According To The IIA Glossary Appended To The Standards

according To The Iia Glossary Appended To Thestandards Which Of The

1. According to The IIA Glossary appended to the Standards , which of the following are most directly designed to ensure that risks are contained? A. Control processes. B. Internal audit activities. C. Governance processes. D. Risk management processes.

2. An internal auditor is examining inventory control in a merchandising division with annual sales of US $3,000,000 and a 40% gross profit rate. Tests show that 2% of the monetary amount of purchases do not reach inventory because of breakage and employee theft. Adding certain controls costing US $35,000 annually could reduce these losses to .5% of purchases. Should the controls be recommended?

A. No, because the cost of the added controls exceeds the projected savings.

B. Yes, because the projected saving exceeds the cost of the added controls.

C. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.

D. Yes, because the ideal system of internal control is the most extensive one.

3. The manager of a production line has the authority to order and receive replacement parts for all machinery that requires periodic maintenance. The internal auditor received an anonymous tip that the manager ordered substantially more parts than were necessary from a family member in the parts supply business. The unneeded parts were never delivered. Instead, the manager processed receiving documents and charged the parts to machinery maintenance accounts. The payments for the undelivered parts were sent to the supplier, and the money was divided between the manager and the family member.

Which of the following internal controls would have most likely prevented this fraud from occurring?

A. Using the company’s inventory system to match quantities requested with quantities received.

B. Establishing predefined spending levels for all vendors during the bidding process.

C. Comparing the bill of lading for replacement parts to the approved purchase order.

D. Segregating the receiving function from the authorization of parts purchases.

4. The requirement that purchases be made from suppliers on an approved vendor list is an example of a

A. Monitoring control.

B. Detective control.

C. Corrective control.

D. Preventive control.

5. The risks created by rapid changes in IT have not affected which concepts of internal control?

1. Cost-benefit analysis 2. Control environment 3. Reasonable assurance 4. Management’s responsibility

A. 1 and 2 only.

B. 3 and 4 only.

C. 2, 3, and 4 only.

D. 1, 2, 3, and 4.

6. Which of the following should the auditor recommend as the most economical point at which to correct input errors in an online system?

A. Output data are balanced with computer-produced control totals and delivered to the user.

B. Entry of data into each field of a record is completed.

C. Entry of data into each record is completed.

D. Input data are balanced with computer-produced control totals.

7. Management is concerned with the potential for unauthorized changes in the payroll. Which of the following is the proper organizational structure to prevent such unauthorized changes?

A. The personnel department authorizes the hiring and pay levels of all employees.

B. The payroll department maintains and authorizes all changes in the personnel records.

C. The payroll department is supervised by the management of the human resources division.

D. The payroll department’s functions are limited to maintaining the payroll records, distributing paychecks, and posting the payroll entries to the general ledger.

8. Internal auditors regularly evaluate controls. Which of the following best describes the concept of control as recognized by internal auditors?

A. Control procedures should be designed from the “bottom up” to ensure attention to detail.

B. Management regularly discharges personnel who do not perform up to expectations.

C. Management takes action to enhance the likelihood that established goals and objectives will be achieved.

D. Control represents specific procedures that accountants and internal auditors design to ensure the correctness of processing.

9. An organization has grown rapidly and has just automated its human resource system. The organization has developed a large database that tracks employees, employee benefits, payroll deductions, job classifications, ethnic code, age, insurance, medical protection, and other similar information. Management has asked the internal audit activity to review the new system. Human resources and payroll are separate departments.

Which of the following combinations provides the best segregation of duties?

A. Human resources adds employees, payroll processes hours, and human resources delivers the paychecks to employees.

B. Human resources adds employees, and payroll processes hours and enters employee bank account numbers. Paychecks are automatically deposited in the employee’s bank account.

C. Payroll adds employees and enters employees’ bank account numbers but processes hours only as approved by human resources. Paychecks are automatically deposited in the employee’s bank account.

D. Human resources adds employees, reviews and submits payroll hours to payroll for processing, and delivers paychecks to employees.

10. An adequate system of internal controls is most likely to detect a fraud perpetrated by a

A. Group of employees in collusion.

B. Single employee.

C. Single manager.

D. Group of managers in collusion.

11. Which of the following situations will cause an internal auditor to question the adequacy of controls over a purchasing function?

A. Receiving reports are forwarded to purchasing where they are matched with purchase orders and sent to accounts payable.

B. Unpaid voucher files and perpetual inventory records are independently maintained.

C. The original and one copy of the purchase order are mailed to the vendor. The copy on which the vendor acknowledges acceptance is returned to the purchasing department.

D. The accounts payable section prepares documentation for payments.

12. The actions taken to manage risk and increase the likelihood that established objectives and goals will be achieved are best described as

A. Supervision.

B. Compliance.

C. Control.

D. Quality assurance.

13. Of the following, which is the most efficient source for an auditor to use to evaluate a company’s overall control system?

A. Control flowcharts.

B. Copies of industry operating standards.

C. Copies of standard operating procedures.

D. A narrative describing departmental history, activities, and forms usage.

14. An internal auditor develops a flowchart primarily to

A. Analyze a system and identify internal controls.

B. Detect errors and irregularities.

C. Reduce the need for interviewing auditee personnel.

D. Determine functional responsibilities.

15. Omen Company is a manufacturer of men’s shirts. It distributes weekly sales reports to each sales manager. The quantity 2R5 appeared in the quantity sold column for one of the items on the weekly sales report for one of the sales managers. The most likely explanation for what has occurred is that the

A. Computer has malfunctioned during execution.

B. Output quantity has been stated in hexadecimal numbers.

C. Program did not contain a data checking routine for input data.

D. Printer has malfunctioned and the “R” should have been a decimal point.

Paper For Above instruction

The internal control environment is a foundational element in safeguarding organizational assets, ensuring accurate financial reporting, and promoting operational efficiency. According to the Institute of Internal Auditors (IIA) standards and guidelines, control processes are designed specifically to contain and manage risks, helping organizations prevent and detect undesirable events or behaviors. These control processes encompass policies, procedures, and activities that mitigate risks related to financial inaccuracies, fraud, operational inefficiencies, and compliance violations (IIA, 2021).

In understanding the various mechanisms for risk containment, it is essential to recognize that governance processes and risk management processes are broader frameworks that oversee organizational objectives and risk exposure (COSO, 2013). However, control processes operate directly within these frameworks to enforce policies and procedures, thereby preventing risks from materializing. Control activities such as authorization, segregation of duties, and reconciliation are critical in minimizing risks associated with errors and fraud (Rubio & Carrillo, 2019).

Regarding the decision to recommend controls based on cost-benefit analysis, the evaluation hinges on whether the projected savings from implementing controls outweigh the costs. For example, in the scenario examining inventory losses due to breakage and employee theft, controls costing $35,000 annually that could reduce losses might be justified if the anticipated savings meet or exceed the costs. Typically, internal auditors recommend controls when the benefits in risk reduction justify the expenses, aligning with the principles of operational efficiency and organizational risk appetite (Deloitte, 2022).

Preventive controls are instrumental in thwarting fraud, like the case involving the manager ordering excess parts from a family member. Segregation of duties, especially separating the authorization process from receipt and payment functions, is crucial in preventing such frauds. Specifically, segregating receiving from authorization ensures that no single individual can both initiate and approve potentially fraudulent transactions (COSO, 2013). Such internal controls serve as deterrents and detection mechanisms against misappropriation of assets.

Another example pertains to the purchasing process, where using an approved vendor list acts as a preventive control, ensuring that purchases are only made from vetted suppliers, reducing the risk of fraudulent or unauthorized transactions (Hopwood et al., 2010). Transitioning to the domain of IT, rapid technological change introduces risks that challenge concepts like cost-benefit analysis, control environment, reasonable assurance, and management's responsibility. While these concepts remain fundamentally unchanged, their application requires adaptation to new technological contexts, emphasizing the importance of IT controls in maintaining effective internal control frameworks (Lain, 2017).

Input error correction in online systems relies heavily on controls embedded within the system architecture to correct errors at the most economical point. For instance, balancing input data with control totals ensures that errors are detected early and rectified before processing proceeds further. Therefore, the recommendation for the most economical correction point is typically at the point where input data are balanced with control totals—ensuring errors are identified before processing completes (Elder et al., 2020).

Segregation of duties is especially vital in sensitive functions like payroll. Implementing structures where personnel who add employees are different from those who process payroll and distribute paychecks reduces the risk of unauthorized modifications. For example, separating responsibilities so that no single individual has control over the entire payroll process enhances security and controls against fraud (Lundquist, 2021).

Internal auditors tend to view control as a management function that involves designing and implementing procedures to ensure organizational objectives are met efficiently and effectively. Control processes are ongoing activities aimed at achieving accuracy, compliance, and efficiency (IIA, 2021). Effective internal controls detect errors and irregularities, acting as safeguards that facilitate operational integrity.

In reviewing rapidly growing organizations, such as a company automating its human resource system, effective segregation of duties is critical. For instance, assigning responsibilities so that human resources manages employee data while payroll processes hours and deposits salaries electronically enhances internal control, reduces fraud risk, and ensures accountability (Cui et al., 2018). A balanced segregation—where no single department controls all aspects—reduces opportunities for fraud or errors.

The ability of internal control systems to detect fraud varies based on the nature of collusion. While controls are most effective against single individuals acting alone, collusion among groups, especially among managers or employees, can circumvent controls. Nevertheless, well-designed internal controls remain crucial as they make collusion more difficult, costly, and time-consuming (Myers & Allen, 2019).

Controls over purchasing functions are questioned when processes lack independent verification. For example, failing to have separate approval and receiving functions, or not verifying purchase orders against receiving reports, increases the risk of fraudulent or erroneous transactions (COSO, 2013). Regular independent review and matching of documentation are essential for control adequacy.

Taking action to manage risk and increase the likelihood of achieving goals is primarily associated with overarching control activities, supervision, and compliance measures that align organizational activities with strategic objectives (ISO, 2015). These controls encompass policies and procedures that guide operational decisions and ensure consistency with organizational aims.

Finally, for evaluating a company's overall control system, control flowcharts are a highly effective tool. They visually map the processes and controls, allowing auditors to identify weaknesses or control gaps efficiently. Flowcharts provide an overarching view that aids in assessing control adequacy across various departments and functions (Cheryl et al., 2019).

Internal audit develops flowcharts to analyze systems, identify control points, and evaluate process efficiency. Flowcharts facilitate understanding of complex systems and highlight control weaknesses, enabling targeted auditing and process improvement (Hall, 2014). They serve as vital tools for internal auditors in their control assessments and operational evaluations.

In the scenario involving Omen Company’s sales report discrepancy—where “2R5” appears—the most plausible explanation is that the program did not include data validation routines. The appearance of “R” in numerical data suggests unprocessed or malformed data input, likely due to lack of input validation or error checking routines during data entry or processing phases (Jorgensen, 2018). This underscores the importance of implementing validation checks in automated systems to prevent such anomalies.

References

• Cheryl, S., Johnson, P., & Lee, M. (2019). Control flowchart analysis: An integrated approach. Journal of Internal Control, 35(2), 45-60.
• COSO. (2013). Internal control—Integrated framework. Committee of Sponsoring Organizations of the Treadway Commission.
• Cui, J., Li, X., & Zhang, L. (2018). Segregation of duties in HR/payroll systems: An effective control strategy. International Journal of Auditing, 22(4), 567-578.
• Deloitte. (2022). Cost-benefit analysis in internal control. Deloitte Insights.
• Elder, R., Evans, M., & Wilson, T. (2020). Correcting input errors in online systems: Best practices. Accounting Technology Review, 28(3), 22-29.
• Hall, J. (2014). Process mapping and flowcharting. Auditing Fundamentals Series.
• Hopwood, A., Linsley, P., & Power, M. (2010). The role of controls in preventing fraud. Journal of Business Ethics, 93, 527-544.
• IIA. (2021). International Standards for the Professional Practice of Internal Auditing. The Institute of Internal Auditors.
• Lain, J. (2017). Impact of rapid IT changes on internal control frameworks. Information Systems Journal, 27(2), 245-260.
• Lundquist, E. (2021). Segregation of duties in payroll processing. Financial Management Journal, 14(1), 102-118.
• Myers, S., & Allen, C. (2019). Fraud detection and internal control strategies. Internal Audit Journal, 44(1), 33-41.
• Rubio, M., & Carrillo, M. (2019). Control activities and risk mitigation in organizations. Management Control Review, 31(3), 45-59.