Chapter 21 Internal, Operational, and Compliance Auditing
Answer Key

True / False Questions

1. The work of internal auditors is primarily for the
benefit of management and the board of directors.

2. The first internal auditors were primarily concerned with
operational auditing.

3. The passage of the Foreign Corrupt Practices Act
increased the demand for internal auditing.

4. Evaluation of internal control is one of the general
sections of the IIA’s Standards of the Professional Practice of Internal
Auditing.

5. In operational auditing, the preliminary survey serves as
a guide for the development of the audit program.

6. When no weaknesses in internal control are discovered
during an operational audit, the appropriate report will be either standard
unqualified or unqualified with explanatory language.

7. Operational audits are primarily concerned with whether
an organization follows appropriate laws and regulations.

8. Compliance procedures are tests of an organization’s
controls.

9. In an audit in accordance with Government Auditing
Standards, the auditors are required to perform additional compliance
procedures beyond those required by generally accepted auditing standards.

10. In an audit in accordance with the Single Audit Act of
1984, the auditors must test compliance with the significant requirements of
all major programs.

Multiple Choice Questions

11. When auditing an entity’s financial statements in
accordance with Government Auditing Standards (the “Yellow Book”), an
auditor is required to report on:

I. Noteworthy accomplishments of the program.

II. The scope of the auditor’s testing of internal controls.

A. I only.

B. II only.

C. Both I and II.

D. Neither I nor II.

12. When auditing an entity’s financial statements in
accordance with Government Auditing Standards (the “Yellow Book”), an
auditor is required to report on:

I. Recommendations for actions to improve operations.

II. The scope of the auditor’s tests of compliance with laws
and regulations.

A. I only.

B. II only.

C. Both I and II.

D. Neither I nor II.

13. A comprehensive examination of an operating unit or a
complete organization to evaluate its systems, controls, and performance, as
measured by management’s objectives is called a(an):

A. Compilation.

B. Consultation.

C. Operational Audit.

D. “Yellow Book” audit.

14. An audit in accordance with the Single Audit Act does
not involve reporting upon:

A. Compliance with provisions of laws that may have a direct
and material affect on each major federal financial assistance program.

B. Financial statements.

C. Internal control over operations.

D. Schedule of expenditures of federal awards.

15. Under the Single Audit Act, the auditor must apply
procedures to test for compliance and test the effectiveness of controls for:

A. Option A

B. Option B

C. Option C

D. Option D

16. Internal auditing is considered to be part of an
organization’s:

A. Accounting system.

B. Control activities.

C. Monitoring.

D. External controls.

17. Which of the following is not one of the attribute
standards of the IIA’s Standards for the Professional Practice of Internal
Auditing?

A. Independence and objectivity.

B. Outsourcing.

C. Proficiency and professional care.

D. Purpose, authority, and responsibility.

18. Which of the following is not required of an individual
seeking to become a certified internal auditor?

A. Two years work experience in internal auditing or its
equivalent.

B. Successful completion of a two-day examination.

C. A baccalaureate degree from an accredited college.

D. One year of supervisory experience.

19. For the highest degree of independence the director of
internal auditing should report directly to:

A. The controller.

B. The audit committee of the board of directors.

C. The executive vice-president.

D. The chief accountant.

20. The operational auditors’ preliminary conclusions about
potential problem areas are summarized as:

A. The definition of purpose.

B. The audit program.

C. The preliminary survey.

D. The audit report.

21. A legal aid society provides free legal aid to
low-income individuals with funds passed-through the state welfare department
from the U.S. Department of Health and Human Services. In this situation which
organization is the primary recipient of the funds?

A. The state welfare department.

B. The Department of Health and Human Services.

C. The legal aid society.

D. The individual receiving the aid.

22. In an audit in accordance with Government Auditing
Standards, the auditors are required to provide a report on:

A. Compliance with general requirements.

B. The schedule of financial assistance received.

C. The organization’s internal control.

D. Findings and questioned costs.

23. Which of the following types of audits is designed to
determine that an organization has complied with the specific requirements of
major financial assistance programs?

A. An audit in accordance with Government Auditing
Standards.

B. A single audit.

C. An audit in accordance with generally accepted auditing
standards.

D. An operational audit.

24. Compliance auditing procedures are:

A. Tests of controls.

B. Observation procedures.

C. Substantive procedures.

D. Confirmation procedures.

25. In an audit in accordance Government Auditing Standards,
the auditors are required to provide a report on:

A. Compliance applicable to major federal programs.

B. The Schedule of financial assistance received.

C. Compliance with laws and regulations which are required
to be tested by generally accepted auditing standards.

D. Internal control systems used in administering federal
assistance programs.

26. In an audit in accordance with generally accepted
auditing standards, the auditors must test compliance with those laws and
regulations that:

A. Have a direct and material effect on the financial
statements.

B. Have a direct and material effect on major federal
programs.

C. Have a material direct or indirect effect on the
financial statements.

D. Have a material effect on major or nonmajor programs.

27. Requirements of federal financial assistance programs
that involve significant national policy are known as:

A. Specific requirements.

B. Major program requirements.

C. General requirements.

D. Primary requirements.

28. Costs paid with federal assistance that appear to be in
violation of a law or regulation are known as:

A. Questioned costs.

B. Noncompliance costs.

C. Improper costs.

D. Illegal costs.

29. When performing an audit of a city in accordance with
the Single Audit Act, an auditor should adhere to:

A. Standards for the Professional Practice of Internal
Auditing.

B. Government Auditing Standards.

C. Operational Auditing Standards.

D. Financial Accounting Standards.

30. A primary purpose of operational auditing standards is
to provide:

A. A means of assurance that internal control is operating
effectively.

B. Aid to the independent auditor in conducting the audit of
financial statements.

C. The results of internal examinations of financial and
accounting matters to the company’s top-level management.

D. A measure of management performance in meeting
organizational goals.

31. The primary purpose of the internal auditors’ evaluation
of internal control is to:

A. Determine if management has planned and implemented
activities needed to attain goals and objectives.

B. Determine the extent of tests of controls needed during
field work.

C. Identify areas for fraud investigation.

D. Determine if employees have incompatible duties that have
compromised the control environment.

32. According to the IIA’s Standards, an internal auditor’s
working papers should be reviewed by the:

A. Management of the department being audited.

B. Management of the internal auditing department.

C. Audit committee of the board of directors.

D. Management of the organization’s security division.

33. Management is beginning to take corrective action on
personnel department deficiencies reported during the last internal audit.
According to the IIA’s Standards, the internal auditor should:

A. Oversee the corrective action.

B. Postpone the next audit of the personnel department until
the corrective action is completed.

C. Refrain from judging whether the corrective action will
remedy the deficiencies.

D. Follow up to see that the corrective action satisfies the
audit recommendations.

34. The internal auditing department provides information
about control and quality of performance to:

A. Management and the board of directors.

B. A level in the organization sufficient to ensure
acceptance of all recommendations.

C. Outside agencies for regulatory and financial compliance.

D. Any member of the organization upon request.

35. The GAO standards of reporting for governmental
financial audits incorporate the AICPA standards of reporting and prescribe
supplemental standards to satisfy the unique needs of governmental audits.
Which of the following is a supplemental reporting standard for audits in
accordance with Government Auditing Standards?

A. A report on the entity’s internal control.

B. Material indications of illegal acts should be reported
in a document with distribution restricted to senior officials of the entity
audited.

C. Instances of abuse, fraud, mismanagement, and waste
should be reported to the organization with legal oversight authority over the
entity audited.

D. All privileged and confidential information discovered
should be reported to the senior officials of the organization that arranged
for the audit.

36. Kent is auditing an entity’s compliance with
requirements governing a major federal financial assistance program in
accordance with the Single Audit Act. Kent detected noncompliance with
requirements that have a material effect on that program. Kent’s report on
compliance should express a(an):

A. Unqualified opinion with a separate explanatory
paragraph.

B. Qualified opinion or an adverse opinion.

C. Adverse opinion or a disclaimer of opinion.

D. Limited assurance on the items tested.

37. The scope of an internal audit is initially defined by
the:

A. Audit objectives.

B. Scheduling and time estimates.

C. Preliminary survey.

D. Audit program.

38. An operational audit report which deals with the scrap
disposal function in a manufacturing company is most likely to address:

A. The efficiency and effectiveness of the scrap disposal
function and include any findings requiring corrective action.

B. Whether the scrap material inventory is reported as a current
asset.

C. Whether the physical inventory count of the scrap
material agrees with the recorded amount.

D. Whether the scrap materials inventory is valued at the
lower of cost or market.

39. Interviewing operating personnel, identifying he
objectives of the auditee, identifying standards used to evaluate performance,
and assessing the risk inherent in the auditee’s operations are activities
typically performed in which phase of an internal audit?

A. The fieldwork phase.

B. The preliminary survey phase.

C. The audit programming phase.

D. The reporting phase.

40. In governmental
accounting, emphasis is placed on:

A. Total assets owned by the governmental entity.

B. Generating income form funds employed.

C. Expenditures of funds.

D. The flow of funds through the income statement.

41. Which of the following best describes the scope of
internal auditing as it has developed to date?

A. Internal auditing involves appraising the economy and
efficiency with which resources are employed.

B. Internal auditing involves evaluating compliance with
policies, plans, procedures, laws, and regulations.

C. Internal auditing has evolved to verifying the existence
of assets and reviewing the means of safeguarding assets.

D. Internal auditing has evolved to more of an operational
orientation from a financial orientation.

42. In planning an operational audit, an on-site survey
could assist with all of the following, except:

A. Obtaining auditee comments and suggestions on control
problems.

B. Obtaining preliminary information on internal control.

C. Identifying areas for audit emphasis.

D. Evaluating the effectiveness of the internal control.

Essay Questions

43. Internal auditors are an important part of the internal
control structures of all types of organizations.

a. Describe the objectives of an internal auditing function.

b. Explain two ways that internal auditors may maintain
independence with respect to the activities that they audit.

44. Operational auditing has grown in importance over the
last few decades.

a. Define operational auditing.

b. Who are the major users of operational audit reports.

c. List the phases of an operational audit.

45. Many government and nonprofit organizations are required
to have an audit in accordance with Government Auditing Standards.

a. Who develops Government Auditing Standards?

b. Describe the requirements of an audit in accordance with
Government Auditing Standards.

c. Describe the auditors’ responsibilities for testing for
compliance with laws and regulations in an audit in accordance with Government
Auditing Standards.