IIA-CIA-Part2 IIA Practice of Internal Auditing Free Practice Exam Questions (2025 Updated)

 Role of CAE as Consultant: The chief audit executive (CAE) can act as a consultant to help management establish a risk management system. Their role should be facilitative rather than directive, ensuring that management owns the risk management process.

 Appropriate Tasks:

Risk Workshops: Coordinating and facilitating risk workshops (option A) helps management identify and assess risks, allowing them to develop appropriate responses. This is a suitable task for the CAE.

Risk Appetite and Indicators: Establishing risk appetite (option B) and setting risk indicators and mitigation plans (option C) are management's responsibilities.

Reporting Risks: Determining the number of significant risks to report (option D) should also be a management function.

A finding can be removed from the final audit report if management provides additional information that accurately contradicts the initial findings. This indicates that the initial findings may have been based on incomplete or incorrect information. Disagreements (Option A) or beliefs about the insignificance (Option D) of the finding do not justify removal unless they are supported by new, contradicting evidence. Even if corrective actions are already taken (Option B), the original finding may still be relevant for documentation and historical context.

IIA Standard 2410: Criteria for Communicating.

IIA Practice Guide on Communicating Results.

If the chief audit executive (CAE) is uncertain that the current audit team has all the required knowledge to conduct the engagement, the most appropriate course of action is to use an external service provider. This helps preserve the independence and objectivity of the internal audit function.

Expertise: External service providers bring specialized knowledge and expertise that may not be available within the internal team.

Independence: Utilizing an external provider ensures that the audit maintains its independence and objectivity, avoiding any potential conflicts of interest.

Quality: Ensures that the audit engagement is conducted with the highest standards, leveraging the external provider's experience and skills.

The risk assessment process in planning begins with identifying inherent risks (risks without considering controls). The next logical step is to identify and map existing controls to those inherent risks to determine whether they mitigate them effectively. Only after this step can residual risk be assessed. Detecting actual fraud (Option B) is not part of planning. Risk appetite (C) is a management responsibility, not audit’s. Option D occurs later after evaluating controls.

The scenario highlights that byproducts (normally waste) have market value and can also be purchased by employees at negligible cost. This creates a perverse incentive for production staff to increase production losses intentionally, since greater loss produces more byproducts available for resale or employee benefit. This risk directly affects internal controls and fraud risk assessment.

Options B, C, and D are not supported by the scenario. The most relevant engagement risk is Option A.

If a control is found to be poorly designed during the planning stage, testing its operating effectiveness becomes redundant because even a well-implemented but poorly designed control will not achieve its intended objectives. The primary focus should be on redesigning the control to ensure it is effective in mitigating risks. Therefore, the auditor should not have proceeded to test the operational effectiveness of a control that was already deemed poorly designed.

The Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards)

"Auditing: A Risk-Based Approach to Conducting a Quality Audit" by Karla M. Johnstone et al.

In internal auditing, it is crucial to have the necessary skills and expertise to effectively evaluate and assess the area under review. When internal auditors lack the required skills, the chief audit executive (CAE) must take steps to ensure the engagement is performed effectively. Option D suggests bringing in a consultant who is independent of the area under review and has the missing expertise. This approach ensures that the engagement is conducted with the necessary knowledge and objectivity, thus maintaining the quality and integrity of the audit process. Unlike options A and B, which compromise the audit's effectiveness, and option C, which could create conflicts of interest, option D provides an optimal solution.

The IIA's International Standards for the Professional Practice of Internal Auditing, Standard 1210 - Proficiency and Standard 1220 - Due Professional Care.

When dealing with the communication of audit results to external parties, the internal auditor must adhere to IIA standards regarding confidentiality, approval processes, and the appropriate handling of sensitive information.

IIA Standard 2440 – Disseminating Results:

This standard outlines that the chief audit executive (CAE) must approve the communication of engagement results to parties outside the organization. The CAE is responsible for ensuring that the distribution of audit findings is appropriate and does not compromise confidentiality or integrity.

Confidentiality and Authorization:

The internal auditor must protect the confidentiality of the information obtained during the audit. Sharing this information with external parties, such as an advertising agency, should only occur with proper authorization, typically from the CAE.

IIA Code of Ethics – Confidentiality:

The Code of Ethics requires auditors to respect the value and ownership of information they receive and to not disclose information without appropriate authority. In this case, if the audit client requests the report to be shared with an external party, the internal auditor must first obtain approval from the CAE to ensure this disclosure is appropriate.

Option B (May not communicate results): While confidentiality is crucial, the CAE can authorize the sharing of information with external parties if it is deemed appropriate.

Option C (Include instructions for limited distribution): While limiting further distribution is a good practice, the initial sharing still requires the CAE’s approval.

Option D (Verbal communication only): This restricts the auditor unnecessarily. The key is obtaining proper authorization, not limiting the form of communication.

Detailed Explanation:Why Not Other Options?Conclusion: Option A is correct as it ensures that the results can be communicated to the external party with the appropriate approval from the CAE, in line with IIA standards on dissemination and confidentiality.

Broad legislative reforms present the most critical external risk to an organization because they can fundamentally change the regulatory environment in which the organization operates. Such changes can impact compliance requirements, operational processes, and strategic planning. The organization must quickly adapt to remain compliant and avoid penalties or legal issues. This type of risk is external and largely uncontrollable, making it particularly critical compared to internal changes or new market entries.

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2120 – Risk Management.

Lagging indicators measure outcomes after the fact, while leading indicators provide predictive insight. Return on investment (ROI) is the most lagging because it measures financial performance after investments and operations have already occurred.

Customer retention (B) and employee satisfaction (C) are more intermediate indicators.

Cost of R&D (D) is a leading indicator, as it influences future innovation.

Thus, ROI is the most lagging indicator.

The primary reason the CAE should actively network and build relationships with senior management and the board is to fulfill their responsibility to keep the board appropriately informed. This is crucial for ensuring that the board has a clear understanding of the risks, control issues, and internal audit findings that may impact the organization.

IIA References:

IIA Standard 2060: Reporting to Senior Management and the Board requires the CAE to report periodically to senior management and the board on the internal audit activity's purpose, authority, responsibility, and performance relative to its plan. The CAE must also communicate significant risk exposures and control issues.

The IIA Practice Guide on Effective Communication with Stakeholders highlights the importance of regular and effective communication between the CAE, senior management, and the board to ensure transparency and alignment on key issues.

A survey with closed-ended questions can produce quantifiable evidence. Closed-ended questions limit responses to predefined options, making it easier to analyze and quantify the results. This type of survey is effective in gathering specific, comparable data from respondents.

IIA Practice Guide: Survey Methods in Internal Auditing

IIA Standards: 2310 - Identifying Information

 Customer Departmentalization: This method categorizes departments based on the type of customers they serve. It aligns services and strategies with the specific needs and characteristics of different customer groups.

 Examples of Customer Departmentalization:

Community Banking: Focuses on services tailored for local communities, often involving personal banking services.

Institutional Banking: Caters to large organizations, offering specialized financial products and services.

Agricultural Banking: Provides financial services to farmers and agricultural businesses, addressing their unique needs.

 Comparison with Other Options:

Product Departmentalization: Option B categorizes by products offered, such as mortgages and credit cards.

Geographical Departmentalization: Option C categorizes by regions, such as south and southwest.

Functional Departmentalization: Option D categorizes by job functions, such as teller and manager.

 References:

Customer departmentalization is exemplified by categorizing banking services into community, institutional, and agricultural sectors, focusing on the distinct needs of different customer groups​​​​.

Audit criteria should be appropriate and specific to each audit assignment, considering the unique context and objectives of each engagement. Consistency across all audit assignments (Option A) is not always feasible or desirable, as it could lead to inappropriate assessments. Instead, criteria should be flexible to allow the identification of nonadherence, represent reasonable standards, and align with good management practices relevant to each specific audit.

IIA Standard 2201: Planning Considerations.

IIA Practice Guide on Audit Planning.

Confirmation letters are generally considered the most reliable source of documentary evidence because they involve direct verification of information with an independent third party. This type of evidence is less prone to bias or manipulation compared to internal documents like policy statements or remittance advices.

IIA References:

IIA Standard 2310: Identifying Information requires that internal auditors gather sufficient, reliable, relevant, and useful information to support engagement results. Third-party confirmations, such as confirmation letters, are considered highly reliable because they come from independent sources.

The Practice Guide on Audit Evidence highlights that external confirmations provide strong evidence of the accuracy of the information being audited.

Best practices in internal auditing emphasize the importance of follow-up on engagement outcomes to ensure that agreed-upon actions are implemented and effective. According to Standard 2500 – Monitoring Progress, the chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management. This ensures that corrective actions are taken and that the internal audit function fulfills its role in improving the organization's governance, risk management, and control processes. Allocating resources for follow-up is crucial to maintain accountability and support continuous improvement.

Institute of Internal Auditors (IIA), International Standards for the Professional Practice of Internal Auditing (Standards), Standard 2500 – Monitoring Progress.

Comprehensive and Detailed Explanation:

When auditors use judgmental (non-statistical) sampling, the results apply only to the items tested and cannot be extrapolated statistically to the entire population. In this case, auditors tested 60 timesheets and found 3 exceptions. The appropriate conclusion is simply that 5% of the selected sample was not properly approved (D). Statements about effectiveness percentages (A, B) would require statistical sampling. Option C is inappropriate because exceptions do not prove flawed design — they may reflect control execution lapses. Per IIA standards, conclusions must reflect evidence without overgeneralization. Thus, Option D is the most appropriate conclusion.

Per Standard 2340 – Engagement Supervision, supervision ensures objectives are achieved, quality is maintained, and staff are developed. Regular discussions between supervisors and team members (D) represent proper, ongoing supervision. Options A, B, and C are either impractical or irrelevant.

A decentralized structure allows decision-making authority to be pushed closer to operations, enabling flexibility and rapid adaptation to technological change.

Traditional (A) and centralized (C) structures are slower and more rigid.

Customer-centric (D) focuses on service orientation but does not directly address adaptability to technology.

Thus, the best fit is decentralized (B).

A. Information obtained from historic audits and memos:Useful for context but not typically part of the formal work program.

B. Risk and control registers or matrices:Used in the planning phase but not part of the detailed execution in the work program.

C. Resource deployment plans and sampling methodologies:Correct. These are essential components of the work program, guiding audit execution and resource allocation.

D. Prior findings and management responses:Inform planning but do not typically appear in the work program itself.

CIA Exam Syllabus Reference:

Domain V: Performing Internal Audit Services – Engagement Work Program.

Due diligence engagements are crucial when planning an acquisition, as they evaluate the financial, operational, and legal aspects of the target entity. This ensures informed decision-making and minimizes acquisition risks. Performance engagements (Option A) focus on efficiency and effectiveness of operations, while system security engagements (Option B) and compliance engagements (Option D) do not address the comprehensive assessment required for acquisitions. The CIA syllabus emphasizes due diligence as a specialized type of consulting engagement (Part 2: Section II).

According to Standard 2330 – Documenting Information, only information that is sufficient, relevant, and supports engagement results should be retained in workpapers. Since the workpapers already contain sufficient evidence, additional notes that do not add value should not be included. Option B is correct: omit unnecessary notes from the workpapers.

A scatter diagram plots two variables on a graph to examine whether there is a correlation or relationship. Here, electricity price and wind speed can be plotted to test if changes in one relate to changes in the other.

A Gantt chart (A) is for project scheduling.

A RACI chart (C) clarifies roles and responsibilities.

A SIPOC diagram (D) maps processes.

Therefore, the best analytical tool for correlation analysis is the scatter diagram.

To maintain independence and objectivity, the internal auditor should seek permission to extend the current engagement and obtain approval from the process owner before performing any improvement tasks such as training staff on how to use macros. This ensures that the improvement task is formally acknowledged and approved, maintaining the integrity of the audit process. References: = IIA Standard 1130 - Impairment to Independence or Objectivity and IIA Standard 2410 - Criteria for Communicating.

The chief audit executive (CAE) can best illustrate the value of the internal audit activity by reporting the overall performance resulting from the internal audit balanced scorecard. The balanced scorecard includes metrics that measure the effectiveness, efficiency, and impact of the internal audit function, providing a comprehensive view of its contributions to the organization. This approach demonstrates how internal audit activities align with and support the organization's strategic objectives. References:

The IIA’s Practice Guide on Measuring Internal Audit Performance.

The IIA’s Practice Guide on Internal Audit Effectiveness.

Combining observations into one reported finding can be appropriate when they were noted during the same audit and the action plan has a common owner. In this case, the failure of both the financial reporting function and the AR staff to perform reconciliations regularly is interconnected and points to a systemic issue under the responsibility of the controller. Addressing these issues together can provide a more comprehensive view of the control deficiencies and facilitate more effective remediation. References:

The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 2410 - Criteria for Communicating.

The IIA’s Practice Advisory on Communicating Results.

When a significant risk is identified during a consulting engagement, the most appropriate response is to report the risk to senior management. Even if the engagement is consulting in nature, it is still crucial for the internal audit activity to ensure that significant risks are communicated to those responsible for managing them.

IIA References:

IIA Standard 2120: Risk Management requires that internal auditors evaluate the effectiveness of risk management processes and communicate significant risks to senior management. This applies regardless of whether the engagement is assurance or consulting.

The Practice Guide on Consulting Services advises that internal auditors must ensure that significant risks identified during consulting engagements are brought to the attention of senior management so that they can take appropriate action.

When concerned about whether a transaction is recorded in the correct period, the internal auditor should consult accounting principles, standards, and relevant guidelines to determine the appropriate timing of the entry. External auditor approval does not negate the internal auditor's responsibility to ensure that the transaction complies with established accounting standards and principles. Consulting the relevant guidelines provides an objective basis for assessing the accuracy of the transaction's recording.

The Institute of Internal Auditors (IIA) Standard 1220 – Due Professional Care: "Internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor."

Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) depending on the applicable framework.

The request for new vendor information to be summarized weekly and for invoices to be flagged automatically in the processing system indicates the use of continuous auditing. Continuous auditing involves ongoing, real-time monitoring of transactions and controls, which allows for the early detection of anomalies or issues.

IIA References:

IIA Standard 2320: Analysis and Evaluation suggests that internal auditors should use appropriate technology to support their analysis. Continuous auditing tools are designed to monitor transactions continuously, enabling auditors to identify and address risks more proactively.

The Practice Guide on Continuous Auditing outlines the benefits of real-time monitoring and how it can be integrated into the audit process to enhance the timeliness and relevance of audit results.