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IIA CIA Exam
Certified Internal Auditor Exam (Page 22 )

Updated On: 12-Jan-2026
Page 22 of 342
PDF with 1702 Questions

Assume that nominal interest rates just increased substantially but that the expected future dividends for an entity over the long run were not affected. As a result of the increase in nominal interest rates. the entity's share price should

  1. Increase.
  2. Decrease.
  3. Stay constant
  4. Change, but in no obvious direction_

Answer(s): B

Explanation:

The dividend growth model is used to calculate the price of a share.



The market value of an entity's outstanding ordinary shares will be higher, everything else equal, if investors

  1. Have a lower required return on equity.
  2. Expect lower dividend growth.
  3. Have longer expected holding periods.
  4. Have shorter expected holding periods.

Answer(s): A

Explanation:

The dividend growth model is used to calculate the cost of equity. The simplified formula is

Thus, when investors have a lower required return on equity, the denominator is smaller, which translates into a higher market value.



If two entities. entity' - and entity Y. are alike in all respects except that entity X employs more debt financing and less equity financing than entity Y does. which of the following statements is true?

  1. Entity X has more net earnings variability than entity Y.
  2. Entity X has more operating earnings variability than entity Y.
  3. Entity X has less operating earnings variability than entity Y.
  4. Entity X has less financial leverage than entity Y.

Answer(s): A

Explanation:

Given that entity X is more highly leveraged, it has greater fixed financing charges than entity Y. Interest payments are fixed financing charges, but ordinary share dividends are not. As a result. entity X will be more risky and therefore will have a more volatile net income stream than entity Y. if other factors are , constant.



A retail mail order entity currently uses a central collection system that requires all checks to be sent to its headquarters. An average of 6 days is required for mailed checks to be received. 3 days for the entity to process them, and 2 days for the checks to clear through the bank. A proposed lockbox system would reduce the mailing and processing time to 2 days and the check clearing time to 1 day. The entity has an average daily collection of US $150, 000. How much will the average cash balance increase by if the entity adopts the lockbox system?

  1. US $1, 200, 000
  2. US $750, 000
  3. US $600, 000
  4. US $450, 000

Answer(s): A

Explanation:

Checks are currently tied up for 11 days 6 for mailing, 3 for processing, and 2 for clearing). If that period were reduced to 3 days. the entity's cash balance would increase by US $1.200.000 $150, 000 per day x 8 days).



A growing entity is assessing current working capital requirements. Ana rage of 58 days is required to convert raw materials into finished goods and to sell them. Then an average of 32 days is required to collect on receivables. If the average time the entity takes to pay for its raw materials is 15 days after they are received. the total cash conversion cycle is

  1. 11 days.
  2. 41 days.
  3. 75 days.
  4. 90 days.

Answer(s): C

Explanation:

The cash conversion cycle is the length of time between paying for purchases and receiving cash from the sale of finished is. It equals the inventory conversion period. plus the receivables collection period, minus the payables defferrel period, or 75 days 58 days + 32 days - 15 days). An entity has a current ratio of 1.4. a quick, or acid test, ratio of 1.2.
and the following partial summary balance sheet:



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