AUI4861/101/0/2012

Compulsory Assignment 01

ASSIGNMENT 01: MULTIPLE-CHOICE QUESTIONS (compulsory) UNIQUE ASSIGNMENT NUMBER: DUE DATE: 18 June 2012 724233

Instructions: (1) Write the correct unique assignment number in the six blocks provided on the markreading sheet. Write the general assignment number (01) in the two blocks provided on the markreading sheet. Consult My studies @ Unisa for an example of how a computer mark-reading sheet should be filled in. If you do not follow these instructions, the computer will reject your answer sheet and it will be returned to you unmarked. Also consult My studies @ Unisa when you answer multiple-choice assignments.

(2)

(3)

(4)

Specific information for answering this assignment (1) (2) This assignment consists of 50 multiple-choice questions. This assignment covers all the topics of Tutorial Letter 501/0/2012.

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QUESTION 1 REQUIRED

50 marks

Select for each question only ONE alternative that you consider to be the most correct and then mark on myUnisa or on the mark-reading sheet the digit that corresponds to the digit of the alternative which you have selected as your answer. Answer the subsections of this question in numerical sequence, for example, as follows: 1.1 1 1.2 3 (1 marks per question) 1.1 Internal auditors may provide consulting services that add value to and improve an organisations operations. The performance of these services ... 1 impairs internal auditors objectivity with regard to an assurance service that involves the same engagement client. precludes the provision of assurance from a consulting engagement. should be consistent with the internal audit activitys empowerment that is reflected in the internal audit charter. imposes no responsibility to communicate information other than to the engagement client.

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1.2

The chief audit executive (CAE) routinely presents an activity report to the board as part of the agenda for the board meeting each quarter. Senior management has asked to review the presentation before each board meeting so that any issues or questions can be discussed beforehand. The CAE should ... 1 provide the activity report to senior management as requested and discuss any issues that may require action to be taken. withhold disclosure of the activity report to senior management because such matters are the sole responsibility of the board. disclose to the board only those matters in the activity report that pertain to expenditures and the financial budget of the internal audit activity. provide information to senior management that pertains only to completed engagements and observations which are available in published engagement communications.

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1.3

The code of ethics requires internal auditors to perform their work with ... 1 2 3 4 honesty, diligence and responsibility. timeliness, sobriety and clarity. knowledge, skills and competencies. punctuality, objectivity and responsibility.

1.4

The obligation to report to senior management and the board is an important part of the auditors work. Which one of the following items is not required to be reported to senior management and/or the board? 1 Subsequent to the completion of an audit but prior to the issuing of an audit report, the audit senior in charge of the audit was offered a permanent position in the auditees department. An annual report summary was made of the departments audit work schedule and financial budget. Significant interim changes were made to the approved audit work schedule and financial budget. An audit plan was approved by senior management and the board. Subsequent to the approval, senior management informed the audit director not to perform an audit of a division because the divisions activities were highly sensitive.

1.5

The CAE of a newly formed internal audit activity is in the process of drafting a formal written charter for the department. Which one of the following items, related to the operational effectiveness of the internal audit department, should be included in the charter? 1 2 3 4 The frequency of the audits that will be performed. The manner in which audit findings will be reported. The procedures that the internal auditors will use in investigating and reporting fraud. The internal auditors unlimited access to those records, personnel and physical properties that are relevant to the performance of the audits.

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1.6

The CAE has reviewed credentials, checked references and interviewed a candidate for a staff position. He concludes that the candidate has a thorough understanding of internal auditing techniques, accounting and management. However, he notes that the candidate has limited knowledge of economics and computer science. Which of the following actions would be most appropriate? 1 Reject the candidate because of the lack of knowledge required by the IIA Standards. Offer the candidate a position despite the lack of knowledge in certain essential areas. Encourage the candidate to obtain additional training in economics and computer science and to then reapply. Offer the candidate a position if other staff members possess sufficient knowledge in economics and computer science.

1.7

Recent criticism of an internal audit activity suggested that audit coverage was not providing adequate feedback to senior management on the processes used in the organisations key lines of business. The problem was further defined as lack of feedback on the recent implementation of automated support systems. Which two functions does the CAE need to improve? 1 2 3 4 Staffing and communicating. Staffing and decision-making. Planning and organising. Planning and communicating.

1.8

Which of the following would be the best source of information for a CAE who is planning staffing requirements? 1 2 3 4 Discussion of audit needs with executive management and the audit committee. Review of audit staff education and training records. Review of audit staff size and composition of similar size companies in the same industry. Interviews with existing audit staff.

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Items 1.9 to 1.11 are based on the following information: Upon his appointment, a new CAE found inexperienced audit staff that were over budget on most audits. A detailed review of audit working papers revealed no evidence of progressive reviews by audit supervisors. Additionally, there was no evidence that a quality assurance programme existed.

1.9

As a means of controlling projects and avoiding time budget overruns, decisions to revise time budgets for an audit should normally be made ... 1 2 3 4 immediately after the preliminary survey. when a significant deficiency has been substantiated. when inexperienced audit staff are assigned to an audit. immediately after expanding tests in order to establish the reliability of findings.

1.10

The duty to determine that audit objectives have been met is part of the overall supervision of an audit assignment and is the ultimate responsibility of the ... 1 2 3 4 staff internal auditor. audit committee. internal auditing supervisor. chief audit executive.

1.11

To properly evaluate the operations of an internal audit department, a quality assurance programme should include ... 1 2 periodic supervision of internal audit work on a sample basis. internal reviews, other than by the internal audit staff, to appraise the quality of department operations. external reviews at least once every five years by qualified persons who are independent of the organisation. periodic rotation of audit managers.

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1.12

Internal audit activities demonstrate their professionalism by 1 adhering to The Institute of Internal Auditors (IIAs) Standards for the Professional Practice of Internal Auditing (Standards). reviewing operational systems to determine their effectiveness and efficiency. meeting ISO 9000 quality standards. meeting deadlines on audits performed.

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1.13

The internal audit charter is 1 2 3 4 a standard document to be used by all internal audit activities. uniquely formulated to meet the needs of an organisation. drafted by the chief executive officer (CEO) of an organisation. optional.

1.14

Providing useful and timely information and promoting improvements in operations are goals of internal auditors. To accomplish these goals in their engagement communication, they should 1 provide senior management with engagement communications that emphasise the operational details of defective conditions. provide operating management with engagement communications that emphasise general concerns and risks. provide information in written form before it is discussed with the engagement client. provide engagement communications that meet the expectations and perceptions of both operational and senior management.

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1.15

The internal audit charter should include 1 2 3 4 the authority under which the head of internal audit acts. the terms of reference for the internal audit activity. the formal definition of internal auditing and its key objectives. all of the above.

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1.16

Practice Advisories are 1 2 3 4 mandatory for all internal auditors. recommendations only and not binding on internal auditors. mandatory for all members of The IIA and CIAs. only applicable in the USA.

1.17

Internal quality assurance reviews are normally conducted by 1 2 3 4 internal audit itself. external auditors. The IIA. outside consultants.

1.18 Some organisations are considering outsourcing the internal audit activity to an external auditing firm. An external audit firm that provides an outsourced internal audit activity has an advantage over an in-house activity, because of the external audit firms 1 familiarity with the organisation; its annual statutory audit provides an in-depth knowledge of the organisation. size; it can hire experienced, knowledgeable and qualified staff. size; it can provide staff who are continuously available, because they are unaffected by other priorities. structure; it is easier for an outsourced firm to accommodate audit requirements in remote locations.

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1.19

A complete quality assurance review process should at least include 1 discussions with the audit committee, review of working papers and review of the risk evaluation. planning and preparation, obtaining feedback from the auditees and making recommendations. planning and preparation, interviewing stakeholders, evaluating the internal audit activity and communicating the results. analysing the internal audit process, making recommendations and writing the report.
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1.20

According to the King III Report on Corporate Governance, the duties of the audit committee should include 1 ensuring that the internal audit activity is independent and has the necessary resources, budget, standing and authority within the organisation to enable it to discharge its functions. appointing the CAE and ensuring that he or she is a member of the audit committee. ensuring that the CEO is a member of the audit committee. identifying suitable candidates and screening nominations to the board of directors.

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1.21

Internal audit reports should be directed towards the 1 2 3 4 audit committee. auditee manager only. internal audit manager. first level of management empowered to take effective action on any findings.

1.22

The impact of the worldwide sweeping regulation on corporate governance affected the internal auditor by 1 2 3 4 holding the internal auditor liable for corporate fraud. changing the focus from financial risk to fraud risk. changing the focus from financial risk to enterprise-wide risk management. changing the focus away from control self-assessment of departments or business units.

1.23

A final communication issued by an internal auditor following an assurance engagement should contain an expression of opinion when 1 2 3 4 the area of the engagement is the financial statements. the internal auditors work is to be used by external auditors. a full-scope engagement has been conducted in an area. an opinion will improve communications with the readers of the communication.

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1.24

The CAE is responsible for engagement supervision. The most important form of supervision during the fieldwork phase of engagements involves 1 seeing that the approved engagement work programme is carried out unless changes are both justified and authorised. providing suitable instructions to subordinates at the outset of the engagement and approving the engagement work programme. appraising each internal auditors performance at least annually. ensuring that communications are accurate, objective, clear, concise, constructive and timely.

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1.25

When engagements are performed for the internal audit activity by non-staff members, the CAE is responsible for 1 ensuring that the engagement communications are accurate, objective, clear, concise, constructive and timely. reviewing the engagement work programmes for approval. providing appropriate supervision from the beginning to the conclusion of the engagement. none of the work performed by those outside the internal audit activity.

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1.26

The status of the internal audit activity should be free from the effects of irresponsible policy changes by management. The most effective way to ensure that freedom is to 1 2 3 4 have the internal audit charter approved by the board. adopt policies for the functioning of the internal audit activity. establish an audit committee within the board. develop written policies and procedures to serve as standards of performance for the internal audit activity.

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1.27

Internal auditors must be objective in performing their work. Assume that the CAE received an annual bonus as part of his or her compensation package. The bonus may impair the CAEs objectivity if 1 2 the bonus is administered by the board of directors or its remuneration committee. the bonus is based on monetary amounts recorded or recommended future savings as a result of engagements. the scope of internal auditing work is evaluating control rather than account balances. All of the answers are correct.

1.28

A CIA performed an assurance engagement to review a department stores cash function. Which of the following actions will be deemed lacking in due professional care? 1 Organisational records were reviewed to determine whether all employees who handle cash receipts and disbursements were covered by fidelity insurance. A flow chart of the entire cash function was developed, but only a sample of transactions was tested. The final engagement communication included a well-supported recommendation for the reduction in staff, although it was known that such a reduction would adversely affect morale. Because of the highly developed system of internal control over the cash function, the final engagement communication assured senior management that no irregularities existed.

1.29 The International Standards for the Professional Practice of Internal Auditing (the Standards) require an auditor to have the knowledge, skills and disciplines essential to perform an internal audit engagement. Which of the following correctly describes the level of knowledge or skill required by the Standards? Auditors must have 1 2 3 proficiency in applying knowledge of auditing standards and procedures to specific situations without extensive recourse to technical research and assistance. proficiency in applying knowledge of accounting and computerised information systems to specific or potential problems. an understanding of broad techniques used in supporting and developing audit findings and the ability to research the proper audit procedures to be used in any audit situation. a broad appreciation for accounting principles and techniques when auditing the financial records and reports of the organisation.

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1.30 The internal audit charter does not usually establish or define the internal audit activitys 1 2 3 4 objectivity and independence. scope and purpose. authority and responsibility. status within the organisation.

1.31 According to the King III Report, the ethical values underpinning good corporate governance include 1 2 3 4 discipline, transparency, accountability and responsibility. transparency, social responsibility, fairness and accountability. accountability, responsibility, transparency and fairness. social responsibility, fairness, accountability and auditability.

1.32 According to the Sarbanes-Oxley Act (SOX), management's report on internal control over financial reporting is required to include 1 2 3 the use of COBIT as a control framework for evaluating internal controls. the use of professional information systems (IS) auditors. a statement of the IS managers responsibility for establishing and maintaining adequate internal control over financial reporting for the company. a statement identifying the framework used by management to assess the effectiveness of the companys internal control over the financial reporting process.

1.33 Good corporate governance depends on 1 a primary corporate focus on the environmental and societal interests of the communities within which an organisation operates. holding the audit committee responsible for the organisations performance. ensuring compliance with SOX. the board and management of the organisation pursuing objectives that are in the interests of the company and stakeholders.

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1.34 The first step in understanding the reality of corporate governance in any company is to 1 2 3 4 read and understand the latest King, Cadbury, COSO and CoCo reports. understand the ownership structure of the organisation. read the statement on internal control in the annual financial statements. consult with the external auditors on compliance with the Sarbanes-Oxley Act.

1.35 Exit conferences ensure the accuracy of the information used by the internal auditor. A second purpose of exit conferences is to 1 2 3 4 get immediate action on a recommendation. improve the relationship with the auditee. agree on the appropriate distribution of the final report. brief senior management on the results of the audit.

1.36 Sharing information and coordinating activities with other internal and external providers of relevant assurance and consulting services by the internal audit activity is 1 appropriate in order to minimise disruption to auditees and to ensure internal and external audit both have the same objectives. required by the IIA Standards. not allowed by the IIA Standards. inappropriate since this will minimise audit coverage and ensure that internal and external audit have differing objectives.

2 3 4

1.37 An active and independent governing board that is coupled with open and truthful communications from all components of management will 1 2 3 4 assist in identifying problems and providing effective oversight. ensure that the organisation makes profits. prevent dishonest management. ensure that the internal controls are adequate and effective.

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1.38

A quality assurance programme within an internal audit department provides reasonable assurance that audit work conforms to applicable standards. Which of the following activities would provide feedback on the effectiveness of an internal audit department? I. II. III. IV. 1 2 3 4 proper supervision performance reviews internal quality reviews external quality reviews I, II and III. II, III and IV. I, III and IV. I, II, III and IV.

1.39 The CAE of a multinational company must form an audit team to examine a newly acquired subsidiary in a foreign country. Consideration should be given to which of the following factors? I. II. III. IV. 1 2 3 4 local customs the auditors language skills the auditors experience prevailing foreign exchange rate I, II and III. II, III and IV. I and III. I and II.

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1.40

The CAE of a large manufacturing company is considering revising the internal audit charter in terms of the minimum educational qualifications and experience required. The CAE wants each internal auditor to have or obtain specialised training in accounting, together with a specialised auditing qualification such as the certified internal auditor (CIA) or chartered accountant (CA(SA)). A disadvantage of imposing this approach on the department is that the charter ... 1 might negatively influence the departments ability to perform quality evaluations of the companys financial and accounting systems. would not promote the professionalism of the department. would prevent the department from using outside consultants when the department did not have the skills and knowledge required for certain audits. could limit the range of activities that could be audited by the department owing to the departments narrow expertise and background.

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1.41

Management has requested the internal audit activity to perform an operational audit of the marketing department and to recommend procedures and policies for improving management control over the operation. The auditor should 1 not accept the engagement, because recommending controls for implementation would impair the future objectivity of the internal audit activity regarding this department. not accept the engagement, because the internal audit activity is presumed to have expertise on accounting controls, not on marketing aspects. accept the engagement, but indicate to management that recommending controls would impair audit independence so that management knows that future audits will be compromised. accept the audit engagement, because organisational independence of the internal audit activity would not be compromised.

1.42

It is important that internal auditors possess adequate communication skills. According to the IIA Standards, the auditor should be able to effectively convey all of the following, except 1 2 3 4 the audit objectives designed for a specific audit engagement. the audit evaluations based on a preliminary survey of an audit engagement. the risk assessment used in selecting the area for audit investigation. recommendations that are generated for a specific audit engagement.

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1.43

An internal auditor reports directly to the audit committee. During the conduct of an audit, the internal auditor discovers a substantial shortage of cash. When questioned, the person responsible explains that the cash was used to pay his childs medical bills and that he, the employee, had agreed to replace these funds from an insurance policy that was due to pay out. Before finalising the audit report, the internal auditor verified that the borrowed amount had, in fact, been reimbursed. Owing to the corrective action taken and since the company had not experienced an actual loss, the internal auditor did not inform anyone about this matter and did not include it in the audit report. In this instance the auditor 1 2 3 4 has organisational independence but not objectivity. has both organisational independence and objectivity. does not have organisational independence, but does have objectivity. has neither organisational independence nor objectivity.

1.44

Because different auditors (ie internal, external and quality) are perceived to be constantly interrupting the companys operations, several members of management have suggested that the internal audit activity (IAA) be incorporated into the newly established quality assurance department in order to align the IAAs activities with the companys new total quality management drive. The CAE has reviewed the quality standards and programmes that the quality assurance manager has proposed. The CAEs response to this suggestion should include 1 amending the internal audit charter to incorporate compliance with the quality assurance procedures. changing the qualification requirements for new staff members to include quality assurance experience. estimating the cost savings from eliminating the internal audit activity. identifying appropriate liaison and cooperation activities between the internal audit activity and the quality assurance department to reduce the impact on operations.

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1.45

Management has requested the internal audit activity to conduct an audit on the implementation of its recently developed corporate code of ethics. In preparing for the audit, the auditor reviews the newly developed code, compares it with the codes of several similar companies and concludes that the newly developed code has serious deficiencies. Based on this conclusion, the auditor should 1 plan an audit for the implementation of the code of ethics and of compliance with the best practices of other codes, since this represents the best available criteria. state the nature of these deficiencies in a formal report to management. inform management of the problems with the existing code and report that it would be inappropriate to conduct an audit until the code is revised to incorporate the industry best practice. conduct the audit as requested by management, but only report on non-compliance with the code.

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1.46 According to the IIA Standards, the purpose of an internal auditors review of the effectiveness of the system of internal control is to determine whether the 1 2 3 4 system is functioning as intended. system is functioning efficiently and economically. organisations goals and objectives have been achieved. financial and operating data are reliable.

1.47 During an audit of a companys purchasing function, the internal auditors detect several violations of company policy regarding competitive bidding. Although the very same problem had been reported on during the previous audit, the recommended remedial action still has not been implemented. Which of the following best describes the appropriate action for this repeat finding? 1 The audit report should include a statement to the effect that the same problem has been reported in the previous audit. During the exit interview, management should be informed that a finding from the previous audit report has not been corrected. The CAE should find out whether management or the board has assumed the risk of not taking corrective action. The CAE needs to determine whether this condition should be reported to the external auditor and/or any regulatory body.

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1.48 The IIA Standards define relevant evidence as being 1 2 3 factual, adequate and convincing. reliable and the best attainable through the use of appropriate audit techniques. consistent with the audit objectives and supporting the audit findings and recommendations. information that helps the organisation to meet its objectives.

1.49 Which of the following is usually not one of the objectives of a quality assurance review? To determine the extent of compliance with 1 2 3 4 applicable legislation and regulation. general standards for the professional practice of internal auditing. specific standards for the professional practice of internal auditing. the strategic objectives of the internal audit activity.

1.50 Which of the following audit committee activities would be of the greatest benefit to the internal audit activity (IAA)? 1 2 3 4 Review and approval of audit programmes. Assurance that the external auditor will place reliance on the work of the IAA. Review and endorsement of all internal audit reports prior to their release. Support for appropriate follow-up of recommendations made by the IAA.

Source: Adapted from Gleims CIA Review

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