MULTIPLE CHOICE:

Identify the letter of the choice that best completes the statement or answers the question.

____ 1. In a broad sense, society benefits from internal auditing because the internal auditor
a. Encourages corporate compliance with standards of public policy.
b. Promotes the efficient and effective use of resources.
c. Evaluates financial data against professional standards.
d. Ensures that operations respond to the demands of the marketplace.

____ 2. Which of the following factors are essential to an effective internal auditing organization?

I. Operating responsibility
II. Organizational status
III. Objectivity
IV. Authority over operations

a. I and II.
b. II and III.
c. III and IV.
d. I and IV.

____ 3. The primary difference between operational auditing and financial auditing is that in operational auditing
a. The auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting standards.
b. The auditor is seeking to help management use resources in the most effective manner possible.
c. The auditor starts with the financial statements of an activity being audited and works backward to the basic processes involved in producing them.
d. The auditor can use analytical skills and tools that are not necessary in financial auditing.

____ 4. The internal audit staff has been asked to conduct an audit of the purchasing department. Top management feels that there have been some production bottlenecks recently because of out-of-stock situations. What is the primary objective of the auditors in this assignment?
a. To appraise the economy with which resources are employed.
b. To review the reliability and integrity of financial and operating information.
c. To review the means of safeguarding assets and verifying the existence of such assets.
d. To ascertain whether results are consistent with established objectives and whether operations are being carried out as planned.

____ 5. Which of the following would be the most appropriate role for the internal auditor in the cash budgeting process?
a. Reviewing budget policies and the design and functioning of the budget process.
b. Working with the controller to prepare the budget.
c. Approving the budget before its implementation.
d. Analyzing monthly budget reports.

____ 6. An internal auditor is performing an audit of the receiving department to determine if only authorized purchases are being accepted. Which of the following documents should the auditor examine?
a. A bill of lading.
b. A "blind" (no quantities shown) copy of the purchase order received directly from the purchasing department.
c. An invoice.
d. A note documenting a telephone conversation with a purchasing agent.

____ 7. An auditor is attempting to determine whether or not inventory is excessive. The inventory turnover rate was 4.7 this year as compared to 6.0 the prior year. The average rate for the industry over the past three years was 6.2. From these facts, the auditor should conclude
a. An inventory turnover rate this much lower than "normal" suggests the possibility of excess inventory.
b. There is definitely an excess inventory problem because the turnover rate is 1.5 times less than the industry average.
c. The turnover rate differences are immaterial and thus do not indicate a problem.
d. The possibility of excess inventory is not apparent from these figures.

____ 8. Which of the following would be the most appropriate test to determine if a major investment in a fixed asset was properly authorized?
a. Vouch payments made on the investment to the controller's approval.
b. Review minutes of board of directors' meetings for investment approval.
c. Compliance test the functioning of the internal controls over expenditures.
d. Confirm details of the purchase with the vendor.

____ 9. Which of the following is not usually a part of the preliminary survey phase of an audit?
a. Touring operations.
b. Conducting audit inquiries.
c. Performing analytical review.
d. Developing the audit program.

____ 10. An auditor decides to test the effectiveness and efficiency of the short-term strategy being employed to market product X. Which of the following would be the most appropriate audit procedure?
a. Discuss the effectiveness and the strategy with the director of marketing.
b. Discuss the effectiveness of the strategy with sales supervisors and individual salespersons.
c. Compare sales of product X prior to and after implementation of the short-term marketing strategy.
d. Evaluate performance goals incorporated into the short-term strategy, and whether those goals are being met.

____ 11. Which of the following would be the most appropriate test to determine whether purchase orders are being processed on a timely basis?
a. Determine the dates of unpaid accounts payable invoices.
b. Compare dates of selected purchase orders with those of purchase requisitions.
c. Select a block of used purchase order numbers and account for all numbers in the block.
d. Discuss processing procedures with operating personnel and observe actual processing of purchases.

____ 12. In an audit of the transportation function, which of the following tests is most appropriate to determine if there is favoritism to individual carriers?
a. Investigate selected demurrage charges to determine if they were appropriate.
b. Determine if the selection of carriers is reviewed and approved by a higher-ranking member of the traffic department.
c. Determine whether freight bills have received a post-audit by the transportation department or an outside specialized freight auditor.
d. Determine that the amount of freight billed to the customer on the sales invoice is equal to the amount actually charged your company by the carrier.

____ 13. In the performance of an audit, audit risk is best defined as the risk that an internal auditor
a. Might not select documents that are in error as part of the examination.
b. May not be able to properly evaluate an organization because of its poor internal accounting controls.
c. May unknowingly fail to recognize appropriately a material error or weakness in an examined organization.
d. May not have the expertise to adequately audit a specific entity.

____ 14. The role of the internal auditor with respect to a purchasing department audit is to
a. Evaluate the adequacy of purchasing policies and procedures and determine the extent of compliance.
b. Review and appraise the adequacy of controls over the creation of all types of company obligations.
c. Review and appraise the conditions by which notes payable come into existence and the control exercised over them.
d. Establish that the purchasing department is independent of receiving, inspection, stores, and accounts payable activities.

____ 15. In examining whether or not an auditee is conforming with the company's affirmative action policy, the internal auditor has found that:

1) Five percent of the employees are from minority groups.
2) No one from a minority group has been hired this year.

The most appropriate conclusion the internal auditor should draw is
a. Insufficient evidence exists of compliance with the affirmative action policy.
b. The auditee is violating the company's policy.
c. The company's policy is unauditable and hence unenforceable.
d. The auditee is complying with the affirmative action policy.

____ 16. Which of the following is the most important purpose of a closing conference?
a. To provide a final quality control review of the accuracy of findings and reasonableness of conclusions included in the report.
b. To inform the board of directors and top management concerning major problems encountered.
c. To give auditee managers an advance start on solving the problems outlined in the report.
d. To provide the auditor an opportunity to "sell" auditee management on the benefits of implementing recommendations.

____ 17. The primary audience for the written report issued by the internal auditor at the completion of an audit should be
a. The external auditors when they intend to rely on the internal auditor's work.
b. Managers outside the area of audit so as to inform them of what is going on in other areas of the organization.
c. The audit committee who needs to be kept informed on the risks to which the organization is exposed.
d. The management inside or outside the audited area who can take corrective action.

____ 18. An internal auditor determines that actual procedures differ from prescribed control procedures. The auditor should

1. Require operating personnel to conform to prescribed procedures.
2. Document the discrepancies and make any appropriate recommendations to management.
3. Expand all aspects of the audit to determine other differences from prescribed procedures.
4. Modify the audit plan as warranted by the differences noted.

a. 1 and 3
b. 2 and 3
c. 1 and 4
d. 2 and 4

____ 19. One of the elements of a standard audit finding is "criteria." Which of the following best describes this element of an audit finding?
a. What the auditor found, the status, or condition.
b. The effect that implementing a recommendation is expected to achieve.
c. The standard of performance, or what should be.
d. The cause or reason why the reported condition occurred.

____ 20. Follow-up activities by the internal auditor may be terminated, even though corrective action has not been taken, when the
a. Recommendations concern activities not included in the scope of the original audit program.
b. Board of directors or management has assumed the risk of not taking corrective action.
c. Auditor has not convinced operating personnel of the soundness of the audit recommendations.
d. Auditor has no authority or responsibility to prescribe or direct the corrective action.

____ 21. An internal auditor is preparing a final audit report to management. There is, however, disagreement between the auditor and the auditee on one finding which details the auditee's violation of corporate purchasing policy. The auditee believes the purchasing policy is open to interpretation and that there was no violation. The auditor believes that the policy is clearly stated and that the auditee's actions were a violation. In this circumstance, the auditor should
a. Delete the finding from the audit report.
b. Present only those facts, which support the audit finding and ignore those which detract from it.
c. Present both the auditor's and auditee's positions in the report.
d. Not issue the audit report until the auditor and auditee agree on all audit findings and recommendations.

____ 22. A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include

Program Economy &
results Compliance efficiency

a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. Yes No Yes

____ 23. Chevez is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Chevez detected noncompliance with requirements that have a material effect on that program. Chevez' report on compliance should express a(an)
a. Unqualified opinion with a separate explanatory paragraph.
b. Qualified opinion or an adverse opinion.
c. Adverse opinion or a disclaimer or opinion.
d. Limited assurance on the items tested.

____ 24. A company's new president meets the director of internal audit for the first time, and asks the director to briefly describe his department's overall responsibility. The director states that internal audit's overall responsibility is to:
a. Act as an independent appraisal function to review operations as a service to management by measuring and evaluating the effectiveness of controls.
b. Review the means of safeguarding assets and, as appropriate, verify the existence of such assets.
c. Ensure compliance with policies, plans, procedures, laws, and regulations, which could have a significant impact on operations and reports.
d. Review the reliability and integrity of financial and operating information and the means used to identify, measure, classify, and report such information.

____ 25. According to the Standards, the internal audit director should ensure follow-up of prior audit findings and recommendations:
a. To determine if corrective action was taken and is achieving the desired results.
b. Unless management rejected the recommendation in their initial response.
c. Unless the audit schedule does not allow time for follow-up.
d. Unless management has accepted the recommendation.

____ 26. Internal auditing has been a dynamic profession. Which of the following best describes the scope of internal auditing as it has developed to date?
a. Internal auditing involves appraising the economy and efficiency with which resources are employed.
b. Internal auditing involves evaluating compliance with policies, plans, procedures, laws, and regulations.
c. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding assets.
d. Internal auditing has evolved to more of an operational orientation from a strictly financial orientation.

____ 27. You have been selected to develop an internal auditing department for your company. Your approach would most likely be to hire:
a. Internal auditors each of whom possesses all the skills required to handle all audit assignments.
b. Inexperienced personnel and train them the way the company wants them trained
c. Degreed accountants since most audit work is accounting related.
d. Internal auditors who collectively have the knowledge and skills needed to complete all internal audit assignments.

____ 28. Which of the following is the most appropriate method of reporting disagreement between the auditor and the auditee concerning audit findings and recommendations?
a. State the auditor's position because the report is designed to provide the auditor's independent view.
b. State the auditee's position because management is ultimately responsible for the activities reported.
c. State both positions and identify the reasons for the disagreement.
d. State neither position. If the disagreement is ultimately resolved, there will be no reason to report the previous disagreement. If the disagreement is never resolved, the disagreement should not be reported, because there is no mechanism to resolve it.

____ 29. A charter is being drafted for a newly formed internal auditing department. Which of the following best describes the appropriate organizational status that should be incorporated into the charter?
a. The director of internal auditing should report to the chief executive officer but have access to the board of directors.
b. The director of internal auditing should be a member of the audit committee of the board of directors.
c. The director of internal auditing should be a staff officer reporting to the chief financial officer.
d. The director of internal auditing should report to an administrative vice president.

____ 30. A primary concern of an operational audit of the family welfare department of a governmental unit would be
a. Determining that proper measures of performance are used.
b. Generating an adequate return on investment.
c. Adhering to Generally Accepted Accounting Principles.
d. Ensuring that persons with direct client contact have at least a bachelor's degree.

____ 31. Which of the following could be an organization factor that might adversely affect the ethical behavior of the director of internal auditing?
a. The director reports directly to an independent audit committee of the board of directors.
b. The director of internal auditing is not assigned any operational responsibilities.
c. A director of internal auditing may not be appointed or approved without concurrence of the board of directors.
d. The director's annual bonuses are based on dollar recoveries or recommended future savings as a result of audits.

____ 32. The president wants to know whether the purchasing function is properly meeting its charge to: "purchase the right material at the right time in the right quantities." Which of the following types of audits addresses the president's request?
a. A financial audit of the purchasing department.
b. An operational audit of the purchasing department.
c. A compliance audit of the purchasing function.
d. A full-scope audit of the manufacturing operation.

____ 33. Which of the following audit techniques would be most persuasive in determining that significant inventory values on the books of a comp[any being acquired are correctly stated?
a. Obtain a management representation letter stating that inventory values are correctly stated.
b. Flowchart the inventory and warehousing cycle and form an opinion based on the quality of internal controls.
c. Conduct a physical inventory and bring in an independent expert if necessary to value inventory items.
d. Interview purchasing and materials control personnel to ascertain the quality of internal controls over inventory.

____ 34. After an audit report with adverse findings has been communicated to appropriate auditee personnel, proper action is to:
a. Schedule a follow-up review.
b. Implement corrective action indicated by the findings.
c. Examine further the data supporting the findings.
d. Assemble new data to support the findings.

____ 35. Recommendations in audit reports may or may not actually be implemented. Which of the following best describes internal auditing's role in follow-up on audit recommendations?

Internal auditing:
a. Has no role; follow-up is management's responsibility.
b. Should be charged with responsibility for implementing audit recommendations.
c. Should follow up to ascertain that appropriate action is taken on audit recommendations.
d. Should request that independent auditors follow up on audit recommendations.

____ 36. The purpose of governmental effectiveness or program results auditing is to determine if the desired results of a program are being achieved. The first step in conducting such an audit should be to:
a. Evaluate the system used to measure results.
b. Determine the time frame to be audited.
c. Collect quantifiable data on the program's success or failure.
d. Identify the legislative intent of the program being audited.

____ 37. An operational audit resulted in a finding regarding efficiency of operations. Select the best approach to gain the auditee's cooperation in this situation.
a. Allow the auditee to participate in development of recommendations for improvement.
b. Emphasize the personal responsibility of the auditee management.
c. Document the adverse finding with a complete list of all operational deficiencies.
d. Submit a draft copy of the final report to higher-level management.

____ 38. A major difference between operational auditing and financial auditing is
a. Operational auditing focuses on activities rather than financial statement assertions.
b. Operational auditing extends beyond the entity to analysis of industry and economic data.
c. Unlike financial auditing, operational auditing does not generally culminate in a formal audit report.
d. Operational auditing is narrower than financial auditing in its breadth of coverage.

____ 39. In conducting an operational audit, the following steps are generally recommended:

A. Develop the audit program
B. Perform the audit
C. Identify audit objectives
D. Evaluate the findings and develop conclusions and recommendations
E. Establish evaluation criteria
F. Report findings and recommendations
G. Conduct a preliminary survey of the activity
H. Appraise the efficiency and effectiveness of the activity

The proper sequence for applying the above steps is:

a. D,H,B,F,E,G,A,C
b. C,E,G,A,H,B,D,F
c. E,C,A,G,D,H,B,F
d. C,E,G,A,B,H,D,F

____ 40. A major part of an operational audit involves appraising the efficiency and effectiveness of the activity or unit being audited. Efficiency and effectiveness appraisal include all but the following steps:
a. Assessing the goal setting process.
b. Determining the extent to which goals are being achieved and the degree of coal congruence.
c. Assessing the financial stability of the unit.
d. Appraising the effectiveness of resource utilization within the unit or activity.

____ 41. The primary difference between an operational audit report and an independent financial audit report is
a. The operational audit report makes no mention of internal control.
b. The operational audit report is not constrained to a single standard reporting format.
c. The operational audit report stresses consistency among accounting periods.
d. Unlike the independent auditor, the internal auditor generally does not discuss the audit findings and the nature of the audit report with the auditee.

____ 42. Which of the following is not a source of responsibility for an independent auditor conducting a governmental compliance audit?
a. Governmental auditing standards as set forth in the General Accounting Office's "yellow book."
b. Standards for the Professional Practice of Internal Auditing.
c. Generally Accepted Auditing Standards as promulgated by the Auditing Standards Board of the AICPA.
d. Federal Single Audit Act of 1984 (as amended in 1996).