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Free IIA IIA-CIA-Part3 Exam Questions (page: 55)

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The four components of time series data are secular trend, cyclical variation, seasonality, and random variation. The seasonality in the data can be removed by:

  1. Multiplying the data by a seasonality factor.
  2. Ignoring it.
  3. Taking the weighted average over four time periods.
  4. Subtracting a seasonality factor from the data.

Answer(s): C

Explanation:

Time series analysis relies on past experience. Changes in the value of a variable may have several possible components including secular trends, cyclical variation, seasonality, and random variation. Seasonal variations are common in many businesses. A variety of methods exist for including seasonal variations in a forecasting model, but most methods use a seasonal index. Alternatively, seasonal variations can be removed from data by using a weighted average of several time periods instead of data from individual periods.



A widely used approach that managers use to recognize uncertainty about individual items and to obtain an immediate financial estimate of the consequences of possible prediction errors is:

  1. Expected value analysis.
  2. Learning curve analysis.
  3. Sensitivity analysis.
  4. Regression analysis.

Answer(s): C

Explanation:

Sensitivity analysis determines how a result varies with changes in a given variable or parameter in a mathematical decision model. For example, in a present value analysis, a manager might first calculate the net present value or internal rate of return assuming that a new asset has a 10-year life. The NPV or IRR can then be recalculated using a 5-year life to determine how sensitive the result is to the change in the assumption. An international not for- profit organization finances medical research. The majority of its revenue and support comes from fund-raising 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 will allow a manufacturer with limited resources to maximize profits?

  1. The Delphi technique.
  2. Exponential smoothing.
  3. Regression analysis.
  4. Linear programming.

Answer(s): D

Explanation:

Linear programming is a technique used to optimize an objective function, that is, to maximize a revenue or profit function or to minimize a cost function, subject to constraints, e.g., limited scarce) resources or minimum/maximum levels of production, performance, etc.
In business, linear programming is used for planning resource allocations. Managers are often faced with problems of selecting the most profitable or least costly way to use available resources.



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.



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