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IIA CIA Exam
Certified Internal Auditor Exam (Page 12 )

Updated On: 12-Jan-2026
Page 12 of 342
PDF with 1702 Questions

An entity obtained a short-term bank loan of US $250, 000 at an annual interest rate of 6%. As a condition of the loan, the entity is required to maintain a compensating balance of US $50, 000 in its checking account. The entity's checking account earns interest at an annual rate of 2 %. Ordinarily, the entity maintains a balance of US $25, 000 in its checking account for transaction purposes. What is the effective interest rate of the loan?

  1. 6.44%
  2. 7.00%
  3. 5.80%
  4. 6.66%

Answer(s): A

Explanation:

The US $50, 000 compensating balance requirement is partially satisfied by the entity's practice of maintaining a US $25, 000 balance for transaction purposes. Thus, only US $25, 000 of the loan will not be available for current use, leaving US $225, 000 of the loan usable. At 6% interest, the US $250, 000 loan would require an interest payment of US $15, 000 per year. This is partially offset by the 2% interest earned on the US $25, 000 incremental balance, or US $500. Subtracting the US $500 interest earned from the US $15, 000 of expense results in net interest expense of US $14, 500 for the use of US $225.000 in funds. Dividing US $14, 500 by US $225, 000 produces an effective interest rate of 6.44%.



The following are the January 1 and June 30 balance sheets of an entity/

From January 1 to June 30. the net works no capital

  1. Decreased by US $1 million
  2. Stayed the s
  3. Increased by US $1 million
  4. Increased by US $2 million

Answer(s): C

Explanation:

Net working capital equals current assets cash, accounts receivable, inventories for this entity) minus current liabilities accounts payable. notes payable, accrued wages). From January 1 to June 30. the net working capital increased by US $1.000.000 {[($4 + $4 + $10) - $3 + $3 + $2)] - [($3 + $5 + $8) - $2 + $4 + $1)]}.



Assume that each day an entity writes and receives checks totaling US $10, 000. If it takes 5 days for the checks to clear and be deducted from the entity's account and only 4 days for the deposits to clear, what is the float?

  1. US $10, 000
  2. US TO
  3. US $(10, 000)
  4. US $50, 000

Answer(s): A

Explanation:

The float period is the time between when a check is written and when it clears the payer's checking account. Check float results in an interest-free loan to the payer because of the delay between payment by check and its deduction from the bank account. If checks written require one more day to clear than checks received, the net float equals one day's receipts. The entity will have free use of the money for one day_ In this case, the amount is US $10, 000.



An entity has a majority of its customers located in states A and B. A major west coast bank has agreed to provide. a lockbox system to the entity at a fixed fee of US $50, 000 per year and a variable fee of US $0.50 for each payment processed by the bank. On average, the entity receives 50 payments per day, each averaging US $20, 000. With the lockbox system, the entity's collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. If the entity makes use of the lockbox system, what would be the net benefit to the entity? Use 365 days per year.

  1. US $55.125
  2. US $60, 875
  3. US $50, 000
  4. US $120, 000

Answer(s): B

Explanation:

If payments are collected 2 days earlier. the entity can earn US $120, 000 $20, 000 50 payments per day 2 days .06) at a cost of US $59, 125 [$50, 000 + 50 payments 365 days $.50)], a gain of US $60, 875.



An entity borrows funds from its bank for a one-year period. The bank charges interest at a nominal rate of 15% per annum, on a discount basis, and requires a 10% compensating balance. The effective annual interest rate on the loan is

  1. 16.67%
  2. 17.65%
  3. 20.00%
  4. 25.00%

Answer(s): C

Explanation:

Discount interest is subtracted before the loan proceeds are paid to the borrower. A compensating balance is an amount that the borrower must keep on deposit with the lender. The effective annual interest rate is increased by both the discount interest arrangement and by the compensating balance requirement The effective rate equals the nominal rate dividend by one minus the sum of the nominal rate and 'the compensating balance percentage, or 20% [.15 - 1.0 - .15 - .1 O)].



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