Which of the following is used to identify and prioritize critical business applications to determine
those that must be restored and the order of restoration in the event that a disaster impairs
information systems processing?

A.

Contingent facility contract analysis.

B.

System backup analysis.

C.

Vendor supply agreement analysis.

D.

Risk analysis

In forming a team to investigate an organization's potential adoption of an activity-based costing
system, the best reason to include an internal auditor on the team would be the auditor's
knowledge of:

A.

Activities and cost drivers.

B.

Information processing procedures.

C.

Current product cost structures.

D.

Internal control alternatives.

Given the scarcity of internal audit resources, a chief audit executive (CAE) decided not to schedule a follow-up of audit recommendations when developing engagement work schedules.
Does the CAE’s decision violate the Standards?

A.

No, because the Standards do not specify whether follow-up is needed.

B.

No, because when there is evidence of sufficient motivation by the client, there is no need for
follow-up action.

C.

Yes, because scarcity of resources is not a sufficient reason to omit follow-up action.

D.

Yes, because the Standards require the auditors to determine whether the client has
appropriately implemented all of the auditor's recommendations

An auditor for a major retail company suspects that inventory fraud is occurring at three stores
which have high costs of goods sold. Which of the following audit activities would provide the most
persuasive evidence that fraud is occurring?

A.

Use an integrated test facility (ITF) to compare individual sales transactions with test
transactions submitted through the ITF and investigate all differences.

B.

Interview the three individual store managers to determine if their explanations about the
observed differences are the same, and then compare their explanations to that of the section
manager.

C.

Schedule a surprise inventory audit to include a physical inventory and investigate areas of
inventory shrinkage.

D.

Select a sample of individual store prices and compare them with the sales entered on the cash
register for the same items

Which of the following procedures would be most helpful in providing additional evidence when an
auditor suspects that an unidentified employee is submitting and approving invoices for payment?

A.

Use generalized audit software to identify invoices from vendors with post office box numbers
or other unusual features. Select a sample of those invoices and trace to supporting documents
such as receiving reports.

B.

Select a sample of payments made during the year and investigate each one for approval.

C.

Select a sample of receiving reports representative of the period under investigation and trace
to approved payment. Note any items not properly processed.

D.

Select a sample of invoices paid during the past month and trace them to appropriate vendor
accounts.

Insurance companies often receive electronic hospitalization claims directly from hospitals. Which
of the following control procedures would be most effective in detecting fraud in such an
environment?

A.

Use integrated test facilities to test the accuracy of processing in a manner that is transparent
to data processing.

B.

Develop monitoring programs to identify unusual types of claims or an unusual number of
claims by demographic class for investigation by the claims department.

C.

Use generalized audit software to match the claimant identification number with a master list of
valid policyholders.

D.

Develop batch controls over all items received from a particular hospital and process those
claims in batches.

During an audit of executive travel, an auditor noted that the president's travel expense
reimbursements were approved by an executive secretary who reported to the president. The
organization's reimbursement policy requires all travel expense reimbursements to be approved
by the traveler's supervisor, but it does not address the president's reimbursements. Which of the
following represents the auditor's best recommendation in this situation?

A.

The organization's reimbursement policy should be amended to grant the president's executive
secretary the authority to approve the president's travel expense reimbursements.

B.

The approval policy for executive travel should be considered at the next meeting of the audit
committee of the board of directors.

C.

The president's travel expense reimbursements should be reviewed and approved by the chief
financial officer

D.

The president's noncompliance should be considered immaterial.

Which of the following, if observed, would not indicate the need to extend the search for other
indicators of fraud in a purchasing department?

A.

The standard of living of one of the purchasing agents has increased.

B.

The internal control structure has significant weaknesses.

C.

The purchasing agents have convinced management to adopt a policy of paying vendors on a
more timely basis in order to avoid incurring penalty charges.

D.

The cost of goods procured seems to be excessive in comparison with previous years.

Which of the following does not represent a difficulty in using red flags as fraud indicators?

A.

Many common red flags are also associated with situations where no fraud exists.

B.

Some red flags are difficult to quantify or to evaluate.

C.

Red flag information is only gathered in extraordinary circumstances.

D.

The red flags literature is not well enough established to have a positive impact on auditing

Which of the following might alert an auditor to the possibility of fraud in a division?
I. The division is not scheduled for an external audit this year.
II. Sales have increased by 10 percent.
III. A significant portion of management's compensation is directly tied to reported net income of
the division.

A.

I only

B.

III only

C.

I and II only

D.

I, II, and III