IIA IIA-IAP Practice Test - Questions Answers, Page 2

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 2130 - Control: Internal audit must assess whether controls ensure compliance and prevent fraud.

Reasoning:

Option A directly addresses the root cause: payment for unrendered services. Requiring acknowledgment of receipt ensures only valid invoices are paid.

Option B (observing invoice input) ensures data entry accuracy but does not address fraud.

Option C (verifying amounts) ensures correct payments for legitimate invoices but does not prevent unauthorized payments.

Best Practice:

Verifying acknowledgment of services before payment is a preventive control, reducing fraud risk.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to Benchmarking:

External benchmarking involves comparing the organization's metrics with those of other entities, typically competitors or industry averages.

Standard 1210 - Proficiency: Internal auditors must have knowledge to evaluate performance against external benchmarks effectively.

Reasoning:

Option B demonstrates external benchmarking by comparing the organization's return on equity with a competitor's performance.

Option A and Option C focus on internal analysis within the organization and do not use external references.

Application in Internal Auditing:

External benchmarking identifies competitive gaps, informs strategic decisions, and supports recommendations for improvement.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 1110 - Organizational Independence: The chief audit executive (CAE) must report functionally to the board to ensure independence.

The audit charter must define the CAE's functional reporting line to the board, securing protection from undue management influence.

Reasoning:

Option C addresses the foundational document---the audit charter---that establishes the CAE's authority and independence.

Option A refers to operational standards, but they do not directly safeguard against interference.

Option B strengthens governance but is secondary to the audit charter in securing independence.

Impact:

A robust audit charter formalizes the CAE's reporting relationship and ensures organizational independence, empowering internal audit.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 2130 - Control: Internal audit must evaluate and contribute to the improvement of governance, risk management, and control processes.

Designing or operating controls (Options A and B) risks impairing internal audit independence (Standard 1100).

Reasoning:

Option C aligns with internal audit's role of evaluating internal controls objectively.

Option A could involve a management function, which compromises independence.

Option B focuses on monitoring, a management responsibility, and does not leverage internal audit's evaluative expertise.

Best Practice:

By evaluating controls, internal auditors provide actionable insights that help improve control effectiveness and efficiency without compromising independence.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Definition of Assurance Services: Assurance services involve the objective examination of evidence to provide an independent assessment of governance, risk management, and control processes.

Compliance engagements align with assurance services by verifying adherence to laws, regulations, or internal policies.

Reasoning:

Option C qualifies as assurance because it involves assessing whether compliance requirements are met.

Option A (process design) and Option B (facilitation) are advisory in nature and fall under consulting services, not assurance.

Impact on the Organization:

Compliance assurance engagements provide critical oversight, helping organizations maintain accountability and avoid regulatory penalties.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 2210 - Engagement Objectives: Internal auditors must establish objectives for each engagement to align with the organization's goals and address identified risks.

Reasoning:

Option A is correct because engagement objectives focus on ensuring audit procedures target and mitigate identified risks effectively.

Option B (common understanding) is important for team alignment but is secondary to risk-focused objectives.

Option C (considering work of other assurance providers) is part of planning but not the primary purpose of setting objectives.

Importance of Objectives:

Engagement objectives drive the audit's focus, ensuring that procedures are purposeful and tailored to mitigate relevant risks.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to Analytical Techniques:

Trend Analysis involves examining data over a period to identify patterns, shifts, or anomalies.

This technique is appropriate for longitudinal data like sales over four years.

Reasoning:

Option B (Trend analysis) is correct as it helps the auditor analyze sales performance over time and identify patterns or deviations.

Option A (Ratio analysis) compares related metrics, such as profitability or liquidity, but does not focus on changes over time.

Option C (External benchmarking) involves comparing performance to external standards or competitors, not internal historical data.

Application in Audit:

Trend analysis allows the auditor to assess growth, seasonal patterns, or irregularities in sales data, providing actionable insights.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to Audit Recommendations:

According to the IIA Standards, a recommendation must be actionable, specific, and designed to address the root cause of an identified issue.

Reasoning:

Option B is correct because effective recommendations focus on preventing recurrence by addressing root causes or implementing control measures.

Option A (factual evidence) supports findings but does not constitute the recommendation itself.

Option C (factors allowing the condition) provides context for findings but does not include actionable measures to resolve or prevent the issue.

Key Components of a Recommendation:

Recommendations should propose practical solutions to mitigate risks, improve processes, or enhance controls.

Measures to prevent recurrence align with the goal of sustainable improvements.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to Compliance Auditing:

Definition: Compliance audits assess adherence to external laws, regulations, or internal policies and procedures.

Standard 2130 - Control: Internal audit must evaluate the adequacy and effectiveness of controls to ensure compliance with applicable laws and regulations.

Reasoning:

Option A is correct because assessing adherence to safety regulations is a compliance activity focused on legal and regulatory conformity.

Option B (analyzing economic activity) relates more to financial auditing or accounting standards compliance, not regulatory compliance.

Option C (reviewing an external service provider's risk management process) aligns with a risk or assurance engagement, not compliance.

Impact of Compliance Audits:

Ensuring adherence to legal requirements protects the organization from regulatory penalties and enhances operational integrity.