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Free IIA IIA-CIA-Part3 Exam Questions (page: 21)

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An international nonprofit organization finances medical research. The majority of its revenue and support comes from fundraising activities, investments, and specific grants from an initial sponsoring corporation. The organization has been in operation over 15 years and has a small internal audit department. The organization has just finished a major fundraising drive that raised US $500 million for the current fiscal period.
The following are selected data from recent financial statements (US dollar figures in millions):



The auditor wishes to determine if the change in investment income during the current year was due to (a) changes in investment strategy, (b) changes in portfolio mix, or (c) other factors.
Which of the following analytical review procedures should the auditor use?

  1. Simple linear regression that compares investment income changes over the past 5 years to determine the nature of the changes.
  2. Ratio analysis that compares changes in the investment portfolio on a monthly basis.
  3. Trend analysis that compares the changes in investment income as a percentage of total assets and of investment assets over the past 5 years.
  4. Multiple regression analysis that includes independent variables related to the nature of the investment portfolio and market conditions.

Answer(s): D

Explanation:

Regression analysis develops an equation to explain the behavior of a dependent variable (for example, investment income) in terms of one or more independent variables (for example, market risk and the risks of particular investments). Multiple regression analysis is the best approach because it allows the auditor to regress the change in investment income on more than one independent variable.



Which of the following is not an appropriate time series forecasting technique?

  1. Least squares.
  2. Exponential smoothing.
  3. The Delphi technique.
  4. Moving averages.

Answer(s): C

Explanation:

The Delphi technique is an approach in which the manager solicits opinions on a problem from experts, summarizes the opinions, and feeds the summaries back to the experts (without revealing any of the participants to each other). The process is reiterated until the opinions converge on an optimal solution. Thus, the Delphi technique is a qualitative, not a quantitative, method.



A company in the process of analyzing inventory safety stock levels is having difficulty because demand vanes widely from one week to the next. However, it has been discovered that demand occurs according to a probability distribution.
Which of the following is a stochastic model that the company could use in this situation?

  1. Markov process.
  2. Linear programming.
  3. Regression analysis.
  4. Critical path network analysis.

Answer(s): A

Explanation:

A stochastic model is probabilistic. Markov processes quantify the likelihood of a future event based on the current state of the process.



A company experiences both variable usage rates and variable lead times for its inventory items. The probability distributions for both usage and lead times are known. A technique the company could use for determining the optimal safety stock levels for an inventory item is:

  1. Queuing theory.
  2. Linear programming.
  3. Decision tree analysis.
  4. Monte Carlo simulation.

Answer(s): D

Explanation:

Simulation is a technique for experimenting with mathematical models using a computer. Monte Carlo simulation is a technique to generate the individual values for a random variable. A random number generator is used to produce numbers with a uniform probability distribution. The second step of the Monte Carlo process then transforms the random numbers into values consistent with the desired distribution. The performance of a model under conditions of uncertainty may be investigated by randomly selecting values for each of the variables in the model based on the probability distribution of each variable and then calculating the value of the solution. Advantages of Monte Carlo simulation are that time can be compressed, alternative policies can be considered, and complex systems can be analyzed.



A bank is designing an on-the-job training program for its branch managers. The bank would like to design the program so that participants can complete it as quickly as possible. The training program requires that certain activities be completed before others. For example, a participant cannot make credit loan decisions without first having obtained experience in the loan department. An appropriate scheduling technique for this training program is:

  1. PERT/CPM.
  2. Linear programming.
  3. Queuing theory.
  4. Sensitivity analysis.

Answer(s): A

Explanation:

PERT/CPM is a network technique for scheduling interrelated time series activities and identifying any critical paths in the series of activities The critical path is the longest path through the network.



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