Question

1. During the audit of assets, an internal auditor believes that several items were classified as assets when they should have been classified as expenses. To whom should the internal auditor report these concerns to?

a.Discuss the matter with the chief audit executive

b. Discuss the matter with senior management to determine if the classifications are correct.

c. Consult with legal counsel for advice.

d. Discuss the matter with the general accountant who classified the transactions

2. Internal auditors can evaluate the effectiveness of internal controls over the purchasing function by reviewing:

a. The daily tasks of the purchasing department including requisitioning, ordering, and purchase approval.

b. The policies regarding separation of the custody of inventory from the authorization to order inventory.

c. The policies for the physical count of inventory

d. The policies regarding the authorization to order inventory and the recording keeping functions for inventory.

3. Under the Sarbanes-Oxley Act of 2002, companies are now required to implement anti-fraud programs and controls that they evaluate on an annual basis as part of their integrated audit. A common component of such anti-fraud programs and controls is the effective design and implementation of codes of ethics and conduct. Which one of the following is not a characteristic of the operating effectiveness of a code of conduct?

a. The existence of a plan to communicate the code of conduct to all (or covered) employees of the company

b. The existence of an appropriate "hot-line" or whistle blowing to report any violations with the company's code of conduct

c. Audit committee involvement and oversight of non-compliance with the company's code of conduct

d. Lack of employee training in the company's code of conduct upon hiring and periodically thereafter

4. Which one of the following is an example of monitoring controls?

1. Internal audits
2. Audit committee reviews
3. Management reviews

a. 2 only

b. 1 only

c. 3 only

d. 1, 2, and 3

Answer 1

1. Answer: b. Discuss the matter with senior management to determine if the classifications are correct.

If the internal auditor believes during the audit of assets that items that should have been classified as expenses have been classified as assets, he should discuss the matter with the senior management to understand the exact nature of these and the reason for classifying the same as expenses. Hence, option b. is the correct answer.

Only if unconvinced after discussions with senior management, the same should be discussed with the chief audit executive. Consultation with legal counsel may not always be necessary while the general accountant who classified the transactions may be doing so only on the instructions from senior management and hence may not be the right person to discuss the same with. Hence, options a., c., and d. are incorrect.

2. Answer: a. The daily tasks of the purchasing department including requisitioning, ordering, and purchase approval.

The effectiveness of internal controls over the purchasing function may be evaluated by observing the daily tasks performed by the staff and the various roles performed by each member. Hence, option a. is the correct answer. The mere existence of policies may not necessarily indicate the effectiveness of the internal controls. Hence, options b., c., and d. are incorrect.

3. Answer: d. Lack of employee training in the company’s code of conduct upon hiring and periodically thereafter.

The existence of a plan for communication of the code of conduct to all employees of the company, a hot-line or whistle blowing to report violations of the code of conduct, and the involvement and oversight by the audit committee in the on-compliance of the code of conduct are all characteristics of the operating effectiveness of the code of conduct. Hence, options a., b., and c., are incorrect. However, the lack of providing training to company employees on the code of conduct indicates absence of operating effectiveness of the code of conduct and hence is the correct answer.

4, Answer: d. 1, 2, and 3

Monitoring controls include ongoing monitoring such as management committee reviews, as also separate evaluations such as internal audits, and audit committee reviews. Thus, internal audits, audit committee reviews, and management reviews are all examples of monitoring controls. Hence, option d. is the correct answer.