IIA IIA-CIA-Part1 Practice Test - Questions Answers, Page 62

According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), the control environment is the most important component of internal control. The control environment sets the tone of the organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. A strong control environment is essential for effective internal control as it includes elements such as integrity, ethical values, management's operating style, and the assignment of authority and responsibility.

COSO Framework: Emphasizes the importance of the control environment as the foundation for all other components of internal control.

The IIA Standards: Standard 2120 -- Risk Management: 'The internal audit activity must evaluate the effectiveness and contribute to the improvement of risk management processes.'

By accepting a role as an engagement supervisor on a highly specialized and technical engagement for which she did not have the expertise, the internal auditor violated the fundamental principle of competency as outlined in The IIA's Code of Ethics. The principle of competency requires internal auditors to perform audit services with the necessary knowledge, skills, and experience. Accepting an assignment without the required expertise undermines the quality and reliability of the audit work.

The IIA Code of Ethics: 'Internal auditors shall engage only in those services for which they have the necessary knowledge, skills, and experience.'

The IIA Standards: Standard 1210 -- Proficiency: 'Internal auditors must possess the knowledge, skills, and other competencies needed to perform their individual responsibilities.'

Preventive controls are designed to prevent fraud or errors before they occur. A code of conduct and whistleblower policy signed by all employees annually helps to establish ethical behavior standards and provides a mechanism for reporting unethical behavior, thereby preventing potential fraud.

Reference:

Institute of Internal Auditors (IIA) Standards on Internal Control and Fraud Prevention.

COSO Internal Control Framework.

Assurance services involve three parties: the auditor, the auditee, and the user of the report. In consulting services, the internal audit activity and the client work together directly, generally involving only two parties.

Reference:

IIA's International Professional Practices Framework (IPPF).

IIA Practice Guide: Assurance and Consulting Services.

Before taking further action, the internal auditor should understand why management asked employees to act against policies and procedures. This could reveal underlying issues or misunderstandings that need to be addressed.

Reference:

IIA's International Standards for the Professional Practice of Internal Auditing.

COSO Framework on Monitoring and Risk Assessment.

If fraud is suspected, it is crucial to follow the organization's protocol for reporting such suspicions. The chief audit executive should be informed so that appropriate steps can be taken, including involving fraud investigators if necessary.

Reference:

IIA Standard 1210.A2: Internal auditors must have sufficient knowledge to identify indicators of fraud.

IIA Practice Guide: Internal Auditing and Fraud.

The International Standards for the Professional Practice of Internal Auditing (Standards) emphasize that internal auditors must be free from interference in determining the scope of internal auditing, performing work, and communicating results. Standard 1110 -- Organizational Independence, and Standard 1120 -- Individual Objectivity, require that internal auditors have access to all relevant records, personnel, and physical properties within the scope of their audit activities. If an area under review restricts the internal audit activity's ability to access records, it directly impacts the auditor's ability to perform their duties objectively and without interference. This scenario undermines the core principles of independence and objectivity, necessitating the CAE to discontinue using statements indicating conformance with the Standards, as the audit results may be compromised.

Reference:

The IIA's International Standards for the Professional Practice of Internal Auditing (Standards) - Standards 1110 and 1120.

In the accounts payable function, the most likely fraud scenario involves the creation of fictitious vendors. This fraud can lead to improper disbursements where payments are made to non-existent entities, effectively siphoning money out of the organization. This type of fraud is easier to execute in accounts payable compared to other functions because it can involve relatively straightforward manipulations of vendor master files and payment processes. Such schemes can result in significant financial losses and are a common concern for internal auditors reviewing accounts payable controls.

Reference:

IIA Practice Guide on Accounts Payable Risks and Controls.

Association of Certified Fraud Examiners (ACFE) publications on common fraud schemes.

Before writing the internal audit charter, the chief audit executive (CAE) must consider how the internal audit activity is viewed by the board. The internal audit charter is a formal document that defines the purpose, authority, and responsibility of the internal audit activity. It should align with the expectations and requirements of the board and senior management. Understanding the board's perception and expectations helps in crafting a charter that ensures appropriate support and engagement from key stakeholders, thereby enhancing the effectiveness and alignment of the internal audit function with organizational objectives.

Reference:

IIA Standard 1000 -- Purpose, Authority, and Responsibility.

IIA's Practice Advisory on Developing the Internal Audit Charter.