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IIA CIA Exam
Certified Internal Auditor Exam (Page 31 )

Updated On: 12-Jan-2026
Page 31 of 342
PDF with 1702 Questions

The major appeal of zero-based budgeting is that it

  1. Solves the problem of measuring program effectiveness.
  2. Relates performance to resource inputs by an integrated planning and resource- allocation process.
  3. Reduces significantly the time required to review a budget.
  4. Deals with some of the problems of the incremental approach to budgeting.

Answer(s): D

Explanation:

The traditional approach to bud! 1.tirl! 1 is to merely increase last year's figures by a given percentage or increment. Zero-based budgeting divides programs into packages of goals, activities, and required resources. The cost of each package is then calculated afresh, without regard to previous performance.



While an operating budget is a key element in planning and control, it is not likely to

  1. Establish a commitment of company resources.
  2. Set out long-range, strategic concepts.
  3. Integrate organizational activities.
  4. Provide subsidiary planning information.

Answer(s): B

Explanation:

Operating budgets seldom set out long-range strategic concepts because they usually deal with the quantitative allocation of people and resources. Strategic concepts are overall goals for the organization and are almost always stated in words.



One of the primary advantages of budgeting is that it

  1. Does not take the place of management and administration.
  2. Bases the profit plan on estimates.
  3. Is continually adapted to fit changing circumstances.
  4. Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.

Answer(s): D

Explanation:

A budget is a quantitative model of a plan of action developed by management. A budget functions as an aid to planning, coordination, and control. Thus, a budget helps management to allocate resources efficiently and to ensure that subunit goals are congruent with those of other subunits and of the organization.



Assume that the optimal capital budget for the company is US $150 million. The marginal cost of capital and the appropriate discount rate to use in evaluating investment proposals for this company would be

  1. 6%
  2. 8%
  3. 10%
  4. 12%

Answer(s): C

Explanation:

The appropriate discount rate the cost of capital used in capital budgeting) theoretically
is determined at the intersection of the IOS and MCC schedules. This intersection is at an r..1r-~:0 of IC I% and an optimal capital budget of US $125 million. However, if the optimal capital budget is assumed to be US $150 million, the company is still in the second interval of the MCC schedule. The marginal cost of financing in this part of the schedule is
10%.



When ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project

  1. That generates cash flows for the longer period of time.
  2. Whose net after-tax flows equal the initial investment.
  3. That has the greater accounting rate of return.
  4. That has the greater profitability index.

Answer(s): D

Explanation:

The profitability excess present value) index facilitates the comparison of investments that have different initial costs. The profitability index equals the present value of future net cash inflows divided by the initial cash investment. The investment with the greater profitability index will be the preferred investment. However, if investments are mutually exclusive, the net present value method may be the better way of ranking project. The excess present value, index indicates the be'. t return per dollar invested but does not consider the alternate', , possibilities for unused Funds. Thus, the small., , f the mutually exclusive projects may have the higher n~ is but the incremental investment in the larger project may make it the better choice. For example, a US $8, 000, 000 project may be a better use of funds than a combination of a US $6.000.000 project with a higher , rx and the best alternative use of the remaining US $2, 000, 000. A company has the following
three investment projects available:


MCC=Marginal cost of capital
IOS=Investment opportunity schedule



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