AUI3702 EXAM Notes

Question: 1 Directors, management, external auditors, and internal auditors all play important roles in creating proper control processes. Senior management is primarily responsible for A. Establishing and maintaining an organizational culture. Answer (A) is correct. Management plans, organizes, and directs the performance of sufficient actions to provide reasonable assurance that goals and objectives will be achieved. Management periodically reviews its objectives and goals and modifies its processes to accommodate changes in internal and external conditions. Management also establishes and maintains an organizational culture, including an ethical climate that fosters control. B. Reviewing the reliability and integrity of financial and operational information. C. Ensuring that external and internal auditors oversee the administration of the system of risk management and control processes. D. Implementing and monitoring controls designed by the board of directors. Question: 2 Which of the following statements regarding corporate governance is not correct? A. Corporate control mechanisms include internal and external mechanisms. B. The compensation scheme for management is part of the corporate control mechanisms. C. The dilution of shareholders’ wealth resulting from employee stock options or employee stock bonuses is an accounting issue rather than a corporate governance issue. D. The internal auditor of a company has more responsibility than the board for the company’s corporate governance. Answer (D) is correct. Governance is the responsibility of the board. Internal audit’s responsibility is to assess governance processes and make appropriate recommendations for improvement. Question: 3 Ensuring effective organizational performance management and accountability is most directly the proper function of A. Control. B. Governance. AUI3702 EXAM Notes Answer (B) is correct. The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: • Promoting appropriate ethics and values within the organization • Ensuring effective organizational performance management and accountability •Communicating risk and control information to appropriate areas of the organization •Coordinating the activities of and communicating information among the board, external and internal auditors and management (Perf. Std. 2110) C. Risk management. D. A quality assurance program. Question: 4 Which of the following is not a role of the internal audit activity in best practice governance activities? A. Support the board in enterprise-wide risk assessment. B. Ensure the timely implementation of audit recommendations. Answer (B) is correct. Management has the responsibility of ensuring the timely implementation of the audit recommendations. The internal audit activity is responsible for the development of a timely procedure to monitor the disposition of the audit recommendations. It works with senior management and the board to ensure that audit recommendations receive appropriate attention. C. Monitor compliance with the corporate code of conduct. D. Discuss areas of significant risks. Question: 5 The internal audit activity has a role in an organization’s governance process. The internal audit activity most directly contributes to this process by A. Identifying significant exposures to risk. B. Evaluating the effectiveness of the risk-management system. C. Promoting continuous improvement of controls. D. Evaluating the design of ethics-related activities. Answer (D) is correct. Perf. Std. 2110 states, “The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: • Promoting appropriate ethics and values within the organization; • Ensuring effective organizational performance management and accountability; •Communicating risk and control information to appropriate areas of the organization; and •Coordinating the activities of and communicating information among the board, external and internal auditors and management.” Thus, in an assurance engagement, “The internal audit activity must evaluate the design, implementation, and effectiveness of the organization’s ethics-related objectives, programs, and activities” (Impl. Std. 2110.A1). Question: 6 The role of the internal audit activity in the ethical culture of an organization is to A. Avoid active support of the ethical culture because of possible loss of independence. B. Evaluate the effectiveness of the organization’s formal code of conduct. Answer (B) is correct. The internal audit activity periodically assesses the elements of the ethical climate of the organization and its effectiveness in achieving legal and ethical compliance. Internal auditors therefore evaluate the effectiveness of, among other things, a formal code of conduct and related statements and policies. C. Assume accountability for the effectiveness of the governance process. D. Become the chief ethics officer. Question: 7 A code of conduct was developed several years ago and distributed by a large financial institution to all its officers and employees. What is the internal auditor’s best approach to providing the board with the