IIA-CIA-Part3 Business Knowledge for Internal Auditing Questions and Answers

A right-to-audit clause in a contract allows an organization to review and assess the operations, controls, and security measures of a third-party service provider (such as payroll service providers). Providing "read-only" functionalities supports this clause by enabling internal auditors to access and review relevant data without modifying it.

Read-only access allows auditors to verify transactions, data integrity, and compliance without affecting system operations.

This ensures that internal audit functions can review third-party controls without interference, supporting contractual audit rights.

The IIA’s Standard 2070 – External Service Provider Relationships states that organizations should retain the right to audit outsourced functions to ensure compliance with internal control policies.

B. This will enforce robust risk assessment practices → Incorrect. While read-only access can contribute to risk assessment, it does not directly enforce risk management policies.

C. This will address cybersecurity considerations and concerns. → Incorrect. Cybersecurity concerns involve encryption, authentication, and intrusion detection—not just read-only access.

D. This will enhance the third party's ability to apply data analytics → Incorrect. The request is for audit purposes, not to improve the third party’s analytics capabilities.

IIA’s Global Technology Audit Guide (GTAG) 7: IT Outsourcing recommends a right-to-audit clause in third-party agreements.

IIA Standard 1312 emphasizes that external audits should have transparent access to outsourced functions.

ISACA's COBIT Framework highlights the importance of audit access in managing third-party risks.

Why Option A is Correct?Explanation of the Other Options:IIA References & Best Practices:Thus, the correct answer is A. This will support execution of the right-to-audit clause.

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.

Total Quality Management (TQM) focuses on continuous improvement, teamwork, and process efficiency. The CAE’s goal is to reduce audit time and improve client satisfaction, which requires collaborative decision-making and diverse skill sets to ensure a high-quality, efficient audit process.

(A) Assign a team with a trained audit manager to plan each audit and distribute fieldwork tasks to various staff auditors. ❌

Incorrect. While structured planning is beneficial, TQM emphasizes decentralized decision-making rather than relying solely on the audit manager.

(B) Assign a team of personnel who have different specialties to each audit and empower team members to participate fully in key decisions. ✅

Correct. TQM encourages cross-functional teams, collaboration, and shared decision-making, which helps in reducing audit time and improving quality.

IIA GTAG "Auditing Continuous Improvement Initiatives" highlights diverse audit teams as a best practice for improving audit effectiveness.

(C) Assign a team to each audit, designate a single person to be responsible for each phase of the audit, and limit decision-making outside of their area of responsibility. ❌

Incorrect. This approach is too rigid and limits team collaboration, which contradicts TQM principles.

(D) Assign a team of personnel who have similar specialties to specific engagements that would benefit from those specialties and limit key decisions to the senior person. ❌

Incorrect. Specializing teams in certain audits may improve technical accuracy, but TQM promotes diverse perspectives rather than restricting decisions to one senior auditor.

IIA GTAG – "Auditing Continuous Improvement Initiatives"

IIA Standard 2110 – Governance (Process Improvement)

ISO 9001 – Total Quality Management Principles

Analysis of Answer Choices:IIA References:Thus, the correct answer is B, as TQM supports cross-functional teams and shared decision-making to improve audit efficiency and client satisfaction.

Understanding Organizational Structures in Internal Audit:

A flat organizational structure has fewer levels of management, leading to faster decision-making, less bureaucracy, and lower administrative costs.

A hierarchical structure has multiple levels of management, which may improve control and oversight but increases complexity and costs.

Why a Flat Structure Reduces Operating and Support Costs:

Fewer management layers mean fewer salaries and reduced administrative expenses.

Streamlined decision-making reduces inefficiencies in reporting and communication.

Leaner support functions lead to cost savings in internal audit activity.

Why Other Options Are Less Relevant:

B. Stable and collaborative environment: Collaboration depends on culture, not just structure. Hierarchical models can also be collaborative.

C. Enables field auditors to report to senior auditors: This is more common in hierarchical structures where clear reporting lines exist.

D. More dynamic with advancement opportunities: Hierarchical structures often provide clearer career progression due to well-defined promotion paths.

IIA Standard 2030 – Resource Management: Encourages optimizing resources, which a flat structure can support.

IIA Practice Guide on Effective Internal Audit Governance: Discusses structural efficiency and cost control in internal audit.

COSO’s Internal Control Framework: Emphasizes efficient resource allocation in governance structures.

Relevant IIA References:✅ Final Answer: A flat structure results in lower operating and support costs than a hierarchical structure (Option A).

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.

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.

Understanding Information Security Responsibilities:

Executive management sets the overall strategy and ensures resources are allocated for information security.

Internal auditors provide independent assurance on security effectiveness.

The board provides oversight and ensures that security risks are managed appropriately.

Line management is responsible for day-to-day operations, including the review and monitoring of security controls to ensure compliance with security policies.

Why Reviewing and Monitoring Security Controls is a Line Management Function:

Line management directly oversees operational security measures, ensuring that established controls are functioning effectively.

They address security gaps, enforce security policies, and report issues to senior management when necessary.

This aligns with IIA Standard 2120 – Risk Management, which requires management to implement and monitor risk mitigation controls.

Why Other Options Are Incorrect:

B. Dedicate sufficient security resources: This is the responsibility of executive management, as they control resource allocation.

C. Provide oversight to the security function: The board and executive management provide oversight, not line management.

D. Assess information control environments: Internal auditors assess control environments, ensuring compliance and effectiveness.

IIA Standards and References:

IIA Standard 2110 – Governance: Emphasizes the board’s role in overseeing security.

IIA Standard 2120 – Risk Management: States that management must monitor security risks.

IIA GTAG (Global Technology Audit Guide) on Information Security (2016): Outlines that line management is responsible for monitoring security controls on a daily basis.

Thus, the correct answer is A: Review and monitor security controls.

If an organization has an immediate need for servers but lacks time for a capital acquisition, the best solution is Infrastructure as a Service (IaaS).

On-Demand Computing Power: IaaS provides virtual servers, storage, and networking resources on a pay-as-you-go basis, eliminating the need for capital purchases.

Scalability & Flexibility: The organization can quickly deploy the necessary infrastructure without long procurement processes.

Reduced IT Management Overhead: The cloud provider manages the hardware, while the organization manages the applications and data.

Option B (Platform as a Service – PaaS): PaaS offers a development environment for building applications, not infrastructure (e.g., servers and networking).

Option C (Enterprise as a Service – EaaS): EaaS is not a standard cloud service model recognized by NIST (National Institute of Standards and Technology) or ISO 17788.

Option D (Software as a Service – SaaS): SaaS provides software applications over the internet (e.g., Gmail, Microsoft 365) but does not address server needs.

IIA’s Global Technology Audit Guide (GTAG) on Cloud Computing emphasizes IaaS as a viable solution for organizations requiring immediate infrastructure deployment.

NIST Special Publication 800-145 (Cloud Computing Definition) defines IaaS as a method to deliver computing resources efficiently without physical acquisition.

IIA Standard 2110 – IT Governance: Highlights the importance of agile IT solutions for meeting business needs, including cloud computing.

Why Option A is Correct (IaaS):Why Other Options Are Incorrect:IIA References:Thus, the most appropriate answer is A. Infrastructure as a Service (IaaS).

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.

When reviewing personal data consent and opt-in/opt-out management processes, internal auditors should focus on ensuring compliance with data protection regulations, such as the General Data Protection Regulation (GDPR) and other applicable data privacy laws. The most critical aspect is ensuring that personal data is processed strictly in line with the consent obtained from individuals.

Data Processing in Accordance with Consent (Correct Choice: B)

IIA Standard 2110 – Governance requires internal auditors to assess whether the organization has effective processes for ensuring compliance with laws and regulations, including data privacy obligations.

GDPR Article 5(1)(b) (Purpose Limitation Principle) mandates that personal data must be collected for specified, explicit, and legitimate purposes and must not be further processed in a manner incompatible with those purposes.

Internal auditors should verify that the organization adheres to this principle by ensuring that data is only used for the purpose for which consent was granted.

Why the Other Options Are Incorrect:

Option A: "Whether customers are asked to renew their consent for their data processing at least quarterly." (Incorrect)

GDPR does not mandate a quarterly renewal of consent. Instead, it requires that consent be freely given, specific, informed, and unambiguous. Periodic renewal may be advisable in some cases, but it is not a strict regulatory requirement.

IIA Standard 2120 – Risk Management requires auditors to evaluate compliance risk exposure, but excessive consent renewals could lead to inefficiencies without adding value.

Option C: "Whether the organization has established explicit and entitywide policies on data transfer to third parties." (Incorrect)

While data transfer policies are critical (as required under GDPR Articles 44-50 on international data transfers), they do not directly relate to the opt-in/opt-out process or consent management.

IIA Standard 2201 – Engagement Planning encourages reviewing policies, but the key focus should be on processing data according to the purpose of consent.

Option D: "Whether customers have an opportunity to opt-out the right to be forgotten from organizational records and systems." (Incorrect)

The right to be forgotten (GDPR Article 17) allows individuals to request data deletion, but it is not an opt-out feature in the traditional sense. Organizations must evaluate each request based on legal grounds before erasing data.

IIA Standard 2130 – Compliance requires verifying whether the organization ensures compliance with data privacy rights, but an opt-out for the right to be forgotten is not a primary audit focus.

IIA Standard 2110 – Governance (Ensuring regulatory compliance)

IIA Standard 2120 – Risk Management (Managing data privacy risks)

IIA Standard 2130 – Compliance (Reviewing legal obligations on personal data)

IIA Standard 2201 – Engagement Planning (Evaluating policies and controls)

GDPR Article 5(1)(b) – Purpose Limitation Principle (Processing data as per consent)

GDPR Articles 17, 44-50 (Data protection and right to be forgotten considerations)

Step-by-Step Justification for the Answer:IIA References for This Answer:Thus, Option B is the correct choice as it aligns with the purpose limitation principle and internal audit’s role in assessing compliance with data protection laws.

Effective IT Change Management Principles:

Change management ensures that modifications to IT systems are controlled, tested, and implemented in a way that reduces risks.

A structured and consistent process is required to prevent disruptions, maintain system integrity, and comply with governance requirements.

IIA Standard 2110 - Governance:

IT governance must include structured change management processes.

Change management should be repeatable and standardized to ensure effectiveness.

IIA GTAG (Global Technology Audit Guide) on Change Management:

Change management must be conducted in a controlled environment to minimize unintended consequences and security risks.

A. The sole responsibility for change management is assigned to an experienced and competent IT team. (Incorrect)

While IT plays a key role, change management should involve multiple stakeholders, including business units, security, compliance, and risk management teams.

IIA Standard 2120 - Risk Management states that risk oversight should not be assigned to a single function.

C. Internal audit participates in the implementation of change management throughout the organization. (Incorrect)

Internal audit evaluates change management but does not implement it.

IIA Standard 1000 - Purpose, Authority, and Responsibility emphasizes that internal audit provides independent assurance rather than operational involvement.

D. All changes to systems must be approved by the highest level of authority within an organization. (Incorrect)

Approvals should be based on a risk-based hierarchy rather than requiring executive-level approval for all changes.

IIA GTAG - Change Management recommends a tiered approval system based on change complexity and risk impact.

Explanation of Incorrect Answers:Conclusion:The most critical factor in effective IT change management is having a consistent, controlled process (Option B).

IIA References:

IIA Standard 2110 - Governance

IIA Standard 2120 - Risk Management

IIA Standard 1000 - Purpose, Authority, and Responsibility

IIA GTAG - Change Management

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.

When employees work from home, secure remote access to the organization's network is essential to protect data and ensure confidentiality. A Virtual Private Network (VPN) is the best option for enabling this securely.

Correct Answer (D - A Virtual Private Network (VPN))

A VPN creates a secure, encrypted connection between the employee's device and the organization’s internal network.

It prevents unauthorized access by ensuring that data is transmitted securely over the internet.

The IIA GTAG 17: Auditing Network Security recommends VPNs for secure remote work environments to prevent cyber threats.

Why Other Options Are Incorrect:

Option A (A Wireless Local Area Network - WLAN):

A WLAN is used within an office or home environment, but it does not provide secure remote access to an organization's network.

Option B (A Personal Area Network - PAN):

A PAN connects devices like smartphones and laptops within a short range (e.g., Bluetooth), but it is not suitable for secure remote access.

Option C (A Wide Area Network - WAN):

A WAN connects multiple locations, but it does not provide encryption or remote security like a VPN.

IIA GTAG 17: Auditing Network Security – Recommends VPNs for secure remote access.

IIA Practice Guide: Auditing IT Security Controls – Covers VPNs as a key security control for remote work.

Step-by-Step Explanation:IIA References for Validation:Thus, D is the correct answer because a VPN ensures secure, encrypted communication for employees working from home.

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.

A high-risk user-developed application (UDA) refers to spreadsheets or other tools created and maintained by end-users (not IT) that are critical to financial reporting, decision-making, or regulatory compliance. The IIA guidance on IT risk management emphasizes evaluating the complexity, significance, and control environment of such applications.

(A) Revenue Calculation Spreadsheet

Uses price and volume reports from production, meaning it relies on structured, external sources, reducing the risk of significant undetected errors.

Less complexity and external verification reduce its risk level.

(B) Asset Retirement Calculation Spreadsheet (Correct Answer)

Contains multiple formulas and assumptions, making it complex and prone to errors.

Assumptions introduce subjectivity and risk of incorrect calculations, affecting financial statements and compliance.

No automated controls or independent validations, making it a high-risk UDA.

IIA Standard 2110 – Governance and GTAG 14 (Auditing User-Developed Applications) emphasize assessing high-risk spreadsheets that impact financial decision-making.

(C) Ad-Hoc Inventory Listing Spreadsheet

Used for written-off inventory, which is historical data and not a key financial driver.

Limited impact on financial reporting, making it a low-risk UDA.

(D) Accounts Receivable Reconciliation Spreadsheet

Used by the accounting manager to verify balances, likely cross-checked with ERP or other financial systems.

Since external reconciliation exists, the spreadsheet does not pose a high inherent risk.

GTAG 14 (Auditing User-Developed Applications) – Identifies UDAs with complex formulas, financial impact, and lack of controls as high-risk.

IIA Standard 2110 (Governance) – Internal auditors must assess governance around financial and operational risk management, including IT risks.

IIA Standard 2120 (Risk Management) – Emphasizes identifying and mitigating risks from user-developed applications.

Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) Asset Retirement Calculation Spreadsheet, as it aligns with IIA guidance on high-risk spreadsheets due to complex formulas, assumptions, and potential financial misstatements.

The internal audit plan must be risk-based, as required by the IIA Standards. If cybersecurity has been identified as a high risk during the annual risk assessment, then it should be included in the audit plan to provide assurance over the adequacy of controls.

Including engagements simply to satisfy management (Option A) or for auditor learning purposes (Option B) does not align with risk-based planning principles. Likewise, management requests alone (Option D) do not dictate audit plan content; engagements must be prioritized based on risk to the organization.

Vertical integration occurs when a company expands its operations into a different stage of its supply chain. In this case, the restaurant is moving from relying on third-party delivery services to handling its own delivery operations, which is an example of backward vertical integration (taking control of a process previously handled by an external provider).

(A) Incorrect – Diversification.

Diversification refers to entering a completely different industry or market (e.g., a restaurant launching a grocery store).

In this case, the restaurant is expanding within the same industry by adding delivery services.

(B) Correct – Vertical integration.

Vertical integration happens when a company takes control of another step in its supply chain.

Since the restaurant is now handling its own deliveries instead of outsourcing, this is an example of backward vertical integration.

(C) Incorrect – Risk avoidance.

Risk avoidance means eliminating an activity entirely to prevent exposure to risk (e.g., deciding not to offer delivery at all).

The restaurant is not avoiding risk but taking on additional responsibilities.

(D) Incorrect – Differentiation.

Differentiation is a strategy focused on making a product/service unique to stand out from competitors.

The restaurant is not introducing a unique feature but integrating delivery operations.

IIA’s Global Internal Audit Standards – Business Strategy and Risk Management

Defines vertical integration and its impact on operational control.

COSO’s ERM Framework – Strategic Risk Considerations

Discusses how vertical integration influences business risks and cost control.

Porter’s Competitive Strategies – Vertical Integration Analysis

Explains backward and forward integration in supply chain management.

Analysis of Answer Choices:IIA References and Internal Auditing Standards:

The CAE must communicate the results of the QAIP to the board and senior management. This includes results from ongoing monitoring, periodic self-assessments, and external assessments.

Option A (board oversight) is part of governance but not a QAIP requirement. Option B is incorrect because conformance is assessed for the activity overall, not per engagement. Option C is incorrect because self-assessments are ongoing, while external assessments are required at least once every five years.

Thus, the essential QAIP requirement for conformance is reporting results to the board (Option D).

Detecting an inventory fraud scheme requires analyzing patterns of inventory adjustments, particularly across different locations. Fraudulent activities often involve unauthorized write-offs, stock transfers, or misstatements of inventory levels.

(A) Analyze invoice payments just under individual authorization limits.

Incorrect: This technique is useful for detecting procurement fraud or invoice splitting, but not directly related to inventory fraud.

(B) Analyze stratification of inventory adjustments by warehouse location. (Correct Answer)

Fraudulent inventory write-offs often occur in specific warehouses or locations where controls are weak.

Stratifying inventory adjustments helps identify abnormal patterns, such as excessive losses in one location.

IIA Standard 2120 (Risk Management) recommends data analytics and trend analysis to detect anomalies.

COSO ERM – Control Activities emphasizes monitoring and review of inventory adjustments to prevent fraud.

(C) Analyze inventory invoice amounts and compare with approved contract amounts.

Incorrect: This technique is effective for detecting overbilling or procurement fraud, but not inventory fraud, which involves physical stock manipulation.

(D) Analyze differences discovered during duplicate payment testing.

Incorrect: Duplicate payment testing helps uncover billing fraud, not inventory fraud.

IIA Standard 2120 – Risk Management: Encourages fraud detection through trend analysis and data monitoring.

IIA Practice Guide – Auditing Inventory Management: Suggests stratification of inventory adjustments to identify fraud.

COSO ERM – Control Activities: Recommends monitoring inventory transactions to prevent fraud.

Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) because analyzing stratification of inventory adjustments by warehouse location helps detect irregular patterns indicative of fraud.

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 Standards, engagement communications must be complete, objective, and balanced. When disagreements arise, the auditor should present both the audit team’s findings and management’s perspective so senior management and the board can make informed decisions.

Option A is excessive; raw correspondence is not necessary. Option C omits management’s opinion, reducing objectivity. Option D limits reporting to agreed items only, which would conceal significant unresolved issues.

The purpose of a guest auditor program is to leverage subject matter expertise from other areas while also enhancing collaboration and mutual learning between business units and internal audit. Allowing guest auditors to interact with internal audit staff fosters knowledge sharing, trust, and future cooperation.

Option A may create conflicts of interest. Option B compromises independence by allowing guest auditors to design and test audit procedures. Option C provides feedback but occurs after the engagement, not during.

In advisory engagements, internal audit may provide consulting support that enhances processes while maintaining objectivity. In this case, the most appropriate value-adding activity is to facilitate development of a checklist for documenting asset transfers. This addresses the identified gap directly and supports management in strengthening controls.

Option A identifies risks but does not resolve the gap. Option C (root cause analysis) is not as practical in this advisory setting. Option D (resource allocation) is a management responsibility, not internal audit’s role.

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:

When management agrees to address audit issues, the CAE must ensure that the final report documents management’s agreement and corrective action plan, including implementation timelines. This ensures accountability and enables proper follow-up monitoring.

Option B (follow-up engagement) may happen later, but the first step is proper documentation. Option C is unnecessary since management already agreed to corrective action. Option D is inappropriate because it is management’s responsibility to develop and own the action plan, not internal audit’s.

A sound network configuration practice should focus on enhancing security, preventing unauthorized access, and ensuring data integrity. The validation of intrusion prevention controls ensures that the network security measures function as intended and effectively protect data from threats.

(A) Change management practices to ensure operating system patch documentation is retained.

Incorrect: While maintaining patch documentation is important, change management alone does not directly enhance network security.

(B) User role requirements are documented in accordance with appropriate application-level control needs.

Incorrect: This practice improves access control and governance, but it is not a direct network security configuration practice.

(C) Validation of intrusion prevention controls is performed to ensure intended functionality and data integrity. (Correct Answer)

Intrusion Prevention Systems (IPS) help detect and prevent malicious activities in real time.

Ensuring proper validation enhances security and prevents data corruption.

IIA GTAG 15 – Information Security Governance recommends continuous monitoring and validation of security controls.

(D) Interfaces reinforce segregation of duties between operations administration and database development.

Incorrect: Segregation of duties is a good governance practice, but it does not directly relate to network security configuration.

IIA GTAG 15 – Information Security Governance: Recommends validating security controls, including intrusion prevention systems.

IIA Standard 2120 – Risk Management: Encourages proactive security controls to prevent cyber threats.

Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (C) Validation of intrusion prevention controls, as it directly enhances information security by ensuring real-time threat detection and data integrity.

A Value-Added Network (VAN) is a third-party network service that securely connects an organization with its trading partners, facilitating secure electronic data interchange (EDI) and business communications.

(A) Value-added network (VAN). (Correct Answer)

A VAN is a private, managed network service that provides secure data transmission between business partners.

It is commonly used for B2B transactions, supply chain management, and EDI.

IIA GTAG 7 – IT Outsourcing recognizes VANs as critical third-party networks for secure business data exchange.

(B) Local area network (LAN).

Incorrect: A LAN connects computers within a limited area (e.g., an office or building), but it is not designed for external trading partner connections.

(C) Metropolitan area network (MAN).

Incorrect: A MAN covers a city or region, but it is not designed for B2B communication.

(D) Wide area network (WAN).

Incorrect: A WAN connects multiple geographic locations, but it is a general networking term, not specific to trading partner communications.

IIA GTAG 7 – IT Outsourcing: Discusses the use of third-party networks like VANs for secure data exchange.

IIA Standard 2110 – Governance: Recommends secure third-party integration for business continuity and security.

Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (A) Value-Added Network (VAN) because it is specifically designed for secure communication between an organization and its trading partners.

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.

The matching principle is a fundamental accounting concept that ensures that expenses are recorded in the same period as the revenues they help generate.

Why Option C (Expense recognition is tied to revenue recognition) is Correct:

The matching principle states that expenses should be recognized in the same period as the revenue they help generate to ensure accurate financial reporting.

This principle is applied in accrual accounting under GAAP and IFRS, ensuring that expenses and revenues are properly aligned.

Why Other Options Are Incorrect:

Option A (Revenues should be recognized when earned):

This describes the revenue recognition principle, not the matching principle.

Option B (Revenue recognition is matched with cash):

Incorrect because the matching principle applies to accrual accounting, not cash accounting. Revenue can be recognized before cash is received.

Option D (Expenses are recognized at each accounting period):

Incorrect because expenses are not necessarily recognized in every period; they are matched to revenue.

IIA Practice Guide – "Auditing Financial Reporting Controls": Discusses the importance of the matching principle.

GAAP & IFRS Accounting Standards: Define and require the application of the matching principle.

COSO Internal Control Framework: Emphasizes revenue-expense alignment for accurate financial reporting.

IIA References:

A risk and control questionnaire (RCQ) is used during preliminary surveys to help the auditor ascertain the existence of controls in a specific process or program. It provides structured information about which controls are in place, which are missing, and how they are applied.

Option A refers to reconciliation, which is not the main purpose. Option C (testimonial information) suggests reliance on management statements, which is weaker than structured control identification. Option D involves external confirmation, which goes beyond the RCQ’s purpose.

The CAE’s role is to provide assurance that risks are identified and managed appropriately. When residual risk appears to exceed the organization’s tolerance, the CAE should first communicate the matter with senior management to discuss the issue and understand management’s acceptance of risk. Only if the risk remains unresolved should it be escalated to the board.

Option A is management’s responsibility, not internal audit’s. Option B is incomplete as evidence alone does not fulfill the communication requirement. Option C is premature because immediate escalation to the board skips management dialogue.

Fixed manufacturing costs refer to costs that do not vary with the level of production activity within a relevant range. These costs include expenses such as depreciation, rent, property taxes, and salaries of permanent employees in the production facility. Their primary purpose is to ensure the availability and operational readiness of production facilities, regardless of fluctuations in production levels.

(A) Correct – To ensure availability of production facilitiesFixed manufacturing costs are incurred to maintain and operate production facilities, ensuring that they remain functional and available for production when needed. These costs exist even if no units are produced, emphasizing their role in sustaining the production infrastructure.

(B) Incorrect – To decrease direct expenses related to productionFixed manufacturing costs are unrelated to direct expenses, such as raw materials and labor, which vary with production volume. Instead, they remain constant regardless of output levels.

(C) Incorrect – To incur stable costs despite operating capacityWhile fixed costs remain stable within a relevant range, their primary purpose is not just cost stability but ensuring production facilities' availability and functionality.

(D) Incorrect – To increase the total unit cost under absorption costingUnder absorption costing, fixed manufacturing costs are allocated to units produced, affecting per-unit cost calculations. However, this is an accounting treatment rather than the core purpose of fixed manufacturing costs.

IIA’s Global Internal Audit Standards – Managing Resources Effectively

Fixed manufacturing costs ensure operational resources are available and managed efficiently.

IIA’s Guide on Cost Management and Internal Control

Highlights the role of cost structures, including fixed costs, in ensuring business continuity.

IIA’s Practice Advisory on Cost Accounting Controls

Discusses the importance of maintaining production facilities to ensure operational readiness.

Breakdown of Answer Choices:IIA References and Internal Auditing Standards:Would you like further clarification on any point?

The root cause is the lack of a structured process for updating access rights when employees change positions. The best recommendation is to establish a role-based access control system, where access rights are determined and approved by process owners, not left to administrators.

Option A is corrective but only retrospective. Option B wrongly blames administrators without addressing the systemic issue. Option C risks inconsistency, as administrators should not decide rights.

Audit observations should include condition, criteria, cause, and effect. In this case, the condition (delay risk), criteria (schedule), and effect (penalties) are already presented. What is missing is the cause—the underlying reason for the project delay. Identifying the cause ensures recommendations address the root of the problem.

A root cause-based recommendation addresses the underlying problem rather than symptoms. In this case, the real issue is the spider infestation, which attracts the birds, which in turn leads to droppings that require harsh cleaning. By enhancing cleaning and displacement of spiders, the organization eliminates the root cause and prevents recurrence.

Options A, B, and C treat symptoms but do not address the true root cause.

A disaster recovery plan (DRP) outlines how an organization will restore IT operations after a disruption. The type of recovery site determines how quickly systems can be brought back online.

Why a Warm Site Recovery Plan is Correct?A warm site is a partially configured backup location with some hardware and software ready, but it requires additional configuration before it can fully support production operations.

Faster than a Cold Site – Unlike a cold site, a warm site has pre-installed infrastructure, reducing downtime.

Requires Some Setup – Unlike a hot site, which is fully operational, a warm site needs configuration and software setup before use.

Balances Cost and Readiness – Less expensive than a hot site while offering faster recovery than a cold site.

B. Hot site recovery plan – A hot site is fully operational and can immediately take over in case of failure.

C. Cool site recovery plan – This is not a standard industry term in disaster recovery.

D. Cold site recovery plan – A cold site has only basic infrastructure (e.g., power and space) and lacks pre-installed hardware/software, requiring much more setup time.

IIA’s GTAG on Business Continuity Management – Defines recovery site options based on operational risk.

ISO 22301 (Business Continuity Management System) – Specifies warm sites as an intermediate recovery solution.

NIST SP 800-34 (Contingency Planning Guide for IT Systems) – Describes warm sites as partially pre-configured recovery environments.

Why Not the Other Options?IIA References:

The auditor’s responsibility does not end with reporting a control deficiency. The CAE must monitor progress and follow up periodically with management to confirm whether corrective actions have been implemented.

Option A stops at documentation and fails to ensure corrective action. Option C incorrectly assumes no further audit is needed. Option D assigns management’s responsibility to the auditor, which would impair independence.

According to IIA Standards, if senior management accepts a risk that the CAE believes may be unacceptable, the CAE must judge whether the risk is indeed acceptable and, if not, escalate the matter to the board. This ensures that governance bodies are aware of significant exposures. Reporting directly to external stakeholders (Option A) is not internal audit’s role. Option B alone is insufficient if the risk is significant. Option D applies only when management’s acceptance aligns with tolerance.

According to IIA guidance, the CAE must escalate to the board when significant risks remain unaddressed. The most critical concern here is that no resources or budget were allocated to implement corrective measures. This indicates that management is not taking the risk seriously, and the exposure to noncompliance with data protection laws remains high.

Option A relates to customer satisfaction, not regulatory compliance. Option C is an issue of communication but not as critical as failing to allocate resources. Option D shows resistance but can be managed if resources are in place.

Thus, the condition that best justifies escalation is Option B: lack of allocated resources.

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:

An IT disaster recovery plan (DRP) ensures business continuity by defining backup and recovery sites. These sites differ based on their level of readiness.

Let’s analyze the answer choices:

Option A: Frozen site

Incorrect. "Frozen site" is not a recognized term in IT disaster recovery planning. The three common categories are cold, warm, and hot sites.

Option B: Cold site

Correct.

A cold site is a designated recovery location that provides only basic facilities such as power, space, internet, and telecommunications.

It does not include servers, infrastructure, or pre-installed systems, meaning that it requires significant setup time before becoming operational.

IIA Reference: Business continuity and IT risk management frameworks classify cold sites as a cost-effective but slower disaster recovery option. (IIA GTAG: Business Continuity Management)

Option C: Warm site

Incorrect. A warm site includes some pre-installed hardware and software, allowing faster recovery compared to a cold site.

Option D: Hot site

Incorrect. A hot site is fully operational with real-time data replication, enabling an immediate switchover in case of disaster.

Efficiency indicators measure how well resources are used to produce outputs. The number of audits completed reflects efficiency because it shows how effectively the internal audit function utilizes available resources to deliver its plan.

Option B (observations) reflects risk exposure, not efficiency. Option C measures effectiveness (impact of audit work), not efficiency. Option D reflects investment in staff development, not operational efficiency.

Transfer pricing regulations aim to prevent tax evasion and ensure that intercompany transactions reflect fair market value, preventing profit shifting to low-tax jurisdictions. Selling inventory at fair value (arm’s length price) aligns with regulatory requirements, reducing the risk of non-compliance.

(A) Correct – The organization sells inventory to an overseas subsidiary at fair value.

Ensuring that transactions reflect fair market value prevents regulatory violations.

Adhering to the arm’s length principle minimizes transfer pricing risks and potential tax penalties.

(B) Incorrect – The local subsidiary purchases inventory at a discounted price.

A discounted price could be seen as an attempt to shift profits between entities, increasing regulatory scrutiny.

(C) Incorrect – The organization sells inventory to an overseas subsidiary at the original cost.

Selling at the original cost does not account for market conditions, potential markup, and fair valuation.

Regulators may view this as non-compliance with the arm’s length principle.

(D) Incorrect – The local subsidiary purchases inventory at the depreciated cost.

Depreciated cost may not represent fair market value and could be interpreted as a tax avoidance mechanism.

IIA’s Global Internal Audit Standards – Compliance with Tax and Transfer Pricing Regulations

Emphasizes fair pricing in intercompany transactions to prevent regulatory violations.

OECD Transfer Pricing Guidelines

Reinforces the arm’s length principle as the standard for pricing related-party transactions.

COSO’s ERM Framework – Compliance Risk Management

Highlights the need for adherence to tax laws and fair-value pricing in financial transactions.

Analysis of Answer Choices:IIA References and Internal Auditing Standards:

User-Developed Applications (UDAs) are applications, spreadsheets, databases, or tools created and maintained by end-users rather than IT departments. They provide flexibility but also introduce risks related to security, accuracy, and change management.

Why Option B is Correct:

UDAs lack formal change management controls.

Since they are typically not subject to rigorous testing and documentation, modifications may introduce errors.

Updating or correcting a formula, macro, or script in a UDA may have unintended consequences that go unnoticed, leading to data integrity issues.

Why Other Options Are Incorrect:

Option A (UDAs are less flexible and more difficult to configure than traditional IT applications):

Incorrect. UDAs are more flexible and easier to modify compared to traditional IT applications, which undergo strict change controls.

Option C (UDAs typically are subjected to application development and change management controls):

Incorrect. Most UDAs lack formal governance or IT oversight. They are typically developed by business users with little or no structured IT controls.

Option D (Using UDAs typically enhances the organization’s ability to comply with regulatory factors):

Incorrect. UDAs introduce compliance risks due to lack of security, audit trails, and formal change controls.

IIA GTAG – "Auditing User-Developed Applications": Discusses risks and controls related to UDAs.

IIA Practice Advisory 2130-1 (Control Risk Self-Assessment): Highlights the importance of internal controls over UDAs.

COSO Internal Control – Integrated Framework: Recommends applying IT general controls (ITGCs) to UDAs.

IIA References:Thus, the correct answer is B. Updating UDAs may lead to various errors resulting from changes or corrections.

When an internal auditor calculates the mean (average), median (middle value), and range (difference between highest and lowest values) of a data population, the primary purpose is to assess the distribution of data and detect anomalies. Let’s analyze the answer choices:

Option A: To inform the classification of the data population.

Incorrect. Classification typically involves categorizing data into specific groups, which requires different statistical or analytical techniques like clustering or decision trees. Mean, median, and range are more useful for identifying distribution patterns.

Option B: To determine the completeness and accuracy of the data.

Incorrect. While summary statistics can highlight extreme values, completeness and accuracy are usually assessed through data reconciliation, validation checks, and comparison with source records.

Option C: To identify whether the population contains outliers.

Correct.

The range (difference between the largest and smallest values) helps to detect extreme values.

The mean and median can show whether the data is symmetrical or skewed (which may indicate outliers).

If the mean is significantly different from the median, it suggests potential outliers pulling the average in one direction.

IIA Reference: Internal auditors use data analytics to detect anomalies and potential fraud by identifying outliers. (IIA GTAG: Auditing with Data Analytics)

Option D: To determine whether duplicates in the data inflate the range.

Incorrect. Duplicates may affect the data set, but range calculations alone do not determine whether duplicates exist. Duplicate identification usually involves checking for repeated entries, not just extreme values.

The CAE must communicate the results of the quality assurance and improvement program (QAIP), including internal assessments, to senior management and the board at least annually. This ensures that oversight bodies remain informed about the internal audit activity’s conformance with the Standards and opportunities for improvement.

Option A refers to external assessments, not internal quality reviews. Option C is too vague. Option D is incorrect, as validation is not required before reporting internal assessment results.

A core feature of blockchain technology is immutability—once data is recorded, it cannot be altered or deleted. While this supports integrity and transparency, it also creates a conflict with data privacy regulations such as the General Data Protection Regulation (GDPR), which grants individuals the “right to be forgotten.” The inability to erase personal data stored on blockchain creates a compliance challenge.

Options A and B are incorrect: phishing is not inherent to blockchain, and transactions are not easily tampered with (immutability actually prevents that). Option C is misleading because regulations address data use but do not “overregulate” blockchain specifically.

The internal audit procedures manual documents policies and procedures for conducting audit engagements, including steps to follow when issues arise, such as disputes with management regarding findings. It ensures consistency and standardization of audit practice.

Option A (strategic plan) and Option C (resources) are not part of audit procedures but rather part of planning or organizational documents. Option D (authority to collect data) belongs in the internal audit charter, not in the procedures manual.

Therefore, the correct answer is appropriate response options for disputes with management (Option B).

The Internet of Things (IoT) refers to a network of interconnected physical devices that collect and exchange data through the internet. The key benefits of IoT include automation, improved decision-making, cost savings, and efficiency gains.

(A) Employees can choose from a variety of devices they want to utilize to privately read work emails without their employer’s knowledge.

This is incorrect because it focuses on unauthorized access rather than a benefit of IoT. Security and monitoring are major concerns in IoT environments.

IIA Standard 2110 – Governance requires organizations to ensure adequate governance structures for IT and data security.

(B) Physical devices, such as thermostats and heat pumps, can be set to react to electricity market changes and reduce costs. ✅

This is correct because IoT enables smart devices to automatically adjust based on real-time data.

Example: Smart thermostats (e.g., Nest, Honeywell) use IoT to track energy prices and consumption, adjusting temperatures to optimize efficiency.

IIA Practice Guide "Assessing the Governance of Risks in IT Projects" highlights IoT as a tool for operational efficiency and cost savings.

(C) Information can be extracted more efficiently from databases and transmitted to relevant applications for in-depth analytics.

This relates more to big data and data analytics, not necessarily IoT.

IIA GTAG "Auditing IT Governance" discusses IoT in operational efficiency but distinguishes it from data extraction.

(D) Data mining and data collection from the internet and social networks is easier, and the results are more comprehensive.

This describes AI and machine learning rather than IoT, which primarily connects physical devices.

IIA GTAG "Auditing Cybersecurity Risk" highlights IoT risks but does not emphasize social media data mining.

IIA GTAG (Global Technology Audit Guide) – "Auditing IT Governance"

IIA GTAG – "Assessing the Governance of Risks in IT Projects"

IIA Standard 2110 – Governance

IIA GTAG – "Auditing Cybersecurity Risk"

Analysis of Answer Choices:IIA References:Thus, the most appropriate answer is B because IoT improves efficiency by automating energy consumption based on market conditions.

Effective change management ensures that IT changes (such as software updates, system modifications, or infrastructure upgrades) are well-controlled, minimizing disruptions. Poor change management leads to instability, inefficiencies, and operational risks.

Unplanned Downtime (2) – Indicates that changes are being implemented without proper testing or failover planning, disrupting business operations.

Excessive Troubleshooting (3) – Suggests that changes are causing recurring issues, leading to increased workload for IT support teams.

Unavailability of Critical Services (4) – Highlights that change-related failures are affecting essential business functions, indicating improper risk assessment.

While inadequate control design is a general IT risk, it is not a direct indicator of poor change management. Instead, it relates more to weaknesses in IT governance and security frameworks.

IIA’s GTAG (Global Technology Audit Guide) on Change Management – Identifies unplanned downtime, excessive troubleshooting, and service unavailability as key red flags of poor change management.

COBIT 2019 (Governance and Management of IT) – Emphasizes structured change management to minimize disruptions.

ITIL Change Management Framework – Highlights these issues as symptoms of ineffective change control.

Why 2, 3, and 4 Are Indicators of Poor Change Management?Why Not Option 1 (Inadequate Control Design)?IIA References:✅ Final Answer: D. 2, 3, and 4 only.

The IIA Standards require that significant governance, risk management, or control issues be communicated to senior management and the board, regardless of whether they arise from assurance or advisory engagements.

Option A is misleading, as it overstates the audit committee’s role. Option C is incorrect because responsibility for final communication lies with the CAE, not the supervisor. Option D is also incorrect since the audit committee does not approve every report; that responsibility rests with internal audit leadership.

The root cause of the missing significant risks lies in the methodology used for risk identification. If the process relies too rigidly on a standard set of questions, it may overlook critical risks. By revising the risk identification methodology, the organization ensures that future projects capture relevant risks comprehensively and consistently, adding long-term value.

Option A addresses only the current project, not the underlying issue. Option B may improve knowledge but does not fix the flawed process. Option D merely shifts responsibility but does not address the methodology weakness.

When performing data analytics, the process typically follows a structured approach. Once the internal auditor has determined the expected value from the review, the next logical step is to obtain the data. Without acquiring the necessary datasets, further actions such as normalization, risk identification, and analysis cannot be effectively carried out.

(A) Incorrect – Normalize the data.

Normalization is a preprocessing step that occurs after data has been obtained.

Before normalizing, the auditor must first access and collect relevant data sources.

(B) Correct – Obtain the data.

Data acquisition is a critical step in data analytics.

The auditor must gather relevant and reliable data from internal and external sources before proceeding with further steps such as cleansing, normalization, and analysis.

(C) Incorrect – Identify the risks.

Risk identification is an essential part of the audit process but typically comes after obtaining and reviewing data patterns.

Without data, identifying risks would be speculative rather than evidence-based.

(D) Incorrect – Analyze the data.

Data analysis comes after obtaining, cleaning, and structuring the data.

Jumping straight to analysis without ensuring data quality would lead to inaccurate conclusions.

IIA’s GTAG (Global Technology Audit Guide) – Data Analytics

Recommends obtaining data as the initial step in data-driven audits.

IIA’s Global Internal Audit Standards – Use of Data Analytics in Auditing

Stresses the importance of data acquisition before proceeding with normalization and analysis.

COSO’s ERM Framework – Data-Driven Decision Making

Highlights the importance of securing data for risk identification and mitigation.

Analysis of Answer Choices:IIA References and Internal Auditing Standards:

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.

Comprehensive and Detailed In-Depth Explanation:

An intranet is a private network used by an organization for internal communication and information sharing among employees. It is accessible only to authorized personnel within the company.

Option A (Extranet) – Allows external parties (e.g., suppliers, partners) to access limited information.

Option B (LAN) – Refers to a network infrastructure rather than controlled access.

Option D (Internet) – Is public and not restricted to internal personnel.

Thus, Option C (Intranet) is the correct answer as it ensures access only to organizational personnel.

Comprehensive and Detailed In-Depth Explanation:

Encryption is a security measure that protects the confidentiality of sensitive data by converting it into an unreadable format. This directly addresses privacy risks by preventing unauthorized access to personal or confidential information.

Option A (Information integrity risk) – Integrity controls (e.g., checksums, hash functions) address this risk.

Option C (Access risk) – Managed through authentication and access controls, not encryption.

Option D (Software risk) – Related to vulnerabilities, which encryption does not directly mitigate.

Since encryption protects privacy by securing sensitive data, Option B is correct.

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.

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.

Comprehensive and Detailed In-Depth Explanation:

Jailbreaking a locked smart device (removing manufacturer-imposed restrictions) increases the risk of infringing on copyright and privacy laws, as it allows unauthorized access to software and applications.

Option A (Not installing anti-malware software) – Increases security risks but does not directly violate regulations.

Option B (Haphazard OS updates) – Can lead to vulnerabilities but is not a legal issue.

Option C (Weak passwords) – Poses a security threat but does not impact compliance with laws.

Since jailbreaking often violates software licenses and may lead to illegal use of software, Option D is the correct answer.

Comprehensive and Detailed In-Depth Explanation:

Partnership contributions should be recorded at their fair market value (FMV) at the time of contribution, ensuring equitable financial representation.

Option A (Original cost of the equipment) – Not appropriate since the asset’s current fair value is relevant, not its historical cost.

Option B (Weighted average approach) – Not applicable; capital accounts should reflect actual contributed value.

Option C (No action necessary) – Incorrect because partners contributed assets of different values, making an equal capital credit unfair.

Since partnership accounting requires fair market value for capital accounts, Option D is correct.

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.

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.

Comprehensive and Detailed In-Depth Explanation:

A cold site is a disaster recovery location that provides only basic infrastructure (e.g., power, cooling, and space) but does not have pre-installed IT systems. Organizations must procure and install servers before recovery can begin.

Option A (Real-time data synchronization) applies to hot sites, which maintain fully operational backup systems.

Option B (Recovery time under one week) is more characteristic of warm or hot sites, as cold sites require longer setup times.

Option D (Defined recovery processes) applies to all disaster recovery plans and does not differentiate cold sites.

Since a cold site lacks pre-installed servers, Option C is the correct answer.

Comprehensive and Detailed In-Depth Explanation:

A favorable labor efficiency variance (Option 1) occurs because experienced workers complete tasks more efficiently, reducing time and waste.

An adverse labor rate variance (Option 2) arises because hiring experienced employees increases labor costs compared to budgeted rates.

Option 3 (Adverse labor efficiency variance) is incorrect because skilled workers typically improve efficiency.

Option 4 (Favorable labor rate variance) is incorrect because higher wages increase costs, leading to an adverse variance.

Thus, the correct answer is A (1 and 2 only).

Comprehensive and Detailed In-Depth Explanation:

The tape rotation schedule is a method used to manage and organize backup media to ensure data is retained for the required period and can be restored when necessary. Different rotation schemes, such as Grandfather-Father-Son (GFS), determine how long each backup tape is kept before being overwritten, directly affecting data retention policies. While real-time backups (option A) provide continuous data protection, they are not always necessary or practical for all systems. Storing backups onsite (option B) offers quick access but may not protect against site-specific disasters; offsite storage is often recommended. Regular restoration tests (contrary to option D) are essential to ensure backup integrity and reliability, not just in failure scenarios.

Exit meetings are intended to ensure that engagement clients clearly understand the observations, conclusions, and recommendations of the internal audit activity. The IIA’s International Standards for the Professional Practice of Internal Auditing emphasize that communication should be clear, constructive, and timely. Providing engagement clients with written summaries of the observations before the exit meeting allows them to review the facts, prepare questions, and understand the basis for the observations. This preparation improves dialogue, reduces confusion, and increases the effectiveness of the meeting.

Option B is less effective because it limits client engagement and postpones resolution of disagreements. Option C is impractical, as reading the full draft report during the meeting is time-consuming and may overwhelm clients. Option D eliminates the opportunity for discussion and relationship building with management, which is a critical part of audit communication.

Comprehensive and Detailed In-Depth Explanation:

A Project Management Information System (PMIS) is a centralized tool used throughout a project's planning, execution, and monitoring phases. It helps track schedules, costs, and risks.

Option A (EVM) – Used primarily in monitoring and control phases, not all three.

Option B (Organizational procedures) – Provides guidance but is not actively used in all project phases.

Option C (Performance measurement) – Important in monitoring, but not central to planning or execution.

Since PMIS is used throughout the project lifecycle, Option D is correct.

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

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.

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.

Understanding Data Analysis in Internal Auditing

Data analytics enhances audit testing by identifying patterns, anomalies, and high-risk transactions within large datasets.

Advanced analytics tools (e.g., AI, machine learning, continuous auditing) help auditors pinpoint areas of fraud, compliance violations, or operational inefficiencies.

Why Option B is Correct?

Data analysis improves risk assessment by allowing auditors to focus on high-risk areas, such as fraudulent transactions or control weaknesses.

IIA Standard 1220 – Due Professional Care requires auditors to use technology to improve audit effectiveness, including identifying risks.

IIA GTAG (Global Technology Audit Guide) 16 – Data Analytics supports using analytics to enhance risk-based auditing.

Why Other Options Are Incorrect?

Option A (Improves effectiveness of spot check testing techniques):

Data analysis enables continuous and full-population testing, rather than just improving spot checks.

Option C (Reduces the overall scope of the audit engagement):

Analytics refines audit focus but does not necessarily reduce the scope; it may expand testing capabilities.

Option D (Increases the auditor’s objectivity):

Objectivity is an ethical requirement rather than a direct effect of data analysis.

Data analytics enhances internal audit testing by providing deeper insights into high-risk areas.

IIA Standard 1220 and GTAG 16 emphasize data analytics in risk-based auditing.

Final Justification:IIA References:

IPPF Standard 1220 – Due Professional Care

IIA GTAG 16 – Data Analytics in Auditing

COSO Framework – Data-Driven Risk Management

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

Analytical procedures involve evaluating financial and operational data by examining plausible relationships between numbers, trends, and industry benchmarks. These procedures assume that data relationships exist and will continue unless there is evidence to the contrary.

(A) Data relationships are assumed to exist and to continue where no known conflicting conditions exist. ✅

Correct. Analytical procedures rely on historical trends and logical relationships between data (e.g., revenue vs. expenses, payroll vs. employee count). If no unusual variations or red flags are observed, auditors assume continuity.

IIA GTAG "Auditing Business Intelligence" supports the assumption that data relationships persist unless evidence suggests otherwise.

(B) Analytical procedures are intended primarily to ensure the accuracy of the information being examined.

Incorrect. The primary goal of analytical procedures is not absolute accuracy but rather identifying trends, anomalies, and risks that require further investigation.

(C) Data relationships cannot include comparisons between operational and statistical data.

Incorrect. Operational and statistical data are commonly used in analytical procedures (e.g., comparing production output with raw material consumption, or customer transactions with website visits).

IIA GTAG "Data Analytics: Elevating Internal Audit Performance" highlights the importance of using both financial and operational data in analytical testing.

(D) Analytical procedures can be used to identify unexpected differences, but cannot be used to identify the absence of differences.

Incorrect. Analytical procedures can identify both unexpected variances and expected consistency. Auditors analyze trends, seasonal fluctuations, and relationships, detecting both errors and missing anomalies.

IIA GTAG – "Auditing Business Intelligence"

IIA GTAG – "Data Analytics: Elevating Internal Audit Performance"

IIA Standard 2320 – Analysis and Evaluation

Analysis of Answer Choices:IIA References:Thus, the correct answer is A, as analytical procedures assume data relationships exist and continue unless conflicting conditions arise.

Understanding BYOD Risks and Legal Implications

Bring-your-own-device (BYOD) policies allow employees to use personal devices for work, but they introduce compliance risks.

Jailbreaking is the process of bypassing manufacturer-imposed security restrictions on a device (e.g., iPhones or Android devices).

This significantly increases the risk of privacy law violations, copyright infringements, and security breaches.

Why Option D is Correct?

Jailbreaking allows users to:

Install unauthorized software, which may violate software licensing agreements and copyright laws.

Remove security restrictions, increasing exposure to data breaches, malware, and non-compliance with privacy regulations (e.g., GDPR, HIPAA, or CCPA).

Bypass digital rights management (DRM), leading to potential copyright infringement issues.

IIA Standard 2110 – Governance mandates that internal auditors evaluate IT risks, including legal compliance related to mobile device usage.

ISO 27001 – Information Security Management also highlights the risks of unapproved software on enterprise devices.

Why Other Options Are Incorrect?

Option A (Not installing anti-malware software):

While a security risk, this primarily exposes devices to cyber threats rather than directly causing regulatory infringements.

Option B (Updating operating software in a haphazard manner):

Irregular updates pose security risks, but they do not directly violate copyright or privacy laws.

Option C (Applying a weak password):

Weak passwords increase security risks, but they do not inherently cause regulatory infringements like jailbreaking does.

Jailbreaking increases risks of copyright infringement (through unauthorized apps) and privacy violations (by removing security controls).

IIA Standard 2110 and ISO 27001 emphasize legal and regulatory compliance in IT security audits.

Final Justification:IIA References:

IPPF Standard 2110 – Governance (IT & Legal Compliance Risks)

ISO 27001 – Information Security Compliance

GDPR, HIPAA, and CCPA – Privacy Law Considerations for BYOD

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.

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 rule

According 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) <</b> $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.