Free Internal Affairs Service Conducting Audits Questions and Answers — Questions and Answers
Question 1: Which of the following professionals has primary responsibility for the performance of an audit?
- The managing partner of the firm.
- The senior assigned to the engagement.
- The manager assigned to the engagement.
- The partner in charge of the engagement. (Correct answer)
Correct answer: The partner in charge of the engagement.
In a public accounting firm, the partner in charge of the engagement bears primary responsibility for the audit's performance and quality. While managers and seniors execute day-to-day work and the managing partner oversees the firm broadly, ultimate accountability for a specific engagement rests with the engagement partner who signs the audit report.
Question 2: What is the proper organizational role of internal auditing?
- To serve as an independent, objective assurance and consulting activity that adds value to operation (Correct answer)
- To assist the external auditor in order to reduce external audit fees
- To perform studies to assist in the attainment of more efficient operations.
- To serve as the investigative arm of the audit committee of the board of directors.
Correct answer: To serve as an independent, objective assurance and consulting activity that adds value to operation
Internal auditing's proper role is to serve as an independent, objective assurance and consulting activity that adds value to the organization's operations. It is not subordinate to the external auditor, not limited to efficiency studies, and not simply an investigative arm of the audit committee — those descriptions either narrow or mischaracterize its purpose under IIA standards.
Question 3: Operational audits generally have been conducted by internal and COA auditors, but may be performed by certified public accountants. A primary purpose of an operational audit is to provide.
- A measure of management performance in meeting organizational goals. (Correct answer)
- The result of internal examinations of financial and accounting matters to a company's top-level management.
- Aid to the independent auditor, who is conducting the examination of the financial statements.
- A means of a assurance that internal accounting controls are functioning as planned.
Correct answer: A measure of management performance in meeting organizational goals.
An operational audit's primary purpose is to assess how well management is performing in meeting the organization's goals — evaluating effectiveness and efficiency of operations. It is distinct from a financial statement audit (which addresses fairness of presentation) and from supporting the external auditor; it focuses on organizational performance rather than accounting accuracy.
Question 4: Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness and also?
- Accuracy
- Evaluation
- Compliance (Correct answer)
- Internal control
Correct answer: Compliance
Governmental auditing under GAGAS (the 'Yellow Book') covers the three Es — efficiency, economy, and effectiveness — plus compliance. Compliance auditing ensures the entity is adhering to applicable laws, regulations, and grant terms. Accuracy, evaluation, and internal control are related concepts but are not the distinct fourth element added beyond the three Es.
Question 5: An objective of a performance audit is to determine whether an entity’s
- Operational information is in accordance with government auditing standards.
- Specific operating units are functioning economically and efficiently (Correct answer)
- Financial statements present fairly the results operations.
- Internal control is adequately operating as designed.
Correct answer: Specific operating units are functioning economically and efficiently
A performance audit examines whether specific operating units are functioning economically and efficiently — it looks at how resources are used to achieve results. It does not render an opinion on financial statement fairness, test whether operational data conforms to auditing standards, or directly assess whether internal controls are operating as designed.
Question 6: Internal auditors should review the means of physically safeguarding assets from losses arising from?
- Exposure to the elements (Correct answer)
- Under usage of physical facilities
- Misapplication of accounting principles.
- Procedures that are not cost justified
Correct answer: Exposure to the elements
Internal auditors must consider physical safeguarding of assets from exposure to the elements (weather, fire, natural deterioration) because these environmental risks can cause real asset losses. Under-usage, misapplication of accounting principles, and lack of cost justification are control or financial concerns, not physical safeguarding threats from environmental exposure.
Question 7: The internal auditing department’s responsibility for deterring fraud is to?
- Establish an effective internal control system
- Maintain internal control
- Examine and evaluate the system of internal control (Correct answer)
- Exercise operating authority over fraud prevention activities
Correct answer: Examine and evaluate the system of internal control
Internal auditing's role in fraud deterrence is to examine and evaluate the internal control system — strong controls make fraud harder to commit and conceal. Establishing and maintaining internal controls is management's responsibility, not the auditors'. Internal auditors also should not exercise direct operating authority over fraud prevention, as that would compromise their independence.
Question 8: Internal auditors review the adequacy of the company’s internal control system primarily to?
- Help determine the nature, timing and extent of tests necessary to achieve audit objectives
- Determine whether the internal control system provides reasonable assurance that the company's objectives and goals are met efficiently and economically (Correct answer)
- Ensure that material weaknesses in the system of internal control are corrected
- Determine whether the internal control system ensures that financial statements are fairly presented
Correct answer: Determine whether the internal control system provides reasonable assurance that the company's objectives and goals are met efficiently and economically
Internal auditors review internal controls primarily to determine whether those controls provide reasonable assurance that the company's objectives and goals are being met efficiently and economically. While this review also informs the nature and timing of audit tests, and may reveal weaknesses, the primary purpose is assessing whether controls support achievement of organizational goals — not solely to ensure accurate financial statements.
Question 9: Which of the following services, if any, may a practitioner who is not independent provide?
- Compilations but not reviews (Correct answer)
- Reviews but not compilations
- Reviews but not financially statement audits.
- Agreed upon procedures but not compilations
Correct answer: Compilations but not reviews
A practitioner who lacks independence may perform a compilation engagement, provided the lack of independence is disclosed in the report. Reviews, audits, and agreed-upon procedures all require independence because they provide varying levels of assurance to third parties. Compilations involve no assurance, which is why the independence requirement is relaxed for that service specifically.
Question 10: In the case of audit engagements, it is in the public interest and, therefore, required by the Code that members of audit teams, firms and network firms shall be independent of audit clients. Independent requires?
- Independence of mind only
- Independence in appearance only
- Both independence of mind and independence in appearance (Correct answer)
- Either independence of mind or independence in appearance
Correct answer: Both independence of mind and independence in appearance
Auditor independence requires both independence of mind (the auditor's actual objectivity and freedom from bias) and independence in appearance (that a reasonable third party would perceive the auditor as independent). Neither component alone is sufficient — an auditor who is mentally objective but appears compromised, or vice versa, does not meet the full standard required by the Code.
Question 11: Holding a financial interest in an audit client may create a self-interest threat. <br> The existence and significance of any threat created depends on? I. The role of the person holding the financial interest<br> II. Whether the financial interest is direct or indirect<br> III. The materiality of the financial interest <br>
- I and II only
- I and III only
- II and III only
- I, II and III (Correct answer)
Correct answer: I, II and III
When assessing the threat posed by a financial interest in an audit client, all three factors matter: who holds the interest (role of the person), what kind of interest it is (direct vs. indirect), and how significant it is (materiality). Omitting any one factor would give an incomplete picture of the self-interest threat, so I, II, and III together are required.
Free Internal Affairs Service Conducting Audits Questions and Answers
Which of the following professionals has primary responsibility for the performance of an audit?