Question 1

Red flags are conditions that indicate a higher likelihood of fraud. Which of the following is not considered a red flag?

Options :

A : The assignment of responsibility and accountability in the accounts receivable department is not clear.

B : An individual has held the same cash-handling job for an extended period without any rotation of duties.

C : Management has delegated the authority to make purchases under a certain value to subordinates.

D : An individual handling marketable securities is responsible for making the purchases, recording the purchases, and reporting any discrepancies and gains/losses to senior management.

Answer: C

Question 2

Which of the following most likely constitutes a violation of The IIA’s Code of Ethics?

Options :

A : Auditor B has been assigned to perform an engagement at the warehousing function 6 months from now. Auditor B has no expertise in that area but accepted the assignment anyway. Auditor B has signed up for continuing professional education courses in warehousing that will be completed before the assignment begins.

B : Auditor D discovered an internal financial fraud during the year. The books were adjusted to properly reflect the loss associated with the fraud. Auditor D discussed the fraud with the external auditor when the external auditor reviewed working papers detailing the incident.

C : Auditor A has accepted an assignment to perform an engagement at the electronics manufacturing division. Auditor A has recently joined the internal audit activity. But Auditor A was senior auditor for the external audit of that division and has audited many electronics organizations during the past 2 years.

D : Auditor C is content as an internal auditor and has come to look at it as a regular 9-to-5 job. Auditor C has not engaged in continuing professional education or other activities to improve effectiveness during the last 3 years. However, Auditor C feels performance of quality work is the same as before.

Answer: D

Question 3

A well-designed internal control questionnaire should

Options :

A : Elicit “yes” or “no” responses rather than narrative responses and be organized by department.

B : Help evaluate the effectiveness of internal control.

C : Be a sufficient source of data for assessment of control risk.

D : Be independent of the objectives of the internal auditing engagement.

Answer: B

Question 4

Risk within an internal audit engagement is defined as the

Options :

A : Uncertainty of an event occurring that could have an impact on the achievement of objectives.

B : Probability that a balance or class of transactions and related assertions contain misstatements that could be material to the financial statements.

C : Failure to accomplish established objectives and goals for operations or programs.

D : Failure to adhere to organizational policies, plans, and procedures, or the failure to comply with relevant laws and regulations.

Answer: A

Question 5

Which of the following best describes an auditor’s responsibility after noting some indicators of fraud?

Options :

A : Report the matter to the audit committee and request funding for outside specialists to help investigate the possible fraud.

B : Consult with external legal counsel to determine the course of action to be taken.

C : Expand activities to determine whether an investigation is warranted.

D : Report the possibility of fraud to senior management and ask how to proceed.

Answer: C

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