Answer (B) is correct. The audit committee consists of outside members of the board of directors (who should be independent of management). Regular communication with this committee helps assure independence and provides a means for the directors and the IAA to keep each other informed. The CAE should communicate the IAA’s plans and resource requirements to senior management and the board for review and approval. Moreover, the CAE should submit to senior management for approval, and to the board for its information, a summary of the IAA’s work schedule, staffing plan, and financial budget.
Answer (D) is correct. To avoid conflict between the CEO and the audit committee, the CAE should request that the board establish policies covering the IAA’s relationships with the audit committee. The CAE should have regular communication with the board, audit committee, or other appropriate governing authority. Furthermore, the board should approve a charter that defines the purpose, authority, and responsibility of the IAA.
Answer (A) is correct. The audit committee consists of outside directors who are independent of management. Its purpose is to help keep external and internal auditors independent of management and to assure that the directors are exercising due care. This committee selects the external auditors, reviews their overall audit plan, examines the results of external and internal auditing engagements, meets regularly with the chief audit executive, and reviews the internal audit activity’s engagement work schedule, staffing plan, and financial budget. These functions should increase public confidence that financial statements are fairly presented.
Answer (D) is correct. The audit committee consists of outside directors who are independent of management. Its purpose is to help keep external and internal auditors independent of management and to assure that the directors are exercising due care. This committee selects the external auditors, reviews their overall audit plan, examines the results of external and internal auditing engagements, meets regularly with the chief audit executive, and reviews the internal audit activity’s engagement work schedule, staffing plan, and financial budget. Engagements may be performed in the vice president’s area of responsibility. Thus, (s)he is not independent of the internal audit activity. The vice president is also not an outside director.
Answer (D) is correct. The organizational status of the internal audit activity is enhanced when it has the support of management and of the board. Internal auditors can thereby gain the cooperation of engagement clients and perform their work free from interference.
Answer (C) is correct. The audit committee has a control function because of its oversight of internal as well as external auditing. It should be made up of directors who are independent of management. The authority and independence of the audit committee strengthen the position of the internal audit activity. The board should concur in the appointment or removal of the chief audit executive, who should have direct, regular communication with the board.
Answer (C) is correct. Internal auditors should have the support of senior management and the board (board of directors, audit committee, board of trustees of a nonprofit organization, etc.) to gain the cooperation of engagement promotes independence and ensures broad engagement coverage, adequate consideration of engagement reports, and appropriate action on engagement recommendations. This enhancement of the position of internal auditing in turn strengthens control processes.
Answer (A) is correct. Independence is enhanced when the board concurs in the appointment or removal of the CAE. The audit committee is a subcommittee of outside directors who are independent of management. The term “board” includes the audit committee.
Answer (A) is correct. According to SIAS 1, “Management plans, organizes, and directs in such a fashion as to provide reasonable assurance that established goals and objectives will be achieved.” Also, “Management establishes and maintains an environment that fosters control.”
Answer (A) is correct. The auditor would be concerned if the decision process were dominated by one individual or a small group. In that case, compensating controls, e.g., effective oversight by the audit committee, reduce risk.
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