When would a contract be dosed out?
When there's a dispute between the contracting parties
When ail contractual obligations have been discharged.
When there is a force majenre.
When the termination clause is enacted.
A contract is closed out when all the contractual terms have been fully satisfied, including the completion of deliverables, final payments, and any post-contract evaluations or obligations.
Correct Answer (B - When all contractual obligations have been discharged)
According to contract management principles and IIA standards, a contract is officially closed out once:
All agreed-upon deliverables have been completed.
All payments and financial obligations are settled.
Final performance evaluations or audits are completed.
The contract is formally reviewed and documented for closure.
The IIA’s GTAG 3: Contract Management Framework supports that contract closure occurs after full performance and obligations are met.
Why Other Options Are Incorrect:
Option A (When there's a dispute between contracting parties):
Disputes do not necessarily close out a contract; instead, they may lead to mediation, renegotiation, or legal action. The contract remains active until resolved.
The IIA’s Practice Guide: Auditing Contracts recommends dispute resolution mechanisms but does not define them as a reason for contract closure.
Option C (When there is a force majeure event):
A force majeure (unforeseen event like natural disasters or war) may suspend or modify contractual obligations but does not always lead to closure.
The contract may be renegotiated or resumed once conditions allow.
Option D (When the termination clause is enacted):
Termination and closure are not the same. Termination means ending the contract before full obligations are met, whereas closure means fulfilling all obligations.
IIA GTAG 3: Contract Management Framework explains that contract termination can occur under specific clauses, but closure happens only after all duties are fulfilled.
IIA GTAG 3: Contract Management Framework – Covers contract lifecycle, including closeout procedures.
IIA Practice Guide: Auditing Contracts – Details contract auditing, dispute resolution, and obligations fulfillment.
Step-by-Step Explanation:IIA References for Validation:
An internal auditor identified a database administrator with an incompatible dual role. Which of the following duties should not be performed by the identified administrator?
Designing and maintaining the database.
Preparing input data and maintaining the database.
Maintaining the database and providing its security,
Designing the database and providing its security
A database administrator (DBA) should not perform duties that compromise segregation of duties (SoD). A conflict arises when a DBA has both design and security responsibilities, as this creates a risk of unauthorized changes, fraud, or data breaches.
(A) Designing and maintaining the database.
Incorrect: These tasks are related but do not create a major conflict, as maintenance follows the design phase.
(B) Preparing input data and maintaining the database.
Incorrect: While data preparation is typically a business function, maintaining the database does not create a direct security risk.
(C) Maintaining the database and providing its security.
Incorrect: Maintenance involves technical upkeep, and while security controls are crucial, they do not inherently conflict.
(D) Designing the database and providing its security. (Correct Answer)
A DBA responsible for both design and security could create backdoors or override security settings, leading to potential data manipulation or fraud.
IIA Standard 2120 – Risk Management requires proper control segregation to prevent fraud and security risks.
IIA GTAG 4 – Management of IT Auditing recommends separation of design, security, and administration functions to minimize risks.
IIA Standard 2120 – Risk Management: Encourages proper separation of duties to mitigate risks.
IIA GTAG 4 – Management of IT Auditing: Recommends strict control over database access and security roles.
Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (D) because combining database design and security responsibilities creates a significant conflict of interest, increasing security risks.
A new manager received computations of the internal rate of return regarding his project proposal. What should the manager compare the computation results to in order to determine whether the project is potentially acceptable?
Compare to the annual cost of capital.
Compare to the annual interest rate.
Compare to the required rate of return.
Compare to the net present value.
Comprehensive and Detailed In-Depth Explanation:
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. It is used to evaluate the profitability of investments.
Option A (Annual cost of capital) – While related, the IRR should be compared directly to the required rate of return (hurdle rate).
Option B (Annual interest rate) – Not always relevant, as the cost of borrowing may differ from the required return on investments.
Option D (Compare to NPV) – NPV is a different method of capital budgeting; while related, it is not used for direct comparison with IRR.
Since the IRR is accepted if it meets or exceeds the required rate of return, Option C is correct.
Which of the following types of data analytics would be used by a hospital to determine which patients are likely to require readmittance for additional treatment?
Predictive analytics
Prescriptive analytics
Descriptive analytics
Diagnostic analytics
An organization has a declining inventory turnover but an increasing gross margin rate. Which of the following statements can best explain this situation?
he organization's operating expenses are increasing.
The organization has adopted just-in-time inventory.
The organization is experiencing inventory theft.
The organization's inventory is overstated.
A declining inventory turnover combined with an increasing gross margin rate suggests that the organization is not selling inventory as quickly as before, but still reporting higher profitability. This can indicate overstated inventory values, meaning that financial statements show higher inventory balances than what actually exists.
(A) Incorrect – The organization’s operating expenses are increasing.
Operating expenses do not directly affect inventory turnover, which measures how quickly inventory is sold.
Higher expenses could reduce net profit, but they would not explain a higher gross margin.
(B) Incorrect – The organization has adopted just-in-time (JIT) inventory.
JIT inventory systems increase inventory turnover by reducing excess stock.
Since turnover is declining, this suggests the opposite of JIT.
(C) Incorrect – The organization is experiencing inventory theft.
Inventory theft usually reduces inventory levels, potentially increasing inventory turnover due to lower stock.
Theft could lower gross margins if significant losses occur.
(D) Correct – The organization’s inventory is overstated.
Overstated inventory leads to lower COGS, artificially inflating gross margin.
If inventory levels are inflated, turnover appears lower because reported inventory is higher than actual sales justify.
IIA’s Global Internal Audit Standards – Financial Statement Audits and Fraud Risk
Covers risks related to inventory misstatements and financial fraud.
IFRS & GAAP Accounting Standards – Inventory Valuation
Defines how inventory overstatement impacts financial ratios.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
After purchasing shoes from an online retailer, a customer continued to receive additional unsolicited offers from the retailer and other retailers who offer similar products.
Which of the following is the most likely control weakness demonstrated by the seller?
Excessive collecting of information
Application of social engineering
Retention of incomplete information.
Undue disclosure of information
The situation describes a scenario where a customer's personal information was shared with third parties without explicit consent, leading to unsolicited offers. This indicates a control weakness in data privacy and confidentiality, specifically the undue disclosure of information to external parties.
(A) Incorrect – Excessive collecting of information.
While collecting too much personal data can be a privacy concern, the issue here is not about data collection but how the data was shared.
(B) Incorrect – Application of social engineering.
Social engineering refers to deceptive tactics used to manipulate individuals into disclosing confidential information, which is not the case here.
(C) Incorrect – Retention of incomplete information.
The issue is not about missing or incomplete data but rather unauthorized sharing of data.
(D) Correct – Undue disclosure of information.
The retailer improperly shared the customer's personal data with other businesses, leading to unsolicited offers.
This represents a failure to comply with data privacy regulations (e.g., GDPR, CCPA).
IIA’s GTAG (Global Technology Audit Guide) – Data Privacy Risks and Controls
Highlights the risks associated with unauthorized data sharing.
NIST Cybersecurity Framework – Data Protection and Privacy
Emphasizes the importance of controlling access to customer information.
COSO’s ERM Framework – Information Governance and Compliance
Discusses the importance of data protection policies to prevent undue disclosure
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Management is pondering the following question:
"How does our organization compete?"
This question pertains to which of the following levels of strategy?
Functional-level strategy
Corporate-level strategy.
Business-level strategy,
DepartmentsHevet strategy
Understanding Strategic Levels in an Organization:
Corporate-Level Strategy: Defines overall company direction, including mergers, acquisitions, and diversification.
Business-Level Strategy: Focuses on how the company competes in its industry (e.g., cost leadership, differentiation).
Functional-Level Strategy: Relates to specific departments (marketing, HR, IT) supporting business-level goals.
Why Option C (Business-Level Strategy) Is Correct?
The question "How does our organization compete?" directly relates to business-level strategy.
It focuses on competitive positioning within the industry, such as:
Cost leadership (competing on price)
Differentiation (unique product offerings)
IIA Standard 2110 – Governance requires auditors to evaluate strategic alignment with competitive positioning.
Why Other Options Are Incorrect?
Option A (Functional-Level Strategy):
Focuses on departmental decisions, not overall competition.
Option B (Corporate-Level Strategy):
Corporate strategy defines broad company direction, not specific competition strategies.
Option D (Department-Level Strategy):
Similar to functional strategy, it does not define how the company competes in the industry.
Business-level strategy answers "How does our organization compete?" by defining industry-specific competitive approaches.
IIA Standard 2110 supports governance over strategic positioning.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (Strategic Planning & Competitive Advantage)
Porter’s Competitive Strategy Framework
COSO ERM – Strategic Risk Management
Which of the following controls is the most effective for ensuring confidentially of transmitted information?
Firewall.
Antivirus software.
Passwords.
Encryption.
Ensuring the confidentiality of transmitted information is crucial to protect data from unauthorized access during transmission. Here's an analysis of the provided options:
A. Firewall:
A firewall monitors and controls incoming and outgoing network traffic based on predetermined security rules. While it helps prevent unauthorized access to or from a private network, it doesn't encrypt the data being transmitted. Therefore, it doesn't ensure the confidentiality of the data during transmission.
B. Antivirus Software:
Antivirus software is designed to detect, prevent, and remove malicious software. It protects the system from malware but doesn't play a role in securing the confidentiality of data during transmission.
C. Passwords:
Passwords are used to authenticate users and control access to systems and data. While they help ensure that only authorized users can access certain information, they don't protect data during transmission from interception or eavesdropping.
D. Encryption:
Encryption involves converting plaintext data into a coded form (ciphertext) that is unreadable to unauthorized parties. Only those possessing the correct decryption key can convert the data back into its original form. By encrypting data before transmission, even if the data is intercepted, it remains unintelligible without the decryption key, thereby ensuring confidentiality. Encryption is widely recognized as one of the most effective methods for protecting data confidentiality during transmission.
Wikipedia
In conclusion, among the options provided, encryption is the most effective control for ensuring the confidentiality of transmitted information, making option D the correct answer.
IT governance begins with which of the following activities?
Identification of risk-mitigating options.
Definition of IT objectives.
Identification of IT risk events.
Definition of risk response policies.
Comprehensive and Detailed In-Depth Explanation:
IT Governance ensures that IT strategies align with business objectives. The first step in IT governance is to define IT objectives, which guide all subsequent activities.
Option A (Identifying risk-mitigating options) is part of risk management but comes after setting objectives.
Option C (Identifying IT risk events) happens during risk assessment, not governance initiation.
Option D (Defining risk response policies) is a later stage in governance planning.
Since governance starts with setting clear IT objectives, B is the correct answer.
According to Maslow’s hierarchy of needs theory, which of the following best describes a strategy where a manager offers an assignment to a subordinate specifically to support his professional growth and future advancement?
Esteem by colleagues
Self-fulfillment
Sense of belonging in the organization
Job security
Which of the following is an example of a key systems development control typically found in the in-house development of an application system?
Logical access controls monitor application usage and generate audit trails.
The development process is designed to prevent, detect, and correct errors that may occur.
A record is maintained to track the process of data from input, to output, to storage.
Business users' requirements are documented, and their achievement is monitored.
Comprehensive and Detailed In-Depth Explanation:
In the context of in-house application system development, establishing a robust development process is crucial. Such a process is designed to prevent, detect, and correct errors that may occur during development and implementation. This includes implementing coding standards, conducting regular code reviews, and performing comprehensive testing phases (unit, integration, system, and user acceptance testing) to identify and rectify errors promptly. While logical access controls (option A) and maintaining records of data processing (option C) are essential, they pertain more to operational controls post-development. Documenting business users' requirements (option D) is a critical initial step; however, without a development process focused on error management, merely documenting requirements doesn't ensure error prevention or correction. Therefore, option B best exemplifies a key systems development control in this context.
Which of the following physical access controls is most likely to be based on the "something you have" concept?
A retina characteristics reader.
A PIN code reader.
A card-key scanner.
A fingerprint scanner.
Comprehensive and Detailed In-Depth Explanation:
Authentication methods are categorized into three factors:
Something you know (e.g., passwords, PINs).
Something you have (e.g., ID cards, key fobs, smart cards).
Something you are (e.g., biometrics like fingerprints, retina scans).
Option C (A card-key scanner) aligns with "something you have", as it requires a physical token (card) for authentication.
Option A (Retina scan) and Option D (Fingerprint scanner) fall under biometric authentication ("something you are").
Option B (PIN code reader) is based on "something you know".
Thus, C is the correct answer because a card-key represents a physical access control mechanism based on possession.
Which of the following capital budgeting techniques considers the expected total net cash flows from investment?
Cash payback
Annual rate of return
Incremental analysis
Net present value
Understanding Capital Budgeting Techniques:
Capital budgeting helps organizations evaluate long-term investment decisions based on expected cash flows.
NPV (Net Present Value) considers total expected net cash flows over the investment’s life and discounts them to present value.
Why Option D (Net Present Value) Is Correct?
NPV calculates the present value of future net cash flows, adjusting for the time value of money.
If NPV is positive, the investment is considered profitable.
IIA Standard 2120 – Risk Management emphasizes financial decision-making tools like NPV for evaluating investment risks.
Why Other Options Are Incorrect?
Option A (Cash Payback):
Measures time to recover initial investment but does not consider total net cash flows.
Option B (Annual Rate of Return):
Uses accounting income, not cash flows, and does not factor in the time value of money.
Option C (Incremental Analysis):
Compares alternative options but does not evaluate total cash flows from an investment.
NPV is the correct method as it evaluates total expected cash flows over time.
IIA Standard 2120 supports financial analysis in investment decision-making.
Final Justification:IIA References:
IPPF Standard 2120 – Risk Management (Capital Budgeting & Investment Risks)
COSO ERM – Financial Risk Management & Decision Analysis
Financial Management Best Practices – NPV Analysis
A clothing company sells shirts for $8 per shirt. In order to break even, the company must sell 25.000 shirts. Actual sales total S300.000. What is margin of safety sales for the company?
$100.000
$200,000
$275,000
$500,000
Understanding the Margin of Safety Concept:
Margin of Safety (MoS) measures how much sales can drop before the business reaches its break-even point.
It is calculated as: Margin of Safety Sales=Actual Sales−Break-even Sales\text{Margin of Safety Sales} = \text{Actual Sales} - \text{Break-even Sales}Margin of Safety Sales=Actual Sales−Break-even Sales
Applying the Formula:
Selling Price per Shirt: $8
Break-even Sales Volume: 25,000 shirts
Break-even Sales Value: 25,000×8=200,00025,000 \times 8 = 200,00025,000×8=200,000
Actual Sales Revenue: $300,000
Margin of Safety: 300,000−100,000=200,000300,000 - 100,000 = 200,000300,000−100,000=200,000
Why Option B ($200,000) Is Correct?
The margin of safety is the difference between actual and break-even sales.
The correct calculation confirms $200,000 as the margin of safety.
IIA Standard 2120 – Risk Management supports financial risk analysis, including break-even and margin of safety evaluations.
Why Other Options Are Incorrect?
Option A ($100,000): Incorrect subtraction.
Option C ($275,000): Incorrect calculation, not based on break-even sales.
Option D ($500,000): Irrelevant and exceeds actual sales.
The correct margin of safety is $200,000, calculated using standard break-even analysis.
IIA Standard 2120 emphasizes financial risk evaluation in decision-making.
Final Justification:IIA References:
IPPF Standard 2120 – Risk Management (Financial Performance & Cost Analysis)
COSO ERM – Financial Stability & Revenue Risk
Management Accounting Best Practices – Break-even & Margin of Safety Calculations
When executive compensation is based on the organization's financial results, which of the following situations is most likely to arise?
The organization reports inappropriate estimates and accruals due to poof accounting controls.
The organization uses an unreliable process forgathering and reporting executive compensation data.
The organization experiences increasing discontent of employees, if executives are eligible for compensation amounts that are deemed unreasonable.
The organization encourages employee behavior that is inconsistent with the interests of relevant stakeholders.
When executive compensation is tied to financial results, there is a strong incentive to manipulate financial reporting or focus solely on short-term performance at the expense of stakeholders’ interests.
Potential for Unethical Behavior:
Executives may prioritize profit-driven decisions (e.g., cost-cutting, aggressive revenue recognition) over long-term sustainability.
As per IIA Standard 2110 – Governance, incentive structures should align with ethical business practices and stakeholder interests.
Increased Risk of Fraud and Misrepresentation:
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) Fraud Risk Management Guide highlights how executive incentives can lead to financial statement manipulation.
This could result in actions like aggressive revenue recognition, improper expense deferrals, or overstating earnings to boost compensation.
Misalignment with Stakeholder Interests:
Employees, customers, and investors suffer if executive compensation encourages short-term gains over long-term stability.
IIA GTAG 3: Continuous Auditing supports monitoring financial reporting risks to detect such inconsistencies.
A. The organization reports inappropriate estimates and accruals due to poor accounting controls. (Incorrect)
Reason: While poor controls can contribute to misstatements, the root cause in this scenario is compensation structure, not control weakness.
B. The organization uses an unreliable process for gathering and reporting executive compensation data. (Incorrect)
Reason: This issue relates to HR and payroll data integrity, not the impact of performance-based compensation on behavior.
C. The organization experiences increasing discontent of employees, if executives are eligible for compensation amounts that are deemed unreasonable. (Incorrect)
Reason: While excessive executive pay may cause employee dissatisfaction, the question focuses on behavioral impacts on stakeholders, making D the more relevant choice.
IIA Standard 2110 – Governance – Ensures executive compensation aligns with organizational ethics and stakeholder interests.
IIA Standard 2120 – Risk Management – Covers the risks associated with incentive-based compensation.
COSO Fraud Risk Management Guide – Discusses financial fraud linked to executive compensation.
IIA GTAG 3: Continuous Auditing – Supports risk-based monitoring of financial statements.
Why is Answer D Correct?Analysis of Incorrect Answers:IIA References:Thus, the correct answer is D. The organization encourages employee behavior that is inconsistent with the interests of relevant stakeholders.
Which of the following intangible assets is considered to have an indefinite life?
Underground oil deposits
Copyright
Trademark
Land
An intangible asset is an asset that lacks physical substance but has value due to its legal rights or expected economic benefits. Some intangible assets have finite useful lives (e.g., copyrights, patents) and are amortized, while others have indefinite useful lives and are not amortized but tested for impairment.
(A) Underground oil deposits. ❌
Incorrect. Oil deposits are natural resources, not intangible assets. They are classified as depletable assets because their value declines as they are extracted.
(B) Copyright. ❌
Incorrect. A copyright grants exclusive rights to reproduce and distribute creative works, but it has a finite legal life (typically 50-100 years, depending on jurisdiction). It is amortized over time.
(C) Trademark. ✅
Correct. A trademark (e.g., a company’s logo or brand name) is considered an indefinite-life intangible asset because it can be renewed indefinitely as long as the business continues to use it and follows renewal requirements.
According to IIA GTAG – "Auditing Intangible Assets", trademarks are subject to impairment testing, but they are not amortized unless their useful life becomes definite.
(D) Land. ❌
Incorrect. Land is a tangible asset, not an intangible one. While it has an indefinite life, it does not fit the category of intangible assets.
IIA GTAG – "Auditing Intangible Assets"
IIA Standard 2130 – Control Activities (Asset Management)
IFRS and GAAP Guidelines – Indefinite and Finite-Lived Intangible Assets
Analysis of Answer Choices:IIA References:Thus, the correct answer is C (Trademark), as trademarks have indefinite lives unless there is evidence to the contrary.
Which of the following statements is true regarding user developed applications (UDAs) and traditional IT applications?
UDAs arid traditional JT applications typically follow a similar development life cycle
A UDA usually includes system documentation to illustrate its functions, and IT-developed applications typically do not require such documentation.
Unlike traditional IT applications. UDAs typically are developed with little consideration of controls.
IT testing personnel usually review both types of applications thoroughly to ensure they were developed properly.
User-Developed Applications (UDAs) are software tools, typically spreadsheets or small databases, created by business users rather than IT professionals. These applications often lack formal security, documentation, and control measures, increasing the risk of data errors, unauthorized access, and compliance failures.
UDAs are often created quickly to meet immediate business needs, without following IT governance, security controls, or development standards.
Unlike traditional IT applications, UDAs lack structured testing, change management, and formal documentation.
The IIA’s GTAG 14 – Auditing User-Developed Applications states that UDAs present higher risks because they are not subject to the same controls as IT-managed applications.
A. UDAs and traditional IT applications typically follow a similar development life cycle → Incorrect. Traditional IT applications follow a formal Software Development Life Cycle (SDLC), whereas UDAs are developed informally by end-users.
B. A UDA usually includes system documentation to illustrate its functions, and IT-developed applications typically do not require such documentation. → Incorrect. IT applications require extensive documentation, whereas UDAs often lack documentation entirely.
D. IT testing personnel usually review both types of applications thoroughly to ensure they were developed properly. → Incorrect. IT applications undergo rigorous testing and quality assurance, while UDAs often bypass IT reviews altogether.
IIA GTAG 14 – Auditing User-Developed Applications highlights the risks of UDAs and emphasizes the need for internal controls.
COBIT Framework (Control Objectives for Information and Related Technologies) recommends IT governance measures for all business-critical applications.
ISO 27001 (Information Security Management System) warns against uncontrolled user-developed applications due to security risks.
Why Option C is Correct?Explanation of the Other Options:IIA References & Best Practices:Thus, the correct answer is C. Unlike traditional IT applications, UDAs typically are developed with little consideration of controls.
Which of the following performance measures includes both profits and investment base?
Residual income
A flexible budget
Variance analysis.
A contribution margin income statement by segment.
Residual income (RI) is a performance measure that considers both profits and the investment base by calculating the excess income generated over a required minimum return on investment (ROI).
(A) Residual income (Correct Answer):
Formula: Residual Income=Operating Income−(Required Rate of Return×Investment Base)\text{Residual Income} = \text{Operating Income} - (\text{Required Rate of Return} \times \text{Investment Base})Residual Income=Operating Income−(Required Rate of Return×Investment Base)
RI evaluates profitability after accounting for the cost of capital, making it a better measure of financial performance than net income alone.
It considers both profits (net operating income) and the investment base (capital employed).
(B) A flexible budget:
A flexible budget adjusts based on changes in activity levels but does not directly include investment base considerations.
(C) Variance analysis:
Variance analysis compares actual vs. budgeted performance but does not consider investment base.
(D) A contribution margin income statement by segment:
The contribution margin shows revenue minus variable costs but does not factor in the investment base.
IIA Practice Guide: Measuring Performance – Recognizes residual income as a key metric for evaluating divisional performance.
COSO ERM Framework – Performance Measurement Component – Emphasizes using metrics that account for both profitability and investment.
IIA Standard 2120 - Risk Management – Highlights the importance of financial metrics in evaluating strategic objectives.
Analysis of Each Option:IIA References:Conclusion:Since Residual Income (RI) considers both profits and investment base, option (A) is the correct answer.
Based on test results, an IT auditor concluded that the organization would suffer unacceptable loss of data if there was a disaster at its data center. Which of the following test results would likely lead the auditor to this conclusion?
Requested backup tapes were not returned from the offsite vendor in a timely manner
Returned backup tapes from the offsite vendor contained empty spaces
Critical systems have been backed up more frequently than required
Critical system backup tapes are taken off site less frequently than required
Which of the following is true of matrix organizations?
A unity-of-command concept requires employees to report technically, functionally, and administratively to the same manager.
A combination of product and functional departments allows management to utilize personnel from various functions.
Authority, responsibility, and accountability of the units involved may vary based on the project's life or the organization's culture.
It is best suited for firms with scattered locations or for multi-line, large-scale firms.
Comprehensive and Detailed In-Depth Explanation:
A matrix organization combines functional and product-based structures, allowing employees to work across multiple departments and report to multiple managers. This enables businesses to utilize expertise from various areas efficiently.
Option A (Unity of command) does not apply to matrix organizations, as employees often report to multiple supervisors.
Option C (Variable authority and accountability) is a secondary characteristic but does not define matrix structures.
Option D (Best for scattered locations/multi-line firms) applies more to divisional rather than matrix structures.
Thus, the correct answer is B, as matrix structures enable collaboration across functional and product teams.
Which of the following forms of compensation best indicates that an organization’s cost-saving objectives have been targeted?
Gain sharing
Commission
Profit sharing
Pension
Comprehensive and Detailed In-Depth Explanation:
Gain sharing is a compensation program where employees receive bonuses tied directly to the company's cost-saving measures and productivity improvements. This approach aligns employees' interests with organizational goals by rewarding them for identifying and implementing efficiencies that reduce costs. Unlike profit sharing, which is based on overall profitability, gain sharing focuses specifically on performance improvements that lead to cost savings. Commissions are typically related to sales performance, and pensions are long-term retirement benefits not directly linked to immediate cost-saving efforts. Therefore, gain sharing is the most indicative of targeting cost-saving objectives.
Which of the following statements is true regarding the capital budgeting procedure known as the discounted payback period?
It calculates the overall value of a project.
It ignores the time value of money.
It calculates the time a project takes to break even.
It begins at time zero for the project.
Comprehensive and Detailed In-Depth Explanation:
The discounted payback period is a capital budgeting technique that determines how long it takes for a project to recover its initial investment, accounting for the time value of money.
Option A (Calculates the overall project value) describes Net Present Value (NPV), not the payback period.
Option B (Ignores the time value of money) applies to the simple payback period, but the discounted payback period does account for the time value of money.
Option D (Begins at time zero) is true for all capital budgeting methods, not specific to this one.
Thus, option C is correct because the discounted payback period measures the break-even time while considering the present value of cash flows.
Which of the following data security policies is most likely to be the result of a data privacy law?
Access to personally identifiable information is limited to those who need it to perform their job.
Confidential data must be backed up and recoverable within a 24-hour period.
Updates to systems containing sensitive data must be approved before being moved to production.
A record of employees with access to insider information must be maintained, and those employees may not trade company stock during blackout periods.
Comprehensive and Detailed In-Depth Explanation:
Data privacy laws, such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), emphasize restricting access to personally identifiable information (PII) to only those who require it for business purposes.
Option B (Data backup within 24 hours) is an IT best practice but is not a core requirement of privacy laws.
Option C (Approval for system updates) is a change management policy, unrelated to data privacy.
Option D (Insider trading restrictions) falls under corporate governance and securities regulations, not data privacy laws.
Thus, Option A is correct, as it aligns with legal requirements for protecting sensitive personal data.
An organization uses the management-by-objectives method, whereby employee performance is based on defined goals. Which of the following statements is true regarding this approach?
It is particularly helpful to management when the organization is facing rapid change
It is a more successful approach when adopted by mechanistic organizations
It is more successful when goal-setting is performed not only by management, but by all team members, including lower-level staff
It is particularly successful in environments that are prone to having poor employer-employee relations
Which of the following security controls would be appropriate to protect the exchange of information?
Firewalls.
Activity logs.
Antivirus software.
File encryption.
Comprehensive and Detailed In-Depth Explanation:
File encryption protects the confidentiality and integrity of information during transmission and storage. It ensures that only authorized recipients can access the data by converting it into an unreadable format.
Option A (Firewalls) – Prevents unauthorized access to networks but does not secure data exchange.
Option B (Activity logs) – Tracks actions but does not protect data confidentiality.
Option C (Antivirus software) – Protects against malware but does not encrypt data in transit.
Thus, file encryption (Option D) is the best security control for protecting exchanged information.
Which of the following best explains why an organization would enter into a capital lease contract?
To increase the ability to borrow additional funds from creditors
To reduce the organization’s free cash flow from operations
To improve the organization’s free cash flow from operations
To acquire the asset at the end of the lease period at a price lower than the fair market value
Which of the following differentiates a physical access control from a logical access control?
Physical access controls secure tangible IT resources, whereas logical access controls secure software and data internal to the IT system.
Physical access controls secure software and data internal to the IT system, whereas logical access controls secure tangible IT resources.
Physical access controls include firewalls, user IDs, and passwords, whereas logical access controls include locks and security guards.
Physical access controls include input processing and output controls, whereas logical access controls include locked doors and security guards.
Comprehensive and Detailed In-Depth Explanation:
Physical access controls are security measures designed to prevent unauthorized physical access to tangible IT resources, such as computer hardware, servers, and networking equipment. Examples include locks, security guards, and biometric access systems. In contrast, logical access controls protect access to software and data within the IT system, ensuring that only authorized users can interact with digital resources. These controls include mechanisms like user IDs, passwords, firewalls, and encryption. Option A accurately captures this distinction, whereas the other options either reverse the definitions or misclassify examples of physical and logical controls.
Which of the following purchasing scenarios would gain the greatest benefit from implementing electronic data interchange (EDI)?
A just-in-time purchasing environment
A large volume of custom purchases
A variable volume sensitive to material cost
A currently inefficient purchasing process
A small chain of grocery stores made a reporting error and understated its ending inventory. What effect would this have on the income statement for the following year?
Net income would be understated.
Net income would not be affected.
Net income would be overstated.
Net income would be negative.
Comprehensive and Detailed Step-by-Step Explanation with all IIA References: =
Understanding the Impact of an Understated Ending Inventory:
Ending inventory is a key component of the cost of goods sold (COGS) calculation: COGS=BeginningInventory+Purchases−EndingInventoryCOGS = Beginning Inventory + Purchases - Ending InventoryCOGS=BeginningInventory+Purchases−EndingInventory
If the ending inventory is understated, it means the reported inventory is lower than its actual value.
This results in an overstated COGS because a smaller amount is subtracted in the formula above.
An overstated COGS leads to an understated net income in the current year.
Effect on the Following Year’s Income Statement:
The beginning inventory for the next year is based on the ending inventory of the previous year.
Since the prior year's ending inventory was understated, the new year's beginning inventory is also understated.
A lower beginning inventory leads to a lower COGS in the new year.
Since COGS is lower, net income in the following year will be overstated.
IIA’s Perspective on Financial Reporting Errors:
The IIA’s International Standards for the Professional Practice of Internal Auditing (IPPF) emphasize the importance of accurate financial reporting.
IIA Standard 1220 – Due Professional Care requires internal auditors to consider the probability of errors, fraud, or misstatements in financial reporting.
COSO’s Internal Control – Integrated Framework highlights that inventory valuation errors can impact financial integrity and decision-making.
GAAP & IFRS Accounting Standards also require proper inventory reporting to ensure accurate financial statements.
IIA References:
IPPF Standard 1220 – Due Professional Care
COSO Internal Control – Integrated Framework
GAAP & IFRS Accounting Principles on Inventory Valuation
Thus, the correct and verified answer is C. Net income would be overstated.
According to IIA guidance on IT, which of the following best describes a situation where data backup plans exist to ensure that critical data can be restored at some point in the future, but recovery and restore processes have not been defined?
Hot recovery plan
Warm recovery plan
Cold plan
Absence of recovery plan
Which of the following physical access controls often functions as both a preventive and detective control?
Locked doors.
Firewalls.
Surveillance cameras.
Login IDs and passwords.
Understanding Physical Access Controls:
Physical access controls protect assets by preventing unauthorized access and detecting potential security violations.
Controls can be preventive (stop incidents from occurring) or detective (identify incidents after they occur).
Why Surveillance Cameras Function as Both Preventive and Detective Controls:
Preventive: The presence of cameras discourages unauthorized access and malicious activities.
Detective: If an incident occurs, cameras provide recorded evidence for investigation and accountability.
Why Other Options Are Less Suitable:
A. Locked doors – Purely preventive, as they block unauthorized access but do not detect breaches.
B. Firewalls – Primarily an IT security measure, not a physical access control.
D. Login IDs and passwords – These are logical (IT) access controls, not physical controls.
IIA GTAG 15 – Auditing Privacy and Security Risks: Highlights the dual role of surveillance as a preventive and detective control.
IIA Standard 2120 – Risk Management: Encourages controls that both prevent and detect risks.
COSO’s Internal Control Framework: Supports security measures that serve multiple control functions.
Relevant IIA References:✅ Final Answer: Surveillance cameras (Option C).
An organization has decided to allow its managers to use their own smart phones at work. With this change, which of the following is most important to Include In the IT department's comprehensive policies and procedures?
Required documentation of process for discontinuing use of the devices
Required removal of personal pictures and contacts.
Required documentation of expiration of contract with service provider.
Required sign-off on conflict of interest statement.
When an organization allows managers to use their own smartphones at work under a Bring Your Own Device (BYOD) policy, IT security and risk management become critical. The most important policy and procedure to include would be documenting the process for discontinuing use of the devices to ensure data security, compliance, and risk mitigation when employees leave the company or change roles.
Data Security & Compliance: Ensuring that sensitive company data is removed securely when an employee leaves or replaces a device is crucial to prevent unauthorized access.
Access Control & Endpoint Management: The IT department needs a clear policy to revoke access to corporate applications and networks when a device is no longer in use.
Risk Mitigation: Unauthorized access to company systems through lost, stolen, or retired devices can lead to security breaches.
Option B (Required removal of personal pictures and contacts): Personal data does not impact company security and is irrelevant to corporate IT policies.
Option C (Required documentation of expiration of contract with service provider): This is the employee's responsibility, not the organization's, and does not address security risks.
Option D (Required sign-off on conflict of interest statement): While conflict of interest policies are important, they are unrelated to IT security concerns related to BYOD.
IIA’s GTAG (Global Technology Audit Guide) on Managing and Auditing IT Vulnerabilities emphasizes the importance of BYOD risk management, including clear procedures for device decommissioning.
IIA's Business Knowledge for Internal Auditing (CIA Exam Syllabus - Part 3) highlights IT governance frameworks that require policies for data access and security when using personal devices.
Why Option A is Correct:Why Other Options Are Incorrect:IIA References:Thus, the most appropriate answer is A. Required documentation of process for discontinuing use of the devices.
A company produces water buckets with the following costs per bucket:
Direct labor = 82
Direct material = $5
Fixed manufacturing = 83.50
Variable manufacturing = 82.50
The water buckets are usually sold for $15. However, the company received a special order for 50.000 water buckets at 311 each.
Assuming there is adequate manufacturing capacity and ail other variables are constant , what is the relevant cost per unit to consider when deciding whether to accept this special order at the reduced price?
$9.50
$10.50
$11
$13
When evaluating a special order, only relevant costs should be considered. Fixed costs are not relevant because they remain unchanged regardless of production levels. The relevant costs include variable manufacturing costs and direct costs (direct labor and direct material).
Step-by-Step Calculation of Relevant Cost per Unit:Given cost per bucket:
Direct Labor = $2
Direct Material = $5
Variable Manufacturing Cost = $2.50
Fixed Manufacturing Cost = $3.50 (Not relevant)
Relevant Cost Per Unit:Direct Labor+Direct Material+Variable Manufacturing Cost\text{Direct Labor} + \text{Direct Material} + \text{Variable Manufacturing Cost}Direct Labor+Direct Material+Variable Manufacturing Cost =2+5+2.50=9.50= 2 + 5 + 2.50 = 9.50=2+5+2.50=9.50
Since fixed costs remain constant, they do not impact the decision to accept the order. The relevant cost is $9.50 per unit.
B. $10.50 – Includes some portion of fixed costs, which should be excluded.
C. $11 – Incorrect because it overestimates costs by considering fixed expenses.
D. $13 – Includes both fixed and variable costs, but only variable costs matter for decision-making.
IIA’s GTAG on Cost Analysis and Decision-Making – Emphasizes using relevant costs for pricing decisions.
COBIT 2019 (Governance and Decision-Making Framework) – Recommends marginal cost analysis for special orders.
Managerial Accounting Principles – States that fixed costs should not influence short-term pricing decisions.
Why Not the Other Options?IIA References:
Which of the following should be established by management during implementation of big data systems to enable ongoing production monitoring?
Key performance indicators.
Reports of software customization.
Change and patch management.
Master data management
When implementing big data systems, organizations must establish ongoing production monitoring to ensure system performance, efficiency, and reliability.
Why Option A (Key performance indicators) is Correct:
KPIs (Key Performance Indicators) measure the effectiveness and success of big data systems.
KPIs help track system efficiency, data processing speed, accuracy, and resource utilization during production.
Examples of KPIs in big data systems include data ingestion rate, processing time, query performance, system uptime, and error rates.
Why Other Options Are Incorrect:
Option B (Reports of software customization):
Incorrect because software customization reports document system modifications but do not monitor system performance.
Option C (Change and patch management):
Incorrect because change and patch management deals with software updates and security fixes, not ongoing performance monitoring.
Option D (Master data management):
Incorrect because master data management focuses on data governance and consistency, not real-time system performance.
IIA GTAG – "Auditing Big Data Systems": Recommends using KPIs to measure the effectiveness of big data implementation.
COBIT 2019 – APO08 (Manage Performance and Capacity): Emphasizes KPI tracking for IT and data system performance.
NIST Big Data Framework: Highlights the importance of KPIs for monitoring big data system performance.
IIA References:
Employees at an events organization use a particular technique to solve problems and improve processes. The technique consists of five steps: define, measure, analyze,
improve, and control. Which of the following best describes this approach?
Six Sigma,
Quality circle.
Value chain analysis.
Theory of constraints.
The Define, Measure, Analyze, Improve, and Control (DMAIC) methodology is the core framework of Six Sigma, a data-driven process improvement approach that aims to reduce defects, enhance efficiency, and optimize performance.
(A) Correct – Six Sigma.
DMAIC is a structured Six Sigma methodology used for problem-solving and process improvement.
It helps organizations identify inefficiencies, eliminate errors, and standardize processes.
(B) Incorrect – Quality circle.
A quality circle is a group of employees who meet to discuss and resolve work-related issues, but it does not follow the structured DMAIC approach.
(C) Incorrect – Value chain analysis.
Value chain analysis focuses on evaluating business activities to improve competitive advantage, not structured process improvement like Six Sigma.
(D) Incorrect – Theory of constraints.
The Theory of Constraints (TOC) focuses on identifying and eliminating bottlenecks in processes, but it does not use the DMAIC approach.
IIA’s Global Internal Audit Standards – Process Improvement and Risk Management
Emphasizes methodologies like Six Sigma for operational efficiency.
COSO’s ERM Framework – Continuous Improvement and Quality Management
Discusses the role of Six Sigma in improving processes and reducing risks.
IIA’s Guide on Business Process Auditing
Recommends structured approaches such as Six Sigma for evaluating process efficiency.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Several organizations have developed a strategy to open co-owned shopping malls. What would be the primary purpose of this strategy?
To exploit core competence.
To increase market synergy.
To deliver enhanced value.
To reduce costs.
When multiple organizations co-own shopping malls, their primary strategy is to increase market synergy, meaning they combine resources and expertise to enhance market presence, attract more customers, and improve competitive positioning.
(A) To exploit core competence.
Incorrect: Core competencies refer to unique internal capabilities, whereas co-owning shopping malls is a collaborative market strategy.
(B) To increase market synergy. (Correct Answer)
Market synergy occurs when businesses collaborate to create greater market impact than they could individually.
Shared ownership enhances customer traffic, brand reach, and business opportunities.
IIA Standard 2110 – Governance highlights the importance of strategic partnerships in achieving synergy.
(C) To deliver enhanced value.
Incorrect: While value is a benefit, the main goal of co-ownership is strategic market advantage and synergy.
(D) To reduce costs.
Incorrect: Cost reduction may be a secondary benefit, but the primary goal is market synergy through shared resources and customer base expansion.
IIA Standard 2110 – Governance: Encourages strategic collaborations for business growth.
COSO ERM – Strategy and Objective-Setting: Highlights market synergy as a key factor in strategic partnerships.
Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) because co-ownership of shopping malls primarily aims to increase market synergy, allowing organizations to leverage shared resources and customer networks for greater market impact.
An organization created a formalized plan for a large project. Which of the following should be the first step in the project management plan?
Estimate time required to complete the whole project.
Determine the responses to expected project risks.
Break the project into manageable components.
Identify resources needed to complete the project
The first step in a project management plan is to break the project into manageable components, known as Work Breakdown Structure (WBS). This step ensures clarity, task allocation, and effective tracking.
(A) Estimate time required to complete the whole project.
Incorrect: Time estimation comes after breaking the project into smaller tasks.
(B) Determine the responses to expected project risks.
Incorrect: Risk management is important but is planned after defining project tasks and scope.
(C) Break the project into manageable components. (Correct Answer)
Dividing the project into smaller tasks (WBS) helps in resource allocation, scheduling, and risk assessment.
IIA GTAG 12 – Project Risk Management suggests using WBS to define tasks clearly.
(D) Identify resources needed to complete the project.
Incorrect: Resources can only be allocated effectively after defining project components.
IIA GTAG 12 – Project Risk Management: Recommends Work Breakdown Structure (WBS) as the first step in project planning.
PMBOK (Project Management Body of Knowledge): Defines WBS as the foundation of project planning.
Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (C) Break the project into manageable components, as this is the first step in structuring and planning a successful project.
Which of the following accounting methods is an investor organization likely to use when buying 40 percent of the stock of another organization?
Cost method.
Equity method .
Consolidation method.
Fair value method.
The equity method is used when an investor owns between 20% and 50% of another company’s stock, indicating significant influence over the investee. Since the investor organization is purchasing 40% of the stock, it qualifies for this method.
(A) Cost method.
Incorrect: The cost method is used when the investor has less than 20% ownership and no significant influence.
(B) Equity method. (Correct Answer)
The equity method is required when the investor has significant influence over the investee (typically between 20% and 50% ownership).
Under this method, the investor records a proportional share of the investee’s profits and losses in its financial statements.
IIA Standard 2330 – Documenting Information recommends accurate financial reporting and appropriate accounting method selection.
(C) Consolidation method.
Incorrect: The consolidation method is used when the investor owns more than 50% of the stock, granting control over the investee.
(D) Fair value method.
Incorrect: The fair value method applies when investments are traded in active markets and do not grant significant influence.
IIA Standard 2330 – Documenting Information: Requires appropriate classification of financial investments.
GAAP & IFRS Accounting Standards: Mandate the equity method for ownership between 20% and 50% with significant influence.
Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) Equity method, as 40% ownership implies significant influence, requiring the use of this method.
What relationship exists between decentralization and the degree, importance, and range of lower-level decision making?
Mutually exclusive relationship.
Direct relationship.
Intrinsic relationship.
Inverse relationship.
Decentralization refers to the process by which decision-making authority is distributed to lower levels of management within an organization. The degree, importance, and range of decision-making at lower levels are directly related to the extent of decentralization.
Direct Relationship Defined:
As decentralization increases, more decision-making power is transferred to lower levels of the organization.
This means that managers and employees at lower levels are empowered to make a broader range of decisions with greater significance.
The Importance of Lower-Level Decision-Making in a Decentralized Structure:
A decentralized structure allows lower-level managers to respond quickly to operational issues and make important decisions without seeking approval from top management.
This enables increased efficiency, innovation, and adaptability in a dynamic business environment.
IIA's Perspective on Governance and Decision-Making:
According to the International Professional Practices Framework (IPPF) by the Institute of Internal Auditors (IIA), internal auditors must assess the governance structure of an organization, which includes understanding how decision-making authority is allocated.
The IIA’s Three Lines Model highlights the role of management in decision-making, emphasizing the need for a clear and effective delegation of authority.
IIA Standard 2110 – Governance states that internal auditors must evaluate decision-making processes to ensure they align with the organization’s objectives and risk management strategies.
Supporting Business Concepts:
Decentralized organizations like multinational corporations, franchises, and divisional structures benefit from empowering lower levels with decision-making authority.
In contrast, centralized organizations retain control at the top, limiting the scope of decisions at lower levels.
A direct relationship exists because the more decentralized a company is, the greater the responsibility of lower levels in making crucial decisions.
IIA References:
IPPF Standards: Standard 2110 – Governance
IIA’s Three Lines Model – Emphasizing clear delegation of authority
COSO Internal Control Framework – Discusses decentralized decision-making in control environments
Business Knowledge for Internal Auditing (IIA Study Guide) – Governance and decision-making structure
Management has decided to change the organizational structure from one that was previously decentralized to one that is now highly centralized. As such: which of the
following would be a characteristic of the now highly centralized organization?
Top management does little monitoring of the decisions made at lower levels.
The decisions made at the lower levels of management are considered very important.
Decisions made at lower levels in the organizational structure are few.
Reliance is placed on top management decision making by few of the organization's departments.
A highly centralized organization is one where decision-making authority is concentrated at the top management level, with lower levels having minimal autonomy. This change means that most critical decisions are made at the corporate level, and lower-level managers have limited decision-making power.
(A) Incorrect – Top management does little monitoring of the decisions made at lower levels.
In a centralized organization, top management monitors and controls most decisions.
This statement applies more to decentralized structures where decision-making is distributed.
(B) Incorrect – The decisions made at the lower levels of management are considered very important.
In a centralized structure, decisions made at lower levels hold less significance since authority is concentrated at the top.
(C) Correct – Decisions made at lower levels in the organizational structure are few.
Centralized structures limit decision-making power at lower levels, keeping control with top executives.
Lower-level managers mostly follow directives from upper management rather than making independent decisions.
(D) Incorrect – Reliance is placed on top management decision-making by few of the organization’s departments.
In a centralized system, most (not just a few) departments rely on top management for decision-making.
IIA’s Global Internal Audit Standards – Organizational Governance and Decision-Making
Explains centralized vs. decentralized structures and their impact on risk management.
COSO’s ERM Framework – Governance and Decision Authority
Discusses the implications of centralization on strategic decision-making.
IIA’s Guide on Corporate Governance and Internal Control Frameworks
Highlights the effect of centralization on accountability, oversight, and risk management.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Which of the following scenarios indicates an effective use of financial leverage?
An organisation has a rate of return on equity of 20% and a rate of return on assets of 15%.
An organization has a current ratio of 2 and an inventory turnover of 12.
An organization has a debt to total assets ratio of 0.2 and an interest coverage ratio of 10.
An organization has a profit margin of 30% and an assets turnover of 7%.
Financial leverage refers to the use of borrowed funds to increase potential returns to shareholders. Effective financial leverage occurs when the return on equity (ROE) is higher than the return on assets (ROA), indicating that the company is generating higher returns for shareholders than it costs to finance the assets with debt.
(A) Correct – An organization has a rate of return on equity of 20% and a rate of return on assets of 15%.
ROE > ROA indicates that financial leverage is being used effectively.
A higher ROE suggests that the company is generating more profits for shareholders relative to its equity.
This aligns with the concept that borrowed funds are being used efficiently to increase profitability.
(B) Incorrect – An organization has a current ratio of 2 and an inventory turnover of 12.
The current ratio and inventory turnover relate to liquidity and operational efficiency, not financial leverage.
(C) Incorrect – An organization has a debt to total assets ratio of 0.2 and an interest coverage ratio of 10.
A low debt-to-assets ratio (0.2) indicates low leverage.
A high interest coverage ratio (10) suggests low reliance on debt financing, which contradicts the concept of financial leverage.
(D) Incorrect – An organization has a profit margin of 30% and an asset turnover of 7%.
Profit margin and asset turnover measure profitability and efficiency, not financial leverage.
High asset turnover may indicate operational efficiency but does not directly reflect financial leverage.
IIA’s Global Internal Audit Standards – Managing Financial Risk
Covers financial leverage and its impact on return metrics.
IIA’s Guide on Financial Ratio Analysis
Explains the relationship between ROE, ROA, and leverage.
COSO’s ERM Framework – Risk Assessment in Financial Decision Making
Discusses the use of leverage in maximizing shareholder value.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Which of the following parties is most likely to be responsible for maintaining the infrastructure required to prevent the failure of a real-time backup of a database?
IT database administrator.
IT data center manager.
IT help desk function.
IT network administrator.
Maintaining the infrastructure for a real-time database backup involves ensuring that backups are correctly configured, continuously running, and fail-safe mechanisms are in place to prevent data loss. The most appropriate role for this responsibility is the IT database administrator (DBA) because:
Primary Role of a DBA:
The DBA is responsible for managing database performance, availability, backup strategies, and recovery processes.
Ensures that real-time backups are functioning properly and failure risks are mitigated.
Database Infrastructure & Backup Strategies:
DBAs configure, monitor, and troubleshoot real-time backup solutions such as replication, mirroring, and log shipping.
They work with backup tools like Oracle Data Guard, SQL Server Always On, and MySQL replication.
Disaster Recovery & Data Integrity:
The DBA ensures data consistency and integrity, especially during system failures or cyber incidents.
They set up recovery point objectives (RPO) and recovery time objectives (RTO) for database resilience.
Option B (IT Data Center Manager):
Oversees physical and environmental infrastructure (e.g., servers, cooling, and power systems). Not directly responsible for database backup failure prevention. (Incorrect)
Option C (IT Help Desk Function):
Provides user support and troubleshooting but does not manage backup infrastructure. (Incorrect)
Option D (IT Network Administrator):
Manages network configurations, security, and connectivity but does not handle database backup infrastructure. (Incorrect)
IIA GTAG – "Auditing Business Continuity and Disaster Recovery": Emphasizes the role of DBAs in backup infrastructure.
COBIT 2019 – BAI10.02 (Manage Backup and Restore): Assigns database backup management responsibilities primarily to DBAs.
IIA's "Auditing IT Operations": Recommends that database administration teams ensure backup mechanisms are tested regularly.
Why Other Options Are Incorrect:IIA References:Thus, the correct answer is A. IT database administrator.
A manufacturer ss deciding whether to sell or process materials further. Which of the following costs would be relevant to this decision?
Incremental processing costs, incremental revenue, and variable manufacturing expenses.
Joint costs, incremental processing costs, and variable manufacturing expenses.
Incremental revenue, joint costs, and incremental processing costs.
Variable manufacturing expenses, incremental revenue, and joint costs
When deciding whether to sell a product as-is or process it further, a manufacturer should consider only relevant costs—those that will change based on the decision.
Why Option A (Incremental processing costs, incremental revenue, and variable manufacturing expenses) is Correct:
Incremental processing costs: These are additional costs required to process the material further, making them directly relevant.
Incremental revenue: The additional revenue that would be generated if the product is processed further is a key factor in decision-making.
Variable manufacturing expenses: These costs change with production levels, making them important in the decision-making process.
Why Other Options Are Incorrect:
Option B (Joint costs, incremental processing costs, and variable manufacturing expenses):
Incorrect because joint costs (costs incurred before the split-off point) are sunk costs and are not relevant in the decision.
Option C (Incremental revenue, joint costs, and incremental processing costs):
Incorrect because, again, joint costs are not relevant to the decision.
Option D (Variable manufacturing expenses, incremental revenue, and joint costs):
Incorrect because joint costs should be ignored in a sell-or-process-further decision.
IIA GTAG – "Auditing Cost Accounting Decisions": Discusses relevant costs in decision-making.
IFRS & GAAP Cost Accounting Standards: Explain cost classification and decision-making.
COSO Internal Control – Integrated Framework: Recommends proper cost allocation methods for financial decisions.
IIA References:
Which of the following inventory costing methods requires the organization to account for the actual cost paid for the unit being sold?
Last-in-first-Out (LIFO}.
Average cost.
First-in-first-out (FIFO).
Specific identification
The specific identification method is an inventory costing approach where the actual cost of each individual unit sold is recorded. This method is used when items are uniquely identifiable, such as in industries dealing with luxury goods, automobiles, or custom-manufactured products.
Correct Answer (D - Specific identification)
Under the specific identification method, each inventory unit is tracked separately, and its actual purchase cost is assigned to the cost of goods sold (COGS) when sold.
This method is commonly used for high-value, low-volume items where unique tracking is feasible.
The IIA’s GTAG 8: Audit of Inventory Management explains how different costing methods impact financial reporting and internal controls.
Why Other Options Are Incorrect:
Option A (LIFO - Last-in, First-out):
LIFO assumes that the most recent (last-in) inventory is sold first, but it does not track actual unit cost. Instead, it assigns the cost of the newest inventory to COGS.
LIFO is often used for tax benefits but does not follow actual unit cost identification.
Option B (Average cost):
The weighted average cost method calculates an average cost for all inventory units rather than assigning actual unit costs.
This method smooths out price fluctuations but does not track specific items' costs.
Option C (FIFO - First-in, First-out):
FIFO assumes that the oldest (first-in) inventory is sold first, assigning its cost to COGS.
However, like LIFO, it does not track individual unit costs.
IIA GTAG 8: Audit of Inventory Management – Explains different inventory costing methods, including specific identification.
IIA Practice Guide: Assessing Inventory Risks – Covers inventory valuation and fraud risks.
Step-by-Step Explanation:IIA References for Validation:Thus, the specific identification method (D) is the only one that accounts for the actual cost paid for each unit sold.
According to IIA guidance, which of the following is a broad collection of integrated policies, standards, and procedures used to guide the planning and execution of a project?
Project portfolio.
Project development
Project governance.
Project management methodologies
Project governance refers to a broad collection of integrated policies, standards, and procedures that provide a framework for planning and executing projects. It establishes decision-making processes, accountability, and risk management controls to ensure that projects align with organizational objectives.
(A) Project portfolio. ❌
Incorrect. A project portfolio refers to a collection of projects managed together to achieve strategic objectives. It does not specifically define the policies, standards, and procedures for project execution.
(B) Project development. ❌
Incorrect. Project development focuses on designing, building, and testing a project, but it does not encompass governance structures like policies, standards, and oversight.
(C) Project governance. ✅
Correct. Project governance includes integrated policies, standards, and procedures that guide project planning, execution, and oversight.
IIA GTAG "Auditing IT Projects" emphasizes project governance as the primary control framework for managing project risks and ensuring alignment with organizational goals.
(D) Project management methodologies. ❌
Incorrect. Project management methodologies (e.g., Agile, Waterfall, PRINCE2) provide structured approaches for executing projects but do not encompass the full governance framework.
IIA GTAG – "Auditing IT Projects"
IIA Standard 2110 – Governance (Project Risk Management)
COSO ERM Framework – Project Oversight and Risk Governance
Analysis of Answer Choices:IIA References:Thus, the correct answer is C (Project governance), as it provides the integrated policies, standards, and procedures needed for effective project oversight.
Which of the following IT-related activities is most commonly performed by the second line of defense?
Block unauthorized traffic.
Encrypt data.
Review disaster recovery test results.
Provide independent assessment of IT security.
Understanding the Three Lines of Defense Model:
First Line of Defense (Operational Management): Performs daily IT security tasks, such as blocking unauthorized traffic and encrypting data.
Second Line of Defense (Risk Management & Compliance): Monitors and reviews security controls, including disaster recovery testing and risk management activities.
Third Line of Defense (Internal Audit): Provides an independent assessment of IT security controls.
Why Option C (Review Disaster Recovery Test Results) Is Correct?
The second line of defense is responsible for monitoring and evaluating IT risk management processes, including disaster recovery and business continuity planning.
Reviewing disaster recovery test results ensures that the organization is prepared for IT disruptions and meets compliance requirements.
IIA Standard 2110 – Governance requires auditors to evaluate whether IT risk management activities (such as disaster recovery) are being effectively monitored.
Why Other Options Are Incorrect?
Option A (Block unauthorized traffic):
This is a first-line defense task, typically handled by IT security teams (e.g., firewall and intrusion detection system monitoring).
Option B (Encrypt data):
Encryption is part of daily IT security operations and is handled by the first line of defense.
Option D (Provide an independent assessment of IT security):
Independent assessments are the responsibility of internal audit (third line of defense), not the second line.
The second line of defense focuses on monitoring IT risk, making disaster recovery test review a key responsibility.
IIA Standard 2110 and the Three Lines of Defense Model confirm this role.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (IT Risk Management)
IIA Three Lines of Defense Model
COBIT Framework – IT Governance & Risk Management
Which of the following is a systems software control?
Restricting server room access to specific individuals
Housing servers with sensitive software away from environmental hazards
Ensuring that all user requirements are documented
Performing of intrusion testing on a regular basis
System software controls refer to security measures and protocols that protect an organization's IT infrastructure from unauthorized access, cyber threats, and system failures. Intrusion testing (penetration testing) is a key system software control used to detect vulnerabilities in IT environments.
Correct Answer (D - Performing Intrusion Testing on a Regular Basis)
Intrusion testing is a critical system software security measure that helps identify weaknesses in software configurations and security defenses.
This falls under system software controls because it directly tests the security of operating systems, applications, and network software.
The IIA’s GTAG 11: Developing IT Security Audits highlights penetration testing as a necessary control for system software security.
Why Other Options Are Incorrect:
Option A (Restricting server room access to specific individuals):
This is a physical access control, not a system software control.
Option B (Housing servers away from environmental hazards):
This is an environmental control, focusing on disaster prevention rather than software security.
Option C (Ensuring that all user requirements are documented):
This relates to project documentation and system development, but it does not control software security.
IIA GTAG 11: Developing IT Security Audits – Recommends regular penetration testing as a system software control.
IIA Practice Guide: Auditing IT Security – Discusses system software security measures.
IIA References for Validation:Thus, D is the correct answer because intrusion testing is a core system software control ensuring security.
When management uses the absorption costing approach, fixed manufacturing overhead costs are classified as which of the following types of costs?
Direct, product costs.
Indirect product costs.
Direct period costs,
Indirect period costs
Absorption costing is a costing method that allocates all manufacturing costs (both variable and fixed) to the cost of a product. In this method, fixed manufacturing overhead costs are treated as indirect product costs because they are not directly traceable to a single unit of production but are still part of the total cost of producing goods.
Let’s analyze each option:
Option A: Direct, product costs.
Incorrect. Direct costs are costs that can be traced directly to a specific product, such as direct materials and direct labor. Fixed manufacturing overhead is not a direct cost because it is spread across all units produced.
Option B: Indirect product costs.
Correct. Fixed manufacturing overhead costs (such as rent, depreciation, and utilities for the production facility) are indirect costs because they support the entire production process rather than a specific product. However, under absorption costing, they are still treated as product costs and allocated to inventory.
IIA Reference: The IIA’s guidance on cost allocation states that absorption costing assigns all manufacturing costs (including fixed overhead) to products. (IIA Practice Guide: Cost and Profitability Analysis)
Option C: Direct period costs.
Incorrect. Period costs are expensed in the period they occur, while absorption costing treats fixed manufacturing overhead as part of inventory (product cost) until sold.
Option D: Indirect period costs.
Incorrect. Fixed manufacturing overhead is not expensed immediately as a period cost under absorption costing; it is capitalized into inventory and expensed as Cost of Goods Sold (COGS) when the product is sold.
Thus, the verified answer is B. Indirect product costs.
Which of the following should be included in a data privacy poky?
1. Stipulations for deleting certain data after a specified period of time.
2. Guidance on acceptable methods for collecting personal data.
3. A requirement to retain personal data indefinitely to ensure a complete audit trail,
4. A description of what constitutes appropriate use of personal data.
1 and 2 only
2 and 3 only
1, 2 and 4 only
2, 3, and 4 only
A data privacy policy outlines how an organization collects, stores, processes, and protects personal data. It should comply with global data protection regulations such as GDPR, CCPA, and IIA guidelines on data security.
(1) Stipulations for deleting certain data after a specified period of time. ✅
Correct. Many data protection laws (e.g., GDPR Article 5) require organizations to delete personal data after a defined retention period to reduce data breach risks.
(2) Guidance on acceptable methods for collecting personal data. ✅
Correct. A privacy policy must define legal and ethical ways to collect personal data (e.g., user consent, lawful processing).
(3) A requirement to retain personal data indefinitely to ensure a complete audit trail. ❌
Incorrect. Retaining personal data indefinitely violates most data privacy regulations (e.g., GDPR Right to Be Forgotten). Data must be stored only for as long as necessary.
(4) A description of what constitutes appropriate use of personal data. ✅
Correct. A privacy policy should clearly define how collected data can and cannot be used to prevent misuse and ensure compliance.
IIA GTAG – "Auditing Privacy Risks"
IIA Standard 2110 – Governance (Data Protection & Privacy)
GDPR (General Data Protection Regulation) – Articles 5 & 17 (Data Retention & Deletion)
Analysis of Answer Choices:IIA References:Thus, the correct answer is C (1, 2, and 4 only) because data should not be retained indefinitely, and the policy must include data collection, retention, and appropriate usage guidelines.
An organization's account for office supplies on hand had a balance of $9,000 at the end of year one. During year two. The organization recorded an expense of $45,000 for purchasing office supplies. At the end of year two. a physical count determined that the organization has $11 ,500 in office supplies on hand. Based on this Information, what would he recorded in the adjusting entry an the end of year two?
A debit to office supplies on hand for S2.500
A debit to office supplies on hand for $11.500
A debit to office supplies on hand for $20,500
A debit to office supplies on hand for $42,500
Understanding the Accounting for Office Supplies:
The organization maintains an account for office supplies on hand, which represents unused office supplies at any given time.
The expense recorded during the year represents the cost of office supplies purchased.
At year-end, the adjusting entry is made to reflect the actual amount of supplies on hand and adjust the supplies expense accordingly.
Formula to Determine the Supplies Used:
Supplies Used=Beginning Balance+Purchases−Ending Balance\text{Supplies Used} = \text{Beginning Balance} + \text{Purchases} - \text{Ending Balance}Supplies Used=Beginning Balance+Purchases−Ending Balance
Plugging in the given values:
Supplies Used=9,000+45,000−11,500=42,500\text{Supplies Used} = 9,000 + 45,000 - 11,500 = 42,500Supplies Used=9,000+45,000−11,500=42,500
This amount ($42,500) represents the actual office supplies used and should be recorded as an expense.
The adjusting entry would include:
A debit to Office Supplies on Hand for $42,500
A credit to Office Supplies Expense for $42,500
Why Other Options Are Incorrect:
A. A debit to office supplies on hand for $2,500 – Incorrect, as this figure does not represent supplies used or purchased.
B. A debit to office supplies on hand for $11,500 – Incorrect, as this is the ending balance and not the adjustment amount.
C. A debit to office supplies on hand for $20,500 – Incorrect, as this does not align with the formula for calculating used supplies.
IIA’s Perspective on Financial Reporting and Adjusting Entries:
IIA Standard 1220 – Due Professional Care emphasizes accurate financial reporting and proper adjustments for year-end entries.
GAAP Accounting Principles require accrual-based adjustments to ensure that expenses are recognized in the period they are incurred.
COSO Internal Control Framework supports proper inventory and expense adjustments to avoid misstated financials.
IIA References:
IIA Standard 1220 – Due Professional Care (Financial Reporting Accuracy)
GAAP Accounting Standards – Adjusting Entries for Supplies and Inventory
COSO Internal Control – Accurate Expense Recognition
Thus, the correct and verified answer is D. A debit to office supplies on hand for $42,500.
An organization discovered fraudulent activity involving the employee time-tracking system. One employee regularly docked in and clocked out her co-worker friends on their days off, inflating their reported work hours and increasing their wages. Which of the following physical authentication devices would be most effective at disabling this fraudulent scheme?
Face or finger recognition equipment,
Radio-frequency identification chips to authenticate employees with cards.
A requirement to clock in and clock out with a unique personal identification number.
A combination of a smart card and a password to clock in and clock out.
Fraud in time-tracking systems—such as "buddy punching" (where one employee clocks in/out for another)—is a common payroll fraud scheme. The most effective method to prevent this is biometric authentication, which ensures that only the actual employee can clock in or out.
(A) Face or finger recognition equipment. ✅
Correct. Biometric authentication (such as fingerprint or facial recognition) is the most effective solution because it uniquely identifies each individual, making it impossible for an employee to clock in on behalf of a colleague.
IIA GTAG "Managing and Auditing IT Vulnerabilities" recommends biometric authentication as a strong fraud prevention measure.
IIA Practice Guide "Fraud Prevention and Detection in an Automated Environment" highlights the use of biometrics for enhancing security in access control systems.
(B) Radio-frequency identification (RFID) chips to authenticate employees with cards.
Incorrect. RFID cards can be shared between employees, allowing fraud to continue. They are useful for access control but do not verify the identity of the person using the card.
(C) A requirement to clock in and clock out with a unique personal identification number (PIN).
Incorrect. PINs can be shared or stolen, making them ineffective in preventing buddy punching.
(D) A combination of a smart card and a password to clock in and clock out.
Incorrect. Like RFID and PIN systems, smart cards and passwords can be shared, making them ineffective against fraudulent time-tracking practices.
IIA GTAG – "Managing and Auditing IT Vulnerabilities"
IIA Practice Guide – "Fraud Prevention and Detection in an Automated Environment"
COSO Framework – Fraud Risk Management
Analysis of Answer Choices:IIA References:Thus, the correct answer is A, as biometric authentication directly verifies the employee’s identity, preventing time-tracking fraud.
At one organization, the specific terms of a contract require both the promisor end promise to sign the contract in the presence of an independent witness.
What is the primary role to the witness to these signatures?
A witness verifies the quantities of the copies signed.
A witness verifies that the contract was signed with the free consent of the promisor and promise.
A witness ensures the completeness of the contract between the promisor and promise.
A witness validates that the signatures on the contract were signed by tire promisor and promise.
Role of a Witness in Contract Signing:
A witness is a neutral third party who observes the signing of a contract and confirms that the named individuals actually signed the document.
This helps prevent disputes regarding the authenticity of signatures and provides legal proof of agreement.
Why Signature Validation is the Primary Role:
Ensures legitimacy: A witness confirms that the signatures belong to the stated individuals, preventing forgery.
Legal enforceability: Many jurisdictions require witnesses for contracts to be legally binding in certain cases (e.g., wills, real estate agreements).
Provides evidence in case of disputes: If a signatory later denies signing, the witness can testify to the authenticity of the signature.
Why Other Options Are Incorrect:
A. A witness verifies the quantities of the copies signed – Incorrect.
A witness does not count copies; their role is to verify authentic signatures.
B. A witness verifies that the contract was signed with the free consent of the promisor and promisee – Incorrect.
While witnessing may imply that parties were present, it does not guarantee free consent (coercion concerns require separate legal evidence).
C. A witness ensures the completeness of the contract between the promisor and promisee – Incorrect.
Contract completeness is a legal or managerial responsibility, not a witness’s role.
IIA’s Perspective on Contract Verification and Internal Controls:
IIA Standard 2120 – Risk Management requires internal auditors to ensure proper contract validation and documentation.
COSO Internal Control Framework highlights the importance of contract controls, including witnessed signings for fraud prevention.
International Contract Law Principles emphasize the role of witnesses in reducing contract disputes.
IIA References:
IIA Standard 2120 – Risk Management in Contract Management
COSO Internal Control Framework – Legal Documentation and Witnessing
International Contract Law Principles – Witnessing Signatures for Legal Validity
Thus, the correct and verified answer is D. A witness validates that the signatures on the contract were signed by the promisor and promisee.
Which of the following risks would Involve individuals attacking an oil company's IT system as a sign of solidarity against drilling in a local area?
Tampering
Hacking
Phishing
Piracy
Hacking refers to unauthorized access to an IT system, typically with the intent to disrupt, steal, or manipulate data. In this scenario, activists attacking an oil company's IT system as a protest falls under hacking because they are illegally breaking into the company’s digital infrastructure to make a statement.
Let’s analyze each option:
Option A: Tampering
Incorrect. Tampering refers to physically altering or interfering with a system (e.g., changing sensor readings in an oil rig), rather than attacking an IT system digitally.
Option B: Hacking
Correct.
The individuals are gaining unauthorized access to the company’s IT system.
This action is commonly associated with hacktivism, where hackers attack organizations for political or ideological reasons.
IIA Reference: Internal auditors assess cybersecurity threats, including hacking and unauthorized access risks. (IIA GTAG: Auditing Cybersecurity Risks)
Option C: Phishing
Incorrect. Phishing involves tricking individuals into revealing sensitive information (e.g., login credentials) through fraudulent emails or websites, but this scenario describes a direct attack on the IT system.
Option D: Piracy
Incorrect. Piracy typically refers to copyright infringement (e.g., unauthorized software use) rather than hacking an IT system.
Thus, the verified answer is B. Hacking.
An investor has acquired an organization that has a dominant position in a mature. slew-growth Industry and consistently creates positive financial income.
Which of the following terms would the investor most likely label this investment in her portfolio?
A star
A cash cow
A question mark
A dog
Understanding the BCG Matrix and Investment Classifications:
The Boston Consulting Group (BCG) Matrix classifies business investments into four categories:
Stars: High growth, high market share.
Cash Cows: Low growth, high market share.
Question Marks: High growth, low market share.
Dogs: Low growth, low market share.
Why the Investment is a Cash Cow:
The organization operates in a mature, slow-growth industry but has a dominant market position and generates consistent positive financial income.
This aligns with the definition of a Cash Cow, as it represents a stable and profitable business with low reinvestment needs.
Investors typically use Cash Cows to fund other investments, as they generate steady cash flow with minimal risk.
Why Other Options Are Incorrect:
A. A star:
A Star requires high growth and high market share, but the organization operates in a slow-growth industry, disqualifying it from this category.
C. A question mark:
A Question Mark is in a high-growth industry but lacks market dominance. Since this company is already dominant, it does not fit this category.
D. A dog:
A Dog has low growth and low market share, meaning it does not generate strong financial returns. The company described produces positive income, ruling out this category.
IIA’s Perspective on Business Strategy and Portfolio Management:
IIA Standard 2120 – Risk Management states that internal auditors must assess the strategic positioning of business investments.
COSO ERM Framework supports the use of strategic models like the BCG Matrix to evaluate investment performance and risk exposure.
IIA References:
IIA Standard 2120 – Risk Management and Strategic Planning
COSO Enterprise Risk Management (ERM) Framework
Boston Consulting Group (BCG) Matrix in Investment Analysis
Thus, the correct and verified answer is B. A cash cow.
An organization has instituted a bring-your-own-device (BYOD) work environment. Which of the following policies best addresses the increased risk to the organization's network incurred by this environment?
Limit the use of the employee devices for personal use to mitigate the risk of exposure to organizational data.
Ensure that relevant access to key applications is strictly controlled through an approval and review process.
Institute detection and authentication controls for all devices used for network connectivity and data storage.
Use management software scan and then prompt parch reminders when devices connect to the network
Understanding BYOD Risks:
A Bring-Your-Own-Device (BYOD) policy allows employees to use personal devices (e.g., laptops, smartphones, tablets) for work.
This increases security risks such as unauthorized access, malware infections, data leakage, and non-compliance with IT security policies.
Why Option C (Detection and Authentication Controls) Is Correct?
Detection and authentication controls ensure that:
Only authorized devices can connect to the organization's network.
User authentication mechanisms (such as multi-factor authentication) verify identities before granting access.
Devices with security vulnerabilities are flagged and restricted.
This aligns with IIA Standard 2110 – Governance, which emphasizes IT security controls for risk mitigation.
ISO 27001 and NIST Cybersecurity Framework also recommend device authentication and monitoring for secure network access.
Why Other Options Are Incorrect?
Option A (Limit personal use of employee devices):
Limiting personal use does not fully address network security risks; malware can still infect devices.
Option B (Control access through approvals and reviews):
While access control is important, it does not mitigate the broader risks of compromised devices connecting to the network.
Option D (Software scans and patch reminders):
Patching is important, but it does not prevent unauthorized access or ensure authentication for devices.
Implementing device detection and authentication controls is the most effective way to mitigate security risks in a BYOD environment.
IIA Standard 2110 and ISO 27001 emphasize strong network security measures.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (IT Risk Management & BYOD Security)
ISO 27001 – Information Security Management
NIST Cybersecurity Framework – Access Control & Authentication
According to Maslow's hierarchy of needs theory, which of the following best describes a strategy where a manager offers an assignment to a subordinate specifically to support his professional growth and future advancement?
Esteem by colleagues.
Self-fulfillment
Series of belonging in the organization
Job security
Understanding Maslow’s Hierarchy of Needs
Maslow’s theory categorizes human needs into five levels:
Physiological Needs (Basic survival: food, water, shelter)
Safety Needs (Job security, stability, financial security)
Social Needs (Belonging, relationships, team interactions)
Esteem Needs (Recognition, achievement, respect)
Self-Actualization (Self-Fulfillment) – Reaching one’s full potential, professional growth, and personal development
Why Option B is Correct?
Offering an assignment for professional growth and advancement supports self-actualization (self-fulfillment).
This aligns with Maslow’s highest level, where individuals seek to maximize their potential and achieve personal excellence.
IIA Standard 1100 – Independence and Objectivity emphasizes the importance of professional growth in auditing and management roles.
Why Other Options Are Incorrect?
Option A (Esteem by colleagues):
Professional growth may increase esteem, but the focus here is on self-fulfillment, not external recognition.
Option C (Sense of belonging in the organization):
Belonging is a lower-level need (social level), while professional growth aligns with self-actualization.
Option D (Job security):
Job security falls under safety needs, which is a lower-tier concern.
Professional development aligns with self-actualization, the highest level in Maslow’s hierarchy, which focuses on maximizing potential.
IIA Standard 1100 supports professional growth as part of career advancement in internal auditing.
Final Justification:IIA References:
Maslow’s Hierarchy of Needs (Self-Actualization Level)
IPPF Standard 1100 – Independence and Objectivity
Which of the following practices impacts copyright issues related to the manufacturer of a smart device?
Session hijacking.
Jailbreaking
Eavesdropping,
Authentication.
Understanding Copyright Issues and Smart Devices:
Copyright laws protect software, firmware, and intellectual property embedded in smart devices.
Jailbreaking refers to modifying a device’s software to remove manufacturer-imposed restrictions, often to install unauthorized third-party apps.
This violates software licensing agreements and may infringe on copyright protections under laws like the Digital Millennium Copyright Act (DMCA).
Why Option B (Jailbreaking) Is Correct?
Jailbreaking allows users to bypass manufacturer restrictions, potentially leading to unauthorized software distribution and copyright violations.
Manufacturers implement Digital Rights Management (DRM) to protect copyrighted firmware and software, which jailbreaking circumvents.
IIA Standard 2110 – Governance includes evaluating intellectual property risks and compliance in IT audits.
Why Other Options Are Incorrect?
Option A (Session hijacking):
This is a cybersecurity attack where a hacker takes control of a user session. It does not impact copyright laws.
Option C (Eavesdropping):
Eavesdropping refers to unauthorized network surveillance, which is a privacy issue, not a copyright issue.
Option D (Authentication):
Authentication is a security mechanism to verify user identity and has no direct relation to copyright concerns.
Jailbreaking bypasses copyright protections and violates software licensing agreements, making it the best answer.
IIA Standard 2110 emphasizes the importance of IT governance and compliance with intellectual property laws.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (Intellectual Property & IT Compliance)
ISO 27001 – IT Security & Digital Rights Protection
Digital Millennium Copyright Act (DMCA) – Copyright Protection for Software
During which phase of the contracting process ere contracts drafted for a proposed business activity?
Initiation phase.
Bidding phase
Development phase
Management phase
Understanding the Contracting Process PhasesThe contracting process generally follows these phases:
Initiation Phase: Identifies the need for a contract and sets initial objectives.
Bidding Phase: Potential vendors or partners submit proposals, and negotiations begin.
Development Phase: Contracts are drafted, negotiated, and finalized before execution.
Management Phase: The contract is executed, monitored, and evaluated for compliance.
Why Option C is Correct?
The development phase is where contracts are formally drafted based on agreements made during bidding and negotiation.
This phase includes legal review, compliance verification, and risk assessment, ensuring the contract aligns with business objectives and legal requirements.
IIA Standard 2110 – Governance requires auditors to assess how contract risks are managed, ensuring formal contract development processes.
Why Other Options Are Incorrect?
Option A (Initiation phase):
This phase defines the business need but does not involve drafting contracts.
Option B (Bidding phase):
In this phase, businesses solicit proposals, but contracts are not fully drafted until vendor selection.
Option D (Management phase):
The management phase involves executing and monitoring the contract, not drafting it.
Contracts are drafted during the development phase after vendor selection and before execution.
IIA Standard 2110 supports governance over contract risk and formal agreement processes.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (Contract Risk & Compliance)
COSO ERM – Risk Management in Contracting
Which of the following statements is true regarding the management-by-objectives method?
Management by objectives is most helpful in organizations that have rapid changes.
Management by objectives is most helpful in mechanistic organizations with rigidly defined tasks.
Management by objectives helps organizations to keep employees motivated.
Management by objectives helps organizations to distinguish clearly strategic goals from operational goals.
Understanding Management by Objectives (MBO):
MBO is a performance management approach where employees and managers set specific, measurable goals together.
The main purpose of MBO is to align individual objectives with organizational goals, enhancing motivation and engagement.
Why Option C (Helps Keep Employees Motivated) Is Correct?
Employee motivation improves when individuals understand how their efforts contribute to the organization’s success.
Setting clear objectives and allowing employees to participate in goal-setting increases job satisfaction and engagement.
IIA Standard 2120 – Risk Management supports frameworks like MBO that contribute to organizational performance and employee effectiveness.
Why Other Options Are Incorrect?
Option A (Most helpful in organizations with rapid changes):
MBO is less effective in rapidly changing environments because it relies on long-term goal setting.
Option B (Best in mechanistic organizations with rigid tasks):
MBO works better in adaptive, flexible organizations, not those with rigid structures.
Option D (Distinguishes strategic from operational goals):
MBO focuses on individual and team goals, not distinguishing strategic vs. operational goals.
MBO enhances employee motivation by involving them in goal-setting and performance tracking.
IIA Standard 2120 supports employee engagement strategies for better performance management.
Final Justification:IIA References:
IPPF Standard 2120 – Risk Management (Employee Engagement & Performance Management)
COSO ERM – Performance Measurement & Goal Alignment
Which of the following statements is true regarding cost-volume-profit analysis?
Contribution margin is the amount remaining from sales revenue after fixed expenses have been deducted.
Breakeven point is the amount of units sold to cover variable costs.
Breakeven occurs when the contribution margin covers fixed costs.
Following breakover1, he operating income will increase by the excess of fixed costs less the variable costs per units sold.
Cost-Volume-Profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating profit.
Correct Answer (C - Breakeven Occurs When the Contribution Margin Covers Fixed Costs)
Contribution Margin (CM) = Sales Revenue – Variable Costs.
The breakeven point is where total contribution margin equals total fixed costs, meaning the company has no profit or loss.
The IIA’s Practice Guide: Auditing Financial Performance supports this as the key breakeven definition.
Why Other Options Are Incorrect:
Option A (Contribution margin is the amount remaining after fixed expenses are deducted):
Incorrect because CM is calculated before fixed expenses are subtracted.
Option B (Breakeven point is the amount of units sold to cover variable costs):
Incorrect because breakeven covers fixed costs as well, not just variable costs.
Option D (Following breakeven, operating income increases by the excess of fixed costs less variable costs per unit sold):
Incorrect because operating income increases by the contribution margin per unit, not by the difference between fixed and variable costs.
IIA Practice Guide: Auditing Financial Performance – Defines breakeven analysis as when contribution margin covers fixed costs.
IIA GTAG 13: Business Performance – Discusses cost-volume-profit analysis for financial decision-making.
IIA References for Validation:Thus, C is the correct answer because breakeven occurs when the contribution margin equals fixed costs.
An Internal auditor is using data analytics to focus on high-risk areas during an engagement. The auditor has obtained data and is working to eliminate redundancies in the data. Which of the following statements is true regarding this scenario?
The auditor is normalizing data in preparation for analyzing it.
The auditor is analyzing the data in preparation for communicating the results,
The auditor is cleaning the data in preparation for determining which processes may be involves .
The auditor is reviewing trio data prior to defining the question
In data analytics, cleaning the data is a crucial step where the auditor eliminates redundancies, corrects inconsistencies, and removes errors to ensure accurate analysis. This step is taken before analyzing the data to identify high-risk areas and relevant processes.
Correct Answer (C - Cleaning the Data in Preparation for Determining Involved Processes)
Data cleaning involves:
Removing duplicate entries to prevent misinterpretation.
Standardizing data formats for consistency.
Handling missing or inaccurate values to ensure reliability.
This step prepares the data for analysis and identification of high-risk processes.
The IIA’s GTAG 16: Data Analysis Technologies emphasizes data cleaning as a critical part of internal audit analytics.
Why Other Options Are Incorrect:
Option A (Normalizing data in preparation for analyzing it):
Normalization refers to structuring data efficiently (e.g., in databases) but does not necessarily involve eliminating redundancies in the way described.
Option B (Analyzing data in preparation for communicating results):
The auditor is still in the data preparation phase, not the analysis or reporting phase.
Option D (Reviewing data prior to defining the question):
The auditor is already working with data. Defining questions typically happens before data collection.
GTAG 16: Data Analysis Technologies – Covers data preparation, cleaning, and analytics in internal auditing.
IIA Practice Guide: Data Analytics in Internal Auditing – Outlines best practices for data validation and cleaning.
Step-by-Step Explanation:IIA References for Validation:Thus, cleaning the data (C) is the correct answer, as it ensures data integrity before identifying relevant processes and risks.
Based on lest results, an IT auditor concluded that the organization would suffer unacceptable loss of data if there was a disaster at its data center. Which of the following test results would likely lead the auditor to this conclusion?
Requested backup tapes were not returned from the offsite vendor In a timely manner.
Returned backup tapes from the offsite vendor contained empty spaces.
Critical systems have boon backed up more frequently than required.
Critical system backup tapes are taken off site less frequently than required
Understanding IT Backup Risks in Disaster Recovery:
Disaster recovery plans rely on backup data to restore operations after a system failure.
An ineffective backup system increases the risk of data loss, operational downtime, and regulatory non-compliance.
Why Option B (Empty Backup Tapes) Is Correct?
If backup tapes contain empty spaces, it indicates data corruption or incomplete backups, leading to unrecoverable data loss in a disaster.
IIA GTAG 16 – Data Management and IT Auditing emphasizes that backups must be tested for integrity and completeness.
ISO 27001 and NIST SP 800-34 recommend periodic verification of backup data to prevent critical failures.
Why Other Options Are Incorrect?
Option A (Delayed return of backup tapes):
While delayed tape retrieval affects recovery speed, it does not indicate data loss.
Option C (More frequent backups than required):
Frequent backups improve data protection, not cause unacceptable loss.
Option D (Less frequent offsite backups):
While infrequent backups increase risk, they do not directly indicate data loss upon testing.
Backup tapes containing empty spaces indicate potential data loss, making it the most critical disaster recovery risk.
IIA GTAG 16, ISO 27001, and NIST SP 800-34 highlight the need for validated backup integrity.
Final Justification:IIA References:
IIA GTAG 16 – Data Management and IT Auditing
ISO 27001 – Information Security Backup Standards
NIST SP 800-34 – Contingency Planning for IT Systems
Management is designing its disaster recovery plan. In the event that there is significant damage to the organization's IT systems this plan should enable the organization to resume operations at a recovery site after some configuration and data restoration. Which of the following is the ideal solution for management in this scenario?
A warm recovery plan.
A cold recovery plan.
A hot recovery plan.
A manual work processes plan
A disaster recovery plan (DRP) ensures that an organization can restore operations after a major IT system failure. The level of readiness depends on the type of recovery site used:
Correct Answer (A - A Warm Recovery Plan)
A warm site is a partially configured recovery site with some hardware and network infrastructure in place.
In the event of a disaster, some configuration and data restoration are required before full operation can resume.
This solution balances cost and recovery speed, making it ideal for moderate-risk scenarios.
The IIA GTAG 10: Business Continuity Management discusses warm sites as an effective disaster recovery solution.
Why Other Options Are Incorrect:
Option B (A Cold Recovery Plan):
A cold site has minimal infrastructure and requires significant time for setup and data restoration.
This is not ideal for organizations needing faster recovery.
Option C (A Hot Recovery Plan):
A hot site is a fully operational backup system that allows instant recovery, but it is very costly.
The scenario mentions "some configuration and data restoration", which suggests a warm site, not a hot site.
Option D (A Manual Work Processes Plan):
A manual plan involves non-IT solutions, which would not address IT system restoration.
IIA GTAG 10: Business Continuity Management – Describes warm, cold, and hot sites for disaster recovery.
IIA Practice Guide: Auditing Business Continuity Plans – Recommends warm recovery sites for balancing cost and recovery time.
Step-by-Step Explanation:IIA References for Validation:Thus, A is the correct answer because a warm recovery plan allows partial system readiness with minimal downtime.
According to IIA guidance on IT, which of the following best describes a situation where data backup plans exist to ensure that critical data can be restored at some point in the future, but recovery and restore processes have not been defined?
Hot recovery plan
Warm recovery plan
Cold recovery plan
Absence of recovery plan
A disaster recovery plan (DRP) ensures that critical systems and data can be restored after an incident. If backup plans exist but no recovery and restore processes are defined, then the organization lacks a functional recovery plan altogether.
(A) Hot recovery plan.
Incorrect. A hot recovery plan includes real-time data replication and immediate failover systems, allowing for almost instant recovery in case of an outage. Since the scenario mentions that no restore process is defined, this cannot be a hot recovery plan.
(B) Warm recovery plan.
Incorrect. A warm recovery plan involves regular backups and a standby system that can be activated within hours or days. However, without defined restore procedures, the organization does not even have a warm recovery plan.
(C) Cold recovery plan.
Incorrect. A cold recovery plan means that backups exist but recovery takes significant time because systems and infrastructure need to be rebuilt. However, a cold plan still includes a recovery process, which the scenario lacks.
(D) Absence of recovery plan. ✅
Correct. If data backup plans exist but no restore processes are defined, then there is no functional recovery plan. Without a structured approach to data recovery, backups alone are useless in an actual disaster scenario.
IIA GTAG "Business Continuity and Disaster Recovery" highlights the need for detailed recovery processes as part of an overall disaster recovery plan.
IIA GTAG – "Business Continuity and Disaster Recovery"
IIA Standard 2120 – Risk Management
COBIT Framework – IT Disaster Recovery Controls
Analysis of Answer Choices:IIA References:Thus, the correct answer is D, as data backups without recovery procedures indicate the absence of a recovery plan.
Which of the following techniques would best detect on inventory fraud scheme?
Analyze invoice payments just under individual authorization limits.
Analyze stratification of inventory adjustments by warehouse location.
Analyze Inventory Invoice amounts and compare with approved contract amounts.
Analyze differences discovered curing duplicate payment testing.
Understanding Inventory Fraud Detection:
Inventory fraud typically involves overstatement or understatement of inventory, fictitious inventory transactions, or misappropriation of stock.
A key way to detect fraud is analyzing inventory adjustments (e.g., write-offs, missing stock, excess inventory) to identify unusual patterns or discrepancies.
Why Stratifying Inventory Adjustments by Warehouse is the Best Approach:
Identifies high-risk locations: Certain warehouses may show significantly higher inventory losses or adjustments, indicating possible fraud.
Detects manipulation: Fraudsters may manipulate inventory records to cover theft or misstatements.
Supports data-driven audit procedures: Stratification allows internal auditors to prioritize high-risk areas for deeper investigation.
Why Other Options Are Incorrect:
A. Analyze invoice payments just under individual authorization limits – Incorrect, as this technique detects fraudulent disbursements, not inventory fraud.
C. Analyze inventory invoice amounts and compare with approved contract amounts – Incorrect, as this method detects pricing or procurement fraud, not inventory manipulation.
D. Analyze differences discovered during duplicate payment testing – Incorrect, as this technique is used to detect billing fraud, not inventory fraud.
IIA’s Perspective on Fraud Detection and Internal Controls:
IIA Standard 2120 – Risk Management requires internal auditors to assess fraud risk, including inventory manipulation.
IIA GTAG (Global Technology Audit Guide) on Fraud Detection recommends data analytics for inventory monitoring.
COSO Internal Control Framework highlights inventory control as a key component of financial accuracy and fraud prevention.
IIA References:
IIA Standard 2120 – Risk Management & Fraud Detection
IIA GTAG – Data Analytics for Fraud Detection in Inventory
COSO Internal Control Framework – Inventory and Asset Management Controls
Thus, the correct and verified answer is B. Analyze stratification of inventory adjustments by warehouse location.
Which of the following statements, is true regarding the capital budgeting procedure known as discounted payback period?
It calculates the overall value of a project.
It ignores the time value of money.
It calculates the time a project takes to break even.
It begins at time zero for the project.
The discounted payback period (DPP) is a capital budgeting technique that determines how long it takes for a project’s discounted cash flows to recover its initial investment. Unlike the regular payback period, the DPP accounts for the time value of money by discounting future cash flows.
(A) It calculates the overall value of a project.
Incorrect. The discounted payback period only measures how long it takes to recover the initial investment—it does not determine the overall value of a project. Net Present Value (NPV) and Internal Rate of Return (IRR) are used to evaluate a project's overall value.
(B) It ignores the time value of money.
Incorrect. Unlike the regular payback period, the discounted payback period accounts for the time value of money by discounting future cash flows using a required rate of return.
(C) It calculates the time a project takes to break even. ✅
Correct. The discounted payback period determines how long it takes for the present value of cash inflows to recover the initial investment. It helps assess the risk and liquidity of a project.
IIA GTAG "Auditing Capital Budgeting and Investment Decisions" states that discounted payback is useful for assessing the risk of projects by considering cash flow recovery time.
(D) It begins at time zero for the project.
Incorrect. The calculation starts at time zero (when the investment is made), but the method itself focuses on future discounted cash flows to determine the break-even point.
IIA GTAG – "Auditing Capital Budgeting and Investment Decisions"
COSO ERM Framework – Capital Investment Risk Management
GAAP/IFRS – Discounted Cash Flow Methods
Analysis of Answer Choices:IIA References:Thus, the correct answer is C, as the discounted payback period measures the time needed to break even after adjusting for the time value of money.
A rapidly expanding retail organisation continues to be tightly controlled by its original small management team. Which of the following is a potential risk in this vertically centralized organization?
Lack of coordination among different business units
Operational decisions are inconsistent with organizational goals
Suboptimal decision making
Duplication of business activities
In a vertically centralized organization, decision-making authority is concentrated at the top levels of management. As a company rapidly expands, maintaining tight control by a small management team can lead to inefficiencies, delays, and suboptimal decision-making due to limited input from operational and frontline staff.
Let’s analyze each option:
Option A: Lack of coordination among different business units
Incorrect. While coordination challenges can exist in a large, decentralized organization, a tightly controlled, centralized structure typically ensures strong coordination but at the cost of slower decision-making.
Option B: Operational decisions are inconsistent with organizational goals
Incorrect. In a centralized structure, top management closely controls decision-making, making goal misalignment less likely.
Option C: Suboptimal decision making
Correct.
Decentralized decision-making allows managers closer to operations to make informed, timely decisions.
A small centralized team may lack specialized knowledge about different departments, leading to inefficient or outdated decisions.
As the company expands, delays in decision-making and lack of responsiveness to market conditions increase risk exposure.
IIA Reference: Internal auditors assess organizational structures to identify risks associated with inefficient decision-making and control bottlenecks. (IIA Standard 2110: Governance)
Option D: Duplication of business activities
Incorrect. Duplication of activities is more common in decentralized structures, where different departments operate independently. A tightly controlled, centralized structure reduces redundancy but at the cost of decision-making efficiency.
Thus, the verified answer is C. Suboptimal decision making.
Which of the following would most likely be found in an organization that uses a decentralized organizational structure?
There is a higher reliance on organizational culture.
There are clear expectations set for employees.
There are electronic monitoring techniques employed
There is a defined code far employee behavior.
Comprehensive and Detailed Step-by-Step Explanation with All IIA References:
Understanding Decentralized Organizational Structures
A decentralized organization distributes decision-making authority to lower levels of management and employees rather than concentrating power at the top.
This structure requires a strong organizational culture to ensure alignment with company goals since direct oversight is reduced.
Why Option A is Correct?
Higher reliance on organizational culture is necessary in decentralized organizations because:
Employees must make independent decisions that align with company values and objectives.
Leaders trust teams to operate autonomously, which requires a shared sense of mission and ethics.
IIA Standard 2110 – Governance emphasizes the importance of corporate culture in managing risks within decentralized structures.
Decentralization requires informal controls like culture, rather than rigid policies and electronic monitoring.
Why Other Options Are Incorrect?
Option B (Clear expectations set for employees):
While clear expectations are important, they are common in both centralized and decentralized structures and do not distinguish decentralization.
Option C (Electronic monitoring techniques employed):
Centralized organizations are more likely to use electronic monitoring for control. Decentralized structures rely more on trust and culture.
Option D (Defined code for employee behavior):
Both centralized and decentralized organizations have codes of conduct, but culture plays a stronger role in decentralized settings.
Decentralized organizations rely on strong corporate culture to ensure employees make decisions aligned with organizational goals.
IIA Standard 2110 supports corporate culture as a key element in governance and risk management.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (Corporate Culture & Risk Management)
COSO ERM Framework – Culture & Decision-Making in Decentralized Structures
According to Herzberg's Two-Factor Theory of Motivation, which of the following factors arc mentioned most often by satisfied employees?
Salary and status
Responsibility and advancement
Work conditions and security
Peer relationships and personal life
Herzberg’s Two-Factor Theory of Motivation identifies two categories of workplace factors:
Hygiene Factors – Prevent dissatisfaction but do not create motivation (e.g., salary, job security, work conditions).
Motivational Factors – Lead to job satisfaction and motivation (e.g., achievement, responsibility, advancement, recognition).
(A) Salary and status. ❌ Incorrect.
Salary is a hygiene factor, meaning it prevents dissatisfaction but does not directly drive job satisfaction.
Status is also not a strong motivator under Herzberg’s theory.
(B) Responsibility and advancement. ✅ Correct.
These are motivational factors in Herzberg’s theory.
Employees feel satisfied when they have responsibility, career growth, and promotion opportunities.
IIA GTAG "Auditing Human Resource Management" highlights career development as a key driver of employee motivation and retention.
(C) Work conditions and security. ❌ Incorrect.
These are hygiene factors, which help avoid dissatisfaction but do not actively motivate employees.
(D) Peer relationships and personal life. ❌ Incorrect.
Good relationships with coworkers help, but they are not primary motivators under Herzberg’s theory.
IIA GTAG – "Auditing Human Resource Management"
IIA Standard 2110 – Governance (Employee Motivation & Engagement)
Herzberg’s Two-Factor Theory of Motivation (Workplace Psychology Research)
Analysis of Answer Choices:IIA References:Thus, the correct answer is B, as responsibility and advancement are the key motivational factors leading to employee satisfaction.
An organization has 10,000 units of a defect item in stock, per unit, market price is $10$; production cost is $4; and defect selling price is $5. What is the carrying amount (inventory value) of defects at your end?
$0
$4,000
$5,000
$10,000
The carrying amount (inventory value) of defective items is calculated based on the lower of cost or net realizable value (NRV) principle under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Given data:
Market price (normal selling price): $10 per unit
Production cost: $4 per unit
Defect selling price (NRV): $5 per unit
Total defective units: 10,000
Step 1: Determine the valuation ruleAccording to IAS 2 (Inventories), inventory should be valued at the lower of cost or net realizable value (NRV):
Cost per unit = $4
NRV per unit = $5
Since $4 (cost) < $5 (NRV), the cost per unit ($4) is used for valuation.
Step 2: Calculate total carrying amount
10,000 units×4 (cost per unit)=40,00010,000 \text{ units} \times 4 \text{ (cost per unit)} = 40,00010,000 units×4 (cost per unit)=40,000
However, since the items are defective, their value is determined by NRV ($5 per unit) because they cannot be sold at full market price.
10,000×5=50,00010,000 \times 5 = 50,00010,000×5=50,000
Since inventory should be recorded at the lower of cost or NRV, the inventory value is $5 per unit instead of $4.
10,000×5=5,00010,000 \times 5 = 5,00010,000×5=5,000
Thus, the verified answer is C. $5,000.
Which of the following is on advantage of a decentralized organizational structure, as opposed to a centralized structure?
Greater cost-effectiveness
Increased economies of scale
Larger talent pool
Strong internal controls
A decentralized organizational structure distributes decision-making authority across different business units or geographic regions. One major advantage is the ability to tap into a larger talent pool, as decision-making is not restricted to headquarters, and leadership opportunities exist at multiple levels.
(A) Greater cost-effectiveness.
Incorrect. A decentralized structure often increases costs due to duplicate resources, additional oversight, and inefficiencies from fragmented decision-making.
(B) Increased economies of scale.
Incorrect. Centralized organizations benefit more from economies of scale because they can standardize processes and consolidate purchasing power. Decentralization reduces these benefits by spreading decision-making across multiple locations.
(C) Larger talent pool. ✅
Correct. Decentralization allows organizations to recruit, develop, and retain talent in different locations, rather than relying solely on headquarters for leadership roles.
This aligns with IIA Standard 2110 – Governance, which emphasizes the importance of leadership distribution and talent management in organizations.
(D) Strong internal controls.
Incorrect. Centralized structures typically have stronger internal controls, as decision-making and risk management are closely monitored. Decentralization increases the risk of inconsistent controls across different units.
IIA Standard 2110 – Governance
COSO Framework – Organizational Structure and Risk Management
IIA GTAG – "Auditing Business Strategy Alignment"
Analysis of Answer Choices:IIA References:Thus, the correct answer is C, as decentralization expands the talent pool by enabling local decision-making and leadership development.
What kind of strategy would be most effective for an organization to adopt in order to Implement a unique advertising campaign for selling identical product lines across all of its markets?
Export strategy.
Transnational strategy
Multi-domestic strategy
Globalization strategy
A globalization strategy focuses on delivering standardized products and marketing campaigns across multiple international markets with minimal local customization. This approach ensures brand consistency and cost efficiencies while targeting a broad audience.
(A) Export strategy.
Incorrect. An export strategy refers to selling domestic products overseas without significant marketing adaptation. It does not involve a unique advertising campaign tailored for global markets.
(B) Transnational strategy.
Incorrect. A transnational strategy balances global efficiency with local responsiveness, meaning advertising campaigns would be adapted based on regional preferences rather than being uniform across all markets.
(C) Multi-domestic strategy.
Incorrect. A multi-domestic strategy involves customizing products and marketing approaches for each local market. This is the opposite of a standardized advertising campaign.
(D) Globalization strategy. ✅
Correct. A globalization strategy implements a standardized marketing approach to maintain a consistent brand message across all markets while reducing costs.
Example: Companies like Apple, Coca-Cola, and Nike use globalized advertising to promote identical products across different countries.
IIA Standard 2110 – Governance emphasizes the need for alignment between business strategy and risk management, which includes global marketing decisions.
IIA Standard 2110 – Governance
COSO Framework – Strategic Risk Management
IIA GTAG – "Auditing Business Strategy Alignment"
Analysis of Answer Choices:IIA References:Thus, the correct answer is D, as a globalization strategy effectively supports a uniform advertising campaign for identical products across multiple markets.
According to IIA guidance, which of the following would be the best first stop to manage risk when a third party is overseeing the organization's network and data?
Creating a comprehensive reporting system for vendors to demonstrate their ongoing due diligence in network operations.
Drafting a strong contract that requires regular vendor control reports end a right-to-audit clause.
Applying administrative privileges to ensure right to access controls are appropriate.
Creating a standing cyber-security committee to identify and manage risks related to data security
When an organization outsources network and data management to a third party, the first step in risk management is to ensure that the contractual agreement includes strong governance provisions, including:
Regular vendor control reports to monitor security and performance.
A right-to-audit clause, allowing the organization to periodically assess compliance and security controls.
Correct Answer (B - Drafting a Strong Contract with Vendor Control Reports & Right-to-Audit Clause)
IIA Practice Guide: Auditing Third-Party Risk Management recommends that contracts with vendors include clear security expectations, reporting requirements, and audit rights.
A right-to-audit clause allows internal auditors to verify compliance with security policies.
Vendor control reports (e.g., SOC 2 reports) provide assurance that the vendor meets security and compliance standards.
Why Other Options Are Incorrect:
Option A (Creating a comprehensive reporting system for vendors):
While useful, a reporting system alone is not the first step—it should be included after contractual protections are in place.
Option C (Applying administrative privileges to ensure appropriate access controls):
This applies to internal access management but does not address third-party risk management.
Option D (Creating a cybersecurity committee):
A cybersecurity committee helps manage ongoing risks, but contractual controls are the first step in managing third-party risk.
IIA Practice Guide: Auditing Third-Party Risk Management – Recommends strong contracts with right-to-audit clauses.
GTAG 7: Information Technology Outsourcing – Discusses vendor risk management and contractual safeguards.
Step-by-Step Explanation:IIA References for Validation:Thus, the best first step is drafting a strong contract with vendor control reports and a right-to-audit clause (B).
Which of the following is a security feature that Involves the use of hardware and software to filter or prevent specific Information from moving between the inside network and the outs de network?
Authorization
Architecture model
Firewall
Virtual private network
Definition of a Firewall:
A firewall is a network security device (hardware or software) that monitors and controls incoming and outgoing network traffic.
It is designed to filter or prevent specific information from moving between internal and external networks, ensuring unauthorized access is blocked.
How a Firewall Works:
It uses rules and policies to determine whether to allow or block traffic.
Firewalls can be configured to prevent malware, hacking attempts, and unauthorized data transfers.
There are different types, including packet-filtering firewalls, stateful inspection firewalls, and next-generation firewalls (NGFWs).
Why Other Options Are Incorrect:
A. Authorization:
Authorization refers to user access control, ensuring users have the correct permissions, but it does not filter network traffic.
B. Architecture model:
An architecture model defines the structure of an IT system but does not actively prevent or filter data movement.
D. Virtual private network (VPN):
A VPN encrypts data and provides secure remote access but does not filter or block data movement between networks.
IIA’s Perspective on IT Security Controls:
IIA Standard 2110 – Governance emphasizes strong cybersecurity controls, including firewalls, to protect sensitive data.
IIA GTAG (Global Technology Audit Guide) on Information Security recommends using firewalls as a primary defense mechanism.
NIST Cybersecurity Framework and ISO 27001 Security Standards identify firewalls as critical tools for network security and data protection.
IIA References:
IIA Standard 2110 – Governance and IT Security
IIA GTAG – Information Security Risks
NIST Cybersecurity Framework
Which of the following situations best illustrates a "false positive" in the performance of a spam filter?
The spam filter removed Incoming communication that included certain keywords and domains.
The spam filter deleted commercial ads automatically, as they were recognized as unwanted.
The spam filter routed to the "junk|r folder a newsletter that appeared to include links to fake websites.
The spam filter blocked a fitness club gift card that coworkers sent to an employee for her birthday.
A false positive occurs when a system incorrectly identifies a legitimate item as a threat or an unwanted entity. In the case of a spam filter, a false positive happens when the filter mistakenly classifies a genuine email as spam, even though it is legitimate.
Option A: "The spam filter removed incoming communication that included certain keywords and domains."
This describes a general filtering mechanism but does not indicate a mistake. If the filter was correctly configured, it is not necessarily a false positive. (Incorrect)
Option B: "The spam filter deleted commercial ads automatically, as they were recognized as unwanted."
If the ads were indeed unwanted, this is a true positive, meaning the system worked correctly. (Incorrect)
Option C: "The spam filter routed to the 'junk' folder a newsletter that appeared to include links to fake websites."
If the newsletter contained suspicious links, the filter was functioning as designed. This is not necessarily an error. (Incorrect)
Option D: "The spam filter blocked a fitness club gift card that coworkers sent to an employee for her birthday."
This is a clear example of a false positive because the email was not spam or malicious, yet the filter mistakenly blocked it. (Correct Answer)
IIA GTAG (Global Technology Audit Guide) on Cybersecurity and IT Risks: Discusses false positives and negatives in automated security controls.
IIA’s "Auditing IT Security Controls" Report: Emphasizes the need for tuning security filters to reduce false positives.
COBIT 2019 – DSS05.07 (Manage Security Services): Highlights the importance of minimizing false positives to ensure business communication is not disrupted.
Analysis of Each Option:IIA References:Thus, the correct answer is D. The spam filter blocked a fitness club gift card that coworkers sent to an employee for her birthday.
Which of the following best describes the primary objective of cybersecurity?
To protect the effective performance of IT general and application controls.
To regulate users' behavior it the web and cloud environment.
To prevent unauthorized access to information assets.
To secure application of protocols and authorization routines.
Cybersecurity is primarily focused on protecting information assets by preventing unauthorized access, data breaches, cyberattacks, and other security threats. The confidentiality, integrity, and availability (CIA) triad is the foundation of cybersecurity, with access control playing a key role in mitigating risks.
(A) Incorrect – To protect the effective performance of IT general and application controls.
While cybersecurity supports IT controls, its primary goal is information security, not just control performance.
(B) Incorrect – To regulate users' behavior in the web and cloud environment.
Cybersecurity includes user behavior policies, but its primary goal is preventing unauthorized access rather than regulation.
(C) Correct – To prevent unauthorized access to information assets.
The core objective of cybersecurity is to prevent unauthorized access, protecting data from cyber threats.
This aligns with the CIA (Confidentiality, Integrity, Availability) security model.
(D) Incorrect – To secure application of protocols and authorization routines.
Protocols and authorization routines are part of cybersecurity controls, but they are not the primary objective.
IIA’s GTAG (Global Technology Audit Guide) – Cybersecurity Risks and Controls
Defines cybersecurity as the protection of information assets from unauthorized access and threats.
NIST Cybersecurity Framework – Access Control and Information Security
Focuses on preventing unauthorized access to sensitive systems.
COBIT Framework – IT Governance and Security
Emphasizes the protection of data and IT assets through cybersecurity measures.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Which of the following attributes of data is most likely to be compromised in an organization with a weak data governance culture?
Variety.
Velocity.
Volume.
Veracity.
Data governance refers to the policies, processes, and controls an organization implements to ensure data integrity, security, and compliance. When an organization has a weak data governance culture, the most compromised attribute of data is "veracity," which refers to the accuracy, reliability, and trustworthiness of data.
Why Option D (Veracity) is Correct:
Weak data governance leads to poor data quality, inconsistencies, and errors, reducing data veracity (trustworthiness and accuracy).
Without strong governance, data may be incomplete, outdated, or manipulated, leading to flawed decision-making.
Data veracity is critical for risk management, internal audit, and regulatory compliance, as unreliable data can lead to financial misstatements and operational risks.
Why Other Options Are Incorrect:
Option A (Variety):
Variety refers to different types and sources of data (structured, unstructured, semi-structured).
A weak data governance culture does not necessarily affect the diversity of data sources.
Option B (Velocity):
Velocity refers to the speed at which data is generated, processed, and analyzed.
Weak governance impacts data quality more than processing speed.
Option C (Volume):
Volume refers to the quantity of data being processed and stored.
Weak data governance might lead to data duplication or loss but does not directly impact data volume.
IIA GTAG – "Auditing Data Governance": Emphasizes the importance of data veracity in decision-making.
COSO Internal Control Framework: Highlights the role of data integrity in financial and operational controls.
IIA’s Global Technology Audit Guide on Data Analytics: Discusses the risks of poor data governance affecting veracity.
IIA References:
Which of the following represents a basis for consolidation under the International Financial Reporting Standards?
Variable entity approach.
Control ownership.
Risk and reward.
Voting interest.
Under International Financial Reporting Standards (IFRS 10 – Consolidated Financial Statements), an entity is required to consolidate its financial statements based on the control principle rather than ownership percentage alone.
Why Option B (Control ownership) is Correct:
According to IFRS 10, consolidation is required when an entity has control over another entity.
Control is defined as having power over the investee, exposure to variable returns, and the ability to influence those returns.
Even if an entity owns less than 50% of voting rights, it may still have control through contractual arrangements, rights over key decisions, or majority board influence.
Why Other Options Are Incorrect:
Option A (Variable entity approach):
This is a concept used in U.S. GAAP (ASC 810 – Variable Interest Entities) rather than IFRS. IFRS focuses on the broader control model.
Option C (Risk and reward):
IFRS previously considered risk and reward under IAS 27/SIC-12, but IFRS 10 replaced this with the control model.
Option D (Voting interest):
Voting rights alone do not determine consolidation under IFRS. Control can exist even without majority voting rights through contractual arrangements or potential voting rights.
IFRS 10 – Consolidated Financial Statements: Defines the principle of control for consolidation.
IIA GTAG – "Auditing Financial Reporting Risks": Discusses the impact of IFRS consolidation principles.
COSO ERM Framework: Emphasizes risk assessment in financial reporting, including consolidation decisions.
IIA References:Thus, the correct answer is B. Control ownership.
Which of the following security controls would provide the most efficient and effective authentication for customers to access these online shopping account?
12-digit password feature.
Security question feature.
Voice recognition feature.
Two-level sign-on feature
Two-level (or multi-factor) authentication (MFA) is the most efficient and effective security control for authenticating customers when accessing online shopping accounts. It provides an extra layer of security beyond just passwords, making it more difficult for unauthorized users to gain access.
Stronger Authentication – It requires two independent verification methods, such as:
Something you know (password, PIN)
Something you have (one-time code, mobile device, smart card)
Something you are (biometric feature)
Reduces Risk of Credential Theft – Even if hackers obtain a user's password, they still need the second factor to gain access.
Meets Regulatory Standards – Many cybersecurity frameworks (NIST, ISO 27001, PCI-DSS) recommend or mandate MFA for customer authentication.
Enhanced Customer Trust – Provides users with better security, reducing risks of fraud or account takeovers.
A. 12-digit password feature – Longer passwords improve security, but they can still be compromised through phishing or brute force attacks.
B. Security question feature – These are often weak because users choose predictable answers (e.g., mother's maiden name).
C. Voice recognition feature – Biometric authentication is useful, but voice recognition can be bypassed using deepfake or recorded audio.
IIA’s GTAG (Global Technology Audit Guide) on Information Security Management – Recommends multi-factor authentication for access control.
IIA’s International Professional Practices Framework (IPPF) – Standard 2110.A2 – Highlights the need for strong security controls to protect customer data.
NIST SP 800-63 (Digital Identity Guidelines) – Encourages multi-factor authentication as a best practice for securing user accounts.
Why Two-Level Sign-On (MFA) Is the Best Choice?Why Not the Other Options?IIA References:✅ Final Answer: D. Two-level sign-on feature (Most effective for online customer authentication).
===============
An organization is considering outsourcing its IT services, and the internal auditor as assessing the related risks. The auditor grouped the related risks into three categories;
- Risks specific to the organization itself.
- Risks specific to the service provider.
- Risks shared by both the organization and the service provider
Which of the following risks should the auditor classify as specific to the service provider?
Unexpected increases in outsourcing costs.
Loss of data privacy.
Inadequate staffing.
Violation of contractual terms.
When an organization outsources IT services, risks can be categorized as:
Risks specific to the organization – Risks that arise internally within the company.
Risks specific to the service provider – Risks that are under the control of the third-party provider.
Shared risks – Risks that require joint management by both the organization and the service provider.
Let’s analyze the answer choices:
Option A: Unexpected increases in outsourcing costs.
Incorrect. While cost increases can be a risk, they are often a shared risk because the organization and the provider negotiate pricing terms.
Option B: Loss of data privacy.
Incorrect. Data privacy concerns are shared between the organization (which must ensure compliance with regulations like GDPR or CCPA) and the service provider (which must implement proper security controls).
Option C: Inadequate staffing.
Correct. The service provider is responsible for maintaining adequate staffing levels to deliver the contracted services effectively. If they fail to do so, service quality can deteriorate, posing risks to the organization.
IIA Reference: Internal auditors should assess vendor risk management, including the provider’s staffing capabilities. (IIA GTAG: Auditing IT Outsourcing)
Option D: Violation of contractual terms.
Incorrect. While the service provider may be responsible for upholding contract terms, the organization is also responsible for contract enforcement. This makes it a shared risk rather than one specific to the provider.
Which of the following represents an inventory costing technique that can be manipulated by management to boost net income by selling units purchased at a low cost?
First-in. first-out method (FIFO).
Last-in, first-out method (LIFO).
Specific identification method.
Average-cost method
The FIFO (First-In, First-Out) method values inventory based on the assumption that older, lower-cost inventory is sold first, leaving newer, higher-cost inventory in stock. During periods of rising prices, FIFO results in lower cost of goods sold (COGS) and higher net income, making it susceptible to manipulation by management.
(A) Correct – First-in, first-out method (FIFO).
FIFO lowers COGS when older, cheaper inventory is sold first, inflating net income.
Management can manipulate earnings by selectively selling older, lower-cost inventory.
(B) Incorrect – Last-in, first-out method (LIFO).
LIFO assumes newer, higher-cost inventory is sold first, resulting in higher COGS and lower net income.
LIFO is typically used to reduce taxable income, not to inflate net income.
(C) Incorrect – Specific identification method.
This method tracks the exact cost of each unit, eliminating the ability to manipulate costs easily.
(D) Incorrect – Average-cost method.
The average-cost method smooths out fluctuations in inventory costs, preventing significant income manipulation.
IIA’s Global Internal Audit Standards – Financial Reporting and Inventory Valuation Risks
Discusses inventory accounting methods and their impact on financial statements.
IFRS and GAAP Accounting Standards – Inventory Valuation
Defines how FIFO can be used to influence financial performance.
COSO’s ERM Framework – Financial Manipulation Risks
Identifies inventory valuation as an area where earnings management can occur.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
In light of increasing emission taxes in the European Union, a car manufacturer introduced a new middle-class hybrid vehicle specifically for the European market only. Which of the following competitive strategies has the manufacturer used?
Reactive strategy.
Cost leadership strategy.
Differentiation strategy.
Focus strategy
A focus strategy targets a specific market segment, geographical area, or niche customer base rather than competing in the entire market.
Why Option D (Focus strategy) is Correct:
The car manufacturer introduced a hybrid vehicle specifically for the European market to address increasing emission taxes, meaning they are focusing on a specific region and customer need.
Focus strategy aims at tailoring products to meet the needs of a particular group of consumers (e.g., environmentally conscious European customers).
Why Other Options Are Incorrect:
Option A (Reactive strategy):
Incorrect because while the company is responding to regulatory changes, "reactive strategy" is not a recognized competitive strategy under Porter’s model.
Option B (Cost leadership strategy):
Incorrect because cost leadership focuses on minimizing costs and offering the lowest price in the broad market. This scenario does not emphasize cost reduction.
Option C (Differentiation strategy):
Incorrect because differentiation involves offering unique products across a broad market, whereas the hybrid vehicle is targeted specifically for the European market.
IIA Practice Guide – "Auditing Strategic Risk Management": Discusses competitive strategies, including focus strategy.
Porter's Competitive Strategy Model: Defines focus strategy as targeting a niche market.
COSO ERM Framework – "Strategic Decision-Making": Recommends market-specific focus strategies to mitigate regulatory risks.
IIA References:
Which of the following security controls focuses most on prevention of unauthorized access to the power plant?
An offboarding procedure is initiated monthly to determine redundant physical access rights.
Logs generated by smart locks are automatically scanned to identify anomalies in access patterns.
Requests for additional access rights are sent for approval and validation by direct supervisors.
Automatic notifications are sent to a central security unit when employees enter the premises during nonwork hours
Preventive security controls proactively stop unauthorized access before it occurs. The most effective method is strict access management, where new or additional access rights require formal validation before being granted.
Prevents Unauthorized Entry – Ensures that only approved personnel have access to the power plant.
Implements Segregation of Duties (SoD) – Supervisors validate access requests, reducing insider threats.
Aligns with Least Privilege Principle – Employees get only the minimum access necessary for their role.
Prevents Security Risks Before They Happen – Unlike detective or corrective controls, this method stops unauthorized access before it occurs.
A. Offboarding procedure (monthly review) – This is a detective control, identifying issues after access is granted, not preventing them.
B. Smart lock anomaly scanning – Also detective, as it identifies suspicious behavior after access has been used.
D. Automatic notifications for after-hours entry – A corrective control, responding to potential violations instead of preventing them.
IIA’s GTAG on Identity and Access Management – Recommends pre-approval processes for sensitive locations.
ISO 27001 Annex A.9 (Access Control) – Requires role-based access management for critical infrastructures.
NIST SP 800-53 (Security and Privacy Controls for Federal Information Systems) – Defines supervisor approval as a key preventive measure.
Why Approval-Based Access Control is the Best Preventive Measure?Why Not the Other Options?IIA References:
Which of the following actions would senior management need to consider as part of new IT guidelines regarding the organization's cybersecurity policies?
Assigning new roles and responsibilities for senior IT management.
Growing use of bring your own devices for organizational matters.
Expansion of operations into new markets with limited IT access.
Hiring new personnel within the IT department for security purposes.
When updating cybersecurity policies, senior management must focus on emerging risks and challenges that impact the organization’s security posture. One major concern is the increasing use of Bring Your Own Device (BYOD) policies, where employees use personal devices for work-related tasks. This introduces security vulnerabilities such as unauthorized access, data leakage, and malware infections.
(A) Incorrect – Assigning new roles and responsibilities for senior IT management.
While defining roles is important, it is a management function rather than a direct cybersecurity policy update.
Cybersecurity policies focus on risks like data protection, access controls, and device security rather than IT management roles.
(B) Correct – Growing use of bring your own devices for organizational matters.
BYOD introduces security risks such as unauthorized access, weak endpoint security, and data loss.
Cybersecurity policies must address encryption, remote access controls, and mobile device management (MDM) solutions.
(C) Incorrect – Expansion of operations into new markets with limited IT access.
While IT expansion poses challenges, cybersecurity policies focus more on data security, threat management, and risk mitigation rather than market access issues.
(D) Incorrect – Hiring new personnel within the IT department for security purposes.
Hiring staff improves security operations but is a resource management decision, not a direct cybersecurity policy concern.
Cybersecurity policies focus on access controls, risk assessments, and compliance requirements.
IIA’s GTAG (Global Technology Audit Guide) – Cybersecurity and Risk Management
Highlights BYOD as a key cybersecurity risk requiring clear policies and controls.
NIST Cybersecurity Framework – Mobile Device Security
Recommends specific policies for managing BYOD risks.
Analysis of Answer Choices:IIA References and Internal Auditing Standards:
Which of the following should software auditors do when reporting internal audit findings related to enterprisewide resource planning?
Draft separate audit reports for business and IT management.
Conned IT audit findings to business issues.
Include technical details to support IT issues.
Include an opinion on financial reporting accuracy and completeness.
When reporting internal audit findings related to Enterprise Resource Planning (ERP) systems, IT audit findings must be relevant to business objectives. Business leaders may not fully understand technical IT risks, so reports should translate IT risks into business impacts to ensure actionable decision-making.
(A) Draft separate audit reports for business and IT management.
Incorrect: Fragmenting reports could create misalignment, reducing the effectiveness of integrated risk management.
(B) Connect IT audit findings to business issues. (Correct Answer)
IT auditors should explain how IT risks impact operations, financial reporting, and strategic goals.
IIA Standard 2410 – Criteria for Communicating requires audit findings to be clear, relevant, and actionable for all stakeholders.
IIA GTAG 8 – Auditing Application Controls emphasizes aligning IT controls with business risks.
(C) Include technical details to support IT issues.
Incorrect: While technical details help IT teams, business executives need risk-based insights, not just technical specifics.
(D) Include an opinion on financial reporting accuracy and completeness.
Incorrect: While ERP systems impact financial data, IT auditors should focus on system risks, not directly on financial reporting opinions (which is the role of financial auditors).
IIA Standard 2410 – Criteria for Communicating: Requires clear and business-relevant communication of audit findings.
IIA GTAG 8 – Auditing Application Controls: Advises IT auditors to relate technical risks to business objectives.
Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) because IT audit findings should be framed in a way that connects technical risks to business implications, making them more relevant to management.
What security feature would Identity a legitimate employee using her own smart device to gam access to an application run by the organization?
Using a jailbroken or rooted smart device feature.
Using only smart devices previously approved by the organization.
Obtaining written assurance from the employee that security policies and procedures are followed.
Introducing a security question known only by the employee.
To ensure security when employees use their own smart devices to access organizational applications, the best approach is to allow only pre-approved devices that meet the organization’s security standards.
Device Security & Compliance: Approved devices are verified for security measures like encryption, mobile device management (MDM), and antivirus protection.
Risk Management: Restricting access to pre-approved devices reduces the risk of malware, unauthorized access, and vulnerabilities.
IT Control & Monitoring: IT can enforce security updates, compliance policies, and access control mechanisms on pre-approved devices.
Option A (Using a jailbroken or rooted smart device feature): Jailbroken or rooted devices remove security protections and create severe security vulnerabilities.
Option C (Obtaining written assurance from the employee that security policies and procedures are followed): Written assurances alone are not a security measure; technical controls must be enforced.
Option D (Introducing a security question known only by the employee): Security questions are weak authentication measures and do not verify the legitimacy of a device.
IIA's GTAG on Information Security Management stresses the importance of device security and requiring IT-approved devices.
NIST Special Publication 800-124 (referenced in IIA’s IT Audit Guidance) highlights best practices for securing mobile devices in an enterprise setting, recommending pre-approved devices.
Why Option B is Correct:Why Other Options Are Incorrect:IIA References:Thus, the most appropriate answer is B. Using only smart devices previously approved by the organization.
An employee was promoted within the organization and relocated to a new office in a different building. A few months later, security personnel discovered that the employee's smart card was being used to access the building where she previously worked. Which of the following security controls could prevent such an incident from occurring?
Regular review of logs.
Two-level authentication.
Photos on smart cards.
Restriction of access hours.
The scenario describes a security breach where an employee’s smart card access was not updated after relocation. The best way to prevent such incidents is to regularly review access logs to detect and revoke outdated permissions.
Timely Detection of Unauthorized Access:
Regular log reviews allow security teams to identify anomalies, such as an employee accessing a location where they no longer work.
Access Control Auditing:
Periodic reviews help update access rights, ensuring that only authorized personnel have access to specific areas.
Compliance with Security Standards:
IIA Standard 2110 - Governance emphasizes ensuring security measures are effective.
ISO 27001 - Access Control Policies recommends regular access reviews to prevent unauthorized access.
B. Two-level authentication:
While multi-factor authentication enhances security, it would not remove outdated access rights from the system.
C. Photos on smart cards:
A photo helps in identity verification, but it does not prevent unauthorized access if the card remains active.
D. Restriction of access hours:
Limiting access times would not stop an unauthorized user from entering during valid hours.
IIA Standard 2110 - Governance: Internal auditors must assess IT and physical security controls.
IIA Standard 2120 - Risk Management: Ensures risks associated with unauthorized access are managed.
COBIT Framework - Identity and Access Management: Recommends reviewing user access logs for anomalies.
Key Reasons Why Option A is Correct:Why Other Options Are Incorrect:IIA References:Thus, the correct answer is A. Regular review of logs.
Which of the following analytical techniques would an internal auditor use to verify that none of an organization's employees are receiving fraudulent invoice payments?
Perform gap testing.
Join different data sources.
Perform duplicate testing.
Calculate statistical parameters.
Duplicate testing is an analytical technique used to detect fraudulent payments, errors, or inefficiencies by identifying repeated transactions within financial records. In this case, an internal auditor would use duplicate testing to ensure that employees are not receiving fraudulent invoice payments by verifying that no invoice has been paid multiple times.
Detecting Duplicate Payments: Fraudulent employees may submit the same invoice multiple times with slight modifications to avoid detection. Duplicate testing helps find identical or similar transactions.
Identifying Unusual Patterns: By analyzing payment records, auditors can detect repeat payments to the same vendor, same invoice number, or similar amounts within a short time frame.
Aligns with Fraud Prevention Practices: As per IIA Standard 2120 - Risk Management, internal auditors must identify and assess fraud risks, including duplicate invoice payments.
Supports Data Analytics in Auditing: IIA GTAG (Global Technology Audit Guide) 16 - Data Analysis Techniques recommends using duplicate testing to identify fraud, control weaknesses, and errors in financial transactions.
A. Perform gap testing: Gap testing is used to identify missing data or transactions in a sequence (e.g., missing invoice numbers), but it does not specifically target duplicate or fraudulent payments.
B. Join different data sources: This method is useful for cross-checking information across multiple databases, but it is not directly related to identifying duplicate invoice payments.
D. Calculate statistical parameters: Statistical analysis provides summary insights about data (e.g., mean, median), but it does not specifically detect duplicate payments.
IIA Standard 2120 - Risk Management: Internal auditors must evaluate fraud risks, including duplicate payments.
IIA Standard 1220 - Due Professional Care: Requires auditors to apply appropriate data analytics techniques.
IIA GTAG 16 - Data Analysis Techniques: Recommends duplicate testing as an effective fraud detection method.
Key Reasons Why Option C is Correct:Why Other Options Are Incorrect:IIA References:Thus, the correct answer is C. Perform duplicate testing.
Which of the following IT professionals is responsible for providing maintenance to switches and routers to keep IT systems running as intended?
Data center operations manager
Response and support team.
Database administrator,
Network administrator
An IT auditor is evaluating IT controls of a newly purchased information system. The auditor discovers that logging is not configured al database and application levels. Operational management explains that they do not have enough personnel to manage the logs and they see no benefit in keeping logs. Which of the fallowing responses best explains risks associated with insufficient or absent logging practices?
The organization will be unable to develop preventative actions based on analytics.
The organization will not be able to trace and monitor the activities of database administers.
The organization will be unable to determine why intrusions and cyber incidents took place.
The organization will be unable to upgrade the system to newer versions.
Logging at the database and application levels is a critical security control that enables monitoring, detecting, and investigating potential security incidents. The absence of logging significantly increases cybersecurity risks and can leave an organization vulnerable to undetected attacks.
Incident Response & Forensics: Without logs, the organization will be unable to determine the cause, origin, and impact of cyber incidents or system intrusions.
Compliance Requirements: Many regulatory frameworks (e.g., ISO 27001, NIST 800-53, GDPR, PCI-DSS, SOX) require logging for security monitoring and auditability.
Threat Detection: Logs help in identifying malicious activities, unauthorized access, and data breaches.
Accountability: Ensures that actions taken within the system can be traced back to specific users or administrators.
Option A (The organization will be unable to develop preventative actions based on analytics): While logging helps in analytics, its primary function is incident detection and forensic investigation.
Option B (The organization will not be able to trace and monitor the activities of database administrators): This is partially correct, but logging is not just for administrators—it is essential for monitoring all system activities, including unauthorized access attempts.
Option D (The organization will be unable to upgrade the system to newer versions): Logging does not impact system upgrades; upgrades are related to software lifecycle management, not logging practices.
IIA’s Global Technology Audit Guide (GTAG) – Information Security Controls recommends logging as a fundamental security control.
IIA Standard 2110 – IT Governance: Emphasizes the need for adequate IT risk management, including logging.
COSO Framework (Monitoring Component): Highlights the importance of system monitoring, which includes logging.
Why Option C is Correct:Why Other Options Are Incorrect:IIA References:Thus, the most appropriate answer is C. The organization will be unable to determine why intrusions and cyber incidents took place.
If an organization has a high amount of working capital compared to the industry average, which of the following is most likely true?
Settlement of short-term obligations may become difficult.
Cash may be bed up in items not generating financial value.
Collection policies of the organization are ineffective.
The organization is efficient in using assets to generate revenue.
Working capital = Current Assets – Current Liabilities
A high amount of working capital compared to industry averages suggests that the organization may not be efficiently using its resources. This could mean that:
Excess cash is invested in inventory or accounts receivable, instead of being used for growth, investment, or shareholder returns.
The company may be holding too much inventory, which could lead to obsolescence or additional storage costs.
The business may have slow turnover in receivables, meaning cash is not being collected efficiently.
A. Settlement of short-term obligations may become difficult. (Incorrect)
A high working capital means the organization has sufficient assets to cover short-term obligations, so liquidity issues are unlikely.
B. Cash may be tied up in items not generating financial value. (Correct)
High working capital may indicate inefficient use of assets, such as excess inventory, high accounts receivable, or idle cash.
This can negatively impact return on assets (ROA) and overall financial performance.
C. Collection policies of the organization are ineffective. (Incorrect)
While high receivables can be a factor, working capital includes all current assets and liabilities, not just accounts receivable.
The issue could be inventory mismanagement or excess liquidity, not just collection policies.
D. The organization is efficient in using assets to generate revenue. (Incorrect)
A high working capital does not necessarily mean efficiency. In fact, it may indicate underutilized resources rather than optimized performance.
IIA GTAG 3 – Continuous Auditing: Implications for Internal Auditors highlights the importance of monitoring key financial metrics such as working capital.
IIA Practice Advisory 2130-1 – Assessing Organizational Performance emphasizes that internal auditors should assess whether financial resources are being used efficiently.
Financial Management Principles (IIA Guidance) discuss the impact of excessive working capital on liquidity and return on investment.
Explanation of Answer Choices:IIA References:Thus, the correct answer is B. Cash may be tied up in items not generating financial value.
Senior management is trying to decide whether to use the direct write-off or allowance method for recording bad debt on accounts receivables. Which of the following would be the best argument for using the direct write-off method?
It is useful when losses are considered insignificant.
It provides a better alignment with revenue.
It is the preferred method according to The IIA.
It states receivables at net realizable value on the balance sheet.
The direct write-off method records bad debts only when an account is deemed uncollectible, meaning there is no estimation of bad debts in advance. This method is typically used when bad debts are immaterial (insignificant) because it does not adhere to the matching principle of accounting.
Simplicity and Practicality:
The direct write-off method is straightforward and only requires writing off bad debts as they occur.
It is best suited for companies where bad debt losses are minimal or rare.
Acceptable for Insignificant Losses:
If bad debts are not material, then estimating and recording an allowance in advance (as in the allowance method) may not be necessary.
Used by Small Businesses and Tax Accounting:
The IRS allows the direct write-off method for tax purposes because it recognizes expenses only when they occur.
Not Aligned with GAAP for Significant Losses:
Generally Accepted Accounting Principles (GAAP) prefer the allowance method, which estimates bad debts in advance to match expenses with related revenues.
B. It provides a better alignment with revenue:
Incorrect because the allowance method provides a better revenue-expense matching approach, not the direct write-off method.
C. It is the preferred method according to The IIA:
The IIA does not have a stated preference between the two methods; however, GAAP prefers the allowance method.
D. It states receivables at net realizable value on the balance sheet:
The allowance method states receivables at net realizable value (NRV) by estimating bad debts in advance, while the direct write-off method does not adjust receivables until a loss occurs.
IIA Standard 2120 - Risk Management: Internal auditors must assess financial risks, including credit risks and bad debt write-offs.
COSO Internal Control Framework - Financial Reporting Component: Emphasizes accurate financial reporting, where the allowance method is generally preferred for better estimation.
Key Reasons Why Option A is Correct:Why Other Options Are Incorrect:IIA References:Thus, the correct answer is A. It is useful when losses are considered insignificant.
At an organization that uses a periodic inventory system, the accountant accidentally understated the organization s beginning inventory. How would the accountant's accident impact the income statement?
Cost of goods sold will be understated and net income will be overstated.
Cost of goods sold will be overstated and net income will be understated
Cost of goods sold will be understated and there Wi-Fi be no impact on net income.
There will be no impact on cost of goods sold and net income will be overstated
A periodic inventory system calculates cost of goods sold (COGS) using the formula:
COGS=Beginning Inventory+Purchases−Ending InventoryCOGS = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}COGS=Beginning Inventory+Purchases−Ending Inventory
If beginning inventory is understated, it causes COGS to be understated, which in turn overstates net income because expenses are lower than they should be.
Understated Beginning Inventory → Understated COGS
Since COGS is too low, fewer expenses are deducted from revenue.
Understated COGS → Overstated Net Income
If COGS is too low, the company's profit (net income) is artificially inflated.
(A) COGS will be understated and net income will be overstated (Correct Answer):
Since the beginning inventory was understated, COGS is lower than it should be, making net income higher than it should be.
(B) COGS will be overstated and net income will be understated:
This would be true if beginning inventory was overstated, but in this case, it was understated, making this incorrect.
(C) COGS will be understated and there will be no impact on net income:
Since COGS affects net income, this statement is incorrect. Understated COGS overstates net income.
(D) There will be no impact on COGS and net income will be overstated:
This is incorrect because COGS is directly affected by an inventory misstatement.
IIA GTAG 3: Continuous Auditing – Discusses the importance of accurate financial reporting in preventing misstatements.
COSO Internal Control Framework – Financial Reporting Component – Highlights the impact of inventory errors on financial accuracy.
IIA Standard 2330 – Documenting Information – Requires auditors to evaluate financial calculations for accuracy and completeness.
Step-by-Step Impact on Financial Statements:Analysis of Each Option:IIA References:Conclusion:Since COGS is understated and net income is overstated, option (A) is the correct answer.
Which of the following items best describes the strategy of outsourcing?
Contracting the work to Foreign Service providers to obtain lower costs
Contracting functions or knowledge-related work with an external service provider.
Contract -ng operation of some business functions with an internal service provider
Contracting a specific external service provider to work with an internal service provider
Understanding Outsourcing:
Outsourcing refers to contracting business processes, functions, or expertise to an external service provider.
Companies use outsourcing to reduce costs, access specialized skills, and improve efficiency.
Why Option B (Contracting Functions or Knowledge-Related Work with an External Provider) Is Correct?
Outsourcing involves delegating specific business functions (e.g., IT support, payroll, customer service) to external specialists.
IIA Standard 2110 – Governance supports evaluating outsourcing risks and effectiveness.
ISO 37500 – Outsourcing Management Framework emphasizes knowledge-based work outsourcing for expertise gains.
Why Other Options Are Incorrect?
Option A (Foreign service providers for cost savings):
While some outsourcing involves foreign providers, outsourcing is not limited to offshoring.
Option C (Internal service provider):
Internal service providers do not involve outsourcing, as the work remains within the company.
Option D (External + internal provider collaboration):
This describes co-sourcing, not pure outsourcing.
Outsourcing involves contracting business functions to an external provider, making option B correct.
IIA Standard 2110 supports governance over outsourcing decisions and risk management.
Final Justification:IIA References:
IPPF Standard 2110 – Governance (Outsourcing & Vendor Risk Management)
ISO 37500 – Outsourcing Management Framework
COSO ERM – Third-Party Risk Management in Outsourcing
Which of the following common quantitative techniques used in capital budgeting is best associated with the use of a table that describes the present value of an annuity?
Cash payback technique.
Discounted cash flow technique: net present value.
Annual rate of return
Discounted cash flow technique: internal rate of return.
Capital budgeting techniques help organizations evaluate long-term investment decisions by assessing future cash flows and their present value. A present value of an annuity table is commonly used in methods that involve discounted cash flows over multiple periods.
Let's analyze the options:
A. Cash payback technique.
Incorrect. The payback period simply calculates the time needed to recover an investment and does not use discounting or present value tables.
B. Discounted cash flow technique: net present value (NPV).
Incorrect. While NPV involves discounting future cash flows, it does not specifically rely on the present value of an annuity table. Instead, NPV uses individual present values of cash flows at a specific discount rate.
C. Annual rate of return.
Incorrect. This method calculates return on investment based on accounting numbers and does not involve discounting future cash flows.
D. Discounted cash flow technique: internal rate of return (IRR). ✅ (Correct Answer)
Correct. The IRR method determines the discount rate that equates the present value of cash inflows to the initial investment (i.e., NPV = 0).
The present value of an annuity table is essential in IRR calculations, especially when future cash flows occur at regular intervals.
IRR is widely used in capital budgeting to compare different investment opportunities.
IIA GTAG (Global Technology Audit Guide) – Auditing Capital Budgeting Decisions – Discusses techniques used for investment evaluation.
COSO ERM Framework – Financial Decision-Making – Covers capital budgeting risks and techniques.
GAAP & IFRS – Investment Decision Guidelines – Explains the importance of present value calculations in investment evaluations.
IIA Standard 2130 – Control Over Capital Investments – Focuses on internal audit’s role in assessing capital budgeting techniques.
IIA References:
Which of the following is a distinguishing feature of managerial accounting, which is not applicable to financial accounting?
Managerial accounting uses double-entry accounting and cost data.
Managerial accounting uses general accepted accounting principles.
Managerial accounting involves decision making based on quantifiable economic events.
Managerial accounting involves decision making based on predetermined standards.
Managerial accounting differs from financial accounting in that it focuses on internal decision-making, cost control, and performance evaluation based on predetermined standards. Unlike financial accounting, which follows GAAP (Generally Accepted Accounting Principles) for external reporting, managerial accounting sets internal benchmarks to guide operational efficiency and strategic planning.
Use of Predetermined Standards:
Managerial accounting often uses standard costing, budgets, and variance analysis to compare actual performance against pre-set benchmarks.
This helps management make data-driven decisions and improve efficiency.
Internal Decision-Making:
Managerial accounting reports are used by internal stakeholders (e.g., managers, executives) rather than external entities.
Control and Performance Measurement:
It focuses on variance analysis (actual vs. expected performance) to highlight areas requiring corrective action.
Not Governed by GAAP:
Unlike financial accounting, managerial accounting does not require compliance with GAAP or IFRS since it is meant for internal use only.
A. Managerial accounting uses double-entry accounting and cost data:
While cost data is relevant to managerial accounting, double-entry accounting is a fundamental principle of all accounting systems, including financial accounting.
B. Managerial accounting uses generally accepted accounting principles (GAAP):
GAAP is required for financial accounting (external reporting), but managerial accounting does not follow GAAP since it focuses on internal decision-making.
C. Managerial accounting involves decision making based on quantifiable economic events:
While managerial accounting analyzes economic data, its distinguishing feature is using predetermined standards to evaluate and improve performance, which makes Option D the best choice.
IIA Standard 2110 - Governance: Internal auditors should assess decision-making processes, including managerial accounting techniques.
IIA Standard 2120 - Risk Management: Cost control and budget variance analysis are key components of risk management.
COSO Framework - Performance Monitoring: Emphasizes variance analysis, which aligns with predetermined standards in managerial accounting.
Key Reasons Why Option D is Correct:Why Other Options Are Incorrect:IIA References:Thus, the correct answer is D. Managerial accounting involves decision making based on predetermined standards.
During which of the following phases of contracting does the organization analyze whether the market is aligned with organizational objectives?
Initiation phase
Bidding phase
Development phase
Negotiation phase
During the initiation phase of contracting, the organization assesses whether the market conditions, supplier capabilities, and contract objectives align with the strategic goals and operational needs of the organization. This phase is critical because it sets the foundation for the entire contracting process, ensuring that the business environment, risks, and potential opportunities are well understood before proceeding.
Market Analysis & Alignment with Organizational Objectives:
The organization conducts market research to evaluate supplier capabilities, industry trends, pricing structures, and risk factors.
This helps determine whether external providers can meet the organization’s needs and objectives.
Aligning market opportunities with organizational strategy is crucial to ensure a contract is viable and beneficial.
Risk Identification & Assessment:
Potential risks such as supply chain disruptions, vendor reliability, and compliance issues are analyzed.
Internal auditors may assess historical performance and external market conditions.
Stakeholder Involvement & Approval:
Internal stakeholders (finance, legal, procurement, and operational teams) collaborate to define the contracting requirements.
The organization sets high-level objectives, including cost-effectiveness, quality standards, and compliance expectations.
Preliminary Budgeting & Feasibility Analysis:
The organization estimates the financial impact of potential contracts and ensures alignment with budgetary constraints.
Initial cost-benefit analysis is conducted to determine contract viability.
Bidding Phase (B): This occurs later in the process when vendors submit proposals, and the organization evaluates them against predefined criteria. It does not focus on market alignment but rather vendor selection.
Development Phase (C): This phase involves drafting the contract terms, service level agreements (SLAs), and detailed responsibilities. Market alignment has already been considered in the initiation phase.
Negotiation Phase (D): Here, the organization finalizes terms and conditions with the selected vendor, focusing on cost, deliverables, and legal requirements rather than market alignment.
IIA’s International Professional Practices Framework (IPPF) – Standard 2120 (Risk Management): This standard emphasizes that organizations must assess external risks (including market conditions) to align with strategic objectives.
IIA’s Global Technology Audit Guide (GTAG) on Contract Management: This guide highlights the importance of market analysis in the initiation phase to ensure contracts support organizational objectives.
IIA’s Practice Guide: Auditing Contract Management: It states that an effective contract management process starts with a thorough market assessment and strategic alignment in the initiation phase.
Step-by-Step Breakdown:Why Not the Other Phases?IIA References:
An organization prepares a statement of privacy to protect customers' personal information. Which of the following might violate the privacy principles?
Customers can access and update personal information when needed.
The organization retains customers' personal information indefinitely.
Customers reserve the right to reject sharing personal information with third parties.
The organization performs regular maintenance on customers' personal information.
Organizations must comply with privacy principles that emphasize data retention limitations. Keeping personal data indefinitely violates privacy laws and regulations such as the General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA).
Privacy Regulations Require Data Minimization:
GDPR Article 5(1)(e) states that personal data should only be kept for as long as necessary for the intended purpose.
IIA GTAG 4: Management of IT Auditing also advises against excessive data retention.
Security and Risk Concerns:
Storing data indefinitely increases the risk of data breaches.
IIA Standard 2110 – Governance emphasizes the need for proper information security governance to protect personal data.
Legal and Compliance Issues:
Organizations are required to define retention policies to prevent unauthorized or unnecessary storage of personal data.
A. Customers can access and update personal information when needed. (Incorrect)
Reason: Allowing customers to access and update their information aligns with privacy principles such as data accuracy and transparency.
C. Customers reserve the right to reject sharing personal information with third parties. (Incorrect)
Reason: This supports data control rights, which is consistent with privacy standards like opt-in and opt-out policies.
D. The organization performs regular maintenance on customers' personal information. (Incorrect)
Reason: Regular maintenance (e.g., updates, corrections, deletions) enhances data accuracy and security, aligning with privacy best practices.
IIA Global Technology Audit Guide (GTAG) 4: Management of IT Auditing – Discusses data privacy principles.
IIA Standard 2110 – Governance – Ensures data security and regulatory compliance.
IIA GTAG 8: Auditing Application Controls – Covers data retention policies and privacy compliance.
Privacy Regulations: GDPR (Article 5), CCPA (Section 1798.105) – Require organizations to delete data once it is no longer needed.
Why is Indefinite Retention a Violation?Analysis of Incorrect Answers:IIA References:Thus, the correct answer is B. The organization retains customers' personal information indefinitely.
Which of the following types of budgets will best provide the basis for evaluating the organization's performance?
Cash budget.
Budgeted balance sheet.
Selling and administrative expense budget.
Budgeted income statement.
Evaluating an organization's performance involves analyzing its profitability over a specific period. The budgeted income statement serves as a crucial tool in this assessment. Here's an analysis of the provided options:
A. Cash Budget:
A cash budget forecasts the organization's cash inflows and outflows over a particular period, ensuring sufficient liquidity to meet obligations. While it is vital for managing cash flow, it doesn't provide a comprehensive view of overall performance, as it excludes non-cash items like depreciation and doesn't reflect profitability.
B. Budgeted Balance Sheet:
The budgeted balance sheet projects the organization's financial position at a future date, detailing expected assets, liabilities, and equity. Although it offers insights into financial stability and structure, it doesn't directly measure operational performance or profitability.
C. Selling and Administrative Expense Budget:
This budget estimates the costs associated with selling and administrative activities. While controlling these expenses is essential, this budget focuses solely on a specific cost area and doesn't encompass the organization's overall financial performance.
D. Budgeted Income Statement:
The budgeted income statement, also known as the pro forma income statement, projects revenues, expenses, and profits for a future period. It provides a detailed forecast of expected financial performance, including:
Revenue Projections: Estimations of sales or service income.
Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold.
Gross Profit: Revenue minus COGS.
Operating Expenses: Expenses related to regular business operations, such as salaries, rent, and utilities.
Net Income: The final profit after all expenses have been deducted from revenues.
By comparing the budgeted income statement to actual performance, organizations can assess how well they met their financial goals, identify variances, and make informed decisions to improve future performance. This comprehensive overview makes it the most effective tool among the options provided for evaluating an organization's performance.
Which of the following is a limitation of the remote wipe for a smart device?
Encrypted data cannot be locked to prevent further access
Default settings cannot be restored on the device.
All data, cannot be completely removed from the device
Mobile device management software is required for successful remote wipe
Remote wipe is not always 100% effective: While remote wiping can delete most user data, some residual data may remain on the device, especially in cases where:
The device has built-in storage redundancies.
Deleted data can be recovered using forensic tools.
The remote wipe command fails to execute properly due to network issues or device settings.
Security Risk: This limitation poses a risk for organizations handling sensitive or confidential data, as unauthorized individuals may recover wiped data.
IIA Standard 2110 - Governance: Internal auditors must assess how organizations manage IT security risks, including risks related to mobile devices and data protection.
IIA Practice Guide: Auditing Cybersecurity Risks highlights the need to evaluate mobile security controls and limitations of data removal techniques.
A. Encrypted data cannot be locked to prevent further access (Incorrect)
Encrypted data remains secure even if the device is lost.
Many enterprise security solutions allow organizations to revoke encryption keys remotely, making data inaccessible.
IIA Standard 2120 - Risk Management advises that effective encryption reduces the impact of data loss.
B. Default settings cannot be restored on the device. (Incorrect)
Most remote wipe solutions allow factory reset, restoring the device to default settings.
Many mobile device management (MDM) tools support full device restoration.
D. Mobile device management software is required for a successful remote wipe. (Incorrect)
While MDM enhances remote wiping capabilities, it is not strictly required.
Some consumer and enterprise mobile operating systems (e.g., iOS, Android) provide built-in remote wipe functionality without MDM.
Explanation of Answer Choice C (Correct Answer):Explanation of Incorrect Answers:Conclusion:Remote wipe has limitations, and the inability to completely remove all data from the device (Option C) is a primary concern.
IIA References:
IIA Standard 2110 - Governance
IIA Standard 2120 - Risk Management
IIA Practice Guide: Auditing Cybersecurity Risks
An organization's board of directors is particularly focused on positioning, the organization as a leader in the industry and beating the competition. Which of the following strategies offers the greatest alignment with the board's focus?
Divesting product lines expected to have negative profitability.
Increasing the diversity of strategic business units.
Increasing investment in research and development for a new product.
Relocating the organization's manufacturing to another country.
Understanding Competitive Business Strategies:
The board of directors' focus is on industry leadership and outperforming competitors.
A strong research and development (R&D) strategy drives innovation, allowing the organization to introduce new and differentiated products that enhance competitive advantage.
Why Option C (Investment in R&D) Is Correct?
R&D drives product innovation, helping the organization stay ahead of competitors.
Investing in new technologies and unique product features differentiates the company and strengthens market leadership.
IIA Standard 2120 – Risk Management supports evaluating strategic investments that enhance business growth and competitive positioning.
Why Other Options Are Incorrect?
Option A (Divesting unprofitable product lines):
While divestment improves financial health, it does not directly contribute to market leadership.
Option B (Increasing diversity of business units):
Expanding into new business areas spreads risk but may not provide a focused competitive advantage in the primary industry.
Option D (Relocating manufacturing to another country):
Lowering costs improves efficiency, but it does not directly position the company as an industry leader.
Investing in R&D aligns best with the board’s goal of industry leadership and competitive advantage.
IIA Standard 2120 supports strategic risk management and innovation investment.
Final Justification:IIA References:
IPPF Standard 2120 – Risk Management (Strategic Investment & Competitive Advantage)
COSO ERM – Business Growth & Innovation Risk Management
Porter’s Competitive Strategy Model – R&D as a Market Differentiator
Which of the following is an example of internal auditors applying data mining techniques for exploratory purposes?
Internal auditors perform reconciliation procedures to support an external audit of financial reporting.
Internal auditors perform a systems-focused analysis to review relevant controls.
Internal auditors perform a risk assessment to identify potential audit subjects as input for the annual internal audit plan
Internal auditors test IT general controls with regard to operating effectiveness versus design
Data Mining for Exploratory Purposes:
Exploratory data mining involves analyzing large datasets to identify trends, patterns, and risks before conducting specific audits.
Internal auditors use data mining to assess risks and determine potential audit subjects, making it a key input in audit planning.
Aligns with IIA Practice Guide on Data Analytics:
Exploratory analysis helps auditors prioritize areas with high-risk indicators.
Supports IIA Standard 2010 - Planning, which requires risk-based audit planning.
A. Internal auditors perform reconciliation procedures to support an external audit of financial reporting. (Incorrect)
Reconciliation is a procedural task, not an exploratory data mining activity.
Supports external audit rather than internal audit’s strategic risk assessment role.
B. Internal auditors perform a systems-focused analysis to review relevant controls. (Incorrect)
This relates more to evaluating control effectiveness rather than exploratory data mining.
Does not directly contribute to identifying new audit areas.
D. Internal auditors test IT general controls with regard to operating effectiveness versus design. (Incorrect)
Testing IT general controls is a structured evaluation, not an exploratory data mining technique.
Exploratory data mining is used to identify risks before formal testing occurs.
Explanation of Answer Choice C (Correct Answer):Explanation of Incorrect Answers:Conclusion:The best example of exploratory data mining by internal auditors is risk assessment for audit planning (Option C).
IIA References:
IIA Standard 2010 - Planning
IIA Practice Guide: Data Analytics
How can the concept of relevant cost help management with behavioral analyses?
It explains the assumption mat both costs and revenues are linear through the relevant range
It enables management to calculate a minimum number of units to produce and sell without having to incur a loss.
It enables management to predict how costs such as the depreciation of equipment will be affected by a change in business decisions
It enables management to make business decisions, as it explains the cost that will be incurred for a given course of action
Relevant cost refers to costs that will change depending on a specific business decision. It is crucial for decision-making as it helps management assess the financial impact of alternatives.
Relevant costs focus on future costs that differ between decision alternatives.
They help management analyze how different choices impact profitability.
This supports decision-making in areas such as pricing, outsourcing, and product discontinuation.
A. It explains the assumption that both costs and revenues are linear through the relevant range → Incorrect. While linear cost behavior is often assumed, it is not the primary purpose of relevant cost analysis.
B. It enables management to calculate a minimum number of units to produce and sell without having to incur a loss → Incorrect. This describes break-even analysis, not relevant cost analysis.
C. It enables management to predict how costs such as the depreciation of equipment will be affected by a change in business decisions → Incorrect. Depreciation is a sunk cost and is not considered relevant for decision-making.
The IIA’s Practice Guide: Financial Decision-Making and Internal Audit’s Role outlines how relevant cost analysis aids business strategy.
International Professional Practices Framework (IPPF) Standard 2120 states that internal auditors should assess management’s cost-analysis techniques.
Managerial Accounting Concepts (by IMA and COSO) emphasize relevant costs in strategic decision-making.
Why Option D is Correct?Explanation of the Other Options:IIA References & Best Practices:Thus, the correct answer is D. It enables management to make business decisions, as it explains the cost that will be incurred for a given course of action.
An internal auditor considers the financial statement of an organization as part of a financial assurance engagement. The auditor expresses the organization's electricity and depreciation expenses as a percentage of revenue to be 10% and 7% respectively. Which of the following techniques was used by the internal auditor In this calculation?
Horizontal analysis
Vertical analysis
Ratio analysis
Trend analysis
Vertical analysis expresses each financial statement item as a percentage of a base figure (e.g., revenue). In this case, the internal auditor calculates electricity and depreciation expenses as a percentage of revenue, which is a clear application of vertical analysis.
(A) Horizontal analysis:
Compares financial data across different periods to identify trends and growth.
The given scenario does not compare financial statements over time, making this incorrect.
(B) Vertical analysis (Correct Answer):
Expresses each line item as a percentage of a base figure (e.g., revenue for income statements, total assets for balance sheets).
In this case, electricity and depreciation expenses are calculated as a percentage of revenue, confirming vertical analysis.
(C) Ratio analysis:
Involves calculating financial ratios (e.g., profitability, liquidity, efficiency).
This scenario does not involve ratios but rather percentage-based comparisons, making it incorrect.
(D) Trend analysis:
Identifies patterns over multiple periods (e.g., revenue growth over five years).
The question does not involve time-based comparisons, so this answer is incorrect.
IIA Practice Guide: Internal Audit and Financial Reporting – Recommends vertical analysis for financial statement assessment.
IIA Standard 2320 – Analysis and Evaluation – Requires auditors to apply relevant analytical techniques, including percentage-based evaluations.
COSO Internal Control Framework – Financial Reporting Component – Supports financial data analysis techniques such as vertical and horizontal analysis.
Analysis of Each Option:IIA References:Conclusion:Since the auditor expressed financial statement items as a percentage of revenue, option (B) is the correct answer.
Which of the following describes the primary advantage of using data analytics in internal auditing?
It helps support the internal audit conclusions with factual evidence.
It reduces the time and effort needed to prepare the audit report.
It helps prevent internal auditors from unknowingly disregarding key process risks.
It enables internal auditors to meet their responsibility for monitoring controls.
Comprehensive and Detailed In-Depth Explanation:
Data analytics in internal auditing provides quantitative, evidence-based insights, enhancing audit conclusions and decision-making.
Option B (Reduces report preparation time) – While efficiency is a benefit, the main advantage is improved accuracy and factual support.
Option C (Prevents overlooking risks) – While true, data analytics primarily strengthens evidence collection.
Option D (Monitoring controls) – Auditors assess controls, but data analytics enhances findings through data-driven validation.
Thus, Option A is correct, as data analytics strengthens audit conclusions with factual evidence.
Which of the following is a systems software control?
Restricting server room access to specific individuals.
Housing servers with sensitive software away from environmental hazards.
Ensuring that all user requirements are documented.
Performing intrusion testing on a regular basis.
Comprehensive and Detailed In-Depth Explanation:
System software controls are mechanisms designed to protect system integrity, security, and performance. Among the given options, performing intrusion testing on a regular basis (D) is a proactive security measure that tests an organization's IT infrastructure to identify vulnerabilities and weaknesses in system security.
Option A (Restricting server room access) is a physical security control, not a system software control.
Option B (Housing servers securely) is an environmental control, focusing on protecting hardware.
Option C (Ensuring documentation of user requirements) relates to project management and system development, rather than system software security.
Since intrusion testing ensures system resilience against cyber threats, option D is the correct answer.
An organization has 1,000 units of a defective item in stock. Per unit, market price is $10; production cost is $4; and the defect selling price is $5. What is the carrying amount (inventory value) of defects at year-end?
$0
$4,000
$5,000
$10,000
During which phase of the contracting process are contracts drafted for a proposed business activity?
Initiation phase.
Bidding phase.
Development phase.
Management phase.
Comprehensive and Detailed In-Depth Explanation:
The development phase of contracting involves drafting, negotiating, and finalizing the contract terms for a business activity. This phase ensures that agreements align with legal and operational requirements before execution.
Option A (Initiation phase) involves identifying needs and planning but does not include drafting contracts.
Option B (Bidding phase) focuses on soliciting and evaluating proposals but does not yet involve contract drafting.
Option D (Management phase) occurs after contracts are finalized and focuses on monitoring performance.
Since the development phase is when contracts are written and finalized, Option C is correct.
Which of the following is an example of a smart device security control intended to prevent unauthorized users from gaining access to a device’s data or applications?
Anti-malware software
Authentication
Spyware
Rooting
Which of the following IT-related activities is most commonly performed by the second line of defense?
Block unauthorized traffic.
Encrypt data.
Review disaster recovery test results.
Provide an independent assessment of IT security.
Comprehensive and Detailed In-Depth Explanation:
The Three Lines of Defense Model classifies risk management roles as follows:
First Line of Defense: Operational management responsible for risk controls (e.g., blocking unauthorized traffic, encrypting data).
Second Line of Defense: Risk management and compliance functions that monitor and assess the effectiveness of first-line controls (e.g., reviewing disaster recovery test results).
Third Line of Defense: Independent audit functions providing assurance (e.g., conducting security assessments).
Option C (Reviewing disaster recovery test results) aligns with the second line of defense because it involves oversight and evaluation of IT controls rather than direct execution.
An organization requires an average of 58 days to convert raw materials into finished products to sell. An additional 42 days is required to collect receivables. If the organization takes an average of 10 days to pay for raw materials, how long is its total cash conversion cycle?
26 days.
90 days.
100 days.
110 days.
Comprehensive and Detailed In-Depth Explanation:
The cash conversion cycle (CCC) is calculated as:
CCC=Days Inventory Outstanding+Days Sales Outstanding−Days Payables Outstanding\text{CCC} = \text{Days Inventory Outstanding} + \text{Days Sales Outstanding} - \text{Days Payables Outstanding}CCC=Days Inventory Outstanding+Days Sales Outstanding−Days Payables Outstanding CCC=58+42−10=90 daysCCC = 58 + 42 - 10 = 90 \text{ days}CCC=58+42−10=90 days
Option A (26 days) – Incorrect, as it does not account for total cycle components.
Option C (100 days) & Option D (110 days) – Overestimate the cycle by not correctly adjusting for payables.
Thus, Option B (90 days) is the correct answer.
According to IIA guidance, which of the following are typical physical and environmental IT controls?
Locating servers in locked rooms with restricted admission.
Applying encryption where confidentiality is a stated requirement.
Allocating and controlling access rights according to the organization's stated policy.
Ensuring a tightly controlled process for applying all changes and patches to software, systems, network components, and data.
Comprehensive and Detailed In-Depth Explanation:
Physical and environmental IT controls focus on securing IT infrastructure against unauthorized access and environmental hazards. Locating servers in locked rooms with restricted admission protects hardware from theft, tampering, and environmental risks.
Option B (Applying encryption) – A logical security control, not a physical one.
Option C (Access rights allocation) – A logical control related to identity management.
Option D (Software patch control) – Part of IT governance and system maintenance, not physical security.
Since physical access control is a critical component of IT security, Option A is correct.
Which of the following represents an example of a physical security control?
Access rights are allocated according to the organization’s policy
There is confirmation that data output is accurate and complete
Servers are located in locked rooms to which access is restricted
A record is maintained to track the process from data input to storage
Which of the following is a primary driver behind the creation and prioritization of new strategic initiatives established by an organization?
Risk tolerance.
Performance.
Threats and opportunities.
Governance.
Comprehensive and Detailed In-Depth Explanation:
Strategic initiatives are established to address emerging threats and opportunities in the business environment. Organizations continuously evaluate external and internal factors to remain competitive and mitigate risks.
Option A (Risk tolerance) influences strategy, but it is not the primary driver for creating new initiatives.
Option B (Performance) is an outcome rather than a primary driver.
Option D (Governance) provides structure but does not directly drive the need for new initiatives.
Since businesses prioritize initiatives in response to external threats and internal opportunities, option C is the correct answer.
Which type of bond sells at a discount from face value, then increases in value annually until it reaches maturity and provides the owner with the total payoff?
High-yield bonds
Commodity-backed bonds
Zero-coupon bonds
Junk bonds
Comprehensive and Detailed In-Depth Explanation:
Zero-coupon bonds are issued at a discount to their face (par) value and do not pay periodic interest. Instead, the bond's value increases over time as it accrues interest, reaching its full face value at maturity. Investors receive the total payoff (the face value) upon maturity, which includes the initial investment plus the interest earned over the bond's term. High-yield bonds (also known as junk bonds) offer higher interest rates due to higher risk but pay periodic interest. Commodity-backed bonds are tied to commodity prices and may pay periodic interest. Therefore, zero-coupon bonds fit the described characteristics.
Which of the following application controls is the most dependent on the password owner?
Password selection.
Password aging.
Password lockout.
Password rotation.
Comprehensive and Detailed In-Depth Explanation:
Password selection is the most dependent on the user, as it involves choosing and setting a secure password that meets organizational security requirements.
Option B (Password aging) – Controlled by system settings, not directly by the user.
Option C (Password lockout) – Automatically triggered after failed login attempts.
Option D (Password rotation) – Enforced by system policies, not the individual user’s decision.
Since password security starts with user selection, Option A is correct.
An organization with global headquarters in the United States has subsidiaries in eight other nations. If the organization operates with an ethnocentric attitude, which of the following statements is true?
Standards used for evaluation and control are determined at local subsidiaries, not set by headquarters
Orders, commands, and advice are sent to the subsidiaries from headquarters
People of local nationality are developed for the best positions within their own country
There is a significant amount of collaboration between headquarters and subsidiaries
Which of these instances accurately describes the responsibilities for big data governance?
Management must ensure information storage systems are appropriately defined and processes to update critical data elements are clear.
External auditors must ensure that analytical models are periodically monitored and maintained.
The board must implement controls around data quality dimensions to ensure that they are effective.
Internal auditors must ensure the quality and security of data, with a heightened focus on the riskiest data elements.
In the context of big data governance, the responsibilities of various stakeholders are delineated as follows:
A. Management's Responsibilities:
Management holds the primary responsibility for establishing and maintaining effective data governance frameworks. This includes ensuring that information storage systems are appropriately defined and that processes for updating critical data elements are clear and well-documented. Such measures are essential to maintain data integrity, availability, and confidentiality. The Institute of Internal Auditors (IIA) emphasizes that management is accountable for the design and implementation of data governance structures, policies, and procedures. These structures should encompass data storage solutions and the mechanisms for updating and managing critical data elements.
The Institute of Internal Auditors
B. External Auditors' Responsibilities:
External auditors are tasked with providing independent assurance on the effectiveness of an organization's financial reporting and related controls. While they may consider the implications of big data on financial reporting, their primary focus is not on the periodic monitoring and maintenance of analytical models. Instead, this responsibility typically falls under management or specialized internal functions. The IIA outlines that external auditors assess the overall control environment but do not directly manage or maintain analytical models.
C. The Board's Responsibilities:
The board of directors provides oversight and strategic direction for the organization's data governance initiatives. However, the implementation of specific controls around data quality dimensions is generally delegated to management. The board ensures that appropriate governance structures are in place and that management is effectively addressing data quality and governance issues. According to the IIA, the board's role is to oversee the data governance framework, ensuring that management has implemented effective controls and processes.
The Institute of Internal Auditors
D. Internal Auditors' Responsibilities:
Internal auditors provide independent assurance on the effectiveness of governance, risk management, and control processes, including those related to data quality and security. While they assess and report on the adequacy of controls over data, the responsibility for ensuring data quality and security rests with management. The IIA states that internal auditors evaluate the effectiveness of data governance practices but do not hold primary responsibility for data quality and security.
The Institute of Internal Auditors
In summary, option A accurately reflects management's responsibility in big data governance, aligning with the IIA's guidelines on data governance roles and responsibilities.
An intruder posing as the organization's CEO sent an email and tricked payroll staff into providing employees' private tax information. What type of attack was perpetrated?
Boundary attack.
Spear phishing attack.
Brute force attack.
Spoofing attack.
A spear phishing attack is a highly targeted email-based attack where an attacker impersonates a trusted individual (e.g., the CEO) to trick recipients into providing sensitive information.
In this scenario, an intruder posed as the CEO and deceived payroll staff into sharing employees' private tax information.
Spear phishing is more targeted than general phishing, often using personal details to make the fraudulent request seem legitimate.
A. Boundary attack. (Incorrect)
A boundary attack refers to attempts to breach an organization’s network perimeter defenses, such as firewalls and intrusion detection systems.
This scenario describes a social engineering attack, not a technical boundary attack.
B. Spear phishing attack. (Correct)
Spear phishing attacks are highly personalized email attacks, usually targeting specific employees within an organization.
Attackers research their targets and use realistic messages to trick them into divulging sensitive data.
This fits the scenario, as the attacker impersonated the CEO to steal tax information.
C. Brute force attack. (Incorrect)
A brute force attack involves systematically guessing passwords to gain unauthorized access to systems.
This attack was based on deception, not password cracking.
D. Spoofing attack. (Incorrect, but closely related)
Email spoofing is a technique where an attacker falsifies the sender’s email address.
While spear phishing often includes spoofing, the broader technique used here is spear phishing, as it involved social engineering and deception.
IIA GTAG 16 – Security Risk: IT and Cybersecurity discusses phishing and social engineering threats, emphasizing internal controls to mitigate them.
IIA Standard 2120 – Risk Management highlights the need for risk assessments in cybersecurity, including employee awareness training for phishing attacks.
National Institute of Standards and Technology (NIST) Special Publication 800-61 classifies spear phishing as a high-risk cyber threat to organizations.
Explanation of Answer Choices:IIA References:
TESTED 02 Apr 2025
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