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Question: V2C3-0001
An internal audit team recently completed an audit of the company’s compliance with its lease-versus-purchase policy concerning company automobiles. The audit report noted that the basis for several decisions to lease rather than purchase automobiles had not been documented and was not auditable. The report contained a recommendation that operating management ensure that such lease agreements not be executed without proper documentation of the basis for the decision to lease rather than buy. The internal auditors are about to perform follow-up work on this audit report. The primary purpose for performing a follow-up review is to

Answers
A: Ensure timely consideration of the internal auditors' recommendations. B: Ascertain that appropriate action was taken on reported findings. C: Allow the internal auditors to evaluate the effectiveness of their recommendations. D: Document what management is doing in response to the audit report and close the audit file in a timely manner.

Answer Explanations
Answer (a) is incorrect because it is not the best answer. It implies that the auditor’s recommendations, not the findings, are the most important elements of the report. Answer (b) is the correct answer. This is what the IIA Standards require. Answer (c) is incorrect because it is not the best choice. This implies that the auditor’s recommendations, not findings, are primary. Answer (d) is incorrect because this implies that processes in the internal auditing activity are primary.

Question: V2C3-0002
An internal audit team recently completed an audit of the company’s compliance with its lease-versus-purchase policy concerning company automobiles. The audit report noted that the basis for several decisions to lease rather than purchase automobiles had not been documented and was not auditable. The report contained a recommendation that operating management ensure that such lease agreements not be executed without proper documentation of the basis for the decision to lease rather than buy. The internal auditors are about to perform follow-up work on this audit report. Assume that senior management has decided to accept the risk involved in failure to document the basis for leaseversus-purchase decisions involving company automobiles. In such a case, what would be the auditors’ reporting obligation?

Answers
A: The auditors have no further reporting responsibility. B: Management's decision and the auditors' concern should be reported to the company's board of directors.

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C: The auditors should issue a follow-up report to management clearly stating the rationale for the recommendation that the basis for lease-versus-purchase decisions be properly documented. D: The auditors should inform the external auditor and any responsible regulatory agency that no action has been taken on the finding in question.

Answer Explanations
Answer (a) is the correct answer. When senior management has assumed such risk, reporting to the board is required only for significant findings. There is no indication that the failure to document several decisions is significant enough to report to the board. Answer (b) is incorrect because of explanation given in choice (a). Answer (c) is incorrect because senior management has already indicated that it understands and has accepted the related risk. Answer (d) is incorrect because reporting to anyone outside the organization is not required or appropriate.

Question: V2C3-0003
Auditors realize that at times corrective action is not taken even when agreed to by the appropriate parties. This should lead an internal auditor to

Answers
A: Decide the extent of necessary follow-up work. B: Allow management to decide when to follow-up, since it is management's ultimate responsibility. C: Decide to conduct follow-up work only if management requests the auditor's assistance. D: Write a follow-up audit report with all findings and their significance to the operations.

Answer Explanations
Answer (a) is the correct answer. The IIA Standards state that the director of internal auditing should determine the nature, timing, and extent of follow-up. Answer (b) is incorrect because the IIA Standards state that follow-up work is not management’s responsibility. Answer (c) is incorrect because the IIA Standards state that follow-up work is not management’s responsibility. Answer (d) is incorrect because the auditor has to provide an opinion as to the decision made with regard to lack of action.

Question: V2C3-0004
Follow-up activity may be required to ensure that corrective action has taken place for certain findings. The internal audit department’s responsibility to perform follow-up activities as required should be defined in the

Answers

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A: Internal auditing department's written charter. B: Mission statement of the audit committee. C: Engagement memo issued prior to each audit assignment. D: Purpose statement within applicable audit reports.

Answer Explanations
Answer (a) is the correct answer. Responsibility for follow-up should be defined in the internal auditing department’s written charter. Answer (b) is incorrect. Follow-up is not specified in the content of the audit committee’s mission statement. Answer (c) is incorrect. This memo may contain a statement about responsibility for follow-up, but such a statement should be based on the wording and authority of the departmental charter. Answer (d) is incorrect. Follow-up authority and responsibility may be cited in applicable audit reports, but the definition should be first contained in the departmental charter.

Question: V2C3-0005
Given the acceptance of the cost savings audits and the scarcity of internal audit resources, the audit manager also decided that follow-up action was not needed. The manager reasoned that cost savings should be sufficient to motivate the auditee to implement the auditor’s recommendations. Therefore, follow-up was not scheduled as a regular part of the audit plan. Does the audit manager’s decision violate the IIA Standards?

Answers
A: No. The Standards do not specify whether follow-up is needed. B: Yes. The Standards require the auditors to determine whether the auditee has appropriately implemented all of the auditor's recommendations. C: Yes. Scarcity of resources is not a sufficient reason to omit follow-up action. D: No. When there is evidence of sufficient motivation by the auditee, there is no need for follow-up action.

Answer Explanations
Answer (a) is incorrect. Follow-up is required. Answer (b) is incorrect. Follow-up is to see that actions are taken, not just that the auditor’s recommendations have been implemented. Answer (c) is the correct answer. The IIA Standards require follow-up action. Lack of resources is not a sufficient reason. Answer (d) is incorrect. Follow-up is required.

Question: V2C3-0006
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Reporting to senior management and the board is an important part of the auditor’s obligation. Which of the following items is not required to be reported to senior management and/or the board?

Answers
A: Subsequent to the completion of an audit, but prior to the issuance of an audit report, the audit senior in charge of the audit was offered a permanent position in the auditee's department. B: An annual report summary of the department's audit work schedule and financial budget. C: Significant interim changes to the approved audit work schedule and financial budget. D: An audit plan was approved by senior management and the board. Subsequent to the approval, senior management informed the audit director not to perform an audit of a division because the division's activities were very sensitive.

Answer Explanations
Answer (a) is the correct answer. This would not have to be communicated. The audit work was done. The director of internal auditing would have to determine that there was no impairment of the independence of the senior’s work. If there was none, the report could be issued without reporting the personnel change. Answer (b) is incorrect. This is a standard part of the required reporting to senior management and the board. Answer (c) is incorrect. This is a standard part of the required reporting to senior management and the board. Answer (d) is incorrect. Both senior management and the board had approved the audit plan. The change dictated by senior management should be reported to the board.

Question: V2C3-0007
During an audit of purchasing, internal auditors found several violations of company policy concerning competitive bidding. The same condition that had been reported in an audit report last year, and corrective action had not been taken. Which of the following best describes the appropriate action concerning this repeat finding?

Answers
A: The audit report should note that this same condition had been reported in the prior audit. B: During the exit interview, management should be made aware that a finding from the prior report had not been corrected. C: The director of internal auditing should determine whether management or the board has assumed the risk of not taking corrective action. D: The director of internal auditing should determine whether this condition should be reported to the independent auditor and any regulatory agency.

Answer Explanations
Answer (a) is incorrect because this action is insufficient. Answer (b) is incorrect because this action is insufficient.

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Answer (c) is the correct answer. This action meets the requirements of the IIA Standards. Answer (d) is incorrect because this action would be inappropriate.

Question: V2C3-0008
Which of the following audit committee activities would be of the greatest benefit to the internal auditing department?

Answers
A: Review and approval of audit programs. B: Assurance that the external auditor will rely on the work of the internal auditing department whenever possible. C: Review and endorsement of all internal audit reports prior to their release. D: Support for appropriate follow-up of recommendations made by the internal auditing department.

Answer Explanations
Answer (a) is incorrect. Review and approval of audit programs is the responsibility of internal audit supervision. Answer (b) is incorrect. External audit’s reliance on the work of internal auditing is the subject of an AICPA pronouncement. Answer (c) is incorrect. Review and approval of internal audit reports is the responsibility of the director of internal auditing or designee. Answer (d) is the correct answer. The audit committee can lend considerable weight to the recommendations of internal auditing.

Question: V2C3-0009
An internal auditor reported a suspected fraud to the director of internal auditing. The director turned the entire case over to the security department. Security failed to investigate or report the case to management. The perpetrator continued to defraud the organization until being accidentally discovered by a line manager two years later. Select the most appropriate action for the audit director.

Answers
A: The director's actions were correct. B: The director should have periodically checked the status of the case with security. C: The director should have conducted the investigation. D: The director should have discharged the perpetrator.

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The fraud was only suspected when reported to the director.htm 1/20/2010 . choices (a). Answer (b) is the correct answer. As per the IIA Standards. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. D: Schedule a future audit of the specific area involved. Answer (c) is incorrect. Refer to the correct answer explanation. According to the Standards. A security department would generally have more expertise in the investigation of a fraud. Question: V2C3-0011 Internal auditing is responsible for reporting fraud to senior management or the board when Answers A: The incidence of fraud of a material amount has been established to a reasonable certainty. (c). Refer to the correct answer explanation. C: Seek the board's approval to initiate corrective action.Wiley CIA 2006 v1 Page 6 of 262 Answer Explanations Answer (a) is incorrect. The director should have periodically checked the status of the case with security. This answer is incorrect. Question: V2C3-0010 If an internal auditor finds that no corrective action has been taken on a prior audit finding that is still valid. file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. the director would not normally have the authority to discharge an employee in an audited area. In addition. Follow-up is specified by the IIA Standards. Immediate discharge would have violated the suspect’s rights. the director should have ensured that the internal auditing department’s responsibilities were met. by definition. B: Suspicious activities have been reported to internal auditing. and therefore. the IIA Standards states that the internal auditor should Answers A: Restate the prior finding along with the findings of the current audit. This answer is incorrect. B: Determine whether management or the board has assumed the risk of not taking corrective action. Answer (b) is the correct answer. and (d) will be incorrect.

the auditor is responsible for reporting such to senior management or the board. so that there is no misunderstanding about the facts. Answer Explanations Answer (a) is the correct answer. C: To indicate concurrence with the audit findings. The auditee may not concur with the audit finding all the time. The director agreed to meet and discuss the situation. The director was familiar with the auditor’s performance and agreed with the evaluation.htm 1/20/2010 . Reporting should occur sooner. D: The review of all suspected fraud-related transactions is complete. Question: V2C3-0013 Following a negative performance evaluation by a supervisor. The objective of the audit is to effect savings resulting from the auditee’s corrective action as early as possible so that the organization will benefit from the action taken. If the incidence of significant fraud has been established with reasonable certainty. Irregular transactions under investigation would not require reporting until the investigation phase is completed. Answer (b) is incorrect. Answer (d) is incorrect. Answer (d) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. D: To ensure that the auditor performance is evaluated. This is an administrative function of the audit department. Question: V2C3-0012 Why should organizations require auditees to promptly reply and outline the corrective action that has been implemented on reported deficiencies? Answers A: To close the open audit issues as soon as possible. a staff auditor went to the audit director to seek a change in the evaluation. Answer (c) is incorrect. Answer (b) is the correct answer. See choice (a).Wiley CIA 2006 v1 Page 7 of 262 C: Irregular transactions have been identified and are under investigation. Which of the following is the best course of action for the director to take? Answers A: Have the supervisor participate in the meeting. B: To effect savings as early as possible. Answer Explanations Answer (a) is incorrect. This is a mechanical aspect of the audit reporting process. No reporting is required when suspicious acts are reported to the auditor. Answer (c) is incorrect.

It does not cover areas such as staffing levels. Private conversation signals to the employee that the director is interested in what he or she has to say and will not be measuring his or her words against those of another. Answer Explanations Answer (a) is incorrect. D: Meet privately with the employee. Answer (c) is the correct answer. Answer (d) is incorrect. Question: V2C3-0014 The requirements for staffing level. Answer (c) is the correct answer. as such. The annual plan should be comprised of both an audit schedule and a budget and.Wiley CIA 2006 v1 Page 8 of 262 B: Have a human resources administrator present to ensure that improper statements are not made. The supervisor. as author of a critical performance review. will only add to the element of management intimidation. Question: V2C3-0015 file://C:\Program Files\Wiley\CIAExam\Print. However. It is never appropriate to mislead an employee in order to obtain information or to determine the employee’s view on a matter. and audit research should be included in Answers A: The internal auditing department's charter. D: Job descriptions for the various staff positions. Answer (b) is incorrect. Answer Explanations Answer (a) is incorrect. the director must establish a position and show support for the supervisor. should include all of these issues. Answer (d) is incorrect.htm 1/20/2010 . C: Meet privately with the employee. it is preferable to meet with the employee privately. Tell the employee of the director's agreement with the performance evaluation and express interest in any additional facts the employee may wish to present. Unless the director thinks the auditor’s concerns are so serious that the human resources department must be informed. Answer (b) is incorrect. Job descriptions do not reflect staffing level requirements. education and training. Encourage discussion by asking for the employee's side of the issue and disclaiming any agreement with the supervisor. The charter outlines the purpose. B: The internal auditing department's policies and procedures manual. the presence of a third party would inhibit the director’s listening effectiveness. authority. The policies and procedures manual spells out how audits should be conducted. and responsibilities of the department. not the details related to staffing and such. There may be more than one valid viewpoint. but that does not necessarily mean that the employee’s is valid. C: The annual plan for the internal auditing department. Again.

Answer (b) is incorrect because it is considered to determine the audit schedule. IV. D: I and II. The development of audit programs occurs during the planning phase of an individual audit. experience levels are relevant in making audit assignments. but does not identify all the acceptable choices. III. Answer Explanations Answer (a) is the correct answer. In addition to language skills. C: Planning workload requirements. Local customs. B: Assessing risk factors. Answer (b) is incorrect. As always. Question: V2C3-0016 The internal audit director of a multinational company must form an audit team to examine a newly acquired subsidiary in another country. III. It is not included within the scope of developing the audit schedule. file://C:\Program Files\Wiley\CIAExam\Print. local customs must be considered. Consideration should be given to which of the following factors? I.Wiley CIA 2006 v1 Page 9 of 262 Which of the following activities is not included in determining the audit schedule? Answers A: Developing audit programs. B: II. For example. The monetary exchange rate would not be a factor in determining the needed traits of the team members. Monetary exchange rate. C: I and III. III. IV.htm 1/20/2010 . Answer (c) is incorrect because it is considered to determine the audit schedule. gender and ethnic compatibility may be important in some Middle Eastern countries because religious restrictions and incompatibilities are relevant. Answer Explanations Answer (a) is the correct answer. Language skills of the auditor. D: Identifying auditable locations. It includes appropriate factors. Answers A: I. II. Answer (d) is incorrect because it is considered to determine the audit schedule. Experience of the auditor. II. Answer (c) is incorrect.

and IV. and III. C: I.htm 1/20/2010 . See choice (c). External reviews. Proper training is an important component of maintaining a current staff. II. III. III. It includes an incomplete answer. Proper training is an important component of maintaining a current staff. and external reviews. An outside consulting firm. and IV. Which of the following activities are designed to provide feedback on the effectiveness of an audit department? I. A college or university. Answer (d) is incorrect. The organization’s external audit firm. B: II. Proper training is an important component of maintaining a current staff. but does not provide feedback. but does not provide feedback. a specialist could be brought in from I. internal reviews. III. III. Internal reviews. III. Question: V2C3-0017 A quality assurance program of an internal audit department provides reasonable assurance that audit work conforms to applicable standards. II. Answer (b) is incorrect. Answers file://C:\Program Files\Wiley\CIAExam\Print. II. Answer Explanations Answer (a) is incorrect. Proper training. IV. II. but does not provide feedback. The department currently being audited. and IV.Wiley CIA 2006 v1 Page 10 of 262 Answer (d) is incorrect. Answers A: I. Answer (c) is the correct answer. IV. D: I. The purpose of a quality assurance program is to evaluate the operations of the internal audit department. The IIA Standards note that a program should include supervision. Question: V2C3-0018 If the internal audit staff does not have the skills to perform a particular task. Proper supervision.

which may lead to excessive turnover in the internal audit department. This is the primary reason. and IV. Question: V2C3-0020 file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is incorrect. such as attending conferences. The key point is independence and objectivity. Answer Explanations Answer (a) is incorrect. auditor burnout can be reduced with less travel. It includes acceptable consultants. D: I. C: I. but they are not the basis for the rotation preference. For example. Answer (c) is incorrect. It includes acceptable consultants. Answer (b) is incorrect. II. This approach establishes a precedent or standard for others to follow. II. but does not identify all the acceptable choices. A specialist from the same department is unacceptable since the person would not be independent or objective. B: II and IV. Answer (d) is the correct answer. Answer Explanations Answer (a) is incorrect. A specialist from the department currently being audited would not be independent due to a natural bias toward that department. and III. seminars. Question: V2C3-0019 The best rationale for rotating internal auditors so those different individuals are assigned to consecutive audits of a given auditee is to Answers A: Prevent burnout on the part of the internal auditor.htm 1/20/2010 . The alternatives may be desirable.Wiley CIA 2006 v1 Page 11 of 262 A: I and II. It is a secondary reason. C: Increase the diligence exercised by internal auditors who know that the quality of their work will be apparent to the next set of internal auditors. D: Avoid the development of bias toward a given auditee. but does not identify all the acceptable choices. Professional development can be obtained in other ways. It is a secondary reason. Answer (b) is incorrect. Answer (d) is the correct answer. and taking the CIA exam. It is a secondary reason. B: Promote rapid professional development on the part of internal auditors by exposing them to the full range of organizational activities.

B: Updating the permanent files. Question: V2C3-0021 The audit team leader is least likely to have a primary role in Answers A: Allocating budget audit hours among assigned staff. C: Reviewing the working papers. This choice is a planning task.Wiley CIA 2006 v1 Page 12 of 262 Which of the following activities does not constitute audit supervision? Answers A: Preparing a preliminary audit program.htm 1/20/2010 . Answer (d) is incorrect because it is a supervisory task. Answer (c) is incorrect because it is a supervisory task. This is a task most likely performed by the audit staff. B: Providing appropriate instructions to the auditors. D: Preparing the critique sheet for the audit. Answer Explanations Answer (a) is the correct answer. Answer (d) is incorrect because it is a common team leader task. Question: V2C3-0022 In which of the following duties would the audit director least likely have a primary role? file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is incorrect because it is a common team leader task. Answer (b) is the correct answer. C: Reviewing audit workpapers. Answer (c) is incorrect because it is a common team leader task. Answer (b) is incorrect because it is a supervisory task. D: Seeing that audit objectives are achieved.

B: Review the summary findings sheet. Answer (d) is the correct answer. Question: V2C3-0023 An element of authority that should be included in the charter of the internal auditing department is Answers A: Identification of the operational departments which the audit department must audit. This is a task most likely performed by the team leader. Access to the external auditor’s working papers cannot be guaranteed in the charter. and physical properties relevant to the performance of audits. B: Identification of the types of disclosures which should be made to the audit committee. Answer (c) is the correct answer. D: Access to the external auditor's working papers. Answer Explanations Answer (a) is incorrect. C: Select or approve team members. personnel. C: Access to records. The auditor is obligated to make all needed disclosures to the audit committee. Question: V2C3-0024 Having been given the task of developing a performance appraisal system for evaluating the audit performance of a large internal auditing staff. Answer Explanations Answer (a) is incorrect because it is a common audit director task. The internal audit department should not specifically identify what activities will be audited. Answer (d) is incorrect. The auditor must have access to all audit evidence in order to fulfill obligations and responsibilities.htm 1/20/2010 . you should file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is incorrect because it is a common audit director task. D: Organize and draft the audit report. Answer (b) is incorrect.Wiley CIA 2006 v1 Page 13 of 262 Answers A: Determine the need for expanded testing. Answer (b) is incorrect because it is a common audit director task.

D: Provide primarily for the evaluation of specific accomplishments directly related to the performance of the audit program. it is probably not the most important in staff development. The personnel whose performance is being appraised should be made aware of the criteria and methods at the time they begin the employment. initiative. not at the time of the performance review. A well-developed set of selection criteria is important in any organization. Answer (b) is incorrect. B: Provide general information concerning the frequency of evaluations and the way evaluations will be performed without specifying their timing and uses. Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect. The criteria named are traits. Question: V2C3-0025 The key factor to the success of an audit organization’s human resources program is Answers A: An informal program for developing and counseling staff. Answer Explanations Answer (a) is incorrect. D: A program for recognizing the special interests of individual staff members. The success of any training program will be heavily dependent on the attributes of those being trained. Although traits are important.Wiley CIA 2006 v1 Page 14 of 262 Answers A: Provide for an explanation of the appraisal criteria methods at the time the appraisal results are discussed with the internal auditor. file://C:\Program Files\Wiley\CIAExam\Print. While compensation is an important factor in attracting and retaining staff. which are largely subjective. Answer (b) is incorrect. Answer (d) is the correct answer. This provides a more objective appraisal than focusing on traits. Selection of individuals with the attributes and education needed for internal auditing is essential if the staff is to develop properly. a performance evaluation system for evaluating audit perfor-mance should primarily focus on specific accomplishments not traits. The appraisal of audit performance should deal primarily with specific accomplishments related to audits. not accomplishments. C: Provide primarily for the evaluation of criteria such as diligence. The frequency and use of the evaluation are important criteria that should be clearly communicated.htm 1/20/2010 . whether it is audit or nonaudit function. B: A compensation plan based on years of experience. C: A well developed set of selection criteria. Answer (c) is the correct answer. Answer (d) is incorrect because such a program should be fair and equitable to all staff members. and tact.

It is not the best choice since there is not obvious link with scheduled work. Position descriptions provide the purpose description and responsibilities of individual positions but are not effective in the day-to-day management of the function. That would not account for the unique needs of a particular organization. Quality control reviews would evaluate compliance and not serve as a daily guide to the audit staff.Wiley CIA 2006 v1 Page 15 of 262 Question: V2C3-0026 Which of the following would be the best source of an internal audit director’s information for planning staffing requirements? Answers A: Discussions of audit needs with executive management and the audit committee. Answer (d) is incorrect. Performance evaluations are a periodic function and will not be effective on a day-to-day basis. Answer Explanations Answer (a) is the correct answer. C: Performance appraisals. Question: V2C3-0027 Which of the following is most essential for guiding the audit staff in maintaining daily compliance with the department’s standards of performance? Answers A: Quality control reviews. It is not the best choice since there is not obvious link with scheduled work. Comprehensive policies and procedures provided by the director of internal audit file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is incorrect. Answer (d) is the correct answer. Answer (c) is incorrect. Answer (c) is incorrect. B: Review of audit staff education and training records. D: Interviews with existing audit staff. Answer Explanations Answer (a) is incorrect. This is a good source of information concerning staff size or skill requirements. Answer (b) is incorrect. D: Policies and procedures.htm 1/20/2010 . C: Review audit staff size and composition of similar sized companies in the same industry. B: Position descriptions.

personnel. B: The manner by which audit findings will be reported.htm 1/20/2010 . D: Internal auditors who collectively have the knowledge and skills needed to complete all internal audit assignments. Many industries find it necessary to have the skills of engineers and other disciplines available on a regular basis. Answer (b) is incorrect. Computer skills are widely needed in companies that perform information technology audits. Question: V2C3-0028 You have been selected to develop an internal auditing department for your company. Answer (c) is incorrect. Question: V2C3-0029 The director of a newly formed internal auditing department is in the process of drafting a formal written charter for the department. The scope of internal auditing is so broad that it is not possible for one individual to have the requisite expertise in all areas. C: The procedures which the internal auditors will employ in investigating and reporting fraud. Which one of the following items. It is desirable to have various skill levels to match auditors appropriately with varying assignment complexities. and physical properties that are relevant to the performance of the audits. No internal audit department can have a credible program without this mix. Having a collective mix of knowledge and skills is an integral part of the IIA Standards.Wiley CIA 2006 v1 Page 16 of 262 guide the audit staff on a daily basis to ensure compliance with department’s standards of performance. Many skills are needed in internal auditing. Answer (d) is the correct answer. D: The internal auditors' unlimited access to those records. It is also necessary to have experienced auditors available to train and supervise less experienced staff members. B: Inexperienced personnel and train them the way the company wants them trained. Answer Explanations Answer (a) is incorrect. should be included in the charter? Answers A: The frequency of the audits to be performed. related to the operational effectiveness of the internal audit department. file://C:\Program Files\Wiley\CIAExam\Print. C: Degreed accountants since most audit work is accounting related. Your approach would most likely be to hire Answers A: Internal auditors each of whom possesses all the skills required to handle all audit assignments.

not only is the frequency of audits not included in the charter. The department’s needs may be for additional expertise in economics or computer science. and interviewed a candidate for a staff position. Answer (c) is incorrect.” Accordingly. However. The procedures to be employed by internal auditors in investigating and reporting fraud are not included in the charter. The director concludes that the candidate has a thorough understanding of internal auditing techniques. personnel and physical properties that are relevant to their work. The manner of reporting audit findings (how it is reported. The IIA Standards state that the charter should include the internal auditors’ access to those records. accounting. Answer (d) is the correct answer. B: Offer the candidate a position despite the lack of knowledge in certain essential areas. Answer (b) is incorrect. the director notes that the candidate has limited knowledge of economics and computer science.Wiley CIA 2006 v1 Page 17 of 262 Answer Explanations Answer (a) is incorrect. The IIA Standards state the general subjects that staff should possess knowledge of. but also such information is not related to the operational effectiveness of the internal audit department. and (c) define the scope of internal auditing activities. Answer (d) is the correct answer.htm 1/20/2010 . Which of the following actions would be most appropriate? Answers A: Reject the candidate because of the lack of knowledge required by the IIA Standards. C: Encourage the candidate to obtain additional training in economics and computer science and then reapply. Question: V2C3-0030 A director of internal auditing has reviewed credentials. Answer (b) is incorrect. checked references.) is not included in the charter and is not related to operational effectiveness of the internal audit department. and physical properties relevant to the performance of audits. This is the most realistic way to address the department’s staffing needs. (b) authorize access to records. etc. This may be good advice. Question: V2C3-0031 Which audit-planning tool is general in nature and is used to ensure adequate audit coverage over time? file://C:\Program Files\Wiley\CIAExam\Print. and management. Having limitations on such access would impact the operational effectiveness of the internal audit department because the internal auditor would not be able to conduct the audit in the proper approach that he designed it. but clearly states that every auditor need not possess knowledge of all of them. The Standards state that “the charter should (a) establish the department’s position within the organization. Answer Explanations Answer (a) is incorrect. to whom it will be reported. D: Offer the candidate a position if other staff members possess sufficient knowledge in economics and computer science. Answer (c) is incorrect. personnel. but it does not adequately address the department’s present needs.

C: The department budget. The department charter is not an audit-planning tool. D: The department charter. Answer Explanations Answer (a) is incorrect. It is required that the department collectively has this knowledge. B: May hire the engineer in spite of the lack of knowledge of internal auditing standards. bring special skills to the department instead of specific knowledge of internal auditing standards. The director of internal auditing Answers A: Should not hire the engineer because of the lack of knowledge of internal auditing standards.Wiley CIA 2006 v1 Page 18 of 262 Answers A: The long-range schedule. Answer (d) is incorrect. What knowledge that was acquired by observing is irrelevant to the skills necessary for internal auditing. however. Answer (b) is the correct answer. Individual internal auditing staff members may. B: The audit program. Question: V2C3-0032 A professional engineer applied for a position in the internal auditing department of a high-technology firm. Answer Explanations Answer (a) is the correct answer. Each new employee of an internal auditing department is not required to have knowledge of internal auditing standards. D: May hire the engineer because of the knowledge of internal auditing gained in the previous position. Answer (d) is incorrect. The audit program is limited in scope to a particular project. Answer (b) is incorrect. The department budget may be used to justify head count. Answer (c) is incorrect. but it is not used to ensure adequate audit coverage over time. Answer (c) is incorrect. The engineer became interested in the position after observing several internal auditors while they were auditing the engineering department. C: Should not hire the engineer because of the lack of knowledge of accounting and taxes. Each individual internal auditor is not required to have knowledge of accounting or taxes. The long-range program gives evidence of coverage of key functions at planned intervals. Question: V2C3-0033 file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Internal auditing standards are required to be known by the department collectively.

Answer Explanations Answer (a) is the correct answer. D: Immediately after expanding tests to establish reliability of findings. C: Internal auditing supervisor.Wiley CIA 2006 v1 Page 19 of 262 Upon being appointed. decisions to revise time budgets for an audit should normally be made Answers A: Immediately after the preliminary survey. Answer (d) is incorrect. Additionally. Expanded tests should have no effect on the time budget. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors. When a deficiency has been substantiated. Answer (b) is incorrect because according to the IIA Standards. As a means of controlling projects and avoiding time-budget overruns. there was no evidence that a quality assurance program existed. the director of internal auditing is responsible for supervision. Time budgets should be appraised for revision after the preliminary survey and preparation of the audit program. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors. Answer Explanations Answer (a) is incorrect because according to the IIA Standards. there was no evidence that a quality assurance program existed. file://C:\Program Files\Wiley\CIAExam\Print. D: Director of internal auditing. C: When inexperienced audit staff is assigned to an audit. Determining that audit objectives have been met is part of the overall supervision of an audit assignment and is the ultimate responsibility of the Answers A: Staff internal auditor. Additionally. B: Audit committee.htm 1/20/2010 . a new director of internal auditing found an inexperienced audit staff that was over budget on most audits. the director of internal auditing is responsible for supervision. The assignment of inexperienced staff should have no effect on the time budget. the budget would have already been expanded as necessary. B: When a significant deficiency has been substantiated. Answer (c) is incorrect. a new director of internal auditing found an inexperienced audit staff that was over budget on most audits. no further audit work is required. Answer (b) is incorrect. Question: V2C3-0034 Upon being appointed.

a new director of internal auditing found an inexperienced audit staff that was over budget on most audits. Answer (d) is the correct answer. B: Internal reviews. a quality assurance program should include Answers A: Periodic supervision of internal audit work on a sample basis. and the commencement date of each audit. a detailed expense budget. Periodic rotation of audit managers is not required. Which of the following best describes the major deficiency of this operating plan? Answers A: Requests by management for special projects are not considered. Question: V2C3-0036 The internal auditing department of a large corporation has established its operating plan and budget for the coming year.Wiley CIA 2006 v1 Page 20 of 262 Answer (c) is incorrect because according to the IIA Standards. B: Opportunities to achieve operating benefits are ignored. C: Measurability criteria and targeted dates of completion are not provided. there was no evidence that a quality assurance program existed. Answer Explanations Answer (a) is incorrect.htm 1/20/2010 . Supervision should be carried out continually. Choice (d) is incorrect. Additionally. including determining that audit objectives are being met. D: Periodic rotation of audit managers. staffing. the director of internal auditing is responsible for supervision. Internal reviews should be conducted by internal auditors and should focus on specific audit projects Answer (c) is the correct answer. Choice (b) is incorrect. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors. to appraise the quality of department operations. To properly evaluate the operations of an internal auditing department. file://C:\Program Files\Wiley\CIAExam\Print. by other than the internal audit staff. The director of internal auditing is responsible for supervision. not just on a periodic test basis. Question: V2C3-0035 Upon being appointed. C: External reviews at least once every three years by qualified persons who are independent of the organization. The operating plan is restricted to the following categories: a prioritized listing of all audits. External reviews should be conducted at least once every three years..

and disciplines required to perform work are ignored. Properly formulated job descriptions provide a basis for the identifying job qualifications (including training and experience). B: Job descriptions. Answer (c) is incorrect. This is a requirement of the IIA Standards. B: Intradepartment memoranda. Question: V2C3-0038 Internal audit staff members should be afforded an appropriate means through which they can discuss problems and receive updates regarding departmental policies. it will not overcome hiring the wrong person. Question: V2C3-0037 The capabilities of individual staff members are key features in the effectiveness of an internal auditing department. Answer Explanations Choice (a) is incorrect because prioritizing audits would consider these factors. Answer (c) is the correct answer. However.Wiley CIA 2006 v1 Page 21 of 262 D: Knowledge. The most appropriate forum for this objective is Answers A: The department's informal communication lines. Continuing education occurs after the proper people are hired. they are not the primary requisite. Answer (d) is incorrect. A thorough orientation helps the new employee become productive more rapidly.htm 1/20/2010 . skills. Answers A: Background checks. Answer Explanations Answer (a) is incorrect. D: Organizational orientation. Select the primary consideration used when staffing an internal auditing department. C: Continuing education. Choice (b) is incorrect because prioritizing audits would consider these factors. Answer (b) is the correct answer. Answer (d) is incorrect. Background checks help ensure that statements made by prospective employees are accurate. However. Staffing for each audit would include this consideration. file://C:\Program Files\Wiley\CIAExam\Print.

D: Provide an independent evaluation.Wiley CIA 2006 v1 Page 22 of 262 C: Staff meetings. The employee evaluation conference is not a timely place to discuss problems and receive updates.htm 1/20/2010 . Question: V2C3-0039 The peer review process can be performed internally or externally. B: Determine if audit activities meet professional standards. A distinguishing feature of the external review is its objective to Answers A: Identify tasks that can be performed better. Formal staff meetings provide the best opportunity for ensuring that issues are addressed timely and efficiently. Question: V2C3-0040 Exit conferences serve to ensure the accuracy of the information used by an internal auditor. External review process will provide independent evaluation for management and the audit committee. Memoranda are generally impersonal and do not afford a good opportunity for maximum exchange of ideas. Answer (d) is the correct answer. Answer Explanations Answer (a) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. C: Set forth the recommendations for improvement. A secondary purpose of an exit conference is to Answers A: Get immediate action on a recommendation. Answer (d) is incorrect. B: Improve relations with auditees. D: Employee evaluation conferences. Answer (b) is incorrect. The internal peer review process will identify things that can be done better. The internal review process will set forth recommendations for improvement. Answer (c) is incorrect. The internal review process will assess if audit activities meet professional standards. Informal communication is not the most appropriate forum. Answer Explanations Answer (a) is incorrect. Answer (c) is the correct answer. Answer (b) is incorrect.

Wiley CIA 2006 v1 Page 23 of 262 C: Agree to the appropriate distribution of the final report. Answer (c) is incorrect. It is an advantage of the field office. file://C:\Program Files\Wiley\CIAExam\Print. The exit conference can be used to allow operating management to air their views and to present any operational objections to specific recommendations. Answer (d) is incorrect. C: There are more opportunities to achieve operating benefits in one of the departments than in the other. B: A reduction of travel time and related travel expense. Question: V2C3-0041 The advantage attributed to the establishment of internal auditing field offices for work at remote locations is best described as Answers A: The possibility of increased objectivity of personnel assigned to a field office. The distribution of reports is not a secondary purpose of an exit conference. C: The increased ease of maintaining uniform company-wide standards. which of the following would be the least important factor? Answers A: There have been major changes in operations in one of the departments. Answer Explanations Answer (a) is incorrect. Choice (d) is incorrect. Question: V2C3-0042 The director of internal auditing is preparing the work schedule for the next budget year and has limited audit resources. B: The audit staff has recently added an individual with expertise in one of the areas. Senior management should be given a greatly condensed view of the results of an audit. An interim report would have been used to accomplish this. it decreases the ease of maintaining standards. Answer (b) is the correct answer. Senior audit personnel are expected to be at corporate level. Answer Explanations Answer (a) is incorrect. D: Brief senior management on the results of the audit. D: More contact with senior audit personnel leading to an increase in control.htm 1/20/2010 . Answer (b) is the correct answer. Objectivity of field office personnel decreases. Answer (c) is incorrect. It is a disadvantage. In deciding whether to schedule the purchasing or the personnel department for an audit.

Answer (c) is incorrect because it is not an activity report as defined by the IIA Standards. Answer Explanations Answer (a) is incorrect because it is an important factor according to the IIA Standards. Question: V2C3-0044 The best means for the internal auditing department to determine whether its goal of implementing broader audit coverage of functional activities has been met is through Answers A: Accumulation of audit findings by auditable area. B: Comparison of the audit plan to actual audit activity. B: List unresolved findings. file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is incorrect because it is an important factor according to the IIA Standards. Question: V2C3-0043 According to the IIA Standards. Answer (d) is the correct answer.htm 1/20/2010 .Wiley CIA 2006 v1 Page 24 of 262 D: The potential for loss is significantly greater in one department than the other. Answer (b) is the correct answer. C: Surveys of management satisfaction with the internal auditing function. This information is a status report to be provided to the audit oversight authority. C: Report the weekly activities of the individual auditors. Answer Explanations Answer (a) is incorrect because it is not an activity report as defined by the IIA Standards. Answer (b) is incorrect because it is not an activity report as defined by the IIA Standards. D: Compare audits completed with audits planned. an internal auditing department’s activity reports should Answers A: List the material findings of major audits. not auditor skill availability. Answer (d) is incorrect because it is an important factor according to the IIA Standards. Audit needs. should drive audit schedules.

C: To indicate concurrence with the audit findings. Answer (d) is incorrect. This is an immaterial aspect of the audit reporting process. Comparison of the plan to actual activity will reveal if the planned breadth was achieved. D: To ensure that the audit schedule is kept up-to-date. Answer Explanations Answer (a) is incorrect. Implementation of a quality assurance program has no bearing on the stated goal. Answer Explanations Answer (a) is incorrect. C: Past effectiveness of the internal auditing department in identifying cost savings. Question: V2C3-0045 Why should organizations require auditees to promptly reply and outline the corrective action that has been implemented on reported deficiencies? Answers A: To remove items from the "pending" list as soon as possible. The auditee may not concur with the audit finding at all times.Wiley CIA 2006 v1 Page 25 of 262 D: Implementation of a quality assurance program. This is an administrative function of the audit department.htm 1/20/2010 . The objective of the audit is to institute compliance with the auditee’s corrective action as early as possible so that the organization will benefit from the action taken. Answer (b) is the correct answer. Answer (d) is incorrect. Answer (b) is the correct answer. B: Activity reports. The number of audit findings is not an indicator of audit breadth or quality. Answer (c) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. B: To institute compliance as early as possible. Question: V2C3-0046 Which of the following factors serves as a direct input to the internal auditing department’s financial budget? Answers A: Audit work schedules. D: Auditing department's charter. Management satisfaction does not directly relate to the expressed goal (broader audit coverage). Answer (c) is incorrect.

While past performance is an indicator of the value of internal auditing. The charter for an internal auditing department defines the purpose. Answer (b) is incorrect. There was no intent to do wrong. C: Chairman of the board.htm 1/20/2010 . it will not impact the funds committed to current operations. or in other sensitive areas. This is partly correct but it has no instructive value. The internal auditing director’s best avenue for proceeding is to Answers A: Fire the auditor to set an example for other auditors. The sanction is probably too severe. and sales director. authority. C: Reprimand the auditor for "talking shop" at a social function. Activity reports compare actual performance with goals and schedules and compare actual expenditures with financial budgets. D: Explain that the act is an ethical violation of the profession and that further such action could result in dismissal or other serious effects. Answer (c) is incorrect. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 26 of 262 Answer Explanations Answer (a) is the correct answer. This is an instructive solution and explains the defect in the actions of the internal auditor. Answer (b) is incorrect. chief operating officer. Answer Explanations Answer (a) is incorrect. Question: V2C3-0048 The internal auditing department for a large corporation recently concluded an audit of sales department travel expenses. Answer (d) is the correct answer. Which of the following groups should receive a copy of the audit report? Answers A: Sales director and vice president for marketing. file://C:\Program Files\Wiley\CIAExam\Print. an internal auditor described to a group of friends the elements of a sensitive audit on which he was working. Question: V2C3-0047 While attending a social function. audit work schedules determine both staffing plans and financial budgets. the staff may lose a good auditor. The single occurrence described does not warrant this action. and vice president for marketing. and responsibility of the department. B: Chairman of the board. B: Remove the auditor from all audits in that area. Also. As specified in the IIA Standards. Answer (c) is incorrect. controller.

file://C:\Program Files\Wiley\CIAExam\Print. The distribution should include only that shown in answer (a). Answer (b) is incorrect.Wiley CIA 2006 v1 Page 27 of 262 D: Chief financial officer. It is included in the evaluation of the performance of an internal auditing department per the IIA Standards. Audit reports should be distributed to those members of the organization who are able to ensure that audit results are given due consideration. The cost benefit of internal auditing is neither easily quantifiable nor the subject of an external review. Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is the correct answer.” The audit manager has been given a particularly difficult assignment. It is included in the evaluation of the performance of an internal auditing department per the IIA Standards. The chairman of the board and controller need not be involved unless significant problems were revealed.htm 1/20/2010 . the probability that this job can be completed by one individual by the required deadline is low. and chief executive officer. It is included in the evaluation of the performance of an internal auditing department per the IIA Standards. Select the best course for the audit manager. Even for a high achiever. Answer (d) is incorrect. sales director. but each individual is self-motivated and could be termed a “high achiever. particularly those submitted to senior management and the audit committee. Answer (b) is incorrect. C: Detailed cost-benefit analysis of the internal auditing department. The distribution should include only that shown in answer (a). the sales director and vice president of marketing would be sufficient. In this case. Chief financial officer and chief executive officer involvement would not be needed. Question: V2C3-0049 External review of an internal auditing department is not likely to evaluate Answers A: Adherence to the internal auditing department's charter. Answer (c) is incorrect. The chairman of the board and chief operating officer need not be involved unless significant problems were revealed. D: Audit planning documents. Answer (d) is incorrect. Question: V2C3-0050 An internal auditing manager has a small team of employees. B: Compliance with the IIA Standards. The distribution should include only that shown in answer (a).

e. D: Ask company management to cancel the job. Question: V2C3-0052 file://C:\Program Files\Wiley\CIAExam\Print. High achievers thrive when the job provides for personal responsibility. Answer (d) is incorrect because high achievers prefer moderate risks. They perform best with moderate risks. feedback. The problem was further defined as lack of feedback on the recent implementation of automated support systems. Question: V2C3-0051 Recent criticism of an internal auditing department suggested that audit coverage was not providing adequate feedback to senior management on the processes used in the organization’s key lines of business. B: Assign two staff members to moderate the risk of failure. There is no indication that staffing or decision making is a problem. There is no indication that there are staffing problems (i. and moderate risks. Answer Explanations Answer (a) is incorrect because high achievers prefer moderate risks.. They perform best with moderate risks. Which two functions does the director of internal auditing need to improve? Answers A: Staffing and communicating. Answer (c) is incorrect because high achievers prefer moderate risks. C: Assign the entire staff to ensure the risk of failure is low. B: Staffing and decision making. Answer (c) is incorrect. Answer (b) is the correct answer. C: Planning and organizing.Wiley CIA 2006 v1 Page 28 of 262 Answers A: Assign one individual since high achievers thrive on high risks. Answer Explanations Answer (a) is incorrect. Answer (d) is the correct answer. They perform best with moderate risks. insufficient audit personnel) or that audit personnel lack necessary skills to provide feedback on automated support systems. D: Planning and communicating. There is no indication that organizing is a problem.htm 1/20/2010 . The problem of lack of feedback indicates the director has problems in planning and allocating audit resources and communicating this need to the audit staff. Answer (b) is incorrect.

Answer (d) is incorrect. D: Policies and procedures. In this type of situation. Discovery sampling is structured to measure the probability of at least one exception occurring in a sample if there are a minimum number of errors in the population. An operating budget variance report is a control device used to monitor actual performance versus budget. C: Performance appraisals. B: Discovery. Answer (c) is incorrect.Wiley CIA 2006 v1 Page 29 of 262 In some cultures and organizations. file://C:\Program Files\Wiley\CIAExam\Print. Management foot-dragging could cause unfavorable variances. Random sampling deals only with the technique used to choose the sample. C: Probability proportional to size. Answer (d) is incorrect. management is highly averse to analysis or possible criticism of their actions and will not grant the internal auditors an adequate charter. A management attitude such as this will most probably have an adverse affect on the internal auditing department’s Answers A: Operating budget variance. Answer Explanations Answer (a) is incorrect. Policies and procedures of the internal audit function are developed by the internal audit department and should not be affected by nonaudit management. Answer (c) is incorrect. D: Variables. Question: V2C4-0001 When an auditor’s sampling objective is to obtain a measurable assurance that a sample will contain at least one occurrence of a specific critical exception existing in a population. Answer Explanations Answer (a) is incorrect. but favorable variances could also occur if many audits were cut short due to scope impairments. B: Charter. Variables sampling need not include at least one exception of a critical occurrence. Probability-proportional-to-size (PPS) sampling deals with the technique used to select items but does not apply when attempting to discover critical occurrences.htm 1/20/2010 . the sampling approach to use is Answers A: Random. managers insist that the internal auditing function is not needed to provide a critical assessment of the organization’s operations. Answer (b) is the correct answer. Answer (b) is the correct answer. An unbiased evaluation of audit staff would not be affected by lack of cooperation on the part of nonaudit management.

Answer (d) is incorrect. Answer Explanations Answer (a) is incorrect. It involves identifying characteristics of the sample and projecting those to the population. Targeted sampling is a nonsense term.htm 1/20/2010 . Variables sampling deals with monetary amounts. B: Discovery sampling. Discovery sampling is best because this application deals with an attribute that is expected to be quite rare. Which of the following sampling approaches would be most appropriate? Answers A: Attributes sampling. C: Variables sampling. Question: V2C4-0003 The appropriate sampling plan to use to identify at least one irregularity. Answer (c) is incorrect. D: Attributes sampling. Management expects 100% compliance with the procedure. file://C:\Program Files\Wiley\CIAExam\Print. assuming some number of such irregularities exist in a population. Answer (d) is incorrect. Attributes sampling is too broad. It involves discontinuing the sampling when a target error rate is achieved. Answer (c) is incorrect. B: Discovery sampling. The document must be filed with bills of lading. and then to discontinue sampling when one irregularity is observed is Answers A: Stop-and-go sampling. Answer (b) involves identifying characteristics that could include “discovering” single instances of suspected special characteristics (irregularities). C: Targeted sampling. D: Variables sampling. Answer (b) is the correct answer. Answer (b) is the correct answer.Wiley CIA 2006 v1 Page 30 of 262 Question: V2C4-0002 Management is legally required to prepare a shipping document for all movement of hazardous materials. Answer Explanations Answer (a) is incorrect. It involves reducing sample size by separating the population into groups of items with similar values.

but a more important issue is restricting the population considered to the vouchers processed by workers that the department manager considers suspicious. It would be difficult to determine what an adequate sample would be in this case. C: Discovery sampling to select a sample of vouchers processed by the department during the past year. Question: V2C4-0005 Because of control weaknesses. B: Probability-proportional-to-size sampling to select a sample of vouchers processed by the department during the past year. it is possible that the individual managers of 122 restaurants could have placed fictitious employees on the payroll. This approach would be appropriate if the monetary value of fraud were to be estimated. To ascertain whether the fraud is present. C: Directed sampling. D: Judgmental sampling to select a sample of vouchers processed by clerks identified by the department manager as acting suspiciously. rather than to estimate its overall frequency. the auditor should use Answers A: Attributes sampling.htm 1/20/2010 .Wiley CIA 2006 v1 Page 31 of 262 Question: V2C4-0004 After partially completing an internal control review of the accounts payable department. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. To efficiently determine whether this fraud exists at less than a 1% level. This presents a significant potential for biasing the sample because of the potential conflict of interest of the department manager. the auditor suspects that some type of fraud has occurred. the best sampling approach would be to use Answers A: Simple random sampling to select a sample of vouchers processed by the department during the past year. The purpose here is to determine whether any fraud has taken place. Discovery sampling is a method designed specifically to do this. Answer Explanations Answer (a) is incorrect. D: Discovery sampling. This approach would be appropriate if the extent of fraud were to be estimated. Answer (c) is the correct answer. Answer (d) is incorrect. Each restaurant employs between 25 and 30 people. B: Judgment sampling. Answer (b) is incorrect.

given that it is expected to occur at a certain rate. file://C:\Program Files\Wiley\CIAExam\Print. B: Discovery sampling. Answer (d) is the correct answer. Answer (b) is the correct answer. a sample is taken to test for the presence of fictitious payees.Wiley CIA 2006 v1 Page 32 of 262 Answer (a) is incorrect. but it would not be as efficient as discovery sampling. Judgment sampling cannot provide the needed statistical assurance. B: A 95% probability that the actual rate of occurrence in the population is less than the critical rate if no exceptions are found. Discovery sampling is appropriate when a near-zero error rate is expected and the characteristic under scrutiny is critical. Sampling for attributes not a variable. Answer (b) is incorrect.htm 1/20/2010 . Answer (c) is incorrect. although none is suspected. Its use is not indicated. Discovery sampling is most often interested in the occurrence of fraud. C: Variables sampling. Answer Explanations Answer (a) is incorrect. Directed sampling focuses on certain transactions or locations that are likely to contain errors. Attribute sampling could work. Answer (c) is incorrect. C: A 95% probability that the actual rate of occurrence in the population is less than the critical rate if the occurrence rate in the sample is less than the critical rate. D: Stop-and-go sampling. It is not in accord with the audit objective. Question: V2C4-0006 In the audit of a health insurance claims processing department. Answer (d) is incorrect. The most appropriate sampling plan would be Answers A: Attributes sampling. Question: V2C4-0007 An auditor applying a discovery sampling plan with a 5% risk of over-reliance may conclude that there is Answers A: A 95% probability that the actual rate of occurrence in the population is less than the critical rate if only one exception is found. Attributes sampling implies a fixed sample size and a need to project a sample occurrence rate. It efficiently defines a sampling effort that will have a specified probability of containing at least one occurrence of the attribute within the population.

Answer (b) is the correct answer. Probability-proportional-to-size (monetary-unit) sampling is used for substantive testing. file://C:\Program Files\Wiley\CIAExam\Print. Stop-and-go is a form of attribute sampling. The probability does not increase because no exceptions were found. If no exceptions are found. There is a 95% probability that the actual rate of occurrence is equal to or greater than the critical rate if one exception is found. Answer (b) is the correct answer. It is not used when very. very few errors are expected. the correct conclusion is that the occurrence rate is less than the critical rate at a given probability level. B: Discovery. Attribute sampling is for normal compliance testing. It allows the verification of values whose range lies between positive and negative infinity.Wiley CIA 2006 v1 Page 33 of 262 D: Greater than a 95% probability that the actual rate of occurrence in the population is less than the critical rate if no exceptions are found. There is a 95% probability that the actual rate is equal to or exceeds the critical rate if any exceptions are found. Question: V2C4-0008 An internal auditor suspects fraud. Answer (d) is incorrect. Question: V2C4-0009 What is a data diddling technique? Answers A: Changing data before input to a computer system. B: Changing data during input to a computer system. C: Stop and go. The plan seeks to select a sample just large enough to include one example of the error or irregularity a specified percentage of the time. Answer Explanations Answer (a) is incorrect. Discovery sampling is used when the internal auditor suspects a rare but material error or fraud. Answer (c) is incorrect. Answer (c) is incorrect.htm 1/20/2010 . Answer (d) is incorrect. Which of the following sample plans should be used if the purpose is to select a sample with a given probability of containing at least one example of the irregularity? Answers A: Attributes. D: Probability proportional to size. Answer Explanations Answer (a) is incorrect.

D: Choices a. and c. C: Stealing small amounts of money from bank accounts. This answer is incorrect. D: Choices a. B: Using "rounding-down" concept. Answer (d) is the correct answer.g. Question: V2C4-0011 Data diddling can be prevented by all of the following except: Answers A: Access controls. Refer to the correct answer explanation. and c.htm 1/20/2010 . Answer Explanations This answer is incorrect. This answer is incorrect. Question: V2C4-0010 What is a salami technique? Answers A: Taking small amounts of assets. Refer to the correct answer explanation. Answer (d) is the correct answer. This answer is incorrect. Refer to the correct answer explanation. B: Program change controls. A salami technique is a theft of small amounts of assets and money from a number of sources (e.. file://C:\Program Files\Wiley\CIAExam\Print. Refer to the correct answer explanation. Refer to the correct answer explanation. b. Refer to the correct answer explanation. inventory accounts. bank accounts. where a fraction of money is taken from bank accounts. Data diddling involves changing data before or during input to computers or during output from a computer system. and accounts payable and receivable accounts). Answer Explanations This answer is incorrect. b. This answer is incorrect.Wiley CIA 2006 v1 Page 34 of 262 C: Changing data during output from a computer system. It is also using the “rounding-down” concept.

D: Reviewing undocumented transactions. Answer (c) is incorrect. Integrity checking also helps in prevention. Answer (b) is incorrect. a legal liability exists to an organization under which of the following conditions? Answers A: When estimated security costs are greater than estimated losses. Computer usage logs may not capture superzapping activity. Superzapping leaves no evidence of file changes. Users may not detect changes in their reports. Question: V2C4-0013 With respect to computer security and fraud. there is no assurance that the task is complete. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Even if these transactions are found. Answer Explanations Answer (a) is the correct answer. Question: V2C4-0012 A reliable way to detect superzapping work is by Answers A: Comparing current data files with previous data files.Wiley CIA 2006 v1 Page 35 of 262 C: Rapid correction of data. D: Integrity checking. Answer (c) is the correct answer. Data diddling can be prevented by limiting access to data and programs and limiting the methods used to perform modification to such data and programs. This answer is incorrect. and the only reliable way to detect this activity is by comparing current data files with previous generations of the same file. Answer (d) is incorrect. Rapid detection is needed—the sooner the better—because correcting data diddling is expensive. B: Examining computer usage logs. This answer is incorrect. Refer to the correct answer explanation. let alone review. It is very difficult to find. Refer to the correct answer explanation. C: Noting discrepancies by those who receive reports. the undocumented transactions. Answer Explanations This answer is incorrect. Refer to the correct answer explanation.

Answer (d) is incorrect. threat. then a legal liability exists. This requires judgment and qualitative considerations because costs are equal to losses. This is not applicable because actual costs and losses are not known at the time of implementing safeguards. Question: V2C4-0014 Are an investigator’s handwritten notes considered valid evidence in court of law? Answers A: No. Refer to the correct answer explanation. Question: V2C4-0015 A security investigator or law enforcement officer should observe which of the following during a computer crime investigation? file://C:\Program Files\Wiley\CIAExam\Print. Losses can result from risks. C: Yes. Answer Explanations Answer (a) is incorrect. Answer (c) is the correct answer. Answer (b) is incorrect. Refer to the correct answer explanation. This poses no legal liability because costs are greater than losses. B: Maybe. C: When estimated security costs are less than estimated losses. D: Depends. Answer (c) is the correct answer. that is. An investigator’s handwritten notes are considered valid evidence as long as the affected parties can read and understood the notes. Answer Explanations This answer is incorrect. exploitation of vulnerabilities. Handwritten notes are no different from typed or printed versions. This answer is incorrect. risk. This answer is incorrect. Implementing countermeasures and safeguards to protect information system assets cost money. Refer to the correct answer explanation.htm 1/20/2010 . When estimated costs are less than estimated losses. D: When actual security costs are equal to actual losses. Courts do not expect organizations to spend more money than losses resulting from a security flaw.Wiley CIA 2006 v1 Page 36 of 262 B: When estimated security costs are equal to estimated losses. Courts can argue that the organization’s management should have installed safeguards but did not and that management did not exercise due care and due diligence. or vulnerability.

Refer to the correct answer explanation. Answers (a). B: Detect. C: Chain of computers. (b). D: Chain of logs. Answer (c) is the correct answer. Refer to the correct answer explanation. D: Deny. and (d) would not allow such a trap. Refer to the correct answer explanation. Answer (b) is the correct answer. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. This answer is incorrect. Question: V2C4-0016 Which of the following security techniques allow time for response by investigative authorities? Answers A: Deter. This answer is incorrect. Chain of custody is required when evidence is collected and handled so that there is no dispute about it. Question: V2C4-0017 file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Refer to the correct answer explanation.Wiley CIA 2006 v1 Page 37 of 262 Answers A: Chain of events. Refer to the correct answer explanation. investigative authorities can trace his or her origins and location. This answer is incorrect. This answer is incorrect. If a system perpetrator can be delayed longer while attacking a computer system. Answer Explanations This answer is incorrect. B: Chain of custody. C: Delay.

This answer is incorrect. Refer to the correct answer explanation. Answer (b) is the correct answer. C: Secondary evidence. or events obtains physical evidence. Refer to the correct answer explanation. Direct inspection or observation of people.Wiley CIA 2006 v1 Page 38 of 262 Most of the evidence submitted in a computer crime case is Answers A: Legal evidence. Answer Explanations This answer is incorrect. it is an example of Answers A: Duplicate evidence.g. Secondary evidence is any evidence offered to prove the writing other than the writing itself and is a part of the best evidence rule. Best evidence is evidence that is the most natural and reliable. Answer Explanations This answer is incorrect. Admissible evidence is evidence that is revealed to the jury or other trier of fact with express or implied permission to use it in deciding disputed issues of fact. Duplicate evidence is a part of the best evidence rule. property.. a photocopy of the original). D: Admissible evidence. invoices. Modern statutes make duplicates easily substitutable for an original. The best evidence is primary. B: Documentary evidence.htm 1/20/2010 . Question: V2C4-0018 When computers and peripheral equipment are seized in relation to a computer crime. accounting records. contracts. Answer (b) is the correct answer. D: Collateral evidence. and management information reports on performance and production. and is not be useful here. Documentary evidence is created information. This answer is incorrect. Refer to the correct answer explanation. The best evidence is original. B: Physical evidence. Refer to the correct answer explanation. C: Best evidence. file://C:\Program Files\Wiley\CIAExam\Print. such as letters. Legal evidence is a broad term. Duplicate evidence is a document that is produced by some mechanical process that makes it more reliable evidence of the contents of the original than other forms of secondary evidence (e.

courts will expect organizations to become reasonably prudent computer owners taking due care (reasonable care) to ensure adequate security. access controls. This answer is incorrect. This answer is incorrect. Question: V2C4-0019 From a computer security viewpoint. B: Using a computer virus program. firewalls. and other reasonable security measures in place. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. Rather. Refer to the correct answer explanation. C: Extraordinary care. or extraordinary care. B: Due care. D: Great care. C: Releasing a computer virus program. The term “due care” means having the right policies and procedures. This answer is incorrect. Question: V2C4-0020 Which of the following is not a criminal activity in most jurisdictions? Answers A: Writing a computer virus program. file://C:\Program Files\Wiley\CIAExam\Print. Courts will not find liability every time a computer is hijacked. Refer to the correct answer explanation. Refer to the correct answer explanation. Computer owners need not take super care. Refer to the correct answer explanation. D: Spreading a computer virus program. great care. courts expect what amount of care from organizations? Answers A: Super care. Courts will find computer owners responsible for their insecure systems. Answer (b) is the correct answer.Wiley CIA 2006 v1 Page 39 of 262 Collateral evidence is evidence relevant only to some evidential fact and that is not by itself relevant to a consequential fact. This answer is incorrect.htm 1/20/2010 .

This answer is incorrect. Refer to the correct answer explanation. Refer to the correct answer explanation. Simply writing a virus program is not a criminal activity. Question: V2C4-0022 The concept of admissibility of evidence does not include which of the following? Answers A: Relevance. The chain of custody or the chain of evidence is a method of authenticating an object by the testimony of witnesses who can trace possession of the object from hand to hand and from the beginning to the end. B: The chain of control. The chain of communication is a distracter. C: The chain of custody. Answer (c) is the correct answer. The chain of control is a distracter. Refer to the correct answer explanation. D: The chain of communications. and spreading a virus with bad intentions of destroying computer resources are the basis for criminal activity. It is the intentions of the developer of a computer virus program that matter the most in deciding what is a criminal activity. file://C:\Program Files\Wiley\CIAExam\Print. releasing. B: Competence. This answer is incorrect. a law enforcement officer should follow which of the following? Answers A: The chain of command. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 40 of 262 Answer Explanations Answer (a) is the correct answer. This answer is incorrect. using. Answer Explanations Answer (a) is incorrect. However. Answer (b) is incorrect. C: Materiality.htm 1/20/2010 . The term “chain of command” refers to relationships between a superior and a subordinate in a workplace setting. Question: V2C4-0021 Once evidence is seized.

Relevant evidence is evidence that had some logical tendency to prove or disprove a disputed consequential fact. This answer is incorrect. Refer to the correct answer explanation. Answer (d) is the correct answer. Refer to the correct answer explanation. This answer is incorrect. Laying a proper foundation for evidence is “the practice or requirement of introducing evidence of things necessary to make further evidence relevant. Question: V2C4-0024 When large volumes of writing are presented in court. material. admissible evidence) is evidence that satisfied all the rules of evidence except those dealing with relevance. Competent evidence (i.htm 1/20/2010 . Refer to the correct answer explanation. Refer to the correct answer explanation. Refer to the correct answer explanation.Wiley CIA 2006 v1 Page 41 of 262 D: Sufficiency.e. It looks at the positive side of the evidence.. This answer is incorrect. If the evidence is damaged. This answer is incorrect. stored. and controlled the evidence and does not ask who damaged the evidence. which type of evidence is inapplicable? Answers A: Best evidence. or competent. there is nothing to show in the court. The chain of custody deals with who collected. This answer is incorrect. Answer Explanations This answer is incorrect. Materiality is the notion that evidence must be relevant to a fact that is in dispute between the parties. Question: V2C4-0023 The chain of custody does not ask which of the following questions? Answers A: Who damaged the evidence? B: Who collected the evidence? C: Who stored the evidence? D: Who controlled the evidence? Answer Explanations Answer (a) is the correct answer. Refer to the correct answer explanation.” Sufficiency is not part of the concept of admissibility of evidence. file://C:\Program Files\Wiley\CIAExam\Print.

Wiley CIA 2006 v1 Page 42 of 262 B: Flowchart evidence. send copies to the defense and to the judge. Refer to the correct answer explanation. Answer (d) is the correct answer. Proper elements of proof and correct types of evidence are needed to prove a case. Refer to the correct answer explanation. D: Prove a case. Demonstrative evidence or visual aids can be real things (i. This saves time in court. Question: V2C4-0025 Evidence is needed to do which of the following? Answers A: Charge a case.e.htm 1/20/2010 . C: Make a case. Answer Explanations Answer (a) is the correct answer. This answer is incorrect. A recommendation for cases with a large volume of evidence is to assemble a single exhibit book containing all documents. B: Classify a case.. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Question: V2C4-0026 What determines whether a computer crime has been committed? file://C:\Program Files\Wiley\CIAExam\Print. prepare a record of exhibits. This answer is incorrect.e. Answer Explanations This answer is incorrect. and the names of the witnesses who are to testify as to each item. This answer is incorrect. Best evidence is primary evidence. the counts each is connected with. C: Magnetic tapes evidence. Refer to the correct answer explanation. and papers. records. It is confined to documents. and introduce it as a single exhibit in court. a gun of the same type used in a homicide) or representation of real things (i. Refer to the correct answer explanation. Both flowchart evidence and magnetic tape evidence are proper. D: Demonstrative evidence. which is the most natural evidence.. Best evidence gives the most satisfactory proof of the fact under investigation. Also. a photograph or map).

Substantiate the allegation. Step 1 is substantiating the allegation. IV. D: When the investigation is completed. This answer is incorrect. and material. B: When a computer expert has completed his or her work. II. C: When the allegation has been substantiated. C: IV. Step 2 is consulting with a computer expert. A computer crime is committed when the allegation is substantiated with proper evidence that is relevant. and parameters of a prospective search. This answer is incorrect. This answer is incorrect. Answers A: IV. This answer is incorrect. Refer to the correct answer explanation. Refer to the correct answer explanation. II. Prepare an investigative plan. Step 4 is consulting with a prosecutor. Refer to the correct answer explanation. competent. Answer (c) is the correct answer. depending on the nature of the allegation and scope of the investigation. Refer to the correct answer explanation. Refer to the correct answer explanation. Items to discuss with the prosecutor may include the elements of proof. II. Answer Explanations This answer is incorrect.Wiley CIA 2006 v1 Page 43 of 262 Answers A: When the crime is reported. and IV. evidence required. D: I. Consult with a computer expert. and III. III.htm 1/20/2010 . This answer is incorrect. III. and I. as appropriate. Step 3 is preparing an investigation plan that sets forth the scope of the investigation and serves as a guide in determining how much technical assistance will be needed. I. I. Consult with a prosecutor. Question: V2C4-0027 The correct sequence of preliminary investigation is I. II. Refer to the correct answer explanation. II. file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is the correct answer. and III. B: III. IV.

Wiley CIA 2006 v1 Page 44 of 262 Question: V2C4-0028 The objective of which of the following team members is similar to that of the information systems security officer involved in a computer crime investigation? Answers A: An investigator. B: After establishing the probable cause(s). B: A district attorney. This answer is incorrect. and to support the investigation. Refer to the correct answer explanation. Each person has a definite and different role and brings varied capabilities to the team approach. A district attorney’s role is to prove the case while the objective of the investigator is to gather facts. Answer (d) is the correct answer. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. A team approach is desirable when a computer-related crime case is a complex one. Question: V2C4-0029 A search warrant is required Answers A: Before the allegation has been substantiated. Refer to the correct answer explanation. file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations This answer is incorrect. Both the internal system auditor’s and the security officer’s objectives are the same since they work for the same organization. This answer is incorrect. C: Before identifying the number of investigators needed. C: A computer expert. D: An internal systems auditor.htm 1/20/2010 . The objectives are to understand system vulnerabilities. Refer to the correct answer explanation. D: After seizing the computer and related equipment. to strengthen security controls.

Refer to the correct answer explanation. Discovery and recognition is one of the seven considerations involved in the care and handling of evidence.Wiley CIA 2006 v1 Page 45 of 262 Answer (b) is the correct answer. The evidence is highly volatile. Refer to the correct answer explanation. When a computer is involved. that is. the evidence is probably not apparent or visible. file://C:\Program Files\Wiley\CIAExam\Print. the investigator must recognize that computer storage devices are nothing more than electronic or magnetic file cabinets and should be searched if it would normally be reasonable to search an ordinary file cabinet. D: Difficult and erasable. Refer to the correct answer explanation. This answer is incorrect. This answer is incorrect. maintenance of evidence is important for which of the following reasons? Answers A: To record the crime. This answer is incorrect.htm 1/20/2010 . Refer to the correct answer explanation. B: Apparent and magnetic C: Electronic and inadmissible. It is the investigator’s capability to discover and to recognize the potential source of evidence. Refer to the correct answer explanation. This answer is incorrect. Question: V2C4-0030 In a computer-related crime investigation. presenting a proper technical perspective in establishing probable cause becomes crucial to securing a search warrant. computer evidence is Answers A: Volatile and invisible. This answer is incorrect. Nevertheless. Answer Explanations Answer (a) is the correct answer. Once the allegation has been substantiated. Question: V2C4-0031 In a computer-related crime investigation. Because of the technical orientation of a computer-related crime investigation. subject to change. B: To collect the evidence. C: To protect the evidence. the prosecutor should be contacted to determine if there is probable cause for a search.

and record it. Refer to the correct answer explanation. leave it alone until a warrant can be obtained. Special procedures are needed to avoid problems of proof caused by improper care and handling of such evidence. what should the investigator do? Answers A: Seize it before someone takes it away B: Leave it alone until a warrant can be obtained. It is proper to maintain computer-related evidence. Refer to the correct answer explanation. Refer to the correct answer explanation.Wiley CIA 2006 v1 Page 46 of 262 D: To avoid problems of proof. Answer Explanations This answer is incorrect. If a computer or peripheral equipment involved in a computer crime is not covered by a search warrant. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Question: V2C4-0033 All of the following are proper ways to handle the computer equipment and magnetic media items involved in a computer crime investigation except: Answers A: Seal. Refer to the correct answer explanation. C: Analyze the equipment or its contents. Question: V2C4-0032 If a computer or peripheral equipment involved in a computer crime is not covered by a search warrant. This answer is incorrect. Answer (d) is the correct answer. D: Store it in a locked cabinet in a secure warehouse. Refer to the correct answer explanation. B: Seal and store items in a cardboard box. This answer is incorrect. store. Answer (b) is the correct answer. and tag the items. The point is that a warrant is required for anything to be collected by the investigator. file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations This answer is incorrect.htm 1/20/2010 .

Do not use plastic bags or sandwich bags to store any piece of computer equipment and/or magnetic storage media. such as the number of the evidence tag. D: Computer logs. B: Physical observation. D: Seal and store items in a plastic bag. These logs can be manually or computer maintained. (2) what information was accessed. An additional label should be attached to the bag identifying its contents and noting any identifying numbers. Physical observation may not be possible in a computer environment due to automated records. seal and store each item in a paper bag or cardboard box to keep out dust. Inquiries of people may not give in-depth answers due to their lack of specific knowledge about how a computer system works. data usage and access control security logs will identify (1) who has accessed the computer. After all equipment and magnetic media have been labeled and inventoried. since plastic material can cause both static electricity and condensation. For example. Question: V2C4-0035 Which of the following is needed to produce technical evidence in computer-related crimes? file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations This answer is incorrect. Answer (d) is the correct answer. which can damage electronically stored data and sensitive electronic components.Wiley CIA 2006 v1 Page 47 of 262 C: Seal and store items in a paper bag. Answer Explanations Answer (a) is incorrect. Answers A: Physical examination.htm 1/20/2010 . Relevant evidence is essential for a successful computer fraud examination. This answer is incorrect. Refer to the correct answer explanation. and (4) how long the access lasted. Question: V2C4-0034 Indicate the most objective and relevant evidence in a computer environment involving fraud. Refer to the correct answer explanation. the latter method is more timely and reliable than the former method. C: Inquiries of people. (3) where the computer was accessed. This answer is incorrect. Answer (d) is the correct answer. Physical examination may not be possible in a computer environment due to automated records. Answer (b) is incorrect. Refer to the correct answer explanation. Answer (c) is incorrect.

This answer is incorrect. The forensic methodology deals with technical evidence. The final stage is returning the evidence to the contributor. The audit methodology deals with reviewing business transactions and systems and reaching an opinion by an auditor. B: System methodology. Answer Explanations Answer (a) is the correct answer. The third stage is repacking the computer and all magnetic disks. A forensic methodology is a process for the analysis of electronically stored data.htm 1/20/2010 .Wiley CIA 2006 v1 Page 48 of 262 Answers A: Audit methodology. The first stage is preparing a report documenting what was done and the results obtained. B: Receive. Refer to the correct answer explanation. Refer to the correct answer explanation. C: Examine. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. they have many meanings. This answer is incorrect. D: Criminal methodology. This answer is incorrect. Question: V2C4-0036 The final stage of reporting results of computer evidence life cycle is Answers A: Return. D: Report. This answer is incorrect. Refer to the correct answer explanation. Refer to the correct answer explanation. Refer to the correct answer explanation. C: Forensic methodology. The second stage is sending printouts and reports to the contributor or subject matter expert for additional analysis. The process must be completely documented to ensure that the integrity of the evidence is not questioned in court. The phrases system methodology and criminal methodology are too vague. file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is the correct answer. This answer is incorrect.

and do not lay magnetic media on top of any electronic equipment. Do not carry magnetic media in the trunk of a vehicle containing a radio unit. Refer to the correct answer explanation. D: Leaving the magnetic media in the trunk of a vehicle containing a radio unit. This answer is incorrect. D: Computer. C: Forensic analysis. Answer Explanations This answer is incorrect. reports. Refer to the correct answer explanation.Wiley CIA 2006 v1 Page 49 of 262 Question: V2C4-0037 Which of the following investigative tools is most effective when large volumes of evidence need to be analyzed? Answers A: Interviews. Refer to the correct answer explanation. and graphs to assist the investigator in analysis and decision making. Refer to the correct answer explanation. C: Subjecting the magnetic media to forensic testing.htm 1/20/2010 . Question: V2C4-0038 Which of the following methods is acceptable to handle computer equipment seized in a computer crime investigation? Answers A: Exposing the magnetic media to radio waves. Forensic analysis is the art of retrieving computer data in such a way that will make it admissible in court. Exposing magnetic media to magnetic fields. This answer is incorrect. may alter or destroy data. Answer Explanations This answer is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. Refer to the correct answer explanation. Answer (c) is the correct answer. such as radio waves. Computers can be used to collect and compile large amounts of data and provide statistics. This answer is incorrect. Forensic analysis is the art of retrieving computer data in such a way that will make it admissible in court. B: Laying the magnetic media on top of electronic equipment. B: Questionnaires. Answer (d) is the correct answer.

. C: Overlooking inefficiencies in the judicial system. D: Accepting the lack of integrity in the system. Willingness to prosecute sends a strong message to the potential perpetrators. drugs).htm 1/20/2010 . D: Piggybacking. honesty) are major causes of fraud.g. whether computer-related or not. weak system of controls). file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 50 of 262 This answer is incorrect.g. Situational pressures (e. and personal characteristics (e. Question: V2C4-0039 Computer fraud is discouraged by Answers A: Being willing to prosecute. gambling. Willingness to prosecute sends a strong message to the potential perpetrators. Answer Explanations Answer (a) is the correct answer. lack of integrity. C: Scavenging.. Answers A: Data diddling. Willingness to prosecute sends a strong message to the potential perpetrators. Answer (b) is incorrect. There is no new way to commit fraud because someone has already tried it somewhere.. Question: V2C4-0040 Identify the computer-related crime and fraud method that involves obtaining information that may be left in or around a computer system after the execution of a job. This encourages computer fraud whereas choice (a) discourages it. opportunities to commit fraud (e. There is nothing new about the act of committing fraud. B: Salami technique. Answer (c) is incorrect. Refer to the correct answer explanation.g. This encourages computer fraud whereas choice (a) discourages it. This encourages computer fraud whereas choice (a) discourages it. B: Ostracizing whistle-blowers.

htm 1/20/2010 . There is no direct correlation between computer fraud and the other three things indicated in the three choices.Wiley CIA 2006 v1 Page 51 of 262 Answer Explanations Answer (a) is incorrect. Data diddling involves changing data before or during input to computers or during output from a computer system. Question: V2C4-0042 Internal auditors would be more likely to detect fraud if they developed/strengthened their ability to Answers A: Recognize and question changes which occur in organizations. Piggybacking can be done physically and electronically. The fact that the system has adequate and clear audit trails will deter fraud perpetrators because they fear getting caught. This answer is incorrect. Scavenging fits the description. Answer (c) is the correct answer. Both involve gaining access to a controlled area without authorization. C: Audit trails are not available. file://C:\Program Files\Wiley\CIAExam\Print. B: Documentation is not available. C: Develop internal controls to prevent the occurrence of fraud. Answer (b) is incorrect. The salami technique is a theft of small amounts of assets (primarily money) from a number of sources. Refer to the correct answer explanation. Audit trails indicate what actions are taken by the system. Refer to the correct answer explanation. B: Interrogate fraud perpetrators to discover why the fraud was committed. Answer (d) is incorrect. Question: V2C4-0041 Computer fraud is increased when Answers A: Employees are not trained. D: Employee performance appraisals are not given. Refer to the correct answer explanation. Answer (c) is the correct answer. Answer Explanations This answer is incorrect. This answer is incorrect.

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D: Document computerized operating system programs.

Answer Explanations
Answer (a) is the correct answer. The recognition and questioning of change is critical to the detection of fraud. Answer (b) is incorrect. Interrogation of fraud perpetrators occurs after detection. Answer (c) is incorrect. The controls mentioned are preventive, not detective. Answer (d) is incorrect. Documentation of operating systems is not within the scope of internal auditing, and would do little to enhance fraud detection skills.

Question: V2C4-0043
According to the IIA Standards, which of the following best describes the two general categories or types of fraud that concern most internal auditors?

Answers
A: Improper payments (i.e., bribes and kickbacks) and tax fraud. B: Fraud designed to benefit the organization and fraud perpetrated to the detriment of the organization. C: Acceptance of bribes or kickbacks and improper related-party transactions. D: Acceptance of kickbacks or embezzlement and misappropriation of assets.

Answer Explanations
Answer (a) is incorrect. These are examples of kinds of fraud within the two general categories or types given in the Standards. Answer (b) is the correct answer. These are the two overall categories or types of fraud given in the IIA Standards. Answer (c) is incorrect. These are examples of kinds of fraud within the two general categories or types given in the Standards. Answer (d) is incorrect. These are examples of kinds of fraud within the two general categories or types given in the Standards.

Question: V2C4-0044
A company hired a highly qualified accounts payable manager who had been terminated from another company for alleged wrongdoing. Six months later the manager diverted $12,000 by sending duplicate payments of invoices to a relative. A control that might have prevented this situation would be to

Answers
A: Adequately check prior employment backgrounds for all new employees. B: Not hire individuals who appear overqualified for a job.

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C: Verify educational background for all new employees. D: Check to see if close relatives work for vendors.

Answer Explanations
Answer (a) is the correct answer. This practice might give some leads to previous shortcomings. Answer (b) is incorrect. Individuals in their declining years may be forced to accept jobs below their full capabilities. Answer (c) is incorrect. This does not include checking prior employment. Answer (d) is incorrect. This is not an adequate control in this scenario.

Question: V2C4-0045
Red flags are conditions that indicate a higher likelihood of fraud. Which of the following would not be considered a red flag?

Answers
A: Management has delegated the authority to make purchases under a certain dollar limit to subordinates. B: An individual has held the same cash-handling job for an extended period without any rotation of duties. C: An individual handling marketable securities is responsible for making the purchases, recording the purchases, and reporting any discrepancies and gains/losses to senior management. D: The assignment of responsibility and accountability in the accounts receivable department is not clear.

Answer Explanations
Answer (a) is the correct answer. This is an acceptable control procedure aimed at limiting risk while promoting efficiency. It is not, by itself, considered a red flag. Answer (b) is incorrect. Lack of rotation of duties or cross-training for sensitive jobs is one of the red-flag list factors. Answer (c) is incorrect. This would be an example of an inappropriate segregation of duties, which is an identified red flag. Answer (d) is incorrect. This is an identified red flag.

Question: V2C4-0046
Internal auditors and management have become increasingly concerned about computer fraud. Which of the following control procedures would be least important in preventing computer fraud?

Answers

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A: Program change control that requires a distinction between production programs and test programs. B: Testing of new applications by users during the systems development process. C: Segregation of duties between the applications programmer and the program librarian function. D: Segregation of duties between the programmer and systems analyst.

Answer Explanations
Answer (a) is incorrect. This is one of the elements of good program change control. Answer (b) is incorrect. Testing of new applications by users is one of the most important controls to help prevent computer fraud. Answer (c) is incorrect. An adequate control structure over program changes is one of the most important control procedures in a computerized environment. Answer (d) is the correct answer. This would be the least important control procedure. The analyst is responsible for communicating the nature of the design to the programmer. There is no control reason not to combine these functions.

Question: V2C4-0047
During a regularly scheduled IT audit of a major division, the IT auditor discovers a complicated programming algorithm that adds costs to a cost-plus program billing the government. The amount added accounted for 95% of the net income for the division for the most recent year. Upon further investigation, the IT auditor finds that only the marketing manager, the divisional manager, and the programmer know of the algorithm. The company has a separate section to investigate fraud. The auditor communicates with management and the special investigation section, and the investigation is turned over to that group. However, after a month, it becomes apparent that senior management has instructed the group to “not make waves” and to drop the investigation. The internal audit department should

Answers
A: Immediately report the circumstances and the IT auditor's findings to the audit committee. B: Immediately report the circumstances and the IT auditor's findings to the appropriate governmental regulatory agency because the auditor cannot knowingly be a party to an illegal act. C: Take no further action. The nature of the fraud has been reported to the proper authorities within the company and the auditor has no power to pursue the investigation further. D: Report the findings to the external auditor because the external auditor should be aware of any material misstatement of account balances.

Answer Explanations
Answer (a) is the correct answer. The auditor cannot knowingly be a party to any illegal act. If the auditor does not do anything, he or she might be perceived as a party. The auditor should report the problem directly to the audit committee and await its decision as to further action to be taken. Answer (b) is incorrect. Although the action recommended is necessary to ultimately disassociate the auditor from

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the fraud, alternatives within the organization should be pursued first. That alternative is represented in response (a). Answer (c) is incorrect. Doing nothing is not acceptable. The auditor could be perceived as a party to the fraud if no action is taken. Answer (d) is incorrect. The auditor is not required to report the finding to the external auditor, but should be free to communicate the problem if the external auditor makes an inquiry.

Question: V2C4-0048
Which of the following statements correctly characterize(s) the “red flags” literature that has recently developed in the auditing profession? I. Red flags are items or actions that have been associated with fraudulent conduct. II. The auditor should document all red flags that may have been noted on an audit engagement. III. Many red flags are “subjective” in nature and might not come to the auditor’s attention during the course of an audit that is properly planned and conducted in accordance with the Standards.

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

Answer Explanations
Answer (a) is incorrect. The auditor is to be alert to red flags and should investigate any situations that might include potential fraud. But the auditor is not required to document all personal red flags, for example, excessive gambling debts or excessive living style. The requirement to document these red flags is pertinent only when the auditor continues a fraud investigation or the item is pertinent to a particular audit finding. Answer (b) is the correct answer. Red flags are associated with fraudulent conduct. However, many red flags are personal in nature and would not necessarily come to the attention of the auditor. These would include items such as excessive living style by a manager, excessive gambling, and so on. Answer (c) is incorrect because Item II is not required. Answer (d) is incorrect because item I is also a correct statement.

Question: V2C4-0049
An employee of an insurance company processed a fraudulent policy loan application for an amount less than the established level requiring supervisory review. The employee then obtained the check and cashed it by forging the endorsement. To prevent the loan’s appearance on a subsequent policyholder statement, the loan amount was transferred to a “suspense” account. Which of the following should expose this situation at the earliest date?

Answers
A: A computer report identifying unusual entries to the suspense account.

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B: The use of prenumbered checks which are periodically accounted for. C: An annual internal audit. D: Regular reconciliation of the "suspense" account performed by an independent employee.

Answer Explanations
Answer (a) is the correct answer. A programmed computer output notification identifying unusual entries would identify the write off of the payee’s account to suspense as an unusual item immediately when it occurs. Answer (b) is incorrect because this is a good control procedure. Answer (c) is incorrect. The annual internal audit may detect the fraud, but it is unlikely to do so because of the small amount involved. In any case the timing of the internal audit may delay discovery. Answer (d) is incorrect. Regular reconciliation of the suspense account would occur at a date later than the computer output notification.

Question: V2C4-0050
The primary purpose of operating a fraud hotline within a company is to

Answers
A: Reduce total costs of operating the company. B: Measure how well organizational units are achieving the organization's goals. C: Establish channels of communication for people to report suspected improprieties. D: Concentrate on areas that deserve attention and to place less attention on areas operating as expected.

Answer Explanations
Answer (a) is incorrect. Performance measures focus on reducing the total costs of the company as a whole. Answer (b) is incorrect. Responsibility accounting is concerned with measuring how well organizational members are achieving the organization’s goals. Answer (c) is the correct answer. Fraud hotlines may identify areas where existing internal controls need to be modified or enhanced. Answer (d) is incorrect. Management by exception concentrates on areas that deserve attention and places less attention on areas operating as expected.

Question: V2C4-0051
A programmer accumulating round-off errors into one account that is later accessed by the programmer is a type of computer fraud. The best way to prevent this type of fraud is to

Answers

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Segregation of duties between systems development and programming would not generally prevent this type of error. D: Use control totals and check the results of the computer. Refer to the correct answer explanation. II. D: I. Answer Explanations This answer is incorrect. since in this particular type of fraud all the amounts will balance. control totals would not detect the fraud. If access to programs was not limited. Refer to the correct answer explanation. II. Answers A: I only. Answer (d) is incorrect. the fraud would go undetected. Answer (c) is incorrect. Since the particular fraud results in a balanced entry. All three items are correct statements according to the IIA Standards. III. Answer Explanations Answer (a) is incorrect. Refer to the correct answer explanation. Independent testing of a program will lead to discovery of this programmed fraud. since programmers possess the skills required to construct the program. C: II only. B: Independently test programs during development and limit access to the programs. Answer (d) is the correct answer. The accumulation of round-off errors into one person’s account is a procedure written into the program. Internal auditors are responsible for assisting in the deterrence of fraud by examining and evaluating the adequacy of the control system. C: Segregate duties of systems development and programming.Wiley CIA 2006 v1 Page 57 of 262 A: Build in judgment with reasonableness tests. This answer is incorrect. Question: V2C4-0052 Which of the following statements is(are) correct regarding the deterrence of fraud? I. and III. Reasonableness tests will not overcome this error. The primary means of deterring fraud is through an effective control system initiated by top management. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Unless the controls outlined in choice (b) are present. Answer (b) is the correct answer. B: I and II only. Internal auditors should determine whether communication channels provide management with adequate and reliable information regarding the effectiveness of the control system and the occurrence of unusual transactions. it would be possible for a programmer to change a program without approval. This answer is incorrect.

Question: V2C4-0054 Fraudulent use of corporate credit cards would be minimized by which of the following internal control procedures? Answers A: Establishing a corporate policy on the issuance of credit cards to authorized employees. On a cost/benefit basis. internal auditing should determine whether such written policy statements exist. can circumvent even the best of internal control systems. practices. Answer Explanations Answer (a) is incorrect. it is entirely reasonable to have more extensive control policies. B: A system of control that depended on separation of duties could be circumvented by collusion among three employees.htm 1/20/2010 . The Internal auditor may not have properly fulfilled the responsibility for the deterrence of fraud by failing to note and report that Answers A: Policies. Establishing a corporate policy on the issuance of credit cards does nothing to prevent file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. Forgeries. Answer (b) is incorrect. In carrying out its responsibility for the deterrence of fraud. C: There were no written policies describing prohibited activities and the action required whenever violations are discovered. Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect. B: Reviewing the validity of credit card need at executive and operating levels on a periodic basis. practices. D: Subjecting credit card charges to the same expense controls as those used on regular company expense forms. Even the best of internal control systems can often be circumvented by collusion. D: Divisional employees had not been properly trained to distinguish between bona fide signatures and cleverly forged ones on authorization forms. like collusion. and procedures in high-risk areas. and procedures to monitor activities and safeguard assets were less extensive in low-risk areas than in high-risk areas.Wiley CIA 2006 v1 Page 58 of 262 Question: V2C4-0053 A significant employee fraud took place shortly after an internal audit. C: Reconciling the monthly statement from the credit card company with the submitted copies of the cardholders' charge slips.

comparison to industry averages is not as likely to reveal the extra cost as is comparison of company data period to period. The accounting clerk continued to submit fraudulent invoices from the “old supplier. This added responsibility allowed her to actually budget for the amount of the fraudulent payments. it was possible for her to continue billings from the old supplier and deposit the subsequent checks. The clerk was considered an excellent employee and eventually was improperly given the added responsibility of preparing the department budgets.” Because contracting for services and approval of supplier invoices had been delegated to the clerk. Question: V2C4-0055 A fraud was perpetrated in a moderate-sized company when the accounting clerk was delegated too much responsibility. into a new account she opened in the name of the old supplier. The service may not have been part of cost of goods sold. Answer (b) is the correct answer. The accounting clerk continued to submit fraudulent invoices from the “old supplier. Analytical tests can be useful in detecting frauds. Answer (b) is incorrect.Wiley CIA 2006 v1 Page 59 of 262 fraudulent usage by those authorized to use company cards. amounts charged may exceed authorized limits and amounts incurred may not be business related.” Because contracting for services and approval of file://C:\Program Files\Wiley\CIAExam\Print. Comparison of production totals would not provide information concerning suppliers or the amount of materials used. the company switched suppliers of a service to a new vendor. Which of the following analytical procedures would most likely have signaled the existence of the fraud? Answers A: Current production with prior period production. This procedure helps ensure the validity of issuance rather than usage within prescribed limitations. C: Budget to actual service expense. At the time the fraud was uncovered. Answer (d) is the correct answer. the company switched suppliers of a service to a new vendor. Answer (c) is incorrect. In this way. per diems and authorization limits would be reviewed. D: Company cost of goods sold to industry cost of goods sold. During the year. During the year. Answer (c) is incorrect. Answer (d) is incorrect. However. Reconciling the monthly statement with the cardholders’ charge slips would determine that the amount of the separate charge items and the vendor codes were in agreement. Answer Explanations Answer (a) is incorrect. B: Current and prior period service expenses. the amount taken was included in the organization’s budget. The same expense controls should be applied to charge transactions as those applied to currency. which she was responsible to mail. Question: V2C4-0056 A fraud was perpetrated in a moderate-sized company when the accounting clerk was delegated too much responsibility. Subjecting credit card expenses to the same controls used in processing similar expense reports. Period-to-period analysis of expenses would have shown a sudden increase in material costs. but if so.htm 1/20/2010 .

” Because contracting for services and approval of supplier invoices had been delegated to the clerk. D: Mailing of check by someone other than persons responsible for check signing or invoice approval. Which of the following audit procedures would most likely lead to the detection of the fraud? Answers A: Take a sample of paid invoices and verify receipt of services by departments involved. This added responsibility allowed her to actually budget for the amount of the fraudulent payments. C: Perform bank statement reconciliation and account for all outstanding checks. The clerk was considered an excellent employee and eventually was improperly given the added responsibility of preparing the department budgets. it was possible for her to continue billings from the old supplier and deposit the subsequent checks. Which of the following controls would be least likely to prevent or detect the fraud described above? Answers A: Require authorization of payments by someone other than the clerk negotiating the contract. Once invoices have been approved and checks are prepared and signed. Independent budget preparation would have allowed an actual to budget comparison to detect the payments.Wiley CIA 2006 v1 Page 60 of 262 supplier invoices had been delegated to the clerk. Answer (c) is incorrect. Answer (d) is the correct answer. it was possible for her to continue billings from the old supplier and deposit the subsequent checks. which she was responsible to mail. into a new account she opened in the name of the old supplier. B: Trace a sample of checks disbursed to approved invoices for services. Answer (b) is incorrect. Answer Explanations Answer (a) is incorrect. into a new account she opened in the name of the old supplier. Question: V2C4-0057 A fraud was perpetrated in a moderate-sized company when the accounting clerk was delegated too much responsibility. the mailing of the check by an independent person provides no means of preventing improper payments. The accounting clerk continued to submit fraudulent invoices from the “old supplier. The clerk was considered an excellent employee and eventually was improperly given the added responsibility of preparing the department budgets. During the year. reviewed by the check signor. Separating contracting for service and approval of invoices would have prevented the fraud. D: Trace a sample of receiving documents to invoices and to checks disbursed. would have prevented payment for services not received. which she was responsible to mail. B: Comparison by person signing checks of invoices to an independent verification of services received. the company switched suppliers of a service to a new vendor.htm 1/20/2010 . file://C:\Program Files\Wiley\CIAExam\Print. This added responsibility allowed her to actually budget for the amount of the fraudulent payments. An independent verification of services received. C: Budget preparation by someone other than person signing contract and approving payment.

Answer (d) is incorrect. compare your counts to receiving reports completed by receiving personnel. comparing production. Fraudulent orders are shipped to another location. The clerk approved the fraudulent invoices. Answer (b) is incorrect. The company allowed designated employees to purchase as much as $250 per day in merchandise under open-ended contracts. Answer (c) is incorrect. material purchased. Answer (d) is the correct answer. receiving reports. because all have been made. purchase price. Bank statement reconciliations do not test the validity of the cash payments. Question: V2C4-0059 A purchasing agent acquired items for personal use with company funds.htm 1/20/2010 . and date of shipment with the vendors. Since purchases of this nature were not subject to normal company receiving policies. the analytic comparisons would show an unexplained increase in materials used. the receiving dock procedures would appear correct.Wiley CIA 2006 v1 Page 61 of 262 Answer Explanations Answer (a) is the correct answer. all supporting documents would match for each cash disbursement. All file://C:\Program Files\Wiley\CIAExam\Print. invoices. Which of the following audit procedures would most likely detect this fraud? Answers A: Take a sample of cash disbursements. and an “approved” invoice would therefore support each check. Answer Explanations Answer (a) is incorrect. Because materials are shipped and used in another business. the dishonest employee picked up the supplies at the vendor’s warehouse. but that information was not communicated to the vendor. Vendors would confirm all transactions. Supervisory approval of the purchases was required. supervisors routinely signed the authorization sheet at the end of the month without reviewing any of the supporting documentation. C: Observe the receiving dock and count material received. the fraudulent payments would not be detected. The test begins with valid receiving reports. and raw material inventory levels and investigate differences. Answer (c) is incorrect. compare purchase orders. He falsified receiving documents and approved the invoices for payment. Question: V2C4-0058 A production manager for a moderate-sized manufacturing company began ordering excessive raw materials and had them delivered to a wholesale company he runs as a side business. Because documents are falsified. Instead of reviewing and authorizing each purchase order. and check copies. Answer (b) is incorrect. Confirming with the using department the receipt of services that have been paid for would uncover the fraud. D: Prepare analytical tests. B: Take a sample and confirm the amount purchased.

file://C:\Program Files\Wiley\CIAExam\Print. During the past year. If the supplies in question had been sent to the company and a receiving report had been signed by an employee other than the one ordering them. who has the authority to do so.Wiley CIA 2006 v1 Page 62 of 262 purchases were for items routinely ordered by the company. that is not the case here. but that information was not communicated to the vendor. There is nothing suggesting inappropriate actions by the vendor or collusion between the vendor and the dishonest employee. Purchase orders are being issued by the dishonest employee. Answer (b) is incorrect. Which of the following internal controls would have been most effective in preventing this fraud? Answers A: Allowing purchases only from a list of preapproved vendors. Answer Explanations Answer (a) is incorrect. They may be prenumbered—that would not prevent him from engaging in this fraud. C: Tracing prices and quantities on selected vendors' invoices to the related purchase orders. Question: V2C4-0060 A purchasing agent acquired items for personal use with company funds.htm 1/20/2010 . Answer (d) is the correct answer. During the past year. B: Requiring the use of prenumbered purchase orders for all purchases of merchandise. B: Performing a trend analysis of printing supplies expenses for a two-year period. This control is to prevent the same document from being used to support two identical payments. The company allowed designated employees to purchase as much as $250 per day in merchandise under open-ended contracts. Answer (c) is incorrect. the fraud could not have occurred. the employee amassed enough merchandise to start a printing and photography business. including discounts and sales taxes. Since purchases of this nature were not subject to normal company receiving policies. such as purchase orders and receiving reports. Supervisory approval of the purchases was required. Which of the following audit procedures performed by the internal auditor would be most effective in leading to the discovery of this fraud? Answers A: Tracing selected canceled checks to the cash payments journal and to the related vendors' invoices. supervisors routinely signed the authorization sheet at the end of the month without reviewing any of the supporting documentation. at the time invoices are paid. D: Recomputing the clerical accuracy of selected vendors' invoices. All purchases were for items routinely ordered by the company. D: Establishing separation of duties between the ordering and receiving of merchandise. the dishonest employee picked up the supplies at the vendor’s warehouse. C: Canceling supporting documents. the employee amassed enough merchandise to start a printing and photography business. Instead of reviewing and authorizing each purchase order.

” Answer (d) is incorrect. C: Immediately report the matter to the appropriate level of management. At closing the supervisor deposits cash equal to the file://C:\Program Files\Wiley\CIAExam\Print. A delay in reporting the suspected defalcation will allow it to continue and/or give the suspected dishonest employee time to destroy or conceal important evidence. Once the dishonest employee knows that he or she is suspected. There is nothing in this scenario that would cause the invoice prices or quantities to be different from those on the purchase order prepared by the dishonest employee. Instead of reviewing and authorizing each purchase order. During the past year. Answer (d) is incorrect. The Standards state that “internal auditors are not responsible for notifying outside authorities of suspected wrongdoing. Analytical procedures would identify an excess use of supplies. Answer (c) is the correct answer. There is a legitimate vendor’s invoice for each cash payment related to this fraud. The company allowed designated employees to purchase as much as $250 per day in merchandise under open-ended contracts. supervisors routinely signed the authorization sheet at the end of the month without reviewing any of the supporting documentation. Question: V2C4-0062 Management discovers that a supervisor at one of their restaurant locations removes excess cash and resets sales totals throughout the day on the point-of-sale (POS) system. Answer Explanations Answer (a) is incorrect. Recomputations prove accuracy of invoices. but do not detect fraud. what should the auditor do next? Answers A: Immediately report the matter to the appropriate law enforcement official. D: Immediately discuss the matter with the employee suspected of the defalcation in order to confirm the audit findings. Answer (b) is the correct answer. but that information was not communicated to the vendor. the appropriate authorities within the organization should be informed. the dishonest employee picked up the supplies at the vendor’s warehouse. the employee amassed enough merchandise to start a printing and photography business. The IIA Standards state: “When an internal auditor suspects wrongdoing. Answer (c) is incorrect.Wiley CIA 2006 v1 Page 63 of 262 Answer Explanations Answer (a) is incorrect. Supervisory approval of the purchases was required. Question: V2C4-0061 A purchasing agent acquired items for personal use with company funds. Since purchases of this nature were not subject to normal company receiving policies. the person has an opportunity to destroy or to conceal important evidence or to flee to avoid apprehension. Once the internal auditor becomes reasonably certain that this defalcation is taking place.htm 1/20/2010 . since a potential felony is involved. All purchases were for items routinely ordered by the company.” Answer (b) is incorrect. but include a description of the suspected defalcation in the audit. B: Say nothing now.

Any differences between sales and deposits are recorded in an over/short account and. D: The forwarding of the close-of-day POS reports to revenue accounting. and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. Answer Explanations Answer (a) is the correct answer. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for one week at the location and then destroyed. Answer (d) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. it is the access to cash and ability to reset POS totals throughout the day that allowed the fraud. The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. At closing the supervisor deposits cash equal to the recorded sales on the POS system and keeps the rest. followed up with the location supervisor. Any differences between sales and deposits are recorded in an over/short account and.htm 1/20/2010 . if necessary. The customer food order checks are serially numbered. The customer food order checks are serially numbered. Answer (c) is incorrect. The depositing of receipts by the supervisor by itself is not the problem. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for one week at the location and then destroyed. and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. This is an independent verification of the deposits made by the supervisor. Answer (b) is incorrect. followed up with the location supervisor. The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. This is a step in the process of independently verifying sales. B: The deposit of cash receipts by the supervisor. B: Comparing a sample of the close of day POS reports to copies of the bank deposit slips. C: The matching of the bank deposit slips to the bank statement by revenue accounting. Question: V2C4-0063 Management discovers that a supervisor at one of their restaurant locations removes excess cash and resets sales totals throughout the day on the point-of-sale (POS) system. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. An inappropriate segregation of duties was created when responsibility for accounting for customer food checks and the depositing of receipts was given to the supervisor.Wiley CIA 2006 v1 Page 64 of 262 recorded sales on the POS system and keeps the rest. Which of the following control procedures allowed the fraud to occur? Answers A: The accounting of customer food checks by the supervisor. Which of the following audit procedures would have detected the fraud? Answers A: Flowcharting the controls over the verification of bank deposit. if necessary.

D: For selected days. The accounting for individual customer food checks would not have detected the fraud because it did not involve manipulation of these devices. The fraud involved receipts.htm 1/20/2010 . Answer (c) is the correct answer. Answer (b) is incorrect. A recruiter established some bogus placement agencies and. D: A management preoccupation with increased financial performance. The fraud involved altering the amounts on the close-of-day POS reports by resetting the POS system totals to zero. Answer (c) is incorrect. the recruiter would list one of the bogus agencies as referring the candidate. not deposits. reconciling the total of customer food checks to daily bank deposits. Generous reward systems can lead managers to falsify records so that rewards can be achieved. Answer (d) is the correct answer. Domineering management cause managers to falsify records so as to meet the demands of upper management. Answer (b) is incorrect. Using the total of the customer food checks as a confirmation of sales would have detected the shortage in the bank deposit. when interviewing walk-in applicants.Wiley CIA 2006 v1 Page 65 of 262 C: On a test basis. Preoccupation with increased financial performance can cause management to falsify records to show increased performance. verifying that the serial-numbered customer food checks are accounted for. Answer Explanations Answer (a) is incorrect. Which of the following factors have generally not been associated with management fraud? Answers A: Generous performance-based reward systems. C: Regular comparison of actual results to budgets. A possible means of detection or deterrence is to Answers file://C:\Program Files\Wiley\CIAExam\Print. B: A domineering management. Regular actual to budget comparisons encourage performance and detect problems before they become too large. Answer (d) is incorrect. Question: V2C4-0065 A personnel department is responsible for processing placement agency fees for new hires. Question: V2C4-0064 The IIA Standards require internal auditors to have knowledge about factors (red flags) that have proven to be associated with management fraud. Answer Explanations Answer (a) is incorrect.

Which of the following conditions would not be considered an indicator of possible fraud? Answers A: Managers regularly assume subordinates' duties. Question: V2C4-0066 Experience has shown that certain conditions in an organization are symptoms of possible management fraud. Answer (b) is incorrect because it is a symptom of possible fraud. This is not practical for all employees. B: Verify new vendors to firms listed in a professional association catalog and/or verify the vendor name and address through the telephone book. Question: V2C4-0067 Which of the following is an indicator of possible financial reporting fraud being perpetrated by management of a manufacturer? file://C:\Program Files\Wiley\CIAExam\Print. The degree of closeness in itself is not a conflict nor might it be subject to scrutiny.htm 1/20/2010 . Answer (d) is the correct answer. C: Monitor the closeness of the relationships of recruiters with specific vendors. Purchasing would have to make an independent source selection of the vendor. This type of checking would prove that the agency is a genuine one. D: Managers subject to formal performance reviews on a regular basis. This would be an internal control strength. Invoices being processed through purchasing will not add any additional controls. C: Mangers not complying with corporate directives and procedures. D: Require all employees to sign an annual conflict of interest statement. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 66 of 262 A: Process all personnel agency invoices via a purchase order through the purchasing department. he or she probably would not disclose any illegal activity that the person is processing through the company. Answer (b) is the correct answer. Answer Explanations Answer (a) is incorrect. B: Managers dealing in matters outside their profit center's scope. Answer Explanations Answer (a) is incorrect because it is a symptom of possible fraud. If a person was unethical. Answer (c) is incorrect. Answer (c) is incorrect because it is a symptom of possible fraud.

4.4 and a host firm GPM of 0. and (3) measurement errors. B: A consistent record of above average return on investment for all subsidiaries. C: A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goods sold to sales is 0. Manufacturers can expect a range of 40 to 60% on this ratio. Answer Explanations Answer (a) is the correct answer. Mere existence does not indicate fraud. Sales of $50 million and cost of goods sold of $25 million yield a gross profit margin (GPM) of 50%. A 50% increase in sales supported by a 25% increase in cost of goods sold is either fortuitous or fraudulent. and (3) measurement errors. D: A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goods sold to sales is 0.5 and host firm GPM of 0. Answer (d) is incorrect. Answer Explanations Answer (a) is incorrect.Wiley CIA 2006 v1 Page 67 of 262 Answers A: A trend analysis discloses (1) sales increases of 50% and (2) cost of goods sold increases of 25%. Answer (c) is incorrect. These include: (1) greater efficiencies exercised by the host firm. Cases where disproportionately large sales increases indicate fraudulent conduct include: (1) collusion by the host firm’s sales personnel and the buying firm’s purchasing personnel and (2) collusion by members of two departments within the host firm. the auditor should view this as an indicator of possible fraud. such as sales and transportation. Increases in sales are usually accompanied by close to proportional increases in cost of goods sold. B: A ratio analysis discloses (1) sales of $50 million and (2) cost of goods sold of $25 million. Since the internal auditor would not know whether the disproportionately large increase in sales is legitimate. C: Complex sales transactions and transfers of funds between affiliated companies.5. Answer (b) is incorrect. The lower GPM realized by the host firm may result from such causes as: (1) host firm inefficiencies. These data indicate an industry GPM of 0. Examples of situation in which increases in sales can be disproportionately larger than increases in cost of goods sold include: (1) operations within the realm of economies of scale (increasing returns to scale) and (2) the introduction of a highly accepted fashion item. The greater GPM realized by the host firm may result from any number of reasonable causes. D: Use of separate bank accounts for payrolls by each subsidiary. Question: V2C4-0068 Which of the following might be considered a red flag indicating possible fraud in a large manufacturing company with several subsidiaries? Answers A: The existence of a financial subsidiary. (2) less acceptance of host firm product or less sales effort. These data indicate an industry GPM of 0.4.4 and (2) the industry average ratio of cost of goods sold to sales is 0.5 and (2) the industry average ratio of cost of goods sold to sales is 0.htm 1/20/2010 .5. (2) greater sales effort (or a more highly accepted product). file://C:\Program Files\Wiley\CIAExam\Print.

Sales. file://C:\Program Files\Wiley\CIAExam\Print. Use of separate bank accounts is normal and convenient.Wiley CIA 2006 v1 Page 68 of 262 Answer (b) is incorrect. Exit interviews are not as effective at the officer level. Answer (c) is the correct answer. typical indicators of the suspected fraud would include all of the following except: Answers A: Not taking an annual vacation. Answer (b) is incorrect. disbursed loan proceeds to personally established accounts. Experience shows that such transfers are often used in fraud schemes. Analysis of segregation of duties will not detect fraudulent activity. Answer (d) is the correct answer. explained as the result of sound investments and not taking vacations • An expensive personal car obtained through business contacts • Gasoline and repair bills submitted for an assigned company car that is higher than company average (mileage logs were submitted on a quarterly basis) • Marked annoyance with questions from auditors In this situation. C: Periodic changes of outside public accountants. D: Regular analytical review of operating divisions. Analytical review of the divisions would reveal trends that might indicate fraud. cash flow. it only shows areas where opportunity exists. Answer (d) is incorrect. and then let the loans go into default. Some pertinent facts about the loan officer include • A high standard of living. Answer Explanations Answer (a) is incorrect. Changing outside auditor’s coverage of divisions will not mandate better due diligence reviews.htm 1/20/2010 . Answer (c) is incorrect. since most individuals will not want to compromise severance arrangements. B: Required exit interviews for all terminated employees. This is the only red flag among the options. Question: V2C4-0069 A subsidiary president terminated a controller and hired a replacement without the required corporate approvals. An approach that might detect this fraudulent activity would be Answers A: Analysis of overall management control for segregation of duties. Question: V2C4-0070 Bank management suspects that a bank loan officer frequently made loans to fictitious companies. and profit statistics were then manipulated by the new controller and president via accelerated depreciation and sale of capital assets to obtain larger performance bonuses for the controller and the subsidiary president. A consistent record of above-average return on investment can be an indication of good management.

C: Automobile operating expenses by loan officer. Trend analysis would not detect annual vacation not taken. B: Accumulation of unpaid vacation days. Answer (d) is the correct answer. Answer (c) is incorrect. and then let the loans go into default. Some pertinent facts about the loan officer include • A high standard of living. Explaining a high standard of living is a fraud indicator.Wiley CIA 2006 v1 Page 69 of 262 B: Becoming easily annoyed with auditor inquiries about questionable loans. Total dollar value of loans made would not correlate to fraudulent loans. Answer (d) is not correlated to making fraudulent loans. Question: V2C4-0072 Bank management suspects that a bank loan officer frequently made loans to fictitious companies. Answer (d) is incorrect. Although trend analysis could detect higher-than-average expenses for operation of the company car. Not taking an annual vacation is a fraud indicator. Question: V2C4-0071 Bank management suspects that a bank loan officer frequently made loans to fictitious companies. D: Submitting gasoline and repair bills that are higher than company average. D: Total dollar volume of loans by loan officer. Answer (c) is incorrect.htm 1/20/2010 . and then let the loans go into default. it has no relationship to suspected fraudulent loans. disbursed loan proceeds to personally established accounts. Trend analysis would detect an increase in the default rate due to bogus loans. disbursed loan proceeds to personally established accounts. C: Explaining a high standard of living as the result of investments. Answer (b) is incorrect. Answer Explanations Answer (a) is the correct answer. Answer (b) is incorrect. Some pertinent facts about the file://C:\Program Files\Wiley\CIAExam\Print. Becoming easily annoyed with auditor questions is a fraud indicator. Answer Explanations Answer (a) is incorrect. explained as the result of sound investments and not taking vacations • An expensive personal car obtained through business contacts • Gasoline and repair bills submitted for an assigned company car that is higher than company average (mileage logs were submitted on a quarterly basis) • Marked annoyance with questions from auditors The most appropriate trend analysis to indicate this potential fraud is Answers A: Loan default rates by loan officer.

C: Comparing current loan approval balances with those of prior years. Secured collateral would be difficult to obtain. and then let the loans go into default.Wiley CIA 2006 v1 Page 70 of 262 loan officer include • A high standard of living. explained as the result of sound investments and not taking vacations • An expensive personal car obtained through business contacts • Gasoline and repair bills submitted for an assigned company car that is higher than company average (mileage logs were submitted on a quarterly basis) • Marked annoyance with questions from auditors The above fraud would least likely be discovered by Answers A: Analyses of the number of loans made by each loan officer. B: Reviewing a representative sample of loan files for properly completed documents. explained as the result of sound investments and not taking vacations • An expensive personal car obtained through business contacts • Gasoline and repair bills submitted for an assigned company car that is higher than company average (mileage logs were submitted on a quarterly basis) • Marked annoyance with questions from auditors The extent of loans made to fictitious borrowers by the loan officer could best be determined by Answers A: Reviewing a representative sample of the loan officer's transactions for compliance with bank policies and procedures. C: External or internal audits of loan files. Answer Explanations Answer (a) is incorrect. B: Analysis of total dollar volume of loans by loan officer. Answer (b) is the correct answer.htm 1/20/2010 . A compliance audit would not show which loans were made to fictitious borrowers. and approval of secured collateral. such as loan agreements. Answer (c) is incorrect because the loan officer’s level of activity might be higher or lower without regard to fraudulent activity. disbursed loan proceeds to personally established accounts. file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C4-0073 Bank management suspects that a bank loan officer frequently made loans to fictitious companies. Some pertinent facts about the loan officer include • A high standard of living. credit approvals. D: Requesting positive confirmations for all outstanding loans made by the loan officer. Answer (d) is incorrect because the perpetrator could easily make positive account confirmations.

rather than just a sample of them. Answer (d) is incorrect. may be greater than the resultant savings. the additional cost of applying controls to all relevant transactions. Question: V2C4-0074 Which of the following policies is most likely to result in an environment conducive to the occurrence of fraud? Answers A: Budget preparation input by the employees who are responsible for meeting the budget.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. Answer (d) is the correct answer. in some areas. Participatory budgeting can reduce antagonism to budgets and reduce the likelihood of inappropriate means of meeting the budget. Which of the following is most likely to be considered an indication of possible fraud? Answers A: A new management team installed as the result of a takeover. Question: V2C4-0075 Internal auditors must exercise due care if they are to meet their responsibilities for fraud detection. in many labor markets the large number of applicants may make cause rejection of qualified ones to be unavoidable. Reconciling outstanding loans to the general ledger would be least likely to discover this fraud. Answer Explanations Answer (a) is incorrect because this procedure has some possibility of detecting fraud. the cost of controls should not exceed their benefits. Answer (c) is incorrect because this procedure has some possibility of detecting fraud. It is quite possible that. Answer (b) is the correct answer. D: The application of some accounting controls on a sample basis. the existence of certain conditions should raise red flags and arouse auditors’ professional skepticism concerning possible fraud.Wiley CIA 2006 v1 Page 71 of 262 D: Reconciliation of total loans outstanding to the general ledger balance. hiring policies should be based on factors other than adequate training—such as the applicants’ personal integrity. Answer (b) is incorrect because this procedure has some possibility of detecting fraud. Under the “reasonable assurance” concept. Second. C: The division's hiring process frequently results in the rejection of adequately trained applicants. Answer (c) is incorrect. First. A prod to achieve an unrealistically high sales or production quota can become a prod to falsify the records so that it appears the quota has been met. Thus. B: Unreasonable sales and production goals. file://C:\Program Files\Wiley\CIAExam\Print.

C: Rapid expansion into new markets. is not an indication of possible fraud. in and of itself. they must be aware of the basic characteristics of fraud. B: Taking unfair or dishonest advantage.htm 1/20/2010 . is not an indication of possible fraud. Negligence is not fraud because it does not involve willful wrongdoing. This is considered a red flag that indicates possible fraud. Answer (b) is incorrect because this is a characteristic of fraud. This is not unusual and. D: An Internal Revenue Service audit of tax returns. C: Perpetration for the benefit or detriment of the organization. Which of the following does not represent a difficulty in using the red flags as fraud indicators? Answers A: Many common red flags are also associated with situations where no fraud exists. Answer (d) is the correct answer. Answer (c) is incorrect. in and of itself. Answer (b) is the correct answer. is not an indication of possible fraud. Which of the following is not a characteristic of fraud? Answers A: Intentional deception. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect because this is a characteristic of fraud. file://C:\Program Files\Wiley\CIAExam\Print.Wiley CIA 2006 v1 Page 72 of 262 B: Rapid turnover of financial executives. Answer (b) is incorrect. in and of itself. Answer (c) is incorrect because this is a characteristic of fraud. This is not unusual and. Question: V2C4-0076 In order for internal auditors to be able to recognize potential fraud. This is not unusual and. Question: V2C4-0077 Auditors have been advised to look at red flags to determine whether management is involved in a fraud. D: Negligence on the part of executive management.

Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect.htm 1/20/2010 . Answer (d) is incorrect. This is not a difficulty. errors. each with defined purchasing areas. The red flags literature is well established. Answer Explanations Answer (a) is incorrect. This. Which of the following. This is a difficulty in using red flags. All vendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasing agents. such as management’s attitude. Answer (d) is the correct answer. It represents a valid business reason for more timely payment. internal auditors should be alert to the possibility of intentional wrongdoing.000. This is generally considered a red flag. When performing an audit. C: Red flag information is not gathered as a normal part of an audit engagement. has adopted a policy of paying vendors on a more timely basis to avoid incurring penalty charges.Wiley CIA 2006 v1 Page 73 of 262 B: Some red flags are difficult to quantify or to evaluate. Answer (c) is the correct answer. and conflicts of interest. Most purchases are made through the purchasing function. They review the reports and compare them with the purchase orders before sending the items to accounts payable with their approval for payment. increase in costs could be considered a red flag. if observed. not necessarily causation analysis. Question: V2C4-0079 file://C:\Program Files\Wiley\CIAExam\Print. and unusual. Significant deficiencies are one of the major factors associated with fraud. Although red flags will be refined in the future as research is done. D: The red flags literature is not well enough established to have a positive impact on auditing. B: The internal control structure has significant weaknesses. An unexpected. ineffectiveness. at the purchasing agents' request. which is most indicative of possible fraud. are difficult to quantify. Red flags are developed through correlation analysis. D: The cost of goods procured seems to be excessive in comparison with previous years. inefficiency. The organization has a policy of requiring three bids on all purchases that exceed $10. Many red flags. C: Management. The purchasing agents place the purchase orders and receive copies of receiving reports to ensure goods are received. Answer (b) is incorrect. Answer (b) is incorrect. would not be considered a red flag. by itself. which is organized around three buyers. Question: V2C4-0078 Management of a nonprofit organization has been monitoring spending and is concerned because payments to some vendors appear to be unusually high. this does not preclude their effective use. would not indicate the need to search for other indicators of fraud? Answers A: The standard of living of one of the purchasing agents has increased. waste. omissions.

Answer (c) is incorrect because it is a responsibility identified in the IIA Standards. B: Have sufficient knowledge to correctly identify indicators that fraud may have been committed. The organization has a policy of requiring three bids on all purchases that exceed $10. C: Identify control weaknesses that could allow fraud to occur. Most purchases are made through the purchasing function. all increases in cost of procured goods from specific vendors. C: Take a statistical sample of goods purchased and compare purchase prices for goods with those of file://C:\Program Files\Wiley\CIAExam\Print.000. which is organized around three buyers. Question: V2C4-0080 Management of a nonprofit organization has been monitoring spending and is concerned because payments to some vendors appear to be unusually high. Most purchases are made through the purchasing function. They review the reports and compare them with the purchase orders before sending the items to accounts payable with their approval for payment.htm 1/20/2010 . They review the reports and compare them with the purchase orders before sending the items to accounts payable with their approval for payment. Management has requested that the auditor investigate the possibility of kickbacks going to a purchasing agent. The organization has a policy of requiring three bids on all purchases that exceed $10. which is organized around three buyers. The presence of red flags does not make the auditor responsible for detecting fraud.000. Answer (d) is incorrect because it is a responsibility identified in the IIA Standards. B: Analyze. All vendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasing agents.Wiley CIA 2006 v1 Page 74 of 262 Management of a nonprofit organization has been monitoring spending and is concerned because payments to some vendors appear to be unusually high. Answer (b) is incorrect because it is a responsibility identified in the IIA Standards. The purchasing agents place the purchase orders and receive copies of receiving reports to ensure goods are received. All vendor invoices are sent directly to accounts payable even though receiving reports first go through the purchasing agents. by purchasing agent. Answer Explanations Answer (a) is the correct answer. Which of the following statements regarding the internal auditor’s responsibility for detecting fraud in the environment described in the scenario above is not correct? The auditor should Answers A: Detect fraud if red flags are present in the environment. D: Evaluate the indicators of fraud sufficiently to determine if a fraud investigation should take place. each with defined purchasing areas. each with defined purchasing areas. Which of the following procedures would be least effective in addressing management’s concern? Answers A: Confirm all contract terms with vendors. The purchasing agents place the purchase orders and receive copies of receiving reports to ensure goods are received.

Most (although not all) frauds are accompanied by changes in lifestyles of those committing the fraud. Answer Explanations Answer (a) is incorrect. Answer (c) is incorrect. Although not the best procedure. Significant management compensation tied to reported profits has been identified as a red flag for potential fraud investigation. D: Observe any changes in the lifestyles or individual consumption habits of the purchasing agents involved. Answer (d) is the correct answer. Answer (b) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . C: The auditor has taken a random sample of sales invoices. This would provide information on excess purchase prices. such as other companies or catalogs. Answer Explanations Answer (a) is the correct answer.Wiley CIA 2006 v1 Page 75 of 262 other sources of similar goods. It would be an important first step. B: There is an unusually large amount of sales returns recorded after year-end. gross margin. Question: V2C4-0082 An auditor is investigating the performance of a division with an unusually large increase in sales. An unusually large amount of sales returns after year-end could indicate that a large amount of nonvalid (without substance) sales were recorded near the end of the year. and profit. The lack of receiving documents would be a good indicator that nonvalid sales were recorded during November and December. D: One of the division's major competitors went out of business during the year. Answer (b) is incorrect. This would be the least useful procedure because the contract terms are already known. Answer (c) is incorrect. Question: V2C4-0081 An auditor is investigating the performance of a division with an unusually large increase in sales. The confirmation would have to be expanded to inquire as to whether pressure was brought to bear by the purchasing agent to generate kickbacks—and that approach would be successful only if the kickbacks were initiated by the purchasing agent rather than the vendor. This would be the best procedure to gather more insight as to what products and which purchasing agent might be involved. gross margin. it provides more information than choice (a). A decrease in the number of competitors during the year could be a potential explanation for the increase in sales and profits. Which of the following indicators is least likely to indicate the possibility of sales-related fraud in the division? Answers A: A significant portion of divisional management compensation is based on reported divisional profits. Answer (d) is incorrect. but cannot locate a shipping document for a number of the sales transactions selected for November and December.

D: Use regression analysis techniques for the first 10 months to estimate the sales and cost of goods sold for the last 2 months. This would be the least effective procedure. B: Confirm accounts receivable with large customers. D: Perform year-end sales and purchase cutoff tests. Sales and gross margin fluctuation analysis identifying unusual months would be a useful procedure to indicate the possibility of fraudulent transactions. Investigate unusually high months of sales and gross margin by examining support for sales. Answer (c) is incorrect. Question: V2C4-0083 An auditor is investigating the performance of a division with an unusually large increase in sales. Answer (b) is the correct answer. Answer (d) is incorrect. noting that all items were properly billed. Without prejudice to answers on the previous question.htm 1/20/2010 . assume that the analysis shows unusually high sales and gross margin during the months of November and December and the auditor wishes to investigate further. If the auditor continued to suspect fraudulent recording of transactions to increase reported profits. This would be an effective procedure because one way to overstate the gross margin would be to overstate inventory. Which of the following audit procedures would be most effective in analyzing whether fraudulent sales may have been recorded? Answers A: Take a sample of shipping documents and trace to related sales invoice. and profit. Performing year-end cutoff tests would be effective in identifying transactions recorded in the wrong period. The auditor would have more information by conducting a year-end physical inventory. C: Perform an analytical review comparing sales and gross margin with the previous 10 months and the first month of the following year. which of the following audit procedures would be least effective? Answers A: Take a physical inventory.Wiley CIA 2006 v1 Page 76 of 262 and profit. file://C:\Program Files\Wiley\CIAExam\Print. B: Develop a schedule of inventory by month and investigate unusual fluctuations by reference to the perpetual inventory records. C: Prepare a schedule of sales fluctuations and gross margin by month. gross margin. Answer Explanations Answer (a) is incorrect.

Thus. is not unexpected and would not raise a red flag. the division is audited by the internal audit department.htm 1/20/2010 . assuming that the customers are willing to respond to confirmations. Which of the following items might alert the auditor to the possibility of fraud in the division? Answers A: The division is not scheduled for an external audit this year. The division has been growing about 7% per year for the past three years and uses a standard cost system. Sales have normally been increasing by about 7% at this division. the auditor knows the following about management policies: • Company policy is to rapidly promote divisional managers who show significant success. Question: V2C4-0084 The internal auditing department has been assigned to perform an audit of a division. The division is growing.Wiley CIA 2006 v1 Page 77 of 262 Answer Explanations Answer (a) is incorrect. That has already been accomplished by the analytical review techniques. C: A significant portion of management's compensation is directly tied to reported net income of the division. • A significant portion of division management’s compensation comes in the form of bonuses based on the division’s profitability. confirming accounts receivable would be an effective procedure. The concern here is that sales have been recorded for shipments not made. Divisional net income has increased by 8%. Answer (c) is incorrect. an increase of 10%. Thus. If fictitious sales were recorded. Answer (b) is incorrect. Thus. successful managers rarely stay at a division for more than three years. Answer (d) is incorrect. Based on background review. Selecting a sample of shipping documents only provides evidence that all shipments were billed. B: Sales have increased by 10%. Answer (b) is the correct answer. The alternative best procedure would be to select recorded sales and trace them back to the underlying documents. The auditor now needs to perform detailed tests to determine the existence of misstatements. D: All of the above. The division was identified by senior management as a turnaround opportunity. Regression analysis would potentially indicate the existence of misstatements. Cost of goods sold has increased by 2%. that procedure was not given as an alternative. During the preliminary review. file://C:\Program Files\Wiley\CIAExam\Print. However. This factor has not been identified as a significant red flag. Analytical review procedures have already been performed and indicate the possibility of a misstatement. the most likely corresponding debit would be to accounts receivable. Inventory has increased by 15%. In addition. Answer Explanations Answer (a) is incorrect. by itself. but is not scheduled for a full audit by the external auditors this year. A more appropriate procedure would be to select recorded sales and trace back to the underlying documents. the auditor notes the following changes in financial data compared to the prior year: • • • • Sales have increased by 10%.

The division has been growing about 7% per year for the past three years and uses a standard cost system. • A significant portion of division management’s compensation comes in the form of bonuses based on the division’s profitability. the auditor notes the following changes in financial data compared to the prior year: • • • • Sales have increased by 10%. the auditor should schedule a cutoff test. Because of the red flags. D: Schedule a year-end sales cutoff test. B: Schedule a complete count of inventory at year-end and have the auditor observe and test the year-end inventory. the most appropriate procedure would be to begin with a physical observation of inventory and expand to price tests after establishing the existence of inventory. Answer (d) is incorrect because neither choice (b) nor (c) is a red flag. and the auditor should start there. Cost of goods sold has increased by 2%. During the preliminary review. Inventory might be overstated because of either quantity or cost differences. Inventory has increased by 15%. C: Schedule a complete investigation of the standard cost system by preparing cost buildups of a sample of products. file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is incorrect. Based on background review. the auditor knows the following about management policies: • Company policy is to rapidly promote divisional managers who show significant success. The division is growing. Answer (d) is incorrect. but is not scheduled for a full audit by the external auditors this year. Thus. and the auditor should start there. Answer (c) is incorrect. Based on the above data. Question: V2C4-0085 The internal auditing department has been assigned to perform an audit of a division. Divisional net income has increased by 8%. but the major problem appears to be existence of inventory. This would be an appropriate procedure. but the existing red flags point primarily to a problem with inventory overstatement. It is November and the audit manager is finalizing plans for a year-end audit of the division.Wiley CIA 2006 v1 Page 78 of 262 Answer (c) is the correct answer.htm 1/20/2010 . The data would seem to indicate that inventory is overstated and cost of goods sold is understated. the audit procedure with highest priority would be to Answers A: Select sales transactions and trace shipping documents to entries into cost of goods sold to determine if all shipments were recorded. Since we are nearing year-end. The division was identified by senior management as a turnaround opportunity. The problem is occurring during normal operations. This would be an appropriate procedure. Answer (b) is the correct answer. This is one of the most common red flags identified in the lIA Standards. but the major problem appears to be existence of inventory. successful managers rarely stay at a division for more than three years.

This would follow choice (a). it is not costly and provides the best direction for further detailed testing. the next audit step to perform would be to Answers A: Interview divisional management to determine why the standard cost system has not been updated on a timely basis. Divisional net income has increased by 8%. successful managers rarely stay at a division for more than three years. Answer (d) is the correct answer. • A significant portion of division management’s compensation comes in the form of bonuses based on the division’s profitability. Answer (c) is incorrect. Cost of goods sold has increased by 2%. The division is growing. but is not scheduled for a full audit by the external auditors this year. Answer Explanations Answer (a) is incorrect. C: Use generalized audit software to prepare a listing of gross margin by product by comparing standard cost with sales price. If the auditor decides there are significant problems with the standard cost system. Question: V2C4-0087 The internal auditing department has been assigned to perform an audit of a division. Select all high-gross-margin items for further investigation. Based on background review.Wiley CIA 2006 v1 Page 79 of 262 Question: V2C4-0086 The internal auditing department has been assigned to perform an audit of a division. It would also need to test for proper allocation of labor and overhead costs. it would be a supplemental procedure after choice (a) is performed. During the preliminary review. it will show up in variances. The division was identified by senior management as a turnaround opportunity. the auditor notes the following changes in financial data compared to the prior year: • • • • Sales have increased by 10%. The division has been growing about 7% per year for the past three years and uses a standard cost system. Since this is an analytical procedure. Again.htm 1/20/2010 . that is. If there is a problem with standard costs. Inventory has increased by 15%. It would be inappropriate to interview management to determine why the standard costs have not been updated when the auditor does not yet have evidence that the standard costs are misstated. Based on background review. whether they are allocated to inventory or cost of goods sold. D: Schedule all variances and determine their source and their disposition. This procedure may have merit. file://C:\Program Files\Wiley\CIAExam\Print. and would need to test more than the correct recording of purchases. Answer (b) is incorrect. B: Select a random sample of products and review the standard cost buildup by tracing purchases to the standard cost record. Thus. but there is no indication that higher-gross-margin products are the ones with standard cost problems. the auditor knows the following about management policies: • Company policy is to rapidly promote divisional managers who show significant success.

During the preliminary review. The appropriate audit action would be to Answers A: Continue to conduct interviews with subordinates until a clear-cut case is made. There is no need to inform divisional management of suspicions. but is not scheduled for a full audit by the external auditors this year. Divisional net income has increased by 8%. which affected competitors. the division would not have shown an increase in net income. It would be appropriate to interview divisional management. Answer (b) is the correct answer. The auditor has sufficient evidence to bring the matter to the attention of management and leave it to them to decide the method of further investigation. The subsidiary company has been in business for several years and enjoyed good profit margins although the general economy was in a recession. successful managers rarely stay at a division for more than three years. Assume the auditor found that there was a plan to overstate inventory and therefore increase reported profits for the division. Cost of goods sold has increased by 2%. • A significant portion of division management’s compensation comes in the form of bonuses based on the division’s profitability. Then report the case to the audit committee. The division was identified by senior management as a turnaround opportunity. The division is growing. If reported correctly. The auditor has substantial evidence that the divisional manager was aware of and approved the plan to overstate inventory. The auditor’s responsibility is for reporting inside the organization. B: Inform management and the audit committee of the findings and discuss proper follow-up action and/or further investigation with them. There is no need to report the item to the external auditor. Answer (d) is incorrect. the auditor notes the following changes in financial data compared to the prior year: • • • • Sales have increased by 10%. Answer (c) is incorrect. Thus. Question: V2C4-0088 The following are facts about a subsidiary: I. Answer Explanations Answer (a) is incorrect. C: Inform the divisional manager of the audit suspicions and obtain the manager's explanation of the findings before pursuing the matter further.Wiley CIA 2006 v1 Page 80 of 262 the auditor knows the following about management policies: • Company policy is to rapidly promote divisional managers who show significant success. This is the correct response according to the IIA Standards. Inventory has increased by 15%.htm 1/20/2010 . file://C:\Program Files\Wiley\CIAExam\Print. but primarily as a fact-finding chore. There is also some evidence that the manager may have been responsible for the implementation of the plan. D: Document the case thoroughly and report the suspicions to the external auditor for further review and external reporting. The division has been growing about 7% per year for the past three years and uses a standard cost system.

Question: V2C4-0089 When comparing perpetrators who have embezzled company funds to perpetrators of financial statement fraud (falsified financial statements). Answer (c) is incorrect. indicates potential favoritism or kickbacks. Insufficient working capital may indicate such problems as overexpansion. III. B: Ignore II since the economy had a downturn during this period. Answer (b) is incorrect. and excessive expenditures. The working capital ratio had declined from a healthy 3:1 to 0. When conducting a financial audit of the subsidiary. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. Rapid turnover in financial positions may signify existing problems that the individuals feel uncomfortable with but do not want to disclose.Wiley CIA 2006 v1 Page 81 of 262 II. two supervisors of accounts receivable. Items II.9:1. the change in working capital is unusual in light of the continuing strong profit margins and should be investigated. the internal auditor would Answers A: Be unlikely to detect I. and IV as warning signals of fraud. IV. and IV are all warning signals. III. four payables supervisors. III. Solesource procurement. The auditor should be on the lookout for diversion of funds to personal use through such methods as unrecorded sales and falsified expenditures. C: Rationalize the fraudulent behavior. the supervisor of purchasing at the subsidiary has instituted a policy of sole-source procurement to reduce the number of suppliers. D: Consider I. The items described can be detected through usual audit procedures in a financial audit. insufficient credit. Use of sole-source procurement is not a practice that encourages competition to assure that the organization is obtaining the required materials or equipment at the best price. but be concerned about II and IV as warning signals of fraud. C: Consider III to be normal turnover. II. However. D: Use company expectations as justification for the act. Corporate purchasing policy requires three bids. Turnover for the last several years has included three controllers. Answer (d) is the correct answer. transfer of funds to other companies. Accountability for funds and other resources should be determined upon termination of employment. those who have falsified financial statements would be less likely to Answers A: Have experienced an autocratic management style.htm 1/20/2010 . decreases in revenues. or III. II. B: Be living beyond their obvious means of support. Although the economy had a downturn. Answer Explanations Answer (a) is incorrect. if not adequately justified. and numerous staff in other financial positions.

In the last year the stores lost over $200. file://C:\Program Files\Wiley\CIAExam\Print. . opportunities.” he said. cash. When discussing frauds. crisis management is what his college professors had termed it. Rationalization is common to all fraud. High expectations are often given as a motivating factor by those who have committed financial statement fraud.htm 1/20/2010 . the pressures. Answer (c) is incorrect. He felt that he was a critical member of the business team. . They had become best friends in college. . the amounts stolen by John were small. When John had difficulty finding a job. “How easy it is to take the money. Answer Explanations This answer is incorrect. Question: V2C4-0090 Randy and John had known each other for many years. (VII) John’s family observed that he was often argumentative and at other times very depressed. Answer (d) is incorrect. Each year the business performed more and more poorly. Randy began delegating more and more responsibility to him. and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. John proved to be a very capable employee. Answer (b) is the correct answer. (I) John was trusted completely and handled all financial functions. It would take two or three people to replace me. Refer to the correct answer explanation. John did not even worry about making the accounts balance. His family had been in the grocery business for several generations. John was able to purchase an expensive car and take his family on several trips each year. At first. The fraud continued for six years. “ is an example of a(n) Answers A: Document symptom. or rationalizations given. After a period of time. (VI) He also joined an expensive country club. D: Physical symptom. not to financial statement fraud. After graduation. As the amounts became larger and larger. inventories. John assisted with the problems when his other duties allowed him time. No one checked his work. pressures. Randy offered him a job in the family store. where they both majored in accounting. Randy took over the family business from his father. opportunities. and bank statement reconciliations. . C: Opportunity to commit. “John was trusted completely . John had (III) difficulties with personal financial problems. As John demonstrated his abilities. Number I. Living beyond one’s means has been linked to employee (embezzlement) fraud. John was doing all of the general accounting and authorization functions for checks. he often thought to himself.Wiley CIA 2006 v1 Page 82 of 262 Answer (a) is incorrect. documents. B: Situational pressure.000. records. Identify the numbered and italicized factors (from the case) as being one of the symptoms. John confessed when he thought the auditors had discovered his embezzlements. Randy decided to expand the business and opened several new stores. (V) he made the books balance. But he became greedy. (II) Randy was always handling the most urgent problem . however. Things were changing at home. Although successful at work. Autocratic management styles have been linked to management (financial statement) fraud. Symptoms of fraud are also studied. Because of these activities. (IV) and that he contributed much more to the success of the company than was represented by his salary. Randy’s bank required an audit.

“Randy was always handling the most urgent . (b). In the last year the stores lost over $200. John confessed when he thought the auditors had discovered his embezzlements. Number II. however. John proved to be a very capable employee. (II) Randy was always handling the most urgent problem . Randy took over the family business from his father. where they both majored in accounting. (c). After a period of time. Because of these activities. John assisted with the problems when his other duties allowed him time. opportunities. .Wiley CIA 2006 v1 Page 83 of 262 This answer is incorrect. As John demonstrated his abilities. (VII) John’s family observed that he was often argumentative and at other times very depressed. But he became greedy. Things were changing at home.000. “ is an example of a(n) Answers A: Opportunity to commit. Therefore. Randy began delegating more and more responsibility to him. (VI) He also joined an expensive country club. D: Rationalization. by definition. . . the pressures. he often thought to himself. opportunities. When John had difficulty finding a job. “Crisis management” provides an opportunity to commit a fraud. . inventories. They had become best friends in college. (IV) and that he contributed much more to the success of the company than was represented by his salary. John was able to purchase an expensive car and take his family on several trips each year. pressures. C: Situational pressure. This answer is incorrect. and (d) are incorrect. When discussing frauds. John was doing all of the general accounting and authorization functions for checks. B: Analytical symptom. Refer to the correct answer explanation. Although successful at work. Each year the business performed more and more poorly.” he said. Randy offered him a job in the family store. file://C:\Program Files\Wiley\CIAExam\Print. choices (a). and bank statement reconciliations. Complete trust is an opportunity to commit a fraud. Question: V2C4-0091 Randy and John had known each other for many years. Therefore. Refer to the correct answer explanation. Answer (c) is the correct answer. cash. or rationalizations given. As the amounts became larger and larger. “How easy it is to take the money. records. It would take two or three people to replace me. The fraud continued for six years. (I) John was trusted completely and handled all financial functions. (V) he made the books balance. and (d) are incorrect. choices (b). crisis management is what his college professors had termed it. Identify the numbered and italicized factors (from the case) as being one of the symptoms.htm 1/20/2010 . and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Randy’s bank required an audit. John did not even worry about making the accounts balance. No one checked his work. Randy decided to expand the business and opened several new stores. He felt that he was a critical member of the business team. Refer to the correct answer explanation. At first. by definition. After graduation. John had (III) difficulties with personal financial problems. This answer is incorrect. Answer Explanations Answer (a) is the correct answer. His family had been in the grocery business for several generations. the amounts stolen by John were small. Symptoms of fraud are also studied. documents.

“How easy it is to take the money. Personal financial problem is a situational pressure to commit a fraud. At first.htm 1/20/2010 . choices (a). (VII) John’s family observed that he was often argumentative and at other times very depressed. the amounts stolen by John were small. Refer to the correct answer explanation.000. “Difficulties with personal financial problems” is an example of a(n) Answers A: Behavioral symptom. Randy decided to expand the business and opened several new stores. They had become best friends in college. . (c). records. Each year the business performed more and more poorly. His family had been in the grocery business for several generations. John was doing all of the general accounting and authorization functions for checks. John confessed when he thought the auditors had discovered his embezzlements. After graduation. Refer to the correct answer explanation. pressures. When discussing frauds. Randy offered him a job in the family store. John did not even worry about making the accounts balance. .” he said. Refer to the correct answer explanation. Randy’s bank required an audit. Number III. John had (III) difficulties with personal financial problems. or rationalizations given. As John demonstrated his abilities. Although successful at work. opportunities. Randy took over the family business from his father. by definition. cash. But he became greedy. documents. D: Opportunity to commit. Because of these activities. crisis management is what his college professors had termed it. (VI) He also joined an expensive country club. As the amounts became larger and larger. where they both majored in accounting. (IV) and that he contributed much more to the success of the company than was represented by his salary. This answer is incorrect. After a period of time. Randy began delegating more and more responsibility to him. John assisted with the problems when his other duties allowed him time. file://C:\Program Files\Wiley\CIAExam\Print. In the last year the stores lost over $200. Things were changing at home. C: Rationalization. Refer to the correct answer explanation.Wiley CIA 2006 v1 Page 84 of 262 This answer is incorrect. When John had difficulty finding a job. Refer to the correct answer explanation. This answer is incorrect. (V) he made the books balance. B: Situational pressure. John was able to purchase an expensive car and take his family on several trips each year. Therefore. No one checked his work. however. Answer (b) is the correct answer. The fraud continued for six years. and (d) are incorrect. and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. (I) John was trusted completely and handled all financial functions. inventories. Identify the numbered and italicized factors (from the case) as being one of the symptoms. opportunities. Answer Explanations This answer is incorrect. This answer is incorrect. John proved to be a very capable employee. the pressures. and bank statement reconciliations. It would take two or three people to replace me. he often thought to himself. Question: V2C4-0092 Randy and John had known each other for many years. He felt that he was a critical member of the business team. Symptoms of fraud are also studied. (II) Randy was always handling the most urgent problem .

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Question: V2C4-0093
Randy and John had known each other for many years. They had become best friends in college, where they both majored in accounting. After graduation, Randy took over the family business from his father. His family had been in the grocery business for several generations. When John had difficulty finding a job, Randy offered him a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randy began delegating more and more responsibility to him. After a period of time, John was doing all of the general accounting and authorization functions for checks, cash, inventories, documents, records, and bank statement reconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work. Randy decided to expand the business and opened several new stores. (II) Randy was always handling the most urgent problem . . . crisis management is what his college professors had termed it. John assisted with the problems when his other duties allowed him time. Although successful at work, John had (III) difficulties with personal financial problems. At first, the amounts stolen by John were small. John did not even worry about making the accounts balance. But he became greedy. “How easy it is to take the money,” he said. He felt that he was a critical member of the business team, (IV) and that he contributed much more to the success of the company than was represented by his salary. It would take two or three people to replace me, he often thought to himself. As the amounts became larger and larger, (V) he made the books balance. Because of these activities, John was able to purchase an expensive car and take his family on several trips each year. (VI) He also joined an expensive country club. Things were changing at home, however. (VII) John’s family observed that he was often argumentative and at other times very depressed. The fraud continued for six years. Each year the business performed more and more poorly. In the last year the stores lost over $200,000. Randy’s bank required an audit. John confessed when he thought the auditors had discovered his embezzlements. When discussing frauds, the pressures, opportunities, and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied. Identify the numbered and italicized factors (from the case) as being one of the symptoms, pressures, opportunities, or rationalizations given. Number IV, “and that he contributed much more . . . ” is an example of a

Answers
A: Rationalization. B: Behavioral symptom. C: Situational pressure. D: Physical symptom.

Answer Explanations
Answer (a) is the correct answer. Contributing more than paid is a rationalization. Therefore, by definition, choices (b), (c), and (d) are incorrect.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

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Question: V2C4-0094
Randy and John had known each other for many years. They had become best friends in college, where they both majored in accounting. After graduation, Randy took over the family business from his father. His family had been in the grocery business for several generations. When John had difficulty finding a job, Randy offered him a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randy began delegating more and more responsibility to him. After a period of time, John was doing all of the general accounting and authorization functions for checks, cash, inventories, documents, rec-ords, and bank statement reconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work. Randy decided to expand the business and opened several new stores. (II) Randy was always handling the most urgent problem . . . crisis management is what his college professors had termed it. John assisted with the problems when his other duties allowed him time. Although successful at work, John had (III) difficulties with personal financial problems. At first, the amounts stolen by John were small. John did not even worry about making the accounts balance. But he became greedy. “How easy it is to take the money,” he said. He felt that he was a critical member of the business team, (IV) and that he contributed much more to the success of the company than was represented by his salary. It would take two or three people to replace me, he often thought to himself. As the amounts became larger and larger, (V) he made the books balance. Because of these activities, John was able to purchase an expensive car and take his family on several trips each year. (VI) He also joined an expensive country club. Things were changing at home, however. (VII) John’s family observed that he was often argumentative and at other times very depressed. The fraud continued for six years. Each year the business performed more and more poorly. In the last year the stores lost over $200,000. Randy’s bank required an audit. John confessed when he thought the auditors had discovered his embezzlements. When discussing frauds, the pressures, opportunities, and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied. Identify the numbered and italicized factors (from the case) as being one of the symptoms, pressures, opportunities, or rationalizations given. Number V, “he made the books balance,” is an example of a(n)

Answers
A: Physical symptom. B: Analytical symptom. C: Lifestyle symptom. D: Document symptom.

Answer Explanations
This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.
Answer (d) is the correct answer. To make the “books balance” is an example of a document symptom. Therefore, by definition, choices (a), (b), and (c) are incorrect.

Question: V2C4-0095
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Randy and John had known each other for many years. They had become best friends in college, where they both majored in accounting. After graduation, Randy took over the family business from his father. His family had been in the grocery business for several generations. When John had difficulty finding a job, Randy offered him a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randy began delegating more and more responsibility to him. After a period of time, John was doing all of the general accounting and authorization functions for checks, cash, inventories, documents, rec-ords, and bank statement reconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work. Randy decided to expand the business and opened several new stores. (II) Randy was always handling the most urgent problem . . . crisis management is what his college professors had termed it. John assisted with the problems when his other duties allowed him time. Although successful at work, John had (III) difficulties with personal financial problems. At first, the amounts stolen by John were small. John did not even worry about making the accounts balance. But he became greedy. “How easy it is to take the money,” he said. He felt that he was a critical member of the business team, (IV) and that he contributed much more to the success of the company than was represented by his salary. It would take two or three people to replace me, he often thought to himself. As the amounts became larger and larger, (V) he made the books balance. Because of these activities, John was able to purchase an expensive car and take his family on several trips each year. (VI) He also joined an expensive country club. Things were changing at home, however. (VII) John’s family observed that he was often argumentative and at other times very depressed. The fraud continued for six years. Each year the business performed more and more poorly. In the last year the stores lost over $200,000. Randy’s bank required an audit. John confessed when he thought the auditors had discovered his embezzlements. When discussing frauds, the pressures, opportunities, and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied. Identify the numbered and italicized factors (from the case) as being one of the symptoms, pressures, opportunities, or rationalizations given. Number VI, “He also joined an expensive country club,” is an example of a

Answers
A: Rationalization. B: Lifestyle symptom. C: Behavioral symptom. D: Physical symptom.

Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
Answer (b) is the correct answer. “Joining an expensive country club” is an example of a lifestyle symptom. Therefore, by definition, choices (a), (c), and (d) are incorrect.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

Question: V2C4-0096
Randy and John had known each other for many years. They had become best friends in college, where they both majored in accounting. After graduation, Randy took over the family business from his father. His family had

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been in the grocery business for several generations. When John had difficulty finding a job, Randy offered him a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randy began delegating more and more responsibility to him. After a period of time, John was doing all of the general accounting and authorization functions for checks, cash, inventories, documents, rec-ords, and bank statement reconciliations. (I) John was trusted completely and handled all financial functions. No one checked his work. Randy decided to expand the business and opened several new stores. (II) Randy was always handling the most urgent problem . . . crisis management is what his college professors had termed it. John assisted with the problems when his other duties allowed him time. Although successful at work, John had (III) difficulties with personal financial problems. At first, the amounts stolen by John were small. John did not even worry about making the accounts balance. But he became greedy. “How easy it is to take the money,” he said. He felt that he was a critical member of the business team, (IV) and that he contributed much more to the success of the company than was represented by his salary. It would take two or three people to replace me, he often thought to himself. As the amounts became larger and larger, (V) he made the books balance. Because of these activities, John was able to purchase an expensive car and take his family on several trips each year. (VI) He also joined an expensive country club. Things were changing at home, however. (VII) John’s family observed that he was often argumentative and at other times very depressed. The fraud continued for six years. Each year the business performed more and more poorly. In the last year the stores lost over $200,000. Randy’s bank required an audit. John confessed when he thought the auditors had discovered his embezzlements. When discussing frauds, the pressures, opportunities, and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied. Identify the numbered and italicized factors (from the case) as being one of the symptoms, pressures, opportunities, or rationalizations given. Number VII, “John’s family observed that he was often argumentative . . . ” is an example of a

Answers
A: Rationalization. B: Lifestyle symptom. C: Behavioral symptom. D: Physical symptom.

Answer Explanations
This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.
Answer (c) is the correct answer. Being “argumentative” is an example of a behavioral symptom. Therefore, by definition, choices (a), (b), and (d) are incorrect.

This answer is incorrect. Refer to the correct answer explanation.

Question: V2C4-0097
An internal auditor would be concerned about the possibility of fraud if

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Answers
A: Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bank daily. B: The same employee who maintains the perpetual inventory records performs the monthly bank statement reconciliation. C: The same person maintains the accounts receivable subsidiary ledger and accounts payable subsidiary ledger. D: One person, acting alone, has sole access to the petty cash fund (except for a provision for occasional surprise counts by a supervisor or auditor).

Answer Explanations
Answer (a) is the correct answer. Paying petty cash–type expenditures from cash receipts facilitates the unauthorized removal of cash before deposit. All cash receipts should be deposited intact daily. Petty cash–type expenditures should be handled through an imprest fund. Answer (b) is incorrect. The monthly bank reconciliation should not be performed by a person who makes deposits or writes checks, but there is no problem with the inventory clerk doing it. Answer (c) is incorrect. There is no direct relationship between the transactions posted to the accounts receivable and accounts payable subsidiary ledgers; having the same person maintain both does not create a control weakness. Answer (d) is incorrect. In order to pinpoint responsibility for petty cash, it is desirable that only one person has access to the fund.

Question: V2C4-0098
When following up on a $200,000 increase in maintenance supplies during the past year, a purchasing agent explained to the auditor that the main reason for the increase was painting services and supplies. The auditor found a blanket purchase order without the normal bid or quote documentation. The blanket purchase order had been signed by the general manager and named the general manager’s father as the sole contractor for painting services on company projects. The auditor also found a number of large invoices authorized for payment by the general manager that showed the general manager’s father as the person who signed for receipt of the material at the supplier. Which is not a symptom of fraud as described in this situation?

Answers
A: Purchased material is not received by authorized company personnel. B: Routine controls are suspended for certain transactions. C: Purchased material is not delivered to a central location on company premises. D: The use of blanket purchase orders.

Answer Explanations

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Answer (b) is incorrect. The provision of paint is not an issue. Answer (c) is incorrect. Question: V2C4-0100 Jane Jackson had been the regional sales manager for a company over ten years. B: Paint and supplies are being purchased for a contractor. The receipt of goods or services off-site is a symptom of fraud. Answer (c) is incorrect. Answer Explanations Answer (a) is the correct answer.Wiley CIA 2006 v1 Page 90 of 262 Answer (a) is incorrect. Below are selected analytical data from the company that have led staff auditors to believe that there has been a financial statement fraud. The auditor also found a number of large invoices authorized for payment by the general manager that showed the general manager’s father as the person who signed for receipt of the material at the supplier. The perpetrator appears to have falsified sales information for the past two years. and Jane had given Frank some information that led to significant audit findings during the past three audits. The indicators include an extraordinary change in account balances as discovered during analytical review procedures. During this time she had become a very close friend with Frank Hansen. Answer (d) is incorrect.htm 1/20/2010 . Answer (d) is the correct answer. Question: V2C4-0099 When following up on a $200. C: The purchasing agent is selecting the contractor on the basis of a blanket purchase order. Frank had helped Jane solve some sales problems. The auditor found a blanket purchase order without the normal bid or quote documentation. The use of blanket purchase orders is an acceptable business practice. a purchasing agent explained to the auditor that the main reason for the increase was painting services and supplies. The scenario refers to normal and appropriate procedures that are suspended for these transactions. D: Invoices are being authorized for payment by the general manager. an internal audit manager. Jane and Frank had many of the same interests and belonged to the same tennis club. The receipt of goods or services by noncompany personnel is a symptom of fraud. The painting contractor is bound by company procedures in this manner. The common indicator of fraud recognized by the auditor in this scenario is Answers A: Analytical procedures revealed an extraordinary increase in account balances.000 increase in maintenance supplies during the past year. In addition to being neighbors. They trusted each other. The blanket purchase order had been signed by the general manager and named the general manager’s father as the sole contractor for painting services on company projects. The purchasing agent is fulfilling this responsibility in accordance with the authority of a purchasing agent’s position. Frank is now certain that Jane is involved in the fraud. Which combination of the following analytical data provides the strongest indication of the possibility of the fraud? file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is incorrect. Frank is concerned because he recently completed an audit in the area and accepted Jane’s explanation for differences in the analytical data.

and given the constant increase. The perpetrator appears to have falsified sales information for the past two years. Answer (d) is incorrect.5% -4 year 5% 4 40 3% Answers A: Percent increase in sales and inventory turnover. Frank is concerned because he recently completed an audit in the area and accepted Jane’s explanation for differences in the analytical data. file://C:\Program Files\Wiley\CIAExam\Print. See choice (a) for turnover. Answer (b) is the correct answer. The increase in percent change in sales is not unreasonable. and Jane had given Frank some information that led to significant audit findings during the past three audits. D: Percent increase in sales and gross margin percentage. In addition to being neighbors. One would expect rapid increases in gross margin percentage if sales were fictitious. are not indications of sales overstatements. one might expect increases in inventory that could keep turnover constant. an internal audit manager. They trusted each other.5 39 2. Frank is now certain that Jane is involved in the fraud. B: Gross margin percentage and change in sales returns. Below are selected analytical data from the company that have led staff auditors to believe that there has been a financial statement fraud. Frank had helped Jane solve some sales problems. If the increase in sales was due to a market sales price increase.htm 1/20/2010 . The turnover and return figures. when taken together. During this time she had become a very close friend with Frank Hansen. Answer (c) is incorrect.Wiley CIA 2006 v1 Page 91 of 262 Percent increase in sales Inventory turnover Gross margin percentage Percent change in sales returns Current year 10% 5 54 8% Last year 8% 4 49 6% -2 year 6% 5 42 3% -3 year 4% 3. Jane and Frank had many of the same interests and belonged to the same tennis club. B: Accepting an audit assignment in an area where he was a close personal friend of management. C: Inventory turnover and change in sales returns. The current dilemma in which Frank finds himself was least likely caused by Answers A: Not rotating audit assignments every year. the large increase in returns is also symptomatic of falsified sales. Answer Explanations Answer (a) is incorrect. C: Failure to select the appropriate analytical procedures. Question: V2C4-0101 Jane Jackson had been the regional sales manager for a company over ten years. one might expect these results.

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D: Accepting the response of management without additional audit testing.

Answer Explanations
Answer (a) is incorrect because failure to rotate assignments and close personal friendships seems to have contributed to Frank’s decision to accept management’s explanation for the analytic findings. Answer (b) is incorrect because failure to rotate assignments and close personal friendships seems to have contributed to Frank’s decision to accept management’s explanation for the analytic findings. Answer (c) is the correct answer. From the information given, it appears Frank found the analytic data, but accepted management’s explanation of the findings. Answer (d) is incorrect because Frank should not accept management’s response on its face value.

Question: V2C5-0001
For which of the following sample results is sampling risk the smallest? Sample size 40 60 80 100 Tolerable error rate 5% 5% 4% 1% Sample error rate 2% 1% 3% 1% a. b. c. d.

Answers
A: a. B: b. C: c. D: d.

Answer Explanations
Answer (a) is incorrect. Sampling risk would be higher for the sample because the sample size is smaller and because the 2% error rate is larger than the 1% in answer (b), while the tolerable error rate is the same. Answer (b) is the correct answer. Compared to the other responses, the percentage of error in the sample is small relative to the tolerable error rate. Answer (c) is incorrect. Sampling risk would be higher than in answer (b) because the sample error rate is very large compared to the tolerable error rate. Although the sample size is larger than that in answer (b), the increase in the sample size is not large enough to compensate for the size of the sample error rate relative to the tolerable error rate. Answer (d) is incorrect. Although this is the largest sample, the sampling risk is extremely high because the sample error rate equals the tolerable error rate.

Question: V2C5-0002
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If an auditor is sampling to test compliance with a particular company policy, which of the following factors should not affect the allowable level of sampling risk?

Answers
A: The experience and knowledge of the auditor. B: The adverse consequences of noncompliance. C: The acceptable level of risk of making an incorrect audit conclusion. D: The cost of performing auditing procedures on sample selections.

Answer Explanations
Answer (a) is the correct answer. The allowable level of sampling risk is the risk an auditor is willing to take that a conclusion based on the sample may be incorrect. The auditor’s experience and knowledge should have no bearing on that decision; however, the auditor’s experience and knowledge may affect his or her decision to use statistical or nonstatistical sampling and may be a factor in assessing nonsampling risks. Answer (b) is incorrect. As adverse consequences of noncompliance increase, the allowable level of sampling risk tends to decrease. Choice (c) is incorrect. The acceptable level of risk of making an incorrect audit conclusion is directly related to the allowable level of sampling risk. Choice (d) is incorrect. The cost of performing auditing procedures on sample selections is one of the factors an auditor should consider when assessing the allowable level of sampling risk. The cost of performing the auditing procedures is weighed against the benefit of minimizing the chance of making an incorrect audit decision.

Question: V2C5-0003
Which of the following techniques could be used to estimate the standard deviation for a sampling plan?

Answers
A: Difference estimation. B: Pilot sample. C: Regression. D: Discovery sampling.

Answer Explanations
Answer (a) is incorrect. Difference estimation is a type of variables sampling plan. It is not a technique for estimating standard deviation. Answer (b) is the correct answer. Auditors use a pilot sample to estimate the standard deviation in a population. This enables auditors to estimate the confidence interval that would be achieved by the sample and therefore helps them decide how large of a sample to select. Answer (c) is incorrect. Auditors use regression to project balances of accounts or other populations. Answer (d) is incorrect. Discovery sampling is a type of sampling plan, not a technique for estimating standard de-

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viation.

Question: V2C5-0004
Identification of an appropriate population to sample is dependent on audit objectives. A population of entries in an asset repairs expense file would be an appropriate population if the audit objective were to determine whether

Answers
A: Expenditures for fixed assets have been improperly expensed. B: Noncapital repair expenditures have been properly charged to expense. C: Noncapital repair expenditures have been recorded in the proper period. D: Expenditures for fixed assets have been recorded in the proper period.

Answer Explanations
Answer (a) is the correct answer. Sampling of this transaction file would be appropriate to ascertain if the cost of fixed assets is improperly expensed. Answer (b) is incorrect. Ascertaining that all noncapital expenditures have been expensed would require testing of expense accounts and selected asset accounts in addition to the repair expense account. Answer (c) is incorrect. Ascertaining that noncapital repair expenditures have been recorded in the proper time period would require sampling from more than one time period. Answer (d) is incorrect. Ascertaining that capital fixed assets expenditures were recorded in the proper time period would involve sampling from the fixed assets file.

Question: V2C5-0005
To test compliance with a policy regarding sales returns recorded during the most recent year, an auditor systematically selected 5% of the actual returns recorded in March and April. Returns during these two busiest months of the year represented about 25% of total annual returns. Error projections from this sample have limited usefulness because

Answers
A: The small size of the sample relative to the population makes sampling risk unacceptable. B: The failure to stratify the population according to sales volume results in bias. C: The systematic selection of returns during the two months is not sufficiently random. D: The error rates during the two busiest months may not be representative of the whole year.

Answer Explanations

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Answer (a) is incorrect. Although sampling risk is related to sample size, it is not related to sample size relative to the population size. In addition, this problem does not contain sufficient information to evaluate the acceptability of sampling risk. Answer (b) is incorrect. The objective of stratifying a population is to decrease the sampling risk, not to reduce bias. This problem does not give enough information to decide whether stratification might have enabled the auditor to use a smaller sample. Answer (c) is incorrect. Systematic selection with a random start is unbiased if the population is randomly organized. Answer (d) is the correct answer. The auditor has selected items from only two months. That sampling plan may enable the auditor to make conclusions about the overall error rates during those two months, but not about error rates during the whole year.

Question: V2C5-0006
Using random numbers to select a sample

Answers
A: Is required for a variables sampling plan. B: Is likely to result in an unbiased sample. C: Results in a representative sample. D: Allows auditors to use smaller samples.

Answer Explanations
Answer (a) is incorrect. Although random-number sampling may be used for variables sampling plan, it is not required. Systematic selection is also acceptable unless the population is not randomly organized. Answer (b) is the correct answer. This is why auditors often use random numbers to select sample items. In a random sample, each sampling unit and each combination of sampling units has an equal probability of selection and is therefore likely to be unbiased. Answer (c) is incorrect. The use of random numbers does not always result in a representative sample. Statistics allow auditors to estimate the probability that a random sample is not representative. Answer (d) is incorrect. The use of random numbers does not affect sample size.

Question: V2C5-0007
An auditor tested a population by examining sixty items selected judgmentally and found one error. The main limitation of the auditor’s sample is the inability to

Answers
A: Quantify sampling risk. B: Quantify the acceptable error rate.

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C: Project the population's error rate. D: Determine whether the sample is random.

Answer Explanations
Answer (a) is the correct answer. The limitation of all nonstatistical sampling techniques is the auditor’s inability to quantify sampling risk. Based on past experience and intuition, the auditor may believe that sampling risk is acceptable, but the auditor is not able to quantify the risk level without using statistical sampling. Answer (b) is incorrect. The auditor could quantify the acceptable error rate independently of the sample design. Answer (c) is incorrect. The auditor can project an error rate of 1/60, or .0167. The problem is that the auditor cannot quantify the risk that the rate in the sample is significantly different from the rate in the population. Answer (d) is incorrect. A mathematician may be able to determine whether the auditor’s selections are random, although it is unlikely that they are. If the sample is representative, it does not matter whether it is random or not.

Question: V2C5-0008
The degree to which the auditor is justified in believing that the estimate based on a random sample will fall within a specified range is called

Answers
A: Sampling risk. B: Nonsampling risk. C: Confidence level. D: Precision.

Answer Explanations
Answer (a) is incorrect. Sampling risk is the complement of the confidence level. Answer (b) is incorrect. Nonsampling risk is the risk of improperly auditing the sampled items and cannot be quantified. Answer (c) is the correct answer. This is the definition of confidence level. Answer (d) is incorrect. Precision is the specified range, not the degree of justification.

Question: V2C5-0009
An auditor is designing a sampling plan to test the accuracy of daily production reports over the past three years. All of the reports contain the same information except that Friday reports also contain weekly totals and are prepared by managers rather than by supervisors. Production normally peaks near the end of a month. If the auditor wants to select two reports per month using an interval-sampling plan, which of the following techniques reduces the likelihood of bias in the sample?

Answers

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Estimating the error rate has no effect on bias. Answer Explanations Answer (a) is incorrect.htm 1/20/2010 . Answer (b) is incorrect. The sample is a subset of the population used to estimate the characteristic. Question: V2C5-0011 In a sampling application. file://C:\Program Files\Wiley\CIAExam\Print. Using multiple random starts would increase the likelihood that the population includes a representative number of reports for each day of the week and for each day of the month.Wiley CIA 2006 v1 Page 97 of 262 A: Estimating the error rate in the population. Answer Explanations Answer (a) is the correct answer. B: Attribute of interest. D: Sampling unit. Sampling unit refers to the item that is actually selected for examination and is a subset of the population. B: Using multiple random starts. The attribute is the characteristic the auditor wants to estimate about the population. Answer (d) is incorrect. Question: V2C5-0010 In a sampling application. Increasing the precision has no effect on bias. D: Increasing the precision. Bias is related to the selection method. Answer (b) is the correct answer. Answer (c) is incorrect. Answer (c) is incorrect. C: Increasing the confidence level. the standard deviation represents a measure of the Answers A: Expected error rate. the group of items about which the auditor wants to estimate some characteristic is called the Answers A: Population. Answer (d) is incorrect. This is the definition of the population. Increasing the confidence level has no effect on bias. C: Sample.

$10. Standard deviation is a measure of data (item) variability. Precision of $4.000/100 = $100 and $100 (2000) = $200. The amount is determined as: ($10/100) 2.Wiley CIA 2006 v1 Page 98 of 262 B: Level of confidence desired.000 and $200. Expected error rate is associated with attribute sampling and is not involved with the standard deviation. If the achieved precision based on this sample was plus or minus $4. Answer (b) is the correct answer.000 = $199. Answer (b) is incorrect. Answer (c) is the correct answer.800.000 D: $199. file://C:\Program Files\Wiley\CIAExam\Print. Achieved precision in variables sampling is computed using the standard deviation.htm 1/20/2010 .000.000.000 = $200 and 200. No exceptions were noted. Answer Explanations Answer (a) is incorrect.000 C: $199. the minimum acceptable value of the population would be Answers A: $204. not added to the estimate of the population. Question: V2C5-0013 An auditor prepared a working paper that consisted of a list of employee names and identification numbers as well as the following statement: By matching random numbers with employee identification numbers. but the precision has been given as $4.000 – $4000 = $196.000 B: $196. Answer (d) is incorrect. This calculation uses standard deviation for determining the precision factor. forty employee personnel files were selected to verify that they contain all documents required by company policy 501. The total dollars in the sample were $10.000 – 200 = $199. and the standard deviation was $10. but the precision has been given as $4. The amount is determined as follows: $10 × 100 = $1. Confidence level is determined by auditor judgment.000. Question: V2C5-0012 An auditor selected a random sample of 100 items from a population of 2.000 should be subtracted. This calculation uses standard deviation for determining the precision factor.000 and $200.000 – 1. Answer (c) is incorrect.000.800 Answer Explanations Answer (a) is incorrect.000. C: Degree of data variability. Answer (d) is incorrect.000 items.000. D: Extent of precision achieved.

A smaller sample might go either way without the increased reliability. Answers (d) is incorrect. To the extent that sample size is affected. Answer (b) is the correct answer. the results might be the same as in the answer (a) above.htm 1/20/2010 . B: The use of stratification. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 99 of 262 The auditor did not place any tick marks on this working paper. D: Listing of the actual documents examined for each employee. the results might be the same as in the Answer (a) above. C: Justification for the sample size. Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect. B: Removal of the employee names to protect their confidentiality. A larger sample might more closely approximate the population standard deviation. To the extent that sample size is affected. reference to the company policy is equivalent to listing the documents that were examined. D: An increase in confidence level. Because high-value items can be sampled 100%. but that could be either higher or lower depending on the point of reference. The audit work papers are themselves kept confidential so it is not necessary to remove employee names. It is not necessary to use tick marks in this case because the same procedures were applied to all sample selections and no exceptions were detected. C: An increase in desired precision. Answer (b) is incorrect. Which one of the following changes would improve the auditor’s working paper the most? Answers A: Use of tick marks to show that each file was examined. In this case. Question: V2C5-0014 The standard deviation of a sample will usually decrease with Answers A: A decrease in sample size. Answers (c) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. a large segment of variability can be eliminated. The working paper should specify the sampling risk and the confidence level or precision achieved by the sample or the method of determining size.

Question: V2C5-0017 Sample size file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is incorrect because it is neither. Question: V2C5-0016 An important difference between a statistical sample and a judgmental sample is that with a statistical sample Answers A: No judgment is required. Answer Explanations Answer (a) is the correct answer. Answer (d) is the correct answer. B: A smaller sample size can be used.Wiley CIA 2006 v1 Page 100 of 262 Question: V2C5-0015 Statistical sampling would be appropriate to estimate the value of an auto dealer’s 3. D: Complete and precise. Answer (b) is incorrect because this may need a large sample. This fits the definition.htm 1/20/2010 .000 line-item inventory because statistical sampling is Answers A: Reliable and objective. everything is by formula. Answer Explanations Answer (a) is incorrect because judgment is needed for sample size. C: More accurate results are obtained. C: Thorough and accurate. Answer (c) is incorrect because it is neither. Answer (d) is incorrect because it is precise but not complete. Answer (c) is incorrect because there is no way to determine this. D: Population estimates with measurable reliability can be made. B: Thorough and complete. It is the only way to measure reliability.

Answer (c) is incorrect by definition.00 Answers A: $60. D: Increases with the use of lower confidence levels. The standard error of the mean is equal to the sample standard deviation divided by the square root of sample size. Answer (b) is incorrect by definition. Population size Sample size Sample standard deviation Confidence level Mean = 10.00 C: $ 2.00 = 90% (Z=1. file://C:\Program Files\Wiley\CIAExam\Print.000 = 144 = $24. Answer (d) is the correct answer. B: Decreases with the use of higher confidence levels.00). C: Remains unchanged with changes in confidence levels. compute the standard error of the mean. Answer Explanations Answer (a) is the correct answer. Answer (d) is incorrect by definition. Answer (c) is incorrect by definition.htm 1/20/2010 .Wiley CIA 2006 v1 Page 101 of 262 Answers A: Increases with the use of higher confidence levels. In its simplest form. ($24.65) = $84.00/12 = $2.00 B: $ 7.30 D: $ 2. the sample-size formula shows that sample size is equal to [(Confidence level factor squared × Estimated standard deviation squared)/(Precision squared)]. Answer (b) is incorrect by definition.00 Answer Explanations Answer (a) is incorrect by definition. thus any increase in confidence level would be accompanied by an increase in sample size. Question: V2C5-0018 Using the following results from a variables sample.

an auditor is evaluating the contents of a large warehouse that contains records from both the retail and the wholesale divisions of the client company. D: The proportion of wholesale boxes in the warehouse is probably much larger than the auditor thought. Which of the following can be concluded? Answers A: The box is more likely to have come from the retail division than from the wholesale division. On average. Unfortunately. by the Bayes theorem. The auditor does know that two-thirds of the boxes in this warehouse come from the wholesale division and one-third from the retail division.06 × 1/3)/0.60. Upon inspecting the contents of one particular randomly selected box. some water has leaked onto the label and smeared the part that indicated the division of origin. Answer (b) is the correct answer. See response (c). Errors are three times as likely in retail boxes as in wholesale boxes. C: The proportion of retail boxes in the warehouse is probably much larger than the auditor thought. Refer to the correct answer explanation. Question: V2C5-0020 Which one of the following statements about sampling is true? Answers A: A larger sample is always more representative of the underlying population than a smaller sample. Answer Explanations This answer is incorrect. a simple random sample always produces the most representative sample. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . errors of this kind have occurred in 6% of retail boxes and 2% of wholesale boxes. Answer (c) is incorrect. we have: P (Retail/Error) = 0. the auditor discovers that the contents do not match the computer-generated label taped to the outside of the box. The contents of any one box are insufficient grounds to conclude anything about the whole warehouse. Thus. Answer (d) is incorrect.06 × 1/3 + 0. B: For very large populations. C: For a given sample size. B: The box is more likely to have come from the wholesale division than from the retail division.02 × 2/3) = 0. the evidence points slightly more toward the retail division. Alternatively. the absolute size of a sample has more impact on the precision of its results than does its size relative to its population. but wholesale boxes are twice as frequent in the warehouse. D: The limitations of an incomplete sample frame can almost always be overcome by careful sampling techniques.Wiley CIA 2006 v1 Page 102 of 262 Question: V2C5-0019 During an internal control inspection.

C: Although precision would not be increased that much. file://C:\Program Files\Wiley\CIAExam\Print. How would the precision of the sample results be affected if the sample size were increased to 200? Answers A: The larger sample would be about two times as precise as the smaller sample. A large sample selected in a biased way leads to less representatives than a smaller but more carefully selected sample. a possible downward bias in the estimate of the average per invoice would be corrected. Question: V2C5-0022 An auditor is considering a sample size of fifty to estimate the average amount per invoice in a large trucking company. D: The cost per sample observation. When the size of the population is very large.Wiley CIA 2006 v1 Page 103 of 262 Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect. The greater the cost per observation. Things that are not in the sampling frame cannot be put there by an appropriate sampling technique. the greater the appropriate sample size. The greater the variability. the greater the required sample size. Answer (d) is incorrect. Answer (b) is the correct answer.htm 1/20/2010 . B: The larger sample would be about four times as precise as the smaller sample. Answer (c) is incorrect. B: The amount of variability in the population under study. Answer (b) is incorrect. Answer (c) is incorrect. C: The sensitivity of the decision using this sample to errors of estimation. Sample size considerations are the same for both of these parameters. Question: V2C5-0021 Which one of the following is not an important consideration in determining the appropriate sample size? Answers A: Whether the sample is designed to estimate a mean or a proportion. Answer Explanations Answer (a) is the correct answer. The advantage of most variations on simple random sampling is that for a given sample size. The more sensitive the decision is to estimation errors. they produce a more representative sample. the smaller the appropriate sample size. the effect on precision of the finite population correction factor is very limited.

Answer (b) is incorrect. The auditor is considering sampling techniques to examine the freight charges on invoices to customers or considering the use of computer audit tools.Wiley CIA 2006 v1 Page 104 of 262 D: Since both sample sizes are larger than 30. Answer (c) is incorrect. This answer is incorrect. A confidence interval concerns only whether the population parameter is contained inside the interval and says nothing directly about the exact value of the parameter.e. Question: V2C5-0023 A 90% confidence interval for the mean of a population based on the information in a sample always implies that there is a 90% chance that the Answers A: Estimate is equal to the true population mean. Which of the following sampling or audit approaches would provide the greatest assurance as to the correctness of the freight charge computations at the current time? file://C:\Program Files\Wiley\CIAExam\Print. This could be true if the confidence interval were one-sided (i. Question: V2C5-0024 The auditor is concerned that a computer program is not properly computing the amount of freight to be added to shipments of merchandise ordered through the catalog. the increase would not have that much of an effect on precision. Refer to the correct answer explanation. Answer (b) is incorrect. Answer Explanations Answer (a) is the correct answer. and thus no “downward bias” is present. This is the definition of a confidence interval.. Answer Explanations Answer (a) is incorrect. Answer (d) is the correct answer. B: True population mean is no larger than the largest end point of the interval. The precision of sample results does not increase at the same rate as sample size. but it is not true for the more common two-sided confidence intervals. Answer (c) is incorrect. Management considers the occurrence of any freight costing errors to be critical. but it has no bearing on the size of the standard deviation. The expected value of the sample mean is the same regardless of sample size. The precision of sample results is proportional to the square root of the sample size. D: True population mean lies within the specified confidence interval.htm 1/20/2010 . C: Standard deviation will not be any greater than 10% of the population mean. all probability bunched below the mean). for which the correct chance of exceeding the top of the interval in a 90% confidence interval would be 5%. The confidence interval is based on the standard deviation.

D: Remain the same. Lower confidence level allows smaller sample size. The auditor is more interested in finding whether errors take place. A computer audit tool is used. Lower confidence level allows smaller sample size. which is designed to test the hypothesis of material errors in the account balance. B: Use either test data or parallel simulation to test the computer application. not to discover whether such errors take place. Answers (d) is incorrect. Test data or parallel simulation would allow a comprehensive test of the computer program at this one point in time and would provide more evidence than sampling procedures. The task cited is to determine whether such errors are occurring. B: Decrease. Lower confidence level allows smaller sample size. file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. Answer (b) is the correct answer. which should have freight charges added to them. Answer (b) is the correct answer. Discovery sampling would not be as comprehensive or as efficient as either of the computer audit techniques in answer (b). D: Use generalized audit software to select a monetary unit sample of invoices that have been billed to customers. Answer (c) is incorrect.Wiley CIA 2006 v1 Page 105 of 262 Answers A: Use discovery sampling selecting transactions from invoices. decreasing the confidence level from 95% to 90% would cause the required sample size to Answers A: Increase. Question: V2C5-0025 If all other factors specified in an attributes-sampling plan remain constant. Answer Explanations Answers (a) is incorrect. which should have freight charges added to them. C: Change by 5%. Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect.htm 1/20/2010 . C: Use difference estimation by selecting transactions from invoices. but the basic technique is a monetary unit sample. The percentage change is not a corresponding percent—only a decrease. The major concern is whether the computer program is properly calculating the freight charges. Difference estimation is used to estimate the dollar amount of error in a population.

Answer (d) is incorrect. Confidence level is determined by auditor judgment. C: Degree of data variability. Answer (c) is the correct answer. D: Reduces the level of tolerable error. Tolerable error is related to materiality and auditor judgment.Wiley CIA 2006 v1 Page 106 of 262 Question: V2C5-0026 In sampling applications. B: Provides a quantitative measure of sampling risk. Answer (b) is incorrect. Achieved precision in variables sampling is computed using the standard deviation. Statistical sampling provides quantifiable risk and results.htm 1/20/2010 . Answer (c) is incorrect. Answer (b) is the correct answer. Expected error rate is associated with attribute sampling and is not involved with the standard deviation. Answer (d) is incorrect. Question: V2C5-0028 file://C:\Program Files\Wiley\CIAExam\Print. Nonsampling risk exists in statistical and nonstatistical sampling. the standard deviation represents a measure of the Answers A: Expected error rate. Standard deviation is a measure of data (items) variability. Statistical sampling provides quantified results. B: Level of confidence desired. which of the following describes an advantage of statistical sampling over nonstatistical sampling? Answers A: Requires nonquantitative expression of sample results. D: Extent of precision achieved. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect. Question: V2C5-0027 In preparing a sampling plan for an inventory-pricing test. C: Minimizes nonsampling risk.

using an appropriate sample size based on a 95% confidence level. the auditor can be 95% sure that the number incorrectly posted was Answers A: At least 100. and desired precision of 2%. B: Positively skewed. as expected.000) is the best guess as to the number of errors. This answer would be correct for a continuous distribution when the mean. Answer (d) is the correct answer. Question: V2C5-0029 A company with 14. Although 80 (4% × 2. D: Evenly distributed between the mean and median. Answer (c) is incorrect.000 items) also confuses the confidence level with the estimated error rate. Answer (b) is incorrect. There is a 95% probability that the number of errors is between 2% (4% – 2%) and 6% (4% + 2%) of the population of 2.htm 1/20/2010 . the auditor traces inventory quantity and cost records from production reports to perpetual inventory records. D: Between 40 and 120. This answer is correct because the mean is greater than the median and the distribution is continuous.Wiley CIA 2006 v1 Page 107 of 262 An internal auditor wishes to determine whether the finished goods perpetual inventory records are being properly updated for completed production.382.000 items. B: At least 80. Answer (b) is the correct answer. This response (5% × 2. If the error rate in the sample is. Answer Explanations Answer (a) is incorrect. and 2. median. C: Symmetrically skewed. To accomplish this.000 production reports were posted to perpetual inventory records during the year. the actual number of errors will be fewer than 80 approximately as often as it exceeds 80 (indicated by the stated precision of 2%). C: Between 60 and 140. Answer Explanations Answer (a) is incorrect because the mean is greater than the median and the distribution is continuous. Answer (c) is incorrect. From this information.412 and $10. and file://C:\Program Files\Wiley\CIAExam\Print.344 customers determines that the mean and median accounts receivable balances for the year are $15. the auditor can conclude that the distribution of the accounts receivable balances is continuous and Answers A: Negatively skewed. This response (5%± 2% × 2. respectively. estimated error rate of 4%.000 items) confuses the confidence level with the estimated error rate. 4%.

Although the range is a measure of variability.65. confidence level = 90% (Z = 1.65 B: $21. file://C:\Program Files\Wiley\CIAExam\Print. C: Standard deviation.Wiley CIA 2006 v1 Page 108 of 262 mode are equal. Distributions spread evenly between two values are uniform distributions.65 D: $80. B: Range. s = $13. The achieved precision is equal to Answers A: $ 1. Achieved precision (A) = sxt . Answer (c) is incorrect by definition. Answer (b) is incorrect. Answer (b) is incorrect by definition. D: Mean.00.00 (1. Answer (d) is incorrect. A = $1.65).50. sx = $1. Answer (d) is incorrect by definition.00.45 C: $70. its use is considerably limited when compared to the standard deviation.htm 1/20/2010 .65) = $1.15 Answer Explanations Answer (a) is the correct answer. Question: V2C5-0031 The measure of variability most useful in variables sampling is the Answers A: Median. Question: V2C5-0030 The following data relate to a variables-sampling application: x = $78. The median is a measure of central tendency. Answer Explanations Answer (a) is incorrect.

and therefore control. The mean is a measure of central tendency. only that the sampling risk can be quantified. Answer (c) is the correct answer. Statistical sampling does not guarantee that the sample obtained will be more representative than a sample selected by nonstatistical sampling techniques. Question: V2C5-0032 The primary reason for an auditor to use statistical sampling is to Answers A: Obtain a smaller sample than would be required by nonstatistical sampling techniques. Answer (d) is incorrect. C: A decrease in required sample size. Answer (b) is incorrect. The auditor chooses between them after considering their relative cost and effectiveness in the circumstances. however. C: Allow the auditor to quantify. B: An increase in population standard deviation. What would be the impact of the change in precision? Answers A: A decrease in population standard deviation. an internal auditor specified a precision of 5% instead of the 4% contained in the preliminary audit program. Question: V2C5-0033 During the audit of inventories. Answer (d) is incorrect. D: An increase in required sample size. Answer Explanations Answer (a) is incorrect. D: Meet requirements of the IIA Standards. The primary difference between statistical and nonstatistical sampling is that statistical sampling allows sampling risk to be measured and thus controlled. Use of the standard deviation enables an auditor to extend the results of a sample to the population. the risk of making an incorrect decision based on sample evidence. Statistical sampling will not necessarily prescribe a smaller sample size than nonstatistical sampling techniques. The IIA Standards do not require statistical sampling. aid the auditor in designing an efficient sample.Wiley CIA 2006 v1 Page 109 of 262 Answer (c) is the correct answer. file://C:\Program Files\Wiley\CIAExam\Print. Both statistical and nonstatistical samples can provide sufficient evidential matter.htm 1/20/2010 . B: Obtain a sample more representative of the population than would be obtained by nonstatistical sampling techniques. It will.

Answer (c) is the correct answer. B: Accuracy. stated at a certain confidence level. The plus or minus 2% is known as the estimate’s Answers A: Precision. of a firm’s invoices contain errors. Population standard deviation is a factor of the variability of data only. Answer (d) is incorrect because answer (c) is the correct answer. C: Standard deviation. D: Standard error. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. it is estimated that 4%.Wiley CIA 2006 v1 Page 110 of 262 Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. B: Range. that we can expect the estimate from a single sample to deviate from the results obtained by applying the same measuring procedures to all the items in the population. Question: V2C5-0035 The measure of variability of a statistical sample that serves as an estimate of the population variability is the Answers A: Basic precision. Answer Explanations Answer (a) is the correct answer. It was just reversed. Population standard deviation is a factor of the variability of data only. Question: V2C5-0034 Based on a random sample.htm 1/20/2010 . plus or minus 2%. Answer (c) is incorrect because it is a probability. D: Interval. Precision refers to the maximum amount. C: Confidence level. Answer (b) is incorrect because it is not used in connection with sampling. Answer (d) is incorrect because it is too general. Sample size is equal to (Standard deviation squared × Confidence-level factor squared) / Desired precision squared.

the confidence level Answers A: Is a decision variable that the internal auditor specifies after considering the economic consequences of drawing the wrong conclusion as a result of sampling error. The variance is the square of the standard deviation.htm 1/20/2010 . The standard deviation is the measure of variability of a statistical sample that serves as an estimate of the population variability. not confidence level. The interval is a set of numbers or observations that consists of all the numbers or observations between and including the end points. In this context. Answer Explanations Answer (a) is the correct answer. Rather it is computed once the sample has been selected and tested. C: Evaluated independently of reliability in a given sample. B: Is a characteristic of the audit population and is not under the direct control of the internal auditor. Answer (d) is incorrect because planned confidence must be specified before sample size can be computed. The range is the difference between the largest and smallest values of a sample or population. Answer (d) is incorrect. Question: V2C5-0037 Internal auditors employ the concept of precision in audit sampling contexts. In a given sample plan. is a measure of accuracy. Answer (c) is incorrect because precision. precision is Answers A: A characteristic of the population at hand and is not under the direct control of the auditor. C: Is essentially a measure of the accuracy of the sample results obtained after the sample has been selected and tested.Wiley CIA 2006 v1 Page 111 of 262 Answer (a) is incorrect. not a population characteristic. Desired precision must be established before the sample is obtained and evaluated. file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0036 Internal auditors employ confidence levels in the context of audit sampling. which is the measure of variability of a statistical sample that serves as an estimate of the population variability. Answer (b) is incorrect. Answer (b) is incorrect because confidence is a decision variable. Confidence level is the probability that an estimate based on a random sample falls within a specified range. B: A measure of the accuracy with which one has generated sample estimates. D: Is not normally specified before the sample size is determined. Answer (c) is the correct answer.

D: Refer respectively to the risks that (1) internal controls will fail and (2) the resultant error will go undetected. Answer Explanations Answer (a) is incorrect because precision is under the auditor’s control. Answer (d) is incorrect because precision applies to attribute samples as well. but not attributes samples. Answer (b) is incorrect because these errors refer to sampling risk. Answer (c) is incorrect because precision and reliability are dependent on one another. sample size will Answers A: Increase if the internal auditor decides to accept more risk of incorrectly concluding that controls are effective when they are in fact ineffective. Everything else being equal. Question: V2C5-0038 In audit sampling applications there are risks of Type I and Type II errors. Answer (d) is incorrect because it deals with aspects of audit risk. Answer (b) is the correct answer. Answer Explanations Answer (a) is the correct answer. C: Have a magnitude that is based only on the economic consequences of incorrect sample-based conclusions. Precision is the range into which an estimate of a population characteristic is expected to fall. audit procedures. Answer (c) is incorrect because these risks do not inherently depend on economic consequences.htm 1/20/2010 . a different concept. which is independent of the quality of audit procedures. Sampling risk results from the possibility that the sample might not be representative in this population.Wiley CIA 2006 v1 Page 112 of 262 D: Important for evaluating variables samples. albeit more expensive. B: Double if the internal auditor finds that the variance of the population is twice as large as was file://C:\Program Files\Wiley\CIAExam\Print. B: Can be decreased by using more reliable. Question: V2C5-0039 The size of a given audit sample is jointly a result of characteristics of the population of interest and decisions made by the internal auditor. These risks Answers A: Result directly from the chance that the sample obtained by the internal auditor is unrepresentative of the population.

Wiley CIA 2006 v1 Page 113 of 262 indicated in the pilot sample. Question: V2C5-0040 The auditor notes an unexpectedly weak correlation between lower interest rates and large mortgages closed and seeks an explanation for the rejection of most large mortgages. Answer (c) is incorrect.htm 1/20/2010 . but achieved precision would not change. C: Develop a regression model to explain the relationship. Answer Explanations Answer (a) is incorrect. C: Decrease if the internal auditor increases the amount of tolerable error. Answer (b) is incorrect. as in this case for large mortgage applications. Answer (c) is the correct answer. how would sample size and achieved precision be affected by a change in confidence level from 95. This decision will cause sample size to decrease. Question: V2C5-0041 Assuming no change in sample standard deviation. B: Take a random sample of all mortgages closed. Answer Explanations Answer (a) is the correct answer. Answer (b) is incorrect. B: Sample size would be larger. This will cause the sample size to more that double. Answer (d) is incorrect. D: Increase as the risk of sampling error increases. D: Use linear programming to analyze allocation of funds. Linear programming to allocate the funds is irrelevant to the issue at hand. A directed nonstatistical (judgment) sample is desirable when reasons exist for focusing audit attention on specific transactions. The auditor should Answers A: Take a judgment sample directed toward applications for large mortgages. file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. A random sample is inefficient in this case. sample size will decrease.7%? Answers A: Sample size would be smaller.5% to 99. and the population (mortgages closed) is inappropriate. but achieved precision would be larger. This would cause sample size to decrease. A regression analysis would not explain the cause of the weak correlation. If tolerable error is increased.

D: Sample size would be larger. An upper precision limit can be calculated based on the size of the sample and the observed error rate. file://C:\Program Files\Wiley\CIAExam\Print. An example of sampling risk is Answers A: Projecting the results of sampling beyond the population tested.htm 1/20/2010 . Any monetary errors discovered in the sample must first be extrapolated to the population before their materiality can be assessed. the auditor should Answers A: Compare the tolerable error rate with the expected error rate. an additional risk— sampling risk—is introduced. Answer (d) is incorrect. Answer (b) is the correct answer. Answer Explanations Answers (a) is incorrect. B: Compute an upper precision limit and compare with the tolerable error. Answers (c) is incorrect. but achieved precision would not change.Wiley CIA 2006 v1 Page 114 of 262 C: Sample size would be smaller. Sample size would be larger and achieved precision would not change. Question: V2C5-0043 Each time an internal auditor draws a conclusion based on evidence drawn from a sample. Answer (b) is the correct answer. the sample size will increase to the size required to keep achieved precision constant. To evaluate the materiality or significance of this control deficiency. Answer (c) is incorrect. an auditor discovers that 4 out of a statistical sample of 100 selected time cards were not signed by the appropriate supervisor. If all other factors remain constant. but achieved precision would be smaller. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect because precision would not change. C: Evaluate the dollar amount of the 4 time cards in relation to the financial statements. Both the expected error rate and the tolerable error rate are known before sampling. Question: V2C5-0042 In testing payroll transactions. This should be compared with the maximum tolerable error. D: Report the errors and let management assess the significance because they are in the best position to know. It is good to remember that sample size varies directly with changes in confidence level and inversely with changes in precision. It is the responsibility of the auditor to determine the significance of detected errors. Sample size would be larger and achieved precision would not change.

A smaller sample size is required if the desired confidence level was equal to 95%. Answer (c) is the correct answer. Question: V2C5-0044 A confidence level of 90% means that Answers A: The expected error rate is equal to 10%. Answer Explanations Answer (a) is incorrect. Drawing a conclusion beyond the population tested is an example of a nonsampling error. Answer (d) is incorrect. Using an improper audit procedure is an example of nonsampling error. B: The point estimate obtained is within 10% of the true population value. A confidence level of 90% does not mean that any point estimate obtained is within 10% of the value of the true population value. C: Incorrectly applying an audit procedure to sample data. Answer (b) is incorrect. A major limitation of such a sampling technique is that it Answers file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0045 Internal auditing is conducting an operational audit of the organization’s mailroom activities to determine whether the use of express mail service is limited to cases of necessity. Answer Explanations Answer (a) is incorrect. the auditor selects the 100 most recent express-mail transactions for review. Sampling error is the likelihood that sampled items do not reflect the population for which conclusions are made. To test cost-effectiveness. Ten times out of 100 they will. Answer (b) is incorrect.htm 1/20/2010 . C: There are 90 chances out of 100 that the sample results will not vary from the true characteristics of the population by more than a specified amount. it is only by chance. Answer (d) is the correct answer. A confidence level of 90% does not necessarily mean that the expected error rate will be 10%. If it is. the sample results will not vary from the true characteristics of the whole population by more than a specified amount. D: A larger sample size is required than if the desired confidence level were equal to 95%. Answer (c) is incorrect. A confidence level of 90% does mean that 90 times out of 100.Wiley CIA 2006 v1 Page 115 of 262 B: Using an improper audit procedure with a sample. D: Drawing an erroneous conclusion from sample data. Incorrectly applying an audit procedure is another example of a nonsampling error.

Answer (b) is incorrect because the sample size is not the reason for not being able to project. Answer (b) is incorrect. Answer (d) is the correct answer.Wiley CIA 2006 v1 Page 116 of 262 A: Does not allow a statistical generalization about all express-mail transactions. Along with the inability to quantify sampling error. C: Conclusions about the correctness of processing for the department. this is a major limitation of a judgmental sample.htm 1/20/2010 . Following a random start. D: Does not describe the population from which it was drawn. From this sample. D: Understanding of the details contained in the processing task. Answer Explanations Answer (a) is the correct answer. every tenth invoice is chosen yielding a sample of 116 invoices. This sample may not be valid because it is not a file://C:\Program Files\Wiley\CIAExam\Print. Conclusions cannot be generalized. which account for 60% of invoices. It is not representative of the employees’ work for the whole year. Since the sample is highly limited due to selection of all claims processed in the past two days. 100 might be enough. the supervisor can develop Answers A: An overall representative view of employee work for the year. Answer (d) is incorrect because 100 might be enough. Answer (c) is incorrect because the auditor is testing for cost effectiveness. Answer Explanations Answer (a) is incorrect. This is a judgment sample. C: Does not evaluate existing controls in this area. the intention of the supervisor is to gain an understanding of the details of the work performed by a particular employee. Answer (c) is incorrect. Question: V2C5-0047 To audit invoices paid over the past year. Question: V2C5-0046 The supervisor of claims-processing department for a health insurance firm selects all claims processed in the past two days by a particular employee for audit. Conclusions for the whole department cannot be drawn. B: Results in a sample size that is too small to project to the population. an auditor selects the two busiest months. B: A quantification of sampling error.

400 and minus $29. Answer Explanations Answer (a) is the correct answer. C: $996. This answer is incorrect. C: Large enough sample.400. D: None of the above-sample is valid.96) is Answers A: $970.940. The two busiest months may not be representative of the entire year.733 to $1. B: Random sample.000 × mean of $200 equals $1.000 plus $29. This amount added to the population of 5.400.267.003.400. Answer (c) is incorrect.940.Wiley CIA 2006 v1 Page 117 of 262 Answers A: Representative sample. the computed precision is 1.267.96 × 30 × 5. If the square root of the sample is incorrectly omitted. B: $706. Answer (b) is incorrect.000 to $1. Answer (b) is incorrect.000/10 = 29. Question: V2C5-0048 A sample of 100 items was taken from a population of 5. There is insufficient information to judge size.000 = 294.96 × 30 × 5. If the sample size is incorrectly used (not the square root).000. Answer (d) is incorrect. the computed precision is 1.600 to $1. The computed precision is 1.060 to $1. Answer (c) is incorrect.htm 1/20/2010 .000.000.294. D: $997. Refer to the correct answer explanation. the computed precision is 1.002.96 × 30 × 5000/100 = 2. If the standard deviation and the square root of the sample size are incorrectly reversed.96 × 10 × 5.029. Question: V2C5-0049 The probability that an estimate based on a random sample falls within a specified range is known as the file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is the correct answer.000 items.000/30 = 3. The mean value was $200 and the standard deviation was $30. The sample is random. The computed confidence interval for a 95% confidence level (Z=1.

The average or mean is an example of central tendency. The error rate is the proportion of incorrect items in a population. The lower limit is the bound below which a population value is not expected to fall at a specified confidence level. The precision is the range in which a population parameter is expected to fall. Answer (b) is incorrect. Answer Explanations Answer (a) is the correct answer. at a specified confidence level.htm 1/20/2010 . Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect. Question: V2C5-0051 One measure of the variability within a sample is the file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is incorrect. Answer (d) is incorrect. The standard error of the mean is a value equal to the standard deviation divided by the square root of sample size. The field is the population. Question: V2C5-0050 The range into which an estimate of a population characteristic is expected to fall at a stated confidence level is known as the Answers A: Precision.Wiley CIA 2006 v1 Page 118 of 262 Answers A: Error rate. Answer (d) is incorrect. B: Lower precision limit. Answer (c) is the correct answer. Standard deviation is a measure of the variability of the data around the mean. D: Sampling field. B: Measure of central tendency. The confidence level is the estimated probability that a value falls within the precision limits. C: Confidence level. D: Standard error of the mean. C: Standard deviation.

The median. file://C:\Program Files\Wiley\CIAExam\Print. including assumptions about the distribution of the population.htm 1/20/2010 . The upper limit is the bound above which a population parameter is not expected to fall. D: Tendency to sample a greater number of units. Judgmental sampling does not rely on any statistical concepts. a form of the average.Wiley CIA 2006 v1 Page 119 of 262 Answers A: Median. Answer (d) is incorrect. Answer Explanations Answer (a) is incorrect. Answer (c) is incorrect. The stem of this question describes judgmental sampling. C: Absence of a normal distribution. A major disadvantage of selecting such a directed sample of items to examine is the Answers A: Difficulty in obtaining sample items. is the sum of the population values. Answer (b) is the correct answer. This makes the auditor’s conclusions difficult to defend. Answer (b) is the correct answer. Answer (c) is incorrect. The standard error is a measure of the sample’s variability. C: Upper precision limit. divided by the number of units in the population. The mean. Judgmental sampling is often used to make sample selection easier. An auditor who uses judgmental sampling often samples fewer units than a statistical plan would have specified. D: Mean. It is computed by dividing sample standard deviation by the square root of sample size. Sampling error cannot be quantified if judgmental sampling is used. a form of the average. Answer Explanations Answer (a) is incorrect. Question: V2C5-0052 An internal auditor suspects that the invoices from a small number of vendors contain serious errors and therefore limits the sample to only those vendors. Answer (d) is incorrect. B: Inability to quantify the sampling error related to the total population of vendor invoices. is the central item in an array. at a specified confidence level. B: Standard error of the mean.

Answer Explanations Answer (a) is incorrect. Queuing theory is used to minimize the cost of waiting in line plus the cost of servicing waiting lines when items arrive randomly at a service point and are serviced sequentially. B: Regression analysis. which are available at a bargain price. Question: V2C5-0054 The fundamental difference between judgmental sampling and statistical sampling techniques is that Answers A: A nonrandom sample will be more representative of the population than a sample chosen by statistical sampling. Regression analysis is a statistical procedure for estimating the relation between variables. However. D: Statistical sampling results in more accurate point estimates of the parameters than judgmental sampling. Answer (c) is incorrect. before doing so. Linear programming is a mathematical technique for maximizing or minimizing a given objective subject to certain constraints. Statistical sampling is a procedure for estimating the value of a population parameter of interest by examining only a few observations from the population. There is no general rule that judgmental will be better than statistical in obtaining it. Answer (d) is the correct answer. C: Queuing theory.htm 1/20/2010 . the manufacturer should use Answers A: Linear programming. B: Statistical sampling results in smaller sample sizes than judgmental sampling. Representativeness of population is the goal of all sampling. Answer (b) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. it would like to know whether these chips are of sufficient quality. Judgmental and random (statistical) selection both attempt to achieve it. Answer Explanations Answer (a) is incorrect. To determine the number of chips to be tested in order to estimate the quality of these computer chips. C: Judgmental sampling does not permit sampling risk to be measured. D: Statistical sampling.Wiley CIA 2006 v1 Page 120 of 262 Question: V2C5-0053 An electronics manufacturer is planning to purchase a large quantity of computer chips.

Type Number of accounts Balance per book Retail 3. The auditor then selects the five largest accounts and from each selected account takes the first purchase transaction at least 60 days old to trace to subsequent collections. Here systematic selection with a random starting point is used.000 for confirmation. The upper stratum is examined 100% and those in the lower stratum are randomly selected. using simple random sampling. The auditor. Answer (b) is incorrect. Thus. The receivables are of four types. The basic difference between judgmental and statistical sampling is that the sampling risk cannot be quantified in judgmental sampling because the behavior of the sample draw cannot be predicted in terms of the laws of the theory of probability. In practice. selects additional 23 accounts with balances less than $2. this is assumed to meet the criteria of probability sampling. Judgmental sampling does not necessarily give less accurate point estimates. Answer Explanations Answer (a) is incorrect. B: The auditor sends confirmations to 30 of the miscellaneous receivables customers.000 Government agencies 34 900. the criteria of probability sampling are met. sampling risk can still be quantified since the sample items are selected according to the criteria of probability sampling. D: For the accounts with governmental agencies.Wiley CIA 2006 v1 Page 121 of 262 Answer (b) is incorrect. This results in the selection of 87 accounts. Answer (c) is the correct answer.800 $1. Question: V2C5-0056 file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0055 An auditor wishes to obtain substantive evidence concerning a division’s accounts receivable balances. the auditor takes the first two digits falling between 1 and 30 to determine the starting point and selects every 30th account to send confirmations.700. the auditor decides to confirm all accounts with a balance in excess of $2. The selection or the transactions does not meet the criteria of probability sampling since all are not available for selection.000.htm 1/20/2010 . Answer (c) is incorrect. From a serial number of a dollar bill. Statistical sampling may or may not result in a smaller sample size than judgmental sampling. the auditor decides not to send confirmations but to trace the accounts to subsequent cash collections. Stratification is used here.500. C: In examining the retail accounts. Answer (d) is incorrect. Although the sample size is arbitrarily chosen.000 Commercial 875 6. Answer (d) is the correct answer. The transactions chosen are judgmental.000 Miscellaneous receivables 900 375.000 In which of the following instances would the auditor be precluded from using statistical inferences? Answers A: The auditor randomly selects 100 commercial accounts for confirmations.

” Question: V2C5-0057 An advantage of statistical over nonstatistical sampling is that statistical sampling Answers A: Enables auditors to objectively measure the reliability of their sample results. requires a random rather than subjective selection technique. file://C:\Program Files\Wiley\CIAExam\Print. This Answer may result in an inefficient or unnecessarily large sample. C: Is compatible with a wider variety of sample selection methods than is nonstatistical sampling. B: Permits use of a smaller sample size than would be necessary with nonstatistical sampling. B: The auditor may fail to recognize an error that is included in the sample. it may not be representative of the population. difference estimation instead of ratio estimation. Confidence level and precision are a matter of auditor judgment.” Answer (b) is incorrect. D: The confidence level and/or precision established by the auditor are not appropriate. as stated above. Answer Explanations Answer (a) is the correct answer. D: Allows auditors to inject their subjective judgment in determining sample size and selection process in order to audit items of greatest value and highest risk. This response gives the correct definition of “sampling risk.Wiley CIA 2006 v1 Page 122 of 262 Sampling risk refers to the possibility that Answers A: The auditor may use a less than optimal statistical method for the circumstances.htm 1/20/2010 . Answer (c) is incorrect. but it is not called “sampling risk.” It can be measured. While statistical sampling may sometimes result in a smaller sample than nonstatistical sampling. Answer (d) is incorrect. Answer (d) is incorrect. and increasing sample size can reduce it. C: Even though a sample is properly chosen. Statistical sampling requires use of a random sample. Statistical sampling results in an objective computation of sample size and. faulty judgment is not called “sampling risk. Nonstatistical sampling permits the use of nonrandom selection techniques. such as high-value and high-risk items. Answer Explanations Answer (a) is incorrect. it may at other times require a larger sample.” Answer (c) is the correct answer. Answer (b) is incorrect. Statistical sampling enables auditors to compute the reliability (confidence) and precision of their sample results. Failure to recognize an error included in a sample is referred to as “nonsampling risk. for example.

Answer (c) is incorrect. the probability-in-proportion-to-size (book value) approach is most efficient here. Answer Explanations Answer (a) is incorrect. Because there is no time or resources to check all items in the warehouse. B: Employ simple random sampling. which one of the following would be the most accurate sampling approach in this case? Answers A: Select those items that are most easily inspected. D: Stratum in the population has an equal number of items selected. file://C:\Program Files\Wiley\CIAExam\Print. C: Sample so that the probability of a given inventory item being selected is proportional to the number of units sold for that item. Question: V2C5-0059 A distinguishing characteristic of random number sample selection is that each Answers A: Item is selected from a stratum having minimum variability.Wiley CIA 2006 v1 Page 123 of 262 Question: V2C5-0058 An auditor is checking the accuracy of a computer-printed inventory listing to determine whether the total dollar value of inventory is significantly overstated. Equal opportunity for selection is a feature of random selection. Dollar values are not used in random selection.htm 1/20/2010 . C: Item in the population has an equal chance of being selected. B: Item's chance for selection is proportional to its dollar value. items with high sales volumes may have low prices. If the sample size were fixed. a sample of inventory items must be used. Answer (b) is incorrect. D: Sample so that the probability of a given inventory item being selected is proportional to its book value. Since the total dollar value is under study. Answer (d) is the correct answer. Answer (c) is the correct answer. Answer (b) is incorrect. Answer Explanations Answer (a) is incorrect. Stratifying the population is not required for random selection. The approach described in the answer (d) is more appropriate than simple random sampling. and thus this method is not as good as that described in the answer (d). Although this approach is better than simple random sampling. How easy it is to inspect an item has nothing necessarily to do with its value.

produce a lower estimate of the variance of the population. Answer (b) is incorrect.Wiley CIA 2006 v1 Page 124 of 262 Answer (d) is incorrect. B: Focus on managers and supervisors because they can also reflect the opinions of the people in their departments. D: Use monetary unit sampling according to employee salaries. B: The larger sample is more likely to produce a large sample mean. one of size 30 and one of size 300? Answers A: The two samples would have the same expected value. Answer Explanations Answer (a) is the correct answer. Stratifying the population is not required for random selection. Question: V2C5-0061 An auditor is conducting a survey of perceptions and beliefs of employees concerning an organization health care plan. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. The variance is also a population parameter. Answer (d) is incorrect. on the average. The expected value of a random sample of any size is equal to the population mean. The smaller sample is less reliable and is therefore more likely to produce unusually large (or small) sample means. C: The smaller sample will have a smaller 95% confidence interval for the mean. age. Question: V2C5-0060 Which one of the following statements is true regarding two random samples drawn in the same way from the same population. D: The smaller sample will. The best approach to selecting a sample would be to Answers A: Focus on people who are likely to respond so that a larger sample can be obtained.htm 1/20/2010 . The smaller sample is less reliable and therefore will have a wider 95% confidence interval. Answer (c) is incorrect. and salaried/hourly status. and the expected value of the sample variance does not change with sample size. C: Use stratified sampling where the strata are defined by marital and family status.

This is the least justified situation to use random selection because the auditor is concerned that the monthly sales journal has been held open to record the next month sales. D: Test the perpetual inventory records to ensure that the sample covers the largest dollar value items in the account. Question: V2C5-0063 Systematic selection can be expected to produce a representative when file://C:\Program Files\Wiley\CIAExam\Print. needs. The auditor should select transactions from the latter part of the month and examine supporting evidence to determine if they were recorded in the proper time period. In which of the following situations would random selection be least justified? The auditor needs to Answers A: Test sales transactions to determine that they were properly authorized and are supported by shipping documents. Answer (c) is the correct answer.Wiley CIA 2006 v1 Page 125 of 262 Answer (a) is incorrect. The remaining accounts are not numbered. Individual account balances could be selected using dollar-unit (PPS) sampling or could be randomly selected by randomly selecting a page number and then selecting an account item (1–50) within each page. Answer (b) is incorrect. Answer (c) is the correct answer. This is an ideal place to apply dollar-unit sampling to gain confidence about potential dollar misstatement of account balances. C: Obtain evidence on the proper sales cutoff by sampling items from the monthly sales journal to determine if the items were recorded in the correct time period. stratified sampling would best ensure that a representative sample would result. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. This convenience sample is likely to emphasize people with lots of time on their hands at the expense of key employees who are too busy with company work to respond. and appropriately. Answer (d) is incorrect. Answer (d) is incorrect. This approach would produce a disproportionate number of highly paid employees who may not have the same needs as lower-paid employees. used technique is random selection. This would be a very appropriate situation in which to use random selection. and experiences. Managers and supervisors often do not have the same needs and perceptions as their subordinates and also often misperceive their views. Question: V2C5-0062 An internal auditor uses a number of techniques to select samples.htm 1/20/2010 . Because different employees probably have different situations. This is an ideal place to use random selection because it could provide evidence on the quality of processing throughout the year. A frequently. B: Confirm accounts receivable and has already selected the 10 largest accounts for confirmation. The auditor only has a computer listing of the accounts in alphabetical order approximately 250 pages long with 50 account balances on every page.

Sampling bias due to the systematic procedure will be small because the population items do not have a pattern with respect to the audit objective. Samples selected using a systematic sampling procedure and a random start will behave as if they were a random sample when the population is randomly ordered with respective to the audit objective.930 Answer Explanations Answer (a) is incorrect. the use of any judgment by an internal auditor in determining which items are included in a sample increases the sampling bias. The number of items in a sample is not relevant to the procedures used to select the specific items comprising the sample. The use of multiple random starts might increase the chance that a sample will behave randomly but only if the population is arranged randomly. Judgmental sampling will not increase the randomness of a sample but will introduce sampling bias into the sample.400 hours next month? Answers A: $4.050 B: $4. Answer (d) is incorrect.970 D: $3. file://C:\Program Files\Wiley\CIAExam\Print.800 200 36 What is the expected utility cost if the company’s 10 machines will be used 2. Answer Explanations Answer (a) is incorrect.825 . Answer (b) is the correct answer.htm 1/20/2010 . B: The population is arranged randomly with respect to the audit objective. This is the description of a random selection procedure where each item in the population has an equal chance of being included in the sample.050 + 10(200) [incorrectly uses the standard error of the estimate]. D: Judgmental sampling is used by the auditor to offset any sampling bias. In fact.050 . Question: V2C5-0064 An internal auditor used regression analysis to evaluate the relationship between utility costs and machine hours. The following information was developed using a computer software program: Intercept Regression coefficient Correlation coefficient Standard error of the estimate Number of observations 2.030 C: $3. $2. C: The sample is determined using multiple random starts and includes more items than required. Answer (c) is incorrect.Wiley CIA 2006 v1 Page 126 of 262 Answers A: Random number tables are used to determine the items included in the sample.

000 time cards to check for signatures would be Answers file://C:\Program Files\Wiley\CIAExam\Print. which represents page 765. Question: V2C5-0065 An internal auditor wants to select a statistically representative sample from a population of 475 inventory control sheets. However.400)] – 100 [incorrectly uses the standard error of the estimate]. Question: V2C5-0066 The most appropriate methodology for drawing a sample from 3. This is the fourth usable number.050 + . This answer is the fifth random number but not the fifth usable number.400) [incorrectly uses the correlation coefficient instead of the regression coefficient].825(2. and unit cost for 50 inventory items. line 26. there are only 475 sheets and only 50 lines per sheet.050 + . $2. line 50.htm 1/20/2010 . Each sheet lists the description. the random number following the starting point (14326) is 76562. [$2. $2. the sample’s first item is found on page 143.400). but the line limitation is exceeded.825(2. This is the fifth usable page number. the first two columns are listed below. line 38. For example. bar code. The auditor uses a random number table to construct the sample.800(2. Answer Explanations Answer (a) is incorrect. Answer (c) is the correct answer. The randomly chosen starting point is 14326. line 62. Answer (d) is incorrect. physical count.Wiley CIA 2006 v1 Page 127 of 262 Answer (b) is the correct answer. Answer (b) is incorrect.050 + . Answer (c) is incorrect. (The route used by the auditor is down Column A to the top of Column B. line 04. D: Page 068. Answer (d) is incorrect. B: Page 429. line 52. C: Page 331.) Column A 75233 14326 76562 28123 64227 80938 22539 29452 Where is the fifth item in the sample located? Column B 06852 42904 64854 04978 33150 04301 41240 69521 Answers A: Page 809. This is the fifth usable number.

Question: V2C5-0067 A car rental agency has branches located throughout the world that are essentially small-scale representations of the entire population. D: Variables sampling. Stratified sampling is used to give special emphasis to certain categories in the population. Skewed or unusual values are not indicated in this case. the internal auditor Answers file://C:\Program Files\Wiley\CIAExam\Print. B: Cluster sampling. Answer (d) is incorrect. Answer (b) is the correct answer.htm 1/20/2010 . B: Cluster sampling. Question: V2C5-0068 In obtaining a sample for the purpose of reaching a conclusion about the population from which it is drawn. This fits the definition. Answer (d) is incorrect. Answer (b) is incorrect. There are no strata. In this case savings would occur because the auditor would not have to travel to all sight to draw a representative sample. Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect. C: Attributes sampling.Wiley CIA 2006 v1 Page 128 of 262 A: Interval sampling. What is the appropriate sampling method for determining the average net revenue per vehicle in inventory? Answers A: Stratified sampling. D: Systematic sampling. Answer Explanations Answer (a) is the correct answer. Systematic (judgmental) sampling is not appropriate for projecting sample results to a population. Attribute sampling is not appropriate for estimating a variable such as dollar amount. C: Stratified sampling. It does not allow reliable estimates. There are no clusters. Answer (c) is incorrect.

since interval sampling is a statistical. Answer (d) is incorrect. The sampling procedure described here is called Answers A: Systematic random sampling. Judgmental interval sampling is a “nonsense” term.htm 1/20/2010 . Answer (d) is incorrect. With dollar-unit sampling. Sampling without replacement is normal. Variables sampling is a sampling methodology. The receipts have preprinted serial numbers and are arranged in chronological (and thus serial number) order. sampling approach. Answer Explanations Answer (a) is the correct answer. Question: V2C5-0069 An auditor wishes to sample 200 sales receipts from a population of 5. B: Dollar-unit sampling. D: Will usually use random sampling with replacement. With systematic random sampling. Random sampling does not require machine-readable data. Answer (b) is incorrect.000 receipts issued during the last year. Question: V2C5-0070 file://C:\Program Files\Wiley\CIAExam\Print. C: Judgmental interval sampling. Answer (b) is incorrect.Wiley CIA 2006 v1 Page 129 of 262 A: Can statistically quantify the sample results only if the sample was selected in such a way that each population item has an equal or known probability of selection. B: Should use judgmental sampling and concentrate on high-risk items. not a sample selection method. every nth element is selected from the sample. the probability of an item being chosen is directly proportionate to its dollar value. Answer (c) is incorrect. The auditor randomly chooses a receipt from the first 25 receipts and then selects every 25th receipt thereafter. not judgmental. with the starting point among the first n elements determined at random. Answer (c) is incorrect. The only way to statistically evaluate a sample is if each item has an equal or known probability of selection. D: Variables sampling Answer Explanations Answer (a) is the correct answer. C: Cannot use random sampling procedures unless the items to be sampled are available in machinereadable form. Judgment sampling is an unsatisfactory alternative for reaching conclusions about a population.

This type of sample selection can best be described as Answers A: Attributes sampling. random samples of households are selected. Answer Explanations Answer (a) is incorrect. This method of sampling is called Answers A: Cluster sampling. statistical samples of whole blocks are selected. and within the selected blocks. Question: V2C5-0071 An internal auditor with an international shipping company needs to sample shipping records over the past six months. Interval sampling selects every nth item for sampling with a randomized starting point. file://C:\Program Files\Wiley\CIAExam\Print. To do so. C: Cluster sampling. Answer (b) is incorrect. Answer (c) is incorrect. a statistical sample of suburban areas is first selected. Answer (d) is incorrect. The sample is then chosen using a statistical sampling approach. Attributes sampling describes a sampling model. Answer (d) is the correct answer. B: Haphazard. Answer (c) is the correct answer. Interval sampling involves taking every nth item from a total population. Answer Explanations Answer (a) is incorrect. not a selection technique. D: Interval sampling.htm 1/20/2010 . Cluster sampling samples groups of items rather than individual items and is most appropriate when each aggregate sampling group is representative of the entire population. such as (1) sampling units are not defined and (2) stages are not defined. Answer (b) is incorrect since it is not a sampling term. Within the chosen areas. B: Stratified sampling. D: Stratified sampling.Wiley CIA 2006 v1 Page 130 of 262 In a regional survey of suburban households to obtain data on television viewing habits. Not enough information is given. Two strata are being used—Mediterranean and North Atlantic. C: Interval sampling. the auditor draws a random sample for ships operating in the Mediterranean and a separate sample for those operating in the North Atlantic. Stratified sampling separates the population into several strata with the elements in each stratum possessing some common attribute.

interval sampling with a random start is valid. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. B: Interval sampling is not an acceptable statistical method.Wiley CIA 2006 v1 Page 131 of 262 Question: V2C5-0072 A sample from a population of over 10. moving through the entire population 7 times.000 bills of lading is needed to estimate an error rate. Answer (b) is incorrect. moving through the entire population. An auditor wishes to use an interval-sampling plan to select a representative sample of at least 100 items from this population. moving through the entire population.. select a random number from 1 to 37 as the starting point and select every 37th item. B: Select a random number from 1 to 15 as the starting point and then select every 15th item until he has 100 items. Auditor judgment is required when using statistical methods. is statistically valid. If the population contains no systematic bias.e. Answer Explanations Answer (a) is incorrect. Interval sampling. Since a sample size of 250 will satisfy precision and confidence level needs. C: Select 7 random digits from 1 to 135 as the starting points and then select every 135th item per pass. D: Interval sampling eliminates the use of auditor judgment. The sample has a random start. the most expensive (per unit) items are listed first. a sampling interval of 40 is chosen. D: Select the 50 largest items (i. Answer (d) is incorrect. and then selects each succeeding 40th item. Within each category. Which of the following is true? Answers A: The sample lacks randomness and will not be correct.050 unnumbered items is arranged by category. C: If the population lacks bias. with 10 items in each category.htm 1/20/2010 . with a random start. The best technique is to Answers A: Select a random number from 1 to 20 as the starting point and then select every 20th item. excluding the 50 largest items already selected. the sample is statistically valid. For ease of implementation. the auditor randomly selects a number between 1 and 40. then. Answer (c) is the correct answer. Question: V2C5-0073 An inventory listing consisting of approximately 2. extensions with the highest dollar amounts).

this technique could result in a sample consisting almost entirely of high-value items (starting numbers = 1. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. There may be a pattern in the way the checks were written. 40 of the items could be from an extreme value. the most appropriate method of sampling would be Answers A: Cluster sampling. There is no reason to stratify. Question: V2C5-0074 You are to audit the timeliness of the payment of vendor invoices based on a representative sample of checks written. Question: V2C5-0075 You are to audit the timeliness of the payment of vendor invoices based on a representative sample of checks written. The sample will be complete after he has moved through three-quarters of the population. file://C:\Program Files\Wiley\CIAExam\Print. B: Interval sampling. D: Stratified sampling. Answer (c) is the correct answer. should result in a representative sample. The 7 different starting points. The sample population consists of a total of 967 consecutively numbered checks that have been issued for accounts payable. Thus.htm 1/20/2010 . since the interval. Due to the pattern of this population. C: Simple random sampling. 9. 25. While it may be a desirable sampling procedure for some purposes. It may be misleading. If you know that 40% of the checks were issued to a single vendor who offered unusually large cash discounts. The sample population consists of a total of 967 consecutively numbered checks that have been issued for accounts payable. plus the fact that the sampling interval (135) is not an exact multiple of the population pattern interval (10). The most appropriate method for drawing a sample of checks is Answers A: Cluster sampling. It is easy to do since checks are numbered consecutively. Answer (b) is incorrect. Answer (c) is the correct answer. Answer (d) is incorrect. or 19). This is a stratified sample. 11.Wiley CIA 2006 v1 Page 132 of 262 Answer (a) is incorrect. would result in every other item being a multiple of 10. 2. Answer (d) is incorrect. or 12) or low-value items (starting numbers = 8. it might not constitute a representative sample. 18. It is not as good as answer (c). so items in the last one-quarter/4 of the population will have zero chance of being selected.

Two strata could be used. However. it is not random because large accounts have a greater chance of being selected than small accounts. D: Select the 50 accounts with the largest total balances plus the 25 accounts (other than those included in the first 50) with the largest past due balances. and thus would not be representative of the population.000 to $3. Since there appears to be no pattern in the sequencing of this population. then the 13th. While this scheme will provide the maximum dollar coverage. Question: V2C5-0076 An auditor using statistical sampling wishes to select a sample from an aged trial balance of 750 accounts receivable.) Answers A: Select all accounts in which the fourth digit to the left of the decimal point in the account balance (i. an appropriate criterion for classi- file://C:\Program Files\Wiley\CIAExam\Print.000. the thousands digit) is a "3. 23rd.. Answer (c) is incorrect. and so on.Wiley CIA 2006 v1 Page 133 of 262 B: Interval sampling. Answer (b) is the correct answer. and b. Answer (d) is incorrect.htm 1/20/2010 . C: Select the 75 accounts with the largest total balances. C: Simple random sampling. There are no account numbers. Which of the following selection schemes is most likely to produce a random sample of 75 items? (In choices a. Question: V2C5-0077 To use stratified variables sampling to evaluate a large. the single vendor and all others. Answer (d) is the correct answer. the accounts are listed in alphabetical order by customer name. it is not random because all accounts do not have an equal chance of being selected. Answer (c) is incorrect because it would not subdivide the population.999 range. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect because there is no basis for this. D: Stratified sampling. This would provide only accounts with balances in the $3." B: Select the 3rd account. This scheme may lead to the selection of accounts most likely to be in error or to invoice collection problems. you are to assume that the digit “3” was appropriately chosen from a random number table. on through the 743rd. heterogeneous inventory. Answer (b) is incorrect because it would not subdivide the population. Account balances range from $50 to $10.e. use of interval sampling with a random start gives each account an equal chance of being selected and should provide an unbiased sample.

Multiple random starts overcome the existence of a pattern by using a number of different starting points. Answer (d) is incorrect. Answer Explanations Answer (a) is incorrect. the objective is to estimate the dollar value of the inventory.htm 1/20/2010 . Answer Explanations Answer (a) is the correct answer. Dollar values are the usual characteristic to create strata in variables sampling. D: Storage locations. file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is the correct answer. Cluster sampling is a selection method resulting in contiguous sampling units and does not overcome patterns. B: Number of items. D: Stratifying the population in anticipation of the pattern. Dollar-unit sampling includes a random start and a selection based on dollar value sampling increments. Answer (b) is incorrect. Answer (d) is incorrect. Turnover volume could be a characteristic of interest in attribute sampling but not in variables sampling. Stratified sampling is dividing the population into two or more strata using the variability of values. not number of items. C: Cluster sampling. Storage location is not a relevant characteristic when creating strata for variables sampling. Strata based on dollar values are the usual population characteristic. Answer (c) is incorrect. Answer (b) is incorrect. B: Systematic sampling with multiple random starts. C: Turnover volume. Question: V2C5-0078 Which of the following would not be appropriate if the auditor expects a built-in pattern in the population? Answers A: Dollar-unit sampling.Wiley CIA 2006 v1 Page 134 of 262 fying inventory items into strata is Answers A: Dollar values. recognizing a pattern in advance permits appropriate sampling techniques. In variables sampling.

The finite population correction factor is used to adjust an initial computed sample size. the auditor would know that the probability was 95% that the error rate in the population was no higher than 4%. The error rate may be higher than 1%. Standard deviation is irrelevant to attributes sampling. Based on those factors. Answer (d) is incorrect. Question: V2C5-0080 Which of the following must be known to evaluate the results of an attributes sample? Answers A: Estimated dollar value of the population.htm 1/20/2010 . The error rate may be less than 4%. the auditor selected 156 items and found three errors. The auditor can conclude that there is Answers A: At least a 95% chance that the error rate in the population exceeds 4%. D: Finite population correction factor. The error rate may exceed 4%. The auditor designed the sample to achieve an upper precision limit of 4% at a confidence level of 95% with a 1% expected error rate. C: Actual size of the sample selected. file://C:\Program Files\Wiley\CIAExam\Print. B: Standard deviation of the sample values. Answer (b) is incorrect. but that probability is less than 95%. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect. but that probability is less than 95%. The auditor knows this because the error rate in the sample was more than 1%. B: At least a 95% chance that the error rate in the population is less than 4%. but the probability that it does it less than 95%.Wiley CIA 2006 v1 Page 135 of 262 Question: V2C5-0079 An auditor designed an attribute sample to test the effectiveness of a control procedure. Answer (c) is the correct answer. If the error rate was equal to 1%. D: More than a 95% chance that the error rate in the population exceeds 1%. Answer (b) is incorrect. Answer (d) is incorrect. Dollar values are irrelevant to attributes sampling. Answer (c) is the correct answer. C: Less than a 95% chance that the error rate in the population is less than 4%. Sample size is used to evaluate the actual occurrence rate.

This is the definition of precision. Answer Explanations Answer (a) is incorrect. The expected error rate is a measure of how frequently the auditor expects the characteristic of interest to exist in the population prior to selecting and evaluating the sample. is used to estimate how much an account balance is in error. C: Upper error limit. Answer (c) is incorrect. like variable sampling. Attribute sampling is used to estimate how many. Variable sampling is used to estimate how much. Precision is the range between the lower and upper error limits.Wiley CIA 2006 v1 Page 136 of 262 Question: V2C5-0081 In evaluating an attribute sample. Answer (d) is incorrect. What sampling plan should the auditor use? Answers A: Variable sampling. Answer (b) is the correct answer.htm 1/20/2010 . C: Judgmental sampling. such as the rate of erroneous claims. Answer Explanations Answer (a) is incorrect. D: Dollar-unit sampling. Answer (c) is incorrect. Confidence level is a measure of how reliable the auditor wants the sample results to be. Answer (b) is the correct answer. file://C:\Program Files\Wiley\CIAExam\Print. Judgmental sampling is not appropriate if inferences are to be made about a population. such as total dollar amount or total weight. the range within which the estimate of the population characteristic is expected to fall is called the Answers A: Confidence level. D: Expected error rate. Answer (d) is incorrect. Question: V2C5-0082 An auditor wishes to determine if the error rate on travel reimbursement claims is within the 5% tolerance level set by management. B: Attributes sampling. Dollar-unit sampling. B: Precision.

Several loans had multiple problems. The concern is with loans that may have been inappropriately rejected. A lending officer initially processes all loan requests. However. D: Take a sample of loans presented to the lending committee for approval and determine if committee actions taken were consistent with bank policies. Answer Explanations Answer (a) is the correct answer. Answer (c) is incorrect. It is not concerned with approval of loans that should not have been made. Question: V2C5-0084 An auditor has taken an attribute sample of a bank’s existing loan portfolio. review the loan applications. but were set up as separate loan entities. therefore. and • Four that were part of a related-party group.Wiley CIA 2006 v1 Page 137 of 262 Question: V2C5-0083 A bank internal auditor wishes to determine if loans that were not funded were rejected using criteria consistent with that contained in bank policies. Out of a sample of sixty loans. This uses a sample of loans that were presented to the lending committee. the audit objective only dealt with loans that were not funded. file://C:\Program Files\Wiley\CIAExam\Print. the auditor finds • Four that were not properly collateralized. review the applications. The most efficient audit procedure to address this objective would be to Answers A: Select an attribute sample of loans not funded and review the loan applications and the reasons for rejecting them. this procedure would cause the auditors to review more loans and would not be as efficient as the procedure noted in answer (a). Those that the officer deems appropriate to be funded are forwarded to the lending committee for its approval. This is an excellent procedure to determine whether all the loans (both funded and unfunded) are being handled consistent with the stated policies and procedures. Answer (d) is incorrect. Of the sixty loans selected in the sample. • Five that are not in compliance with bank policies (other than lack of collateralization). B: Select an attribute sample of loans that were funded. It does not include loans that would have already been rejected by an individual lending officer.htm 1/20/2010 . III. This only provides information on loans that were funded. There are significant noncompliance audit findings that should be reported. There is sufficient evidence that fraudulent activity is taking place by one or more of the bank’s lending officers. Answer (b) is incorrect. The financial statements will be misstated as a result of these actions. II. This would be the most appropriate audit procedure because the audit objective only asks for a determination that rejected loans have been rejected for proper reasons. Which of the following conclusions can the auditor reach from these findings? I. C: Take a sample of all loan applications. these errors were noted on a total of ten loans. and determine if the funded loans complied with bank policies. and trace them to either a funded or rejected loan to determine if all actions taken were consistent with bank policies.

Refer to the correct answer explanation. there is not sufficient evidence to conclude fraudulent activity on the part of the bank’s lending officers. Answer (d) is incorrect. B: I and III. There must be intent to deceive for some personal gain to infer fraud. The dollar value of the population relates to a variable often involved in sample selection when testing for variables. and the Answers A: Recorded dollar value of the population. Answer Explanations This answer is incorrect.Wiley CIA 2006 v1 Page 138 of 262 Answers A: I and II.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. Item I is incorrect. Although these findings are significant audit findings. D: Standard deviation in the population. an auditor must consider the confidence level factor. The sampling interval is used in monetary-unit sampling to select items based on monetary-unit value distributions. Answer (b) is incorrect. C: II and III. Item II is incorrect. Answer (c) is the correct answer. file://C:\Program Files\Wiley\CIAExam\Print. D: III only. Question: V2C5-0085 In selecting a sample of items for attributes testing. C: Expected occurrence rate. the desired precision. These are significant audit findings (item III). Answer (d) is the correct answer. The financial statements will not necessarily be incorrect as long as the bank can determine that the loans receivable are properly classified as to term and are carried at their net realizable value. The standard deviation is not a variable having relevance when selecting samples for attributes sampling. This answer is incorrect. Refer to the correct answer explanation. The expected occurrence rate is one necessary factor in selecting samples for attributes sampling. This answer is incorrect. Refer to the correct answer explanation. B: Sampling interval.

B: Smaller. decreasing the estimated occurrence rate from 5% to 4% while keeping all other sample size planning factors exactly the same would result in a revised sample size which would be Answers A: Larger. C: Unchanged. In attributes sampling. Answer Explanations Answer (a) is incorrect because a lower confidence level and a less rigorous precision allow a smaller sample with other factors constant. C: Unchanged. Answer Explanations Answer (a) is incorrect because a smaller estimated occurrence rate results in a smaller sample size when all other factors are the same. Answer (d) is incorrect because a smaller estimated occurrence rate results in a smaller sample size when all other factors are the same. Answer (c) is incorrect because a smaller estimated occurrence rate results in a smaller sample size when all other factors are the same.htm 1/20/2010 . B: Smaller. D: Indeterminate. file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0087 If all other sample size planning factors were exactly the same in attributes sampling. changing the confidence level from 95% to 90% and changing the desired precision from 2% to 5% would result in a revised sample size which would be Answers A: Larger. A smaller estimated occurrence rate results in a smaller sample size when all other factors are the same. Answer (b) is the correct answer. D: Indeterminate.Wiley CIA 2006 v1 Page 139 of 262 Question: V2C5-0086 An auditor is planning to use attributes sampling to test the effectiveness of a specific internal control related to approvals for cash disbursements.

Standard deviation is irrelevant to attribute sampling. Answer (b) is incorrect. Question: V2C5-0089 An auditor has to make a number of decisions when using attribute sampling. Which of the following statements regarding efficiency and effectiveness of an attribute sample is true? Answers A: Decreasing the confidence level to 90% and decreasing the tolerable control failure rate to 3% will result in both increased efficiency and effectiveness. Answer Explanations Answer (a) is incorrect. Assume an auditor expects a control procedure failure rate of 0. Answer (d) is incorrect because a lower confidence level and a less rigorous precision allow a smaller sample with other factors constant. C: Increasing the confidence level to 95% and decreasing the tolerable control failure rate to 3% will increase audit effectiveness. C: Actual size of the sample selected.Wiley CIA 2006 v1 Page 140 of 262 Answer (b) is the correct answer. Answer (d) is incorrect. Sample size is used to evaluate the actual occurrence rate. Answer (c) is incorrect because a lower confidence level and a less rigorous precision allow a smaller sample with other factors constant. A lower confidence level and a less rigorous precision allow a smaller sample with other factors constant.5%. D: Increasing the confidence level to 95% will increase audit efficiency. Dollar values are irrelevant to attribute sampling. Question: V2C5-0088 Which of the following must be known to evaluate the results of an attribute sample? Answers A: Estimated dollar value of the population. The term “effectiveness” is used to describe the likelihood that the statistical sample result will be a more accurate estimate of the true population error rate. The term “efficiency” is used to describe anything that affects sample size. B: Decreasing the tolerable failure rate from 4% to 3% will increase audit efficiency. The auditor is making a decision on whether to use a 90% or a 95% confidence level and whether to set the tolerable control failure rate at 3% or 4%. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . The finite population correction factor is used to adjust an initial computed sample size. B: Standard deviation of the sample values. D: Finite population correction factor. Answer (c) is the correct answer.

Question: V2C5-0091 An auditor is testing on a company’s large. the auditor could use any one of the following sampling techniques except: Answers A: Difference or ratio estimation. Attribute sampling is used to reach conclusions about exception occurrence rates in populations. Answer (c) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. which decreases audit efficiency. Discovery is only used when exception rates are expected to be very low. Answer (b) is incorrect. Decreasing the confidence level results in a decrease in effectiveness.Wiley CIA 2006 v1 Page 141 of 262 Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. D: Attribute. If the auditor has established a 5% tolerable rate. B: Discovery. normally distributed accounts receivable file. resulting in a decrease in efficiency as defined in the problem. Decreasing the tolerable failure rate will result in a larger sample size. while decreasing the tolerable failure rate results in a decrease in efficiency. Stratified sampling arranges populations for more efficient sampling. C: Stratified. normally distributed accounts receivable file. The objectives of the audit are to test end-of-period dollar balances and accounts receivable posting exception (error) rates. Difference or mean estimation is used when sampling for dollar values.htm 1/20/2010 . Increasing the confidence level and decreasing the tolerable failure rate will result in a much larger sample size and will give the auditor a more precise estimate of the population parameters. The objectives of the audit are to test end-of-period dollar balances and accounts receivable posting exception (error) rates. Answer (d) is the correct answer. Increasing the confidence level results in a larger sample size. Answer (c) is the correct answer. the auditor would use which sampling plan for testing the actual exception rate? Answers A: Difference or mean per unit estimation. Question: V2C5-0090 An auditor is testing on a company’s large. Answer Explanations Answer (a) is incorrect. To test the accounts receivable file to compute an estimated dollar total. Answer (d) is incorrect. The expected population exception rate is 3% for the accounts receivable posting processes.

B: Unstratified mean-per-unit. Difference or ratio estimation can be used to estimate population dollar values.htm 1/20/2010 . C: Probability proportional to size. but would be inappropriate since there are a large number of small balance account errors.Wiley CIA 2006 v1 Page 142 of 262 B: Unstratified mean-per-unit estimation. Question: V2C5-0092 An auditor is testing on a company’s large. The accounts receivable file contains a large number of small dollar balances and a small number of large dollar balances and the auditor expects to find numerous errors in the account balances. Which factor below is the most important for the auditor to consider? Answers file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is incorrect. Answer Explanations Answer (a) is the correct answer. Question: V2C5-0093 An internal auditor planning an attribute sample from a large number of invoices must estimate the tolerable error. Probability-proportional-to-size (PPS) is used for estimating dollar values of errors when the expected error frequency is low. Probability-proportional-to-size (PPS) can be used for estimating population dollar values. Attribute sampling does not involve dollar-balance estimation. Answer (b) is incorrect. normally distributed accounts receivable file. Attribute sampling does not involve dollar-balance estimation. Mean-per-unit estimation is used to project a total dollar value for a population. Answer Explanations Answer (a) is incorrect. Mean-per-unit estimation can be used to estimate population dollar values. Answer (d) is the correct answer. Difference or ratio estimation is used when estimating dollar amounts of errors for normally distributed populations. D: Attribute. D: Attribute. Answer (d) is incorrect. Answer (b) is incorrect. Answer (c) is incorrect. C: Probability proportional to size. The most appropriate sampling technique to estimate the dollar amount of errors would be Answers A: Difference or ratio estimation. The objectives of the audit are to test end-of-period dollar balances and accounts receivable posting exception (error) rates.

B: Number of items. D: Population variance. It is a consideration but not the most important one.000 to determine whether the credit department is requiring a credit check for credit sales when appropriate. Answer (c) is incorrect. Answer (b) is the correct answer. Answer Explanations Answer (a) is incorrect. Storage location may be associated with the risk of misstatement of the items. C: Desired confidence level. Answer (c) is incorrect. D: Storage locations. This factor is independent of precision. Turnover volume could be associated with the risk of misstatement of the items. B: Population size. which of the following would least likely be used as criteria to classify inventory items into strata? Answers A: Dollar values. Knowing the population is large is sufficient. Answer (d) is incorrect. Since the precision is under the control of the auditor.htm 1/20/2010 . Question: V2C5-0094 To use stratified sampling to evaluate a large. heterogeneous inventory. the audit objective is the most important factor to be considered. The extent of risk of misstatement is associated with the dollar values of inventory items. Answer (d) is incorrect. Tolerable error is the specified precision or the maximum sampling error that will still permit the results to be useful. Answer (b) is incorrect. C: Turnover volume. Question: V2C5-0095 Using company policies to establish when approval is needed. an auditor has sampled accounts receivable balances exceeding $1. This is an example of Answers file://C:\Program Files\Wiley\CIAExam\Print. The number of items is not generally associated with the risk of misstatement.Wiley CIA 2006 v1 Page 143 of 262 A: Audit objective. Answer Explanations Answer (a) is the correct answer.

D: Fail to prove the error rate is above 0. one can conclude that the sample results Answers A: Indicate another sample is needed. Dollar-unit sampling is used to estimate dollar amounts. D: Variables sampling. Null hypothesis is Error Rate <= 0. No sample could prove this. Attributes sampling typically involve tests of the effectiveness of controls. B: Prove there are no errors in accounts payable. Answer (b) is incorrect. Variables sampling describes methods used to estimate dollar amounts. Answer Explanations Answer (a) is incorrect. No errors were found. The sample is adequate. Answer (c) is incorrect.5%. Mean-per-unit sampling is used to estimate dollar amounts. file://C:\Program Files\Wiley\CIAExam\Print. This is the definition of 95% confidence level.5%. One hundred of the 10. Question: V2C5-0097 What is the chief advantage of stop-or-go sampling? Answers A: The error rate in the population can be projected to within certain precision limits.000 accounts payable transactions were randomly selected using a 95% confidence level. C: Attributes sampling. Answer (c) is the correct answer. Answer (b) is incorrect. Answer (d) is incorrect. With 95% certainty. C: Indicate the null hypothesis is false. B: Mean-per-unit sampling. Answer Explanations Answer (a) is incorrect. The report should be made to management and coordinated with the external auditor. Question: V2C5-0096 An audit of accounts payable was made to determine if the error rate was within the stated policy of 0.htm 1/20/2010 .Wiley CIA 2006 v1 Page 144 of 262 A: Dollar-unit sampling.5% Answer (d) is the correct answer.

Answer (c) is incorrect. C: It allows sampling analysis to be performed on populations that are not homogeneous. An increase in the confidence limits will result in a loss of precision (assuming contact sample size). C: Stratified mean-per-unit sampling. Difference-estimation sampling is used when we want to obtain a “corrected” estimate of a previously stated “book” value (a variables-sampling technique). Stratified mean-per-unit sampling is used in substantive testing (a variables-sampling technique). Only upper precision limits and statements are made.Wiley CIA 2006 v1 Page 145 of 262 B: It may reduce the size of the sample that needs to be taken from a population. B: Difference-estimation sampling. Answer (b) is incorrect. thus reducing sampling costs. Answer (b) is the correct answer. Question: V2C5-0098 A statistical sampling technique which will minimize sample size whenever a low rate of noncompliance is expected is called Answers A: Ratio-estimation sampling. The stop-or-go sampling technique will yield a smaller sample size if the error rate is low.500 accounts receivable outstanding. Answer (c) is incorrect. Question: V2C5-0099 In order to estimate the value of 2. D: Stop-or-go sampling.htm 1/20/2010 . It is also the only technique listed that is applicable to estimates of rate of compliance (attributes sampling). The populations must be homogeneous in all attribute-sampling plans. the best sampling method would be Answers file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. Answer (d) is the correct answer. Answer Explanations Answer (a) is incorrect. Rate of noncompliance is not applicable to ratio-estimation sampling (a variables-sampling technique). Answer Explanations Answer (a) is incorrect. D: It allows the sampler to increase the confidence limits of his analysis without sacrificing precision. Stop-or-go sampling helps prevent oversampling for attributes by permitting the sampler to halt an audit test at the earliest possible moment.

Answer (d) is incorrect. Answer (d) is incorrect. this is an indication that the Answers A: Occurrence rate was smaller than expected. D: Sampling interval. and the Answers A: Recorded dollar value of the population. not values. Answer (b) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. B: Acceptable risk level. an auditor must consider the desired precision.htm 1/20/2010 . The expected occurrence rate is not a criterion in sample selection for variables. C: Cluster sampling. Answer Explanations Answer (a) is the correct answer. It is an inappropriate plan for drawing samples. It is an inappropriate plan for drawing samples. Answer (c) is incorrect. Risk level is a necessary criterion to include in the sample selection process for variables. the standard deviation. It is for estimating discrete characteristics. if the achieved dollar precision range of the statistical sample at a given confidence level is greater than the desired dollar precision range.Wiley CIA 2006 v1 Page 146 of 262 A: Variables estimation. Answer Explanations Answer (a) is incorrect. Answer (b) is the correct answer. Variables sampling method is good for estimating the dollar value. C: Expected occurrence rate. The sampling (skip) interval is the monetary-unit interval when selecting samples using monetary-unit sampling. Question: V2C5-0100 In selecting a sample of items for variables testing. The recorded dollar value is not needed for variables testing. B: Stop-and-go sampling. D: Attributes estimation. Question: V2C5-0101 In a variable-sampling application. Answer (c) is incorrect.

Achieved precision (sampling error) is equal to the confidence level factor times the standard error of the mean. The point estimate of the sample mean does not include a confidence interval. Standard deviation (variability) directly affects the computed precision. Answer Explanations Answer (a) is incorrect. Question: V2C5-0102 In a variables-sampling application. Answer (d) is the correct answer. it is the result of such as misclassifications. Occurrence rate is irrelevant for computing achieved precision. which of the following factors will vary directly with a change in confidence level from 90 to 95%? Answers A: Standard error of the mean. Answer Explanations Answer (a) is incorrect. In obtaining this preliminary information the internal auditor Answers A: Can seldom rely on the results of prior years' sample results since they pertain only to the prior years' file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is the correct answer. Answer (c) is incorrect. Answer (d) is incorrect. D: Standard deviation was greater than expected. C: Achieved precision. D: Point estimate of the arithmetic mean. The standard error of the mean is dependent on only the standard deviation and sample size. A lower actual variability would result in achieved precision being lower than desired precision. the internal auditor requires some knowledge of the variability of the population. Occurrence rate is irrelevant for computing achieved precision. B: Nonsampling error.htm 1/20/2010 . Question: V2C5-0103 In determining the sample size for variables sampling. Answer (b) is incorrect.Wiley CIA 2006 v1 Page 147 of 262 B: Occurrence rate was greater than expected. Nonsampling error is not variable according to sampling criteria. C: Standard deviation was less than expected. Answer (b) is incorrect.

The range of values is limited to 0 through 1. It calls for yes-or-no. B: Frequently takes a convenience pilot sample of 30 to 50 items and use this to estimate the variability of the population. and use this range as an estimate of the population variability for purposes of computing sample size. C: Stop-or-go. Which of the following sample plans would be appropriate? Answers A: Attributes. Answer Explanations Answer (a) is incorrect. B: Discovery. D: Variables. Answer (b) is incorrect. The sample range is not the correct measure of variability for this purpose. It would be inefficient to disregard the audit evidence found in the pilot sample. Question: V2C5-0105 file://C:\Program Files\Wiley\CIAExam\Print. applies audit tests to these items. It allows the verification of values whose range lies between positive and negative infinity.Wiley CIA 2006 v1 Page 148 of 262 populations. The pilot sample is then discarded and the real sample is taken from the remaining population. D: Will frequently take a random pilot sample of 30 to 50 items. The plan seeks to select a sample just large enough to include one example of the error or irregularity a specified percentage of the time. Variables sampling is used for substantive testing. Answer (b) is the correct answer. Answer (c) is incorrect. This is a common practice. Attri-bute sampling is for compliance testing. compute the range in this sample. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect. Pilot samples are often used to estimate variability. Question: V2C5-0104 An internal auditor wishes to estimate the number of units in a certain class of inventory without counting each one.htm 1/20/2010 . Discovery sampling is used when the internal auditor suspects a gross error or fraud. Stop-or-go sampling is an attribute-sampling plan. Answer (c) is incorrect. C: Frequently takes a random pilot sample of 30 to 50 items. Answer (d) is the correct answer. and uses the variability in these items to estimate the variability in the population of audit values. right-or-wrong answers.

Answer Explanations Answer (a) is incorrect. but it is not as efficient as ratio estimation when a large number of errors are expected in the account balance. in the account balance. Proportional relationships tend to support the use of ratio estimation. The most efficient sampling procedure to accomplish the auditor’s objectives would be Answers A: Dollar-unit sampling. Answer (b) is incorrect. The auditor has decided to audit all items over $50. Answer Explanations Answer (a) is incorrect. D: Subsidiary ledger book balances for some inventory items are unknown.Wiley CIA 2006 v1 Page 149 of 262 Ratio estimation sampling would be inappropriate to use to project the dollar error in a population if Answers A: The recorded book values and audited values are approximately proportional. Individual item amounts must be known to use ratio estimation. C: Attribute sampling. file://C:\Program Files\Wiley\CIAExam\Print. Attribute sampling is not used to estimate a dollar amount. The auditor expects the errors to vary directly with the value recorded in the perpetual records. B: Ratio estimation. This audit decision is made because the auditor expects to find a large amount of errors in the perpetual inventory records.000 plus a random selection of others. B: A number of observed differences exist between book values and audited values. Question: V2C5-0106 The auditor wishes to sample the perpetual inventory records to develop an estimate of the dollar amount of misstatement. but is not sure that it will be enough to justify taking a complete physical inventory. Ratio estimation is supported by proportional differences. Stratified mean-per-unit sampling could be used. The account balance is made up of a large number of small value items and a small number of large value items. Answer (b) is the correct answer. A minimum number of differences must be present to validly use ratio estimation. C: Observed differences between book values and audited values are proportional to book values. Answer (d) is the correct answer. Answer (c) is incorrect. Answer (c) is incorrect. Ratio estimation is the most efficient sampling methodology because the auditor expects a large number of errors and expects the errors to vary directly with size of the account balance on the perpetual record. if any. Answer (d) is incorrect. D: Stratified mean-per-unit sampling. Dollar-unit sampling becomes less accurate when a large number of errors are expected.htm 1/20/2010 .

Individual item amounts must be known to use difference estimation.Wiley CIA 2006 v1 Page 150 of 262 Question: V2C5-0107 Difference estimation sampling would be appropriate to use to project the dollar error in a population if Answers A: Subsidiary ledger book balances for some individual inventory items are unknown. Answer (d) is incorrect because these estimators do not require an audit value for every item in the population. B: Virtually no differences between the individual book values and the audited values exist. Answer Explanations Answer (a) is incorrect because the stratified mean per unit would work here. The error magnitude is unimportant. C: A number of nonproportional differences between book values and audited values exist. C: Either a difference estimator or a ratio estimator will be more efficient than an unstratified mean per unit estimator in this case. a stratified mean per unit estimator will perform poorly in this case. Ratio or difference estimates would be more efficient in this situation. D: Observed differences between book values and audited values are proportional to book values. Answer (b) is incorrect. The monetary amount of individual invoices is highly variable. the internal auditor should be aware that Answers A: Since the error magnitude is uncertain. Answer (d) is incorrect. There must be sufficient errors in the population to generate a reliable sample estimate. D: Neither a difference or ratio estimator is practical in this case unless an audit value and a book value exist for each item in the population. There must be a sufficient number of nonproportional errors to generate a reliable sample estimate. If file://C:\Program Files\Wiley\CIAExam\Print. there is little advantage to stratifying the population. Ratio estimation is supported by proportional differences. In evaluating which specific approach to variables sampling to employ. Question: V2C5-0108 An internal auditor is interested in the processing accuracy of a sales invoice preparation system. Answer (b) is incorrect because the advantage of stratification is not dependent on error rates.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. Answer (c) is the correct answer. B: With error rates in this range. Answer (c) is the correct answer. The internal auditor has sound reasons for believing that the error rate in invoice processing is between 3% and 10% but has no idea of the monetary magnitude of the errors.

it must be subtracted from.000 to $3.263.000 17 The total book value of the entire finished goods inventory (1.000 D: $7.000 $630.000 (1. As explained above. The average overstatement error in the sample is $250 per item ($630. Since the difference is an overstatement.Wiley CIA 2006 v1 Page 151 of 262 such values were available.htm 1/20/2010 .988.713. and computes an “audited value” for each (calculated as quantity times unit cost per production reports). Answer (d) is incorrect.800. not difference estimation. and the estimated total is $6. not added to. This answer (1.000 / 100 items).655.200. the auditor’s best guess (point estimate) as to the correct total is Answers A: $6. an auditor had the following results: Projected inventory value Confidence level Confidence interval Standard error (Standard error = standard deviation/ square root of sample size) $3.988.000 $100. On the basis of difference estimation.100 items) is $6. This is the book value plus the projected overstatement.000 Answer Explanations Answer (a) is incorrect.000 file://C:\Program Files\Wiley\CIAExam\Print. Thus the projected overstatement is $275.100 items × the average audited value of $6.000 – $605.000 B: $6. it is the projected overstatement that must be subtracted.100 items × $250).000. The internal auditor then compares the audited value with the “book value” (inventory cost per perpetual inventory records) and uses difference estimation to estimate the correct total for the finished goods inventory.963. Answer (b) is the correct answer.000 C: $6. the book value. Question: V2C5-0110 Using mean-per-unit sampling to estimate the value of inventory. Results of the 100-item sample are as follows: Total audited value Total book value (of these 100 items) Number of items incorrectly stated (out of 100) $605. This response was obtained by subtracting the $25. there would be no need to sample at all.000 total sample overstatement from the book value.000 minus $275. physically counts them.000 95% $2.050 per item) is based on mean-per-unit estimation. Question: V2C5-0109 An auditor randomly selects 100 items of finished goods perpetual inventory.000. Answer (c) is incorrect.000.

000.000 2. Answer (b) is incorrect. Which of the following is a logical conclusion from the sample? 2. file://C:\Program Files\Wiley\CIAExam\Print. This conclusion is not supported by the facts given.200.000. Which of the following changes would result in a narrower confidence interval? $3.000 to $3.200. Answer (c) is incorrect.000.800.200. There is a 95% chance that the true inventory value falls between $2. Instead. a 95% chance that the true value of inventory is more than $2.000 and less than $3. This is a valid statement about the confidence interval. Question: V2C5-0111 Using mean-per-unit sampling to estimate the value of inventory. D: There is a 2.800. there is a 5% chance that the true value of inventory is more than $3.075. It is not possible to conclude from the information given that inventory is materially misstated.000 or more misstates the inventory amount.000.000 and $3.000.000 Answers A: An increase in the confidence level from 95 to 99%.000.000.800. Answer Explanations Answer (a) is incorrect.5% chance that inventory is less than $2.200.0 $200.200.000 95% $2. C: Inventory is materially misstated. B: A decrease in the confidence level from 95 to 90%. This conclusion is also not supported by the facts given in the problem.htm 1/20/2010 . There is. an auditor had the following results: Projected inventory value Confidence level Confidence interval Standard error (Standard error = standard deviation/ square root of sample size) Z value (approximately) Precision The recorded value of inventory was $3.5% chance that the inventory amount is greater than $3. however.000 or less $2. Answer (d) is the correct answer.800.0 $200.000 $100.800.000.Wiley CIA 2006 v1 Page 152 of 262 Z value (approximately) Precision The recorded value of inventory was $3. There is also a 2.075. B: There is a 5% chance that $200.000.000 Answers A: There is a 95% chance that the misstatement of inventory is less than $100.

075. the wider the interval.Wiley CIA 2006 v1 Page 153 of 262 C: A decrease in the allowable risk of incorrect acceptance.000.000 2. which would result in a wider confidence interval. Decreasing the allowable risk of incorrect acceptance would increase the confidence level. Decreasing the confidence level would decrease the Z value and that would result in a smaller confidence interval. file://C:\Program Files\Wiley\CIAExam\Print. an auditor had the following results: Projected inventory value Confidence level Confidence interval Standard error (Standard error = standard deviation/ square root of sample size) Z value (approximately) Precision The recorded value of inventory was $3. Answer (b) is incorrect. The larger the standard error. The standard error is not a projection of error in the population. The standard error is used to compute precision and the confidence interval.000 95% $2. Answer (d) is incorrect.0 $200. C: The degree of variation in the dollar amount of sample items.800. B: The average rate of error in the sample. The standard error is a function of the standard deviation.000 to $3. Answer (b) is the correct answer. The amount of error that the auditor would be willing to accept (the tolerable error) is the auditor’s decision.000 $100.200. The confidence interval = mean ± Z value × standard error. Increasing the precision would make the confidence interval wider.000. The standard error of $100. The amount of tolerable error has no effect on the standard error. The standard error is not a measurement of the errors in the sample. Answer (c) is the correct answer. Question: V2C5-0112 Using mean-per-unit sampling to estimate the value of inventory. D: The error in the population that the auditor can accept. D: An increase in the precision. which is a measurement of the average variation from the mean of the sample. Answer Explanations Answer (a) is incorrect. Answer (c) is incorrect.000 Answers A: The projected population error based on errors in the sample.htm 1/20/2010 . Increasing the confidence level would result in a wider confidence interval. Answer Explanations Answer (a) is incorrect.000 reflects $3. Answer (d) is incorrect. it is not the result of a statistical calculation.

The risk of incorrect acceptance could not be quantified when nonstatistical sampling is used.htm 1/20/2010 .075. B: The precision would be larger. Which of the following statistical sampling methods would be most appropriate for this test? Answers file://C:\Program Files\Wiley\CIAExam\Print.000. The value of inventory could not be projected when nonstatistical sampling is used.000. D: The risk of incorrect acceptance would be higher.0 $200.000 2. C: The projected value of inventory would be less reliable. The service center houses the service trucks that are used to drive to the customers’ locations to service their appliances. Question: V2C5-0114 The auditor is performing a test to determine whether the gas and electric appliance company should move its service center from one location to another. an auditor had the following results: Projected inventory value Confidence level Confidence interval Standard error (Standard error = standard deviation/ square root of sample size) Z value (approximately) Precision The recorded value of inventory was $3.000 Answers A: The confidence level could not be quantified.000 to $3. Answer (d) is incorrect. Answer (b) is incorrect. The auditor wants to determine the reduction in average miles driven as a result of moving to the other location. Answer (c) is incorrect. If the auditor had used nonstatistical sampling instead of statistical sampling.800. Nonstatistical sampling does not. the auditor would not be able to quantify precision. Unless the auditor uses statistical sampling. Answer Explanations Answer (a) is the correct answer. which of the following would be true? $3.200.000 95% $2.Wiley CIA 2006 v1 Page 154 of 262 Question: V2C5-0113 Using mean-per-unit sampling to estimate the value of inventory. Statistical sampling enables an auditor to quantify the confidence level or the sampling risk.000 $100.

b. D: Mean-per-unit sampling. B: Discovery sampling. Question: V2C5-0115 An auditor is designing stratified. not to estimate a variable. Although this stratum has the largest number of items. Attribute sampling will not produce a quantitative value. Answer (b) is incorrect.100 Expected mean $100 $200 $80 $150 Expected standard deviation $9 $4 $2 $1 Total dollar value $200. This is the only statistical sampling method designed to estimate a variable for which there are not available individual book values making up the value of a population. mean-per-unit variables sampling plan. Although this stratum has the largest mean. Allocating more selections to strata with larger standard deviations decreases the standard error of the mean. C: c. The objective of stratifying a sample is to reduce variation in order to be able to use a smaller sample than would be required without stratification. B: b.000 2. it has a smaller standard deviation than stratum defined in the answer (a). Discovery sampling is used to uncover an attribute that exists in the population with a low rate of occurrence. c.000 $450. C: Probability proportional to size (dollar-unit) sampling. Answer Explanations Answer (a) is the correct answer. Answer (c) is incorrect.000 3. This stratum has the largest expected standard deviation. Answer Explanations Answer (a) is incorrect. To which one of the following strata should the auditor allocate the largest proportion of the overall sample size? Number of items 2.250 3. Answer (d) is the correct answer. d.000 $465. Answers A: a. D: d.htm 1/20/2010 .000 $240. is has the smallest standard file://C:\Program Files\Wiley\CIAExam\Print.000 a. which results in a smaller confidence interval. Answer (c) is incorrect. Answer (b) is incorrect. Individual book values adding up to a total book value is required for this method to be used.Wiley CIA 2006 v1 Page 155 of 262 A: Attribute sampling.

000 Book value $ 200. 1.000 + 5. Answer (b) is incorrect.000 = 1.000.000 $5.000) = $5. Question: V2C5-0117 An internal auditor has obtained the following data by selecting a random sample from an inventory population.000 C: $5.000 Audited value $220.1 ($5. Ratio estimation = $220.420.000 file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 .000.000 The estimate of the population dollar value using difference estimation sampling would be Answers A: $4. Question: V2C5-0116 An internal auditor has obtained the following data by selecting a random sample from an inventory population.Wiley CIA 2006 v1 Page 156 of 262 deviation.500.000.200.200.000 D: $5.000 × 5. Answer (d) is incorrect. This calculation uses the means of the book value of the sample rather than the mean of the audit sample: $200. As explained above.000 $5. Mean-per-unit = $220.720.000/$200.1 and 1. Answer (d) is incorrect.000 $ 200. Answer (c) is the correct answer.000/200 = $1.000 B: $5.000 Population 5. Number Audited of items value Book value Sample 200 $220.500. The total dollar value is directly related to the mean and number of items in a stratum.000.000 B: $5.000 = $5.000.720.200.000 = $5. neither of these factors is a normal consideration in allocating sample size to strata.000.000 Answer Explanations Answer (a) is incorrect.200.000/200 = $1100 and $1100 (5000) = $5.000 Sample Population The estimate of the population dollar value using mean-per-unit sampling would be Answers A: $5. This calculation added the audit value of the sample to the book value of the population: $220.420. Number of items 200 5.000.700.500.

000 – $200.000/200 = $1100 and $1100 (5000) = $5.000.200.000/$200.200.680.000 – 200.000 = $5.000 and $20.000 = 1.273 B: $5. Mean-per-unit = $220.000 = .000) = $5.720.000 = $20.000 C: $5.200. Estimated difference of $500.000.000/ $220.000 = $20. Number Audited of items value Book value Sample 200 $220.000 = $5.727.500.000 = $5.700.htm 1/20/2010 .Wiley CIA 2006 v1 Page 157 of 262 C: $5.000 and $5.000.000)/200] × (5.200.000 Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect.000 per Answer (d) should be added to $5.90909091 ($5.000 Population 5.700.000 $5. Answer (d) is the correct answer.1 ($5. Question: V2C5-0119 The internal auditor for an insurance company is conducting an audit of claims processing and wants to assess the average length of time that it takes to process automobile claims to determine whether processing is being completed within standards set by company policy.000 + $5.680.200.000.000. Mean-per-unit = $220. Answer (c) is incorrect.500.000 and $20.000) = $4.000 D: $5. not deducted from $5.000/200 = $100 and $100 (5000) = $500.000 D: $5.000 – $200.700. Question: V2C5-0118 An internal auditor has obtained the following data by selecting a random sample from an inventory population.90909091 and .000 and $500.000 + 480. Answer (b) is incorrect. Ratio estimation = $220.273.200. This calculation reverses the correct ratio estimation as: Ratio estimation = $200.1 and 1.000.000 $ 200.500.720.000 + $5.000 and $500.000/200 = $100 and $100 (5000) = $500.000 The estimate of the population dollar value using ratio estimation would be Answers A: $4.727. Answer (c) is incorrect. Answer (d) is the correct answer.000. Difference estimation = $220.000 Answer Explanations Answer (a) is incorrect. Difference estimation = $220. This is an incorrect calculation using the difference in units between the population and sample and then adding this incorrect amount to the book value as follows: [(220. file://C:\Program Files\Wiley\CIAExam\Print.200.000 – 200) = 480.000/200 = $1100 and $1100 (5000) = $5.700.200.000.

C: Attribute sampling. Attribute sampling would not lead to an estimate of the average length of time to process the claims. be used to estimate the probability that a claim is not processed within the company’s defined standard. Probability proportional to size (PPS) Increase in sample size Decrease in sample size a. d. B: b. however. It could. Discovery sampling is used to determine if an isolated event is occurring in the population. Answer (b) is incorrect. Question: V2C5-0120 What effect does an increase in the standard deviation have on the required sample size of mean-per-unit estimation and probability pro-portion to size sampling? Assume no change in any of the other characteristics of the population and no change in desired precision and confidence. file://C:\Program Files\Wiley\CIAExam\Print.Wiley CIA 2006 v1 Page 158 of 262 The auditor plans to take a sample of claims made during the year and perform the needed analysis.htm 1/20/2010 . The most appropriate sampling method would be Answers A: Mean-per-unit variables sampling. Mean-per-unit variables sampling is the most appropriate sampling procedure because it allows the auditor to calculate a mean of the processing time and build confidence levels around the mean. B: Probability proportion to size. It would be used here only if exceeding the policy for claims processing was expected to be extremely rare and extremely important. Answer (c) is incorrect. c. D: Discovery sampling. Probability proportion to size is not appropriate in this situation. The normal sampling distribution will allow the auditor to also estimate the percentage of claims that are not processed within the time limit contained in the company’s policy. Mean-per-unit Increase in sample size No change in sample size Increase in sample size No change in sample size Decrease in sample size No change in sample size Answers A: a. b. Answer (d) is incorrect. Answer Explanations Answer (a) is the correct answer.

D: Statistical difference estimation.800. Answer Explanations This answer is incorrect. the sample size. Refer to the correct answer explanation. the auditor has estimated the value of the total equipment account to be $2. Answer (b) is the correct answer. Dollar-unit sampling uses individual dollars instead of account balances as the sampling units. since the sampling units are homogeneous. A change in the standard deviation has no effect on the required sample size when probability proportional to size sampling is used. Answer Explanations Answer (a) is incorrect. Difference estimation uses differences between audit and book values to project population values. such as internal control errors. Attributes sampling estimates the presence of a qualitative characteristic. An increase in the standard deviation represents an increase in the variability of the population and therefore the sample size would increase when using mean-per-unit estimation. B: Mean-per-unit sampling. Answer (b) is incorrect. C: Attributes sampling.Wiley CIA 2006 v1 Page 159 of 262 C: c. Answer (c) is incorrect. Question: V2C5-0122 An audit of a wholesale company’s inventory was conducted to estimate its value. Question: V2C5-0121 By statistically projecting the population value based on the average value of sampled subsidiary accounts.000 items with a book value of $1 million. since the sampling units are homogeneous—the individual dollars. A change in the standard deviation has no effect on the required sample size when dollarunit sampling is used.000. Answer (d) is incorrect. Answer (d) is incorrect. This is an example of Answers A: Dollar-unit sampling. not decreasing.htm 1/20/2010 . Answer (c) is the correct answer. D: d. The audit plan was to estimate inventory value with a precision of plus or minus 2% at a 90% confidence level. An increase in the standard deviation represents an increase in the variability of the population and therefore requires increasing. The inventory contained 20. The sample results were file://C:\Program Files\Wiley\CIAExam\Print. Mean-per-unit sampling uses subsidiary account balances or records as a basis for projecting total account balances.

256. C: $1.000 = $32.020.060. A 90% confidence level implies that 10% of the time the true population total will be outside the computed range. This is within the plan goal of ± 2%. the estimated inventory value is between Answers A: $784. that the correct total is $800. The computation underlying this response transposes the correct definitions of “precision” and “confidence.000. This means that Answers A: There is a 4% chance that the actual correct total is less than $720.019.000 or more than $880. Answer (d) is incorrect.400 and $1. Answer Explanations Answer (a) is incorrect.Wiley CIA 2006 v1 Page 160 of 262 Sample Size: 300 Sample Mean per unit: $52 Sample Standard Deviation per unit: $10.400 and $1.000 and $1.200) or understated by more than 3. Based on the sample.000 or more than $832.600. Question: V2C5-0123 An auditor is using the mean-per-unit method of variables sampling to estimate the correct total value of a group of inventory items. Based on the data given: Precision of sample result = 1.800).600. Answer (c) is the correct answer.6% ($28.000.000 (52 ± 1.000.000 ± $32.000 to $832.216.060. C: The probability that the inventory is not significantly overstated is between 6% and 14%.000 ± 20.000 provides a range of $768. Answer Explanations Answer (a) is incorrect.000. $800.600.98%.600 or $1.000 and $1.03 Based on the sample results. B: $844.000.019.040.80 Sample Precision per unit: $1. the auditor estimates. Answer (b) is incorrect. D: $979. It is centered on book value mean. file://C:\Program Files\Wiley\CIAExam\Print. with a precision of plus or minus 4% and confidence of 90%. 20.400 to $1. D: The inventory is not likely to be overstated by more than 4.htm 1/20/2010 . Precision of plus or minus 4% gives the boundaries of the computed range: 4% × $800.03/52 = 1. It uses standard deviation instead of precision to compute confidence interval.4% ($35. It uses book plus or minus value mean and standard deviation rather than sample mean and precision to compute the confidence interval.” Answer (b) is the correct answer. B: There is a 10% chance that the actual correct total is less than $768.000.000.03) = $1.

0 file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. c. An increase in the standard deviation represents an increase in the variability of the population and therefore requires increasing. Answers A: a. Answer (d) is incorrect. This response improperly uses confidence to modify precision. b. an increase in the standard deviation increases the sample size since it is used to estimate unknown values.000 2. See explanations for answers (a) and (b). Answer (c) is the correct answer. such as inventory. In mean-per-unit estimation. The sample design and results were as follows: Contract costs charged Number of invoices in population Tolerable error Confidence level Reliability factor $10.htm 1/20/2010 . C: c. Mean-per-unit estimation Decrease in sample size No change in sample size Increase in sample size No change in sample size Dollar-unit sampling No change in sample size Decrease in sample size No change in sample size Increase in sample size a. This response improperly uses precision to modify confidence and fails to specify a dollar amount for the range within which the correct total is apt to lie. not decreasing.000. Answer (b) is incorrect. since the sampling units are homogeneous—the individual dollars. Answer Explanations Answer (a) is incorrect. B: b. d. A change in the standard deviation has no effect on the required sample size when dollarunit sampling is used. the sample size. In dollar-unit sampling. D: d. Question: V2C5-0124 What effect does an increase in the standard deviation have on the required sample size of mean-per-unit estimation and dollar-unit sampling? Assume no change in any of the other characteristics of the population and no change in desired precision and confidence. Question: V2C5-0125 An auditor applied dollar-unit sampling to select a sample of costs charged by a contractor. an increase in the standard deviation has no effect on the sample size since it yields a smaller sampling error.Wiley CIA 2006 v1 Page 161 of 262 Answer (c) is incorrect.000 1% 95% 3. and the phrase “not likely” is ambiguous.

Wiley CIA 2006 v1 Page 162 of 262 Sampling interval Sample size Expected error Detected error Which of the following is true about this sample? $33. Answer (c) is incorrect. C: The population has a high degree of variability in dollar amount. C: The sampling risk is acceptable if errors do not exceed $33.000 (1% of $10. Question: V2C5-0126 In which of the following situations would monetary-unit sampling be more effective and efficient than ratio estimation? Answers A: The population contains a large number of differences between the recorded amount and the actual amount. The acceptable level of sampling risk is 5%. B: The population is expected to contain few differences between the recorded amount and the actual amount. Monetary-unit sampling is especially efficient and effective when there are a file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is incorrect. the desired confidence level and precision were achieved.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. D: The population has a low degree of variability in dollar amount. Answer (d) is the correct answer.000. The chance is 5% that errors are more than 1% of $10. B: There is a 1% chance that the contract invoices contain significant errors.333 300 None None Answers A: The probability of selecting any particular invoice is 15% (300/2000).000.000. Answer (b) is the correct answer. No errors were detected in the sample. Therefore. The probability of selecting any particular invoice is proportional to the dollar amount of the invoice. which is 100% less 95%. Sampling risk is the complement of the confidence level. The ratio approach. D: There is a 95% chance that the costs are not overstated more than $100.333.000). Monetary-unit sampling is generally inefficient and less effective than variables sampling when there are a larger number of differences. tends to be especially efficient in such circumstances. however. Answer (b) is incorrect.

374 $35. d. Question: V2C5-0128 Monetary-unit sampling is most useful when the internal auditor Answers A: Is testing the accounts payable balance. The auditor started the selection process with a random start of 04719. Which of the following items would be the third sample item selected? a.719th dollar. This item would not be selected because it does not contain the 34. however.719.375 through 35. Answer (b) is the correct answer. $4719 + 15. file://C:\Program Files\Wiley\CIAExam\Print.000/50 = $15. This item would not be selected because it does not contain the 34. thus it contains 34. A high degree of variability in the dollar amount of the population generally has no effect on the effectiveness of these two methods relative to each other. The selection interval is $750.108 $12.985 $ 4. c. C: c. The cumulative amount is the first amount greater than $34.243 Answers A: a.Wiley CIA 2006 v1 Page 163 of 262 small number of differences.719.305 $ 456 Cumulative amount $31.000. Answer (d) is incorrect.e. A low degree of variability among the items in the population reduces the relative efficiency of both of these methods compared to alternative statistical sampling methods.000. The cumulative amount is less than $34. A high degree of variability in the dollar amount within the population makes both of these methods efficient relative to alternative statistical methods. Sample size is 50.000).htm 1/20/2010 .719.482. B: b. Answer (c) is incorrect. B: Cannot cumulatively arrange the population items. Invoice amount $ 7. which would be the threshold for the third selection (i. Ratio estimation. A low degree of variability does not affect the effectiveness of these methods. Question: V2C5-0127 An auditor is using dollar-unit sampling with a fixed interval to test an account with a balance of $750. requires a large number of differences to be effective. b.000 + $15. It contains dollars 31. D: d. Answer Explanations Answer (a) is incorrect.787 $48.482 $47.719th dollar. Answer (d) is incorrect.. Answer (c) is incorrect.

This is one of the requirements for using monetary-unit sampling. the expected sample size for monetary-unit sampling would be Answers A: Less than 70. the less its chance of being included in the sample.000th item inventory is $3. Answer Explanations Answer (a) is incorrect.000) = 150. which represents the correct sample size. (3) ($3.000 and a 95% confidence level (reliability factor = 3. Answer (c) is the correct answer.000. Additionally. one of the assumptions for using monetary-unit sampling is the error rate in the population should be small (e. Again. Errors in these accounts are more likely to result in material misstatements and are thus more critical to the internal auditor. Refer to the correct answer explanation. D: Greater than 160. The internal auditor should not use this procedure if material errors are expected.Wiley CIA 2006 v1 Page 164 of 262 C: Expects to find several material errors in the sample.g. C: From 140 to 160. Answer (d) is the correct answer. less than 10%). Refer to the correct answer explanation. Answer Explanations This answer is incorrect..htm 1/20/2010 . This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Question: V2C5-0130 An auditor is planning to use monetary-unit sampling for testing the dollar value of a large accounts receivable population. An auditor specifies a maximum tolerable error of $60. Question: V2C5-0129 The book value of a 3.000. Overstated items have a greater chance of being included in the sample. Answer (c) is incorrect. D: Is concerned with overstatements.000/$60.” Answer (b) is incorrect. The advantages of using monetary-unit sampling include all of the following except: file://C:\Program Files\Wiley\CIAExam\Print. Assuming that no individual item in the population exceeds the monetary value of the interval.000. samples under this procedure include more of the “higher-dollar” accounts because of the way the sample is conducted.0). Monetary-unit sampling is “generally not appropriate for testing understatement of liabilities since the more a balance is understated. B: From 70 to 140.

htm 1/20/2010 . Answer (b) is the correct answer. since the sampling units are homogenous. Monetary unit sampling would result in a larger sample size. and (2) the probability of any item being selected is proportional to its size. Answer (b) is incorrect. Monetary unit sampling can effectively handle a small number of understatement errors. Answer (c) is incorrect. Monetary unit sampling does not assume normally distributed populations. D: The auditor expects to find more errors in the larger dollar value items than in the smaller dollar value items. B: It does not require the normal distribution approximation required by variable sampling. Answer (d) is the correct answer. D: It results in a smaller sample size than that required when using classical sampling. Account numbers do not have to be assigned to use monetary unit sampling. Question: V2C5-0132 Many firms are beginning to use the statistical processing control techniques as part of their total quality manage- file://C:\Program Files\Wiley\CIAExam\Print. this is an advantage. as errors increase. Monetary unit sampling is being an efficient model. Monetary unit sampling uses dollar units as the homogenous units. Question: V2C5-0131 Which of the following factors would most likely preclude the auditor from using monetary unit sampling? Answers A: The auditor expects to find a limited number of understatements of individual account balances. Thus. Answer (d) is incorrect. but are listed only alphabetically. This would not preclude the use of monetary unit sampling because: (1) most large-dollarvalue items are selected and a census of that data is performed. monetary unit sampling works especially well in the situation described here. Answer (c) is incorrect. C: It can be applied to a group of accounts. Answer Explanations Answer (a) is incorrect. this is an advantage. and this is not an advantage. this is an advantage.Wiley CIA 2006 v1 Page 165 of 262 Answers A: It is an efficient model for establishing that a low error rate population is not materially misstated. Answer Explanations Answer (a) is incorrect. B: The auditor expects to find that a large percentage of items sampled have misstatements. Monetary unit sampling is not as effective in calculating an upper error estimate when a very large number of errors are expected. C: Individual accounts are not assigned a number.

Acceptance sampling is a standard statistical process control technique. because it samples each individual dollar. Answer (b) is the correct answer. The number of transactions is not the issue. B: Statistical inferences are to be made. D: The account contains a large number of transactions. Answer Explanations Answer (a) is incorrect. It is not used in statistical processing control. B: Dollar-unit sampling. the number of dollars is. Answer (d) is incorrect. Question: V2C5-0133 Dollar-unit sampling is not efficient if Answers A: Computerized account balances are being audited. C: Quality control charts. Dollar unit is a sampling technique that has been uniquely applied to auditing. Quality control charts are an integral part of total quality management approaches. automatically stratifies. Answer (b) is incorrect. D: Continuous monitoring and feedback. Answer (c) is incorrect. The issue of manual or computerized accounts would not have any impact on sampling efficiency. Dollar-unit sampling is an accepted method of estimating the dollar error of an account balance. Answer (c) is the correct answer. Answer (d) is incorrect. C: The audit objective is oriented to understatements. the least likely it is to be identified. Dollar unit sampling. Question: V2C5-0134 file://C:\Program Files\Wiley\CIAExam\Print. Continuous monitoring and frequent feedbacks are two of the important elements of statistical quality control. dollar-unit sampling is not appropriate because the larger the understatement. If the audit objective is to identify understatements.Wiley CIA 2006 v1 Page 166 of 262 ment approach.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. Which of the following would not constitute a part of statistical processing control techniques? Answers A: Acceptance sampling.

Based on these determinations. Dollar-unit sampling is often used for these purposes. Question: V2C5-0136 file://C:\Program Files\Wiley\CIAExam\Print. like answer (a). Answer (c) is the correct answer. Dollar-unit sampling performs relatively poorly with very large error rates. PPS) sampling.Wiley CIA 2006 v1 Page 167 of 262 An internal auditor is considering the use of dollar-unit (probability-proportional-to-size. D: The error rate in the population is believed to be quite large. The auditor determines that a $100. which are of significant concern for accounts payable. the sample of size 90 is needed. Dollar-unit sampling is the only quantitative method listed. C: Dollar-unit sampling. D: Attributes sampling. Answer (d) is incorrect. The sampling plan most likely used is Answers A: Stop and go. It requires a definition of a cluster. which are of significant concern for accounts payable. Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect because this technique is ineffective at detecting understatements. C: The auditor is interested in testing the accuracy and valuation of accounts receivable. Answer (b) is incorrect. This technique is likely to be especially beneficial if Answers A: The auditor is interested in testing the proper valuation of accounts payable.htm 1/20/2010 . cannot apply to attributes sampling.000 error is material and a 95% confidence level is appropriate. Question: V2C5-0135 A sampling plan is needed to test for overstatement of a $3 million accounts payable book balance. A quantitative materiality amount cannot apply to stop or go. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect because this technique is ineffective at detecting understatements. B: The auditor believes that the items to be tested are just as likely to be overstated as understated. B: Cluster sampling. a form of attributes sampling. This question involves a variable and. Answer (d) is incorrect.

. . It stratifies.480 Assuming the 4-digit random number 1461 is selected as a starting point. B: Ratio-estimation sampling. Answer (c) is the correct answer. the first two invoice numbers to be included in the sample are Answers A: 1790 and 1795. D: 1795 and 1805.Wiley CIA 2006 v1 Page 168 of 262 An internal auditor is preparing to sample accounts receivable for overstatement.975 . A partial list is Invoice No.450 8. 8. It does not automatically stratify. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print.400 1.000 and totaling $700. in that each dollar is a sampling unit and the larger the account balance. . 1. 1804 1805 Amount $ 75 1. C: 1795 and 1804. the greater the chance of selection. D: Mean-per-unit sampling. Answer Explanations Answer (a) is incorrect. It does not automatically stratify. 1781 1790 1795 . beginning with invoices number 1781.htm 1/20/2010 . . It does not automatically stratify.500 . .600 invoices.470 30 Cumulative amount $ 75 1. C: Dollar-unit sampling. B: 1790 and 1805. Total receivables consist of 1.000. Question: V2C5-0137 An auditor wishes to select a dollar-unit sample of 100 sales invoices that are included in receivables. . ranging in value from $25 to $3. Answer (b) is incorrect.475 2. A statistical sampling method that automatically provides stratification when using systematic selection is Answers A: Attributes sampling. Answer (d) is incorrect.

as explained in Answer (a) above. but would represent an efficient method of gathering preliminary information that would be useful in structuring the interviews. Answer (d) is incorrect.000 / sample size of 100).461.461 (the starting point) and $8. See explanation given for the answer (c).461. This would be a good method to learn more about the nature of processing and to solicit input from employees as to the potential cause of the situation being investigated. C: Interview selected clerical employees in the claims department to find out more about the procedures used and the rationale for the procedures. and invoice number 1805 includes cumulative amount $8. The impersonal method may have been applicable if the auditor wished open responses. It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. The sampling interval is $7. the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. Thus the first two dollars to be selected are cumulative amounts $1.461 + $7.000 interval. and obtain their observations about the nature and efficiency of processing. Invoice number 1795 is obtained by adding 1461 to the initial selection and does not reflect the $7. and obtain their observations about the nature and efficiency of processing. and. but not enough guidance is given here to lead to that kind of response.461. This is not as good of a procedure as answers (b) and (c).975. Invoice number 1795 includes cumulative amounts $1.461 ($1. This is the least effective communication and information-gathering technique of the four responses because it is impersonal and it alleges inefficiencies before there is evidence that the problems are due to inefficiencies in the processing. Invoice number 1790 includes cumulative amount $1. Answer Explanations Answer (a) is incorrect.000). Answer (c) is incorrect. and (2) many claimants are not being paid on a timely basis.Wiley CIA 2006 v1 Page 169 of 262 Answer (a) is incorrect. Question: V2C5-0138 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. invoice number 1804 does not include the second cumulative amount of $8. D: Distribute a questionnaire to gain a greater understanding of the responsibilities for claims processing and the control procedures utilized. This would supplement the supervisor’s perceptions with those from individuals intimately involved with the processing of transactions. Answer (d) is incorrect. Answer (c) is incorrect. This would be an effective communication technique. Answer (b) is the correct answer. In preparing for an audit of the area. and thus does not include the starting point of $1.000 (population total of $700.476 through $2. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Which of the following procedures would be the least effective in gathering information about the nature of the processing and potential problems? Answers A: Interview supervisors in the claims department to find out more about the procedures used and the rationale for the procedures. Answer (b) is the correct answer. B: Send an electronic mail message to all clerical personnel detailing the alleged problems and request them to respond.461.

not necessarily the nature of the questionnaires. This is not an inappropriate use of a questionnaire. B: The use of a questionnaire in a situation where a structured interview should have been used. The auditor should Answers A: Request that the conversation be videotaped so that it will be available as evidence should fraud be found. D: All of the above. Unfortunately. Answer (c) is incorrect.Wiley CIA 2006 v1 Page 170 of 262 Question: V2C5-0139 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. A clerical employee approaches the auditor and indicates that she has important information about a collusion within her department to process fraudulent claims and split the proceeds among the members of a small group. It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. C: Questionnaires do not allow for opportunities to document other information. Consequently. Answer (d) is incorrect. the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. and (2) many claimants are not being paid on a timely basis. the auditor did not document the potential problems for further audit investigation. file://C:\Program Files\Wiley\CIAExam\Print. and (2) many claimants are not being paid on a timely basis. The problem was the auditor did not listen well enough to expand the information-gathering process. Questionnaires may be limited. but wishes to remain anonymous. Question: V2C5-0140 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. Answer (b) is incorrect. the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. Answers (b) and (c) are not appropriate conclusions. The auditor used a questionnaire during interviews to gather information about the nature of claims processing. The primary deficiency with the above process is that Answers A: The auditor failed to consider the importance of the information offered. the questionnaire did not cover a number of pieces of information offered by the person being interviewed. Questionnaires are limited. The major problem is that the auditor was too oriented to the questionnaire and failed to appropriately consider the other information that was offered. but the problem is with its application. She is willing to discuss the matter with the auditor.htm 1/20/2010 . In preparing for an audit of the area. but the auditor needs to be flexible enough to gather other information when it is offered. Answer Explanations Answer (a) is the correct answer. In preparing for an audit of the area.

C: Document the information and use it to plan the audit. Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect. B: Not document the nonverbal communication because it is subjective and is not corroborated. Answer (d) is the correct answer. The auditor conducted an interview with the supervisor. If the nonverbal communication affects the auditor’s perception of the information gathered. Answer Explanations Answer (a) is the correct answer. C: Conclude that the nonverbal communication is persuasive and that sufficient evidence exists to charge fraud against the group. Auditors frequently encounter and act on nonverbal communication. The auditor should determine if there are available sources to corroborate the assertion made by the employee before changing the nature of the investigation. Answer (b) is incorrect. The auditor will focus on the possibility of fraud. D: Obtain the information and develop procedures that could corroborate the information. Change the nature of the audit from one of economy and efficiency to one of fraud. In preparing for an audit of the area. but should not completely change the direction of the investigation without corroborating evidence. The auditor noted that the supervisor became uncomfortable and nervous and changed the subject whenever the auditor raised questions about certain types of claims. The auditor should gather enough information to determine if there is other evidence available that might corroborate the assertion and provide a basis for further investigation. The supervisor’s answers were consistent with company policies and procedures. The information is strictly “hearsay” evidence at this point in time. and (2) many claimants are not being paid on a timely basis. the auditor should Answers A: Document the supervisor's answers. Question: V2C5-0141 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. because they are self-serving. D: Ignore the specific answers given in the interview.htm 1/20/2010 . the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. Answer (b) is incorrect. The auditor should not require that the interview be videotaped at this time.Wiley CIA 2006 v1 Page 171 of 262 B: Reply that the matter must be reported to appropriate organizational officials for subsequent followup. The employee has requested anonymity. No formal investigation has yet begun. It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. When documenting the interview. noting the nature of the nonverbal communications. it should be documented so that it can be considered as the audit proceeds. The auditor should attempt to corroborate the oral information before changing the nature of the audit or reporting it to company officials. If the nonverbal communication affects the auditor’s perception of the information file://C:\Program Files\Wiley\CIAExam\Print.

The answers given should be documented. The auditor is not in position to detail the allegations against each specific employee. such as the direct interview. Answer (c) is incorrect. It would not be proper to detail allegations to each individual employee at this point. if it exists. Nonverbal communication is not sufficient to reach a conclusion that fraud has taken place. The auditor has identified the parties most likely to have been involved in the fraud. A paper-based document. The auditor sends each potential participant a personal electronic mail message indicating the nature of the investigation and urges the individual to come forward and explain the nature of the fraud. as written.Wiley CIA 2006 v1 Page 172 of 262 gathered. the auditor is directed to go ahead with a fraud investigation. C: The nature of the communication. Answer (d) is incorrect. and (2) many claimants are not being paid on a timely basis. Question: V2C5-0142 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. such as a letter. B: The medium. Question: V2C5-0143 file://C:\Program Files\Wiley\CIAExam\Print. In preparing for an audit of the area. should have been used to elicit the response from the auditees.htm 1/20/2010 . The nature of the communication is highly sensitive and personal. The auditor wants to gain more information about the nature of the fraud. it should be documented so that it can be considered as the audit proceeds. along with the allegations made by the employee. the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. The major problem is with the impersonal form of the communication. rather than seeking an open-ended response. A more personal form of communication. Answer (c) is incorrect. would result in incomplete documentation of the auditee’s response. Questionnaires are used to gain an understanding about the nature of processing. However. The auditor should have sent a questionnaire to each employee. It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. D: The nature of the message. Answer (b) is the correct answer. especially in a situation like this where nonverbal actions may indicate untruthfulness. Answer (d) is incorrect. A major problem with this particular communication is Answers A: The medium. The message. not whether it was delivered electronically or on paper. Personal interviews should have been used instead of electronic mail. There is a need for personal communication. The auditor states that this is strictly an audit investigation and legal authorities are not involved. it may be sufficient to perform a fraud investigation. The auditor has already obtained most of this information and is interested in more specific facts as to how a fraud may have taken place and who was involved in the fraud if one had taken place. The auditor should have detailed the specific allegations against each employee and allowed them the opportunity to respond. After informing management. is too general. Answer Explanations Answer (a) is incorrect. should have been used instead of electronic mail message. but the process of only documenting the verbal responses. if indeed one is taking place.

In preparing for an audit of the area. The amounts represent less than 0. This is a fraud audit. Emphasize that the supervisor's cooperation will be documented in the workpapers. Answer (c) is incorrect. D: Describe the purpose of the interview and the nature of the evidence sought. C: Respond in a like manner and indicate the evidence the auditor has already obtained. Answer (d) is the correct answer. B: Indicate this is not a fraud audit and that the purpose is to identify the nature of incorrectly processed transactions and the reason for the problems encountered. The auditor should not react adversely to the hostile actions by the supervisor.htm 1/20/2010 . It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. After pursuing the investigation.Wiley CIA 2006 v1 Page 173 of 262 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. It has two major concerns: (1) some claims are being paid that should not be paid or are being paid in amounts in excess of the policy. will order the others file://C:\Program Files\Wiley\CIAExam\Print. the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems.000 out of $85 million in claims processed. Otherwise. Encourage the supervisor to continue the interview. The auditor should Answers A: Indicate that if the supervisor will not cooperate.1 percent of the claims processed. not a fraud interrogation. Answer Explanations Answer (a) is incorrect. The auditor decides to question the supervisor. Question: V2C5-0144 Management of a property and casualty insurance company is concerned about the efficiency and effectiveness of the claims processing activities. The auditor should not respond with hostility or threaten the supervisor to get a confession. but should not act as a fraud interrogator. and (2) many claimants are not being paid on a timely basis. The supervisor makes an offer to: (1) name all employees involved. and (3) implement the necessary controls if the auditor would agree to describe the situation as a control procedure breakdown and not report it to management as a fraud. the supervisor will not cooperate in the investigation. two clerical employees corroborate the allegations and indicate that it was a plan developed by the supervisor and that they were put under pressure to go along with the scheme. and (2) many claimants are not being paid on a timely basis. Put pressure on the supervisor to confess to the fraud and to name others involved in the scheme. the internal auditor decides to perform a preliminary survey to gather more information about the nature of processing and potential problems. who becomes very hostile in responding to the auditor’s questions. It is up to them to decide whether to turn the investigation over to legal authorities. The auditor should be prepared to turn the investigation over to proper authorities if the supervisor will not cooperate. a clearly immaterial amount in the supervisor’s opinion. Answer (b) is incorrect. The auditor’s responsibility is to refer the matter to management and the audit committee. In preparing for an audit of the area. This would be incorrect communication because the auditor has explicitly embarked on a fraud audit. (2) describe the circumvention of controls that allowed the fraud to take place. The supervisor has a change of heart and indicates the amount of fraud was less than $85. the auditor will turn the matter over to legal authorities for further investigation. but should carefully explain the situation and provide an opportunity for the supervisor to calm down and continue the interview.

III. and others use a response scale). but response II is also an appropriate communication. When the survey was last conducted. Which of the following would represent an appropriate response to the supervisor? I. This system consists of the division’s customer service office conducting an annual mail survey. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. but that more details on the nature of the fraud would be needed and the supervisor would have to sign an agreement as to the compromise reached. This is a correct communication. D: II and III only. The survey is three pages long and its 30 questions use a mixture of response modes (e.htm 1/20/2010 . Only one mailing is sent. This is a correct communication. but response III is also an appropriate communication. Nonresponse bias is often a concern in conducting mail surveys. The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. Answer (c) is incorrect. This would be an inappropriate response for the auditor. the matter must be first reported as a fraud and the negotiations would have to take place with management. The auditor is already well over time budget and is intrigued by the opportunity to negotiate an end to the investigation and improve the control procedures. some multiple choice. C: III only. file://C:\Program Files\Wiley\CIAExam\Print. B: II only. Indicate that the auditor has no authority to negotiate. some questions are open-ended. The main reason that nonresponse bias can cause difficulties in a sample such as the one taken by the customer service office is that Answers A: The sample means and standard errors are harder to compute.Wiley CIA 2006 v1 Page 174 of 262 involved not to cooperate. B: Those who did not respond may be systematically different from those who did. If the supervisor wants to negotiate. Answer (d) is the correct answer. 45 of the questionnaires were not returned. If the customer does not return the questionnaire. C: The questionnaire is too short. the negotiation should be performed with management and the assigned fraud investigation team. Indicate that if the supervisor wishes to negotiate.g. Answers A: I only. Answer (b) is incorrect. and will engage legal counsel. Indicate the situation is open to negotiation. no follow-up is conducted.. Question: V2C5-0145 An audit team has been assigned to review “the customer satisfaction measurement system” that the industrial products division implemented two years ago. II. Answer Explanations Answer (a) is incorrect.

Longer questionnaires actually increase nonresponse bias. some multiple choice. Answer Explanations Answer (a) is incorrect. Answer (b) is the correct answer.. This is a valid scaling answers for multiple-answer questions. and others use a response scale). Which of the following is a common error made in designing multiple-choice questions in a survey questionnaire? Answers A: Unipolar rather than bipolar labels are used for the response categories. some multiple choice. Answer (d) is incorrect. This system consists of the division’s customer service office conducting an annual mail survey. so. The survey is three pages long and its 30 questions use a mixture of response modes (e. Overlapping categories frequently cause respondent difficulty. Answer Explanations Answer (a) is incorrect. This system consists of the division’s customer service office conducting an annual mail survey. 45 of the questionnaires were not returned. Nonresponse decreases sample size. confidence intervals would be wider rather than narrower. If the customer does not return the questionnaire. Formulas are equally easy to compute with bad as with good data. B: The alternative response categories for the questions are not mutually exclusive. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months.htm 1/20/2010 .g. Answer (d) is incorrect. C: Likert scaling is used instead of semantic differential scaling. if anything. no follow-up is conducted. This is a valid scaling answers for multiple-answer questions. One of the steps of the audit program is to review the quality of the questionnaire’s design. This is a desirable feature of a question. This can result because people may choose not to respond for reasons related to the purpose of the questionnaire. Only one mailing is sent. Answer (c) is incorrect. Question: V2C5-0146 An audit team has been assigned to review “the customer satisfaction measurement system” that the industrial products division implemented two years ago. some questions are open-ended.g. Answer (a) is incorrect.. When the survey was last conducted. Question: V2C5-0147 An audit team has been assigned to review “the customer satisfaction measurement system” that the industrial products division implemented two years ago.Wiley CIA 2006 v1 Page 175 of 262 D: Confidence intervals are narrower. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. some questions are open-ended. D: The question itself uses terms that are very familiar to the respondent. The survey is three pages long and its 30 questions use a mixture of response modes (e. and others use a response file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is the correct answer.

B: Reduce the effects of pattern response tendencies. D: They are less expensive since mailing costs are avoided. some multiple choice.g. no follow-up is conducted. some questions are open-ended. no follow-up is conducted. If the customer does not return the questionnaire. complex sequences. disagree. Which of the following is not an advantage of face-to-face interviews over mail surveys? Answers A: The response rate is typically higher. The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. The survey is three pages long and its 30 questions use a mixture of response modes (e. Answer (d) is the correct answer.g. 45 of the questionnaires were not returned. 45 of the questionnaires were not returned.. One of the principal advantages of mail surveys is their cost efficiency because mailing costs are less than interview labor costs. Some designs will have different groups of respondents answer alternative versions of the questionnaire that present the questions in different orders and reverse the orientation of the endpoints of the scale (e. If the customer does not return the questionnaire. Answer Explanations Answer (a) is incorrect. Question: V2C5-0148 An audit team has been assigned to review “the customer satisfaction measurement system” that the industrial products division implemented two years ago. Mail surveys often have notoriously low response rates. file://C:\Program Files\Wiley\CIAExam\Print. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. Audio-visual aids.g. B: Interviewers can increase a respondent's comprehension of questions. The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15. strongly disagree). agree. neither.. and other varieties of questions are made possible by the interactive nature of interviews. The purpose of such questionnaire variations is to Answers A: Eliminate intentional misrepresentations.Wiley CIA 2006 v1 Page 176 of 262 scale). The interviewer’s flexibility to interpret responses and rephrase questions increases response quality. Many questionnaires are made up of a series of different questions that use the same response categories (e. Answer (b) is incorrect. strongly agree. C: Test whether respondents are reading the questionnaire. Answer (c) is incorrect. Only one mailing is sent. agree on the right and disagree on the left or vice versa). C: Survey designers can use a wider variety of types of questions.. This system consists of the division’s customer service office conducting an annual mail survey. Only one mailing is sent.htm 1/20/2010 . When the survey was last conducted. When the survey was last conducted. and others use a response scale).

This system consists of the division’s customer service office conducting an annual mail survey. they are less likely to do what they think the researcher wants. There are many known effects of the sequence and format of questions. Since people are going about their normal business. some multiple choice. If the customer does not return the questionnaire. some questions are open-ended. and others use a response scale). Only one mailing is sent.htm 1/20/2010 . Refer to the correct answer explanation. Answer Explanations This answer is incorrect. C: Unexpected or unusual events are more likely to be observed. D: People are less likely to alter their behavior because they are being studied Answer Explanations Answer (a) is incorrect. and the potentially biased wording of some of the questions. Answer (d) is incorrect. This answer is incorrect. Question: V2C5-0149 An audit team has been assigned to review “the customer satisfaction measurement system” that the industrial products division implemented two years ago. the poor quality of the questionnaire design. Answer (b) is the correct answer. 45 of the questionnaires were not returned. Refer to the correct answer explanation. censor their comments. Lack of experimental control and measurement precision is the chief weaknesses of unobtrusive measures.. The customer service office mails the survey in September and tabulates the results for questionnaires returned by October 15.Wiley CIA 2006 v1 Page 177 of 262 D: Make it possible to get information about more than one population parameter using the same questions. and so on. One method for dealing with these is to use questionnaire variations that cause these biases to average out across the sample. A survey is sent to 100 purchasing departments randomly selected from all customers who made purchases in the prior 12 months. Answer (b) is the correct answer. The survey is three pages long and its 30 questions use a mixture of response modes (e.g. When the survey was last conducted. B: It is easier to make precise measurements of the variables under study. file://C:\Program Files\Wiley\CIAExam\Print. Several of the audit team members are concerned about the low response rate. They suggest that the customer service office might want to supplement the survey with some unobtrusive data collection. no follow-up is conducted. Unobtrusive measures are useful for exploratory investigations for this reason. such as observing customer interactions in the office or collecting audiotapes of phone conversations with customers. Which of the following is not a potential advantage of unobtrusive data collection compared to surveys or interviews? Answers A: Interactions with customers can be observed as they occur in their natural setting. Observing the phenomenon in its natural setting is a principal advantage of unobtrusive measures. Answer (c) is incorrect. This answer is incorrect. Refer to the correct answer explanation.

B: Ratio analysis. It implies a careful. II. Probably not a problem. a mental comparison with standards. it is not unobtrusive. not passing over. Which of the following would least likely be used in the preparation of a preliminary survey questionnaire? Answers A: An analysis of quality control documents. It is unrelated to the subject. Answer (c) is incorrect. Probably a problem.” Use of rating scales requires the participant to actively participate. used primarily to analyze the changes in account balances over time. an evaluative sighting. D: Rating scales. Answer (d) is the correct answer. It means a visual examination with a purpose. noticing. Ratio analysis is a subset of trend analysis used in analytical review. C: Unobtrusive measures or observations. Trend analysis is a specialized form of analytical review procedure. The questionnaire illustrates the use of Answers A: Trend analysis. Question: V2C5-0151 An audit of the quality control department is being planned. “Observing means seeing. B: The permanent audit file.Wiley CIA 2006 v1 Page 178 of 262 Question: V2C5-0150 An audit team developed a preliminary questionnaire with the following response choices I.htm 1/20/2010 . D: Management's charter for the quality control department. III. Answer (b) is incorrect. The auditors are using a numerical rating for the organization audited (source: Sawyer’s Internal Auditing IIA). C: The prior audit report. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. Possibly a problem. knowledgeable look at people and things. Answer Explanations Answer (a) is incorrect.

Even though it is very useful for audits of distant locations. Answer (b) is incorrect. B: It involves the auditee's supervisory personnel in the audit. an audit director sends a memorandum and questionnaire to the supervisors of the department to be audited. Knowing what the department is supposed to do will help the auditor develop knowledgeable questions. Answer (c) is incorrect. Answer (b) is the correct answer. Such analysis is a part of fieldwork. B: Internal control questionnaires cannot be relied on. Answer Explanations Answer (a) is incorrect.Wiley CIA 2006 v1 Page 179 of 262 Answer (a) is the correct answer. What is the most likely result of that procedure? Answers A: It creates apprehension about the audit. Greater knowledge of the upcoming audit is more likely to remove some of the apprehension about it. It will normally be more economical since the legwork will be done by those most competent to do it rapidly. Question: V2C5-0152 In advance of a preliminary survey. The auditor’s supervisor should be critical of the above procedure based on the fact that Answers A: Audit information must be corroborated in some way. The report will identify prior findings and recommendations that should be followed up on this year. C: It is an uneconomical approach to obtaining information. Question: V2C5-0153 Management answered “yes” to every question when filling out an internal control questionnaire and stated that all listed requirements and control activities were part of its procedures. Answer (d) is incorrect. Answer (d) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. This helps involve the supervisors of the auditee’s department and encourages a more collegial approach to the audit. such as questions used in prior audits and problems detected in prior years. it can also be advantageous in other circumstances.htm 1/20/2010 . Answer (c) is incorrect. This file probably contains information. An internal auditor retrieved this questionnaire from management during the preliminary survey visit but did not review the responses with management while on site. which comes after the preliminary survey. D: It is only useful for audits of distant locations. that will help in the development of appropriate questions to ask this year.

personnel. Self-audit questionnaires provide indirect evidence. Answer Explanations Answer (a) is the correct answer. The auditor should have interviewed management for additional information because the interview technique Answers A: Provides the opportunity to insert questions to probe promising areas. Interviews do not produce objective evidence unless the information corroborates facts already in evidence. Interviews tend to be more costly in relation to the amount of information that must be included because of the preparation and discussion time involved. An ICQ does not need to address accounting information to ensure integrity. Answer Explanations Answer (a) is the correct answer. which must be confirmed. Answer (c) is incorrect. Answer (d) is incorrect. B: Is the most efficient way to upgrade the information to the level of objective evidence. a skilled interviewer can react to potential problems and expand questioning of more relevant subjects. D: Is the only audit procedure that does not require confirmation and walk-through of the information that is obtained. The auditor’s supervisor is writing the performance assessment for the auditor on this preliminary survey assignment. C: Is the least costly audit technique when a large amount of information is involved. and functional units is one of the strengths of these audit tools. Answer (b) is incorrect. Answer (d) is incorrect. Critical information obtained during an interview must be followed up and confirmed. Which of the following represents criteria that should not be considered in designing the questionnaire? file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0154 Management answered “yes” to every question when filling out an internal control questionnaire and stated that all listed requirements and control activities were part of its procedures. ICQs can be designed so that the auditee can answer the questions without the auditor being present. During face-to-face contact. Answer (c) is incorrect. Question: V2C5-0155 An auditor is considering developing a questionnaire to research employee attitude toward control procedures. Answer (b) is incorrect. D: The questionnaire was not designed to address accounting operations and controls.htm 1/20/2010 . The ability to adapt general-purpose internal control questionnaires (ICQs) to different organizational units.Wiley CIA 2006 v1 Page 180 of 262 C: The auditors were not present while the questionnaire was being filled out. An internal auditor retrieved this questionnaire from management during the preliminary survey visit but did not review the responses with management while on site. The supervisor cites the need to review management’s responses on the control questionnaire.

Answer Explanations Answer (a) is incorrect. When questionnaires are too long. Answer (d) is the correct answer. C: Requires that the auditor be in attendance to properly administer it. Answer (b) is incorrect. Likert scales. They are tiring for auditees to complete due to their length. “Yes” and “no” answers may be very general and not specific as to degree. Validity and reliability of this question is extremely important. people tend not to fill them out. Validity and reliability of this question is extremely important. Answer (b) is incorrect. and so on. C: The questionnaire should be short to increase the response rate.Wiley CIA 2006 v1 Page 181 of 262 Answers A: Questions must be worded to ensure a valid interpretation by the respondents. Question: V2C5-0157 Which of the following best describes the major disadvantage of using a questionnaire rather than a flowchart to evaluate internal controls? Answers file://C:\Program Files\Wiley\CIAExam\Print. B: Questions must be reliably worded so that they measure what was intended to be measured. fill-in-the-blank. D: Questions should be worded such that a "no" answer indicates a problem. The structured questionnaire asks for specific “yes” or “no” answers plus brief explanations. B: Takes less of the auditee's time to complete than other control evaluation devices. Questions can be multiple answer. Answer (c) is incorrect. Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect. Answer (d) is the correct answer. The evidence provided is indirect and therefore could require corroboration in some way. essay. D: Provides indirect audit evidence that might need corroboration. Question: V2C5-0156 Which of the following statements describes an internal control questionnaire? It Answers A: Provides detailed evidence regarding the substance of the control system.htm 1/20/2010 .

Answer (c) is incorrect because it is an advantage of a flowchart.Wiley CIA 2006 v1 Page 182 of 262 A: Questionnaires usually take more time to complete and are more cumbersome. D: Auditors may complete questionnaires without really understanding overall operations of internal control systems. B: It reduces the risk of overlooking important aspects of the system. This is an advantage of questionnaires. the divisional vice president agrees that all significant recommendations made by the audit staff refer to key controls and related operating activities that are correctly described for local management within the volume of standard operating procedures for the division. Answer (d) is incorrect because positive responses must also be tested to determine compliance. Answer (d) is the correct answer. The vice president proposes to transcribe key control activities from the division’s extensive written procedures to a self-audit standard operating procedure (SOP) file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . After some discussion about the past year’s audit activity at twelve plants in the division. D: The negative responses indicate the only areas needing further audit work. B: Responses do not efficiently flag potential internal control weaknesses. Answer Explanations Answer (a) is incorrect. Developing or reviewing flowcharts is an extremely effective way to gain an overall understanding of the system and pinpoint control points and the lack of controls. It can be prepared in advance and functions very much like a checklist. Answer Explanations Answer (a) is incorrect because it is an advantage of a flowchart. Question: V2C5-0159 An audit manager is conducting the annual meeting with manufacturing division management to discuss proposed audit plans and activities for the next year. Answer (b) is the correct answer. Such are readily obtained or developed. The opposite is true. This is the major disadvantage of using questionnaires. Question: V2C5-0158 Which of the following is the primary advantage of using an internal control questionnaire? Answers A: It provides a clear picture of the interrelationships that exist between the various controls. Answer (c) is incorrect. Answer (b) is incorrect. C: It forces an auditor to acquire a full understanding of the system. C: It is difficult for auditors to develop or obtain questionnaires that are appropriate for most internal control systems.

information obtained via questionnaires must be verified to be considered objective. B: Inappropriately implying equal weight to each item on the checklist. file://C:\Program Files\Wiley\CIAExam\Print. B: Adding this control should eliminate significant audit recommendations in the coming year.htm 1/20/2010 . C: Decreasing the uniformity of data acquisition. and there is no evidence that such a control would be effective. Control of SOP questionnaires by the internal auditing department would not affect the level of evidence obtained in this manner. but the auditors need to verify that controls are working as documented in the SOP. A specific advantage of a SOP questionnaire is that it may be used by local management to periodically ensure that employee practices remain current with relevant.Wiley CIA 2006 v1 Page 183 of 262 questionnaire. What significance should the audit manager attach to such SOP questionnaires in relation to the proposed audit schedule for the next year? Answers A: The SOP questionnaires should improve control adequacy. C: Audit activity can be reduced if the vice president agrees to require internal auditing department approval on all divisional standard operating procedures. as described. and up-to-date standard operating procedures. there is no basis in fact for reducing the proposed scope. adding internal auditing department approval does not impact the effectiveness of these controls. are providing directive controls. D: Being incapable of translating the experience or sound reasoning intended to be captured by each item on the checklist. Answer Explanations Answer (a) is the correct answer. D: SOP questionnaires must be mailed and controlled by the internal auditing department to be considered in relation to the proposed audit schedule. Question: V2C5-0160 Checklists used to assess audit risk have been criticized for all of the following reasons except: Answers A: Providing a false sense of security that all relevant factors are addressed. Answer (b) is incorrect. so the scope of audit activities can be reduced accordingly. These SOP questionnaires have no impact on inherent risk. this improves the overall level of control and the control environment when followup is included to ensure performance. Answer Explanations Answer (a) is incorrect because this answer is a criticism of checklists. Answer (d) is incorrect. which appear to be adequate. Standard operating procedures. Answer (c) is incorrect. valid.

After the first few interviews. This interview is your job. not someone else’s. the major benefit of a recording. Answer (d) is the correct answer. this option would not work because of confidentiality and negative reaction from your respondent. Extensive note taking may interfere with your communication with your respondent. D: Organize notes around topics on the interview plan and note responses in the appropriate area. then type everything said into a computer for documentation.Wiley CIA 2006 v1 Page 184 of 262 Answer (b) is incorrect because this answer is a criticism of checklists. then delete unimportant points after the meeting. For most organizational purposes. the auditor will not be able to remember everything that was said in the interview. B: Tape-record the interview to capture everything that everyone says. since you cannot maintain eye contact or notice nonverbal as well when you are occupied with your own notes. Question: V2C5-0161 When an internal auditor is interviewing to gain information. Answer (d) is incorrect because this answer is a criticism of checklists. the auditor plans to interview five employees from each of five different departments (25 employees in all). Question: V2C5-0162 As part of the test of the effectiveness of a disaster recovery plan. but generally will not elicit positive feelings from your respondent.htm 1/20/2010 . reviewing the notes after the meeting to make additions. Checklists increase the uniformity of data acquisition. then highlight important points after the meeting. Answer (c) is incorrect. Organizing note taking ahead of time helps you have time during the interview to listen and evaluate the responses and the reactions of your respondent. C: Have the rest of the employees write down their responses. Answer (c) is the correct answer. Tape recording might be used for controversial material. allowing complete concentration on the interview. C: Hire a professional secretary to take notes. The most effective way to record interview information for later use is to Answers A: Write notes quickly. file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is incorrect. you will not need exact quotes. Answer (b) is incorrect. what would be the best way for the auditor to remain attentive during the remaining interviews? Answers A: Make up completely different questions to stay interested. Aside from cost. as it is said. B: Ask the questions in a slightly different format and in a different sequence. trying to write down everything in detail.

Unless fraud is suspected or the audit deals with cash or negotiable securities. it is more effective to defuse the anxiety of anticipating the audit by providing information ahead of time explaining the audit process and how to prepare for it. but the auditor should keep it from being an important continuing part of the audit by using good interpersonal skills to build a positive participative relationship with auditees. Answer (d) is incorrect. Answer (c) is incorrect. C: Ask surprise questions about daily procedures. The most appropriate course of action for the auditor to take related to these problems is to Answers file://C:\Program Files\Wiley\CIAExam\Print. To date the causes have not been fully identified for all types of errors noted. Individuals feel more important when they are asked people questions rather than control questions. Answer (d) is incorrect. Answer (c) is incorrect. Auditee fear may be a natural part of anticipating the audit. particularly when their responses may be critical of management. it is more effective to Answers A: Ask for specific answers that can be quantified. The results of the auditor’s test depend on comparing responses to the same questions. This will improve the important interpersonal part of building the audit relationship. Employees are less likely to be forthcoming in a group. Changing the wording of the questions and the sequence in which they are asked may eliminate some of the tedium associated with a series of interviews and may also allow the auditor to refine the technique during the process. Written responses to questions are often very different from verbal responses.Wiley CIA 2006 v1 Page 185 of 262 D: Interview the remaining employees in groups of four or five. D: Take advantage of the fact that fear is an important part of the audit. Question: V2C5-0164 The current audit of disbursement activities shows a significant number of errors made during the accounts payable vouchering process that have resulted in lost discounts and an extraordinary number of adjustments and credit memos. Later fieldwork will cover information that can be quantified. Answer (b) is the correct answer. Answer (b) is the correct answer.htm 1/20/2010 . B: Ask people about their jobs. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect. Building rapport is more important in the early interviews. and the interviewer does not have the option of immediately pursuing a particular answer. Question: V2C5-0163 When conducting interviews during the early stages of an internal audit.

The auditor is looking to gather feedback. B: Expand sample sizes for attributes already tested in transactions entered by accounts payable and purchasing. analyzing. this information will not provide additional feedback. Answer (c) is the correct answer. Answer (b) is incorrect. but it will not provide feedback. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 186 of 262 A: Interview accounts payable clerks and those involved in processing these transactions. Interviews do not provide a systematic format. Answer (c) is incorrect. The cash disbursements testing will show results of transaction processing after the vouchering process has been performed and corrections have been posted to the system. C: Concentrate on audit program requirements for cash disbursements testing to discover any related information from those tests. D: Are best suited to reaching audit conclusions. Expanding sample sizes will generate more factual information about error rates in these attributes. Answer (d) is incorrect. questioning the personnel and others affected within the organization represents the remaining method. D: Describe the transaction-related problems identified to date in a special report to management without expressing a cause or an auditor's conclusion about the situation. Answer Explanations Answer (a) is the correct answer. C: Should be corroborated by gathering objective data. Question: V2C5-0166 file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0165 Interviewing techniques are used frequently by internal auditors. When considering the potential use of interviewing techniques to gather audit evidence.htm 1/20/2010 . The three methods of gathering feedback include observing. auditors should be aware those interviews Answers A: Are more objective than questionnaires in gathering data. Evidence from interviews is not conclusive. Interviews are not more objective than questionnaires. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. and questioning. Evidence obtained by interviews should be corroborated. B: Provide a systematic format to ensure audit coverage.

Answer (c) is incorrect. Answer (b) is incorrect. This comparison would help highlight the effectiveness of the promotion in increasing sales. D: The operating expenses vary in relation to other operating expenses. The sales department has been giving away expensive items in conjunction with new product sales to stimulate demand. This is the key analysis. nonrecurring. but management believes the cost may be too high. as it would show the extent of additional revenue versus cost. Answer Explanations Answer (a) is the correct answer. B: The company has relatively stable operations that have not changed much over the past year. a more directed audit approach would be appropriate. The promotion seems successful. Question: V2C5-0167 An internal auditor plans to use an analytical review to verify the correctness of various operating expenses in a division. Answer (b) is the correct answer. B: A comparison of the unit cost of the products sold before and during the promotion period.htm 1/20/2010 . Answer (c) is incorrect. If the auditor already suspects fraud. unusual. Answer Explanations Answer (a) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. or nonrecurring transactions during the year. Analytical review would be useful in identifying whether large. Relatively stable operating data are a good scenario for using analytical review. There is no indication that cost of the products sold has changed. or unusual transactions occurred. This would be helpful because the sales department may have useful information on new customers and repeat purchases. D: A review of the sales department's reasons for believing that the promotion has been successful. C: The auditor would like to identify large. but not in relation to revenue. C: An analysis of marginal revenue and marginal cost for the promotion period. The use of an analytical review as a verification technique would not be a preferred approach if Answers A: The auditor notes strong indicators of a specific fraud involving this account.Wiley CIA 2006 v1 Page 187 of 262 Management has requested an audit of promotional expenses. The challenge is to address the effectiveness of the promotion. compared to the period before the promotion. Answer (d) is incorrect. Which of the following audit procedures would be the least useful to determine the effectiveness of the promotion? Answers A: A comparison of product sales during the promotion period with sales during a similar nonpromotion period.

the internal auditor should consider the following factor(s) in determining the extent to which analytical procedures should be used: Answers A: Adequacy of the system of internal control. The precision of the prediction of the internal audit results would be a factor in determining the extent of analytical audit procedures to be used. Answer (c) is incorrect. Which one of the following would be the best example of a monitoring control? Answers A: The restaurant manager reconciles the cash received with the food orders recorded on the computer. All food orders for each restaurant are required to be input into an electronic device that records all 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 ID number. Answer (d) is the correct answer. All differences are investigated immediately by the restaurant. Question: V2C5-0168 During an audit. The significance of the area being examined would be a factor in determining the extent of the analytical audit procedures to be used. Answer (b) is incorrect. and there is segregation of duties between the food servers and the cooks. file://C:\Program Files\Wiley\CIAExam\Print. Analytical review only needs to have accounts related to other accounts or other independent data.htm 1/20/2010 . The manager then reconciles the cash received for the day with the computerized record of food orders generated. 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. B: All food orders must be entered on the computer. C: Precision with which the results of analytical audit procedures can be predicted. Answer Explanations Answer (a) is incorrect. It does not require that they be related to revenue. Question: V2C5-0169 A restaurant food chain has over 680 restaurants. B: Significance of the area being examined. All of the above factors would be considered in determining the extent of analytical audit procedures to be used. D: All of the above.Wiley CIA 2006 v1 Page 188 of 262 Answer (d) is incorrect. Adequacy of the system of internal control would be used to determine the extent of analytical audit procedures to be completed.

It involves appropriate personnel assessing the design and operation of controls on a timely basis and taking necessary actions. which will tell management whether its other controls are operating effectively. Answer Explanations Answer (a) is the correct answer. Question: V2C5-0170 The auditor of a construction company that builds foundations for bridges and large buildings performed a review of the expense accounts for equipment (augers) used to drill holes in rocks to set the foundation for the buildings. This is the least appropriate audit procedure because it just defers the investigation to the following year. To improve the quality of equipment. D: Arrange to take an inventory of augers to determine if the augers purchased this year were on hand and would be available for use in the next two years. it would not be appropriate to defer investigative action to the following year. This is a daily operational control. but would expect an increase in the expenses of other augers.htm 1/20/2010 . If a fraud was being conducted. the president of the company approved the supplier. file://C:\Program Files\Wiley\CIAExam\Print. who explained that the augers last two to three years and are expensed when purchased. Answer Explanations Answer (a) is incorrect. B: Develop a comparative analysis of auger expense over the past few years to determine if the relationship held in previous years. Which of the following procedures would be the least appropriate audit procedure to address these analytical findings? Answers A: Note the explanation in the working papers for investigation during the next audit and perform no further work at this time. Monitoring refers to an overall control. During the review. This is an example of a reconciliation control applied at the store level. the auditor noted that the expenses related to some of the auger accounts had increased dramatically during the year. The auditor spoke to the construction manager. Answer (c) is the correct answer. These are operational and segregation controls. Answer (b) is incorrect. the auditor should see a decrease in the expense accounts for these augers in the next year. Monitoring can be done through ongoing activities or separate evaluations. C: Take a sample of debits to the auger expense account and trace to independent shipping documents and to invoices for the augers. D: Cash is transmitted to corporate headquarters on a daily basis.Wiley CIA 2006 v1 Page 189 of 262 C: Management prepares a detailed analysis of gross margin per store and investigates any store that shows a significantly lower gross margin. Thus. Answer (d) is incorrect. Ongoing monitoring procedures are built into the normal recurring activities of an entity and include regular management and supervisory activities. Monitoring is a process that assesses the quality of the internal control structure’s performance over time. The auditor also found out that the construction manager is responsible for the inventorying and receiving of the augers and is a part owner of a company that supplies augers to the company.

Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect. C: Report the findings. This would be an appropriate attempt to establish some independent evidence as to whether the goods were received.to three-year period. the auditor noted that the expenses related to some of the auger accounts had increased dramatically during the year. Defer the reporting to management until a satisfactory explanation can be obtained. to management and recommend an investigation for possible irregularities. The IIA Standards states: “Results. the auditor can only recommend. B: Expand audit procedures by observing the receipt of all augers during a reasonable period of time and trace the receipts to the appropriate accounts. the president of the company approved the supplier. because the construction manager has a conflict of interest. who explained that the augers last two to three years and are expensed when purchased. Answer (b) is incorrect. The auditor spoke to the construction manager. The results should be reported to other levels of management because the auditor has already noted that the construction manager has a conflict of interest. Follow up to see if the controls are properly implemented. the auditor cannot insist that controls be implemented. file://C:\Program Files\Wiley\CIAExam\Print. but would expect an increase in the expenses of other augers.” Answer (d) is incorrect. Thus. or relationships from applying analytical auditing procedures that are not sufficiently explained should be communicated to the appropriate levels of management. Answer (c) is incorrect. The auditor should look for the existence of receiving reports signed by someone other than the construction manager and should verify that the individuals signing the reports exist. be implemented. Determine causes of any discrepancies. This would be an effective procedure to establish the “face validity” of the manager’s explanation. The suggested audit procedure is incomplete and would not likely answer the question on the causes of the problem. This would only delay the reporting of an important finding. Question: V2C5-0171 The auditor of a construction company that builds foundations for bridges and large buildings performed a review of the expense accounts for equipment (augers) used to drill holes in rocks to set the foundation for the buildings.htm 1/20/2010 . If the relationship is valid. To improve the quality of equipment. During the review. D: Report the findings to the construction manager and insist that appropriate internal controls. The auditor also found out that the construction manager is responsible for the inventorying and receiving of the augers and is a part owner of a company that supplies augers to the company. Which of the following would be the most appropriate action to take? Answers A: Note the actions and follow-up next year. Assume the auditor did not find a satisfactory explanation for the results of the analytical procedures performed and has conducted the appropriate follow-up procedures. Further. The results should be reported to management. the auditor should see a decrease in the expense accounts for these augers in the next year. The audit of the area is otherwise complete. such as independent receiving reports. as they are.Wiley CIA 2006 v1 Page 190 of 262 Answer (b) is incorrect. it should also hold for the previous years. This would be a good procedure to determine if the augers exist since they are supposed to be used over a two.

Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect. D: Assess the performance of the subsidiary and indicate where additional audit work may be needed.Wiley CIA 2006 v1 Page 191 of 262 Question: V2C5-0172 An auditor performs an analytical review by comparing the gross margins of various divisional operations with those of other divisions and with the individual division’s perfor-mance in previous years. Answer (d) is incorrect. Answer (b) is incorrect. B: Test the subsidiary's controls designed to safeguard assets.htm 1/20/2010 . an auditor compares the inventory turnover rate of a subsidiary with established industry standards in order to Answers A: Evaluate the accuracy of the subsidiary's internal financial reports. Comparison with industry standards will not test the controls designed to safeguard the file://C:\Program Files\Wiley\CIAExam\Print. A decrease in the number of suppliers would cause less price competition on the incoming side and. Based on the above information. would result in a decreased gross margin. or divisional management during the year. Comparison with industry standards will not test the accuracy of internal reporting. A decrease in accounts receivable would be very unlikely to signal an increase in the gross margin. production methods. Answer Explanations Answer (a) is incorrect. The auditor notes a significant increase in the gross margin at one division. Answer (b) is incorrect. C: An overstatement of year-end inventory. the most likely cause of the increase in gross margin would be Answers A: An increase in the number of competitors selling similar products. all else being equal. An overstatement of year-end inventory would result in an increase in the gross margin. Question: V2C5-0173 During an operational audit. C: Determine if the subsidiary is complying with corporate procedures regarding inventory levels. An increase in the number of competitors would result in price competition and a likely decrease in gross margin. The auditor does some preliminary investigation and also notes that there were no changes in products. D: An understatement of year-end accounts receivable. B: A decrease in the number of suppliers of the material used in manufacturing the product.

and purchase order. Answer (d) is the correct answer. This would not be an effective procedure because. but the perpetual inventory would reflect actual purchases. and approval by the accounts payable department. The auditor interviewed both management and the purchasing agents. If all match. • All recorded receipts are immediately recorded into a perpetual inventory record by the department to which the goods are transferred after receipt. Question: V2C5-0174 During an audit of a smaller division. A fraud would result in an overstatement of inventory in the ledger. Which of the following audit procedures would be most effective in determining whether material fraud was taking place? Answers A: Take a random sample of cash disbursements and trace to approved purchase orders and receiving slips. Answer Explanations Answer (a) is incorrect. vendor invoice. Such an analytical procedure will provide an indication of the efficiency and effectiveness of the subsidiary’s management of the inventory. Answer (c) is incorrect. such as fasteners. file://C:\Program Files\Wiley\CIAExam\Print. Agent 2 is responsible for electric motors. receiving slip. • There are separate accounts payable and receiving departments. This procedure would only verify that purchase orders were processed. D: Perform an analytical review of inventory by product line to determine whether a particular product line has increased. Answer (d) is incorrect. Inquire of the purchasing agent as to the reason for the inventory increase. and Agent 3 is responsible for smaller parts. This procedure would provide limited evidence on the possibility of fraud. The purchasing agent matches the vendor invoice. the auditor notes the following regarding the purchasing function: • There are three purchasing agents. The purchasing agent investigates differences. the purchasing agent sends the documents forward to the accounts payable department. It would not indicate the existence of fictitious purchase orders. • Only the accounts payable department has the ability to authorize an item for payment. Answer (c) is incorrect. Comparison with industry standards will not test compliance.Wiley CIA 2006 v1 Page 192 of 262 inventory. Agent 1 is responsible for ordering all large component parts. B: Reconcile the perpetual inventory to the general ledger and investigate any differences. by definition. all invoices are sent to the purchasing agent placing the order.htm 1/20/2010 . • In order to hold vendors more responsible. Answer (b) is the correct answer. C: Take a random sample of purchase orders. Both groups were very satisfied with the current system because it helped maintain vendor accountability and provided sufficient segregation of duties since only the accounts payable department can authorize an item for payment. Trace each purchase order to a receiving slip. but would not be as complete as answer (a). all cash disbursements would be accompanied by approved documents.

This response is unrelated to the purchasing environment described above. would best decrease the likelihood of fraud in the environment described above? Answers file://C:\Program Files\Wiley\CIAExam\Print. B: The purchasing agents could be sending fake purchase orders to a dummy vendor. • In order to hold vendors more responsible. D: The production department could be deflating the price of products purchased and thereby increasing the reported gross margin of sales. inserting a receiving slip. Based on the above scenario. The auditor interviewed both management and the purchasing agents. all invoices are sent to the purchasing agent placing the order. and purchase order. such as fasteners.htm 1/20/2010 . Answer (c) is incorrect. • All recorded receipts are immediately recorded into a perpetual inventory record by the department to which the goods are transferred after receipt. and having payments made to the dummy vendor. Question: V2C5-0176 Which of the following control procedures. Agent 1 is responsible for ordering all large component parts. If all match. the auditor notes the following regarding the purchasing function: • There are three purchasing agents. if any. The auditor is responsible for evaluating the control structure to determine if the structure would allow for undetected fraud. This possible fraud would be detected because no receiving report would be available to support the vendor’s invoice. would be Answers A: The purchasing agents could be purchasing the majority of products from a favorite vendor since rotation among purchasing agents is not mandatory. if properly implemented.Wiley CIA 2006 v1 Page 193 of 262 Question: V2C5-0175 During an audit of a smaller division. receiving slip. Both groups were very satisfied with the current system because it helped maintain vendor accountability and provided sufficient segregation of duties since only the accounts payable department can authorize an item for payment. C: The receiving department could be diverting receipts to different locations and failing to create receiving reports. Agent 2 is responsible for electric motors. This type of fraud would not be detected by the control system since the purchasing agent could insert the fictitious receiving slip. the purchasing agent sends the documents forward to the accounts payable department. Answer Explanations Answer (a) is incorrect. Nothing in the scenario suggests fraudulent activities. • There are separate accounts payable and receiving departments. • Only the accounts payable department has the ability to authorize an item for payment. Answer (d) is incorrect. The purchasing agent matches the vendor invoice. the most likely undetected fraud. The purchasing agent investigates differences. There may be good reason to purchase most goods from a particular vendor. Answer (b) is the correct answer. and Agent 3 is responsible for smaller parts.

Answer (d) is incorrect. It is not a recomputation or compelling. Answer Explanations Answer (a) is incorrect. D: Require that the receiving department make the updates to the perpetual inventory record. but the purchasing agent could just develop new dummy vendors. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect.htm 1/20/2010 . Analytical relationships provide evidence that related transactions have been recorded.Wiley CIA 2006 v1 Page 194 of 262 A: Require periodic rotation of purchases among different vendors. this would be a trend away from establishing long-term relationships with key vendors as part of many TQM programs. This would just create an additional opportunity for fraud by the receiving department. Answer (b) is incorrect. Rotation of duties would not affect the type of fraud that could take place in this environment. An even better procedure would be to have both the receiving reports and vendor invoices be sent to accounts payable. Answer (d) is incorrect. Although relevant. This change in procedures would make it difficult for the purchasing agent to insert a fictitious receiving report. analytical evidence is not direct. The purchasing agent could just develop another dummy vendor for the new product line. C: Require receiving reports be sent directly to accounts payable. Further. A reliable test of the valuation of those securities would be a file://C:\Program Files\Wiley\CIAExam\Print. C: May provide the best available evidence for the completeness assertion. Question: V2C5-0178 A company makes a practice of investing excess short-term cash in marketable equity securities. D: Are not sufficient by themselves for management assertions. Answer (c) is the correct answer. B: Require rotation of duties among the three purchasing agents. Answer (c) is the correct answer. Question: V2C5-0177 Analytical procedures Answers A: Are considered direct evidence of the assertion being evaluated. For assertions and accounts of low materiality. This might partially deal with the problem. analytical evidence is often considered sufficient. B: Are compelling evidence when they involve recomputation. but should be used for fraud.

Answer (b) is incorrect. D: Calculation of premium or discount amortization. There is no amortization of premium or discount on equity investments only on bonds and other debtor investments held for long-term purposes. Answer (d) is incorrect. Answer (b) is incorrect. Marketable equity investments held for the short term are not subject to the equity method of accounting. This procedure would not provide evidence about value. Answer (d) is incorrect. Answer Explanations Answer (a) is the correct answer. A determination of overall reasonableness can be made based on analytical procedures. the auditor experienced difficulty obtaining required information from a specific em- file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0180 During an internal audit. Question: V2C5-0179 Analytical procedures in which current financial statements are compared with budgets or previous statements are primarily intended to determine Answers A: Adequacy of financial statement disclosure. Answer Explanations Answer (a) is incorrect. B: Existence of specific errors or omissions. C: Recalculation of investment carrying value using the equity method. Analytical procedures do not generally provide evidence regarding the adequacy of disclosure. Answer (c) is the correct answer. B: Confirmation of securities held by the broker.htm 1/20/2010 .Wiley CIA 2006 v1 Page 195 of 262 Answers A: Comparison of cost data with current market quotations. Answer (c) is incorrect. C: Overall reasonableness of statement contents. Analytical procedures will not disclose specific errors of cutoff. This procedure would provide most competent evidence about value of the marketable equity securities. Analytical procedures do not disclose specific errors or omissions. D: Use of an erroneous cutoff date.

Answer Explanations Answer (a) is the correct answer. select the one statement the supervisor could make that addresses the criterion and is appropriate for an evaluation. Expansion or resources requires more resources. Answer (b) is incorrect because this is an interpersonal skill. B: Expansion of resources. D: You are able to reduce conflict with ease and without putting individuals on the defensive.Wiley CIA 2006 v1 Page 196 of 262 ployee. Question: V2C5-0181 An audit supervisor is preparing the annual evaluation of a senior auditor’s overall performance. the auditor requested a private meeting with the employee for the purpose of identifying the problem and resolving the difficulty through open discussion. The organizational structure has not changed. Question: V2C5-0182 file://C:\Program Files\Wiley\CIAExam\Print. Answers A: You need to further analyze alternatives before selecting a solution. C: You could expedite your problem solving by focusing on logic instead of reasoning activities. The auditor does not use formal authority. B: Your ability to communicate ideas clearly is exemplary. These skills are part of the problem-solving process. Answer (c) is incorrect. Problem-solving skills. For each of the following criteria.htm 1/20/2010 . When this situation continued for one week. Problem solving involves face-to-face meetings. Answer Explanations Answer (a) is the correct answer. C: Authoritative command. D: Altering the human variable. Answer (d) is incorrect. Answer (d) is incorrect because this skill falls into the interpersonal category. Answer (b) is incorrect. Answer (c) is incorrect because both logic and reasoning skills are critical components of problem solving. Which conflict management technique was the auditor applying? Answers A: Problem solving.

meeting to solve an important problem. Answer (c) is incorrect because this activity is found in networking. B: Generate alternative solutions. Answers A: Your ability to effectively socialize within the organization has had a positive impact on the department. This would be part of evaluating alternative solutions. Possible steps in the creative problem-solving process are listed below. Which step should the committee perform next? Answers A: Select a solution. C: You have developed quite a strong reputation outside the department thereby increasing your credibility. Answer (c) is incorrect. The stem describes completion of this step. file://C:\Program Files\Wiley\CIAExam\Print.Wiley CIA 2006 v1 Page 197 of 262 An audit supervisor is preparing the annual evaluation of a senior auditor’s overall performance. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect because this is an activity found in networking. identifying the cause of the problem. D: Consider the reaction of competitors to various courses of action. Human resources management. Answer (d) is the correct answer. This is the second step in the process and the one the group should take up next. select the one statement the supervisor could make that addresses the criterion and is appropriate for an evaluation. Answer (b) is incorrect because decision making is an activity associated with traditional management. For each of the following criteria. Finally. and. Question: V2C5-0183 An organization’s executive committee. finally. B: You have successfully handled numerous issues that have challenged your decision-making abilities. This is the third step and cannot be taken prior to identifying alternatives. C: Identify the problem. D: Your motivational skills in the field increased morale within this department. Answer (b) is the correct answer. members agreed and could move on to the next step. Answer (d) is incorrect. spent 30 minutes analyzing data and debating the cause of the problem.htm 1/20/2010 . what is the desired situation. This is a primary activity in human resource management. Identifying the problem includes three parts: what is the actual situation.

Answer Explanations Answer (a) is incorrect due to explanation given for the Answer (d). Programs like the one described in this problem offer extrinsic rewards. C: Employees who do not contribute innovative ideas are essentially punished because they do not receive praise and bonuses. They merely reward innovators and encourage all employees to participate voluntarily. B: A mandate from top management. B: The employees have been classically conditioned to be innovative. Why do programs like this often result in greater innovation? Answers A: Innovation is intrinsically rewarding because it results in personal satisfaction and the pleasure derived from a job. Answer (b) is incorrect because classical conditioning applies to reflexive behavior. C: The Delphi technique in which a series of questionnaires is used to arrive at a consensus. Question: V2C5-0185 An operational audit of your organization’s budget process has revealed that department heads frequently circumvent budget controls by actions such as padding their budgets and concealing opportunities to cut costs. and those whose ideas increase profits receive cash bonuses. increase the probability that employees will submit innovative ideas. Which one of the following methods is likely to generate a high level of commitment to the solution among members of the group? Answers A: The brainstorming technique in which group members orally identify as many alternatives as possible without criticism from other members. employees of many companies do not believe innovation will be rewarded so they do not try to innovate or they keep their ideas to themselves. D: An open discussion of the problem and potential solutions until a consensus is reached. file://C:\Program Files\Wiley\CIAExam\Print. The desired employee behavior in this problem—innovation—is voluntary. One of the audit recommendations involves forming a group comprised of department heads to find a solution for this problem. Although innovation is intrinsically rewarding to many people. such as praise and cash bonuses. Answer (c) is incorrect because programs like the one described in this problem do not punish anyone.Wiley CIA 2006 v1 Page 198 of 262 Question: V2C5-0184 The president of an organization believes employees should be rewarded for innovative ideas and has established a formal method for employees to submit their ideas for consideration by top management.htm 1/20/2010 . All employees who submit ideas are praised. D: Positive reinforcements. Answer (d) is the correct answer.

Open discussion in which the members reach consensus is the most effective technique for obtaining commitment to the solution. Question: V2C5-0187 Which of the following problem-solving tools is an idea-generating and consensus-building technique? Answers file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is incorrect. Mixing solutions with problem identification is a frequent problem cited in the managerial literature. The auditor also recognizes that the auditee will resist any recommendations about adopting broader goals. D: Only report the conditions found and leave the rest of the analysis to the auditees. and should therefore report the problem to the auditee. on the group’s commitment to the solution. Brainstorming is a good technique for generating a large number of ideas because it helps group members overcome the pressure to conform while the group is identifying options. The best course of action would be to Answers A: Avoid conflict and present only those goals that are consistent with the auditee's views since all others will be ignored. Question: V2C5-0186 The auditor has recognized that a problem exists because the organizational unit has been too narrow in its definition of goals. Organizations cannot avoid conflict. for obtaining a high level of group commitment to the solution. Answer (c) is incorrect. It has no predictable effect. not just the auditee. This would be a violation of the Standards. and they make group formation pointless.htm 1/20/2010 .Wiley CIA 2006 v1 Page 199 of 262 Answer Explanations Answer (a) is incorrect. which specify reporting criteria. however. Top management mandates are unlikely to result in a high level of commitment. Answer (d) is the correct answer. however. B: Identify the broader organizational goals and present a set of recommendations that attempts to meet both the organizational and auditee goals. Answer (c) is incorrect. C: Subtly mix the suggested solution with the problem definition so that the auditee will identify the solution apparently independently of the auditor. Answer Explanations Answer (a) is incorrect. It is not designed. Answer (b) is the correct answer. It is now becoming accepted that some levels of conflict are necessary in order for organizations to grow and adapt to a changing environment. The goals of the unit focus on profits. The auditor is responsible to the organization. The Delphi technique is effective for generating a large number of ideas and for arriving at a consensus. but is not an effective means of dealing with the problem identified. Answer (b) is incorrect. but the overall organizational goals are much broader.

The nominal group technique is an idea-generating and consensus-building problem solving tool. The best way to enhance creativity is to involve other people. Answer (c) is incorrect. Major decisions regarding production. B: Synectics. sales. and intracompany product transfers are controlled through central headquarters. file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0189 A company has four manufacturing plants spread throughout the country. fantasies. Answer Explanations Answer (a) is incorrect because brainstorming is a technique to generate a great number of ideas. Answer (d) is the correct answer. Answer (c) is incorrect because systems analysis breaks down a large problem into many smaller problems. and strategic directions are controlled and coordinated through central headquarters. D: Use a disciplined problem-solving approach. Question: V2C5-0188 A company has recently introduced total quality management (TQM). Since there are many interdependencies between the plants.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. D: Nominal group technique. Answer (d) is incorrect. and analogies. Two manufacturing plants (C and D) serve as suppliers to the other two plants (A and B) that produce the company’s two major lines of industrial products. product pricing. This technique gives everyone an opportunity to express ideas without being interrupted by others in the group. C: Systems analysis. The director should Answers A: Seek isolation from all distractions in order to think the problem through. B: Bring the audit team together for a brainstorming session. The director of internal auditing is faced with determining a new and innovative approach to auditing in this new environment. The supervisor is still an individual. Group decisions tend to be more creative than individual decisions. a great deal of production. Group decisions tend to be more creative than individual decisions because they bring many points of view to bear on the problem. Answer (b) is incorrect because synectics involves the use of nontraditional activities such as excursions. Answer (b) is the correct answer. C: Rely on the audit supervisor to develop a new approach.Wiley CIA 2006 v1 Page 200 of 262 A: Brainstorming.

should have brought the problem to management’s attention much sooner. the auditor discovers that the plant has experienced production problems with costs far in excess of what management had planned and with finished goods inventory levels that are clearly excessive. A report is prepared detailing any inventory items with levels in excess of two weeks' production. Since there are many interdependencies between the plants. Since there is a great deal of central coordination needed. Inventory costs going into cost of goods sold should be computed on a last in. During the preliminary survey in conjunction with an upcoming audit of plant B. Sales orders come from sales representatives located throughout the country and can be transmitted directly to the production plant for processing or can be transmitted through central headquarters to the production plant for shipping and billing. Answer (c) is the correct answer. Two manufacturing plants (C and D) serve as suppliers to the other two plants (A and B) that produce the company’s two major lines of industrial products. if implemented correctly. It appears to be an arbitrary judgment that should be better justified. All sales prices are determined at central headquarters. would not totally address the cost overruns or the excess production problems. Answer (d) is incorrect. sales.Wiley CIA 2006 v1 Page 201 of 262 Each plant is responsible for its own computer systems and for making purchases to support production.htm 1/20/2010 . A good standard cost system would assist management in identifying the causes of the cost overruns. This is a type of management control that. first out basis to be the most up-to-date. Major decisions regarding production. or it may be excessive. product pricing. Sales orders come from sales representatives located throughout the country and can be transmitted directly to the production plant for processing or can be transmitted through central headquarters to the production plant for file://C:\Program Files\Wiley\CIAExam\Print. a great deal of production. B: Perpetual inventory control procedures are implemented at each plant. Which of the following management control procedures would have best brought the problems to management’s attention earlier? Answers A: Standard costing procedures are implemented at each plant with a summary of variances reported to central headquarters on a weekly basis. Each plant is responsible for its own computer systems and for making purchases to support production. Question: V2C5-0190 A company has four manufacturing plants spread throughout the country. it is important that management establish a reporting and control system to compare actual performance with budgeted performance. and strategic directions are controlled and coordinated through central headquarters. by itself. D: A weekly report is prepared which compares actual sales with forecasted sales and budgeted gross margin with actual gross margins. but a report on variances. The problem is with production levels and production costs. Data on sales and gross margin do not provide timely input into the nature of the problem. There is no rationale given for the criteria to be used in developing the management report. C: Production plans based on management forecasts are sent to the plants on a monthly basis. The report goes to plant management and central headquarters. The Answer of two weeks of production in inventory may be low. Answer Explanations Answer (a) is incorrect. A weekly report compares actual production with forecasted production and weekly costs with budgeted costs. and intracompany product transfers are controlled through central headquarters. Answer (b) is incorrect. Perpetual inventory records would be useful but not sufficient to address the cost overrun and the excessive inventory level.

and (3) the plants processing of the information for shipment. This procedure develops information on all aspects of the process. All sales prices are determined at central headquarters. Complement documentation with a copy of the program flowchart. Question: V2C5-0191 A company has four manufacturing plants spread throughout the country. sales. This procedure provides information on the sales order process. All sales prices are determined centrally and are electronically sent to the plant to update their sales price table (file). This is a limited procedure. and the use of the table in the billing program. Major decisions regarding production. This is the most complete answer. (2) the ability to access and/or change the price data that are used by the computer program to develop sales invoices. product pricing. (2) the transmission of the data to the plants to generate the shipment. Answer (d) is incorrect. The internal auditor wishes to know how this processing is functioning. D: Obtain a copy of the existing program flowchart from the plant to determine how price data are accessed. The auditor should Answers A: Start with management's decisions to set sales prices. Answer (b) is incorrect. Sales orders come from sales representatives located throughout the country and can be transmitted directly to the production plant for processing or can be transmitted through central headquarters to the production plant for shipping and billing. The most appropriate audit procedure and audit tools to use would be to Answers A: Document the flow of sales price information from headquarters to the plant. All sales transactions should be based on the prices in the computerized table.htm 1/20/2010 . The auditor wishes to develop a flowchart of (1) the process of receiving sales order information at headquarters. It does not gather as much information as Answer (a). There are three potential problems: (1) the correct transfer of the data to the plants. Answer (c) is incorrect. and intracompany product transfers are controlled through central headquarters. C: Use a questionnaire to identify who approves the shipment of goods and how the goods are priced. how the table is accessed and updated. a great deal of production. and (3) the use of the tables in the billing program. file://C:\Program Files\Wiley\CIAExam\Print.Wiley CIA 2006 v1 Page 202 of 262 shipping and billing. Two manufacturing plants (C and D) serve as suppliers to the other two plants (A and B) that produce the company’s two major lines of industrial products. B: Develop a flowchart of the sales order process to determine how orders are taken and priced. and strategic directions are controlled and coordinated through central headquarters. Gather internal documentation on the approval process for changing sales prices. but only limited information on how individual invoices are priced. Each plant is responsible for its own computer systems and for making purchases to support production. Any pricing deviations must be approved by the plant-marketing manager and by a manager in the marketing department at central headquarters for updating the tables. Answer Explanations Answer (a) is the correct answer. All sales prices are determined at central headquarters. This procedure would provide information about how the computer program is supposed to work. but may not be up-to-date and does not provide information on how the data are entered into the price tables. Since there are many interdependencies between the plants.

Problem solving is the only method that can remove the source of the conflict. three others transferred out within a week. It will not identify flows where documents or data were “peeled off” and processed separately. Starting with the completed transaction does not provide as complete an understanding the full process. but it will not resolve the hurt feelings and mistrust. Answer (c) is incorrect. Answer (c) is the correct answer. This provides the most complete description of the total process. will not get to the root of the problem. B: Forcing. and the remaining employees were openly hostile. This is a stopgap measure and. D: Problem solving. starting with the initiation of the transaction and tracing it through to the completion of the transaction allows the auditor to “walk through” and define both the processing and the relevant control procedures. Additionally.Wiley CIA 2006 v1 Page 203 of 262 Prepare an overview flowchart that links these details. B: Start with a shipment of goods and trace the transaction back through the origination of the sales order as received from the sales representative. but focuses only on the part of the processing that takes place at the plant level. This method may submerge the conflict for a period of time. Select the best method for resolving this dysfunctional conflict situation. but does not cover the processing of sales orders. Answers A: Conflict triggering. C: Start with the receipt of a sales order from a sales representative and walk-through both the manual and computerized processing at headquarters and the plant until the goods are shipped and billed. Question: V2C5-0192 A manager recently transferred from a manufacturing company to a service-oriented affiliate. A conflict trigger is a means of stimulating conflict. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect. Answer (b) is incorrect. it does require time. two employees quit on the spot. Answer Explanations Answer (a) is incorrect. When the manager unexpectedly announced a set of production standards. interview relevant personnel to determine if any changes have been made. like forcing. C: Smoothing. This is a good procedure. file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is the correct answer.htm 1/20/2010 . This is a good procedure to understand the process of making changes to the sales price data. D: Obtain a copy of the plant's systems flowchart for the sales process. then develop an overview flowchart that will highlight the basic process. Answer (b) is incorrect. However.

The least squares method refers to regression analysis and involves specified variables. Answer (b) is the correct answer. Answer Explanations Answer (a) is incorrect. Answer (c) is incorrect. Answers A: Synectics. The Delphi approach seeks to obtain group consensus on a relatively narrow set of alternatives through a series of iterations such as those described in the stem. The maximum likelihood technique is a complex alternative to least squares. D: Optimizing of expected payoffs. Optimizing expected payoffs is used in decision-making alternatives.Wiley CIA 2006 v1 Page 204 of 262 Question: V2C5-0193 A chief executive officer (CEO) believes that a major competitor may be planning a new campaign. The CEO selects the best possibilities then sends another questionnaire asking for the most likely option. Answer (d) is incorrect. fantasies. The CEO sends a questionnaire to key personnel asking for original thinking concerning what the new campaign may be. C: Brainstorming. and newspapers offers the optimal desired result in increased sales and improved public image. B: Value analysis. Synectics is a highly structured approach to problem solving.) A company wishes to determine what advertising mix among radio.htm 1/20/2010 . Question: V2C5-0194 Listed below are situations and techniques for generating creative alternatives in solving problems. television. It uses excursions. The process employed by the CEO is called the Answers A: Least squares technique. D: Forced relationship. and analogies. (Answers are only used once. C: Maximum likelihood technique. Answer (b) is the correct answer. Answer Explanations Answer (a) is incorrect. which relies on historical information. identify the technique most appropriate for each situation. B: Delphi technique. For each question. Value analysis is primarily designed to optimize performance at a minimum file://C:\Program Files\Wiley\CIAExam\Print.

identify the technique most appropriate for each situation. Answers A: Brainstorming. Answers A: Blast then refine. identify the technique most appropriate for each situation. (Answers are only used once. and steps for generating solutions. Answer (b) is incorrect. and refining are used when a completely new way of thinking or speculation is required or when answering a question such as “What else will do the job”? Answer (d) is incorrect. A small group will be formed to identify and solve this significant problem. You must come up with something quickly. The purpose of brainstorming is to generate a great number of ideas.Wiley CIA 2006 v1 Page 205 of 262 cost. You do not have time for more traditional techniques.) Costs of a specific department must be cut by 40% and quality must improve or it cannot compete in the marketplace. Answer (c) is incorrect.htm 1/20/2010 . D: Operations research. Question: V2C5-0195 Listed below are situations and techniques for generating creative alternatives in solving problems. Blasting. Synectics is a highly structured approach to problem solving. This drastic charge was recently given to your department. Answer (d) is incorrect.) A company cannot identify why production has been decreasing at a particular plant. You decide to employ a radical new production arrangement. For each question. Question: V2C5-0196 Listed below are situations and techniques for generating creative alternatives in solving problems. and analogies. Forced relationship involves the identification of a problem. All efforts to isolate the cause with conventional accounting and administrative systems have failed. creating. fantasies. regardless of their position. Operations research is a management science discipline attempting to find optimal solutions to business problems. Answer Explanations Answer (a) is the correct answer. file://C:\Program Files\Wiley\CIAExam\Print. C: Blast then refine. All group-member suggestions will be evaluated equally. As a final effort before closing the plant. you need to gain the cooperation of selected employees from all levels. It uses excursions. For each question. the factors or forces contributing to making it a problem. B: Synectics. Answer (c) is incorrect. (Answers are only used once. Conventional cost-cutting techniques have been attempted but to no avail. Brainstorming is a group approach to breaking down broadly based problems into essential elements.

Answer (b) is incorrect. Answer Explanations Answer (a) is the correct answer. Answer (d) is incorrect. Answer (c) is incorrect. Answer (d) is incorrect. (Answers are only used once. The purpose of brainstorming is to generate a great number of ideas. A very structured group to view the problem from management and various minority group perspectives has been created.) All attempts to solve a problem based on affirmative action program goals have failed. B: Forced relationship. Answers A: Synectics. the factors or forces contributing to making it a problem. Synectics is a highly structured group approach utilizing various analogies and metaphors to assist in viewing problems from widely divergent viewpoints. For each file://C:\Program Files\Wiley\CIAExam\Print. C: Morphological matrix analysis. Blast then refine is the technique being utilized. All group members will be required to study the complaints and slogans of the various minority groups in order to produce a new program. Morphological matrix analysis is a system involving the methodical interrelating of all elements of a problem in order to discover new approaches to a solution. Question: V2C5-0197 Listed below are situations and techniques for generating creative alternatives in solving problems. Operations research is a management science discipline attempting to find optimal solutions to business problems. D: Attribute listing. C: Brainstorming. Answer Explanations Answer (a) is the correct answer. Answer (c) is incorrect. and steps for generating solutions. For each question. Attribute listing emphasizes the detailed observation of each particular characteristic or quality of an item or situation. Forced relationship involves the identification of a problem. The old ways were completely disregarded and an entirely new approach was devised to meet the objectives of cost cutting and improved quality. D: Operations research. Answer (b) is incorrect.Wiley CIA 2006 v1 Page 206 of 262 B: Edisonian. Edisonian technique involves trial-and-error experimentation toward reaching a solution.htm 1/20/2010 . Question: V2C5-0198 Listed below are situations and techniques for generating creative alternatives in solving problems. identify the technique most appropriate for each situation.

Answer (d) is incorrect. and suggestions given by the advertising agency. Answer Explanations Answer (a) is the correct answer. You are not limited to the suggested ideas and have been encouraged to suggest original ideas of your own.Wiley CIA 2006 v1 Page 207 of 262 question. The purpose of brainstorming is to generate a great number of ideas. Answer (c) is the correct answer. file://C:\Program Files\Wiley\CIAExam\Print. but some modification will be necessary if such new application is to be successful. identify the technique most appropriate for each situation. You have been chosen to participate in this process and to look at past slogans. Attribute listing emphasizes the detailed observation of each particular characteristic or quality of an item or situation. Value analysis is primarily designed to optimize performance at a minimum cost. Answer Explanations Answer (a) is incorrect. For each question. logos. D: Synectics.) A company is about to introduce a new service and wishes to develop a new slogan and logo to be utilized in advertising and on company publications.) A company has a computer that it no longer needs because of a discontinued operation. Free association is the approach to idea stimulation whereby other symbols and ideas are to be freely associated with a problem. Question: V2C5-0199 Listed below are situations and techniques for generating creative alternatives in solving problems. identify the technique most appropriate for each situation. Answer (b) is incorrect. Currently there are several computer projects that may be able to utilize the machine. Attribute listing is applied primarily to improve tangible objects by listing the parts and essential features of the object and systematically analyzing modifications to improve the object.htm 1/20/2010 . Operations research is a management science discipline attempting to find optimal solutions to business problems. B: Operations research. Answers A: Attribute listing. (Answers are only used once. C: Morphological matrix analysis. C: Free association. D: Attribute listing. Answer (b) is incorrect. B: Value analysis. (Answers are only used once. Answers A: Brainstorming.

Answers A: Free association.Wiley CIA 2006 v1 Page 208 of 262 Answer (c) is incorrect. It has attempted to keep critical parts for its fleet in stock so that equipment will have minimal downtime. Operations research is a management science discipline attempting to find optimal solutions to business problems. Question: V2C5-0200 Listed below are situations and techniques for generating creative alternatives in solving problems. Answers file://C:\Program Files\Wiley\CIAExam\Print. Blasting.) A company has experienced numerous complaints because a passenger door has not opened smoothly. Free association is the approach to idea stimulation whereby other symbols and ideas are to be freely associated with a problem. Carrying cost and order cost have not been measured. The Edisonian approach has been chosen here. The item is no longer under warranty and the manufacturer has informed the company that a very expensive new door must be purchased and installed to solve the problem. Synectics is a highly structured approach to problem solving. creating. and refining are used when a completely new way of thinking or speculation is required or when answering a question such as “What else will do the job?” Answer (d) is the correct answer.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. identify the technique most appropriate for each situation. Question: V2C5-0201 Listed below are situations and techniques for generating creative alternatives in solving problems. You have been asked to supervise an attempt by your engineering department to come up with less expensive alternative solutions. For each question. and analogies. Morphological matrix analysis is a system involving the methodical interrelating of all elements of a problem in order to discover new approaches to a solution. C: Blast then refine.) A company is concerned that spare parts inventories are too large. For each question. (Answers are only used once. B: Operations research. fantasies. identify the technique most appropriate for each situation. You have been asked to make a formal recommendation on spare parts stocking levels. Answer (c) is incorrect. It uses excursions. Answer (d) is incorrect. Management wants to know what the optimal spare parts inventory should be if downtime is estimated to cost $150 per day. Edisonian technique involves trial-and-error experimentation toward reaching a solution. All attempts to repair the door have failed. Answer (b) is incorrect. D: Edisonian. (Answers are only used once.

htm 1/20/2010 . largely internal information. Answer (c) is incorrect. It is not a frequent use. accurate. management control. aggregate information. C: Highly current. Answer (d) is the correct answer. outdated. Question: V2C5-0202 Management activities can be classified in three levels: strategic planning. Which of the following best describes the information requirements for strategic planning? Answers A: Frequent use. detailed information. Attribute listing emphasizes the detailed observation of each particular characteristic or quality of an item or situation. Answer Explanations Answer (a) is the correct answer. aggregate.Wiley CIA 2006 v1 Page 209 of 262 A: Operations research. The purpose of brainstorming is to generate a great number of ideas. Answer (b) is incorrect. C: Attribute listing. None applies. D: Wide scope. external. D: Brainstorming. future-oriented information. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. It is not detailed or necessarily outdated. Information requirements vary with the level of management activity. Operations research attempts to find optimal solutions utilizing classical concepts such as statistics. and operational control. Answer (d) is incorrect. B: Value analysis. and logical thinking to develop and test hypothesis. simulation. B: Future-oriented. This application closely fits the problem and charge given. Answer (c) is incorrect. The focus of a strategic planning is on broad issues dealing with a time horizon of five to ten years and looking at a macro level. Question: V2C5-0203 The control self-assessment (CSA) is a Answers file://C:\Program Files\Wiley\CIAExam\Print. Value analysis is primarily designed to optimize performance at a minimum cost.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. It is a consulting engagement in identifying problems and solving them for the benefit of the organization. The CSA is a preventive auditing tool in that it identifies issues and problems earlier before they get bigger. Answer (b) is the correct answer.htm 1/20/2010 . Answer (b) is the correct answer. Refer to the correct answer explanation. D: Corrective auditing tool. B: Preventive auditing tool.Wiley CIA 2006 v1 Page 210 of 262 A: Directive auditing tool. C: Financial audit engagement. B: Consulting engagement. and compliance areas. Refer to the correct answer explanation. The CSA is not a traditional audit engagement applied to financial. Question: V2C5-0204 The control self-assessment (CSA) is a Answers A: Compliance audit engagement. Refer to the correct answer explanation. Question: V2C5-0205 The most popular approach to control self-assessment (CSA) is the file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations This answer is incorrect. D: Operational audit engagement. Refer to the correct answer explanation. This answer is incorrect. Answer Explanations This answer is incorrect. C: Detective auditing tool. This answer is incorrect. Refer to the correct answer explanation. operational.

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Answers
A: Workshop approach. B: Questionnaire approach. C: Survey approach. D: "Wall-writing" approach.

Answer Explanations
Answer (a) is the correct answer. The workshop is the most popular approach to CSA in assessing risks and evaluating controls for a given objective or process. In the “wall-writing” approach, meeting participants respond to questions posed by the facilitator of the workshop (meeting). The questionnaire approach and the survey approach are the same.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0206
When the culture of an organization is supportive of candid employee responses in a control self-assessment workshop, which of the following is favored by most organizations?

Answers
A: Audit-facilitated workshops. B: Client-facilitated workshops. C: Questionnaire approach. D: Management-produced analyses.

Answer Explanations
Answer (a) is the correct answer. A CSA approach using facilitated workshops (meetings) with the internal auditors as facilitators is favored by most organizations. This approach is especially good when the culture of the organization is supportive of candid participant responses in the workshops. Self-certification is an output of management-produced analyses.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

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Question: V2C5-0207
When the culture of an organization is not supportive of candid employee responses in a control self-assessment workshop, which of the following can be suggested to organizations?

Answers
A: Audit-facilitated workshops. B: Client-facilitated workshops. C: Questionnaire approach. D: Meeting approach.

Answer Explanations
This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.
Answer (c) is the correct answer. When an organization’s culture does not support a participative approach like facilitated workshops, questionnaires and management-produced analyses of controls can be used. The meeting approach is the facilitated workshop approach, whether it is an audit or client facilitated.

This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0208
Which of the following is used when an organization wants to investigate a control breakdown?

Answers
A: Management-produced analyses. B: Surveys. C: Questionnaires. D: Workshops.

Answer Explanations
Answer (a) is the correct answer. Management-produced analysis is a special type of self-assessment and used in self-certification of internal controls, annual representation letter required by external auditors, during a new computer system development project, during business combinations, or during an investigation into the reasons why a particular control breakdown or fraud occurred.

This answer is incorrect. Refer to the correct answer explanation.

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This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0209
Which of the following control self-assessment (CSA) approaches or formats are used about 70% of the time? I. Workshops. II. Surveys. III. Questionnaires. IV. Interviews.

Answers
A: I or II. B: II or III. C: I or IV. D: III or IV.

Answer Explanations
This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.
Answer (c) is the correct answer. Workshops or interviews are used in about 70% of CSA efforts; surveys or questionnaires are used about 30% of the time.

This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0210
The work flow in the control self-assessment (CSA) workshops “objectives-risks-controls-residual risksassessment” is referred to as

Answers
A: Objective-based approach. B: Risk-based approach. C: Control-based approach. D: Process-based approach.

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Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
Answer (b) is the correct answer. The risk-based approach examines risks first in achieving an objective, looks at controls next, and finally identifies any significant residual risks. The risk-based workshop takes the participants through the entire sequence of objectives-risks-controls. The work flow in the objective-based approach is objectives-controls-residual risks-assessment. The work flow in the control-based approach is objectives-riskscontrols-assessment. The work flow in the process-based approach is overall objectives-activity-level objectivesrisks-controls-assessment.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0211
Which of the following components of the enterprise risk management (ERM) framework addresses processes and people in an organization?

Answers
A: Strategic risks. B: Operational risks. C: Financial risks. D: Hazard risks.

Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
Answer (b) is the correct answer. The operational risk is related to the organization’s internal systems, products, services, processes, technology, and people. The strategic risks include risks related to strategy, political, economic, regulatory, and global market conditions. It also includes reputation risks, leadership risks, brand management risks, and customer risks. The financial risk includes risks from volatility in foreign currencies, interest rates, and commodities. It also includes credit risk, liquidity risk, and market risk. The hazard risk includes risks that are insurable, such as natural disasters, various insurable liabilities, impairment of physical assets and property, and terrorism. The ERM includes both upside and downside risks.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0212
Which of the following is not the goal of enterprise risk management (ERM) initiatives?

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Answers
A: Integrating risks. B: Creating shareholder value. C: Protecting shareholder value. D: Enhancing shareholder value.

Answer Explanations
Answer (a) is the correct answer. The ERM approach is more than just integrating risks, where risks are a part of uncertainty. The goal of an ERM initiative is to create, protect, and enhance shareholder value by managing the uncertainties that could influence in achieving the organization’s objectives.

This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

Question: V2C5-0213
The scope of enterprise risk management (ERM) encompasses which of the following? I. Creating opportunities. II. De-risking opportunities. III. Analyzing strengths. IV. Focusing on weaknesses.

Answers
A: I and II. B: I and III. C: III and IV. D: I, III, and IV.

Answer Explanations
Answer (a) is the correct answer. According to the IIA Research Foundation, ERM defines risk as any event or action that could adversely influence an organization’s ability to achieve its objectives. ERM encompasses the more traditional view of potential hazards (threats) as well as opportunities. Management must consider derisking the opportunities when creating and evaluating new opportunities. Risks and opportunities move together, and the key is to determine if the potential of a given opportunity exceed the risks. Items III and IV are part of the strength, weaknesses, opportunity, and threat (SWOT) analysis used in strategic management. When companies fail to manage risks, opportunities are missed, and shareholder value can be lost, which creates great pressure on management to improve corporate governance.

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D: III and IV. The other three Answers are part of the value-added potential. Question: V2C5-0214 The enterprise risk management (ERM) focuses on which of the following? Answers A: Value-added potential. Answers A: I and II. Refer to the correct answer explanation. Follow-up on ERM scorecards. Question: V2C5-0215 The role and focus of the internal audit function in enterprise risk management (ERM) with the objective of improving corporate governance includes which of the following? I. This answer is incorrect. The IIA’s Standards on ERM. which made them very effective ERM champions. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.Wiley CIA 2006 v1 Page 216 of 262 This answer is incorrect. Internal controls for ERM. This answer is incorrect. the chief audit executives (CAEs) of the study companies understand the value-added potential of ERM. C: Asset management principles.htm 1/20/2010 . file://C:\Program Files\Wiley\CIAExam\Print. ERM adds value because it is both inward-looking and forward-thinking. This answer is incorrect. B: II and III. II. According to the IIA Research Foundation. IV. D: Management accountability. Answer Explanations Answer (a) is the correct answer. This answer is incorrect. Refer to the correct answer explanation. III. B: Risk management process. C: I and IV. Follow-up on ERM metrics. Refer to the correct answer explanation. Refer to the correct answer explanation.

and formal action plans are key part of the ERM infrastructure. C: I and IV. overall assessment of risks and internal control effectiveness. Use of traditional auditing tools. Refer to the correct answer explanation. Question: V2C5-0217 file://C:\Program Files\Wiley\CIAExam\Print. This answer is incorrect. II. III. B: II and III. Refer to the correct answer explanation. (2) change their audit approach to focus on business risk. the internal audit’s role has been to provide reliable. Refer to the correct answer explanation. Refer to the correct answer explanation. Traditionally. (3) focus on future events (not past events). internal auditors now (1) take a more business-oriented approach to audit company’s operations. This answer is incorrect. and (4) review formal action plans developed by management as part of the ERM implementation. Control-based audit approach. This answer is incorrect.Wiley CIA 2006 v1 Page 217 of 262 Answer Explanations This answer is incorrect. Answer Explanations Answer (a) is the correct answer. Refer to the correct answer explanation. Answers A: I and II. (3) perform more effective follow-up on open ERM scorecards and metrics to increase management accountability. IV. Facilitation skills. Question: V2C5-0216 Which of the following attributes of the internal audit department can hinder the implementation of enterprise risk management (ERM) in the auditor’s organization? I. D: III and IV. Scorecards. This answer is incorrect. In order to meet the ERM implementation challenge. Consultant role. Refer to the correct answer explanation. Answer (c) is the correct answer. (2) be a consultant to the ERM implementation team (not as a policeman). metrics. In light of ERM implementation in improving corporate governance.htm 1/20/2010 . This answer is incorrect. the internal auditor should (1) use a risk-based audit approach (not a control-based approach). and (4) acquire competent skills to become an ERM facilitator (not use traditional accounting and auditing tools and skills).

Control self-assessment (CSA) is a management technique where an organization’s members identify and analyze controls and risks within business processes for continuous improvement. This answer is incorrect. which of the following address soft controls? Answers A: Control self-assessment techniques. Refer to the correct answer explanation. Answer Explanations Answer (a) is the correct answer. C: Authorization techniques. This answer is incorrect. The internal auditor is an enabler (facilitator) in introducing the control selfassessment program into his or her organization. This answer is incorrect. D: Enforcer. Refer to the correct answer explanation. Refer to the correct answer explanation. Refer to the correct answer explanation. file://C:\Program Files\Wiley\CIAExam\Print.Wiley CIA 2006 v1 Page 218 of 262 According to the control self-assessment (CSA) approach. B: Reviewer. This answer is incorrect. This answer is incorrect. CSA techniques address soft controls while traditional audit techniques focus on hard controls. The roles mentioned in the other answers reflect the various roles in traditional audits. Question: V2C5-0218 The role of an internal auditor in introducing a control self-assessment (CSA) program into the organization is that of a(n) Answers A: Enabler. Soft controls are more difficult to assess than hard controls. Soft controls are informal while hard controls are formal. B: Dual controls. Refer to the correct answer explanation. Answer Explanations Answer (a) is the correct answer. C: Evaluator. An example of a hard control is: Is there a code of ethics in place? An example of a soft control is: Are the employees willing to follow it? This answer is incorrect. D: Traditional audit techniques.htm 1/20/2010 . Refer to the correct answer explanation.

Refer to the correct answer explanation. This answer is incorrect. C: Vertical sessions.htm 1/20/2010 . C: Documentation. The implementation of the CSA program is categorized as either “vertical” or “horizontal. D: Auditing. Horizontal sessions are organization-wide (or division-wide) sessions that cut across departmental responsibilities to identify and control risks that have a broader effect. B: Improvement. D: Individual sessions. Answer (c) is the correct answer. This answer is incorrect. Answer (b) is the correct answer. B: Diagonal sessions. Diagonal and individual sessions are distracters.Wiley CIA 2006 v1 Page 219 of 262 Question: V2C5-0219 In the implementation of control self-assessment (CSA).” Vertical sessions are process-specific sessions that examine a given business process in depth. Refer to the correct answer explanation. Refer to the correct answer explanation. The file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations This answer is incorrect. which of the following examines a given business process in depth? Answers A: Horizontal sessions. Question: V2C5-0220 The major purpose of control self-assessment (CSA) is Answers A: Control. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. Most people react badly to the concept of being controlled and audited.

Answer (c) is the correct answer. Employees can provide an independent assessment of internal controls.000 without any other approval. Improvement resulting from a self-assessment exercise where interested parties in the organization are involved from the beginning in the evaluation process will lead to effective results and outcomes. Employees are objective about their jobs. Refer to the correct answer explanation. Buyers. This answer is incorrect. IV. Question: V2C5-0221 Control self-assessment (CSA) is a process that involves employees in assessing the adequacy of controls and identifying opportunities for improvement within an organization. This answer is incorrect. B: III and IV. D: II and IV. who are responsible for all purchases for specific product lines. Question: V2C5-0222 An auditor becomes concerned that fraud in the form of payments to bogus companies may exist. Refer to the correct answer explanation. Item II is incorrect. these would not be considered independent assessments.Wiley CIA 2006 v1 Page 220 of 262 chore of documentation is not exciting to many either. Which of the following are reasons to involve employees in this process? I.htm 1/20/2010 . Which of the following audit procedures would be most effective in addressing the auditor’s concerns? Answers file://C:\Program Files\Wiley\CIAExam\Print. Refer to the correct answer explanation. Answers A: I and II. Refer to the correct answer explanation. II. III. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. This answer is incorrect. Items I and IV are the reasons for involving employees in the process. are able to approve expenditures up to $50. Item III is incorrect. This answer is incorrect. Although employees can be involved in assessing internal controls. Employees become more motivated to do their jobs right. Managers want feedback from their employees. Employees in general are not felt to be objective about their jobs and/or performance. C: I and IV.

000 to determine whether they were properly approved. This would only provide information on whether the transactions that were authorized by the buyer were properly processed. this procedure is limited because it is not directed to the specific indicators that a fraud might exist. This is the most comprehensive procedure because it identifies major vendors. the question is whether there is support for the expenditure. This would provide evidence only on purchases above $50. Test data would provide evidence on whether the edit controls are currently working. concentrates on new vendors. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect. D: Use generalized audit software to select a sample of employees. select a sample of paid invoices to new vendors and examine evidence which shows that services or goods were received. The concern. C: Use generalized audit software to take a random sample of all expenditures under $50. or an invalid ethnic classification. Answer Explanations Answer (a) is incorrect. B: Develop a "snapshot" technique to trace all transactions by suspected buyers. Answer (d) is the correct answer. Answer (c) is incorrect. B: Review and test access controls to ensure that access is limited to authorized individuals. Further. which is to determine the extent of the potential problem as a precursor for planning the extent to which additional audit work is necessary. however. Answer (b) is incorrect. Use the sample to determine the validity of data items and project the result to the population as a whole. It does not provide evidence on whether the transaction should have been processed. The best approach to determine the extent of the potential problem would be to Answers A: Submit test data to test the effectiveness of edit controls over the input of data. Question: V2C5-0223 An auditor wishes to determine the extent to which invalid data could be contained in a human resources computer system. Answer (c) is the correct answer. This would provide information on whether transactions under $50. age in excess of retirement age. That is not the question here.000 contained the buyer’s authorization. and searches for underlying support that goods or services were provided by the vendor.Wiley CIA 2006 v1 Page 221 of 262 A: Use generalized audit software to list all purchases over $50. but they do not address the auditor’s major concern. which must be approved by someone other than the buyer. This is both the most effective and the most efficient procedure as it provides a file://C:\Program Files\Wiley\CIAExam\Print. C: Use generalized audit software to develop a detailed report of all data outside specified parameters. Access controls are important.000 to determine whether they were properly approved. Examples would be an invalid job classification. D: Use generalized audit software to list all major vendors by product line. is that data may have entered the system earlier and may be corrupted.000.htm 1/20/2010 .

B: Take a block sample of all loans in excess of a specified dollar limit and determine if they are current and properly categorized. Answer (c) is incorrect. This is the best procedure because it takes a sample from the total loan file and tests to determine that the loan is properly categorized as well as properly collateralized. Answer Explanations Answer (a) is the correct answer. The goods are received at a central warehouse. A computer program matches the invoice with the applicable purchase order and receiving information. For each loan approved. C: Take a discovery sample of all loan applications to determine whether each application contains a statement of collateral. If the items match. The company receives an invoice electronically from the vendor. Answer (d) is incorrect. the invoice is scheduled for payment and a report is made to the treasurer. If the invoice does not match the other items within predefined ranges. properly aged as to current payments. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 222 of 262 comprehensive analysis of the extent that obviously incorrect data is included in the database. All the applicable documents are electronically marked. cross-referenced. This sample only deals with large-dollar items and does not test for proper collateralization. and take a statistical sample stratified by the current and aged population. This is an inefficient audit procedure because it samples from loan applications. Question: V2C5-0224 A bank internal auditor wishes to determine whether all loans are backed by sufficient collateral. Examine each loan selected for proper collateralization and aging. examine the loan application to determine that the loan has proper collateralization. Question: V2C5-0225 A retail company uses electronic data interchange (EDI) to order all of its merchandise. D: Take a sample of payments made on the loan portfolio and trace them to loans to see that the payments are properly applied. The goods are price-marked at the warehouse and shipped to individual stores within twenty-four to forty-eight hours. The best audit procedure to accomplish this objective would be to Answers A: Use generalized audit software to read the total loan file. and retained in open files. age the file by last payment due. Answer (b) is incorrect.htm 1/20/2010 . Inventory and accounts payable is updated when the goods are received. not loans approved. This is a valid procedure. For each loan identified. where they are electronically scanned into the computer to determine that a purchase order had been issued and to record the goods. This would be an ineffective procedure because it is based only on loans in which payments are currently being made—it does not include loans that should have been categorized differently because payments are not being made. a report is generated and sent to accounts payable for further investigation. answer (c) provides more comprehensive and efficient evidence. verify aging and categorization. file://C:\Program Files\Wiley\CIAExam\Print. but given the auditor’s more limited objective. and properly categorized as current or noncurrent.

htm 1/20/2010 . C: Use "parallel simulation" technique and apply on a monthly basis. Parallel simulation would not be an efficient technique because it would cause the auditor to develop a massive parallel system. the invoice is scheduled for payment and a report is made to the treasurer. The test data method is limited to a point in time in which the testing is accomplished. file://C:\Program Files\Wiley\CIAExam\Print. B: Use generalized audit software to read the purchase order file for the year. Select a statistical sample of purchase orders and trace to applicable receiving and vendor invoice files. All the applicable documents are electronically marked. Answer (b) is the correct answer. where they are electronically scanned into the computer to determine that a purchase order had been issued and to record the goods. If the items match. Which one of the following audit procedures would be most effective in determining the items to investigate? Answers A: Submit test data to identify attributes of nonmatching items. cross-referenced.Wiley CIA 2006 v1 Page 223 of 262 The auditor wants to determine whether the computer program is appropriately matching the purchase receipts and vendor invoices throughout the year. a report is generated and sent to accounts payable for further investigation. Question: V2C5-0226 A retail company uses electronic data interchange (EDI) to order all of its merchandise. If the invoice does not match the other items within predefined ranges. Answer (d) is incorrect. Inventory and accounts payable is updated when the goods are received. It simply writes these transactions out to a file for further audit investigation. and retained in open files. Answer Explanations Answer (a) is incorrect. B: Use an integrated test facility throughout the year. The auditor wants to determine the extent to which items are not matched at year-end and investigate the potential cause of the nonmatching items. The SCARF method is used to identify outliers (transactions with unusual characteristics or transactions that are processed when they do not pass normal edit controls). The goods are price-marked at the warehouse and shipped to individual stores within twenty-four to forty-eight hours. The integrated test facility would allow the auditor to submit data periodically during the year to determine how well the program worked throughout the year. Follow up by investigating the attributes identified. A computer program matches the invoice with the applicable purchase order and receiving information. Answer (c) is incorrect. Which one of the following computerized audit techniques would be most efficient and effective in accomplishing this objective? Answers A: Use the test data method during the last quarter. The goods are received at a central warehouse. The company receives an invoice electronically from the vendor. It would not be a good technique for addressing the audit objective. Using it only during the last quarter of the year would not be effective unless there was also a test of program changes. D: Use the SCARF (systems control audit review file) on a daily basis.

but it would not be used efficiently here since it is reading the purchase order file only. Answer (c) is incorrect. Generalized audit software is a good tool.Wiley CIA 2006 v1 Page 224 of 262 C: Use SCARF to identify unusual items. Answer (d) is a more encompassing solution. The list could then be investigated further to determine the possibility of fraud. Take an attribute sample and trace to the underlying paper documents. Question: V2C5-0228 file://C:\Program Files\Wiley\CIAExam\Print. Tagging and tracing is most effective to determine that items properly submitted are processed correctly. Answer (b) is incorrect. Which of the following computer audit tools and techniques would be most helpful in identifying the existence of this type of fraud? Answers A: Tagging and tracing. One common type of welfare fraud is individuals receiving more than one social welfare payment. C: Integrated test facility. The ITF is most effective to determine that items properly submitted are processed correctly. Answer (b) is the correct answer.htm 1/20/2010 . The test data method would only tell us whether the computer program is working correctly at one point in time. Generalized audit software could be used to develop a list of multiple recipients at one address. B: Generalized audit software. This would not be the most effective technique. It would not identify all the problems encountered during the year. Answer Explanations Answer (a) is incorrect. Answer (d) is more efficient. D: Use generalized audit software to read the electronically marked unmatched items. Answer (c) is incorrect. D: Spreadsheet analysis. but using the same address. Answer (d) is incorrect. This is often accomplished by filing multiple claims under multiple names. It allows the auditor to analyze the potential problems before investigating further. This would be the best method because it would sample from a population that has been explicitly identified as nonmatching. SCARF would not be an effective audit tool because the auditor wishes to identify nonmatched items. Question: V2C5-0227 Governmental auditors have been increasingly called on to perform audits to determine whether individuals are getting extra social welfare payments. Many of the items selected may have been appropriately matched and some may not have been filled. Answer Explanations Answer (a) is incorrect. Answer (d) is the correct answer.

Question: V2C5-0229 The auditor determines that a major user application is implemented on a spreadsheet. C: I. III. If we were to rank order the effectiveness. Which of the following conclusions is(are) justified from the audit evidence? I. D: I only. but the auditor has researched the area and understands the algorithm and its correct computation. Examine the logic to determine if it has been correctly incorporated into the spreadsheet. Answers A: II only. Although the algorithm is correctly implemented. Answer (b) is incorrect because all three of the procedures would work.htm 1/20/2010 . The freight-dispatching algorithm is complicated. Use a product to print out the logic of the user spreadsheet. The auditor wishes to gain assurance on whether the spreadsheet has properly implemented the freight-dispatching algorithm. but the auditor has researched the area and understands the algorithm and its correct computation. and no one. if properly implemented. freight costs have been increasing. has reviewed the spreadsheet. has reviewed the spreadsheet. and no one. the spreadsheet helped reduce costs dramatically. III. and III. other than the developer. The increased freight costs must be due to some other cause than the spreadsheet calculation. Assume the audit testing performed in the previous question indicates that the spreadsheet has correctly implemented the freight-dispatching algorithm. II. Which of the following audit procedures would accomplish the task? I. The spreadsheet takes input regarding projected freight deliveries from the mainframe computer and develops an optimal freight-dispatching plan. Answer (c) is the correct answer. Run the test data through the user application. II. Develop an independent spreadsheet and run test data through it and through the user’s spreadsheet. The freight-dispatching algorithm is complicated. the spreadsheet helped reduce costs dramatically. Answer Explanations Answer (a) is incorrect because all three of the procedures would work. When first used two years ago. it would be I. B: I and III. The spreadsheet takes input regarding projected freight deliveries from the mainframe computer and develops an optimal freight-dispatching plan. All three audit approaches would work. Answers file://C:\Program Files\Wiley\CIAExam\Print. III. Answer (d) is incorrect because all three of the procedures would work. other than the developer. freight costs have been increasing. then II. However. However. Develop a set of test data and manually calculate the expected results.Wiley CIA 2006 v1 Page 225 of 262 The auditor determines that a major user application is implemented on a spreadsheet. II. procedure II would work. When first used two years ago. The spreadsheet must be obtaining incorrect data when it is downloaded from the mainframe. Compare the results. it is not the most efficient algorithm. However.

not conclusions. and the length of the program. Select a sample of the differences for further investigation. Compare and identify differences. Many programs will not have changes made to them during the applicable time period. Which of the following audit procedures would best address the stated objective? Answers A: Use generalized audit software to randomly select a sample of current applications. B: Take a sample of all program change requests. and the auditor obtains copies of the table of contents of the program library system at various periods of time. B: I. Answer (b) is incorrect. They represent hypotheses. the version number of the program. Question: V2C5-0230 The auditor wishes to test controls over computer program changes. The only justifiable conclusion that can be reached based on the audit tests is that something other than the calculation is causing the increase in freight costs. Answer Explanations Answer (a) is incorrect. not conclusions. there will not be program change request forms for many items selected. Answer (d) is Incorrect because the auditor has researched the potential algorithms and did not conclude that the one implemented is not sufficient. There is not enough evidence to justify this conclusion. D: Obtain a list of programming projects implemented by the data processing manager during the last six months. there are no unauthorized program changes). Answer (b) is incorrect.htm 1/20/2010 . Although hypotheses I and II may be potential explanations. Although hypotheses I and II may be potential explanations. and III. Take a sample from the list and trace to program change authorization forms. The specific objective to be addressed in the following audit step is that only authorized changes have been made to computer programs (i. The organization uses an automated program library system. Trace the requests to proper authorization and to changes in the program library. they would need to be tested. The table of contents indicates the date a change was last made to the program. Trace those selected to program change authorization forms. Sampling from authorized changes will tell the auditor only that authorized changes had been made. This would be an inefficient procedure.Wiley CIA 2006 v1 Page 226 of 262 A: III only. II. C: Use generalized audit software to compare the table of contents of the program library currently with an auditor copy made previously. Thus.e. Answer (c) is incorrect. The auditor is searching for unauthorized changes. C: I and II. They represent hypotheses. file://C:\Program Files\Wiley\CIAExam\Print. D: II only. Answer Explanations Answer (a) is the correct answer.. they would need to be tested.

Question: V2C5-0231 Auditors have learned that increased computerization has created more opportunities for computer fraud. Similar to response (b). but has also led to the development of computer audit techniques to detect frauds. Question: V2C5-0232 While performing analytical procedures related to an audit of a social services agency of a government entity. Answer (d) is incorrect. Answer (c) is incorrect. C: Snapshot. The auditor can later evaluate the items. SCARF is an audit technique that captures unusual transactions (or transactions in excess of edit checks) that have been submitted for processing. A type of fraud that has occurred in the banking industry is a programming fraud where the programmer designs a program to calculate daily interest on savings accounts to four decimal points. the auditor noted that there was an unusually large increase in payments to individual recipients who are under the direction of a particular social worker in the agency. file://C:\Program Files\Wiley\CIAExam\Print. Which of the following computer audit techniques would be most effective in detecting this type of fraud? Answers A: Parallel simulation. It would not be applicable here. D: SCARF (systems control and audit review file). It is doubtful that confirmation of an account balance would detect errors less than 1 cent made on a daily basis. It is not applicable here.Wiley CIA 2006 v1 Page 227 of 262 Answer (c) is the correct answer. The auditor then investigates the changes to see if they had been authorized. Since the auditor is looking for unauthorized changes. This method would work best because the amounts credited to each account would be compared to that calculated by the auditor’s parallel program. The programmer then truncates the last two digits and adds it to his or her account balance. Answer (d) is incorrect. Which of the following audit procedures would be the best procedure to investigate this observation? Answers A: Use generalized audit software to sort payments to recipients by social worker. Then sort the payments by common addresses and names.htm 1/20/2010 . the population only identifies those projects that have been authorized. B: Generalized audit software that selects account balances for confirmation with the depositor. This would be the best procedure. Snapshot is a technique for tracing the processing of transactions through a system. the auditor must first identify all changes that have taken place. Answer (b) is incorrect. Answer Explanations Answer (a) is the correct answer. The auditor is concerned with unauthorized changes.

The auditor has identified the following control procedures as potential items to include in the recommendation. Sending confirmations to the recipients listed on the file would not be the first approach that is being used for two reasons: (1) response (a) better establishes whether there is a defined pattern of potential fraud. Incorporate a code into the computer program to search for duplicate names and addresses.htm 1/20/2010 . I. Which of the following control combinations would effectively address the auditor’s concerns and improve control over valid recipients? Answers A: I. Like the ITF. D: Use generalized audit software to take a random sample of recipients and investigate by sending confirmations to each recipient to determine if they had received proper payments. Answer (c) is incorrect. and III. II. III. IV. Require that all additions to the recipient file be independently investigated and approved by a supervisor of the social workers. Require social workers to be rotated among recipients. the auditor noted that there was an unusually large increase in payments to individual recipients who are under the direction of a particular social worker in the agency. Require the use of self-checking digits on the account numbers of all recipients so that any duplicates will be immediately noted by the system. C: I and IV. not whether only valid recipients are receiving payment. III. file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0233 While performing analytical procedures related to an audit of a social services agency of a government entity. Develop an exception report that will go the section supervisor whenever duplicates are noted. and IV. This is a future-oriented approach and would not provide much information about the possibility of fraudulent items currently contained in the file. The auditor is considering making a recommendation on appropriate controls to address a potential problem of fictitious recipients.Wiley CIA 2006 v1 Page 228 of 262 B: Implement an integrated test facility and monitor transactions throughout the year to identify unusual items. Answer (d) is incorrect. Answer (b) is incorrect. This would be the best procedure because it would be an efficient manner to determine if there were any easily seen fraudulent pattern associated with the payments under the control of the social worker. the social worker will receive the confirmation (all sent to a common address) and will be able to respond positively. II. (2) if the recipients are indeed fraudulent. not the addition of new recipients to the files. The integrated test facility is designed to test the correctness of processing. C: Implement the snapshot approach and tag transactions that are related to the social worker identified with the unusually large increases. snapshot concentrates on the processing of data. Answer Explanations Answer (a) is the correct answer. B: I. II.

real-time environment. C: Embedded audit data collection. The concern is over the process of setting up valid recipients. Answer (d) is the correct answer. Answer Explanations Answer (a) is incorrect because generalized audit software can be used for data collection. Question: V2C5-0234 Many public utility companies operate complex customer service systems (CSS) to manage their customer service function. Question: V2C5-0235 Which of the following information systems auditing techniques processes real transaction data (or a copy of the real data) through auditor-developed test programs? Answers A: Integrated test facility. Which of the following IT auditing techniques provides the auditor with the capability to continuously monitor customer service data that are collected from telephone calls in CSS? Answers A: Generalized audit software. which allows customer service data to be directly entered online from customer telephone calls. Item III incorporates an important computer check. B: Control flowcharting. Each recipient set up in the system would have a unique self-checking digit. Answer (b) is incorrect because control flowcharting is developed to document and/or review the controls in an application system. and Item IV rotates duties so that a new worker will find that some recipients are not valid. and IV.Wiley CIA 2006 v1 Page 229 of 262 D: I. Answer Explanations Answer (a) is incorrect. All three of these responses would be effective in dealing with the audit and control concern identified by the auditor: Item I segregates duties. Answer (c) is incorrect. D: Integrated test facility (ITF). The self-checking digit would not improve the control procedure.htm 1/20/2010 . Item II would not add to the control. not to collect data. file://C:\Program Files\Wiley\CIAExam\Print. CSS operate in an online. Answer (c) is the correct answer. Item III would also contribute. Answer (b) is incorrect. Answer (d) is incorrect because ITF is used to test programs. but operates independently—and thus not continuously—from an application. III. Embedded audit data collection provides the auditor with the capability to continuously monitor the operation of an application.

Question: V2C5-0237 In auditing an online perpetual inventory system. Answer (d) is incorrect. Answer Explanations Answer (a) is the correct answer. Test data runs permit the auditor to verify the processing of preselected transactions. Parallel simulation processes real transaction data through auditor-developed test programs. Answer Explanations Answer (a) is incorrect. Mapping is a procedure for reporting code usage within a program. Answer (c) is the correct answer. It gives no evidence about unexercised portions of the program. D: Mapping. Tracing provides a detailed listing of the sequence of program statement execution. Code review can be used as a means of code comparison but is inefficient. Analytical review is the process of creating and evaluating ratios between numbers. an auditor selected certain file-updating transactions for detailed testing.. The audit technique that will provide a computer trail of all relevant processing steps applied to a specific transaction is described as file://C:\Program Files\Wiley\CIAExam\Print. the best IT audit technique is for the auditor to conduct a(n) Answers A: Code comparison. often in the context of financial statements. Question: V2C5-0236 To determine if there have been any unauthorized program changes since the last authorized program update. The integrated test facility involves the use of test data and also the creation of fictitious entities (e.htm 1/20/2010 . Answer (b) is incorrect. Answer (b) is incorrect. C: Parallel simulation.g. B: Code review. Answer (c) is incorrect. C: Test date run. vendors and employees) on master files. It is an efficient technique because it is performed by software. D: Analytical review.Wiley CIA 2006 v1 Page 230 of 262 B: Tracing. Answer (d) is incorrect. Code comparison is the process of comparing two versions of the same program to determine whether the two correspond. Code review is the process of reading program source code listings to determine whether the code contains potential errors or inefficient statements.

or ranges of values. Answer Explanations Answer (a) is incorrect because it is an example of functions that generalized audit software is able to perform. D: Tagging and tracing. Answer (b) is incorrect. This is a manual function that must be performed by the auditor. missing information. Question: V2C5-0239 Generalized audit software can be used to Answers file://C:\Program Files\Wiley\CIAExam\Print. Simulation permits comparisons of live data processing but does not produce a trail of processing steps. Answer (c) is incorrect. Tagging is an audit technique to obtain a computer trail of processing steps relevant to a given transaction. Answer (d) is incorrect because it is an example of functions that generalized audit software is able to perform. B: Snapshot. Code comparison verifies that program changes and maintenance are correctly followed.Wiley CIA 2006 v1 Page 231 of 262 Answers A: Simulation. B: Check for duplications.htm 1/20/2010 . C: Code comparison. Answer (d) is the correct answer. D: Verify calculation totals and analyses produced. Answer Explanations Answer (a) is incorrect. Answer (b) is incorrect because it is an example of functions that generalized audit software is able to perform. Question: V2C5-0238 Which of the following statements is not true concerning the tasks that generalized audit software is able to perform? Answers A: Provide totals of unusual items. Snapshot is a technique for taking a picture of computer memory to aid in verifying a decision process. C: Specify which data elements will be tested and the criteria to be used. Answer (c) is the correct answer.

Using a host language extension. The software compares two files for data consistency. file://C:\Program Files\Wiley\CIAExam\Print. Generalized audit software cannot verify operating system logic. Answer (b) is incorrect. Question: V2C5-0241 Embedded audit modules Answers A: Identify unexecuted computer code. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is the correct answer. Making manual adjustments to output does not reverse the fictitious entries in the master file. not ITF. Answer (c) is incorrect. This is the major reason for not using ITF. Reserving specific master file records and processing them at regular intervals pertains to base case system evaluation instead of ITF. Answer (c) is incorrect. D: Identify and reverse the fictitious entries to avoid contamination of the master file. Collecting transaction and master file records in a separate file is a feature of embedded audit data collection. Answer (d) is incorrect. Answer (d) is the correct answer. B: Perform concurrent auditing of data files. D: Access complex data structures without using host language extensions. Generalized audit software only permits ex-post (after the fact) auditing. C: Notify user personnel so they can make manual adjustments to output.Wiley CIA 2006 v1 Page 232 of 262 A: Examine the existence and consistency of data maintained on files. an auditor can gain direct access to the database. Question: V2C5-0240 A primary reason auditors are reluctant to use integrated test facility (ITF) is that it requires them to Answers A: Reserve specific master file records and process them at regular intervals. B: Collect transaction and master file records in a separate file.htm 1/20/2010 . C: Verify processing logic of operating systems software. Answer (b) is incorrect.

They can be continuously monitored or specifically activated. Answer (b) is incorrect. Answer (d) is the correct answer. D: All of the above. Answer (c) is incorrect because it is a characteristic of mapping. The department submitted test transactions throughout the year. processing steps built into the computer program.htm 1/20/2010 . The ITF only provides audit evidence on the correctness of processing of data that has been submitted to the computer application. Answer (c) is the correct answer. and developed test data to test them. The auditing department identified the key controls. Response (b) and (c) are not correct. C: The computer application and its control procedures were processing payroll transactions correctly during the past year. the auditors can conclude Answers A: The system is properly capturing the hours worked by employees during the year and the hours have been properly submitted to payroll and processed correctly. Question: V2C5-0243 The greatest impact information technology has had on the audit process is file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0242 An internal auditing department implemented an integrated test facility (ITF) to test its payroll processing. Thus. The auditor cannot conclude that all employees were paid correctly and that their pay was correctly recorded because to do so the auditor would need evidence that all employees were correctly classified as to pay rate and that all their time was correctly submitted to the computer program. B: All employees were correctly paid during the year and their pay was correctly computed. Answer Explanations Answer (a) is incorrect. not that all data have been entered correctly.Wiley CIA 2006 v1 Page 233 of 262 B: Aid in debugging application systems. it does not provide evidence that all hours worked have been entered into the system for processing. Answer Explanations Answer (a) is incorrect because it is a characteristic of snapshot. Answer (b) is incorrect because it is a characteristic of tracing. D: Enable continuous monitoring of transaction processing. Assuming the auditors did not find any differences in their test results. C: Analyze the efficiency of programming. The auditor’s inference can only be to the operation of computerized controls and the correctness of computer processing during the year because the integrated test facility tests only tests the computerized portion of the application. Answer (d) is incorrect.

Whether using information technology or not. Which of the following automated tools is the auditor most likely to use? Answers file://C:\Program Files\Wiley\CIAExam\Print. Answer Explanations Answer (a) is incorrect. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect.Wiley CIA 2006 v1 Page 234 of 262 Answers A: Its use to track personnel performance and development of audit staff. Answer (b) is incorrect. B: Process test data against master files that contain real and fictitious entities. Answer (b) is incorrect. This is a function of mapping. Question: V2C5-0245 An internal auditor was assigned to confirm whether operating personnel had corrected several errors in transaction files that were discovered during a recent audit. This is a function of an embedded audit routine. This is a function of generalized audit software. This task can be performed manually without the use of information technology. This is a function of an integrated test facility. Computer-assisted techniques have had the greatest impact on the audit process. C: Select sample data from files and check computations. C: Its use to conduct audits utilizing various computer-assisted techniques.htm 1/20/2010 . D: Its use as a strategic tool to develop the audit plan. While it has changed audit documentation. the audit risk is the same. and so on. Question: V2C5-0244 Generalized audit software is designed to allow auditors to Answers A: Monitor the execution of application programs. Answer (c) is the correct answer. it has not impacted the audit scope or test procedures. They have changed the audit scope and test procedures. such as automated working paper packages. B: Its use in the audit reporting process. D: Insert special audit routines into regular application programs. Answer (c) is the correct answer. Answer (d) is incorrect.

B: Compare the software on a sample of microcomputers with the purchase documentation. Question: V2C5-0247 A principal disadvantage of auditing around rather than through the computer is Answers file://C:\Program Files\Wiley\CIAExam\Print. Reviewing the minutes may determine the intent to comply with copyright laws but cannot establish compliance. Reviewing the policy will not determine compliance with copyright limitations. Answer Explanations Answer (a) is the correct answer. Answer Explanations Answer (a) is incorrect. An inventory of software alone cannot determine compliance without comparing it to supporting purchase documentation. Answer (c) is incorrect. C: Inventory all the software that is being run on microcomputers. Answer (d) is incorrect. Question: V2C5-0246 An audit test to substantiate that a company is complying with software copyright requirements is to Answers A: Review the corporate policy on copyrights. Answer (c) is incorrect. Tracing provides an audit trail of the instructions that are executed when a program is run. B: Parallel simulation.htm 1/20/2010 . Answer (b) is incorrect. Answer (b) is the correct answer. Mapping monitors the execution of a program. Comparing a sample of software being run on personal computers with purchase documentation will establish a basis for determining compliance. D: Tracing. Answer (d) is incorrect. Online inquiry is an interactive procedure that allows an auditor or other authorized personnel to select and view individual records or transactions. C: Mapping. Parallel simulation processes real data through audit programs so simulated output and regular output can be compared. D: Review the minutes of the MIS steering committee or similar body.Wiley CIA 2006 v1 Page 235 of 262 A: Online inquiry.

Auditing around the computer does not involve testing the transaction (audit) trail. The most effective computer audit technique to investigate the fraud would be to Answers A: Use test-data for multiple vendors and investigate unexpected results.Wiley CIA 2006 v1 Page 236 of 262 A: The time involved in testing controls for simulation programs is extensive. Answer (b) is incorrect. All the payments were sent to the same address. D: Test application controls through an integrated test facility and investigate unexpected results.htm 1/20/2010 . Answer (c) is the correct answer. The fraud did not involve a program change. Test data would check the processing of information. B: The costs involved in testing controls over computer processing are high. Answer (c) is the correct answer. Answer Explanations Answer (a) is incorrect. B: Perform a complete audit of computer program changes. High costs are not involved with testing controls when auditing around the computer. Answer (b) is incorrect. not the validity of the input information. or other commonalities of the billings. Answer Explanations Answer (a) is incorrect. This software could check the mailing addresses of vendors and detect common address. A high level of technical expertise is a disadvantage of auditing through the computer— not around the computer. the auditor would test all of the vendor information rather than a sample of the vendor transactions because file://C:\Program Files\Wiley\CIAExam\Print. The auditor suspects a possible fraud. Simulation programs involve computer applications and require auditing through the computer. C: Use generalized audit software to compare addresses across multiple files and print out duplicates for investigation. D: The technical expertise to compensate for auditing around the computer is extensive. Question: V2C5-0248 An accounting clerk developed a scheme to input fraudulent invoices for nonexistent vendors. Answer (d) is incorrect. C: The integrity of the audit trail through the computer is not tested. Question: V2C5-0249 In the audit example described in the previous question. This test is not designed to test for the processing of invalid information. Answer (d) is incorrect.

D: Generalized audit software. Question: V2C5-0250 To achieve cost-effective audits of computer-based systems where similar audit tasks are required to meet a variety of objectives. Answer (d) is the correct answer. Comparison programs compare source versions of operational programs with authorized copies and identify only changes or deviations in logic. Sampling error is not larger when computers are used to draw the sample. Question: V2C5-0251 file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 .Wiley CIA 2006 v1 Page 237 of 262 Answers A: Although nonsampling error is reduced. It is cost effective. This is not an example of “auditing through the computer. Answer (c) is incorrect. Standards do not prohibit the use of sampling. Answer Explanations Answer (a) is incorrect. the auditor should use Answers A: Comparison programs. Custom audit software is written for a specific audit and cannot be used on different systems. C: Query functions and report writers. Answer (b) is incorrect. Answer (c) is incorrect. Generalized audit software allows many different audits to be done where similar audit tasks are required. Answer Explanations Answer (a) is incorrect. B: The audit procedures used to compare vendor information require the reading of all records. sampling error is larger when computers are used to draw the sample. Answer (b) is the correct answer. B: Custom audit software. It requires the auditor to learn rules of each environment—usually limited to retrieval. D: The only effective procedures require auditing through the computer. The audit procedure to be applied in this case requires a matching of all records to identify vendor addresses that are the same. C: Audit standards prohibit the use of sampling if fraud is expected.” The test uses audit software to extract and compare data. Answer (d) is incorrect.

detailed reports that reconcile payroll expenses charged to the department are not generated. The transaction file of payroll hours is maintained by the system as a primary source of payroll input. However. employees report their hours on time sheets. Data file security is a general control concern. Since the vendors generate these document numbers. file://C:\Program Files\Wiley\CIAExam\Print. Audit staff members have been trained in the use of an audit software package and have a working knowledge of the database employed for this system but do not have programming experience. The payroll is then processed and pay stubs are printed and distributed to the employees. It is never acceptable for an internal auditor to rely on the representations of an auditee. C: Testing purchase transactions using a test-data approach. In the system being audited. Answer (b) is incorrect. which are keyed each week by an assigned individual in each department. Answer (c) is the correct answer.htm 1/20/2010 . Question: V2C5-0252 The internal auditing department has begun an audit of an automated payroll system. In order to preserve the confidentiality of the payroll information of employees. this question involves the document numbers on vendor invoices. After the department manager reviews the gross hours. Computer-based sequence checks are applications controls. the information is released to the online payroll system. All payments are through direct deposit. Given the skill level of the assigned staff. the purchasing firm has no access to a sequencing of such invoices. which of the following methods will most likely be applied to test the accuracy of the payroll calculation? Answers A: Parallel simulation. The use of test data is a useful audit procedure to test application controls. Answer (d) is incorrect. It is appropriate for an internal auditor to seek to determine whether the checks are working. The question deals with application controls. C: Tagging and tracing. B: Manually comparing vendor invoice numbers with those listed on computer-generated lists of accounts payable to assess the effectiveness of computer-based sequence checks.Wiley CIA 2006 v1 Page 238 of 262 Which of the following is an appropriate audit procedure that may be used to test the adequacy of application controls over computer-based accounts payable? Answers A: Observing the computer library and operations area to obtain evidence to support an opinion about the security of accounts payable data files. D: Using a computer-generated questionnaire to obtain reliable information about the accuracy and completeness of input and update of accounts payable data from the organization's computer management personnel. Management wants to know whether the payroll program is reliable. Answer Explanations Answer (a) is incorrect. B: Integrated test facility.

Wiley CIA 2006 v1 Page 239 of 262 D: Mapping and program analysis. but would not allow identification of lost or incomplete updates.000 vendors. All payments are matched against a 60-day payment history file. You have been told that vendors have recently reported several duplicate payments. Whenever there is a match on amount. the most appropriate approach is Answers A: Test data. the agency is building a heavy rail system and makes payments to contractors and subcontractors for this $2 billion project. Answer (b) is incorrect. Question: V2C5-0254 You have been assigned to review the propriety of the duplicate payments edit control in the accounts payable system of a public agency. but may contaminate actual transaction data. An integrated test facility tests the system on a continuous basis. Controlled reprocessing allows update inputs to be inexpensively reprocessed and compared to original update results. Management believes that some unreported duplicate payments may exist for which the agency should seek refund. In addition. Question: V2C5-0253 To identify lost or incomplete sales accounting record updates using the computer. and vendor number. Answer (c) is the correct answer. Test data checks specific controls. Mapping and program analysis requires a strong programming background. Answer (b) is incorrect. Use of an integrated facility usually requires advanced planning before a system is implemented. file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is incorrect. D: Integrated test facility. B: Parallel simulation. Tagging and tracing is more difficult to employ than parallel simulation. Answer Explanations Answer (a) is incorrect. invoice number. Answer Explanations Answer (a) is the correct answer. The agency purchases spare parts from approximately 2. The director of management information systems (MIS) stated that the duplicate payments were isolated instances that would eventually have been discovered by controls outside of the computer system. Use of audit software to perform parallel simulation is an acceptable audit application. Answer (d) is incorrect. something not available on this audit team. Answer (d) is incorrect.htm 1/20/2010 . Parallel simulation is quite expensive and is inappropriate for a one-time identification of lost or incomplete updates. C: Controlled reprocessing. Installing an integrated test facility after the fact can be quite costly and time consuming.

Answer Explanations Answer (a) is incorrect. but it does not address the duplicate payments problem. which of the following computer-assisted audit techniques would allow the auditor to select predefined transactions for audit during normal processing? Answers A: Extended records. B: Tracing. it is not the solution to the problem at hand. B: Source code desk checking. Tracing is used to identify the execution and sequence of computer instructions. Mapping is used to determine if any unexecuted code exists. Generalized audit software can be utilized to review 100% of the file for duplicate payments using any matching requirements and thus help identify potential duplicate payments claims. Embedded audit data collection requires screening routines be inserted within production runs and thus allows identification and selection of transactions meeting predefined criteria. Answer (b) is incorrect. D: Embedded audit data collection. Which of the following is the best computer-assisted audit technique or tool to use in this situation? Answers A: Statistical sampling. Answer (d) is the correct answer. Specific identification of duplicate payments is the problem here. An integrated test facility is useful for passing test data through a production system. C: Integrated test facility. Only the manager of accounts payable is capable of overriding this edit. Extended records combine elements from different files into a single record. D: Generalized audit software.Wiley CIA 2006 v1 Page 240 of 262 duplicate payments warning is sent to the accounts payable clerk. Answer (c) is incorrect.htm 1/20/2010 . Answer (c) is incorrect. Answer (b) is incorrect. Answer Explanations Answer (a) is incorrect. Statistical sampling is most useful in estimating the size of a population (variables sampling) or the degree of error (attribute sampling). file://C:\Program Files\Wiley\CIAExam\Print. Answer (d) is the correct answer. C: Mapping. Question: V2C5-0255 When concerned with the validity of certain recurring transactions. While desk checking the source code might detect a program error.

B: Developing a simulation program to compare actual data and test data. Comparing shipping records with credit limits demonstrates only that credit limits might not have been exceeded. D: Shipping records with customer credit limits. Snapshot is a technique using specially coded inputs to trace the transaction trail. an auditor would compare computer-generated Answers A: Receivables ledger updates with detailed sales invoices. Answer (d) is incorrect. Answer (c) is incorrect. Answer (c) is incorrect. C: Using specially coded inputs to trace test data through the transaction trail. Answer (d) is incorrect. file://C:\Program Files\Wiley\CIAExam\Print. B: Shipping records with detailed sales invoices. An integrated test facility uses a fictitious or dummy entity against which data are processed and stored. Answer (b) is the correct answer. Comparing entries in the receivable ledger with sales invoices only demonstrates that the prepared invoices were posted. Question: V2C5-0257 Which of the following best describes the operation of an integrated test facility (ITF)? Answers A: Establishing a dummy entity against which test data are processed and stored. Simulation programs are techniques using separate programs to process actual data and then compare results. Data conversion is the process of translating transactions into a form compatible with an operating system. D: Translating business transactions into a format that the operating system processes. Answer Explanations Answer (a) is incorrect.htm 1/20/2010 . C: Shipping records with original customer orders. Answer (b) is incorrect. Comparing shipping records with sales invoices would disclose any shipments that were not billed. Comparing shipping records with original customer orders only demonstrates that shipments were made to customers—not those customers were billed.Wiley CIA 2006 v1 Page 241 of 262 Question: V2C5-0256 To test that all inventory shipments are billed to customers. Answer Explanations Answer (a) is the correct answer.

Wiley CIA 2006 v1 Page 242 of 262 Question: V2C5-0258 An internal auditor identifies a situation where there is doubt whether all overhead is completely allocated to cost centers by the computer program. C: It increases the amount of technical skill required of the auditor. Control flowcharting is generally at the systems level rather than the program level. Answer Explanations Answer (a) is incorrect. The test data approach inputs data into the application and allows output to be compared to predetermined results.htm 1/20/2010 . Answer (c) is incorrect. Extended records are used to capture an audit trail through a system. Answer (b) is the correct answer. Inquiry of the systems programmer would be of little help in relation to specific program logic problems. A major advantage of this type of auditing is the ability to immediately process data using microcomputer software without first having to manually enter the data into the microcomputer. Which of the following is an advantage of this type of “paperless audit” of accounts receivable balances? Answers A: It reduces the amount of substantive testing required. B: It allows immediate processing of audit data on a spreadsheet working paper. Answer Explanations Answer (a) is incorrect. Question: V2C5-0259 Modern computer technology makes it possible to perform “paperless audits. B: Inquiry of the systems programmers. file://C:\Program Files\Wiley\CIAExam\Print. C: Use of extended records and mapping.” For example. Answer (d) is the correct answer. D: It allows direct confirmation of customer account balances. thus identifying the degree of completeness of the allocation. The best procedure to test the completeness of the allocation by the program is Answers A: Use of control flowcharting. an auditor might utilize a microcomputer to directly access the accounts receivable files and copy selected customer records into the microcomputer for audit analysis. Audit technology has no direct effect on the amount of substantive testing required. Answer (b) is incorrect. D: The test-data approach. in an audit of computer-processed customer accounts receivable balances.

Answer (d) is incorrect. B: The test transactions could enter the live data environment. C: Calculate batch totals for each input. Processing computer files does not in itself provide confirmation of customer account balances. Computer matching of fields such as goods received number. C: The ITF technique cannot be used with simulated master file records. Answer Explanations Answer (a) is the correct answer. product code. supplier code. Answer (c) is incorrect. it is not an advantage. B: Maintain control totals of inventory value. Answer (d) is incorrect. D: Use check digits in account numbers. Answer (b) is the correct answer. including the presence of processing controls. While this is true. Question: V2C5-0260 To ensure that goods received are the same as those shown on the purchase invoice. and quantity assures agreement between goods received and goods invoiced. An acknowledged risk of using the ITF is the contamination of live master files. a computerized system should Answers A: Match selected fields of the purchase invoice to goods received. Answer Explanations Answer (a) is incorrect. Question: V2C5-0261 Which of the following is a disadvantage of using an integrated test facility (ITF) when auditing a computer application? Answers A: The ITF may be useful in verifying the correctness of account balances.Wiley CIA 2006 v1 Page 243 of 262 Answer (c) is incorrect.htm 1/20/2010 . The ITF is utilized to test programs in operation. Check digits only provide for validation of predefined account numbers. during application testing. file://C:\Program Files\Wiley\CIAExam\Print. Batch totals only provide a total value for a field and do not allow for detail matching. Control totals do not identify specific item-by-item differences. but not in determining the presence of processing controls. D: The test data must be processed by IT staff with substantial technical skills. Answer (b) is incorrect.

An embedded audit module enables continuous monitoring and analysis transaction processing. Answer (d) is incorrect. The ITF technique can be used for both system development and application testing. Answer (d) is incorrect. Answer (c) is incorrect. C: It is usually longer. A vertical flowchart is usually designed to provide for written descriptions. B: Identify program code that may have been inserted for unauthorized purposes. including the functioning of processing controls. Retrieval and analysis programs such as generalized audit software offer the features and flexibility suitable for verifying the correctness of information on a computer file. Question: V2C5-0262 Which of the following is one purpose of an embedded audit module? Answers A: Enable continuous monitoring of transaction processing. The snapshot method is a technique utilized to capture and print all data pertinent to the analysis of a specific moment in the processing cycle. file://C:\Program Files\Wiley\CIAExam\Print. B: It brings into sharper focus the assignment of duties and independent checks on performance. Mapping is a technique for determining whether a computer program contains any unexecuted code that should be examined. D: It does not provide as broad a picture at a glance.Wiley CIA 2006 v1 Page 244 of 262 Answer (c) is incorrect. Answer Explanations Answer (a) is incorrect. By emphasizing the flow of processing between departments and/or people. C: Verify the correctness of account balances on a master file. D: Review the contents of a specific portion of computer memory.htm 1/20/2010 . it more clearly shows any inappropriate separation of duties and lack of independent checks on performance. Answer (b) is incorrect. Question: V2C5-0263 Which of the following is true of a horizontal flowchart as compared to a vertical flowchart? Answers A: It provides more room for written descriptions that parallel the symbols. Minimal technical skill is required to process test data when using an ITF. Answer (b) is the correct answer. Answer Explanations Answer (a) is the correct answer.

D: Run chart. The definition of a flowchart is that it is a graphical representation of a sequence file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Answer (d) is incorrect. C: Histogram. A narrative review covering the history and forms’ usage of the department is not as efficient or comprehensive as flowcharting for communicating relevant information about controls. and forms usage. Answer (c) is incorrect. Copies of procedures and related forms do not provide an efficient method of reviewing the processing activities. C: A narrative describing departmental history. More of the flow of processing can be depicted on one page than in a vertical flowchart with written descriptions. activities. which is the most efficient source for an auditor to use to evaluate a company’s overall control system? Answers A: Control flowcharts.Wiley CIA 2006 v1 Page 245 of 262 Answer (c) is incorrect. Answer Explanations Answer (a) is the correct answer. Question: V2C5-0265 Which of the following tools would best give a graphical representation of a sequence of activities and decisions? Answers A: Flowchart. Question: V2C5-0264 Of the following. D: Copies of industry operating standards. especially those involving several departments. Industry standards do not provide a picture of existing practice for subsequent audit activity. B: Control chart. Control flowcharting provides an efficient and comprehensive method of describing relatively complex activities. Answer Explanations Answer (a) is the correct answer. B: Copies of standard operating procedures. It is usually shorter because space for written descriptions is not provided. Answer (d) is incorrect. Answer (b) is incorrect.

A histogram is a bar chart showing conformance to a standard bell curve. Question: V2C5-0267 An auditor reviews and adapts a systems flowchart to understand the flow of information in the processing of cash receipts. Answer (b) is incorrect. Which of the following statements is true regarding the use of such flowcharts? The flowcharts Answers A: Show specific control procedures used. D: Show only computer processing. which is the most valuable in providing a summary outline and overall description of the process of transactions in an information system? Answers A: Flowcharts. A flowchart is most valuable in providing a summary outline and description of transaction flows. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. Transaction retrievals are used to select items for testing and review. such as edit tests that are implemented and batch control reconciliations. Answer (d) is incorrect. Answer (b) is incorrect. D: Software code comparisons. A run chart tracks the frequency or amount of a given variable over time.Wiley CIA 2006 v1 Page 246 of 262 of activities and decisions. Software code comparisons are used to validate that programs in production correspond to an authorized copy of the software. Answer Explanations Answer (a) is the correct answer. Answer (c) is incorrect. A control chart is used to monitor actual versus desired quality measurements during repetition operation. C: Are generally kept up to date for systems changes. not manual processing. Answer (d) is incorrect. C: Test decks. Question: V2C5-0266 Of the techniques available to an auditor.htm 1/20/2010 . B: Transaction retrievals. B: Are good guides to potential segregation of duties. Answer (c) is incorrect. Test decks are used to verify processing accuracy.

the internal auditor will most likely use Answers A: A horizontal (or systems) flowchart. B: A questionnaire approach. D: A detailed narrative approach. D: An internal control questionnaire. the auditor will have to interview key personnel to determine changes in processing since the flowchart was developed. Answer (c) is incorrect because it is not a procedure-oriented documenting tool. Answer (b) is incorrect because it does not highlight the interaction of departments. C: A matrix approach.htm 1/20/2010 . Therefore. Answer Explanations Answer (a) is the correct answer. Question: V2C5-0268 In documenting the procedures used by several interacting departments. The flowcharts are generally not kept up-to-date for changes. C: A Gantt chart. Systems flowcharts show segregation of duties and the transfer of data between different segments in the organization. Question: V2C5-0269 Which method of evaluating internal controls during the preliminary review provides the auditor with the best visual grasp of a system and a means for analyzing complex operations? Answers A: A flowcharting approach. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is the correct answer. Answer (c) is incorrect. Those would be found in a programming flowchart. Answer (d) is incorrect. Answer (d) is incorrect because it does not highlight the interaction of departments. A systems flowchart should show both the manual processing and the computer processing. The systems flowchart shows the overall flow.Wiley CIA 2006 v1 Page 247 of 262 Answer (a) is incorrect. but would not identify the specific edit tests implemented. B: A vertical flowchart. It highlights the interaction between departments.

Risk financing deals with internal funding and external transfer of risk Answer (d) is incorrect. Answer (b) is incorrect. Controls are implemented in the risk mitigation phase in order to reduce the effects of risks. D: Corporate governance. A detailed narrative does not provide the means of evaluating complex operations that a flowchart does. C: Revenue growth.htm 1/20/2010 . measurement. A questionnaire approach provides only an agenda for evaluation. Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. Answer (c) is incorrect. Answer (c) is incorrect. the scope of traditional risk management includes which of the following? Answers A: Insurance. Risk assessment includes identification. B: Earnings growth. Answer Explanations Answer (a) is incorrect. Answer (d) is incorrect. B: Risk mitigation. Question: V2C5-0270 From enterprise risk management (ERM) viewpoint. A matrix approach does not provide the visual grasp of the system that a flowchart does. A flowchart provides a visual grasp of the system and a means of analysis that cannot be achieved by other methods. C: Risk financing. and prioritization of risks Answer (b) is the correct answer. Risk monitoring addresses internal and external reporting and feedback into risk assessment Question: V2C5-0271 From enterprise risk management (ERM) viewpoint. analysis.Wiley CIA 2006 v1 Page 248 of 262 Answer (a) is the correct answer. D: Risk monitoring. control processes are implemented in which of the following? Answers A: Risk assessment.

Some organizations are embracing all sources of risk at the outset. but are tackling the processes one at a time. This answer is incorrect. Other organizations taking on all risk sources and all processes. all of the following can oversee risk management activities except Answers A: Chief financial officer. This answer is incorrect. and the impact and nature of risk. The strategies have concentrated on insurance solutions primarily. revenue growth. C: Chief audit executive. Refer to the correct answer explanation. covering areas such as earnings growth. and corporate governance. Answer Explanations Answer (a) is incorrect. with most starting with risk assessment. Question: V2C5-0273 From enterprise risk management (ERM) viewpoint. B: Total risk approach. D: Pilot project approach. Question: V2C5-0272 In implementing enterprise risk management (ERM). Most organizations are seeking early wins that will help build momentum and promote further development toward their ideal ERM process.htm 1/20/2010 . C: Early wins approach. Now the focus of ERM is broad. types of risk management strategies. risk management has been focused more narrowly in terms of scope of risks. file://C:\Program Files\Wiley\CIAExam\Print. Answer (b) is incorrect. Refer to the correct answer explanation. Refer to the correct answer explanation. most organizations are following a(n) Answers A: Layered approach. This answer is incorrect. one at a time. into their risk assessment and risk mitigation processes. Answer (d) is incorrect. but on a small. Some organizations are using a layered approach of risk.Wiley CIA 2006 v1 Page 249 of 262 Answer (a) is the correct answer. Answer (c) is the correct answer. manageable subset of their operations as a pilot project. B: Chief executive officer. Traditionally.

Other tools of importance include risk mapping or optimization software. B: Risk mapping tool. D: Performance management system tool. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. Answer (b) is the correct answer. B: Desire for a unifying framework. 30% felt that chief audit executive is responsible for overseeing enterprise risk management or compliance activities. C: Optimization software tool. Chief executive officer was not involved in this activity. Question: V2C5-0275 Which of the following is the primary driver for enterprise risk management (ERM) activity? Answers A: Corporate governance guidelines. This answer is incorrect. Question: V2C5-0274 Organizations do not view enterprise risk management (ERM) as a(n) Answers A: Analytical tool. Answer Explanations This answer is incorrect. The chief financial officer was second with 24% and the chief risk officer was third with 21%. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Refer to the correct answer explanation. According to the IIA survey respondents. This answer is incorrect. This answer is incorrect. Refer to the correct answer explanation. The IIA survey indicated that some organizations see ERM as an analytical tool rather than as a performance management system.Wiley CIA 2006 v1 Page 250 of 262 D: Chief risk officer. Refer to the correct answer explanation. Answer (d) is the correct answer. This answer is incorrect. Refer to the correct answer explanation.

D: Desire for earnings stability. Question: V2C5-0276 According to the IIA survey regarding enterprise risk management (ERM). Similarly. D: Revenue growth. Question: V2C5-0277 Enterprise resource management (ERM) is seen as providing immediate value in which of the following areas? I. Contingency planning. however. which of the following is ranked as the highest business issue today? Answers A: Earnings consistency. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. revenue growth was the second highest ranked business issue. Refer to the correct answer explanation. B: Expense control. Capital management. Expense control or reduction was ranked as the third most important issue today. Refer to the correct answer explanation. Earnings consistency.Wiley CIA 2006 v1 Page 251 of 262 C: Competitive pressure. This answer is incorrect. few years from now earnings consistency will be viewed to be the third most important issue. II. This answer is incorrect. Answer Explanations This answer is incorrect. C: Earnings growth. Answer (b) is the correct answer. Earnings growth received the highest rating. More than half of the IIA survey respondents cited the desire for a unifying framework is the primary driver for ERM. Refer to the correct answer explanation. This answer is incorrect. III. Refer to the correct answer explanation. file://C:\Program Files\Wiley\CIAExam\Print.htm 1/20/2010 . Answer (c) is the correct answer. Refer to the correct answer explanation. This answer is incorrect. and 38% cited corporate governance guidelines as another important driver.

B: II only. This answer is incorrect. Answer Explanations This answer is incorrect. C: Organizational turf battles. Answer Explanations This answer is incorrect. The IIA survey respondents indicated that organizational culture is the top barrier followed by unclear benefits to senior management. Answers A: I only. Refer to the correct answer explanation. and lack of tools. Question: V2C5-0278 Which of the following is the major barrier to implementing enterprise risk management (ERM) program? Answers A: Unclear benefits. Answer (d) is the correct answer. This answer is incorrect. B: Lack of tools. Refer to the correct answer explanation. D: II and IV.Wiley CIA 2006 v1 Page 252 of 262 IV. Refer to the correct answer explanation. The IIA survey respondents indicated that capital management and contingency plans provide significant and immediate value. file://C:\Program Files\Wiley\CIAExam\Print. This answer is incorrect. Refer to the correct answer explanation. C: I and III. They also believed that ERM could assist with earnings consistency and expense control. Refer to the correct answer explanation. organizational turf battles. lack of formalized process. This answer is incorrect. Answer (c) is the correct answer. Expense control. D: Organizational culture. Refer to the correct answer explanation.htm 1/20/2010 .

only 21% of respondents reported that risk assessment activity related to the human resource function. C: Operations. C: Insurance management. operations file://C:\Program Files\Wiley\CIAExam\Print. The IIA survey respondents reported that most internal auditing. Question: V2C5-0280 Risk management has evolved from which of the following? Answers A: Operations research. This answer is incorrect. Answer Explanations Answer (a) uses a scientific approach to decision making. Decision theory provides a basis for judging the goodness or badness of decisions before the outcome is known. Decision theory has its roots in operations research and management science. D: Management science. B: Decision theory. D: Internal audit.Wiley CIA 2006 v1 Page 253 of 262 Question: V2C5-0279 Comprehensive risk assessment does not exist in which of the following functions? Answers A: Human resources. Refer to the correct answer explanation. Decision theory provides a basis for judging the goodness or badness of decisions before the outcome is known. Answer (c) is the correct answer. B: Finance. This answer is incorrect. Decision theory has its roots in operations research and management science.htm 1/20/2010 . finance. Refer to the correct answer explanation. The strategic factor in the transition from insurance management to risk management was the evolution of decision theory. Refer to the correct answer explanation. In contrast. Answer Explanations Answer (a) is the correct answer. comprehensive risk assessment process in place. This answer is incorrect. and operations functions have a formal. Risk management has evolved from insurance management. Answer (b) uses a scientific approach to decision making.

g. property risks. performance risks (risks resulting from human failure of a contractor to complete a project. B: A morale hazard. file://C:\Program Files\Wiley\CIAExam\Print. property risks (damage to or destruction of property. liability risks.g.. Answer (b) is the correct answer. Question: V2C5-0282 A business firm with an inventory of obsolete stock that is overinsured might represent which of the following? Answers A: A moral hazard. or disability). shoplifting losses in a retail store that are rarely insurable). and management science disciplines. liability risks (liability suits arising out of automobiles).g. high interest rates. and political phenomena. Although the major focus of most risk managers is on insurable risks. options. and high inflation rates). and the loss of use of property that has been damaged). including personal risks. C: Speculative risks. unemployment. default of a debtor). Fundamental risks are those that are impersonal in origin and consequences—they are generally beyond the control of the individual. Answer (d) uses a scientific approach to decision making. Pure risks are of several types. and derivatives). The risk manager cannot ignore those pure risks that are not insurable (e. D: Fundamental risks. Question: V2C5-0281 Risk management is concerned primarily with Answers A: Dynamic risks. B: Pure risks.. Decision theory provides a basis for judging the goodness or badness of decisions before the outcome is known. Answer (d) is incorrect. They are group risks.htm 1/20/2010 . Pure risks are those in which there is a chance of loss or no loss only. Risk management deals with both insurable and uninsurable risks.Wiley CIA 2006 v1 Page 254 of 262 research.. caused for the most part by economic. C: A physical hazard. Answer (c) is incorrect. although they may also result from physical occurrences. Speculative risks involve the chance of loss or gain (e. and performance risks. Examples include personal risks (death. hedging. social. the more appropriate realm of risk management is pure risk. Answer Explanations Answer (a) is incorrect. sickness. Dynamic risks are those that arise from changes in the economy (e. Decision theory has its roots in operations research and management science.

Answer Explanations Answer (a) is the correct answer. or the inflated losses that occur simply because the loss is insured. B: Risk retention. and the legal environment that can influence the probability of loss. defective wiring. and road conditions. in which the risk is transferred from the individual to the group. This answer is incorrect. storage of flammables. Answer (d) is incorrect. Question: V2C5-0283 Which of the following techniques for dealing with risk may represent a special variation of other techniques? Answers A: Risk financing. C: Risk sharing. depending on the success of the risk-sharing arrangement. and false claims to defraud an insurer. court decisions. Answer (b) is incorrect. Refer to the correct answer explanation. Legal hazards include statutes. and examples include businesses that are losing money. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. It may also be a form of risk retention. Both risk retention and risk transfer and part of risk financing. Answer (c) is the correct answer.Wiley CIA 2006 v1 Page 255 of 262 D: A legal hazard. Moral hazard is a dishonest tendency. Risk sharing is viewed as a special case of risk transfer. A hazard is a condition that increases the probability of loss from a peril. file://C:\Program Files\Wiley\CIAExam\Print. Physical hazards include conditions such as faulty housekeeping. This answer is incorrect. Question: V2C5-0284 Risk avoidance should be used in those instances in which Answers A: The severity of loss is high. D: Risk transfer. Answer (c) is incorrect. obsolete inventory that is overinsured. Morale hazard is reflected in a careless attitude that may accompany the existence of insurance.htm 1/20/2010 . Examples include faulty wiring and improper storage of flammables.

htm 1/20/2010 . the risk should be avoided or transferred.Wiley CIA 2006 v1 Page 256 of 262 B: The exposure has catastrophic potential and the risk cannot be reduced or transferred. Speculative risks involve the chance of loss or gain (e. financial risks. Pure risks are those in which there is a chance of loss or no loss only (e. Refer to the correct answer explanation. and operational risks. and speculative risks. D: Dynamic risks. and people. Refer to the correct answer explanation. options. B: Market risk. operational risks. such as pure risks. Operational risks include risks related to systems. financial risk. processes.g. and speculative risks. hedging. This answer is incorrect. Question: V2C5-0286 file://C:\Program Files\Wiley\CIAExam\Print.g. Question: V2C5-0285 The term “enterprise risk management” (ERM) refers to which of the following? Answers A: Risks related to financial derivatives and futures. Refer to the correct answer explanation. Answer (b) is the correct answer. Refer to the correct answer explanation. D: The frequency or severity cannot be determined. strategic risks. Answer Explanations This answer is incorrect. and derivatives). operational. Answer (c) is the correct answer. Financial risks include credit risk and interest rate risk. This answer is incorrect. C: Pure. Strategic risks include reputation risk and leadership risk. and pure risks. This answer is incorrect. Risk situations that have high severity and high frequency should be either avoided or reduced. ERM is a broad concept that includes many areas. disability). Refer to the correct answer explanation. Answer Explanations This answer is incorrect. technology.. Reduction is appropriate when it is possible to reduce either the severity or the frequency to a manageable level. strategic. static risks. Refer to the correct answer explanation. C: The frequency of loss is high. financial. This answer is incorrect.. Otherwise. default of a debtor.

Risk financing includes risk retention and risk transfer. Answer (c) is incorrect. This answer is incorrect. D: Selection of risk treatments. C: Risk avoidance and risk reduction. Risk management is broken down into two major categories: risk control and risk financing.Wiley CIA 2006 v1 Page 257 of 262 The two broad approaches to dealing with risk management are Answers A: Risk retention and risk transfer. This answer is incorrect. Risk control focuses on minimizing the risk of loss to which the organization is exposed. Refer to the correct answer explanation. Question: V2C5-0288 file://C:\Program Files\Wiley\CIAExam\Print. determining the objectives of the program is the first step in the risk management process that is most likely to be overlooked.htm 1/20/2010 . Answer Explanations Answer (a) is incorrect. D: Risk control and risk financing. It is meaningless in that it combines parts of the two categories. The risk management process properly handles the other answers. Risk control includes risk avoidance and risk reduction. Answer (b) is the correct answer. Despite its importance. B: Risk avoidance and risk transfer. B: Determination of objectives. C: Identification of risks. Consequently. the risk management efforts of many firms are fragmented and inconsistent. Answer (b) is incorrect. Risk financing concentrates on arranging the availability of funds to meet the losses that do occur. Answer (d) is the correct answer. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. Question: V2C5-0287 Which of the following steps in the risk management process is most likely to be overlooked? Answers A: Evaluation of risks. Refer to the correct answer explanation.

Minimizing the adverse effects of losses and uncertainty connected with pure risks is necessary. Answer (c) is the correct answer. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. C: Minimize the adverse effects of losses and uncertainty connected with pure risks. Risk management is concerned with pure risk. Answer Explanations This answer is incorrect. retention is not recommended. This answer is incorrect. Risk retention is most appropriate for situations in which there is a low probability of occurrence (frequency) with a low potential severity. Question: V2C5-0289 Risk retention is most appropriate for situations in which there is a Answers A: Low frequency and a high severity. B: Minimize uninsured losses. file://C:\Program Files\Wiley\CIAExam\Print. The higher the probabilities of loss. Refer to the correct answer explanation. Frequency determines whether the risk is economically insurable. the higher the expected value of loss and the higher the cost of transfer. Refer to the correct answer explanation. Risk management is a process that involves managing the pure risks. Severity dictates whether a risk should be retained. C: Low frequency and a low severity.htm 1/20/2010 . Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. If the potential severity is more than the organization can afford. Answer (c) is the correct answer. Refer to the correct answer explanation. B: High frequency and a high severity. D: High frequency and a low severity.Wiley CIA 2006 v1 Page 258 of 262 The ultimate goal of risk management is to Answers A: Minimize insurance expenditures. This answer is incorrect. D: Eliminate financial and operational losses.

file://C:\Program Files\Wiley\CIAExam\Print. Refer to the correct answer explanation. The cost of financing losses is the amount of funds that is paid for the losses that occur. Refer to the correct answer explanation. by earmarking funds or by the purchase of insurance. The cost of risk for retained risks is the opportunity cost on the funds that must be earmarked and that cannot be used for other purposes. B: Opportunity cost. D: High frequency and a low severity. Question: V2C5-0291 Regarding enterprise resource management (ERM) framework. B: High frequency and a high severity.Wiley CIA 2006 v1 Page 259 of 262 Question: V2C5-0290 Insurance is most appropriate for situations in which there is a Answers A: Low frequency and a high severity. Refer to the correct answer explanation. and a low probability (frequency) implies a low expected value and a low cost of transfer. Answer Explanations Answer (a) is the correct answer. C: Average cost. Insurance is most appropriate for situations in which there is a low frequency and a high severity. Financing involves paying for the losses out of current income or existing assets. D: Interest cost. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. C: Low frequency and a low severity. the cost of financing risk is a(n) Answers A: Marginal cost. Answer (b) is the correct answer.htm 1/20/2010 . The high severity implies a catastrophic impact if the loss should occur. Answer Explanations This answer is incorrect. This answer is incorrect.

htm 1/20/2010 . Answer Explanations file://C:\Program Files\Wiley\CIAExam\Print. organizations must consider Answers A: Delinking opportunities. Perils are causes of loss. This answer is incorrect. and examples include fire and flood. C: A condition that increases the chance of loss. Refer to the correct answer explanation. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. Risk or exposure is the possibility of loss. Answer (c) is the correct answer. Uncertainty can exist where there is no risk. Question: V2C5-0292 From an enterprise risk management (ERM) viewpoint. C: Derisking opportunities. B: The same thing as exposure. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Question: V2C5-0293 When creating new businesses. D: Uncertainty regarding loss. D: Desourcing opportunities. B: Desizing opportunities. Refer to the correct answer explanation. the term “hazard” refers to Answers A: The same thing as risk.Wiley CIA 2006 v1 Page 260 of 262 This answer is incorrect. A hazard is a condition that increases the probability (chance) of loss from a peril.

This answer is incorrect. Financial risks. It also includes credit risk. D: Hazard risks. Question: V2C5-0294 Which of the following enterprise risk management (ERM) frameworks address market risk? Answers A: Strategic risks. and market risk. Refer to the correct answer explanation. which of the following are more difficult to identify and assess? I. C: Financial risks. Answer (c) is the correct answer.htm 1/20/2010 . Refer to the correct answer explanation. interest rates. This answer is incorrect. Refer to the correct answer explanation. Refer to the correct answer explanation. This answer is incorrect. Financial risk includes risks from volatility in foreign currencies. II. and commodities. file://C:\Program Files\Wiley\CIAExam\Print. Answers A: I only. III. Answer (c) is the correct answer. This answer is incorrect. Strategic risks.Wiley CIA 2006 v1 Page 261 of 262 This answer is incorrect. B: Operational risks. Hazard risks. In capitalizing on opportunities. the goal is to be a market leader but yet reduce risk. liquidity risk. Operational risks. Question: V2C5-0295 Regarding enterprise risk management (ERM). IV. Refer to the correct answer explanation. C: I and II. B: II only. they must consider derisking opportunities. Answer Explanations This answer is incorrect. As organizations think about the future and actually create the future of their business. Refer to the correct answer explanation.

IV. Answer (c) is the correct answer. Refer to the correct answer explanation. Refer to the correct answer explanation. with operational and strategic risks. Inc. Strengths. Answer Explanations This answer is incorrect.htm 1/20/2010 .Wiley CIA 2006 v1 Page 262 of 262 D: III and IV. Refer to the correct answer explanation. John Wiley & Sons. Weaknesses. Wiley CIA Examination Review. B: II only. © 2006 file://C:\Program Files\Wiley\CIAExam\Print. Question: V2C5-0296 Enterprise risk management (ERM) should encompass which of the following? I. 1. Hazard risks include both insurable and uninsurable risks. C: I and II. Answers A: I only.0. Refer to the correct answer explanation. assess. Hazards. III. Answer (d) is the correct answer. ERM integrates the management of all risks. Refer to the correct answer explanation. This answer is incorrect. This answer is incorrect. This answer is incorrect. including the more traditional hazard and financial risks. Answer Explanations This answer is incorrect. It is important to emphasize that the uncertainties could have a potential upside or downside so that ERM encompasses the more traditional view of potential hazards as well as opportunities. Opportunities. D: III and IV. This answer is incorrect. Refer to the correct answer explanation. II. and evaluate. The latter two risks are new and are more difficult to identify.

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