‘SU 1: Mandatory Guidance A primary purpose of establishing a code of within a professional organization is to ‘A. Reduce the likelihood that members of the profession will be sued for substandard work. = Eneure that all members of the profession perform at approximately the same level of ‘competence. © Promote an ethical culture among professionals who serve others. 'D. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization. ‘An accounting association established @ code of {for all members. What is one of the iation's primary purposes of establishing the ‘of ethics? ‘A. To outline criteria for professional behavior to maintain standards of integrity and objectivity B. To establish standards to follow for effective accounting practice. ©. To provide a framework within which ‘accounting policies could be effectively developed and executed. D. To outline criteria that can be used in conducting interviews of potential new accountants. 7. In analyzing the differences between two recently snerged businesses, the chief audit executive of Drganization A notes that ithas a formal code of. ‘ethics and Organization B does not. The code of ‘Sthies covers such things as purchase agreements, ‘teletionships with vendors, and other issues. Its paose isto guide individual behavior within the Which of the following statements regarding the ‘eristence of the code of ethics in A can be logically interred? 1 Aexhibits higher standard of ethical behavior than does B. & Abas established objective criteria by which an individual's actions can be evaluated. iL The absence of a formal code of ethics in B ‘would prevent a successful review of ethical behavior in that organization. A. landil. B. Ionly. C. Monty. D. Mend 29 snes se REQUIRED: The primary purpose of condut wins ¢ rfessiona ‘ygehization. sisting a code of DISCUSSION: The IIA's Code of Eth purpose is “to promote en ethical culture in the eas Fitemal auditing” The definition of internal audio eon ie enindependent, objective assurance ang uc ng states that ‘Moreover, internal auditing is founded on “the rahe ri activity.’ eject assurance about govemance, rk st placed in fis control” Accordingly, internal auditors are Serve others by providing assurance and congqagsonals MnO ‘Anewer (A)|s incorrect, Although this esting Services. establishing @ code of conduct, tis not the pens ™2y follow from Fo consider ft so would be self-serving, AngworiBre pose A code of conduct can help to establish minimun oy sneaec" A cemetonce, but t would be impossible to enemy seancards of ‘competence by all members of a profession, Anes ay of incorrect, In some siuetions_ responsibilty tothe public at large may confct with and be more important organization, important than loyalty to one's Answer (A) is correct. REQUIRED: The primary Purpose of establishing a code of ethics. DISCUSSION: The primary purpose: behavior for a professional organization eee, of ethical culture among professionals who serve others, "lS a" ethical ‘Answer (8) is incorrect. National standards-setti i not a code of ethics, provide guidance for effective wae, bodies, practice. Answer (G) is incorrect. A code of ethics xeon provide the framework within which accounting poncios arc developed. Answer (D) is incorrect. The primar are for interviewing new accountants. ry purpose is not Hott ESE, ance : The inference(s) regardi ete eas : A formal code of ethic (1) communicates acceptable valves to al mersctv ey S method of policing and disciplining membere for wage oe (By establishes objective standards against which imaitieers Treasure their own performance, and (4) communiggyas oo” crganzatons vale eysom to.cutsiers, inicates the ‘Answer (A) is incorrect.. The mere exi , ethics does not ensure that its principles we of A’s code of ‘Answer (C)is incorrect. The absence of a formal code ddoes not preclude a successful review of ethical bepccigs Seuss organization. Policies end procedures may provine wninae for such an engagement. Answer (D) is incorrect qrne creer Of a code of ethics does establish objective erie preyexstenee individual actions can be evaluated. However, th which formal code of ethios does not preclude a successful sovion ofa ethical behavior in an organization. Policies and seers provide the criteria for such an engagement, "7 Procedures may30 SU: Mandatory Guidence 8. A review of an organization's code of conduct revealed that it contained comprehensive guidelines designed to inspire high levels of ethical behavior. The review also revealed that employees were knowledgeable of its provisions. However, some ‘employees stil did not comply with the code. What element should a code of conduct contain to enhance Its effectiveness? Periodic review and acknowledgment by all employees, B. Employee involvement in its development. Public knowledge of its contents and purpose. D. Provisions for disciplinary action in the event of Violations. A 2 .3_Internal Audit Ethics —- Introduction and Principles 9. The IIA Rules of Conduct set forth in The !IA’s Code of Ethics ‘A. Describe behavior norms expected of internal auditors, B. Ate guidelines to assist internal auditors in dealing with engagement clients C. Are interpreted by the Principles. D. Apply only to particular conduct specifically ‘mentioned, 10, Today's internal auditor will often encounter 2 Wide range of potential ethical dilemmas, not all of which are explicitly addressed by The IIA's Code of Ethics. Ifthe intemal auditor encounters such @ dilemma, the internal auditor should always ‘A. Seek counsel from an independent attorney to determine the personal consequences of Potential actions. B. Apply and uphold the principles embodied in ‘The IIA’s Code of Ethics. C. Seek the counsel of the board before deciding onan action, D. Act consistently with the code of ethics ‘adopted by the organization even if such action, is not consistent with The IIA’s Code of Ethics. ‘Answer (0) is correct. REQUIRED: The element that enhances the effectiveness of @ code of conduct. DISCUSSION: Penalties for violations of a code of conduct should enhance its effectiveness, Some individuals will be deterred from misconduct if they expect it to be detected and Punished. ‘Answer (A) is incorrect. Periodic review and acknowledgment would ensure employee knowledge and ‘acceptance of the code, which are not at issue. Answer (B) is incorrect. Employee involvement in development would encourage employee acceptance, which is not at issue Answer (C)is incorrect. Ful knowedge might affect the behavior of some individuals but not to the same extent as the perceived likelihood of sanctions for wrongdoing. ‘Answer (A) is correct. REQUIRED: The true statement about The IIA’s Code of thi ics, DISCUSSION: The IIA’s Code of Ethics extends beyond the definition of internal auditing to include two essential components: (1) Principles that are relevant to the profession and practice of internal auditing and (2) Rules of Conduct that describe behavior norms expected of intemal auditors (Introduction). ‘Answer (B) is incorrect. The Rules of Conduct provide guidance to internal auditors in the discharge of their esponsibility to all those whom they serve. Engagement clients are not the only parties served by intemal auditing. Answer (C) is incorrect. The Rules of Conduct are an aid in interpreting the Principles. Answer (D) is incorrect. The conduct may be unacceptable or discreditable although not mentioned in the Rules of Conduct. ‘Answer (B) is correct. REQUIRED: The action taken when an internal auditor encounters an ethical dilemma. i DISCUSSION: ‘The Code includes Principles (integrity, objectivity, confidentiality, and competency) relevant to the profession and practice of internal auditing and Rules of Conduct that describe behavioral norms for internal auditors and that interpret the Principles. Internal auditors are expected to apply and uphold the Principles. Furthermore, that a particular conduct is not mentioned in the Rules does not prevent it from being unacceptable or discreditable. ‘Answer (A) is incorrect. Seeking the advice of legal counsel on all ethical decisions is impracticable. ‘Answer (C) is incorrect, ‘Seeking the advice of the board on all ethical decisions is impracticable. Furthermore, the advice might not be consistent with the profession's standards. Answer (0) is incorrect. If the organization's standards are not consistent with, or as high as, the profession's standards, the internal auditor is held to the standards of the profession.SU 1: Mandatory Guidance in. complying with The IIA’s Code of Ethics, an auditor should "A. Use individual judgment in the application of the principles set forth in the Code. 'S. Respect and contribute to the objectives of the organization even if itis engaged in illegal activities. ‘©. Go beyond the limitation of personal technical skills to advance the interest of the organization. D. Primarily apply the competency principle in establishing trust. 42. An internal auditor who encounters an ethical ‘Giemma not explicitly addressed by The IIA’s Code of Eihics should always ‘A. Seek counsel from an independent attomey to determine the personal consequences of potential actions. 5. Take action consistent with the principles embodied in The IlA's Code of Ethics. ©. Seek the counsel of the audit committee before Geciding on an action. D. Act consistently with the employing ‘organization's code of ethics even if such action would not be consistent with The IlA's Code of Ethics. L4_Internal Audit Ethics - Integrity 43. Which of the following is permissible under The llA's Code of Ethics? A. In response to @ subpoena, an auditor appeared in @ court of law and disclosed confidential, audit-telated information that could potentially damage the auditor's organization. B. An auditor used audt-related information in @ decision to buy stock issued by the employer corporation. C. After praising an employee in @ recent audit engagement communication, an auditor accepted a gift from the employee. D. An auditor did not report significant observations about illegal activity to the board because management indicated that it would resolve the issue. 31 Answer (A) is correct. REQUIRED: The action complying with The IlA’s Code of ics. DISCUSSION: The IIA’s Code of Ethies includes principles that internal auditors are expected to apply and uphold. They are interpreted by the Rules of Conduct, behavior norms expected of internal auditors. That a particular conduct is not mentioned in the Rules of Conduct does not prevent it from being unacceptable or discreditable. Consequently, a reasonable inference Is that individual judgment is necessary in the ‘application of the principles and the Rules of Conduct ‘Answer (B) is incorrect. An intemal auditor “shall not knowingly be 2 party to any illegal activity.” Furthermore, an internal auditor is bound to respect and contribute only to the legitimate and ethical objectives of the organization. Answer (C) is incorrect. Internal auditors “shall engage only in those services for which they have the necessary knowledge, skills, and experience.” Answer (D) is incorrect. Applying and upholding the integrity principle is the means by which an intemal auditor establishes trust as a basis for reliance on his/her judgment. Ethi Answer (B) is correct. REQUIRED: The proper action that always should be taken by an internal auditor who encounters an ethical dilemma not explicitly addressed by The IIA’s Code of Ethics. DISCUSSION: The IIA's Code of Ethics is based on principles relevant to the profession and practice of internal auditing thet intemal auditors are expected to apply and uphold: integrity, objectivity, confidentiality, and competency. Fur re, the Code states that particular conduct may be unacceptable or discreditable even if tis not mentioned in the Rules of Conduct. ‘Answer (A) is incorrect. The auditor must act consistently with the spirit of The IIA's Code of Ethics. It is net practical to seek the advice of legal counsel for all ethical decisions. Moreover, unethical behavior may not be illegal. Answer (C) is incorrect.’ It is not feasible to seek the audit committee's advice {or all potential dilemmas. Furthermore, the advice might not be consistent with the profession's standards. Answer incorrect. If the organization's standards are not con ‘or as high as, the profession's standards, the internal auditor should abide by the latter. Answer (A) is correct. REQUIRED: The auditor action permissible under The IIA's Code of Ethies. DISCUSSION: Rule of Conduct 1.2 under the integrity principal states, “internal auditors shall observe the law and make disclosures expected by the law and the profession.” Thus, auditors must comply with subpoenas. ‘Answer (B) is incorrect. Rule of Conduct 3.2 prohibits auditors from using audit information for personal gain. ‘Answer (C) is incorrect. Rule of Conduct 2.2 prohibits an auditor ‘rom accepting anything that might be presumed to impair the auditor's professional judgment. Answer (0) is incorrect. Rule of Conduct 1.3 prohibits auditors from knowingly being a party to any illegal or improper activity. Significant observations of illegal activity should be reported to the board.32 SU: Mandatory Guidance 14. The IIA’s Code of Ethics requires internal ‘auditors to perform their work with Honesty, diligence, and responsibility. Timeliness, sobriety, and clarity. Knowledge, skills, and competencies. Punctuality, objectivity, and responsibility. pom, 1.5_Internai Audit Ethics -- Objectivity 48. AIA is working in a nonintemal-auditing Position as the director of purchasing. The CIA signed a contract to procure a/Jarge order from the supplier with the best price, quality, and performance. Shortly after signing the contract, the supplier presented the CIA with a gift of significant monetary Value. Which of the following statements regarding the acceptance of the gift is true? ‘A. Acceptance of the gitt is prohibited only ifit is not customary. B. Acceptance of the gift violates The IIA’s Code of Ethics and is prohibited for a CIA. . Because the CIA is no longer acting as an intemal auditor, acceptance of the gift is ‘governed only by the organization's code of conduct. D. Because the contract was signed before the gift was offered, acceptance of the gift does Not Violate either The IIA's Code of Ethics or the organization's code of conduct. 16. The chief audit executive (CAE) has been ppointed to commie to evaluate the appointment of the extemal auditors. The engagement partner for the external accounting firm wants the CAE to join her {or @ week of hunting at her private lodge. The CAE shou ‘A. Accept, assuming both their schedules allow it B. Refuse on the grounds of conflict of interest. C. Accept as long as itis not charged to employer time. D. Ask the comptroller whether accepting the invitation is a violation of the organization's code of ethics. Answer (A) is correct. REQUIRED: The qualities internal auditors should exhibit in the performance of their work. DISCUSSION: Rule of Conduct 1.1 under the integrity principle states, “Internal auditors shall perform their work with honesty, diligence, and responsibilty.” Answer (B) Is incorrect. Timeliness, sobriety, and clarity are not mentioned in the Code. Answer (C) is incorrect. Knowledge, skills, and competencies are mentioned in the Standerds. Answer (is incorrect. Punctuality isnot mentioned inthe fe. Answer (B) is correct. REQUIRED: The true statement about acceptance of a gift from a supplier. DISCUSSION: Members of The Institute of Internal Auditors ‘and recipients of, or candidates for, IIA professional certifications ibject to disciplinary action for breaches of The IlA’s Code of Ethics. Rule of Conduct 2.2 under the objectivity principle states, “internal auditors shail not accept anything that may impair or be presumed to impair their professional judgment.” ‘Answer (A) is incorrect. Acceptance of the gift could easily be presumed to have impaired the CIA's professional judgment. Answer (C) is incorrect. The CIA is stil governed by The IIA’s code of conduct. Answer (D)is incorrect. The timing of signing the contract is irrelevant. Answer (B) is correct. REQUIRED: The CAE's response to a social invitation by an external auditor who is Subject to evaluation by @ committee on which the CAE serves. DISCUSSION: Rule of Conduct 2.1 under the objectivity principle states, “internal auditors shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization.” Furthermore, under Rule of Conduct 2.2, “Internal auditors shall not accept anything that may impair or be presumed to impair their professional judgment.” ‘Answer (A) is incorrect. The auditor should not accept. ‘Answer (C) is incorrect. Not charging the time to the company is not sufficient to eliminate confict-of-interest concems. ‘Answer (D) is incorrect. ‘The auditor should know that accepting the invitation raises confict of interest issues.‘SU 1: Mandatory Guidance 17._ In review of travel and entertainment expenses, 2 certified intemal auditor questioned the business purposes of an officers reimbursed travel expenses. The officer promised to compensate for the questioned amounts by not claiming legitimate ‘expenses in the future. If the officer makes good on the promise, the intemal auditor ‘A. Can ignore the original charging of the nonbusiness expenses. B. Should inform the tax authorities in any event. C. Should stil include the finding in the final engagement communication, D. Should recommend that the officer forfeit any frequent fiyer miles received as part of the questionable travel. 48, An intemal auditor for a large regionel bank was asked to serve on the board of directors of a local bank. The bank competes in many of the same. markets as the regional bank but focuses more on consumer financing than on business financing. In accepting this position, the internal auditor |. Violates The lIA’s Code of Ethics because serving on the board may be in conflict with the best interests of the internal auditor's employer I. Violates The IIA's Code of Ethics because the information gained while serving on the board of directors of the local bank may influence recommendations regarding potential acquisitions A. lonly. B. tonly. C. Landi. D. Neither | nor il 419. Which of the following concurrent occupations could appear to subvert the ethical behavior of an internal auditor? ‘A. Internal auditor and a well-known charitable organization's local in-house chairperson. B. Intemal auditor and part-time business insurance broker. C. Intemal auditor and adjunct faculty member of 2 local business college that educates potential employees. D. Intemal auditor and landlord of muttiple housing that publicly advertises for tenants in @ local community newspaper isting monthly rental fees. 33 ‘Answer (C) is correct. REQUIRED: The internal aucitor’s action when an officer ‘agrees to compensate for questionable expenses by not claiming legitimate expenses in the future. DISCUSSION: Rule of Conduct 2.3 under the objectivity principle states, “Internal auditors shell disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review.” ‘Answer (A) is incorrect. The possibly fraudulent behavior of the officer is a material fact that should be reported regardless of whether the questioned expenses are reimbursed. Answer (6) is incorrect. Communication of results to parties outside the organization is not required in the absence of a legal mandate. ‘Answer (D) is incorrect. Management should determine what constitutes just compensation ‘Answer (C) is correct. REQUIRED: The possible violation(s), if any, of The IIA’s Code of Ethics. DISCUSSION: Rule of Conduct 2.1 under the objectivity principle states, “Internal auditors shall not participate in any ‘activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in confict with the interests of the organization.” Accordingly, service on the board of the local bank constitutes @ conflict of interest and may prejudice the intemal auditor's ability to carry out objectively his/her duties regarding potential acquisitions. ‘Answer (A) is incorrect. Serving on the board of the local bank creates a confit of interest and may prejudice the internal auditor's ability to perform his/her duties. Answer (B) is incorrect. Serving on the board of the local bank may also be in conflict with the best interests of the auditor's employer. Answer (D) is incorrect. Serving on the board of the local bank creates @ confit of interest and may prejudice the internal auditor's ability to perform his/her duties. Answer (B) is correct. REQUIRED: The concurrent occupations that could create an ethical issue. DISCUSSION: Rule of Conduct 2.1 under the obj principle states, “internal auditors shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization.” As a business insurance broker, the intemal auditor may lose his/her objectivity because (s)he might benefit from a change in the employer's insurance coverage. Answer (A) is incorrect. The activities of a cherity are Unlikely to be contrary to the interests of the organization. Answer (C) is incorrect. Teaching is compatible with internal ‘auditing. Answer (D) is incorrect. Whereas dealing in ‘commercial properties might involve a conflict, renting reside Units most likely does not.34° SU: Mandatory Guidance 1.6_Internal Audit Ethics -- Confidentiality 20. Which ofthe following is permissible under The IIA's Code of Ethics? ‘A. Disclosing confidential, engagement-related information thet is potentially damaging to the organization in response to @ court order. B._ Using engagement-related information in a decision to Buy an ownership interest in the ‘employer organization, C. Accepting an unexpected git from an ‘employee whom the internal auditor has praised in @ recent engagement ‘communication. D. Not reporting significant observations and recommendations about illegal activity to the board because management has indicated it will address the issue. 21. Which situation most lkely violates The IIA’s Code of Ethics and the Standards? A. The chief audit executive (CAE) disagrees with the engagement client about the observations ‘and recommendations in a sensitive area. The CAE discusses the detail of the observations and the proposed recommendations with a fellow CAE from another organization. B. Anorganization’s charter for the internal audit activity requires the chief audit executive (CAE) to present the yearly engagement work schedule to the board for its approval and suggestions. C. The engagement manager has removed the most significant observations and recommendations from the final engagement ‘communication. The in-charge internal auditor ‘opposed the removal, explaining that (s)he knows the reported conditions exist. The in-charge internal auditor agrees that, technically, information is not sufficient to support the observations, but management cannot explain the conditions, and the observations are the only reasonable conclusions. D. Because the internal audit activity lacks skill and knowledge in a specialty area, the chief audit executive (CAE) has hired an expert. ‘The engagement manager has been asked to review the expert's approach to the assignment. Although knowledgeable about the area under review, the manager is hesitant to accept the assignment because of lack of expertise. Answer (A) is correct. Eth RECUIRED: ‘The action permissible under The lA’s Code of this. DISCUSSION: The principle of confidentiality permits the disclosure of confidential information if there is a legal or Professional obligation to do so. ‘Answer (B) is incorrect. Rule of Conduct 3.2 prohibits internal auditors from using information for personal gain. Answer (C) is incorrect. Rule of Conduct 2.2 prohibits internal auditors from accepting anything that may impair, or be presumed to impair, their professional judgment. Answer (D) is incorrect. Rule of Conduct 2.3 under the objectivity principle requires intemal auditors to disciose all material facts known to them that, if not disclosed, might distort the reporting of activities under review. ‘Answer (A) is correct. REQUIRED: The situation most likely to be considered @ violation of The IIA's Code of Ethics. DISCUSSION: Rule of Conduct 3.1 under the confidential principle states, “internal auditors shall be prudent in the use protection of information acquired in the course of their duties.” Discussion of sensitive matters with an unauthorized party is the situation most likely to be considered a Code violation. ‘Answer (B) is incorrect. Approval of the engagement work schedule by the board and senior management is required. ‘Answer (C) is incorrect. Information must be sufficient to achi ‘engagement objectives. Answer (D) is incorrect. The Standé allow use of experts when needed.SU 1: Mandatory Guidance 22. Which of the following actions taken by a chief ‘audit executive (CAE) could be considered professionally ethical under The IIA's Code of Ethics? ‘A. The CAE decides to delay an engagement at a branch so that his nephew, the branch manager, will have time to “clean things up." B. To save organizational resources, the CAE cancels all staff training for the next 2 years on the basis that all staff are too new to benefit from training C. To save organizational resources, the CAE limits procedures at foreign branches to ‘confirmations from branch managers that no major personnel changes have occurred. D. The CAE refuses to provide information about organizational operations to his father, who is @ part owner. 1.7_Internal Audit Ethics -- Competency 23. During the course of an engagement, an internal ‘auditor discovers that a clerk is embezzling funds from the organization. Although this is the first ‘embezzlement ever encountered and the organi has a security department, the intemal auditor decides to interrogate the Suspect. If the internal auaitor ie olting The II's Code of this, the rule Violated is most likely A. Falling to exercise due diligence. B. Lack of loyalty to the organization. C. Lack of competence in this area D. Failing to comply with the law. 24. Internal auditors who fail to maintain their eficlency through continuing education could be ind to be in violation of ‘A. The Intemational Standards for the Professional Practice of intemal Auditing. B. The llA’s Code of Ethics. C. Both the Intemational Standards for the Professional Practice of Internal Auditing and The IIA's Code of Ethics. D. None of the answers are correct. tion 35 ‘Answer (D) is:correct. REQUIRED: The action considered ethical under The IIA’s Code of Ethics DISCUSSION: Rule of Conduct 3.1 under the confidentiality principle states, “intemal aucitors shall be prudent in the use and protection of information acquired in the course of their duties.” Additionally, Rule of Conduct 3,2 states, “Internal auditors shall ‘not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and sthical objectives of the organization.” Thus, such use of information by the CAE might be ilegel under insider racing rules. ‘Answer (A) is incorrect. According to Rule of Conduct 1.1, “Internal auditors shall perform their work with honesty, diligence, and esponsibility.” Answer (B) is incorrect. According to Rule of Conduct 4.3, “intemal auditors shall continually improve their proficiency and the effectiveness and quality of their services.” ‘Answer (C) is incorrect. According to Rule of Conduct 4.2, “Internal auditors shall perform internal audit services in accordance with the Intemational Standards for the Professional Practice of Internal Auditing (Standards).” The Standards require Supporting information to be sufficient, reliable, relevant, and useful. Answer (C) is correct. REQUIRED: The ethics rule most likely violated, DISCUSSION: Rule of Conduct 4.1 under the competency principle states, “Internal aucitors shall engage only in those services for which they have the necessary knowledge, skills, and experience.” Internal auditors may not have, and are not expected to have, knowledge equivalent to thet of a person ‘whose primary responsibilty is to detect and investigate fraud (Impl. Std. 1210.42) ‘Answer (A) is incorrect. The requirement to perform work with diligence does not override the competency Rules of ‘Conduct or the need to use good judgment. Answer (B) is incorrect. Loyalty is better exhibited by consulting with fessionals and knowing the limits of competence. Answer (D) is incorrect. The intemal aucitor may violate the suspect's civil rights as a result of inexperience. ‘Answer (C) is correct. REQUIRED: The effect of failing to meet continuing ‘education requirements. DISCUSSION: Rule of Conduct 4.3 under the competency principle states, “Intemal auditors shall continually improve their proficiency and the effectiveness and quality of their services.” Furthermore, Attr. Std. 1230 states, "Intemal auditors must enhance their knowledge, skills, and other competencies through continuing professional development.” Hence, both The IIA's Code of Ethics and the Standards are violated by failing to eam continuing education credits. Answer (A) is Incorrect. The IIA’s Code of Ethics also is violated. Rule of Conduct 4.3 under the competency principle states, “Internal auditors shall continually improve their proficiency and the effectiveness and quality oftheir services.” ‘Answer (B) is incorrect. The Standards also are violated because they require auditors to enhance their knowledge, skills, ‘and other competencies through continuing professional development. Answer (D) is incorrect. Both the Code and the Standards would be violated.36 © SU 1: Mandatory Guidance 25. Anew staff intemal auditor was told to perform an engagement in an area with which the internal auditor Was not familiar. Because of time constraints, ‘no supervision was provided. The assignment represented @ good learning experience, but the area was clearly beyond the internal auditor's competence. Nonetheless, the intemal auditor prepared comprehensive working papers and ‘communicated the results to management. In this situation, ‘A. The internal audit activity violated the Siandards by hiring an internal auditor without proficiency in the area. B, The internal audit activity violated the Standards by not providing adequate supervision. ©. The chief audit executive has not violated The IIA's Code of Ethics because it does not address supervision. D. The Standards and The IIA’s Code of Ethics were followed by the internal audit activity. 1.8_Internal Audit Charter 28. During an engagement to evaluate the organization's accounts payable function, an internal auditor plans to confirm balances with suppliers. ‘What is the source of authority for such contacts with Units outside the organization’ Internel audit activity policies and procedures. ‘The Standards. ‘The Code of Ethics. The internal audit activity's charter. pom> 27. The board of an organization has cherged the Chief audit executive (CAE) with upgrading the internal audit activity. The CAE's first task is to develop a charter. What item should be included in the statement of objectives? ‘A. Report all engagement results to the board every quarter. B. Notify governmental regulatory agencies of unethical business practices by organization management. C. Evaluate the adequacy and effectiveness of the organization's controls. D. Submit budget variance reports to management every month. Answer (B) is correct. REQUIRED: The effect of feling to supervise an internal auditor who lacks proficiency in the area of the engagement. DISCUSSION: Rule of Conduct 4.2 under the competency principle requires intemal auditing services to be performed in ‘accordance with the Standards. Attr. Std. 1200 requires engagements to be performed with proficiency and due professionel care. They also should be properly supervised to ensure that objectives are achieved, quality is assured, and staff is developed (Pert. Std. 2340). ‘Answer (A) is incorrect. All internal auditors need not be proficient in all ereas. The internal audit activity as a whole should have an appropriate mix of skills. Answer (C) is incorrect. The Code requires compliance with the Standards, and the Standards require proper supervision. Answer (D) is incorrect. The Standards and the Code were not followed Answer (D) is correct. REQUIRED: The source of authority for an internel auditor to contact units outside the organization. DISCUSSION: The charter establishes the internal audit ‘activty’s position within the organization, including the nature of the chief audit executive's functional reporting relationship with the board; authorizes access to records, personnel, and physical properties relevant to the performance of engagements; and defines the scope of internal audit activities (Inter. Std. 1000). Thus, the charter prescribes the internal audit activity's relationships with other units within the organization and with those outside. ‘Answer (A) is incorrect. Policies and procedures guide the ternal auditors in their consistent compliance with the internal audit activty’s standards of performance. Answer (B) is incorrect. The internal audit activity’s authority is defined in @ charter approved by the board. Answer (C) is incorrect. The purpose of the Code of Ethics is to promote an ethical culture in the profession of intemal auditing. ‘Answer (C) is correct. REQUIRED: The item included in the statement of objectives of the cherter. DISCUSSION: The charter establishes the internal audit activity’s position within the organization, including the nature of the chief audit executive's functional reporting relationship with the board; authorizes access to records, personnel, and physical properties relevant othe performance of engagements; ane defines the scope of intemal audit activities (Inter. Std. 1000). internal auditing brings a systematic, disciplined approach to evaluating and improving risk management, cont, and ‘governance processes (Definition of Internal Auditing). "Answer (A) is incorrect. Only significant engagement results are discussed with the board. Answer (B) is incorrect. Internal auditors ordinarily are not required to report deficiencies in regulatory compliance to the appropriate agencies. However, they must observe the law and make disclosures expected by the law and profession (Rule of Conduct 1.2). Answer (D) is incorrect. Submission of budgetary variance reports is not a primary objective of internal auditing. Its @ budgetary control that management may require on a periodic besis.SU 1; Mandatory Guidance 28. The authority of the intemal audit activity is limited to that granted by ‘A. The board and the controller. B. Senior management and the Stendards. C. Management and the board, D. The board and the chief financial officer. 29. Intemal auditing has planned an engagement to evaluate the effectiveness of the quality assurance function as it affects the receipt of goods, the transfer ‘of the goods into production. and the scrap costs related to defective items. The engagement client ‘argues that such an engagement is not within the ‘scope of the internal audit activity and should come under the purview of the quality assurance department only. What is the most appropriate response? A. Refer to the intemal audit activity's charter and the approved engagement plan that includes the area designated for evaluation in the current time period. B. Because quality assurance is @ new function, seek the approval of management as a mediator to set the scope of the engagement. C. Indicate that the engagement will evaluate the function only in accordance with the standards set by, and approved by, the quality assurance function before beginning the engagement. D. Terminate the engagement because it wil not be productive without the client's cooperation. 37 Answer (C) is correct, REQUIRED: The source of authority of the internal audit activity. DISCUSSION: The purpose, authority, and responsibilty of the internal audit activity must be formally defined in a charter. The CAE must periodically review and present the charter to senior management and the board for approval (Attr. Std. 1000). ‘Answer (A) is incorrect. The controller is not-the only member of management. Answer (B) is incorrect. The Standards cannot provide actual authority to-an internal aucit activity. Answer (D) is incorrect. Management and the board, not a particular manager, give the internal audit activity its ‘authority. ‘Answer (A) is correct. REQUIRED: The response to an assertion thet quality assurance is beyond the scope of internal au DISCUSSION: The writen charter, approved by the board, defines the scope of intemal audit activities (Inter. Std. 1000). ‘Answer (B) is incorrect. The engagement client does not determine the scope of this type of assurance engagement. A limitation imposed by the client might prevent the internal ‘audit activity from achieving its objectives. Answer (C) is incorrect. Other objectives may be established by management and the internal auditors. The engagement is not limited to the specific standards set by the quality assurance department. It ‘considers such standards in the development of the engagement program. Answer (D) is incorrect. The internal auditors must ‘conduct the engagement and communicate any scope limitations to management and the board.‘SU 2: Independence, Objectivity, and Due Care 59 EXAMPLE From CIA Exam An external assessment of an internal audit activity contains an expressed opinion. The opinion applies A. Only to the internal audit activity's conformance with the Standards. B. Only to the effectiveness of the internal auditing coverage. C. Only to the adequacy of internal control, D. To the entire spectrum of assurance and consulting work. This question tests the candidate's understanding of which subject an external assessment should evaluate and express an opinion on. (A) is incorrect. An opinion is expressed on all assurance and consulting work performed (or that should have been performed under the internal audit activity's charter). (B) is incorrect. The scope of an extemal assessment extends to more than the effectiveness of the internal auditing coverage. (C) is incorrect. An external assessment addresses the internal audit activity, not the adequacy of the organization's controls. (D)is correct. External assessments of an intemal audit activity contain an expressed opinion as to the entire spectrum of assurance and consulting work performed (or that should have been performed under its charter), including (but not limited to) conformance with the Definition of Internal Auditing, the Code of Ethics, and the Standards. An external assessment also includes, ‘as appropriate, recommendations for improvement (PA 1312-1, para. 2). On completion of the review, a formal communication should be given to senior management and the board (PA 1312-1, para. 3). and review! You have completed the outline for this subunit. Study multiple-choice 1s 29 through 31 beginning on page 67. of the following facts, by themselves, could toa lack of independence of the internal ised the new auditor of not the best interests of the of audit committee members come ‘fom within the organization. ‘The intemal audit activity’s charter has not been ‘epproved by the board. only. Nonly. I and Ill only. 11, and ti. ‘Answer (0) is correct. REQUIRED: The factor(s) contributing to @ lack of independence. DISCUSSION: The CEO's statement suggests that the internal audit activity lacks the support of senior management and the board. Furthermore, the lack of outside audit committee members may contribute to a loss of independence. The board's failure to approve the charter may have the same effect. The. charter enhances the independence of the intemal audit activity. By specifying the purpose, authority, and responsibilty of the intemal audit activity, it establishes the position of internal audit in the organization, including the nature of the chief eudit executive's functional reporting relationship with the board (Inter. Std. 1000). ‘Answer (A) is incorrect. The other facts listed could also contute fo a lack of independence, Answer (Bis incorect Lack of support by the CEO and lack of a charter weaken the intemal audit activity’s position. Answer (C)is incorrect, Lack of ‘support by the CEO weakens the internal cudit activity's position.60 SU: Independence, Objectivity, and Due Care 2._ To avoid being the apparent cause of conflict between an organization's senior management and ___the board, the chief audit executive should ‘A. Communicate all engagement results to both senior management and the board. B. Strengthen the independence of the internal audit activity through organizational position. C. Discuss all reports to senior management with the board first. 1D. Request board approval of policies that include intemal audit actvty relationships withthe ard. 3._An organization is in the process of establishing its new internal audit activity. The controller has no previous experience with intemal auditors. Due to this lack of experience, the controller advised the applicants that the CAE will be reporting to the extemal auditors. However, the new chief audit executive will have free access to the controller to report anything important. The controller wil then convey the CAE’s concerns to the board of directors. The internal aucit activity will A. Be independent because the CAE has direct access to the board. B. Not be independent because the CAE reports to the extemal auditors. C._ Not be independent because the controller has no experience with internal auditors. D. Not be independent because the organization did not specify that the applicants must be certified internal auditors. 4, Independence permits internal auditors to rende: impartial and unbiased judgments. The best way to achieve independence is through Individual knowledge and skils. A duat-reporting relationship. ‘Supervision within the organization. Organizational knowledge and skills. v:om> Answer (D) is correct REQUIRED: The action to prevent the internal audit activity from being the apparent cause of conflict between senior agement and the board. the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive has direct and unrestricted access to senior management and the board. This can be achieved through a dual-reporting relationship (Inter. Std. 1100). ‘Answer (A) is incorrect. Receipt of all engagement results senior management and the board is unnecessary and inefficient. Answer (B) is incorrect. Organizational position the internal audit activity to achieve independence but is not, by iiselt, enough to avoid conflict. Answer (Cs incorrect. The board essentaly hasan oversight rater than an operational tole. Answer (8) i correct REQUIRED: The true statement about a requirement that the internal audit activity report o the external auditors and the controller DISCUSSION: To achieve the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the CAE has direct and unrestricted to senior management and the board (Inter. Std. 1100). Also, CAE must communicate and interact directly with the board (Atte, Std. 1111). ‘Answer (A) is incorrect. Under this arrangement, the i audit activity will not have direct access to the board; the will be indirect via the controller. Answer (C) is incorrect. ‘Whether the controller has experience with internal auditors not affect the internal audit activity’s independence. Answer’ is incorrect. Although desirable, the CIA designation is not mandatory for a person to become an internal auditor. A ClA should insist on independence for the internal audit activity. ‘Answer (B) is correct. REQUIRED: The best way to achieve independence. DISCUSSION: Independence is the freedom from conditions that threaten the ability ofthe internal audit activity carry out internel audit responsibilities in an unbiased mai To achieve the degree of independence necessary to ef carry out the responsibilities of the internal audit activity, the has direct and unrestricted access to senior management the board. This can be achieved through a dual-reporting relationship (Inter. Std. 1100). ‘Answer (A) is incorrect. Individual knowledge and skills allow individual auditors to achieve professional proficiency. ‘Answer (C) is incorrect. Supervision ensures that engag objectives are achieved, quality is assured, and staff is developed. Answer (0) is incorrect. 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IGAE bears the responsibilty to do which of ‘Encourage the objectivity of the board. Encourage the objectivity of the CEO. Foster an attitude of professional skepticism ‘among members of the board. ‘Maintain individual objectivity. jining individual objectivity of internal is the responsibilty of The chairperson of the board of directors. The chairperson of the audit committee. ‘The external assessment team. The chief audit executive. 61 ‘Answer (A) is correct. REQUIRED: The action most likely impairing objectivity. DISCUSSION: Internel auditors must have en impartial, unbiased attitude and avoid any conflict of interest {Attr. Std. 1120). Conflict of interest is situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest (Inter. Std. 1120). The internal ‘auditor's promotion may create a bias. ‘Answer (B) is incorrect. Budget restrictions do not constitute an impairment of independence or objectivity. Answer (C) is incorrect. An intemal auditor may recommend, but not implement, standards of control and still maintain objectivity. Answer (0) is incorrect. An internal auditor may review contracts prior to their execution. Answer (D) is correct. REQUIRED: The party responsible for assessing the individual objectivity of internal auditors. DISCUSSION: The CAE must establish policies and brocadures to assess the cbjectivty of individual internal auditors. ‘Answer (D) is correct, REQUIRED: The CAE's responsibilty with regard to internal auditor objectivity DISCUSSION: The CAE must establish policies and procedures to assess the objectivity of individual internal auditors. Answer (D) is correct. REQUIRED: "The responsiblity ofthe chet aut executive, DISCUSSION: The CAE must establish policies and progedures to assess the objectivity of nical tema auditors. ‘Answer (A) is incorrect. Objectivity is @ quality of individual intemal auditors, not the board. Answer (B)is incorrect. ‘Objectivity is @ quality of individual internal auditors, not the CEO. Answer (C) is incorrect. The CAE must establish policies and procedures fo assess the obectvly of incvcual internal auditors, Answer (D) is correct. REQUIRED: The party(ies) responsible for maintaining the ity of internal auditors. DISCUSSION: The responsibilty rests with the CAE and with internal auditors themselves to maintain a sense of62 SU2: Independence, Objectivity, and Due Care 2.3_Impairment to Independence and Objectivity 10. When faced with an imposed scope limitation, the chief audit executive needs to ‘A. Refuse to perform the engagement until the scope limitation is removed. B. Communicate the potential effects of the scope limitation to the board. C. Increase the frequency of engagements concerning the activity in question, D. Assign more experienced personnel to the ‘engagement. 11. _In which of the following situations does an internal auditor potentially lack pbjectivity? ‘A. An internal auditor reviews the procedures for ‘a new electronic data interchange (EDI) connection to a major customer before itis implemented. B. A former purchasing assistant performs review of intemal controls over purchasing 4 months after being transferred to the internal auciting department. C. An intemal auditor recommends standards of control and performance measures for @ contract with @ service organization for the processing of payroll and employee benefits. D. Apayroll accounting employee assists an internal auditor in verifying the physical inventory of small motors. 12. An internal auditor who had been supervisor of the accounts payable section should not perform an assurance review of that section. ‘A. Because a reasonable period of time in which to establish independence cannot be determined. B. Until at least 1 year has elapsed. C. Until after the next annual review by the external auditors. 1D. Untiitis clear that the new supervisor has assumed the responsibilities. ‘Answer (B) is correct. REQUIRED: The appropriate response to an imposed ‘scope limitation DISCUSSION: A scope limitation, along with its potential effect, needs to be communicated, preferably in writing, to the board (PA 1130-1, para. 3). ‘Answer (A) is incorrect. The engagement may be cond under a scope limitation. Answer (C) is incorrect. A scope limitation does not necesserily require more frequent engagements. Answer (D) is incorrect. A scope limitation does not necessarily require more experienced personnel. ‘Answer (B) is correct REQUIRED: The situation in which the internal auditor lack objectiviy. DISCUSSION: Persons transferred to or temporarily engaged by the internal audit activity should not be assigned to aucit those activities they previously performed until at least 1 year has elapsed. Such assignments are presumed to impair objectivity (PA 1130.A1-1, para. 1), ‘Answer (A) is incorrect. Objectivity is not adversely aff when the intemal auditor recommends standards of control for systems of reviews procedures before they are implemented. Answer (C) is incorrect. Objectivity is not adversely affected when the intemal auditor recommends standards of control for systems or reviews procedures before they are implemented. Answer (D) is incorrect. Use of staff from other areas to assist the internal auditor does not impair objectivity, especially when the staff is from outside of the area where the engagement is being performed. Answer (B) is correct. REQUIRED: The appropriate time for an internal auditor review an operating activity for which (s)he had responsibilty. DISCUSSION: Persons transferred to, or temporarily engages by, the intemal audit activity should not be assigned audit activities they previously performed until at least 1 year elapsed. Such assignments are presumed to impair objectivity (PAN130.A1-1 pa. 1), Answer (A) is incorrect. The issues are whether (1) objectivity (not independence) has been restored and (2) at least 1 year has elapsed. Answer (C) is incorrect. The e review does not bear any relation to restoring the internal auditor's objectivity. Answer (D) is incorrect. The new super presumably would have assumed his/her responsibilities immediately. Hence, 1 year could not have elapsed.SU 2: Independence, Objectivity, and Due Care 24 Auditor Proficiency 43._A chief audit executive (CAE) for a very small internal audit department has just received 2 request from management to perform an audit of an extremely ‘complex area in which the CAE and the department hhave no expertise. The nature of the audit ‘engagement is within the scope of internal audit actives. Management has expressed a desire to have the engagement conducted in the very near fulure because of the high level of risk involved. ‘Which of the following responses by the CAE would be in violation of the Standards? A. Discuss with management the possibility of outsourcing the audit ofthis complex area. B. Add an outside consultant to the audit staff to assist in the performance of the audit engagement. C. Accept the audit engagement and begin immediately, since itis @ high-risk area, igcuss the timeline of the audit engagement with management to determine if sufficient time exists in which to develop appropriate expertise. D. 44. Your organization has selected you to develop an internal audit activity. Your approach will most likely be to hire ‘A. Intemal auditors, each of whom possesses all the skills required to handle all engagements. B. Inexperienced personnel and train them the way the organization wants them trained. C. Degreed accountants because most intemal audit work is accounting related. D. Internal auditors who collectively have the knowledge and skills needed to perform the responsibilities of the internal audit activity ‘25_Internal Audit Resources 45. Which one of the following is responsible for Anewer (Dis cored. REQUIRED: The reason(s) for using specialists in healthcare benefits. DISCUSSION: If the intemal auditors lack the necessary expertise, external service providers should be employed who ‘can provide the requisite knowledge, skills, and other competencies, Thus, extemal service providers may provide assistance in (1) estimating the liability for postretirement benefits, 2) developing a comparative analysis of healthcare costs, and (3) training the staff to audit healthcare costs. ‘Answer (A) is incorrect. Use of external service providers with expertise in healthcare benefits is also appropriate when ‘comparing healthcare costs with those of other programs and training staff to conduct healthcare audits. Answer (B) is incorrect. Use of external service providers with expertise in healthcare benefits is also appropriate when evaluating the estimated liability for postretirement benefits and training staff conduct healthcare audits. Answer (C) is incorrect. Use of external service providers with expertise in healthcare benefits also appropriate when comparing healthcare costs with those. ‘other programs and evaluating the estimated liability for postretirement benefits Answer (C) is correct. REQUIRED: The circumstances in which a person with ‘qualifications described should be hired. DISCUssiO! knowledge, skils, and other competencies needed to perform their individual responsibilities. The internal audit activity collectively must possess or obtain the knowledge, skills, and other competencies needed to perform its responsibilities (Attr, Std, 1210). However, each member of the internal audit Scavy ned not be quali nal cscpines (PA T2101 para. 1). ‘Answer (A) is incorrect. Regardless of their backgrou internal auditors must enhance their knowledge, skills, and competencies through continuing professional development. Answer (B) is incorrect. The use of a mentor is encouraged regardless of the new internal auditor's background. Answer is incorrect. Unless other intemal auditors possess sufficient knowledge of these competencies, hiring this person would accentuate staffing deficiencies, Answer (A) is correct. REQUIRED: The frequency with which assessments be performed. DISCUSSION: The CAE should conduct periodic skills assessments to determine the specific resources available. Assessments should be performed at least annually. ‘Answer (B) is incorrect. Periodic skills assessments be performed more frequently than every 5 years. Answer incorrect. Periodic skills assessments do not need to be Performed quarterly. Answer (D)is incorrect. Periodic skills assessments do not need to be performed semiannually.ch of the following statements is true with to due professional care? An internal auditor should perform detailed ‘ests of all transactions before communicating results, ‘An item should not be mentioned in an sment communication unless the internal auditor is absolutely certain of the item. ‘An engagement communication should never bbe viewed as providing en infallible truth about @ subject. ‘An internal auditor has no responsibility to recommend improvements. professional care implies reasonable care nce, not infallibiity oF extraordinary Thus, which of the following is ‘The conduct of examinations and verifications toa reasonable extent. ‘The conduct of extensive examinations, ‘The reasonable assurance that compliance does exist. ‘The consideration of the possibility of material imegularties. [An internal auditor judged an item to be jal when planning an assurance However, the assurance engagement ince the Her itis subsequenty Sufficient staff is available. Adverse effects related to the item are likely to ‘occur. Related information is reliable. Miscellaneous income is affected. SU 2: Independence, Objectivity, and Due Care 65 Answer (C) is correct. REQUIRED: The true statement about due professional care. DISCUSSION: Due professional care implies reasonable care and competence, not infallblty or extraordinary performance. Thus, it requires the internal auditor to conduct examinations and verifications to a reasonable extent. ‘Acoordingly, internal auditors cannot give absolute assurance that noncompliance or irregularities do not exist (PA 1220-1, ara. 2). Pare rtwer (A) is incorrect. An intemal auctor must conduct reasonable examinations and verifications, but detailed tests of all transactions are not required. Answer (B) is incorrect. ‘Absolute assurance need not, and cannot, be given. Answer (0) js incorrect. An internal auditor must recommend improvements to promote conformance wih acceptable procedures and practices. ‘Answer (B)is correct. REQUIRED: The obligation not imposed by the due sional care standard. DISCUSSION: Due professional care implies reasonable care and competence, not infallibiity or extraordinary performance. It requires the internal auditor to conduct examinations and verifications to a reasonable extent (PA 1220-1, para. 2). ‘Answer (A) is incorrect. Examination and verification need only be undertaken to a reasonable extent. Answer (C) is incorrect. An intemal auditor cannot give absolute assurance. ‘Answer (D) is incorrect. The possibilty of material irregularities must be considered. ‘Answer (B) is correct, REQUIRED: The basis for including an item in the engagement although itis immaterial. ISCUSSION: Internal auditors must exercise due professional care by considering the relative complexity, materiality, or signi ‘of matters to which assurance procedures are applied (Impl. Std. 1220.A1). Materiality Judgments are made in the light of al the circumstances and involve qualitative as well as quantitative considerations. Moreover, internal auditors also must consider the interplay of risk with materiality. Consequently, engagement effort may be required for a quantitatively immaterial tem if adverse effects are likely to occur, for example, a material contingent lability arising from an illegal payment that is otherwise immaterial. ‘Answer (A) is incorrect. In the absence of other considerations, devoting additional engagement effort to an immaterial item is inefficient. Answer (C) is incorrect. Additional ‘engagement procedures might not be needed if related information is reliable. Answer (D) is incorrect. The item is more likely to be included if it affects recurring income items rather than miscellaneous income. :66 22. To ensure that due professional care has been taken at all times during an engagement, the internal auditor should always ‘A. Ensure that all financial information related to the aucit is included in the audit plan and ‘examined for nonconformance or irregularities. B. Ensure that all audit tests are fully documented. C. Consider the possibilty of nonconformance or irregularities at all times during an ‘engagement D. Communicate any noncompliance or irregularity discovered during en engagement promptly fo the audit committee. 2.7 Quality Assurance and Improvement Program 23. ‘An individual became head of the internal audit activity of an organization 1 week ago. An ‘engagement client has come to the person ‘complaining vigorously that one of the internal auditors is taking up an excessive amount of client time on an engagement that seems to be lacking 2 clear purpose. In handling this conflict with a client, the person should consider ‘A. Discounting what is said, but documenting the B. Whether e» 24, complaint. ting procedures within the internal aucit activity provide for proper planning and quality assurance. Presenting an immediate defense of the intemal ausitor based upon curently known cts, Promising the client that the internal auditor will, finish the work within 1 week. The chief audit executive should develop and ‘maintain @ quality assurance and improvement Program that covers all aspects of the internal aucit Activity and continuously monitors its effectiveness. All of the following are included in ¢ quality program except A. B. c. Annual appraisals of individual internal auditors’ performance. Periodic internal assessment. Supervision. Periodic external assessments. ‘SU 2: Independence, Objectivity, and Due Care Answer (C) is correct REQUIRED: The action the internal auditor should alweys take to ensure that due professional care has been exercised at all times during an engagement. DISCUSSION: Due professional care implies reasonable care and competence, not infallbility or extraordinary Performance. ‘Thus, due professional care requires the internal auditor to conduct examinations and verifications to a reasor extent. Accordingly, internal auditors cannot give absolute assurance thet noncompliance or reguarties do not exist. Nevertheless, the possibilty of material irregularities or noncompliance needs to be considered whenever the internal auditor undertakes an internal auditing assignment (PA 1220-1, pare. 2). Thus, considering the possiblity of nonconformance ‘material irregularities at all times during an engagement is the only way of demonstrating that due professional care has been taken in an internal audit assignment. ‘Answer (A) is incorrect. The automatic inclusion of rele financial information in an audit plan does not guarantee that professional care has been exercised over the audit as a whi ‘Answer (B) is incorrect. Keeping detailed working papers does: not ensure that due professional care hes been exercised di the tests. Answer (0) is incorrect. Due professional care does ‘ot require that immaterial instances of noncompliance or irregularity be reported to the audit committee. Answer (B) is correct. REQUIRED: The matter that should be considered in handling @ complaint that an internal auditor is taking an ‘excessive amount of auditee time on an audi DISCUSSION: The CAE should examine departmental procedures and the conduct of the specific engagement Tentioned to ascertain that proper planning and quality assurance procedures aren paoe end ae being followed, ‘Answer (A) is incorrect. The CAE has responsibilities for planning engagement work schedules and maintaining a q assurance and improvement program and cannot afford to 2 potentially valid complaint, Answer (C) is incorrect. Taking defensive position with the client stifles communication, hat future engagement involvements, and ignores basic tesponsibilties for managing the internal audit activity. ‘Answer (D) is incorrect. Making @ promise to end the work ‘2 specified time without knowledge of the work schedule Jeopardizes the authority of the CAE and the internal audit in the current and future engagements. The CAE has an obligation fo assure that adequate time is allowed for achik ‘engagement objectives, Answer (A) is correct. REQUIRED: The element not part of e quality assurar ram. DISCUSSION: Appraising each internal auditor's work least annually is property a function of the human resources program of the internel audit activity. ‘Answer (B) is incorrect. Internai assessment is an el of a quality program. Answer (C) is incorrect. Supervision is. element of @ quality program. Ongoing reviews are internal assessments that include engagement supervision. Answer 's incorrect. External essessment is an element of a quality rogram.‘SU 2: Independence, Objectivity, and Due Care !what minimal required frequency does the executive report the results of internel inthe form of ongoing menitring to ‘management and the board’ Annually. Biennially. ‘auditors may report that their activities with the Standards. They may use this ‘only if ‘tis supported by the results of the quality program. An independent external assessment of the internal audit activity is conducted annually. ‘Senior management or the board is ‘ecountable for implementing a quality program. ‘External assessments of the intemal audit ‘activity are made by extemal auditors. Following an extemal assessment of the internal ‘activity, who is (are) responsible for licating the results to the board? Internal auditors. Audit committee. Chief audit executive. External auditors. Which of the following is part of an internal audit ‘quality assurance program, rather than being as part of other responsibilities ofthe chief ‘executive (CAE)? A. The CAE provides information about and access to internal audit working papers to the external auditors to enable them to understand and determine the degree to which they may rely on the intemal auditors’ work 5. Management approves a formal charter establishing the purpose, authority, and responsibilty of the internal audit activity. ‘©. Ezch individual intemal auditor's performance is appraised at least annually. D. Supervision of an internal auditor's work is performed throughout each audit engagement. 67 Answer (C) is correct. REQUIRED: The frequency of reporting the results of intemal assessments. DISCUSSION: To demonstrate conformance with the mandatory IIA guidance, the results of external and periodic intemal assessments are communicated upon completion of such assessments and the results of ongoing monitoring are communicated at least annually (Inter. Std. 1320). ‘Answer (A) is correct. REQUIRED: The condition permitting intemal auditors to report that their activities conform with the Standards. DISCUSSION: The chief audit executive may state that the internal audit activity conforms with the Intemational Standards for the Professional Practice of intemal Auditing only if the results of the quality assurance and improvement program support this statement (Attr. Std. 1321). ‘Answer (B) is incorrect. An independent external assessment of the internal audit activity must be conducted at least once every 5 years. Answer (C) is incorrect. The CAE must develop and maintain a QAlf intemal audit activity. Answer (D) 3 may be made by others who are (1) independent, (2) qualified, and (3) from outside the organization. ‘Answer (C) is correct. REQUIRED: The individual or group responsible for ‘communicating the results of external assessments to the board. DISCUSSION: The chief audit executive must communicate the results of the QAIP to senior management and the board (Attr. Std. 1320), ‘Answer (A) is incorrect.. The chief audit executive (not internal auditors) is responsible for communicating the results of extemal assessments to the board. Answer (B) is incorrect. The chief audit executive (not the audit committee) is responsible for ‘communicating the results of external assessments to the board. ‘Answer (0) is incorrect. The chief audit executive (not external auditors) is responsible for communicating the results of external assessments t0 the board. ‘Answer (D) is correct. REC aes ‘The item that is part of an internal audit activty’s quality assurance program. DISCUSSION: The CAE develops and maintains a quality ‘assurance and improvement program (Attr. Std. 1300) that includes ongoing and periodic assessments (PA 1300-1, para. 2). Ongoing monitoring is incorporated into the routine Policies and practices used to manage the internal aut activity. ngagerent supervision is among the processes and tools used in ongoing internal assessments (PA 1311-1, para. 1). ‘Answer (A) is incorrect. Providing extemal auditors relates to the responsibil coordinate with external auditors. Answer (B) is incorrect. A CAE’s responsibilty to seek approval of a charter to establish the authority, purpose, and regponsibilty ofthe intemal audit activity is not part of e quality assurance program. Answer (C) is incorrect. Individual performance appraisals are part of a CAE’s responsibility for personnel management and development, rking papers to the of the CAE to68 U2: Independence, Objectivity, and Due Care 29. Ordinarily, those conducting internal quality program assessments report to The board. The chief audit executive. ‘Senior management. The internal audit staff pomp, 30. Quality program assessments may be performed internally or externally. distinguishing feature of an external assessment is its objective to ‘A. Identity tasks that can be performed better. B. Determine whether internal audit services meet professional standards. C. Set forth the recommendations for improvement. D. Provide independent assurance, ‘Answer (B) is correct. REQUIRED: The person(s) to whom those conducting intemal ually program assessments repor. DISCUSSION: The CAE establishes a structure for reporting results of internal assessments that maintains ‘appropriate credibility and objectivity. Generally, those assig ‘esponsibility for conducting ongoing and periodic reviews rep to the CAE while performing the reviews and communicate results directly to the CAE (PA 1311-1, para. 7) Answer (A) is Incorrect. Atleast annually, the CAE repo the results of intemal assessments to the board. Answer (C) incorrect. The CAE shares information about internal assessments with appropriate persons outside the internal a activity, such as senior management. Answer (D) Is incot Results ordinarily are communicated directly to the CAE. Gi a self-assessment, reporting to the internal audit staff essenti involves having the staff report to itself Answer (D) is correct. REQUIRED: The distinguishing feature of an external assessment. DISCUSSION: External assessments must be conduct least once every 5 years by a qualified, independent reviewe! review team from outside the organization (Attr. Std. 1312). Individuals who perform the external assessment are free of obligation to, or interest in, the organization whose internal activity is assessed (PA 1312-1, para. 5), Answer (A) is incorrect. An internal assessment will id tasks that can be performed better. Answer (B) is incorrect. An internal assessment will determine whether internal audit services meet professional standards. Answer (C) is inco An internal assessment will set forth recommendations for improvement. Use the additional questions in Gleim CIA Test Prep Online to create Test Sessions that emulate Pearson