursements. A. Management's responsibility is to establish internal control policies and procedures. In addition, management has the authority to authorize transactions. As long as the same person does not perform both authorization of transactions and recordkeeping, custody, or reconciliation responsibilities, segregation of duties is maintained. B. The purpose of segregation of duties is to prevent one person from being able to both perpetrate and conceal a fraud or even an error. C. It is appropriate for an accountant to prepare both journal entries and financial statements. D. The recordkeeping function includes recording both cash receipts and cash disbursements. As long as the same person does not perform both recordkeeping and authorization, custody, or reconciliation responsibilities, segregation of duties is maintained. Question 60 - CIA 593 I-13 - Internal Control and Control Processes No incentive for efficiency or economy may exist in a cost-plus construction contract for small, unique projects. The potential exists for inflated costs. An appropriate control to encourage efficiency and economy in these contracts is A. Provision for maximum costs and sharing any savings. B. Elimination of change orders to the contract. C. A checklist approach to the review of contract costs. D. Use of an agreed-upon price for each unit of work. A. There is always the potential of abuse in a cost-plus contracting system. Generally, under this system contractors have no incentive to be efficient and the opportunity to overstate costs is created. Thus, if there is a provision for maximum costs and sharing any savings, the contractor could be encouraged to be efficient. B. The elimination of change orders would not be practical. C. A checklist approach to the review of contract costs would not be useful. D. The use of an agreed-upon price for each unit of work is not a cost-plus contract. Question 61 - CMA 690 3-25 - Internal Control and Control Processes Auditors document their understanding of internal control with questionnaires, flowcharts, and narrative descriptions. A questionnaire consists of a series of questions concerning controls that auditors consider necessary to prevent or detect errors and irregularities. The most appropriate question designed to contribute to the auditors' understanding of the completeness of the expenditure cycle would concern the

A. Use and accountability of prenumbered checks. B. Internal verification of quantities, prices, and mathematical accuracy of sales invoices. C. Qualifications of accounting personnel. D. Disposition of cash receipts. A. In understanding the completeness of the expenditure cycle, the auditor is interested in whether all the transactions have been recorded. If prenumbered checks are used sequentially, a gap in check numbers would be something for the auditor to investigate, because it may mean that there are unrecorded transactions. B. Verification of sales invoices will not contribute to an understanding of the completeness of the expenditure cycle, because sales invoices are part of the revenue cycle. C. Qualifications of accounting personnel are unrelated to the controls over the expenditure cycle. D. Cash receipts are unrelated to the expenditure cycle and can contribute nothing to the auditors' understanding of the completeness of the expenditure cycle. Question 62 - HOCK CIA P2B H6 - Internal Control and Control Processes Which one of the facilitated team workshops does the CSA specialist (possibly an internal auditor) review the controls in place within an organization and/or subgroup? A. Objective-based format. B. Control-based format. C. Process-based format. D. Risk-based format. A. The objective-based format focuses on the best way to accomplish a business objective. The purpose of this format is to understand whether control procedures are working effectively and are resulting in residual risks within an acceptable level. B. The control-based format focuses on how well the controls are in place and working. The purpose of this format is to produce an analysis of the gap between how controls are actually working and how well management expects the controls to work. C. The process-based format focuses on selecting activities that are elements of a chain of processes. The purpose of this format is to evaluate, update, validated, improve and even streamline the whole process and its component activities. D. The risk-based format begins by listing all possible barriers, obstacles, threats and exposures that might prevent achieving an objective. The purpose of the workshop is to determine significant residual risk.

Question 64 - CIA 1189 I-9 - Internal Control and Control Processes An internal auditor noted that several shipments were not billed. To prevent recurrence of such nonbilling, the organization should A. Undertake a validity check with customers as to orders placed. B. Undertake periodic tests of gross margin rates by product line and obtain explanations of significant departures from planned rates. C. Numerically sequence and independently account for all controlling documents (such as packing slips and shipping orders) when sales journal entries are recorded. D. Release product for shipment only on the basis of credit approval by the credit manager or other authorized person. A. This would not prevent shipments from going out without being invoiced. B. Although tests of gross margin rates can be used as an analytical procedure after the fact, it is not an effective way to prevent shipments from going out without being invoiced. C. Packing slips should be produced for every shipment, and an invoice should be produced for every packing slip. If packing slips and invoices are numerically sequenced and accounted for when sales journal entries are recorded, unrecorded shipments or unauthorized shipments should be prevented or detected. D. This would not prevent shipments from going out without being invoiced. Question 65 - CIA 596 I-63 - Internal Control and Control Processes Developing engagement observations, conclusions, and recommendations involves comparing the condition with the relevant standard or criterion. Which of the following choices best represents an appropriate standard or criterion to support engagement observations, conclusions, and recommendations? A. An internal accounting control principle, cited and copied from a public accounting reference. B. A quality standard operating procedure (number and date) for the department. C. A sound industry practice, based on the internal auditor's knowledge and experience obtained during many engagement assignments within the organization. D. All of the answers represent an appropriate standard or criterion to support engagement observations, conclusions, and recommendations. A. Public accounting references are a potential source of valid criteria. B. Quality standard operating procedures are a potential source of valid criteria. C. Sound industry practices are a potential source of valid criteria.

D. Adequate criteria are needed to evaluate controls. Internal auditors should ascertain the extent to which management has established adequate criteria to determine whether objectives and goals have been accomplished (PA 2120.A4). Question 66 - CIA 586 III-5 - Organizational Structure The CEO of a rapidly growing high-technology firm has exercised centralized authority over all corporate functions. Because the company now operates in four geographically dispersed locations, the CEO is considering the advisability of decentralizing operational control over production and sales. Which of the following conditions probably will result from and be a valid reason for decentralizing? A. More efficient use of headquarters staff officials and specialists. B. Quicker and better operating decisions. C. Greater local control over compliance with governmental regulations. D. Less overall operating costs. A. This is not a valid reason for decentralizing, which can result in duplication of efforts and producing less efficient use of headquarters staff officials and specialists. B. Decentralization usually brings about quicker operating decisions because they are made by lower-level managers. The quality of the decisions often goes up (assuming proper training of management) because employees closest to the problems are usually the most knowledgeable about them. C. Difficulty of assuring uniform action by units of the entity that have substantial autonomy is a disadvantage of decentralization. Compliance with governmental regulations is usually more easily achieved by centralization. D. Higher overall costs, brought about by duplication, are often a result of decentralization Question 67 - CIA 1187 II-12 - Internal Control and Control Processes During an engagement involving a construction contract, the internal auditor discovered that the contractor was being paid for each ton of dirt removed. The contract called for payment based on cubic yards removed. Which internal control might have prevented this error? A. Comparison of invoices with purchase orders or contracts. B. Comparison of actual costs with budgeted costs. C. Extension checks of invoice amounts. D. Comparison of invoices with receiving reports. A. The best method to detect the error is to do a comparison between the invoice and contract. By comparing the two, the internal auditor would see that the basis of payment (ton vs. cubic yards) was different. B. Comparing actual costs with budgeted costs would not state the reason for the variance.

C. The problem is not necessarily with the amount of payment but with the basis of payment. D. Since the company never received the dirt there would not be a receiving report. Question 68 - CIA 1194 3-3 - Internal Control and Control Processes Organizational procedures allow employees to anticipate problems. This type of control is known as: A. A feedback control. B. A performance appraisal. C. A feedforward control. D. A strategic control. A. This is a retrospective control based on the outcome of a completed activity. B. This is a retrospective control. C. Procedures provide guidance on how tasks should be accomplished. D. This is a broader based control that should go hand-in-hand with strategic planning. Question 69 - CIA 1195 3-1 - Internal Control and Control Processes Which group has the primary responsibility for the establishment, implementation, and monitoring of adequate controls in the posting of accounts receivable? A. External auditors. B. Accounting management. C. Internal auditors. D. Accounts receivable staff. A. External auditors are responsible for audit of financial statements. B. Management is responsible for controls. C. See response "d." D. Accounts receivable staff are responsible for daily transaction handling. Question 70 - CIA QZP1D-2 - Internal Control and Control Processes The scope of internal audit activity is much broader than that of an external audit. Which of the following activities conducted by the IAA would be considered relevant to the external auditors? A. The existence of a preventive maintenance program. B. The performance of an engagement that reviewed the payroll and payment cycle. C. The performance of an operational audit by the IAA.

D. None of the answers are correct. A. The focus of the external auditor is on financial statements. The existence of preventive maintenance program is not related to the financial audit. B. The primary focus of the external auditor is to provide an opinion on the fairness of the financial statements. Financial audits are often performed in connection with a transaction cycle (e.g., payroll and payment cycle, revenue and cash collection cycle). C. The focus of the external auditor is on financial statements. D. See correct answer for an explanation. Question 71 - CIA 587 I-24 - Internal Control and Control Processes Which of the following control procedures do you expect to find during an engagement to evaluate risk management and insurance? A. Policy of repetitive "standard journal entries" to record insurance expense. B. Cutoff procedures with regard to insurance expense reporting. C. Required approval of all new insurance policies by the organization's CEO. D. Periodic internal review of the "in force" list to evaluate the adequacy of insurance coverage. A. A policy of repetitive "standard journal entries" to record insurance expense has to do with control over the accounting of the insurance expense, not with risk management. B. Cutoff procedures with regard to insurance expense reporting have to do with control over the accounting of the insurance expense, not with risk management. C. Approval of all new insurance policies should be delegated not to the CEO, but to some lower level manager. D. The "in force" list is a means to review current insurance policies of the engagement client. This then gives the internal auditor the opportunity to review the extent of the insurance coverage at a given period of time. The internal auditor should then compare the list of current insurance policies with the list of insurance policies in the previous engagement. Question 72 - CIA 592 II-16 - Internal Control and Control Processes Controls should be designed to provide reasonable assurance that A. The internal audit activity's guidance and oversight of management's performance is accomplished economically and efficiently. B. Management's planning, organizing, and directing processes are properly evaluated. C. Management's plans have not been circumvented by worker collusion. D. Organizational objectives and goals will be achieved economically and efficiently.

A. Oversight of management's performance is provided by the board. B. Internal auditors would evaluate management's processes. C. This is an inherent limitation of internal control. D. Control is "any action taken by management, the board, and other parties to enhance risk management and increase the likelihood that established objectives and goals will be achieved." Question 73 - CIA 598 1-77 - Internal Control and Control Processes Internal controls are designed to provide reasonable assurance that: A. Material errors or irregularities would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties. B. Management's plans have not been circumvented by worker collusion. C. The internal auditing department's guidance and oversight of management's performance is accomplished economically and efficiently. D. Management's planning, organizing, and directing processes are properly evaluated. A. Internal control can only provide reasonable assurance regarding the achievement of an entity's objectives, not a guarantee. Controls may be preventive (to deter undesirable events from occurring), detective (to detect and correct undesirable events which have occurred), or directive (to cause or encourage a desirable event to occur). Thus, prevention, detection, and correction are three functions of internal controls. B. Collusion is an inherent limitation of internal control. C. The board of directors or a similar body are responsible for the guidance and oversight of management. D. The examination and evaluation of those processes is a function of the internal auditing department. Question 74 - CMA 1290 4-22 - Internal Control and Control Processes The most critical aspect of separation of duties within information systems is between A. Project leaders and programmers. B. Management and users. C. Programmers and computer operators. D. Programmers and systems analysts. A. This is not the most critical aspect of separation of duties with information systems. B. This is not the most critical aspect of separation of duties with information systems.

C. Programmers are the individuals who write, test and document the systems. Computer operators perform the actual operation of the computers for processing the data. Computer operators should not have programming functions and should not be able to program. Programmers should not have access to the computers and programs that are in actual use for processing. The most critical separation of duties is between programmers and computer operators. D. This is not the most critical aspect of separation of duties with information systems. Question 75 - CIA 1190 I-10 - Internal Control and Control Processes Which of the following controls would be the most appropriate means to ensure that terminated employees had been removed from the payroll? A. Establishing computerized limit checks on payroll rates. B. Reconciling payroll and time-keeping records. C. Establishing direct-deposit procedures with employees' banks. D. Mailing checks to employees' residences. A. This procedure would detect excessive pay to current employees but not inappropriate pay to terminated employees. B. If an employee has been terminated but the employee has not been removed from the pa