CIA Part 1 Section III FC

What is the preliminary survey?
The preliminary survey is the first step in the audit

process and it is particularly useful for a first-time
engagement when there is little detailed information about
the engagement client.
© 2017 HOCK international

What are checklists?
Checklists ensure that tasks, steps, or items that need to

be accomplished are completed. Checklists are generally
standardized; therefore, items that need particular attention
during the engagement will not be omitted, which might
happen if a new checklist had to be created for each
engagement.

What are questionnaires?
A series of questions that are given to engagement clients

and sometimes other parties that are used to collect
information about the engagement client.

What are surveys?
Surveys are questionnaires that are sent to people outside

of the organization. They are relatively low-cost to
conduct and can provide valuable information about
external perceptions about the organization.

What are four types of interviews?
1) Preliminary
2) Fact-gathering
3) Follow-up
4) Exit

What are the six steps
in the interview process?
1) Planning for the interview

2) Scheduling the interview
3) Opening the interview
4) Conducting the interview
5) Recording the interview
6) Assessing the interview

What is sampling?
With sampling, an auditor tests only a portion of existing

items and then draws a conclusion about the population as
a whole.

What is statistical sampling?
“Statistical sampling (e.g. random and systematic) involves

the use of techniques from which mathematically
constructed conclusions regarding the population can
be drawn. Statistical sampling allows the auditor to draw
conclusions supported by arithmetic confidence levels
(e.g., odds of an erroneous conclusion) regarding a
population of data output.” (from PA 2320)

What is nonstatistical sampling?
“Nonstatistical sampling is an approach used by the auditor

who wants to use his or her own experience and
knowledge to determine the sample size. Nonstatistical
sampling (e.g., judgmental) may not be based objectively
and, thus, results of a sample may not be mathematically
supportable when extrapolated over the population.”
(from PA 2320)

What are two broad
categories of sampling?
1) Attributes sampling
2) Variables sampling

What is attributes sampling?
Attributes sampling is the testing of internal controls, and

the testing for the existence of a specific characteristic.

What is variables sampling?
Variables sampling is the testing for the amount of a

certain item.

What is sampling risk?
The risk that the sample is not representative of the

population.

What is the
risk of incorrect acceptance?
The risk that, based on the sample, the auditor concludes

that the population is incorrect, when the population is, in
fact, correct.

What is the
risk of incorrect rejection?
The risk that, based on the sample, the auditor concludes

that the population is correct, when the population is, in
fact, incorrect.

What is the
confidence level?
Confidence level is a measure of how confident the auditor

is that the sample is representative of the population as a
whole. As the sample size increases, the confidence level
increases.

What are five methods
of selecting the sample?
1) Judgmental sampling (haphazard sampling)

2) Random number sampling
3) Stratified sampling
4) Systematic sampling
5) Block sampling

What are four methods
of attribute sampling?
1) Acceptance sampling
2) Sequential sampling
3) Discovery sampling
4) Stop-or-go sampling

What is the tolerable error?
The rate of deviation (noncompliance) that would be

acceptable and not cause the auditor to change the
assessed level of control risk.

What is the sample error?
The results of sample testing are often accompanied by a

sample error (or sampling error) value, usually expressed
as +/- a certain amount. This expression acknowledges the
fact that the sample is only part of the population and that it
does not completely and exactly reflect the entire
population. The larger the sample size, the smaller this
error will be.

What are three methods
of extrapolating the result
of the sample to the population?
1) Mean-per-unit sampling
2) Difference estimation
3) Ratio method

What is probability-proportional-
to-size sampling?
A form of variable sampling in which the auditor uses the

actual individual dollars within the population as the
population instead of the number of invoices or some other
identifier of each account or invoice. This type of sampling
is often used when the population consists of very diverse
values or amounts because this method automatically
stratifies the population.
Also called dollar-unit or monetary-unit sampling.

What is data mining?
The process of looking for patterns or other useful

information, usually from an enterprise-wide database or a
data warehouse.

What is extraction?
Extraction is analyzing data for information or patterns to

produce useful business information.

What are three methods to test
computer-processed transactions?
1) Test data approach

2) Integrated test facility (ITF)
3) Parallel simulation

What are Computer Assisted
Audit Techniques (CAAT)?
CAATs are systems-based or transactions-based

software that automatically extract and analyze data.
CAATs are used in all phases of the audit from planning to
reporting.

What are the five
spreadsheet risks?
1) Unskilled users
2) Lack of guidelines for spreadsheet preparation
3) Data entry and recycling
4) Spreadsheet errors
5) Loss of data

What are analytical procedures?
Analytical procedures are the analysis and examination of

the relationship between two pieces of information to
determine if that relationship is “reasonable.”

What is Root Cause Analysis?
Root Cause Analysis is the process of identifying why an

issue occurred.

What is variance analysis?
The comparison of the actual performance with the

budgeted or anticipated results and then determining the
reasons for any differences.

What is trend analysis?
The analysis of the change in an amount or a balance over

time.

What is regression analysis?
Regression analysis forecasts a future amount based on

the relationship between the amount and one independent
variable (the variable that changes over time).

What is the
coefficient of correlation?
The measure of the relationship between two variables.

The higher the coefficient of correlation, the more predictive
the independent variable is in forecasting the future
amount.

What is ratio analysis?
A specific type of trend analysis that compares

relationships between financial information at a specific
point in time.

How is working capital calculated?
Current Assets
- Current Liabilities
= Working Capital

How is the current ratio calculated?
Current Assets
Current Liabilities

How is the quick ratio calculated?
Cash + Net Receivables + Marketable Securities

Current Liabilities

How is the defensive
interval ratio calculated?
Cash + Net Receivables + Marketable Securities

Daily Operating Cash Outflow

How is the debt-to-equity
ratio calculated?
Total Debt
Shareholders’ Equity

How is the debt ratio calculated?
Total Debt
Total Assets

How is the times-interest-earned
ratio calculated?
Earnings before Interest and Taxes

Interest Expense

How is the inventory turnover
ratio calculated?
Cost of Sales
Average Inventory

How is the number-of-days-
inventory-is-held ratio calculated?
365, 360, or 300

Inventory Turnover

How is the accounts receivables
turnover ratio calculated?
Net Credit Sales

Average Accounts Receivable

How is the number-of-days-
receivables-held ratio calculated?
365, 360, or 300

Receivables Turnover

How is the accounts payable
Annual Credit Purchases

Average Accounts Payable

How is the days-purchases-in-
payables ratio calculated?
365, 360, or 300

Accounts Payable Turnover

How is the fixed asset
Sales
Average Net Property, Plant and Equipment

How is the total asset
Sales
Average Total Assets

How is the
operating cycle calculated?
Days Sales in Inventory

+ Days Sales in Receivables
= Operating Cycle

How is the
cash cycle calculated?
Days Sales in Inventory

+ Days Sales in Receivables
- Days Purchases in Payables
= Cash Cycle

How is profit margin calculated?
Net Income after Interest and Taxes

Net Sales

How is net operating income
to sales calculated?
EBIT
Net Sales

How is return on
total assets calculated?
Net Income
Average Total Assets

How is return on
common equity calculated?
Net Income – Preferred Dividends

Average Book Value of Common Equity

How is return on
total equity calculated?
Net Income
Average Total Equity

What is benchmarking?
The process in which a company uses the standards set by

other companies as a target or model for its own
operations. Also known as best practices.

What are the steps in the
benchmarking process?
1) Select and prioritize benchmarking projects

2) Organize benchmarking teams
3) Research and identify best practices
4) Analyze the critical success factors of best practices
5) Implementation phase
6) Follow-up and feedback

What are observations?
Observations are the relevant statements of fact

discovered during the engagement, and they are made as
a result of comparing the difference between the current
state of affairs (where the company presently stands) with
the ideal state of affairs (where the company would like to
be).

What are
conclusions and opinions?
Conclusions and opinions are the internal auditor’s

evaluations of the observations and recommendations
regarding the activities that were under review. An opinion
should be clearly and concisely written and include only
conclusions that can be justified and adequately supported
by the facts.

What are recommendations
and action plans?
Recommendations are what the auditor has identified that

the client can do to improve and action plans are how those
recommendations can be implemented.

What are the four attributes
for observations
and recommendations?
1) Criteria
2) Condition
3) Cause
4) Effect

What is the purpose
of working papers?
Working papers form the basis for the conclusions of the

engagement.

What security issues do
electronic working papers have?
1) Data protection
2) Data access
3) Changing data

Who has control over
the working papers?
The chief audit executive must control access to

engagement records. (from Standard 2330)

What is a flowchart?
A flowchart is a diagram that create a visual representation

of processes or events, usually through text boxes and
arrows representing chains of command or orders of
events.

What are the
two types of flowcharts?
Horizontal and vertical flowcharts.

What is a data flow diagram?
A data flow diagram is a graphical notation of the path and

transformation of data as it moves through an information
system.

What are the five elements
of a data flow diagram?
1) Data sources (where the information comes from)

2) Data destinations (where the information goes)
3) Data flows (how the data gets there)
4) Transformation process (what happens to the data)
5) Data storage (how the data is stored for the long term)

What are the four
characteristics of evidence?
1) Sufficient
2) Reliable
3) Relevant
4) Useful

What is sufficient evidence?
Sufficient evidence is “enough” evidence. Enough evidence

needs to be collected so that another auditor looking at that
same set of collected information would conclude that
enough evidence was obtained.

What is reliable evidence?
Reliable evidence is said to be “competent.” The

competence of any evidence is determined largely by the
source of the evidence. The best source of evidence is
something that auditor directly observe. The worst source
of evidence is the engagement client.

What is relevant evidence?
Relevant evidence is related to the item that is being

audited.

What is useful evidence?
Useful information enables the organization to meet its

goals. Finding useful information is one of the main goals
and roles of the internal audit function.

CIA Part 1 Section III FC

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CIA Part 1 Section III FC

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What is the preliminary survey?

The preliminary survey is the first step in the audit

© 2017 HOCK international

Checklists ensure that tasks, steps, or items that need to

© 2017 HOCK international

A series of questions that are given to engagement clients

© 2017 HOCK international

Surveys are questionnaires that are sent to people outside

© 2017 HOCK international

© 2017 HOCK international

1) Planning for the interview

© 2017 HOCK international

With sampling, an auditor tests only a portion of existing

© 2017 HOCK international

“Statistical sampling (e.g. random and systematic) involves

© 2017 HOCK international

“Nonstatistical sampling is an approach used by the auditor

© 2017 HOCK international

© 2017 HOCK international

Attributes sampling is the testing of internal controls, and

© 2017 HOCK international

Variables sampling is the testing for the amount of a

© 2017 HOCK international

The risk that the sample is not representative of the

© 2017 HOCK international

The risk that, based on the sample, the auditor concludes

© 2017 HOCK international

The risk that, based on the sample, the auditor concludes

© 2017 HOCK international

Confidence level is a measure of how confident the auditor

© 2017 HOCK international

1) Judgmental sampling (haphazard sampling)

© 2017 HOCK international

© 2017 HOCK international

The rate of deviation (noncompliance) that would be

© 2017 HOCK international

The results of sample testing are often accompanied by a

© 2017 HOCK international

© 2017 HOCK international

A form of variable sampling in which the auditor uses the

© 2017 HOCK international

The process of looking for patterns or other useful

© 2017 HOCK international

Extraction is analyzing data for information or patterns to

© 2017 HOCK international

1) Test data approach

© 2017 HOCK international

CAATs are systems-based or transactions-based

© 2017 HOCK international

© 2017 HOCK international

Analytical procedures are the analysis and examination of

© 2017 HOCK international

Root Cause Analysis is the process of identifying why an

© 2017 HOCK international

The comparison of the actual performance with the

© 2017 HOCK international

The analysis of the change in an amount or a balance over

© 2017 HOCK international

Regression analysis forecasts a future amount based on

© 2017 HOCK international

The measure of the relationship between two variables.

© 2017 HOCK international