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IIA CIA Exam
Certified Internal Auditor Exam (Page 27 )

Updated On: 12-Jan-2026
Page 27 of 342
PDF with 1702 Questions

Based on a comparison of RST's times-interest-earned ratios in Year 5 and Year 6, what is a likely conclusion?

  1. RST's long-run solvency has declined.
  2. RST's long-run solvency has improved.
  3. RST's liquidity has improved.
  4. RST's liquidity has declined.

Answer(s): B

Explanation:

The times-interest-earned ratio increased from 14.67 times in Year 5 44, 0On - 3, 00n) to 23.33 times in Year 6 70, 000 - 3.000). This increase signifies that RST has more profit available to meet the interest payments on its debt, and that long-run solvency has improved. Consequently, creditors will RST's obligations as less risky. An entity had the following opening and closing inventory balances during the current year:

The following transactions and events occurred during the current year 300, 000 of raw materials were purchased, of which 20, 000 were returned because of defects.
600, 000 of direct labor costs were incurred.
750, 000 of production overhead costs were incurred.



In which stage of an entity's development is it most likely to seek and obtain external equity financing in the form of venture capital?

  1. Formation.
  2. Rapid growth.
  3. Growth to maturity.
  4. Maturity and industry decline.

Answer(s): B

Explanation:

At the rapid growth stage, if an entity is reasonably profitable. it will experience financing needs in excess of funds available either internally or from trade credit or bank credit Additional debt financing on results in an unreasonable amount of financial leverage at this stage, and public equity financing ordinarily is not yet available. Hence, a rapidly growing entity is most likely to seek and obtain venture capital financing. RST Corporation's Income Statement for Year 5 and Year 6



The market value of RST's ordinary stock at the end of Sear 6 was US $100.00 per share.



Faced with 3 years of steadily decreasing profits despite increased sales and a growing economy, which of the following is the healthiest course of action for a chief executive officer to take?

  1. set a turnaround goal of significantly increasing profits within 2 months. Set clear short-term objectives for ach operating unit that, together. should produce the turnaround.
  2. Reduce staff by 10% in every unit
  3. Classify all job functions as either a) adding value in the eyes of the customer such as production and sales) or b) not adding value in the eyes of the customer such as accounting and human resources)_ Reduce staff in the non-value-adding functions by 20%_
  4. Implement a plan to encourage innovation at all levels. Use early retirement and reemployment programs to trim staff size.

Answer(s): D

Explanation:

Organizational decline has been found to have the following characteristics: greater 7 centralization. lack of long-term planning, reduced innovation, scapegoating, resistance to change, high turnover of competent leaders, low morale, nonprioritized downsizing, and conflict. Reversing these characteristics is the key to reversing organizational decline, for example, by encouraging innovation in all aspects of the organization's activities and by redeploying personnel.



While auditing a marketing department, the internal auditor discovered that the product life cycle model was used to structure the marketing mix. The manager has asked the auditor for advice about increasing advertising of various products. During which stage of the life cycle would it be appropriate to advertise that the entity's product is the lowest price and best quality of all competitors?

  1. Introduction stage.
  2. Growth stage.
  3. Maturity stage.
  4. Decline stage.

Answer(s): C

Explanation:

The maturity stage is the ideal time for advertising lower prices and superior quality because this is the period during a products life when competition is greatest Due to the availability of many substitutes. an entity has reasons to set itself apart. Because price and quality are both concerns of customers during the maturity stage. it is an ideal time for the entity to differentiate its product by advertising low prices and higher quality.



A computer company charges indirect manufacturing costs to a project at a fixed percentage of a cost pool. This project is covered by a cost-plus government contract. Which of the following is an appropriate guideline for determining how costs are assigned to the pool?

  1. Establish separate pools for variable and fixed costs.
  2. Assign prime costs and variable administrative costs to the same pool.
  3. Establish a separate pool for each assembly line worker to account for wages.
  4. Assign all manufacturing costs related to the project to the same pool.

Answer(s): A

Explanation:

Cost pools are accounts in which a variety of similar costs are accumulated prior to allocation to cost objectives. The overhead account is a cost pool into which various types of overhead are accumulated prior to their allocation. Indirect manufacturing costs are an element of overhead allocated to a cost pool. Ordinarily, different allocation methods are applied to variable and fixed costs, thus requiring them to be separated. Establishing separate pools allows the determination of dual overhead rates. As a result, the assessment of capacity costs, the charging of appropriate rates to user departments, and the isolation of variances are facilitated.



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