CIA Exam Part 1: Study Unit (2)
Questions and Answers with Rationales
Which of the following facts, by themselves, could contribute to a lack of independence
of the internal audit activity?
The CEO accused the new auditor of not operating "in the best interests of the
organization."
The majority of audit committee members come from within the organization.
The internal audit activity's charter has not been approved by the board.
A. 1 only.
B. 2 only.
C. 2 and 3 only.
D. 1, 2, and 3. - ans Answer (D) is correct.
The CEO's statement suggests that the internal audit activity lacks the support of senior
management and the board. Furthermore, the lack of outside audit committee members
may contribute to a loss of independence. The board's failure to approve the charter
may have the same effect. The charter enhances the independence of the internal audit
activity. By specifying the purpose, authority, and responsibility of the internal audit
activity, it establishes the position of internal audit in the organization, including the
nature of the chief audit executive's functional reporting relationship with the board
(Inter. Std. 1000).
To avoid being the apparent cause of conflict between an organization's senior
management and the board, the chief audit executive should
A. Communicate all engagement results to both senior management and the board.
B. Strengthen the independence of the internal audit activity through organizational
position.
C. Discuss all reports to senior management with the board first.
D. Request board approval of policies that include internal audit activity relationships
with the board. - ans Answer (D) is correct.
To achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the chief audit executive has direct and
unrestricted access to senior management and the board. This can be achieved through
a dual-reporting relationship (Inter. Std. 1100).
An organization is in the process of establishing its new internal audit activity. The
controller has no previous experience with internal auditors. Due to this lack of
experience, the controller advised the applicants that the CAE will be reporting to the
external auditors. However, the new chief audit executive will have free access to the
controller to report anything important. The controller will then convey the CAE's
concerns to the board of directors. The internal audit activity will
A. Be independent because the CAE has direct access to the board.
B. Not be independent because the CAE reports to the external auditors.
C. Not be independent because the controller has no experience with internal auditors.
,D. Not be independent because the organization did not specify that the applicants must
be certified internal auditors. - ans Answer (B) is correct.
To achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the CAE has direct and unrestricted access
to senior management and the board (Inter. Std. 1100). Also, the CAE must
communicate and interact directly with the board (Attr. Std. 1111).
A medium-sized publicly owned organization operating in Country X has grown to a size
that the governing authority believes warrants the establishment of an internal audit
activity. Country X has legislated internal audit requirements for government-owned
organizations. The organization changed the bylaws to reflect the establishment of the
internal audit activity. The governing authority decided that the chief audit executive
(CAE) must be a certified internal auditor and will report directly to the newly established
audit committee. Which of the items discussed above will contribute the most to the new
CAE's independence? - ans Answer (C) is correct.
Independence is effectively achieved when the CAE reports functionally to the board
(Inter. Std. 1110). The audit committee is a subset of the board.
Which of the following activities undertaken by the internal auditor might be in conflict
with the standard of independence?
A. Risk management consultant.
B. Product development team leader.
C. Ethics advocate.
D. External audit liaison. - ans Answer (B) is correct.
Independence precludes internal auditors from assuming management roles. Product
development team leader is a management role.
The reporting relationship within the organization's management structure that facilitates
the day-to-day operations of the internal audit activity is
A. Administrative reporting.
B. Financial reporting.
C. Management reporting.
D. Functional reporting. - ans Answer (A) is correct.
Administrative reporting is the reporting relationship within the organization's
management structure that facilitates the day-to-day operations of the internal audit
activity. Administrative reporting typically includes (1) budgeting and management
accounting; (2) human resource administration, including personnel evaluations and
compensation; (3) internal communications and information flows; and (4)
administration of the organization's internal policies and procedures (PA 1110-1, para.
4).
An external quality assessment team was evaluating the independence of an internal
audit activity. The internal audit activity performs engagements concerning all of the
elements included in its scope. Which of the following reporting responsibilities is most
likely to threaten the internal audit activity's independence? Reporting to the
A. President.
,B. Chief financial officer.
C. Executive vice president.
D. Audit committee. - ans Answer (B) is correct.
The CAE must report to a level within the organization that allows the internal audit
activity to fulfill its responsibilities (Attr. Std. 1110). The higher the level to which the
internal audit activity reports, the more likely that independence will be assured.
Reporting to the chief financial officer limits the influence and independence of the
internal audit activity.
The CAE should report functionally to the board. The board is responsible for which of
the following activities?
Internal communication and information flows
Approval of the internal audit risk assessment and related audit plan
Approval of annual compensation and salary adjustments for the CAE
A. 1 and 2 only.
B. 2 and 3 only.
C. 1 and 3 only.
D. 1, 2, and 3. - ans Answer (B) is correct.
Organizational independence is effectively achieved when the CAE reports functionally
to the board. Examples of functional reporting to the board involve the board
Approving the internal audit charter
Approving the risk-based internal audit plan
Receiving communications from the CAE on the internal audit activity's performance
Approving decisions regarding the appointment and removal of the CAE
Making appropriate inquiries of management and the CAE to determine whether there
are inappropriate scope or resource limitations (Inter. Attr. Std. 1110)
Independence permits internal auditors to render impartial and unbiased judgments.
The best way to achieve independence is through
A. Individual knowledge and skills.
B. A dual-reporting relationship.
C. Supervision within the organization.
D. Organizational knowledge and skills. - ans Answer (B) is correct.
Independence is the freedom from conditions that threaten the ability of the internal
audit activity to carry out internal audit responsibilities in an unbiased manner. To
achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the CAE has direct and unrestricted access
to senior management and the board. This can be achieved through a dual-reporting
relationship (Inter. Std. 1100).
When evaluating the independence of an internal audit activity, a quality assurance
review team performing an external assessment considers several factors. Which of the
following factors has the least amount of influence when judging an internal audit
activity's independence?
A. Criteria used in making internal auditors' assignments.
B. The extent of internal auditor training in communications skills.
, C. Relationship between engagement records and engagement communications.
D. Impartial and unbiased judgments. - ans Answer (B) is correct.
Training in communication relates to the knowledge, skills, and other competencies
needed to perform engagements, not to independence.
The optimal administrative reporting line of the CAE is to
A. The audit committee.
B. Line management.
C. Board of directors.
D. CEO or equivalent. - ans Answer (D) is correct.
Administrative reporting is the reporting relationship within the organization's
management structure that facilitates the day-to-day operations of the internal audit
activity. Administrative reporting typically includes (1) budgeting and management
accounting; (2) human resource administration, including personnel evaluations and
compensation; (3) internal communications and information flows; and (4)
administration of the organization's internal policies and procedures (PA 1110-1, para.
4). Reporting functionally to the board and administratively to the CEO facilitates
organizational independence (PA 1110-1, para. 2).
Regardless of which reporting relationship the organization chooses, several key
actions can help ensure that the reporting lines support and enable the effectiveness
and independence of the internal auditing activity. Which key action will not achieve its
functional reporting purpose?
A. Organizational independence is effectively achieved when the CAE reports
functionally to the board (Interpretation of Standard 1110).
B. The CAE should meet with the board, with management present, to reinforce the
independence of the internal audit activity.
C. The board should have the final authority to approve the internal audit risk
assessment.
D. The board should approve the CAE's performance evaluation. - ans Answer (B) is
correct.
Private meetings between the CAE and the board without management present are an
essential part of the functional reporting relationship (PA 1110-1, para. 3)
A formal document (charter) approved by the board that defines the internal audit
activity's purpose, authority, and responsibility enhances its
A. Exercise of due professional care.
B. Proficiency.
C. Relationship with management.
D. Independence. - ans Answer (D) is correct.
The charter establishes the internal audit activity's position within the organization,
including the nature of the chief audit executive's functional reporting relationship with
the board (Inter. Attr. Std. 1000). To achieve the degree of independence necessary to
effectively carry out the responsibilities of the internal audit activity, the CAE has direct
and unrestricted access to senior management and the board (Inter. Attr. Std. 1100).
Questions and Answers with Rationales
Which of the following facts, by themselves, could contribute to a lack of independence
of the internal audit activity?
The CEO accused the new auditor of not operating "in the best interests of the
organization."
The majority of audit committee members come from within the organization.
The internal audit activity's charter has not been approved by the board.
A. 1 only.
B. 2 only.
C. 2 and 3 only.
D. 1, 2, and 3. - ans Answer (D) is correct.
The CEO's statement suggests that the internal audit activity lacks the support of senior
management and the board. Furthermore, the lack of outside audit committee members
may contribute to a loss of independence. The board's failure to approve the charter
may have the same effect. The charter enhances the independence of the internal audit
activity. By specifying the purpose, authority, and responsibility of the internal audit
activity, it establishes the position of internal audit in the organization, including the
nature of the chief audit executive's functional reporting relationship with the board
(Inter. Std. 1000).
To avoid being the apparent cause of conflict between an organization's senior
management and the board, the chief audit executive should
A. Communicate all engagement results to both senior management and the board.
B. Strengthen the independence of the internal audit activity through organizational
position.
C. Discuss all reports to senior management with the board first.
D. Request board approval of policies that include internal audit activity relationships
with the board. - ans Answer (D) is correct.
To achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the chief audit executive has direct and
unrestricted access to senior management and the board. This can be achieved through
a dual-reporting relationship (Inter. Std. 1100).
An organization is in the process of establishing its new internal audit activity. The
controller has no previous experience with internal auditors. Due to this lack of
experience, the controller advised the applicants that the CAE will be reporting to the
external auditors. However, the new chief audit executive will have free access to the
controller to report anything important. The controller will then convey the CAE's
concerns to the board of directors. The internal audit activity will
A. Be independent because the CAE has direct access to the board.
B. Not be independent because the CAE reports to the external auditors.
C. Not be independent because the controller has no experience with internal auditors.
,D. Not be independent because the organization did not specify that the applicants must
be certified internal auditors. - ans Answer (B) is correct.
To achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the CAE has direct and unrestricted access
to senior management and the board (Inter. Std. 1100). Also, the CAE must
communicate and interact directly with the board (Attr. Std. 1111).
A medium-sized publicly owned organization operating in Country X has grown to a size
that the governing authority believes warrants the establishment of an internal audit
activity. Country X has legislated internal audit requirements for government-owned
organizations. The organization changed the bylaws to reflect the establishment of the
internal audit activity. The governing authority decided that the chief audit executive
(CAE) must be a certified internal auditor and will report directly to the newly established
audit committee. Which of the items discussed above will contribute the most to the new
CAE's independence? - ans Answer (C) is correct.
Independence is effectively achieved when the CAE reports functionally to the board
(Inter. Std. 1110). The audit committee is a subset of the board.
Which of the following activities undertaken by the internal auditor might be in conflict
with the standard of independence?
A. Risk management consultant.
B. Product development team leader.
C. Ethics advocate.
D. External audit liaison. - ans Answer (B) is correct.
Independence precludes internal auditors from assuming management roles. Product
development team leader is a management role.
The reporting relationship within the organization's management structure that facilitates
the day-to-day operations of the internal audit activity is
A. Administrative reporting.
B. Financial reporting.
C. Management reporting.
D. Functional reporting. - ans Answer (A) is correct.
Administrative reporting is the reporting relationship within the organization's
management structure that facilitates the day-to-day operations of the internal audit
activity. Administrative reporting typically includes (1) budgeting and management
accounting; (2) human resource administration, including personnel evaluations and
compensation; (3) internal communications and information flows; and (4)
administration of the organization's internal policies and procedures (PA 1110-1, para.
4).
An external quality assessment team was evaluating the independence of an internal
audit activity. The internal audit activity performs engagements concerning all of the
elements included in its scope. Which of the following reporting responsibilities is most
likely to threaten the internal audit activity's independence? Reporting to the
A. President.
,B. Chief financial officer.
C. Executive vice president.
D. Audit committee. - ans Answer (B) is correct.
The CAE must report to a level within the organization that allows the internal audit
activity to fulfill its responsibilities (Attr. Std. 1110). The higher the level to which the
internal audit activity reports, the more likely that independence will be assured.
Reporting to the chief financial officer limits the influence and independence of the
internal audit activity.
The CAE should report functionally to the board. The board is responsible for which of
the following activities?
Internal communication and information flows
Approval of the internal audit risk assessment and related audit plan
Approval of annual compensation and salary adjustments for the CAE
A. 1 and 2 only.
B. 2 and 3 only.
C. 1 and 3 only.
D. 1, 2, and 3. - ans Answer (B) is correct.
Organizational independence is effectively achieved when the CAE reports functionally
to the board. Examples of functional reporting to the board involve the board
Approving the internal audit charter
Approving the risk-based internal audit plan
Receiving communications from the CAE on the internal audit activity's performance
Approving decisions regarding the appointment and removal of the CAE
Making appropriate inquiries of management and the CAE to determine whether there
are inappropriate scope or resource limitations (Inter. Attr. Std. 1110)
Independence permits internal auditors to render impartial and unbiased judgments.
The best way to achieve independence is through
A. Individual knowledge and skills.
B. A dual-reporting relationship.
C. Supervision within the organization.
D. Organizational knowledge and skills. - ans Answer (B) is correct.
Independence is the freedom from conditions that threaten the ability of the internal
audit activity to carry out internal audit responsibilities in an unbiased manner. To
achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the CAE has direct and unrestricted access
to senior management and the board. This can be achieved through a dual-reporting
relationship (Inter. Std. 1100).
When evaluating the independence of an internal audit activity, a quality assurance
review team performing an external assessment considers several factors. Which of the
following factors has the least amount of influence when judging an internal audit
activity's independence?
A. Criteria used in making internal auditors' assignments.
B. The extent of internal auditor training in communications skills.
, C. Relationship between engagement records and engagement communications.
D. Impartial and unbiased judgments. - ans Answer (B) is correct.
Training in communication relates to the knowledge, skills, and other competencies
needed to perform engagements, not to independence.
The optimal administrative reporting line of the CAE is to
A. The audit committee.
B. Line management.
C. Board of directors.
D. CEO or equivalent. - ans Answer (D) is correct.
Administrative reporting is the reporting relationship within the organization's
management structure that facilitates the day-to-day operations of the internal audit
activity. Administrative reporting typically includes (1) budgeting and management
accounting; (2) human resource administration, including personnel evaluations and
compensation; (3) internal communications and information flows; and (4)
administration of the organization's internal policies and procedures (PA 1110-1, para.
4). Reporting functionally to the board and administratively to the CEO facilitates
organizational independence (PA 1110-1, para. 2).
Regardless of which reporting relationship the organization chooses, several key
actions can help ensure that the reporting lines support and enable the effectiveness
and independence of the internal auditing activity. Which key action will not achieve its
functional reporting purpose?
A. Organizational independence is effectively achieved when the CAE reports
functionally to the board (Interpretation of Standard 1110).
B. The CAE should meet with the board, with management present, to reinforce the
independence of the internal audit activity.
C. The board should have the final authority to approve the internal audit risk
assessment.
D. The board should approve the CAE's performance evaluation. - ans Answer (B) is
correct.
Private meetings between the CAE and the board without management present are an
essential part of the functional reporting relationship (PA 1110-1, para. 3)
A formal document (charter) approved by the board that defines the internal audit
activity's purpose, authority, and responsibility enhances its
A. Exercise of due professional care.
B. Proficiency.
C. Relationship with management.
D. Independence. - ans Answer (D) is correct.
The charter establishes the internal audit activity's position within the organization,
including the nature of the chief audit executive's functional reporting relationship with
the board (Inter. Attr. Std. 1000). To achieve the degree of independence necessary to
effectively carry out the responsibilities of the internal audit activity, the CAE has direct
and unrestricted access to senior management and the board (Inter. Attr. Std. 1100).
