Free IIA IIA-CIA-Part2 Practice Exam with Questions & Answers | Set: 12

Consulting engagements involve advisory and value-adding activities requested by management, as outlined in IIA Standard 1000. Helping design the risk management program aligns with this definition, as it supports management ' s efforts without direct assurance. Options A, C, and D are assurance engagements, as they involve evaluations of process effectiveness or control adequacy. The CIA Part 2 syllabus emphasizes the importance of distinguishing between assurance and consulting engagements (Section II: Types of Engagements).

Internal control questionnaires are used to determine whether specific control procedures are in place within an organization. They help auditors identify the existence and implementation of controls designed to mitigate risks. These questionnaires can provide a preliminary understanding of the control environment and identify areas that may require further detailed testing.

The Institute of Internal Auditors (IIA) Practice Guide: Using Internal Control Questionnaires to Assess Risk

IIA Standard 2130 - Control

Comprehensive and Detailed Explanation:

The most objective way to validate hours worked is to cross-check billed hours with independent evidence of presence — such as access logs (C) from security or entry systems. This provides direct evidence that contracted personnel were on-site.

Option A (due diligence review) focuses on vendor selection, not time validation.

Option B relies on vendor-supplied data, which may be manipulated.

Option D provides insights but is subjective.

According to IIA Standard 2310, evidence must be reliable and verifiable. Access logs provide such assurance, making Option C the strongest choice.

The most effective way to identify the HR department ' s risks and controls, especially after recent process changes, is to discuss the department ' s present strategies and objectives with the head of the HR department. This approach allows the auditor to gain current and relevant insights directly from the person most knowledgeable about the department ' s current operations, risks, and controls. It ensures that the auditor understands the current environment, any new challenges, and the specific controls in place to mitigate risks. This method is more comprehensive and current compared to reviewing past reports or generalized organizational frameworks, which might not reflect recent changes accurately.

The Institute of Internal Auditors (IIA) Standard 2010 – Planning: " The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organization’s goals. "

IIA Practice Guide on " Engaging with Stakeholders "

When using the balanced scorecard approach to assess the performance of the internal audit activity, a key performance indicator relevant to the audit client is the percentage of recommendations implemented by the corrective action date. This KPI measures the effectiveness and impact of the audit activity by tracking how well the audit recommendations are being acted upon within the agreed-upon timeframe. It reflects the responsiveness and commitment of the organization to address identified issues and improve its control environment, which is directly relevant to the interests and concerns of the audit clients.

The Institute of Internal Auditors (IIA) Practice Guide: " Measuring Internal Audit Performance "

Kaplan, R.S. & Norton, D.P. (1996). " The Balanced Scorecard: Translating Strategy into Action "

The current ratio = Current Assets ÷ Current Liabilities. This is a key liquidity measure, showing an organization’s ability to pay short-term obligations with short-term assets.

Debt-to-equity (A) measures leverage.

Profit margin (B) measures profitability.

Times interest earned (D) measures ability to cover interest expense.Thus, the correct ratio for short-term debt-paying ability is the current ratio.

Proper engagement supervision is documented through formal records that show a systematic review and oversight process. A completed engagement workpaper review checklist provides evidence that the supervisor has reviewed and approved the work done by the audit team. This formal checklist ensures all critical aspects of the engagement are reviewed systematically, meeting the standards for proper supervision documentation. References:

" Internal Auditing: Assurance & Advisory Services " (The Institute of Internal Auditors)

" International Standards for the Professional Practice of Internal Auditing " (IIA)

 Inventory Valuation Principles: Inventory valuation must accurately reflect the ownership of goods. The accounting treatment of inventory in transit depends on the shipping terms, specifically whether it is FOB (Free on Board) shipping point or FOB destination.

 FOB Shipping Point:

Ownership Transfer: When goods are shipped FOB shipping point, ownership transfers to the buyer as soon as the goods leave the seller ' s premises.

Impact on Inventory Valuation: If goods shipped FOB shipping point are in transit at the end of the reporting period, they should be included in the buyer ' s inventory, not the seller ' s.

 FOB Destination:

Ownership Transfer: When goods are shipped FOB destination, ownership transfers to the buyer only when the goods arrive at the buyer ' s premises.

Impact on Inventory Valuation: Goods in transit under FOB destination terms should remain in the seller ' s inventory until they reach the buyer.

 Consignment:

Goods Received on Consignment: Goods held on consignment should not be included in the inventory of the consignee (the holder) but remain in the inventory of the consignor (the owner).

Goods Sent on Consignment: Goods sent out on consignment should still be included in the inventory of the consignor until they are sold by the consignee.

 Correct and Incorrect Valuations:

Incorrect Valuation (Option C): Including goods in transit shipped FOB shipping point in the seller ' s inventory would be incorrect, as ownership has transferred to the buyer.

Correct Valuation (Option D): Including goods sent on consignment in the consignor ' s inventory is correct because ownership has not transferred.

 References:

Correct inventory valuation practices ensure that goods in transit are properly accounted for based on the shipping terms, thus providing an accurate financial picture of inventory​​​​.

When planning to audit an outsourced function, the most appropriate first step for an internal auditor is to understand the objectives and strategies of the new arrangement. This step is crucial because it sets the foundation for the entire audit process. By understanding the objectives and strategies, the auditor gains insights into the rationale behind the outsourcing decision, the expected outcomes, and how these align with the organization ' s overall goals. This understanding helps in identifying key risks, establishing relevant audit criteria, and tailoring the audit scope and procedures accordingly. Without this initial step, the auditor may miss critical aspects of the outsourced arrangement, leading to an incomplete or ineffective audit.

Institute of Internal Auditors (IIA) Practice Guide: " Auditing Outsourced Activities "

COSO Enterprise Risk Management Framework

According to the IIA guidance, reviewing and approving payroll timesheets by the timekeeper before processing is considered least effective in managing the risk of payroll fraud. While this procedure might detect some errors or irregularities, it does not provide a robust control against fraud because the timekeeper can collude with employees or fail to review timesheets adequately. On the other hand, procedures such as comparing payroll lists to personnel records, deactivating payroll database access upon termination, and validating changes to payroll by the personnel department involve checks and balances that are more effective at preventing or detecting fraudulent activities.

IIA Practice Guide: Managing the Business Risk of Fraud: A Practical Guide

IIA Standards and Guidance: IPPF – Practice Guide

At the planning stage, auditors must organize and structure their work to ensure all necessary steps are covered. A checklist is the appropriate tool, as it provides a systematic list of tasks, reduces oversight, and helps manage workload. A control questionnaire (C) is used for assessing controls, and a fishbone diagram (D) is used for root cause analysis, not task management. Option A is irrelevant to planning execution.

According to the IIA ' s guidance, internal audit can accept consulting engagements, including providing training, as long as it does not impair their independence and objectivity. In this scenario, the most appropriate action for the chief audit executive (CAE) is to accept the engagement and hire an external specialist to deliver the training. This ensures that the internal audit activity does not compromise its independence by training on areas where they might later need to provide objective assurance. By using an external expert, the CAE ensures the training is conducted by someone with the requisite expertise and without any conflict of interest.

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 1130: Impairment to Independence or Objectivity.

IIA Practice Guide, " Independence and Objectivity. "

To measure the performance related to the quality of audit recommendations, the internal audit activity should focus on whether the audit findings were relevant and useful to management. This directly assesses the practical impact and value of the audit recommendations, ensuring that they address significant issues and assist management in improving operations and controls. References: = IIA’s Practice Guide on Measuring Internal Audit Effectiveness and Efficiency.

According to Standard 2340 – Engagement Supervision, engagement work must be properly supervised to ensure that objectives are achieved, quality is maintained, and staff are developed. Supervision is not limited to approving the engagement program at the beginning; it requires ongoing review of workpapers and fieldwork throughout the engagement. This includes providing timely feedback, asking clarifying questions, and ensuring consistency and sufficiency of evidence.

In this case, the supervisor only reviewed the work program at approval and after completion, which is inadequate. The required improvement is regular, ongoing review of workpapers and guidance throughout the engagement. This directly aligns with Standard 2340’s requirement for continuous supervision rather than only final review.

Introduction:

Developing professional competencies requires a structured approach to identify gaps and plan for targeted improvements.

Commitment to Development:

Conducting a skills assessment and creating a development plan demonstrates a proactive and strategic approach to professional growth.

Options Analysis:

Option A: Requesting to be part of all engagements shows enthusiasm but does not ensure targeted competency development.

Option B: Attending training courses is beneficial but without a targeted plan, it may not address specific needs.

Option C: Completing a skills assessment and development plan directly addresses individual training needs and sets a clear path for professional growth.

Option D: Attending webinars is useful but should be part of a broader development strategy.

Conclusion:

The best demonstration of an internal auditor ' s commitment to developing professional competencies is completing a skills assessment and development plan for targeted training needs.

Internal Audit Standards and Practice Guides