Operational and Governmental Compliance Auditing

MULTIPLE CHOICE:
1.

In a broad sense, society benefits from internal auditing

because the internal auditor
a.
Encourages corporate compliance with standards of
public policy.
b.
Promotes the efficient and effective use of resources.
c.
Evaluates financial data against professional
standards.
d.
Ensures that operations respond to the demands of the
marketplace.

ANSWER:
2.

Which of the following factors are essential to an

effective internal auditing organization?
I.
II.
III.
IV.

Operating responsibility
Organizational status
Objectivity
Authority over operations

a.
b.
c.
d.

I and II.
II and III.
III and IV.
I and IV.

ANSWER:
3.

The primary difference between operational auditing and

financial auditing is that in operational auditing
a.
The auditor is not concerned with whether the audited
activity is generating information in compliance with
financial accounting standards.
b.
The auditor is seeking to help management use
resources in the most effective manner possible.
c.
The auditor starts with the financial statements of an
activity being audited and works backward to the basic
processes involved in producing them.
d.
The auditor can use analytical skills and tools that
are not necessary in financial auditing.

ANSWER:

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Chapter 16 Operational and Governmental Compliance Auditing

4.

The internal audit staff has been asked to conduct an audit

of the purchasing department. Top management feels that
there have been some production bottlenecks recently
because of out-of-stock situations. What is the primary
objective of the auditors in this assignment?
a.
b.
c.
d.

ANSWER:
5.

To appraise the economy with which resources are

employed.
To review the reliability and integrity of financial
and operating information.
To review the means of safeguarding assets and
verifying the existence of such assets.
To ascertain whether results are consistent with
established objectives and whether operations are
being carried out as planned.
D

Which of the following would be the most appropriate role

for the internal auditor in the cash budgeting process?
a.
b.
c.
d.

ANSWER:
6.

Reviewing budget policies and the design and

functioning of the budget process.
Working with the controller to prepare the budget.
Approving the budget before its implementation.
Analyzing monthly budget reports.
A

An internal auditor is performing an audit of the receiving

department to determine if only authorized purchases are
being accepted. Which of the following documents should
the auditor examine?
a.
b.
c.
d.

A bill of lading.
A blind (no quantities shown) copy of the purchase
order received directly from the purchasing
department.
An invoice.
A note documenting a telephone conversation with a
purchasing agent.

ANSWER:
7.

271

An auditor is attempting to determine whether or not

inventory is excessive. The inventory turnover rate was
4.7 this year as compared to 6.0 the prior year. The

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Chapter 16 Operational and Governmental Compliance Auditing

average rate for the industry over the past three years was
6.2. From these facts, the auditor should conclude
a.
b.
c.
d.

ANSWER:
8.

b.
c.
d.
ANSWER:

Vouch payments made on the investment to the

controllers approval.
Review minutes of board of directors meetings for
investment approval.
Compliance test the functioning of the internal
controls over expenditures.
Confirm details of the purchase with the vendor.
B

Which of the following is not usually a part of the

preliminary survey phase of an audit?
a.
b.
c.
d.

ANSWER:
10.

Which of the following would be the most appropriate test

to determine if a major investment in a fixed asset was
properly authorized?
a.

9.

An inventory turnover rate this much lower than

normal suggests the possibility of excess inventory.
There is definitely an excess inventory problem
because the turnover rate is 1.5 times less than the
industry average.
The turnover rate differences are immaterial and thus
do not indicate a problem.
The possibility of excess inventory is not apparent
from these figures.

Touring operations.
Conducting audit inquiries.
Performing analytical review.
Developing the audit program.
D

An auditor decides to test the effectiveness and efficiency

of the short-term strategy being employed to market product
X. Which of the following would be the most appropriate
audit procedure?
a.

Discuss the effectiveness and the strategy with the

director of marketing.

Chapter 16 Operational and Governmental Compliance Auditing

b.
c.
d.

ANSWER:
11.

b.
c.
d.
ANSWER:

Determine the dates of unpaid accounts payable

invoices.
Compare dates of selected purchase orders with those
of purchase requisitions.
Select a block of used purchase order numbers and
account for all numbers in the block.
Discuss processing procedures with operating personnel
and observe actual processing of purchases.
B

In an audit of the transportation function, which of the

following tests is most appropriate to determine if there
is favoritism to individual carriers?
a.
b.
c.
d.

ANSWER:
13.

Discuss the effectiveness of the strategy with sales

supervisors and individual salespersons.
Compare sales of product X prior to and after
implementation of the short-term marketing strategy.
Evaluate performance goals incorporated into the
short-term strategy, and whether those goals are being
met.

Which of the following would be the most appropriate test

to determine whether purchase orders are being processed on
a timely basis?
a.

12.

273

Investigate selected demurrage charges to determine if

they were appropriate.
Determine if the selection of carriers is reviewed and
approved by a higher-ranking member of the traffic
department.
Determine whether freight bills have received a postaudit by the transportation department or an outside
specialized freight auditor.
Determine that the amount of freight billed to the
customer on the sales invoice is equal to the amount
actually charged your company by the carrier.
B

In the performance of an audit, audit risk is best defined

as the risk that an internal auditor

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Chapter 16 Operational and Governmental Compliance Auditing

a.
b.
c.
d.

ANSWER:
14.

The role of the internal auditor with respect to a

purchasing department audit is to
a.
b.
c.
d.

ANSWER:
15.

Might not select documents that are in error as part

of the examination.
May not be able to properly evaluate an organization
because of its poor internal accounting controls.
May unknowingly fail to recognize appropriately a
material error or weakness in an examined
organization.
May not have the expertise to adequately audit a
specific entity.

Evaluate the adequacy of purchasing policies and

procedures and determine the extent of compliance.
Review and appraise the adequacy of controls over the
creation of all types of company obligations.
Review and appraise the conditions by which notes
payable come into existence and the control exercised
over them.
Establish that the purchasing department is
independent of receiving, inspection, stores, and
accounts payable activities.
A

In examining whether or not an auditee is conforming with

the companys affirmative action policy, the internal
auditor has found that:
1)
2)

Five percent of the employees are from minority

groups.
No one from a minority group has been hired this year.

The most appropriate conclusion the internal auditor should

draw is
a.
b.
c.
d.

Insufficient evidence exists of compliance with the

affirmative action policy.
The auditee is violating the companys policy.
The companys policy is unauditable and hence
unenforceable.
The auditee is complying with the affirmative action
policy.

Chapter 16 Operational and Governmental Compliance Auditing

ANSWER:
16.

b.
c.
d.

ANSWER:

To provide a final quality control review of the

accuracy of findings and reasonableness of conclusions
included in the report.
To inform the board of directors and top management
concerning major problems encountered.
To give auditee managers an advance start on solving
the problems outlined in the report.
To provide the auditor an opportunity to sell
auditee management on the benefits of implementing
recommendations.
A

The primary audience for the written report issued by the

internal auditor at the completion of an audit should be
a.
b.
c.
d.

ANSWER:
18.

Which of the following is the most important purpose of a

closing conference?
a.

17.

275

The external auditors when they intend to rely on the

internal auditors work.
Managers outside the area of audit so as to inform
them of what is going on in other areas of the
organization.
The audit committee who needs to be kept informed on
the risks to which the organization is exposed.
The management inside or outside the audited area who
can take corrective action.
D

An internal auditor determines that actual procedures

differ from prescribed control procedures. The auditor
should
1.
2.
3.
4.
a.

Require operating personnel to conform to prescribed

procedures.
Document the discrepancies and make any appropriate
recommendations to management.
Expand all aspects of the audit to determine other
differences from prescribed procedures.
Modify the audit plan as warranted by the differences
noted.
1 and 3

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Chapter 16 Operational and Governmental Compliance Auditing

b.
c.
d.

ANSWER:
19.

c.
d.
ANSWER:

What the auditor found, the status, or condition.

The effect that implementing a recommendation is
expected to achieve.
The standard of performance, or what should be.
The cause or reason why the reported condition
occurred.
C

Follow-up activities by the internal auditor may be

terminated, even though corrective action has not been
taken, when the
a.
b.
c.
d.

ANSWER:
21.

One of the elements of a standard audit finding is

criteria. Which of the following best describes this
element of an audit finding?
a.
b.

20.

2 and 3
1 and 4
2 and 4

Recommendations concern activities not included in the

scope of the original audit program.
Board of directors or management has assumed the risk
of not taking corrective action.
Auditor has not convinced operating personnel of the
soundness of the audit recommendations.
Auditor has no authority or responsibility to
prescribe or direct the corrective action.
B

An internal auditor is preparing a final audit report to

management. There is, however, disagreement between the
auditor and the auditee on one finding which details the
auditees violation of corporate purchasing policy. The
auditee believes the purchasing policy is open to
interpretation and that there was no violation. The
auditor believes that the policy is clearly stated and that
the auditees actions were a violation. In this
circumstance, the auditor should
a.
b.

Delete the finding from the audit report.

Present only those facts, which support the audit
finding and ignore those which detract from it.

Chapter 16 Operational and Governmental Compliance Auditing

c.
d.

ANSWER:
22.

Present both the auditors and auditees positions in

the report.
Not issue the audit report until the auditor and
auditee agree on all audit findings and
recommendations.
C

A governmental audit may extend beyond an examination

leading to the expression of an opinion on the fairness of
financial presentation to include
Program
results
Yes
Yes
No
Yes

a.
b.
c.
d.
ANSWER:
23.

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Compliance
Yes
Yes
Yes
No

Economy &
efficiency
No
Yes
Yes
Yes

Chevez is auditing an entitys compliance with requirements

governing a major federal financial assistance program in
accordance with the Single Audit Act. Chevez detected
noncompliance with requirements that have a material
effect on that program. Chevez report on compliance
should express a(an)
a.
b.
c.
d.

ANSWER:

Unqualified opinion with a separate explanatory

paragraph.
Qualified opinion or an adverse opinion.
Adverse opinion or a disclaimer or opinion.
Limited assurance on the items tested.
B

24. A companys new president meets the director of internal

audit for the first time, and asks the director to briefly
describe his departments overall responsibility. The
director states that internal audits overall responsibility
is to:
a.
b.

Act as an independent appraisal function to review

operations as a service to management by measuring and
evaluating the effectiveness of controls.
Review the means of safeguarding assets and, as
appropriate, verify the existence of such assets.

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Chapter 16 Operational and Governmental Compliance Auditing

c.

Ensure compliance with policies, plans, procedures,

laws, and regulations, which could have a significant
impact on operations and reports.
Review the reliability and integrity of financial and
operating information and the means used to identify,
measure, classify, and report such information.

d.

ANSWER:
25.

According to the Standards, the internal audit director

should ensure follow-up of prior audit findings and
recommendations:

a.

To determine if corrective action was taken and is

achieving the desired results.
Unless management rejected the recommendation in their
initial response.
Unless the audit schedule does not allow time for
follow-up.
Unless management has accepted the recommendation.

b.
c.
d.
ANSWER:
26.

Internal auditing has been a dynamic profession. Which of

the following best describes the scope of internal auditing
as it has developed to date?
a.
b.
c.
d.

ANSWER:
27.

Internal auditing involves appraising the economy and

efficiency with which resources are employed.
Internal auditing involves evaluating compliance with
policies, plans, procedures, laws, and regulations.
Internal auditing has evolved to verifying the
existence of assets and reviewing the means of
safeguarding assets.
Internal auditing has evolved to more of an
operational orientation from a strictly financial
orientation.
D

You have been selected to develop an internal auditing

department for your company. Your approach would most
likely be to hire:
a.

Internal auditors each of whom possesses all the

skills required to handle all audit assignments.

Chapter 16 Operational and Governmental Compliance Auditing

b.
c.
d.

ANSWER:
28.

b.
c.
d.

ANSWER:

State the auditors position because the report is

designed to provide the auditors independent view.
State the auditees position because management is
ultimately responsible for the activities reported.
State both positions and identify the reasons for the
disagreement.
State neither position. If the disagreement is
ultimately resolved, there will be no reason to report
the previous disagreement. If the disagreement is
never resolved, the disagreement should not be
reported, because there is no mechanism to resolve it.
C

A charter is being drafted for a newly formed internal

auditing department. Which of the following best describes
the appropriate organizational status that should be
incorporated into the charter?
a.
b.
c.
d.

ANSWER:
30.

Inexperienced personnel and train them the way the

company wants them trained
Degreed accountants since most audit work is
accounting related.
Internal auditors who collectively have the knowledge
and skills needed to complete all internal audit
assignments.

Which of the following is the most appropriate method of

reporting disagreement between the auditor and the auditee
concerning audit findings and recommendations?
a.

29.

279

The director of internal auditing should report to the

chief executive officer but have access to the board
of directors.
The director of internal auditing should be a member
of the audit committee of the board of directors.
The director of internal auditing should be a staff
officer reporting to the chief financial officer.
The director of internal auditing should report to an
administrative vice president.
A

A primary concern of an operational audit of the family

welfare department of a governmental unit would be

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Chapter 16 Operational and Governmental Compliance Auditing

a.
b.
c.
d.
ANSWER:
31.

b.
c.
d.

ANSWER:

The director reports directly to an independent audit

committee of the board of directors.
The director of internal auditing is not assigned any
operational responsibilities.
A director of internal auditing may not be appointed
or approved without concurrence of the board of
directors.
The directors annual bonuses are based on dollar
recoveries or recommended future savings as a result
of audits.
D

The president wants to know whether the purchasing function

is properly meeting its charge to: purchase the right
material at the right time in the right quantities. Which
of the following types of audits addresses the presidents
request?
a.
b.
c.
d.

ANSWER:
33.

Which of the following could be an organization factor that

might adversely affect the ethical behavior of the director
of internal auditing?
a.

32.

Determining that proper measures of performance are

used.
Generating an adequate return on investment.
Adhering to Generally Accepted Accounting Principles.
Ensuring that persons with direct client contact have
at least a bachelors degree.

A financial audit of the purchasing department.

An operational audit of the purchasing department.
A compliance audit of the purchasing function.
A full-scope audit of the manufacturing operation.
B

Which of the following audit techniques would be most

persuasive in determining that significant inventory values
on the books of a comp[any being acquired are correctly
stated?
a.

Obtain a management representation letter stating that

inventory values are correctly stated.

Chapter 16 Operational and Governmental Compliance Auditing

b.
c.
d.

ANSWER:
34.

ANSWER:

Schedule a follow-up review.

Implement corrective action indicated by the findings.
Examine further the data supporting the findings.
Assemble new data to support the findings.
A

Recommendations in audit reports may, or may not,. Actually

be implemented. Which of the following best describes
internal auditings role in follow-up on audit
recommendations?
Internal auditing:
a.
b.
c.
d.

ANSWER:
36.

Flowchart the inventory and warehousing cycle and form

an opinion based on the quality of internal controls.
Conduct a physical inventory and bring in an
independent expert if necessary to value inventory
items.
Interview purchasing and materials control personnel
to ascertain the quality of internal controls over
inventory.

After an audit report with adverse findings has been

communicated to appropriate auditee personnel, proper
action is to:
a.
b.
c.
d.

35.

281

Has no role; follow-up is managements responsibility.

Should be charged with responsibility for implementing
audit recommendations.
Should follow up to ascertain that appropriate action
is taken on audit recommendations.
Should request that independent auditors follow up on
audit recommendations.
C

The purpose of governmental effectiveness or program

results auditing is to determine if the desired results
of a program are being achieved. The first step in
conducting such an audit should be to:
a.
b.
c.

Evaluate the system used to measure results.

Determine the time frame to be audited.
Collect quantifiable data on the programs success or
failure.

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Chapter 16 Operational and Governmental Compliance Auditing

d.

ANSWER:
37.

b.
c.
d.
ANSWER:

Allow the auditee to participate in development of

recommendations for improvement.
Emphasize the personal responsibility of the auditee
management.
Document the adverse finding with a complete list of
all operational deficiencies.
Submit a draft copy of the final report to higherlevel management.
A

A major difference between operational auditing and

financial auditing is
a.
b.
c.
d.

ANSWER:
39.

An operational audit resulted in a finding regarding

efficiency of operations. Select the best approach to gain
the auditees cooperation in this situation.
a.

38.

Identify the legislative intent of the program being

audited.

Operational auditing focuses on activities rather than

financial statement assertions.
Operational auditing extends beyond the entity to
analysis of industry and economic data.
Unlike financial auditing, operational auditing does
not generally culminate in a formal audit report.
Operational auditing is narrower than financial
auditing in its breadth of coverage.
A

In conducting an operational audit, the following steps are

generally recommended:
A.
B.
C.
D.
E.
F.
G.
H.

Develop the audit program

Perform the audit
Identify audit objectives
Evaluate the findings and develop conclusions
and recommendations
Establish evaluation criteria
Report findings and recommendations
Conduct a preliminary survey of the activity
Appraise the efficiency and effectiveness of the
activity

Chapter 16 Operational and Governmental Compliance Auditing

283

The proper sequence for applying the above steps is:

a.
b.
c.
d.
ANSWER:
40.

c.
d.
ANSWER:

Assessing the goal setting process.

Determining the extent to which goals are being
achieved and the degree of coal congruence.
Assessing the financial stability of the unit.
Appraising the effectiveness of resource utilization
within the unit or activity.
C

The primary difference between an operational audit report

and an independent financial audit report is
a.
b.
c.
d.

ANSWER:
42.

A major part of an operational audit involves appraising

the efficiency and effectiveness of the activity or unit
being audited. Efficiency and effectiveness appraisal
include all but the following steps:
a.
b.

41.

D,H,B,F,E,G,A,C
C,E,G,A,H,B,D,F
E,C,A,G,D,H,B,F
C,E,G,A,B,H,D,F

The operational audit report makes no mention of

internal control.
The operational audit report is not constrained to a
single standard reporting format.
The operational audit report stresses consistency
among accounting periods.
Unlike the independent auditor, the internal auditor
generally does not discuss the audit findings and the
nature of the audit report with the auditee.
B

Which of the following is not a source of responsibility

for an independent auditor conducting a governmental
compliance audit?
a.
b.

Governmental auditing standards as set forth in the

General Accounting Offices yellow book.
Standards for the Professional Practice of Internal
Auditing.

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Chapter 16 Operational and Governmental Compliance Auditing

c.
d.

ANSWER:

Generally Accepted Auditing Standards as promulgated

by the Auditing Standards Board of the AICPA.
Federal Single Audit Act of 1984 (as amended in 1996).
B

COMPLETION:
43.

Management auditing concentrates more on ____________ than

efficiency.

ANSWER:
44.

Efficiency is __________ oriented, whereas effectiveness is

__________ oriented.

ANSWER:
45.

EVALUATION CRITERIA

The __________ __________ consists of those procedures

necessary to satisfy the audit objectives and produce
sufficient and competent evidence to corroborate or refute
the auditors preliminary findings.

ANSWER:
48.

RISK-BASED

In conducting an operational audit, identification of

___________ __________ is necessary if the auditor is to
ultimately determine the cause of discovered
inefficiencies.

ANSWER:
47.

INPUT OUTPUT

Until recently, operational auditing performed recurring

efficiency and effectiveness audits on different functions
or units in a company. The emphasis has now begun to shift
away from recurring audits to focus more on managements
special problems. This latter approach is referred to as
________- __________ operational auditing.

ANSWER:
46.

EFFECTIVENESS

AUDIT PROGRAM

In drafting an operational audit report, the difference

between actual and expected conditions should be presented
as to _______ and _______.

ANSWER:

CAUSE EFFECT

Chapter 16 Operational and Governmental Compliance Auditing

49.

When auditing state and local governmental entities that

are recipients of federal financial assistance, auditors
must, in addition to generally accepted auditing standards,
comply with governmental auditing standards, as defined in
the GAOs _________ _________.

ANSWER:
50.

285

YELLOW BOOK

In addition to GAAS and yellow book standards, an auditee

that receives $300,000 or more in federal financial
assistance in a single fiscal year, must be audited in
accordance with the ________ ________ _______ __ ____.

ANSWER:

SINGLE AUDIT ACT OF 1984

MATCHING:
51.

Select the term that best fits the listed definition.

A. Circular A-133
B. Effectiveness
C. Efficiency
D. Evaluation criteria
E. Yellow book
F. Risk-based operational auditing
G. Percentage-of-coverage rule
H. Operational auditing
I. Management auditing
J. General Accounting Office
K. Foreign Corrupt Practices Act of 1977
L. Single Audit Act of 1984 (as amended in 1996)
M. Governmental compliance auditing
____1.

A subset of internal auditing that reviews an entitys

activities for efficiency and effectiveness.

____2.

A subset of operational auditing that attempts to

measure the effectiveness with which an organizational
unit is administered.

____3.

May be viewed as an input measure.

____4.

May be viewed as an output measure.

____5.

Requires companies to develop and implement internal

controls that permit preparation of financial

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Chapter 16 Operational and Governmental Compliance Auditing

statements in accordance with GAAP and to maintain
accountability over assets.

____6.

An audit approach that focuses on managements special

problems and means for solving them.

____7.

Define the process or activity being audited.

____8.

Auditing that concentrates on testing and reporting on

conformity with laws and regulations relating to
recipients of federal financial assistance.

____9.

A GAO document that sets forth governmental auditing

standards.

____10.

A federal law that establishes audit requirements for

state and local governmental bodies and other not-forprofit entities receiving federal financial
assistance.

____11.

Requires that at least 50% of federal expenditures be

encompassed by the independent audit.

____12.

The document that interprets and explains the major

provisions of the Single Audit Act of 1984 (as amended
in 1996).

SOLUTION:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

H
I
C
B
K
F
D
M
E
L
G
A

Chapter 16 Operational and Governmental Compliance Auditing

287