Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

MODULE 12

INTERNAL AUDITING

1. An audit committee must comprise of outside directors. Which of the following is considered an outside
director? A member of the board of directors who is
a. The treasurer
b. The company’s president
c. A retired executive from another company
d. A consultant to the company

2. The primary difference between operational auditing and financial auditing is that in operational auditing
a. The auditor is not concerned with whether the audited activity is generating information in
compliance with financial accounting standards
b. The auditor is seeking to help management use resources in the most effective manner possible
c. The auditor starts with the financial statements of an activity being audited and works backward to
the basic processes involved in producing them
d. The auditor can use analytical skills and tools that are not necessary in financial auditing

3. Internal auditing often extends beyond examinations leading to the leading determination of the fairness of
financial presentation and includes audits of efficiency, effectiveness, and
a. Internal control
b. Evaluation
c. Accuracy
d. Compliance

4. Which of the following factors are essential to an effective internal auditing organization?
I. Operating responsibility
II. Organizational status
III. Objectivity
IV. Authority over operations

a. I and II
b. II and III
c. III and IV
d. I and IV

5. Internal auditors are most likely to issue a report on which of the following?
a. Annual financial statement reporting
b. Internal control
c. Tax compliance
d. Quarterly financial statement reporting

6. The internal audit staff has been asked to conduct an audit of the purchasing department. Top management
feels that there has have been some production bottlenecks recently because of out-of-stock situations.
What is the primary objective of the auditors in this assignment?
a. To appraise the economy with which resources are employed
b. O review the reliability and integrity of financial and operating information
c. To review the means of safeguarding assets and verifying the existence of such assets
d. To ascertain whether results are consistent with established objectives and whether operations are
being varied out as planned

7. The best description of the scope of internal auditing is that is encompasses

a. Primarily operational auditing
b. Both financial and operational auditing
c. Primarily the safeguarding of assets and verifying the existence of such assets
d. Primarily financial auditing

8. The role of the internal auditor with respect to a purchasing department audit is to
a. Evaluate the adequacy of purchasing policies and procedures and determine the extent of
compliance
b. Review and appraise the adequacy of controls over the creation of all types of company
obligations
c. Review and appraise the conditions by which notes payable come into existence and the control
exercised over them

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 d. Establish that the purchasing department is independent of receiving, inspection, stores, and
accounts payable activities

9. Which of the following statements regarding assurance services is/are true with respect to internal auditors?
I. Assurance services by internal auditors can be provided only to internal management and the audit
committee: that is, that cannot by provide to outside entities
II. Assurance services require the specification of assertions to be tested
III. Assurance services can be provided only in the areas of controls and financial reporting

a. I and II
b. II only
c. I, II, and III
d. None of the above

10. Which of the following statements is correct regarding the performance of consulting activities by internal
auditors?
a. Consulting activities, by definition, impair the independence of the auditor and therefore should be
performed only in areas that the internal audit department does not plan to audit in the future
b. Consulting activities are simply an extension of the auditor’s current work in providing
recommendations
c. Consulting is a more proactive approach in which the auditor takes the lead in analyzing problems,
deciding the best course of action, and assisting the management In implementing solutions
d. Consulting should be limited to internal controls because that is the auditor’s area of primary
competence

11. The primary audience for the written report issued by the internal auditor at the completion of an audit
should be
a. The external auditors when they intend to rely on the internal auditor’s work
b. Managers outside the area of audit so as to inform them of what is going on in other areas of the
organization
c. The audit committee who needs to be kept informed in the risks to which the organization is
expose
d. The management inside or outside the audited area who can take corrective action

12. Which of the following statements is/are true regarding independence and objectivity as applied to internal
auditing?
I. Independence is a departmental feature that affects the scope of audits
II. Only the audit committee can determine independence
III. Objectivity is a personal feature that is to be exhibited by all internal audit team members on an
audit

a. I and II
b. I and III
c. I, II, and III
d. III only

13. An internal auditor determines that the actual procedures differ from prescribed control procedures. The
auditor should
1. Require operating personnel to conform to prescribed procedures
2. Document the discrepancies and make any appropriate recommendations to management
3. Expand all aspects of the audit to determine other differences from prescribed procedures
4. Modify the audit plan as warranted by the differences noted

a. 1 and 3
b. 2 and 3
c. 1 and 4
d. 2 and 4

14. The internal audit function should be responsible to

a. The audit committee
b. Senior management
c. The external auditor
d. Both the audit committee and senior management

15. Follow-up activities by the internal auditor may be terminated, even though corrective action has not been
taken, when the
a. Recommendations concern activities not included in the scope of the original audit program
b. Board of directors or management has assumed the risk of not taking corrective action

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 c. Auditor has not convinced operating personnel of the soundness of the audit recommendations
d. Auditor has no authority or responsibility to provide or direct the corrective action

16. Which of the following would not be an audit activity that contributes to improved corporate governance?
a. Perform a compliance audit to determine in the marketing department operates in conformance
with company policies
b. Help train operational managers in Control Self-Assessment
c. Assist the external auditors in conducting the annual external audit
d. Perform an operational audit of the company’s procurement processes

17. An internal auditor is preparing a final audit report to management. There is, however, disagreement
between the auditor and the auditee on one finding which details the auditee’s violation of corporate
purchasing policy. The auditee believes the purchasing policy is open to interpretation and that there was
no violation. The auditor believes that the policy id clearly stated and that auditee’s actions were a
violation. In this circumstance, the auditor should
a. Delete the finding from the audit report
b. Present only those facts, which support the audit finding and ignore those which detract from it
c. Present both the auditor’s and auditee’s positions in the report
d. Not issue the audit report until the auditor and auditee agree on all audit findings and
recommendations

18. Which of the following statements is not correct regarding the internal and external audit profession?
a. External auditors cannot perform internal audit work for their public company financial statement
audit clients
b. Internal audit work is broader in scope
c. All auditors performing internal audits must be Certified Internal Auditors
d. The audit committee is an important client

19. According to the Standards, the internal audit director should ensure follow-up of prior audit findings and
recommendations:
a. To determine if corrective action was taken and is achieving the desired results
b. Unless management rejected the recommendation in their initial response
c. Unless the audit schedule does not allow time for follow-up
d. Unless management has accepted the recommendation

20. The major objective of operational audit is to:

a. Analyze operational areas for control deficiencies, especially those that would allow a fraud to go
undetected
b. Perform trend analysis to identify high risk areas that merit management attention
c. Analyze operations to identify potential deficiencies as a basis for improving operational
performance
d. Determine mismanagement or ineffective management by department or divisional managers

21. Internal auditing has been a dynamic profession. Which of the following best describes the scope of
internal auditing as it has developed to date?
a. Internal auditing involves appraising the economy and efficiency with which resources are
employed
b. Internal auditing involves evaluating compliance with policies, plans, procedures, laws, and
regulations
c. Internal auditing has evolved to verifying the existence of assets and reviewing he means of
safeguarding assets
d. Internal auditing has evolved to more of an operational orientation from a strictly financial
orientation

22. You have been selected to develop an internal auditing department for your company. Your approach
would most likely be to hire:
a. Internal auditors each of whom possesses all the skulls required to handle all audit assignments
b. Inexperienced personnel and train them the way the company wants them trained
c. Degreed accountants since most audit work is accounting related
d. Internal auditors who collectively have the knowledge and skills need to complete all internal
audit assignments

23. Operational auditing is primarily oriented toward:

a. Future improvements to accomplish management’s goals
b. The accuracy of data reflected in management’s financial records
c. Verifying that the company’s financial statements are fairly presented
d. Past protection provided by existing internal control

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24. Which of the following is the most appropriate method of reporting disagreement between the auditor and
the auditee concerning audit findings and recommendations?
a. State the auditor’s position because the report is designed to provide the auditor’s independent
view
b. State the auditee’s independent view
c. State both positions and identify the reasons for the disagreement
d. State neither position. If the disagreement is ultimately resolved, there will be no reason to report
the previous disagreement. If the disagreement is never resolved, the disagreement should not be
reported because there is no mechanism to resolve it

25. Workpapers document the work done by the internal auditor. The internal auditor should
a. Prepare the workpapers and permit no access to them by auditees
b. Encourage qualified auditees to assist in preparing audit workpapers on nonsensitive subjects
c. Prepare the workpapers but review them with the auditee to be sure that the evidence is
appropriately compiled
d. Defer preparation of workpapers for a business segment until the audit work on that phase is
completed

26. Which of the following could by an organization factor that might adversely affect the ethical behavior of
the director of internal auditing?
a. The director reports directly to an independent audit committee of the board of directors
b. The director of internal auditing is not assigned any operational responsibilities
c. A director of internal auditing may not be appointed without concurrence of the board of directors
d. The director’s annual bonuses are based on peso recoveries or recommended future savings as a
result of audits

27. Operational audit planning includes

a. Establishing the audit objectives and the scope of work
b. Determining the efficiency with which the organization uses its resources
c. Establishing qualifications for members of the internal audit department
d. Reviewing existing operating systems on a preliminary basis

28. The president wants to know whether the purchasing function is properly meeting its charge to: “purchase
the right material at the right time in the right quantities.” Which of the following types of audits addresses
the president’s request?
a. A financial audit of the purchasing department
b. An operational audit of the purchasing department
c. A compliance audit of the purchasing function
d. A full-scope audit of the manufacturing operation

29. Prior to commencing an operational audit, the auditee management requests that the auditor include certain
tests in the audit program. the auditor should
a. Refuse to add them to the audit program as requested by the auditee
b. Comply of there is sufficient time available in the budget
c. Give priority to these requests
d. Perform the tests when they are approved by the audit committee or its designee

30. A company’s new president meets the director of internal audit for the first time and asks the director to
briefly describe his department’s overall responsibility is to:
a. Act as an independent appraisal function to review operations as a service to management by
measuring and evaluating the effectiveness of controls
b. Review the means of safeguarding assets and, as appropriate, verify the existence of such assets
c. Ensure compliance with policies, plans, procedures, laws, and regulations, which could have a
significant impact on operations and reports
d. Review the reliability and integrity if financial and operating information and the means used to
identify, measure, classify, and report such information

31. Which of the following shortcomings that was uncovered during a review of recent audit should cause the
greatest concern to the supervisor of internal auditing?
a. Incomplete documentation related to certain findings
b. Lack of approval for additions to the audit program
c. Overrun on the time budget and completion schedule
d. Lack of compliance with the prescribed format for workpapers

32. Recommendations in audit reports may or may not actually be implemented. Which of the following best
describes internal auditor’s role in follow-up on recommendations? Internal auditor:
a. Has no role; follow-up is a management’s responsibility
b. Should be charged with responsibility for implementing audit recommendations

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 c. Should follow up to ascertain that appropriate action is taken on audit recommendations
d. Should request that independent auditors follow up on audit recommendations

33. The most important function of operational audit report is to

a. Report findings and recommendations
b. State the auditor’s opinion or conclusion
c. Direct management to take specified actions
d. Report the objective of the audit

34. A major difference between operational auditing and financial auditing is

a. Operational auditing focuses on activities rather than financial statement assertions
b. Operational auditing extends beyond the entity to analysis of industry and economic data
c. Unlike financial auditing, operational auditing dies not generally culminate in a formal audit report
d. Operational auditing is narrower than financial auditing in its breadth of coverage

35. In an operational audit of a computerized inventory control system that generates purchase orders based on
reorder points and economic order quantities, which of the following approaches would provide the best
evidence that purchase orders are authorized?
a. Trace purchase orders to the computer listing
b. Compare receiving reports to purchase order details
c. Test the system to determine that only authorized individuals can change the parameters in the
program that generates purchase orders
d. Review the system documentation to determine proper functioning of the program

36. A major part of an operational audit involves appraising the efficiency and effectiveness of the activity or
unit being audited. Efficiency and effectiveness appraisal include all but the following steps:
a. Assessing the goal setting process
b. Determining the extent to which goals are being achieved and the degree of goal congruence
c. Assessing the financial stability if the unit
d. Appraising the effectiveness of resource utilization within the unit or activity

37. The operational auditor should evaluate the organization’s overall planning process to determine whether
a. All plans, policies, and procedures are compatible with the organization’s objectives
b. Expected benefits di not exceed the cost of drawing them up
c. Each plan id developed or approved by senior management
d. The premises for plans are based on historical data

38. A governmental audit may extend beyond an examination leading to the expression of an opinion on the
fairness of financial presentation to include
Program Results Compliance Economy & Efficiency
a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. Yes No Yes

39. The purpose of governmental effectiveness or program results auditing is to determine if the desired results
of a program are being achieved. The first step in conducting such an audit should be to:
a. Evaluate the system used to measure results
b. Determine the time frame to be audited
c. Collect quantifiable data on the program’s success or failure
d. Identify the legislative intent of the program being audited

40. The major objective of the internal auditor’s review of computer program testing procedures in system
development is to determine if
a. The tested controls are cost effective
b. Significant errors could occur in processing data
c. Programmed tests will allow continuity of the operation tested
d. A cost-benefit analysis of processing alternatives has been performed

41. Which of the following is not a reason to conduct an operational audit?

a. Efficiency
b. Economy
c. Correctness of accounting procedures
d. Effectiveness

42. An operational audit resulted in a finding regarding the efficiency of operations. Select the best approach to
gain the auditee’s cooperation in this situation.
a. Allow the auditee to participate in the development of recommendations for improvement

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 b. Emphasize the personal responsibility of the auditee management
c. Document the adverse finding with a complete list of all operational deficiencies
d. Submit a draft copy of the final report to higher-level management

43. To maximize independence, the director of internal auditing should report to the
a. Audit committee
b. Controller
c. Chief financial officer
d. Director of information systems

44. Independence of the internal auditors would be least likely achieved if internal auditors report to the?
a. President
b. Controller
c. Audit committee
d. The board of directors

45. Lydia previously worked in accounts payable before transferring to internal audit. She has been assigned to
do some testing in the accounts payable because of familiarity with that department. Which of the
following is the vest response to this situation?
a. The assignment makes good sense because of her expertise
b. She should not audit this function, since she may be reviewing some of her own previous work
c. The assignment should only be made if she works under a supervisor
d. Lydia should have not transferred to internal audit since she previously worked in operations

46. In performing an operational audit, internal auditors are most likely to focus upon which of the following
attributes?
a. Controls relating to the adequacy of the financial statements
b. All controls and not just those relating to financial statements
c. Efficiency of operations
d. Operations of the business, including efficiency, effectiveness, internal control and others

47. The primary difference between an operational audit and a compliance audit is which of the following?
a. An operational audit focuses on business efficiencies and effectiveness, while a compliance audit
focuses on whether laws and other requirements are being followed
b. An operational audit focuses on reliability of the financial statements, while a compliance audit
focuses on whether laws and other requirements are being followed
c. An operational audit focuses on business efficiencies and effectiveness, while a compliance audit
focuses on reliability of the financial statements
d. A compliance audit focuses on business efficiencies and effectiveness, while an operational audit
focuses on whether laws and other requirements are being followed

48. What is the final step that should be undertaken in an operational audit?
a. Reporting of the findings
b. Follow-up procedures to determine if recommendations gave been implemented
c. Report on the organization’s internal control and compliance with legal requirements
d. An operational meeting with Board of Directors

49. Operational audit generally have been performed by internal auditors but may be performed by independent
accountants. A primary purpose of an operational audit is to provide:
a. A means of assuring that internal controls are functioning as planned
b. Aid to the independent auditor, who is auditing the financial statements
c. The results of internal examinations of financial and accounting matters to an entity’s top-level
management
d. A measure of management performance in meeting organizational goals

50. Which of the following is generally considered one of the main reasons why internal auditors evaluate the
effectiveness of their company’s internal control structure?
a. To determine whether all risks and exposures of the company have been either reduced or
eliminated
b. To determine whether the established internal controls are functioning as intended by management
c. To determine the extent of reliance the internal auditors can place on the controls I the process of
evaluating the financial statements
d. To reduce the amount of detailed testing of their external auditors

51. Which of the following is not one of the three phases in an operational audit?
a. Planning
b. Review of the internal control structure
c. Evidence accumulation and evaluation

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 d. Reporting and follow-up

52. There are several sources that the operational auditor can utilize in developing specific evaluation criteria.
An area that is not considered a source is
a. Generally accepted accounting principles
b. Historical performance, such as results from prior periods.
c. Comparable performance, such as the data of comparable entities
d. Discussion and agreement between the management of the entity to be audited, the operational
auditor, and the entity or persons to who the findings will be reported

53. An operational auditor is most likely to be concerned with whether a transaction was
a. Necessary
b. Reasonable
c. Properly approved
d. Properly supported with documentation

54. When planning an operational audit, the auditor should consider the risk of
a. Misleading financial statements
b. Inadequate internal controls
c. Inefficient operations
d. Lawsuits for inadequate auditing

55. When performing an operational audit, the auditor would normally be concerned with all of the following
except
a. Calculation of earnings per share
b. Investigation of budget variance
c. Follow up on inventory shortages
d. Reasons for idle equipment

56. The benefits of an operational audit generally include all if the following except
a. Increased revenue
b. Increased reliability of the financial statements
c. Increased productivity
d. Decreased costs

57. An operational audit report is not likely to be addressed to the

a. Department supervisors
b. Audit committee
c. Stockholders
d. Top management

58. In an compliance audit, an auditor is concerned with whether an entity’s transactions are in conformance
with
a. Management objectives
b. Board of director directives
c. Laws and regulations
d. Accepted business practices

59. A major responsibility of internal auditing is to:

a. Install sound accounting, financial, and operating controls at reasonable cost
b. Determine the extent of compliance with established policies, plans, and procedures
c. Account for the company’s assets and safeguard them from losses
d. Develop reliable management data

60. In comparison to the independent auditor, an internal auditor is more likely to be concerned with:
a. Legal and regulatory compliance
b. Cost accounting procedures
c. Operational auditing
d. Internal control

61. When an independent auditor decided that the work performed by internal auditors may have a bearing on
the nature timing, and extent of planned audit procedures, the independent auditor should evaluate the
objectivity of the internal auditors. Relative to objectivity, the independent auditor should
a. Consider the organizational level to which internal auditors report
b. Review the quality control program in effect to the internal audit staff
c. Examine the quality of the internal audit reports
d. Consider the qualifications of the internal staff

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