IIA-CIA-Part3 Exam Dumps - Business Knowledge for Internal Auditing
Which of the following would most likely serve as a foundation for individual operational goats?
Individual skills and capabilities.
Alignment with organizational strategy.
Financial and human resources of the unit.
Targets of key performance indicators
Answer:
Explanation:
Individual operational goals must align with an organization's overall strategy to ensure that employee efforts contribute to corporate success. Operational goals are specific, measurable objectives that support the broader strategic direction.
Why Option B (Alignment with organizational strategy) is Correct:
Organizational strategy defines the long-term vision, mission, and objectives.
Individual operational goals should align with this strategy to ensure consistency and effectiveness.
Strategic alignment ensures resources are used efficiently and performance contributes to corporate success.
Why Other Options Are Incorrect:
Option A (Individual skills and capabilities):
While important, skills alone do not define operational goals—they are tools to achieve goals.
Option C (Financial and human resources of the unit):
These resources support operational goals, but they do not serve as the foundation. Goals are set based on strategy first.
Option D (Targets of key performance indicators - KPIs):
KPIs measure performance but are not the basis for setting operational goals. Goals should align with strategy first, then KPIs track progress.
IIA Practice Guide – "Performance Management Auditing": Highlights strategic alignment as a basis for setting operational goals.
COSO ERM Framework – "Strategic and Performance Integration": Emphasizes aligning individual goals with organizational strategy.
IIA's Global Perspectives & Insights – "Auditing Organizational Performance": Discusses the role of strategy in goal-setting.
IIA References:Thus, the correct answer is B. Alignment with organizational strategy.
A small chain of grocery stores made a reporting error and understated its ending inventory. What effect would this have on the income statement for the following year?
Net income would be understated.
Net income would not be affected.
Net income would be overstated.
Net income would be negative.
Answer:
Explanation:
Comprehensive and Detailed Step-by-Step Explanation with all IIA References: =
Understanding the Impact of an Understated Ending Inventory:
Ending inventory is a key component of the cost of goods sold (COGS) calculation: COGS=BeginningInventory+Purchases−EndingInventoryCOGS = Beginning Inventory + Purchases - Ending InventoryCOGS=BeginningInventory+Purchases−EndingInventory
If the ending inventory is understated, it means the reported inventory is lower than its actual value.
This results in an overstated COGS because a smaller amount is subtracted in the formula above.
An overstated COGS leads to an understated net income in the current year.
Effect on the Following Year’s Income Statement:
The beginning inventory for the next year is based on the ending inventory of the previous year.
Since the prior year's ending inventory was understated, the new year's beginning inventory is also understated.
A lower beginning inventory leads to a lower COGS in the new year.
Since COGS is lower, net income in the following year will be overstated.
IIA’s Perspective on Financial Reporting Errors:
The IIA’s International Standards for the Professional Practice of Internal Auditing (IPPF) emphasize the importance of accurate financial reporting.
IIA Standard 1220 – Due Professional Care requires internal auditors to consider the probability of errors, fraud, or misstatements in financial reporting.
COSO’s Internal Control – Integrated Framework highlights that inventory valuation errors can impact financial integrity and decision-making.
GAAP & IFRS Accounting Standards also require proper inventory reporting to ensure accurate financial statements.
IIA References:
IPPF Standard 1220 – Due Professional Care
COSO Internal Control – Integrated Framework
GAAP & IFRS Accounting Principles on Inventory Valuation
Thus, the correct and verified answer is C. Net income would be overstated.
Which of the following best describes the primary objective of cybersecurity?
To protect the effective performance of IT general and application controls.
To regulate users' behavior it the web and cloud environment.
To prevent unauthorized access to information assets.
To secure application of protocols and authorization routines.
Answer:
Explanation:
Cybersecurity is primarily focused on protecting information assets by preventing unauthorized access, data breaches, cyberattacks, and other security threats. The confidentiality, integrity, and availability (CIA) triad is the foundation of cybersecurity, with access control playing a key role in mitigating risks.
(A) Incorrect – To protect the effective performance of IT general and application controls.
While cybersecurity supports IT controls, its primary goal is information security, not just control performance.
(B) Incorrect – To regulate users' behavior in the web and cloud environment.
Cybersecurity includes user behavior policies, but its primary goal is preventing unauthorized access rather than regulation.
(C) Correct – To prevent unauthorized access to information assets.
The core objective of cybersecurity is to prevent unauthorized access, protecting data from cyber threats.
This aligns with the CIA (Confidentiality, Integrity, Availability) security model.
(D) Incorrect – To secure application of protocols and authorization routines.
Protocols and authorization routines are part of cybersecurity controls, but they are not the primary objective.
IIA’s GTAG (Global Technology Audit Guide) – Cybersecurity Risks and Controls
Defines cybersecurity as the protection of information assets from unauthorized access and threats.
NIST Cybersecurity Framework – Access Control and Information Security
Focuses on preventing unauthorized access to sensitive systems.
COBIT Framework – IT Governance and Security
Emphasizes the protection of data and IT assets through cybersecurity measures.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Which of the following measures the operating success of a company for a given period of time?
Liquidity ratios.
Profitability ratios.
Solvency ratios.
Current ratios.
Answer:
Explanation:
Profitability ratios measure a company's ability to generate profit over a specific period, making them the best indicators of operating success. These ratios assess financial performance by comparing income to various financial metrics such as revenue, assets, and equity.
Correct Answer (B - Profitability Ratios)
Profitability ratios reflect how effectively a company generates income from its operations over a given period.
Key profitability ratios include:
Gross Profit Margin: Measures how efficiently a company produces goods and services.
Operating Profit Margin: Shows profitability from core operations.
Net Profit Margin: Indicates the percentage of revenue converted into profit.
Return on Assets (ROA): Measures how efficiently assets generate earnings.
Return on Equity (ROE): Assesses how well equity investments generate returns.
The IIA Practice Guide: Auditing Financial Performance emphasizes profitability ratios in evaluating operational success.
Why Other Options Are Incorrect:
Option A (Liquidity Ratios):
Liquidity ratios measure a company's ability to meet short-term obligations rather than its operating success.
Examples: Current Ratio, Quick Ratio.
IIA GTAG 13: Business Performance emphasizes that liquidity ratios relate to short-term financial health, not operating success.
Option C (Solvency Ratios):
Solvency ratios evaluate a company's ability to meet long-term financial obligations, not operating performance.
Examples: Debt-to-Equity Ratio, Interest Coverage Ratio.
Option D (Current Ratio):
The current ratio is a liquidity ratio, measuring whether a company can meet its short-term liabilities with current assets.
It does not directly assess profitability or operational success.
IIA Practice Guide: Auditing Financial Performance – Covers the role of profitability ratios in evaluating a company’s success.
IIA GTAG 13: Business Performance – Discusses financial analysis, including profitability, liquidity, and solvency metrics.
Step-by-Step Explanation:IIA References for Validation:Thus, profitability ratios (B) are the best measures of a company’s operating success over a period.
Which of the following contract concepts is typically given in exchange for the execution of a promise?
Lawfulness.
Consideration.
Agreement.
Discharge
Answer:
Explanation:
Consideration is a fundamental element of a legally binding contract, referring to something of value exchanged between parties. It ensures that each party receives a benefit or suffers a legal detriment in return for the promise made.
Essential for Contract Enforceability – A contract must involve an exchange of value (e.g., money, services, goods, or a promise to act or refrain from acting).
Legal Reciprocity – Both parties must give and receive something of value to make the contract valid.
Distinguishes Contracts from Gifts – A gift is voluntary and does not require consideration, whereas a contract does.
A. Lawfulness – A contract must be lawful, but lawfulness is a requirement, not something exchanged.
C. Agreement – An agreement is part of a contract, but without consideration, an agreement is not legally binding.
D. Discharge – Discharge refers to ending a contract, not forming one.
IIA’s GTAG on Contract Management Risks – Highlights consideration as a key contract principle.
COSO’s Internal Control Framework – Covers contract law fundamentals in risk management.
Common Law and Uniform Commercial Code (UCC) – Define consideration as an essential element of a contract.
Why Consideration is the Correct Answer?Why Not the Other Options?IIA References:
While performing an audit of a car tire manufacturing plant, an internal auditor noticed a significant decrease in the number of tires produced from the previous operating
period. To determine whether worker inefficiency caused the decrease, what additional information should the auditor request?
Total tire production labor hours for the operating period.
Total tire production costs for the operating period.
Plant production employee headcount average for the operating period.
The production machinery utilization rates.
Answer:
Explanation:
Understanding the Audit Concern:
The internal auditor observed a significant decline in tire production and needs to assess whether worker inefficiency is the cause.
Worker inefficiency is typically measured in terms of productivity, which relates output (number of tires produced) to input (labor hours worked).
Why Option A is Correct?
Total tire production labor hours provide a direct measure of worker efficiency. By analyzing the number of tires produced per labor hour, the auditor can determine whether efficiency has declined.
If labor hours remained constant or increased while production declined, this indicates inefficiency.
This approach aligns with IIA Standard 1220 – Due Professional Care, which requires auditors to use appropriate analysis to support findings.
Additionally, per IIA Standard 2310 – Identifying Information, auditors must obtain sufficient and relevant data to support conclusions.
Why Other Options Are Incorrect?
Option B (Total tire production costs):
Total costs include factors beyond labor efficiency, such as raw material prices, machinery maintenance, and overhead. This does not directly measure worker productivity.
Option C (Plant production employee headcount average):
Employee headcount alone does not reflect efficiency; it does not account for hours worked or individual performance.
Option D (Production machinery utilization rates):
Machinery efficiency is important but does not directly measure worker inefficiency. A decline in machine utilization could be due to maintenance, material shortages, or other non-labor factors.
Labor hours per unit of production (tires produced per labor hour) is the best metric for evaluating worker efficiency.
IIA Standards 1220 and 2310 support data-driven, relevant information gathering for audit conclusions.
Final Justification:IIA References:
IPPF Standard 1220 – Due Professional Care
IPPF Standard 2310 – Identifying Information
Performance Standard 2320 – Analysis and Evaluation
An organization has a declining inventory turnover but an increasing gross margin rate. Which of the following statements can best explain this situation?
he organization's operating expenses are increasing.
The organization has adopted just-in-time inventory.
The organization is experiencing inventory theft.
The organization's inventory is overstated.
Answer:
Explanation:
A declining inventory turnover combined with an increasing gross margin rate suggests that the organization is not selling inventory as quickly as before, but still reporting higher profitability. This can indicate overstated inventory values, meaning that financial statements show higher inventory balances than what actually exists.
(A) Incorrect – The organization’s operating expenses are increasing.
Operating expenses do not directly affect inventory turnover, which measures how quickly inventory is sold.
Higher expenses could reduce net profit, but they would not explain a higher gross margin.
(B) Incorrect – The organization has adopted just-in-time (JIT) inventory.
JIT inventory systems increase inventory turnover by reducing excess stock.
Since turnover is declining, this suggests the opposite of JIT.
(C) Incorrect – The organization is experiencing inventory theft.
Inventory theft usually reduces inventory levels, potentially increasing inventory turnover due to lower stock.
Theft could lower gross margins if significant losses occur.
(D) Correct – The organization’s inventory is overstated.
Overstated inventory leads to lower COGS, artificially inflating gross margin.
If inventory levels are inflated, turnover appears lower because reported inventory is higher than actual sales justify.
IIA’s Global Internal Audit Standards – Financial Statement Audits and Fraud Risk
Covers risks related to inventory misstatements and financial fraud.
IFRS & GAAP Accounting Standards – Inventory Valuation
Defines how inventory overstatement impacts financial ratios.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Which of the following is a security feature that involves the use of hardware and software to filter or prevent specific information from moving between the inside network and the outside network?
Authorization
Architecture model
Firewall
Virtual private network