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IIA CIA Exam
Certified Internal Auditor Exam (Page 6 )

Updated On: 12-Jan-2026
Page 6 of 342
PDF with 1702 Questions

An entity uses the following formula in determining its optimal level of cash.

This formula is a modification of the economic order quantity EOQ) formula used for inventory management. Assume that the ._.set of selling marketable securities is US $10 per transaction and the interest rate on marketable securities is 6% per year. The entity estimates that it will make cash payments of US $12.000 over a one-month period. What is the average cash balance rounded to the nearest dollar)?

  1. US $1, 000
  2. US $2, 000
  3. US $3, 464
  4. US $6, 928

Answer(s): C

Explanation:

The BOO for inventory is a function of ordering cost per order, inventory demand, and carrying cost. In the cash model, the fixed cost per sale of securities is equivalent to the ordering cost, the demand for cash is similar to the demand for inventory, and the interest
rate is effectively the cost of carrying a dollar of cash for the period. Substituting in the formula yields an optimal cash balance of about US $6.928. Thus, the average cash balance is US $3, 464 $6, 928 - 2).



An entity has daily cash receipts of US $300, 000. A bank has offered to provide a lockbox service that will reduce the collection time by 3 days. The bank requires a
monthly fee of US $2, 000 for providing this service. If money market rates are expected to average 6% during the year, the additional annual income loss) of using the lockbox service is

  1. US $(24, 000)
  2. US $12, 000
  3. US $30, 000
  4. US $54, 000

Answer(s): C

Explanation:

Because collections will be accelerated by 3 days at a rate of US $300, 000 per days, the entity will have an additional US $900, 000 to invest. At a rate of 6%, the interest earned will be US $54, 000 per year. However, the bank will charge US $24, 000 $2, 000 per month x 12 months) for its services. Thus, the entity will increase its income by US $30, 000 54, 000 - $24, 000).



Which one of the following is not a characteristic of a negotiable certificate of deposit? Negotiable certificates of deposit

  1. Have a secondary market for investors.
  2. Are regulated by the government
  3. Are usually sold in denominations of a minimum of US $100, 000.
  4. Have yields considerably greater than bankers' acceptances and commercial paper.

Answer(s): D

Explanation:

A certificate of deposit CD) is a form of savings deposit that cannot be withdrawn before maturity without incurring a high penalty. A negotiable CD can be traded. CDs usually have a fairly high rate of return compared with other savings instruments because they are for fixed, usually long-term periods.



Company B's bank requires a compensating balance of 20% on a US $100.000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?

  1. 5.83%
  2. 7.00%
  3. 8.40%
  4. 8.75%

Answer(s): D

Explanation:

Interest on the loan is US $7, 000 7% x $100, 000) Given that the borrower has to maintain a 20% compensating balance, only US $80, 000 [$100, 000 ­ 20% x 100, 000)] is available for use. Thus. the company is paying US $7.000 for the use of US $80.01 ii a in funds at
an effective cost of 8.75% US. $7.000 ÷ 80, 000).



A chanqe in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in the investment in accounts receivable. Based upon this information, the entity's

  1. Average collection period has decreased.
  2. Percentage discount offered has decreased.
  3. Accounts receivable turnover has decreased.
  4. Working capital has increased.

Answer(s): A

Explanation:

An increase in discounts taken accompanied by declines in receivables balances and doubtful accounts all indicate that collections on the increased sales have been accelerated. Accordingly, the average collection period must have declined. The average collection period is a ratio calculated by dividing the number of days in a year 365) by the receivable turnover Thus, the higher the turnover, the shorter the average collection period The turnover increases when either sales the numerator) increase, or receivables the denominator) decrease Accomplishing both higher sales and a lower receivables increases the turnover and results in a shorter collection on period.



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