IIA IIA-CIA-Part2 - Practice of Internal Auditing

Comprehensive and Detailed Explanation:

The governing body (board of directors) is responsible for strategic oversight. The most relevant evidence of their involvement in strategic social media decisions would be board meeting minutes (A), as these formally document discussions, approvals, and resolutions on strategic topics. Budget reports (B) reflect financial allocations but not governance involvement. Marketing plans (C) and procedures manuals (D) reflect management’s role in execution, not the board’s strategic oversight. According to IIA guidance on governance assessments (Standard 2110), auditors should look at evidence of board-level involvement in significant strategic initiatives. Thus, meeting minutes are the strongest and most direct evidence of governance participation in strategic decisions on social media use.

A. Determine whether the purchasing department complies with policy by examining a random selection of purchase orders:Correct. Reviewing a random sample of purchase orders is a standard procedure for evaluating compliance with purchasing policies, such as approval requirements, vendor selection, and adherence to budget constraints.

B. Evaluate whether purchasing requests are properly approved by authorized staff by obtaining independent verification from the vendors:Vendor verification is not typically used to evaluate internal approvals as this information is available within the organization’s records.

C. Ascertain whether material receipts are recorded on a timely basis by reviewing physical inventory stock counts:Physical inventory reviews focus on inventory management and reconciliation, not specifically on the timeliness of receipts.

D. Determine whether prices charged for goods received are correct by reviewing the appropriate accounts payable record by vendor:While reviewing accounts payable records helps verify the accuracy of pricing, it does not directly evaluate the purchasing department’s adherence to procedures.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Audit Engagement Objectives and Procedures.

ï‚· Customer Departmentalization: This method categorizes departments based on the type of customers they serve. It aligns services and strategies with the specific needs and characteristics of different customer groups.

ï‚· Examples of Customer Departmentalization:

Community Banking: Focuses on services tailored for local communities, often involving personal banking services.

Institutional Banking: Caters to large organizations, offering specialized financial products and services.

Agricultural Banking: Provides financial services to farmers and agricultural businesses, addressing their unique needs.

ï‚· Comparison with Other Options:

Product Departmentalization: Option B categorizes by products offered, such as mortgages and credit cards.

Geographical Departmentalization: Option C categorizes by regions, such as south and southwest.

Functional Departmentalization: Option D categorizes by job functions, such as teller and manager.

ï‚· References:

Customer departmentalization is exemplified by categorizing banking services into community, institutional, and agricultural sectors, focusing on the distinct needs of different customer groups​​​​.

A cause-based recommendation aims to address the root cause of an issue to prevent its recurrence. By recommending the removal of inappropriate user access, the audit report is identifying the underlying problem (the granting of inappropriate access) and suggesting a solution that will help prevent this issue from happening again. This type of recommendation is focused on mitigating risks by addressing their causes, thereby strengthening the control environment.

The Institute of Internal Auditors (IIA), Practice Guide on Writing Audit Reports

"Internal Auditing: Assurance and Advisory Services" by Urton L. Anderson et al.

Ensuring that risks to the timely completion of the engagement are assessed should be performed first during engagement supervision activities. This initial step is crucial as it sets the foundation for the entire audit process. By identifying and assessing risks early, the audit supervisor can develop appropriate plans and strategies to mitigate these risks, ensuring that the engagement stays on track and is completed within the allocated time frame. Addressing this aspect first helps in prioritizing tasks, allocating resources effectively, and managing any potential obstacles that might delay the audit process.

Once an internal auditor has identified a business process, the next step is to understand the specific activities involved in that process. This includes mapping out each step or action taken within the process to gain a detailed understanding of how it operates. Identifying process activities helps in evaluating the efficiency, effectiveness, and potential risks associated with the process

IIA guidance emphasizes considering risk, impact, and root cause in audit findings (Standard 2410 – Criteria for Communicating). In this case, brakes are safety-critical products. Even if the company discards failed items, testing in conditions not reflecting real-world use is a major deficiency, since it creates risk that unsafe products could pass the test and reach customers.

Therefore, Option C is correct: testing conditions must simulate real-world operating environments, especially where human life is at stake.

Strengthening password policies and ensuring unique passwords are used within a specified period are key measures in preventing unauthorized access and reducing the risk of fraud. Password management is a critical aspect of IT security and can significantly mitigate the risk of cyber fraud. The other recommendations (Options B, C, and D) address operational issues but do not directly impact fraud prevention as effectively as enhancing password security does.

IIA Standard 2110: Governance.

IIA Practice Guide on IT Controls and Cybersecurity.

When reviewing the board of directors, internal auditors should consider testing the presence of an independent critical mass. This refers to the existence of a sufficient number of independent directors who can provide unbiased judgment and oversight. Independence is a cornerstone of effective governance, ensuring that decisions are made in the best interest of the organization without undue influence from management. This attribute is crucial for maintaining the integrity and objectivity of the board's decisions and actions.

IIA's Practice Guide on Assessing Organizational Governance.

The chief audit executive (CAE) is accountable for ensuring that adequate support exists for the conclusions and opinions formed by the internal audit activity. When relying on the work of external auditors, the CAE must ensure that the work is sufficient and appropriate to support the internal audit conclusions. This involves reviewing the external auditors' work to confirm its relevance and reliability, and integrating it into the internal audit processes as necessary.

The Institute of Internal Auditors (IIA) Standard 2050 - Coordination and Reliance.

IIA Standard 2340 - Engagement Supervision

Directive controls are designed to encourage desired behavior or outcomes.

Option A: Segregation of duties is a preventive control, not a directive control.

Option B: Exception reports are detective controls.

Option D: Supervisory review is also a preventive or detective control.

Option C: Training programs are directive controls as they guide employees on the correct procedures and practices to follow​​​​.

Comprehensive and Detailed Explanation:

The current ratio = Current Assets ÷ Current Liabilities. To increase it, either current assets must rise or current liabilities must decrease.

Option A has no effect because it simply shifts funds between accounts.

Option B increases current assets (inventory) without adding current liabilities, since the loan is long-term, thus improving the ratio.

Option C (leasing) affects long-term liabilities, not current assets.

Option D converts receivables to cash, which keeps current assets unchanged in total.

Therefore, the only option that improves the current ratio is purchasing inventory using long-term loans (B), since it raises current assets without raising current liabilities.

Best practices for assurance engagement communication activities include defining the methods and timing of engagement communications during the "communicate" phase. This ensures that all stakeholders are aware of how and when they will receive information about the engagement, facilitating clear and effective communication. While it is important to communicate significant observations to relevant parties, including the audit committee if necessary, and to escalate issues as appropriate, the method and timing of these communications are crucial for maintaining clarity and coordination throughout the engagement. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 2420 - Quality of Communications.

The IIA’s Practice Guide on Communicating Assurance Engagement Results.

Partnership liquidation refers to the process of dissolving a partnership, where all assets are sold, liabilities are paid off, and any remaining assets are distributed among the partners. This process marks the end of the partnership's legal existence and its economic activities.

Legal and Economic Termination: Upon liquidation, the partnership ceases to exist legally and economically. This means that it can no longer operate or enter into new business transactions.

Asset Distribution: The liquidation process ensures that all assets are sold, and the proceeds are used to pay off any outstanding debts. Any remaining funds are distributed to the partners according to the partnership agreement.

Capital Deficiency: While capital deficiency might prompt liquidation, it is not a defining characteristic of the process.

Creditors Payment: Creditors are paid from the partnership's assets, not directly by the partners unless agreed otherwise or if the assets are insufficient to cover the liabilities.

Comprehensive and Detailed Explanation:

Porter’s competitive strategies include cost leadership, differentiation, and focus.

A cost leadership strategy emphasizes efficiency, low costs, and economies of scale, which often requires strict standard operating procedures (A).

A differentiation strategy emphasizes unique value, branding, and innovation across a wide market, not necessarily a targeted approach (B).

A focus strategy emphasizes serving a niche market segment, not technological leadership (C).

Creativity and uniqueness are traits aligned with differentiation, not cost leadership (D).

Therefore, the true statement is Option A, reflecting how cost leadership relies on standardized processes to maintain efficiency and reduce costs.