FinancialCIA-IICertified Internal Auditor (CIA)

QUESTION: 480Confirmations are a highly regarded form of information. Confirmation is most effectivein addressing the existence assertion for theA. Addition of a milling machine to a machine shop.B. Sale of merchandise during regular course of business.C. Inventory held on consignment.D. Granting of a patent for a special process developed by the organization.Answer: CWhen inventories are held by an outside custodian, such as a consignee, the internalauditor ordinarily obtains direct confirmation in writing from the custodian. Confirmationof consigned goods is most likely to be effective for the existence and rights-andobligations assertions.QUESTION: 481Observation is considered a reliable engagement procedure, but one that is limited inusefulness. However, it is used in a number of different engagement situations. Which ofthe following statements is true regarding observation as an engagement technique?A. It is the most effective engagement methodology to use in filling out internal controlquestionnaires.B. It is the most persuasive methodology to learn how transactions are really processedduring the period under review.C. It is rarely sufficient to satisfy any assertion other than existence.D. It is the most persuasive technique for determining if fraud has occurred.Answer: CObservation is effective for verifying whether particular assets such as inventory orequipment exist at a given date. However, it is of limited use in addressing otherassertions. Thus, it provides less persuasive information about the assertions ofcompleteness, rights, valuation, and presentation and disclosure. For example, merelyobserving inventory does not determine whether the engagement client has rights in it.QUESTION: 482One engagement procedure for an engagement to evaluate facilities and equipment is totest the accuracy of recorded depreciation. Which of the following is the best source ofinformation that the equipment in question is in service?A. A review of depreciation policies and procedures.B. A comparison of depreciation schedules with a listing of insurance appraisals for thesame equipment.

C. A comparison of depreciation schedules with the maintenance and repair logs for thesame equipment.D. A review of inventory documentation for the equipment.Answer: CThe maintenance and repair records provide information that equipment exists and is inuse. Equipment in service is more likely to require maintenance than retired equipment.However, the best information is the internal auditor's direct observation.QUESTION: 483Which of the following documents provides the most persuasive information concerningthe existence and valuation of a receivable?A. A credit approval document supported by the customer's audited financial statements.B. A copy of a sales invoice to the customer in the engagement client's records.C. A positive confirmation received directly from the customer.D. A customer's purchase order in the engagement client's records related to the creditsale.Answer: CA positive confirmation by the debtor is the most reliable information other than paymentthat the receivable is a valid asset and that it is properly valued. This information isespecially reliable because the customer has no incentive to confirm a nonexistentobligation and because the documentation has not been under the engagement client'scontrol.QUESTION: 484A bank internal auditor wanted to verify the accuracy of the general ledger balance of adepository account. One engagement procedure used in this process was to mail positiveconfirmations to statistically sampled depositors. However, the number of repliesreceived was not adequate to form a valid conclusion about the account's accuracy. Whataction should the internal auditor take to accomplish this objective?A. Assume that the no replies represent tacit agreements by the depositor, document theresults, and perform no further work on this engagement procedure.B. Expand the original confirmation sample to include additional depositors.C. Verify accuracy of the depositors' addresses. Retail confirmation requests a secondtime with a notation indicating that it is a second request.D. Mail negative confirmation requests to all non-replies and document results of testing.If necessary, telephone depositors to inquire about any disagreement with balancesconfirmed.

Answer: CA positive confirmation asks the debtor for a reply. It may ask the respondent to statewhether (s)he agrees with the information given or request that the recipient fill in theaccount balance or provide other information. The latter type of positive confirmation iscalled a blank form. The negative confirmation asks for a response only when the debtordisagrees. Positive confirmation is therefore useful when an internal auditor wants toobtain documentary information to verify account balances. If the internal auditor fails toreceive positive confirmation, alternative procedures including second and third requestsshould be employed.QUESTION: 485Which of the following statements describes an internal control questionnaire?A. It provides detailed information regarding the substance of the control system.B. It takes less of the engagement client's time to complete than other control evaluationdevices.C. It requires that the internal auditor be in attendance to properly administer it.D. It provides indirect information that might need corroboration.Answer: DAn internal control questionnaire consists of a series of questions about the controlsdesigned to prevent or detect errors or irregularities. Answers to the questions help theinternal auditor to identify specific policies and procedures relevant to specific assertions.They also help in the design of tests of controls to evaluate their effectiveness. Thequestionnaire provides a framework to assure that specific concerns are not overlooked,but it is not a sufficient means of understanding the entire system. Thus, the evidenceobtained is indirect and requires corroboration by means of observation, interviews,flowcharting, examination of documents, etc.QUESTION: 486During interviews with the inventory management personnel, an internal auditor learnedthat salespersons often order inventory for stock without receiving the approval of thevice president of sales. Also, detail testing showed that there are no written approvals onpurchase orders for replacement parts. The results of detail testing are a good example ofA. Indirect information.B. Circumstantial information.C. Corroborative information.D. Subjective information.Answer: C

Corroborative information is evidence from a different source that supplements andconfirms other information. For example, oral testimony that a certain procedure was notperformed may be corroborated by the absence of documentation.QUESTION: 487Which of the following engagement objectives will be accomplished by tracing a sampleof accounts receivable debit entries to customer invoices and related shippingdocuments?A. Sales are properly recorded.B. Sales are billed at the correct prices.C. Accounts receivable represent valid sales.D. Customer credit is approved.Answer: CBy vouching sales transactions from the accounts receivable ledger back to the salesinvoices, the internal auditor verifies that these accounts receivable are properlysupported by sales. These sales should then be vouched back to related customer ordersand traced forward to shipping documents. The purpose is to detect fictitious sales andassure that each sale is properly documented and posted to the accounts receivablesubsidiary ledger. The latter objective also requires sales invoices to be traced to theaccounts receivable subsidiary ledger.QUESTION: 488Management believes that some specific sales commissions for the year were too large.The accuracy of the recorded commission expense for specific salespersons is bestdetermined byA. Computation of selected sales commissions.B. Calculating commission ratios.C. Use of analytical procedures.D. Tests of overall reasonableness.Answer: ASales commission is based on the application of a ratio to the amount of the sale. The bestinformation about the accuracy of sales commission expense for specific individuals is torecomputed the amounts derived from a sample of transactions. These tests should bedone at the same time as procedures testing accrued liabilities.QUESTION: 489

An internal auditor traces copies of sales invoices to shipping documents to determinethatA. Customer shipments were billed.B. Sales that are billed were also shipped.C. Shipments to customers were also recorded as receivables.D. The subsidiary accounts receivable ledger was updated.Answer: BIf the invoices in the sample can be correctly matched with shipping documents, someassurance is given that items billed are also shipped.QUESTION: 490A large manufacturer has a transportation division that supplies gasoline for theorganization's vehicles. Gasoline is dispensed by an attendant who records the amountissued on a serially prenumbered gasoline disbursement form, which is then given to theaccounting department for proper recording. When the quantity of gasoline falls to acertain level, the service station attendant prepares a purchase requisition and sends it tothe purchasing department where a purchase order is prepared and recorded in a gasolinepurchases journal. Which of the following engagement procedures best determineswhether gasoline disbursements are fully recorded?A. Compare the gasoline purchase requisitions with the gasoline disbursement records.B. Select a number of gasoline purchases from the gasoline purchases journal andcompare them with their corresponding purchase orders. Ascertain that the purchases areserially prenumbered, are matched with purchase requisitions, and are authorized bysomeone independent of employees of the service station.C. Perform analytical procedures comparing this period's gasoline consumption withprior periods.D. Match the quantity of gasoline disbursed according to disbursement forms with anindependent reading of quantity disbursed at the pump.Answer: DPhysical information is best obtained through direct observation or inspection by theinternal auditor. Because the gasoline disbursement forms are prenumbered, the internalauditor is able to match them with the independent reading of quantity disbursed at thepump to test the completeness of disbursement records.QUESTION: 491To control daily operating costs, an organization decreased the number of times amessenger service was used each day. Despite those measures, the monthly bill continued

to increase. What procedure should the internal auditor use to detect whether improperservices were being billed?A. Reconcile a sample of messenger invoices to pickup receipts.B. Test the mathematical accuracy of a sample of messenger invoices.C. Scan ledger accounts and messenger invoices.D. Observe daily use of the messenger service.Answer: AWhen the amount charged for a service increases as an entity reduces its use of theservice, the possibility exists that the entity is being charged for service not received. Theinternal auditor should reconcile a sample of messenger invoices to pickup receipts. Bymultiplying the number of trips authorized by the charge per trip, any discrepancy can beidentified.QUESTION: 492To determine whether credit controls are inconsistently applied, preventing valid sales tocreditworthy customers, the internal auditor shouldA. Confirm current accounts receivable.B. Trace postings on the accounts receivable ledger.C. Analyze collection rates and credit histories.D. Compare credit histories for those receiving credit and for those denied credit.Answer: DCredit policy should maximize profits by balancing bad debt losses and the increase insales derived from granting credit. One concern in an engagement to review creditmanagement is whether credit policies and procedures are fairly administered.QUESTION: 493To test whether debits to accounts receivable represent valid transactions, the internalauditor should trace entries from theA. Sales journal to the accounts receivable ledger.B. Accounts receivable ledger to the cash receipts journal.C. Accounts receivable ledger to sales documentation.D. Cash receipts documentation to the accounts receivable ledger.Answer: C

By vouching sales transactions from the accounts receivable ledger back to the salesinvoices, the internal auditor verifies that these accounts receivable are properlysupported by sales. These sales should then be vouched back to related customer ordersand traced forward to shipping documents. The purpose is to detect fictitious sales andassure that each sale is properly documented and posted to the accounts receivablesubsidiary ledger. The latter objective also requires sales invoices to be traced to theaccounts receivable subsidiary ledger.QUESTION: 494Cash receipts should be deposited on the day of receipt or the following business day.Select the most appropriate engagement procedure to determine that cash is promptlydeposited.A. Review cash register tapes prepared for each sale.B. Review the functions of cash handling and maintaining accounting records for properseparation of duties.C. Compare the daily cash receipts totals with the bank deposits.D. Review the functions of cash receiving and disbursing for proper separation of duties.Answer: CA standard control over the cash receipts function is to require that daily cash receipts bedeposited promptly and intact. Hence, the total of cash receipts for a day should equal thebank deposit because no cash disbursements are made from the daily receipts. Todetermine whether cash receipts are promptly deposited, the internal auditor shouldcompare the daily cash receipts totals with bank deposits.QUESTION: 495Which of the following engagement procedures will provide the least relevantinformation for determin