QUESTION: 77

According to IIA guidance, which of the following is a limitation of a heat map?

Impact cannot be represented on a heat map unless it is quantified in financial terms
Impact and likelihood at times cannot be differentiated as to which is more important.
A heat map cannot be used unless a risk and control matrix has been developed.
Qualitative factors cannot be incorporated into a heat map

Answer(s): B

Explanation:

Introduction:
Heat maps are tools used in risk management to visualize the impact and likelihood of risks.
Limitations of Heat Maps:
Despite their usefulness, heat maps have several limitations, including difficulties in prioritizing risks when impact and likelihood are closely matched.
Options Analysis:
Option A: Impact can be represented qualitatively as well, not just in financial terms. Option B: Differentiating the relative importance of impact versus likelihood can be challenging, leading to potential misinterpretation of risk priorities. Option C: Heat maps can be used without a risk and control matrix, although such a matrix enhances their effectiveness.
Option D: Qualitative factors can be incorporated into heat maps, adding depth to the analysis.
Conclusion:
The limitation of a heat map is that at times, impact and likelihood cannot be differentiated as to which is more important, making it difficult to prioritize risks accurately.

Reference:

Internal Audit Standards and Practice Guides .

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QUESTION: 78

A bicycle manufacturer incurs a combination of fixed and variable costs with the production of each bicycle.
Which of the following statements is true regarding these costs?

if the number of bicycles produced is increased by 15 percent, the variable cost per unit will increase proportionally
The fixed cost per unit will vary directly based on the number of bicycles produced during the production cycle.
The total variable cost will vary proportionally and inversely with the number of bicycles produced during a production run.
if the number of bicycles produced is increased by 30 percent, the fixed cost per unit will decline.

Answer(s): D

Explanation:

Introduction:
Understanding cost behavior is crucial in managing production and financial performance in manufacturing.
Cost Characteristics:
Fixed costs remain constant in total but vary per unit with changes in production volume. Variable costs vary directly with production volume but remain constant per unit.
Options Analysis:
Option A: Variable costs per unit remain constant regardless of production volume.

Option B: Fixed costs per unit decrease as production volume increases, not directly. Option C: Total variable costs vary directly with production volume, not inversely. Option D: Fixed costs per unit will decline as the number of units produced increases due to the spreading of fixed costs over a larger number of units.
Conclusion:
When production increases by 30%, the fixed cost per unit will decline as the same total fixed cost is allocated over a greater number of units.

Reference:

Cost Accounting Standards and Practices .

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QUESTION: 79

Which of the following is an advantage of utilizing an external fraud specialist in a suspected fraud investigation?

increased access to the organization's employees.
Increased ability to preserve evidence and the chain of command.
Increased ability to scrutinize the organization's key business processes.
increased access to the organization's software and proprietary data.

Answer(s): B

Explanation:

Introduction:
Engaging an external fraud specialist brings several advantages to an investigation, particularly in preserving the integrity of evidence.
Advantages of External Fraud Specialists:
External specialists bring expertise, objectivity, and resources that may not be available internally.
Options Analysis:
Option A: Access to employees is not necessarily increased with external specialists. Option B: External fraud specialists have the skills and protocols to preserve evidence and maintain the chain of command, ensuring legal and procedural compliance. Option C: Scrutinizing business processes is part of their role, but the primary advantage lies in evidence preservation.
Option D: Access to software and proprietary data is not the primary advantage; internal controls can provide this access as needed.

Conclusion:
The main advantage of utilizing an external fraud specialist is their increased ability to preserve evidence and maintain the chain of command, which is critical in legal and compliance contexts.

Reference:

Internal Audit Standards and Practice Guides .

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QUESTION: 80

Which of the following statements is true regarding an organization's inventory valuation?

The valuation will be incorrect if the inventory includes goods in transit shipped free on board
(FOB) destination to another organization.
The valuation will be correct if the inventory includes goods received on consignment from another organization.
The valuation will be incorrect if the inventory includes goods in transit shipped FOB shipping point from another organization.
The valuation will be correct if the inventory includes goods sent on consignment to another organization

Answer(s): C

Explanation:

Inventory Valuation Principles: Inventory valuation must accurately reflect the ownership of goods. The accounting treatment of inventory in transit depends on the shipping terms, specifically whether it is FOB (Free on Board) shipping point or FOB destination.
FOB Shipping Point:
Ownership Transfer: When goods are shipped FOB shipping point, ownership transfers to the buyer as soon as the goods leave the seller's premises.
Impact on Inventory Valuation: If goods shipped FOB shipping point are in transit at the end of the reporting period, they should be included in the buyer's inventory, not the seller's.
FOB Destination:
Ownership Transfer: When goods are shipped FOB destination, ownership transfers to the buyer only when the goods arrive at the buyer's premises.
Impact on Inventory Valuation: Goods in transit under FOB destination terms should remain in the seller's inventory until they reach the buyer.
Consignment:
Goods Received on Consignment: Goods held on consignment should not be included in the inventory of the consignee (the holder) but remain in the inventory of the consignor (the owner). Goods Sent on Consignment: Goods sent out on consignment should still be included in the inventory of the consignor until they are sold by the consignee.
Correct and Incorrect Valuations:
Incorrect Valuation (Option C): Including goods in transit shipped FOB shipping point in the seller's inventory would be incorrect, as ownership has transferred to the buyer. Correct Valuation (Option D): Including goods sent on consignment in the consignor's inventory is correct because ownership has not transferred.

Reference:

Correct inventory valuation practices ensure that goods in transit are properly accounted for based on the shipping terms, thus providing an accurate financial picture of inventory.

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