1. A contract dispute has arisen between an organization and a major supplier.

To resolve the
dispute, the most competent evidence is
Select one:
a. The original contract. 
The strongest form of evidence would be the original contract. A written contract would be
considered primary evidence that is considered to be the most persuasive form of evidence.

b. A letter from the supplier's attorney.

The strongest form of evidence is the original contract.
c. Actions by parties to the contract.
The strongest form of evidence is the original contract.

d. Oral testimony of contracting parties.

Oral testimony is not as strong of evidence as the original contract. Oral testimony cannot contradict
the original written contract

2. When evaluating the propriety of a payment to a consultant, the most appropriate information for
the internal auditor to obtain and review is
Select one:
a. Physical information in the form of the consultant's report. 
Physical information in the form of a report only indicates that work as performed, not if authorized
personnel made payment.

b. Oral information in the form of opinions of operating management.

Oral information is less reliable information than a contract.
c. Documentary information in the form of a contract.
Documentary information in the form of a contract is persuasive information.

d. Analytical information in the form of comparisons with prior years' expenditures on consultants.
Comparing with prior years' expenditures would not provide any useful information. It is possible that
circumstances in the organization have changed.

3. Engagement information is usually considered relevant when it is

Select one:
a. Derived through valid statistical sampling. 
Valid statistical sampling is related to the determination of sufficiency and reliability rather than
relevance.

b. Objective and unbiased.

Objectivity and being unbiased will not assure that the information will be considered relevant.
c. Consistent with the engagement objectives.
Information should be sufficient, reliable, relevant, and useful to provide a sound basis for engagement
observations, conclusions, and recommendations. Relevant information supports engagement
observations and recommendations and is consistent with the objectives for the engagement.

d. Factual, adequate, and convincing.

Factual, adequate and convincing information will not assure that the information will be considered
relevant.

4. An internal auditor takes a photograph of the engagement client's workplace. The photograph is a
form of what kind of information?
Select one:
a. Documentary. 
Documentary information is stored in some permanent form, i.e., checks, invoices, bills, shipping
records, purchase orders, etc.

b. Physical.
Physical information would include items such as a photograph, map, etc.
c. Analytical.
Analytical information is a comparison of relationships among data.

d. Testimonial.
Testimonial information would include oral or written statements given during an interview.

5. Which of the following is an example of documentary information?

Select one:
a. A page of the internal auditor's working papers containing the computations that demonstrate the
existence of an error or irregularity. 
Studying the internal auditor's working papers containing computations is analytical information.

b. A letter from a former employee alleging a fraud.

A letter from a former employee alleging fraud would be testimonial information.
c. A photograph of an engagement client's workplace.
A photograph of an engagement client's workplace is physical information.

d. A page of the general ledger containing irregularities placed there by the perpetrator of a fraud.
A page of the general ledger would be documentary information. . Documentary information is stored
in some permanent form, i.e., checks, invoices, bills, shipping records, purchase orders, etc.

6. In deciding whether recorded sales are valid, which of the following items of information is most
reliable?
 Select one:
a. The shipping document, independent bill of lading, and the invoice for the merchandise. 
Information is reliable if it is the best attainable information through the use of appropriate
engagement techniques (Interpretation: Standard 2310). The shipping document and invoice is the
most reliable information that a sale was made. The bill of lading will show that the merchandise was
shipped.

b. A memorandum from the director of the shipping department stating that another employee
verified the personal delivery of the merchandise to the customer.
The memorandum in this problem cannot be verified.
c. A copy of the customer's purchase order.
A copy of the customer's purchase order will only prove that the customer ordered the item, not that the
customer purchased it.

d. Accounts receivable records showing cash collections from the customer.

Accounts receivable records showing cash collections from the customer is less reliable than the
shipping document and invoice.

7. Which of the following techniques is most likely to result in sufficient information with regard to an
engagement to review the quantity of fixed assets on hand in a particular department?
Select one:
a. Analytical review of purchase requests and subsequent invoices. 
An analytical review of purchase requests and subsequence invoices would not provide the most
sufficient information since items that were originally purchased for the department may not still be
there.

b. Physical observation.
Physical observation would provide the most sufficient information about the quantity of fixed assets on
hand.
c. Interviews with department management.
Interviews with department management would not provide sufficient information.

d. Examination of the account balances contained in general and subsidiary ledgers.

Examination of account balances would not provide sufficient information that the fixed assets are
still the property of the department.

8. Analytical procedures in which current financial statements are compared with budgets or
previous statements are primarily intended to determine the
Select one:
a. Overall reasonableness of statement contents. 
Analytical procedures provide internal auditors with an efficient and effective means of assessing
and evaluating information collected in an engagement. Analytical procedures are useful in
 identifying, among other things, differences that are not expected, the absence of differences when
they are expected, potential errors, potential irregularities or illegal acts, or other unusual or
nonrecurring transactions or events. A comparison of current financial statements with budgets will
help the internal auditor determine the overall reasonableness of the statement information.

b. Use of an erroneous cutoff date.

Analytical procedures have to do with the relationship among data. Analytical procedures will not help
detect the use of an erroneous cutoff date.
c. Adequacy of financial statement disclosure.
Analytical procedures have to do with the relationship among information. Analytical procedures will not
determine the adequacy of financial statement disclosures.

d. Existence of specific errors or omissions.

Analytical procedures have to do with the relationship among information, not the existence of specific
errors or omissions.

9. What characteristic of information is satisfied by an original signed document?

Select one:
a. Usefulness. 
Useful information will help the organization achieved its goals. Goals are not specified in the
problem.

b. Relevance.
Relevant information concerns the relationship of the information to some objective of the engagement.
In this problem there is not mention of engagement objectives, therefore the information is not
relevant.
c. Sufficiency.
Sufficient information is factual, adequate, and convincing. An original signed document may not be
sufficient

d. Reliability.
Reliable information is competent and the best attainable through the use of appropriate procedures
(Standard 2310). An original document is considered to be reliable.

10. Which of the substantive fieldwork procedures presented below provides the best information
about completeness of recorded revenues?
Select one:
a. Vouching charges made to the accounts receivable subsidiary ledger to supporting shipping
records.  Vouching charges made to the accounts receivable subsidiary ledger to support shipping
records would still not pick up unrecorded sales.
b. Vouching shipping records to the customer order file.
Vouching shipping records to the customer order file would establish that goods shipped were ordered.
c. Reconciling the sales journal to the general ledger control account.
Reconciling the sales journal to the general ledger would still not pick up unrecorded sales
 d. Reconciling shipping records to recorded sales.
Reconciling shipping records to recorded sales would be the best way to audit the completeness of
recorded revenues. Revenue is recognized when it is earned and an exchange has taken place.
Revenue has not been earned and an exchange has not taken place until the goods have been
shipped. All shipped goods should be invoiced and recorded as revenue. Reconciling shipping
records to recorded sales would discover any items shipped that had not been recorded as revenue
as well as any items recorded as revenue that had not been shipped.

11. Of the following, the information collected by the internal auditor during an engagement is best
described as
Select one:

a. The records of preliminary planning and surveys, the engagement work program, and the results
of fieldwork. 

The records of preliminary planning and surveys are not engagement information. The engagement
work program, and the results of fieldwork are working papers.

b. Detailed documentation for systems that do not achieve desired objectives, actions that were
taken improperly, and actions that should have been taken but were not.

The information identified should be sufficient, relatable, relevant, and useful would include both positive
as well as negative observations.

c. An intermediate fact, or group of facts, from which the internal auditor can infer the fairness of an
assertion being reviewed.

An intermediate fact, or group of facts, from which the internal auditor can infer the fairness of an
assertion being reviewed is circumstantial evidence. Circumstantial evidence is indirect evidence so
therefore, it does not include direct evidence which is crucial to the internal auditor during an
engagement.

d. The information documented by the internal auditor and obtained through observing conditions,
interviewing people, and examining records.

The information documented by the internal auditor and obtained through observing conditions,
interviewing people, and examining records is what is entailed in an engagement. Internal auditors
must identify sufficient, reliable, relevant, and useful information to achieve the engagement
objectives (Standards 2310).

12. One engagement procedure for an engagement to evaluate facilities and equipment is to test the
accuracy of recorded depreciation. Which of the following is the best source of information that the
equipment in question is in service?
Select one:
 a. A comparison of depreciation schedules with the maintenance and repair logs for the same
equipment. 
Comparing depreciation schedules with maintenance and repair logs would provide information that
the equipment does in fact exist and is being used.

b. A review of depreciation policies and procedures.

Reviewing depreciation policies and procedures will do little to test the accuracy of the recorded
depreciation.
c. A review of inventory documentation for the equipment.
Depreciated equipment could still be in inventory.

d. A comparison of depreciation schedules with a listing of insurance appraisals for the same
equipment.
Comparing depreciation schedules with a listing of insurance appraisals does not test the accuracy
of recorded depreciation. Depreciated equipment could still be insured.

13. While performing an engagement relating to an organization's cash controls, the internal auditor
observed that cash deposits are not deposited intact daily. A comparison of a sample of cash
receipts lists revealed that each cash receipt list equaled cash journal entry amounts but not daily
bank deposits amounts, and cash receipts list totals equaled bank deposit totals in the long run. This
information as support for the internal auditor's observations is:
Select one:
a. Not sufficient, reliable, or relevant. 
The presented is considered to be sufficient, reliable, and relevant.

b. Relevant but not sufficient or reliable.

The information would also be considered to be sufficient and reliable.
c. Sufficient, reliable, and relevant.
The presented information has all the traits to be considered sufficient, reliable, and relevant. It is
sufficient because a reasonable person would judge a comparison the organization's records with
the bank records as persuasive proof that deposits where not made intact daily. It is reliable because
the auditor is able to verify information by an independent source (bank). The information is
furthermore deemed relevant because it is relevant to the issue of whether cash receipts are
deposited intact daily.

d. Sufficient but not reliable or relevant.

The information would also be considered to be reliable and relevant.

14. An internal auditor is evaluating the advertising function. The organization has engaged a
medium-sized local advertising agency to place advertising in magazine publications. As part of the
review of the engagement working papers, the internal auditing supervisor is evaluating the
information collected. The internal auditor reviewed the language in the advertising for its legality
and compliance with fair trade regulations by interviewing the organization's advertising manager,
the product-marketing director (who may not have been objective), and five of the organization's
 largest customers (who may not have been knowledgeable). The supervisor can justifiably conclude
that the information is
Select one:

a. Conclusive. 

If the information is not sufficient it cannot be conclusive

b. Reliable.

It can be concluded that the advertising director and the product-marketing director are not objective.

c. Irrelevant.

The information is relevant, but it is not sufficient.

d. Insufficient.

Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the
engagement's objectives (Standard 2310). Sufficient information is factual, adequate, and convincing
so that a prudent, informed person would reach the same conclusions as the internal auditor.
Interviewing people who likely will neither be objective nor knowledgeable is unlikely to be sufficient.

15. The best evidence to determine if excess levels of inventory are accumulating is
Select one:
a. Comparing current production requirements with the total of inventory on hand and on order.
Comparing current requirements with the total of orders and current inventory should identify
whether the total of inventory on hand and on order exceeds current requirements.

b. Reviewing purchase orders.

Reviewing purchase orders will show material that is being bought, but will not identify excess inventory.
c. Counting inventory and comparing quantity to perpetual records.
Counting inventory and comparing to recorded inventory will show whether actual and inventory counts
match, but will not show whether the inventory on-hand and on order is excess

d. Analyzing last quarter's excess inventory reports.

Analyzing last quarter's excess report represents review of prior data and is not necessarily
representative of current inventory conditions.

16. On an audit of the purchasing department, an internal auditor receives information from an
employee alleging that a buyer for the company favors a particular supplier. The best source of
evidence to evaluate this allegation is
Select one:
 a. Reviewing the file of open purchase orders.
Review of recent awards may be informational but it will not explain the rationale for the awards
which should be in the purchase files.

b. Analyzing supplier ratings.

Analysis of supplier ratings may be informative but will not explain the basis of award.
c. Discussing purchases from the supplier with the buyer.
Discussions with the buyer may be helpful, but they represent oral evidence that is not as reliable as
independent verification.

d. Reviewing purchase files for all recent awards to supplier.

Properly prepared purchase files should identify the basis for awards, including the rationale for
awarding to the winner and not awarding to other suppliers.

17. The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the
performance of an engagement with three internal auditors who are on a rotation assignment. After 6
months in the internal audit activity (IAA), they will move back to line positions. Each of them has
fairly extensive organizational experience and is on a fast track to a high-level management line
position. To develop their analytical decision-making abilities, the CAE pulls some old
engagement working papers, holding back the review notes and clearning comments. The CAE asks
them to indicate the informational criteria that are violated.
The organization is required to comply with certain specific standards related to environmental
issues. One of these standards requires that certain hazardous chemicals be placed in certified
containers for shipment to a governmental disposal site. The container must bear an inspection seal
signed within the last 90 days by a governmental inspector. Based on the following tests, the internal
auditor concluded that the organization was in compliance for the engagement period
I. Determine from each chemical loading supervisor that compliance requirements are understood
II. Inspect sealed containers for evidence of leakage.
III. Ask chemical loading personnel about procedures performed.
Which of the following informational criteria, if any, is violated?
 
 
Select one:

a. Reliability. 

The information would be considered reliable.

b. Sufficiency.

Sufficient information is factual, adequate, and convincing so that a prudent, informed person would
reach the same conclusions as the internal auditor (Standard 2310). These tests would be
considered insufficient since the internal auditor did not determine that every container had an
inspection seal signed within the last 90 days.
 c. Relevance.

The information would be considered relevant.

d. No criteria are violated.

The criteria of sufficiency is violated.

18. The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the
performance of an engagement with three internal auditors who are on a rotation assignment. After 6
months in the internal audit activity (IAA), they will move back to line positions. Each of them has
fairly extensive organizational experience and is on a fast track to a high-level management line
position. To develop their analytical decision-making abilities, the CAE pulls some old
engagement working papers, holding back the review notes and clearing comments. the CAE asks
the team to indicate the informational criteria that are violated.
During the planning stage of an engagement, the internal auditor made an on-site observation of the
vehicle maintenance department and included the following statement in a memorandum summary
of the results:
"We noted that several maintenance garages were deteriorating badly. Fencing around the property
was in need of repair."
Which of the following informational criteria, if any, is violated?
Select one:

a. Sufficiency. 

No criteria has been violated in this problem. The on-site observation made by the internal auditor
would be considered sufficient in determining that repairs are needed.

b. No criteria are violated.

The on-site observations about the needed repairs contain information that is sufficient, reliable, and
relevant.

c. Relevance.

No criteria has been violated in this problem.

d. Reliability.

No criteria has been violated in this problem.

19. The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the
performance of an engagement with three internal auditors who are on a rotation assignment. After 6
months in the internal audit activity (IAA), they will move back to line positions. Each of them has
 fairly extensive organizational experience and is on a fast track to a high-level management line
position. To develop their analytical decision-making abilities, the CAE pulls some old
engagement working papers, holding back the review notes and clearing comments. The CAE asks
them to indicate the informational criteria that are violated.
The organization's inventories are under the administration of three production managers. The
internal auditors perform a standard limited test of finished goods inventory balances every year.
During this year's engagement concerning inventories, the internal auditors noted finished goods
inventories were abnormally high, sales were consistent with prior years, and returns and
allowances appeared normal. The internal auditors performed the usual random sample recount of
several finished goods inventory cards without discrepancy and then extended the testing to include
10 raw materials and 10 work-in-process cards, noting no exceptions. The following statement was
included in the engagement working papers:
"Our standard test of finished goods inventories revealed no exceptions to the inventory count. We
extended our tests this year to include both raw materials and work-in-process without exception. At
the time of our engagement, the supervising inventory managers were not available; however, the
division secretary indicated that performance standards were on file. It appears that there is
adequate awareness and understanding of the performance standards."
Which of the following informational criteria is not violated?
Select one:

a. Reliability. 

The reliability criteria has been violated

b. All criteria are violated.

All the criteria have been violated. The sufficiency criteria was violated since only several inventory items
where recounted, and this would not be considered adequate. The reliability criterion was violated
since the division secretary gave the performance standard information, and this would not be
considered competent information. The inventory managers should have been interviewed. The
relevance criterion was violated as well since the testing of raw materials and work-in-process does
not relate the finished goods inventory.

c. Relevance.
The relevance criteria has been violated.

d. Sufficiency.

The sufficiency criteria has been violated.

20. The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the
performance of an engagement with three internal auditors who are on a rotation assignment. After 6
months in the internal audit activity (IAA), they will move back to line positions. Each of them has
fairly extensive organizational experience and is on a fast track to a high-level management line
position. To develop their analytical decision-making abilities, the CAE pulls some old
 engagement working papers, holding back the review notes and clearing comments. The CAE asks
the team to indicate the informational criteria that are violated.
In an engagement performed at the organization's real estate development subsidiary, the
engagement objective was to determine that capitalized land improvements had been assigned
equally to all developed lots. The internal auditors identified the following information:
1. Independent appraisals of all lot values.
2. Sales records for similar subdivision lots.
3. An analysis of market values of each lot.
Which of the following informational criteria, if any, are violated?
Select one:

a. Reliability and sufficiency. 

The reliability criterion has not been violated, but the sufficiency criterion has been violated.

b. No criteria are violated.

Sufficiency and relevance criteria have been violated.

c. Relevance and reliability.

The relevance criterion has been violated, but the reliability criterion has not been violated.

d. Sufficiency and relevance.

The criteria of sufficiency and relevance are violated. The sufficiency criterion is violated since there is
no information about cost allocation. The relevance criterion is violated since there is no information
that refers to the objective.

21. The chief audit executive (CAE) is reviewing some of the basic concepts inherent in the
performance of an engagement with three internal auditors who are on a rotation assignment. After 6
months in the internal audit activity (IAA), they will move back to line positions. Each of them has
fairly extensive organizational experience and is on a fast track to a high-level management line
position. To develop their analytical decision-making abilities, the CAE pulls some old
engagement working papers, holding back the review notes and clearing comments. The CAE asks
the team to indicate the informational criteria that are violated.
In an engagement to evaluate the effectiveness and validity of a subsidiary's marketing
expenditures, the internal auditors identified the following information:
1. Analytical comparisons of advertising expenditures and changes in shopping patterns and item
sales.
2. Direct observation of various advertising media used.
3. Review of a marketing survey of general public reaction to the marketing plan.
Which of the following informational criteria, if any, is violated?
Select one:
 a. No criteria are violated. 

The information contained in the problem is sufficient (factual, adequate, and convincing so that a
prudent, informed person would reach the same conclusions), reliable (competent and the best
attainable through the use of appropriate engagement techniques), and relevant (supports
engagement observations and recommendations and is consistent with the objectives for the
engagement).

b. Sufficiency.

The sufficiency criterion has not been violated.

c. Reliability.

The sufficiency criterion has not been violated.

d. Relevance.

The relevance criterion has not been violated.

22. One criticism of the banking industry is that loan committees were not properly carrying out their
function of examining proposed loans, determining that proper collateral exists, and assessing the
associated risk before approving the loan. In gathering evidence to determine if the loan committee
is operating effectively, the auditor should:
Select one:
a. Reconcile the total amount of loans made plus those rejected with the total amount of loans
submitted to the committee for approval. 
Reconciliation controls are important in the banking industry. This reconciliation, however, provides
only evidence that all proposed loans are accounted for; it does not present any evidence on the
effectiveness of the loan committee review process.

b. All of the above.

There is only one correct answer among the choices here.
c. Examine individual loans for signatures of the committee members and determine the amount of
loans made during each meeting and an approximation of time spent in approving the loans.
This is the most comprehensive procedure since it provides evidence on approval as well as additional
evidence on how conscientiously the process was carried out (that is, it provides evidence as to
whether any meaningful discussion took place during the committee meetings).

d. Interview loan officers to see if their individual loan recommendations were followed.
he audit emphasis is on the effectiveness of the loan committee. The loan committee acts as a
constraint on the lending officers. Thus, while this procedure would provide some evidence, it is not
sufficient evidence.
 23. Productivity statistics are provided quarterly to the board of directors. An internal auditor checked
the ratios and other statistics in the four most recent reports. The internal auditor used scratch paper
and copies of the reports to verify the accuracy of computations and compared the data used in the
computations with supporting documents. The internal auditor wrote a note for the working
papers describing these procedures and then discarded the scratch paper and report copies. The
note stated,
"The ratios and other statistics in the quarterly reports to the board were checked for the last 4
quarters and appropriate supporting documents were examined. All amounts appear to be
appropriate."
In this situation,
Select one:

a. The internal auditor should have included the scratch paper in theworking papers. 

Scratch paper should not be included in the working papers.

b. Four quarters do not provide a large enough sample on which to base a conclusion.

Four quarters is a large enough sample.

c. The internal auditor did not consider whether the information in the report to the board was
compiled efficiently.

The objective of the engagement was not to evaluate efficiency.

d. The internal auditor's working papers are not sufficient to facilitate an efficient review of the
internal auditor's work.

The internal auditor'sworking papers are not complete. It would not be possible to conduct a sufficient
review of the internal auditor's work.

24. Ordinarily, what source of information should most affect the internal auditor's conclusions?
Select one:
a. Inquiry. 
Inquiry information is generally less reliable than external information

b. Informal.
Informal information is generally less reliable than external information.
c. Oral.
Oral information is generally less reliable than external information.

d. External.
External independent information is going to be the most reliable type of information for the internal
auditor because it is generated independent of the engagement client.
 25. Which of the following represents the most reliable information that a receivable actually exists?
Select one:
a. A sales invoice. 
A sales invoice is internally generated, therefore, it is not the most reliable source of information to
confirm that a receivable actually exists.

b. A bill of lading.
A bill of lading would provide no useful information on the status of a receivable. A bill of lading would be
used to confirm that shipments were made.
c. A receiving report.
A receiving report would provide no useful information on the status of a receivable.

d. A positive confirmation.
A confirmation is the most reliable source of information to confirm that a receivable actually exists.

26. In testing the write-off of a deteriorated piece of equipment, the best information about the
condition of the equipment is
Select one:
a. The equipment manager's statement regarding condition. 
The equipment manager's statement regarding condition of the equipment is not conclusive
information.

b. A physical inspection of the actual piece of equipment.

Observing the actual condition of the equipment is the most reliable and conclusive information for the
internal auditor to determine the condition of the equipment.
c. Accounting records showing maintenance and repair costs.
Accounting records showing maintenance and repair costs is not conclusive information.

d. The production department's equipment downtime report.

The production department's equipment downtime report will be less reliable and persuasive than the
internal auditor's observation.

27. Reliable information is

Select one:
a. Supportive of the engagement observations and consistent with the engagement objectives.
Supportive of the engagement observations and consistent with engagement objective is relevant
information.

b. Competent and the best attainable through the use of appropriate engagement techniques.
Reliable information is the best attainable through the use of appropriate engagement techniques
(Standard 2310).
 c. Helpful in assisting the organization in meeting prescribed goals.
Assisting the organization in meeting prescribed goals is useful information, not reliable information.

d. Factual, adequate, and convincing so that a prudent person would reach the same conclusion as
the internal auditor.
Factual, adequate, and convincing information are the traits of sufficiency.

28. Which of the following is an essential factor in evaluating the sufficiency of evidence? The
evidence must
Select one:

a. Be convincing enough for a prudent person to reach the same decision. 

If evidence is sufficient, it means that enough information has been gathered to enable another
person to come to the same conclusions as the auditor

b. Be based on references that are considered reliable.

If evidence is sufficient, it means that enough information has been gathered to enable another person to
come to the same conclusions as the auditor. Information that is based on references that are
considered reliable is competent evidence, but that does not constitute sufficiency.

c. Bear a direct relationship to the finding and include all of the elements of a finding.

If evidence is sufficient, it means that enough information has been gathered to enable another person to
come to the same conclusions as the auditor. Information that bears a direct relationship to the
finding and includes all of the elements of a finding is relevant evidence, but that does not constitute
sufficiency

d. Be well documented and cross-referenced in the working papers.

If evidence is sufficient, it means that enough information has been gathered to enable another person to
come to the same conclusions as the auditor. Documentation and cross-referencing, while
important, do not constitute sufficiency.

29. An internal auditor's objective is to determine the cause of inventory shortages shown by the
physical inventories taken by an independent service organization that used some engagement
client personnel. The internal auditor addresses this objective by reviewing the count sheets,
inventory printouts, and memos from the last inventory. The source of information and the sufficiency
of this information are
Select one:
a. Both external and internal and sufficient. 
The source of information is both internal and external, but it is not sufficient.
 b. Both external and internal and not sufficient.
By employing the external inventory service and using some of the engagement client personnel the
source of information is both external and internal. But, the information gathered by the internal
auditor will not be enough to determine the cause of the inventory shortages.
c. External and sufficient.
The source of information is also internal, not only internal, but it is not sufficient.

d. Internal and not sufficient.

The source of information is also is external, not only internal, but it is not sufficient.

30. To identify the amount of obsolete inventory that may exist in an organization, an internal auditor
probably should collect information using all of the following procedures except
Select one:
a. Confirmation. 
Confirmation is used in cases to verify the existence of physical assets. Obsolete inventory has to do
with the diminished value of the inventory, not with existence.

b. Scanning.
Scanning would be an acceptable method to identify the amount of obsolete inventory.
c. Analytical review.
Analytical review would be a means to identify the amount of obsolete inventory.

d. Recomputation.
Recomputation is necessary to revalue the carrying value of the inventory.

31. Which of the following is generally not true when evaluating the persuasiveness of evidence?
The evidence is considered more persuasive if
Select one:
a. Known by an auditor's personal knowledge, rather than from a third party confirmation. 
Personal knowledge is generally more persuasive than knowledge obtained from other parties.

b. Obtained from an external source, rather than from an internal source.

Generally evidence from outside the organization is more persuasive than evidence obtained from
organizational sources.
c. Obtained under conditions of strong controls, rather than weak controls.
Evidence obtained under conditions of strong control is always more persuasive than if controls had
been weak.

d. Verified by internally maintained documents, rather than by written inquiry of third party.
Written inquiry confirmation obtained from outside third parties is more persuasive than internal company
documents.
 32. Which of the following audit procedures would provide the least relevant evidence that the
company had included all of its outstanding debt on a recent disclosure statement that was made
public?
Select one:
a. Send bank confirmations to all banks that have done business with the company, asking for
information on outstanding notes.
Bank confirmations are relevant and a common audit procedure for unrecorded liability tests.

b. Compare the notes listed in last year's audited disclosure statement with the notes listed this year
and reconcile the differences.
Comparison to previous year's outstanding debt and verifying payment or inclusion on this year's
disclosure is a relevant and common procedure.
c. Prepare a schedule of outstanding notes using the company's list of notes payable, and trace
them to the general ledger and disclosure statement.
A list prepared from the company's notes would not include unrecorded notes.

d. Analyze the interest expense and notes payable accounts to determine if interest has been
recorded for notes that are not on the disclosure statement.
Analytical tests of interest expense to debt is relevant and a common audit proce-dure.

33. Which of the tests provides the least significant information when testing for suspected
fraudulent sales?
Select one:
a. Performing analysis of write-offs and sales returns, and comparing the amounts over the past

several years. 
Performing analysis of write-offs and sales returns could be used to detect fraudulent activity. Write-
offs could be used as a cover to commit fraud.

b. Tracing a sample of inventory removal slips from inventory through billing to the sales journal.
racing a sample of inventory removal slips from inventory is not likely to provide evidence to fraud. It's
possible that the inventory could have been used for display or for some other purpose.
c. Confirming sales transactions with customers and investigating nonresponses.
Confirming sales transactions with customers could detect fictitious sales.

d. Performing analytical tests of sales by comparing sales and gross margins over time.
Performing analytical tests of sales by comparing sales and gross margins over time could indicate
fraudulent activity.

34. The internal auditor is concerned with the overall valuation of inventory. Rank the following
sources of engagement information from most persuasive to least persuasive in addressing the
assertion as to the valuation of inventory.
1. Calculate inventory turnover by individual product.
 2. Assess the net realizability of all inventory items with a turnover ratio of 2.0 or less by interviewing
the marketing manager as to the marketability of the product.
3. Calculate the net realizable value (NRV) of all inventory products (using software to calculate NRV
based on the last selling price) and compare NRV with cost.
4. Take a statistical sample of inventory and examine the latest purchase documents (invoices and
receiving slips) to calculate inventory cost.
Select one:
a. I, II, III, IV. 
The correct order is IV, I, III, II.

b. I, IV, II, III.

The correct order is IV, I, III, II.
c. II, III, IV, I.
The correct order is IV, I, III, II.

d. IV, I, III, II.

The most persuasive information for valuing inventory is to examine the latest purchase documents.
The next most persuasive information is to calculate the inventory turnover by individual product. A
low turnover may indicate a problem with obsolescence. In this case, the auditor would conduct
more analytical procedures. Calculating NRV may also indicate a valuation problem. The problem
with NRV is that the sales price may be inappropriate. In addition, assessing the NRV for those
items with a turnover of 2 or less may also not be appropriate.

35. During an audit of a defense contract, the auditor becomes concerned with the possibility of
inappropriate charges to overhead. However, when examining the underlying documentation of
expenses, the auditor finds that all expenditures are properly supported. All billings show total cost
and the application of a percentage overhead rate that appears consistent with previous years.
Assume the contract with the defense contractor states that the government will not pay for costs
associated with waste or inefficiency on the part of the contractor. Which of the following sources of
evidence would be least persuasive regarding potential waste and inefficiency on the part of the
contractor?
Select one:

a. A walk-through of the contractor's manufacturing and development facilities. 

A walk-through provides insight on the efficiency of operations and would be an effective first step in
establishing the potential need to investigate for waste and inefficiency.

b. Management certification that it has not incurred waste or inefficiencies that are not allowed in the
contract.
This is a form of testimonial evidence and is insufficient without significant corroborating evidence. Since
management has a self-interest in certifying it is free from waste and inefficiency, it is the least
persuasive evidence.
c. An examination of the nature of expenses incurred to determine their intent and relationship to the
contract.
An examination of actual expenditures would indicate whether duplicate expenses have been incurred or
whether waste was taking place.

d. A comparison of contract expense with that of similar projects in the past or similar projects with
other companies.
Comparison with similar projects, over time or across projects, would provide insight on possible
waste and inefficiency.

36. During an audit of a defense contract, the auditor becomes concerned with the possibility of
inappropriate charges to overhead. However, when examining the underlying documentation of
expenses, the auditor finds that all
expenditures are properly supported. All billings show total cost and the application of a percentage
overhead rate that appears consistent with previous years.
Assume that the contract also states that the contractor must comply with all applicable
environmental regulations because the government is responsible for fines for such regulations. The
governmental auditor finds that the environmental protection agency has recently performed an
environmental audit of the contractor and found numerous, but minor, deviations from current
environmental law. However, there was one major item: the company was not meeting the standard
for emissions into the atmosphere. The auditor contacts the environmental regulators and finds the
company has acted responsibly. It has fixed all the minor findings and has approved a large capital
expenditure to reduce the emission of toxic wastes into the air.
Which of the following statements regarding these findings are correct?
I. Materiality of the findings should be based on the potential amount of fines that could be imposed,
not on the fact that most of the deviations were minor in nature.
II. The auditor should report the problem with toxic emissions but should not report the other items
because they were of a minor nature.
III. Because the report will have a significant effect on the government, the auditor should report the
toxic waste emissions only if the nature and type can be substantiated.
Select one:
a. I and III only. 
All of the violations are material because they may result in fines. Therefore, all of the environmental
regulatory findings should be reported. The environmental regulator is a reliable source of evidence
and has more expertise than the auditor in this area. Therefore, the evidence of the agency should
be included in a compliance report.

b. I only.
The materiality of the findings should be based on the potential impact to the governmental agency, that
is, the potential amount of fines involved, since the contract clearly specified the contractor must
meet all applicable environmental regulations.
c. II only.
All of the violations are material because they may result in fines. Therefore, all of the environmental
regulatory findings should be reported.

d. I, II, and III.

 All of the violations are material because they may result in fines. Therefore, all of the environmental
regulatory findings should be reported. The environmental regulator is a reliable source of evidence
and has more expertise than the auditor in this area. Therefore, the evidence of the agency should
be included in a compliance report.

37. Which of the following documents would provide the best evidence that a purchase transaction
has actually occurred?
Select one:
a. Cancelled check issued in payment of the procured goods. 
The canceled check indicates that the goods have been paid for, not received

b. Ordering department's original requisition for the goods.

The supervisor's signature indicates the ordering of the goods was authorized, not that the goods were
received.
c. Supplier's invoice for the procured goods.
The supervisor's signature indicates the ordering of the goods was authorized, not that the goods were
received.

d. Receiving memorandum documenting the receipt of the goods.

The receiving memorandum indicates that the goods were received; therefore, a purchase transaction
has occurred.

38. Data gathered in support of an audit conclusion can be rated on a continuum of reliability. The
most reliable form of evidence would be an
Select one:
a. External document obtained directly from an outside source. 
An external document obtained directly from its source cannot be altered by the auditee.

b. Internal document obtained from the auditee.

Internal documents may be altered by the auditee.
c. Internal document that has been circulated through an outside party.
Circulation through an outside party does not mean the document is correct, unless it is received directly
by the auditor.

d. Internal document subject to rigorous internal review procedures.

Internal documents may be altered by the auditee, even if internal control procedures are followed.

39. During an audit of cash controls, an auditor compared a sample of cash receipts lists with (1) the
total of daily cash receipts journal entries, and (2) daily bank deposit slip amounts. The comparison
revealed that:
 .Each cash receipts list equaled cash journal entry totals but not daily bank deposit amounts. .Totals
for cash receipts lists equaled bank deposit totals in the long run.
To support a finding that "Cash receipts are not deposited intact daily," the above evidence is
Select one:
a. Not sufficient, competent, or relevant.
The evidence is sufficient, competent, and relevant.
b. Sufficient, competent, and relevant. 
The evidence is sufficient (factual, adequate, and convincing), competent (reliable and the best
attainable through appropriate audit techniques), and relevant (consistent with audit objectives).

c. Sufficient, but not competent or relevant.

The evidence is competent and relevant.

d. Relevant, but not sufficient or competent.

The evidence is sufficient and competent.

40. Which of the following procedures would provide the best evidence of the effectiveness of a
credit-granting function?
Select one:
a. Check for evidence of credit approval on a sample of customer orders.
The credit limits may be set too high or not properly revised periodically. The existence of approval
will not detect these problems

b. Ask the credit manager about the effectiveness of the function.

Responses from the credit manager will lack objectivity, a key attribute of competent evidence.
c. Observe the process.
Observation will provide evidence on whether the credit personnel are following the procedures while
being observed. However, since they know they are being watched, they will probably do what they
believe they should do, not what they normally do.

d. Review the trend in receivables write-offs.

The purpose of the credit-granting function is to minimize write-offs while at the same time accepting
sales likely to result in collection. Reviewing the trend in write-offs will provide some insight
concerning the minimization of write-offs.

41. Competent evidence is best defined as evidence which

Select one:
a. Is supplementary to other evidence already gathered and which tends to strengthen or confirm it. 
This is the definition of corroborative evidence. While corroborative evidence may be competent,
much competent evidence is primary rather than supplementary.

b. Is obtained by observing people, property, and events.

This is the definition of physical evidence. All physical evidence is not necessarily competent; in fact, the
quality of competence is more often associated with documentary evidence.
 c. Is reasonably free from error and bias and faithfully represents that which it purports to represent.
Competent evidence is reliable evidence and the best attainable through the use of appropriate audit
techniques.

d. Proves an intermediate fact, or group of facts, from which still other facts can be inferred.
This is the definition of circumstantial evidence. Circumstantial evidence is not necessarily
competent evidence.

42. To identify the amount of obsolete inventory which might exist, an internal auditor would
probably collect evidence using all the following except
Select one:
a. Recomputation. 
Recomputation of the value of identified obsolete items is necessary in order to establish current
inventory carrying value.

b. Confirmation.
Confirmation is used to verify the physical existence of an item. Obsolete inventory represents a
question of value, not physical existence.
c. Analytical review.
Analytical review offers a means to identify part numbers that have a high likelihood of being obsolete.

d. Scanning.
Scanning is an excellent means of noting unusual relationships such as very old items with no activity.

43. Which type of evidence would be most convincing when evaluating the collectibility of accounts
receivable?
Select one:
a. Negative accounts receivable confirmations. 
Negative confirmation is a valid audit procedure regarding the validity, but not necessarily the
collectibility, of accounts receivable.

b. Positive accounts receivable confirmations.

Positive confirmation is a valid audit procedure regarding the validity, but not necessarily the collectibility,
of accounts receivable.
c. Shipping documents.
Shipping documents would verify the original shipment of material, but not collectibility.

d. Aged accounts receivable listings.

This is the best evidential matter for an auditor to utilize. It reflects how long the accounts receivable
have been outstanding and puts overdue accounts in perspective. This is the primary document to
work from in utilizing other audit procedures, such as discussing with management and reviewing
confirmation replies.
 44. In evaluating the validity of different types of audit evidence, which of the following conclusions is
not correct?
Select one:
a. Internally created documentary evidence is considered less valid than externally created
documentary evidence. 
With externally created documentary evidence, there is less likelihood of an alteration by a third
party.

b. The validity of documentary evidence is independent of the effectiveness of the control system in
which it was created.
The validity of documentary evidence depends on the internal control system.
c. The validity of confirmations varies directly with the independence of the party receiving the
confirmation.
This is the reason that confirmations are sent to the internal audit department in most cases.

d. Recomputation, though valid, is restricted in its usefulness due to its limited scope.
Recomputation will not be possible in many applications.

45. To be sufficient, audit evidence should be

Select one:

a. Based on references that are considered reliable. 

This is a quality of competence of evidence.

b. Directly related to the finding and include all of the elements of a finding.
This is a quality of relevance of evidence.
c. Well-documented and cross-referenced in the workpapers.
This is a mechanical aspect of evidence; it has no specific relationship to any of the characteris-tics of
evidence.

d. Convincing enough for a prudent person to reach the same conclusion as the auditor.
This is one of the qualities of sufficiency. Sufficient means "enough." This means that the auditor
must collect enough information so that the information would be convincing enough for a prudent
person to reach the same conclusion.

46. What evidence is appropriate to determine if completed purchase transactions were valid and at
the best price?
Select one:
a. Purchase orders, receiving reports, and bid quotes. 
Evidence that the material was ordered (purchase order), valid (receiving reports), and best priced
(bid quotes) is cited.
 b. Purchase requisitions, purchase orders, and bid quotes.
Evidence of receipt is needed to confirm validity.
c. Purchase requisitions, journal voucher entries, and bid quotes.
Evidence that the material was ordered (purchase order) and received (receiving report) is necessary to
confirm validity.

d. Receiving reports, purchase orders, and purchase requisitions.

Evidence of best price (bid quotes) is needed.

47. Which of the following represents the most competent evidence that trade receivables actually
exist?
Select one:
a. Receiving reports. 
This is not evidence of a receivable.

b. Bills of lading.
This is not as reliable as a confirmation and it does not confirm the continued existence of the
receivable.
c. Positive confirmations.
A confirmation from a customer is the most reliable evidence that a receivable exists.

d. Sales invoices.
An invoice is not particularly reliable because it is not developed external to the company and does
not consider subsequent payment.

48. A letter in response to an auditor’s inquiry is an example of

Select one:
a. Analytical evidence. 
Analytical evidence stems from analysis and verification.

b. Physical evidence.
Physical evidence is obtained by observing people, property, or events.
c. Testimonial evidence.
Testimonial evidence takes the form of letters or statements in response to inquiries or interviews.

d. Documentary evidence.
Documentary evidence includes letters received by the auditee (external) and documents originating
within the auditee's organization.
 49. Which of the following is an example of internal documentary evidence?
Select one:
a. A customer’s purchase order. 
Customer’s purchase orders originate externally – with the customer.

b. A carrier’s bill of lading.

The carrier’s bill of lading originates with the vendor and arrives with incoming merchandise.
c. A sales invoice copy.
Although a copy of the sales invoice is mailed to the customer, the copy examined by the auditor
normally would never have left the selling company’s premises.

d. A vendor’s month-end statement.

Month-end statements originate externally – with the vendor.

50. In evaluating the quality of housekeeping services performed in a large hospital, the most
reliable source of evidence would be
Select one:
a. Interviews with a sample of medical personnel. 
Evidence gathered first-hand by the auditor and also originating with unbiased parties is considered
most competent.

b. A review of housekeeping records maintained by the medical records department of the hospital.
The medical records department would be unlikely to maintain any records except those of patients.
c. Interviews with top hospital officials.
It's unlikely top hospital officials would be able to evaluate the quality of the housekeeping services.

d. A review of survey forms returned by medical personnel directly to the manager of housekeeping
services.
Prior to the auditor’s visit, the manager could have removed survey forms with critical comments.

51. The physical examination of the client's inventory is considered to be

Select one:
a. Both reliable and sufficient. 
Inspection or observation of a tangible asset is not sufficient. It is not sufficient because the auditor
would not know if the inventory were actually owned or its value.

b. Both reliable and useful.

The inspection or observation of a tangible asset is considered both reliable and useful. It is considered
reliable because evidence that is obtained directly by the auditor is the most reliable. It is also
considered useful because it helps the auditor meet the objective of the audit.
c. Both relevant and sufficient.
The inspection or observation of a tangible asset is not sufficient. It is not sufficient because the auditor
would not know if the inventory were actually owned or its value.

d. Both sufficient and useful.

The inspection or observation of inventory is not sufficient. It is not sufficient because the auditor
would not know if the inventory were actually owned or its value.

52. An intermediate fact, or group of facts, from which the internal auditor can infer the fairness of an
assertion being reviewed is
Select one:
a. Direct evidence 
Direct evidence is simple, fact-based comments that are presented without interpretation or
assumptions.

b. Corroborative evidence.
Corroborative evidence is evidence that supports other evidence. Enough corroborative evidence may
eventually become conclusive.
c. Circumstantial evidence.
An intermediate fact, or group of facts, from which the internal auditor can infer the fairness of an
assertion being reviewed is circumstantial evidence. Circumstantial evidence is indirect evidence so
therefore; it does not include direct evidence that is crucial to the internal auditor during an
engagement.

d. Conclusive evidence.
Conclusive evidence is evidence that is so strong only one conclusion can be drawn about the
subject.

53. Reliable evidence is best defined as evidence that

Select one:
a. Is supplementary to other evidence already gathered and tends to strengthen or confirm it. 
Corroborative evidence is supplementary to other evidence gathered by the auditor and tends to
strengthen or confirm it. Corroborative evidence is not necessarily reliable.

b. Proves an intermediate fact, or group of facts, from which still other facts can be inferred.
Circumstantial evidence proves an intermediate fact, or group of facts, from which still other facts can be
inferred. Circumstantial evidence is not necessarily reliable.
c. Is obtained by observing people, property, and events.
Physical evidence is obtained by observing people, property, and events. Not all physical evidence is
reliable.

d. Is reasonably free from error and bias and faithfully represents what it purports to represent.
 Reliable information is competent and the best attainable through the use of appropriate
engagement techniques. The term used to describe the reliability of evidence is competence.
Competent evidence means that it actually supports the conclusion that it seems to support. The
best source of evidence is the auditor. The worst source of evidence is from the client. The
information from the client will need to be supported by corroborative evidence.

54. Which of the following examples of audit evidence is the most persuasive?
Select one:
a. Vendor invoices filed by the accounting department. 
Vendor invoices filed by the accounting department are considered external-internal information.
Even though the invoices were created externally, the client is the last party to have the document.
Thus, the document may be altered by the client without the knowledge of the third party. This
information is more reliable than purely internal information, but less reliable than purely external
information.

b. Canceled checks written by the treasurer and returned from a bank.

Canceled checks written by the treasurer and returned from a bank is internal-external information. This
originates with the engagement client but is processed externally. This information is not as
persuasive as purely external information.
c. Time cards for employees that are stored by a manager.
Time cards for employees that are stored by a manager are considered internal information, and thus,
less reliable than purely external information.

d. Real estate deeds, which were properly recorded with a government agency.
Real estate deeds are considered to be purely external information. External information is
information that the auditor receives directly from a third party. This is the most persuasive form of
information because the client has not had access to it.