QUESTION: 33

A member of the internal audit team worked eight months ago in an area of the organization that she is now being tasked with auditing.
Which of the following would most likely be impacted by her participation in the audit?

Integrity
Objectivity
Competency

Answer(s): B

Explanation:

Comprehensive and Detailed Step-by-Step Reference to IIA Standards:

Standard 1120 - Individual Objectivity: Internal auditors must perform engagements with honesty and without any bias.

Serving in an operational or management role in the area being audited within the past year can impair objectivity, as the auditor may unconsciously favor or critique processes they were involved in developing or managing.

Reasoning:

Option B is correct because recent involvement in the audited area could compromise objectivity, leading to potential conflicts of interest or biased assessments.

Option A (integrity) is less likely impacted, as integrity relates to adherence to ethical principles and honesty.

Option C (competency) is not affected, as the individual's skills and knowledge remain intact regardless of the recency of their involvement.

Mitigating Actions:

The chief audit executive (CAE) should evaluate and address potential impairments to objectivity, possibly assigning the auditor to a different engagement.

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QUESTION: 34

Which of the following best describes the difference between inherent risk and residual risk?

Inherent risk is the level of risk before the risk assessment process, residual risk is the level of risk remaining after completing the risk assessment process.
Inherent risk is the level of risk the organization is willing to accept, residual risk is the level of risk deemed unacceptable by the organization.
Inherent risk is the level of risk in the absence of any targeted actions or controls to alter its severity, residual risk is the risk remaining after implementing corrective actions.

Answer(s): C

Explanation:

Comprehensive and Detailed Step-by-Step
Definitions from Risk Management Frameworks (e.g., COSO ERM):

Inherent Risk: The raw or natural level of risk before any controls or mitigating actions are applied.

Residual Risk: The remaining level of risk after implementing controls or risk responses.

Reasoning:

Option C is correct because it captures the essence of inherent risk as the baseline risk level and residual risk as the mitigated level after control actions.

Option A inaccurately states that residual risk is tied to the completion of a risk assessment process instead of mitigation actions.

Option B confuses inherent risk with risk appetite, which reflects the organization's tolerance for risk.

Significance of Differentiation:

Understanding both risk levels helps prioritize resources for managing critical risks and improving controls.

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QUESTION: 35

Which of the following best explains why internal auditors should identify risk scenarios during a risk assessment of the area being audited?

To determine what would prevent the achievement of objectives in the area being audited.
To determine whether established controls are operating effectively to mitigate critical risks.
To evaluate the adequacy of management's risk management process in the area being audited.

Answer(s): A

Explanation:

Comprehensive and Detailed Step-by-Step Reference to IIA Standards:

Standard 2120 - Risk Management: Internal audit must assess and evaluate the risk management processes of the organization.

Identifying risk scenarios supports engagement objectives by determining vulnerabilities and threats to process objectives.

Reasoning:

Option A is correct because risk scenarios provide insights into potential events or conditions that could hinder achieving objectives. This allows auditors to assess risk exposure and evaluate controls effectively.

Option B (control effectiveness) is a subsequent step in the audit process but does not explain the need for identifying risk scenarios.

Option C focuses on evaluating management's process, which is broader than identifying specific risks for the engagement.

Practical Application:

Risk scenarios guide auditors in tailoring their approach to address areas of greatest vulnerability.

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QUESTION: 36

Which of the following conditions would threaten an internal auditor's objectivity?

Providing assurance services over the activity where the internal auditor was employed 10 months prior.
Using knowledge that the internal auditor gained in his previous position to update systems and controls descriptions.
Providing consulting services over the activity where the internal auditor was employed two years prior.

Answer(s): A

Explanation:

Comprehensive and Detailed Step-by-Step Reference to IIA Standards:

Standard 1120 - Individual Objectivity: Internal auditors should avoid situations that impair their ability to provide unbiased assurance.

Practice Advisory 1130.A1-1: Objectivity is impaired if auditors audit activities they previously managed within the last 12 months.

Reasoning:

Option A is correct because the auditor's recent role in the audited area creates a conflict of interest and threatens objectivity.

Option B does not impair objectivity; leveraging prior knowledge is permissible if applied objectively.

Option C (consulting services two years prior) does not impair objectivity due to the elapsed time.

Mitigating Actions:

Auditors with recent involvement in an audited area should disclose the conflict and be reassigned to preserve objectivity.

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