IIA-CIA-Part3 Exam Dumps - IIA CIA Questions and Answers

When a company invests in common stock, it can earn income in two primary ways:

Dividend income: When the company receives dividends, it recognizes the income.

Capital gains: When the stock is sold for a higher price than its purchase price, it results in a gain.

Why Option C (Receives dividends) is Correct:

Dividends represent income from an investment in common stock when declared and paid by the issuing company.

Under GAAP and IFRS, dividend income is recognized when received, not when declared.

Companies record dividends as investment income in their income statement.

Why Other Options Are Incorrect:

Option A (Purchases bonds):

Incorrect because purchasing bonds is an investment transaction, not income recognition.

Option B (Receives interest):

Incorrect because interest income applies to bond investments, loans, or deposits, not common stock investments.

Option D (Sells bonds):

Incorrect because selling bonds results in capital gains or losses, not regular investment income from common stock.

IIA Practice Guide – " Auditing Investment & Treasury Activities " : Discusses the recognition of investment income.

IFRS 9 (Financial Instruments) & GAAP Standards: Provide guidance on recording dividends as investment income.

COSO Internal Control – Integrated Framework: Emphasizes proper financial reporting and income recognition.

IIA References:

Owner’s equity represents the residual interest in a company’s assets after deducting liabilities. It is a fundamental concept in financial accounting, reflecting the net worth of a business.

Formula:Owner’s Equity=Assets−Liabilities\text{Owner’s Equity} = \text{Assets} - \text{Liabilities}Owner’s Equity=Assets−Liabilities

Represents the True Value of Ownership – It measures the owner ' s claim on the business after settling all obligations.

Directly Tied to the Accounting Equation – Assets=Liabilities+Owner’s Equity\text{Assets} = \text{Liabilities} + \text{Owner’s Equity}Assets=Liabilities+Owner’s Equity Rearranging the equation: Owner’s Equity=Assets−Liabilities\text{Owner’s Equity} = \text{Assets} - \text{Liabilities}Owner’s Equity=Assets−Liabilities

Commonly Used in Financial Statements – Found in the Balance Sheet under the " Equity " section.

B. Total assets – Incorrect because assets include both owner-financed and liability-financed resources.

C. Total liabilities – Incorrect because liabilities represent debts owed, not ownership value.

D. Owner’s contribution plus drawings – Incorrect because it only considers investments and withdrawals, not retained earnings or net assets.

IIA’s GTAG on Business Financial Management – Discusses financial statement analysis, including owner’s equity.

COSO’s Internal Control – Integrated Framework – Highlights financial reporting accuracy, including equity calculations.

IFRS & GAAP Accounting Standards – Define owner’s equity as assets minus liabilities in financial reporting.

Why Option A is Correct?Why Not the Other Options?IIA References:

The Internet of Things connects sensors, machines, devices, and systems so operational data can be captured and transmitted continuously. In a manufacturing plant, the primary benefit is real-time monitoring of production equipment, output, temperature, vibration, downtime, quality indicators, and maintenance conditions. This allows management to detect production issues quickly, reduce downtime, improve preventive maintenance, and optimize throughput. IoT may introduce cybersecurity and data-integrity concerns, but securing sensitive data and detecting cyberattacks are not its main production-process benefit. Data integrity also requires additional controls over devices, transmission, storage, and analytics. Internal auditors should evaluate IoT governance, access control, device security, monitoring, and operational reliance. Therefore, Option A is correct.

The auditor should next study the company’s firewall configuration rules because the observation indicates that employees can access websites that policy prohibits. Firewall or web-filtering rules should restrict access to unauthorized categories such as shopping sites, social media, gambling, or malicious domains. A training policy may help awareness but does not explain why access was technically allowed. Access point encryption relates to wireless network security, not web filtering. Software installation controls prevent unauthorized software but do not directly block website access. Internal auditors should compare acceptable-use policy requirements with actual network filtering, firewall rules, proxy settings, exception lists, and monitoring reports. Since the control failure appears to be web access restriction, Option B is correct.

The fraud risk is that technical descriptions may be written to favor a particular supplier, product, or bidder because procurement specialists lack the expertise to challenge technical specifications. Requiring review by a group of internal experts provides independent technical challenge and reduces the risk of biased or restrictive specifications. Requiring procurement specialists to obtain technical education is impractical and not a timely control. Assigning specifications to procurement specialists may reduce technical quality. Assigning them to potential bidders would create a serious conflict of interest and increase bid-rigging risk. Internal audit should evaluate whether tender specifications are objective, approved, technically justified, and open to fair competition. Therefore, Option A is correct.

Comprehensive and Detailed In-Depth Explanation:

Capital budgeting involves long-term investment decisions, such as purchasing new equipment, expanding facilities, or launching new products. These strategic financial decisions require approval at the highest level of governance.

The Board of Directors (Option A) is responsible for reviewing and approving capital budgets, ensuring alignment with corporate strategy.

Senior management (Option B) and the CFO (Option C) contribute by evaluating proposals, but they typically do not have final approval authority.

Accounting personnel (Option D) manage financial reporting but do not approve budgets.

Thus, the Board of Directors (A) is the correct answer.

The internal audit plan should be risk-based. To achieve this, the CAE should develop an audit universe that lists all auditable units (processes, functions, systems, etc.) and use it as the foundation for risk assessment and prioritization.

Option B is too narrow (monetary value is just one factor). Option C is incomplete since senior management’s input is important but not the sole basis. Option D is incorrect because eliminating units not mandated by law ignores risk-based planning requirements.

Thus, the most appropriate approach is Option A: establishing an audit universe.

Comprehensive and Detailed In-Depth Explanation:

The development phase of contracting involves drafting, negotiating, and finalizing the contract terms for a business activity. This phase ensures that agreements align with legal and operational requirements before execution.

Option A (Initiation phase) involves identifying needs and planning but does not include drafting contracts.

Option B (Bidding phase) focuses on soliciting and evaluating proposals but does not yet involve contract drafting.

Option D (Management phase) occurs after contracts are finalized and focuses on monitoring performance.

Since the development phase is when contracts are written and finalized, Option C is correct.

Periodic testing of backup media is a recognized backup best practice because backups have value only if data can actually be restored when needed. Media may be corrupted, incomplete, unreadable, encrypted incorrectly, or incompatible with recovery systems. Performing full backups on weekdays is not universally a best practice; backup frequency and type should be based on recovery objectives and system criticality. Storing backups only onsite is weak because a local disaster may destroy both production systems and backups. Verifying retrieval within seven years is too arbitrary; retention should be based on legal, regulatory, operational, and recovery requirements. Internal auditors should review backup schedules, offsite storage, encryption, media integrity, restore testing, and retention. Therefore, Option B is correct.

Logging at the database and application levels is a critical security control that enables monitoring, detecting, and investigating potential security incidents. The absence of logging significantly increases cybersecurity risks and can leave an organization vulnerable to undetected attacks.

Incident Response & Forensics: Without logs, the organization will be unable to determine the cause, origin, and impact of cyber incidents or system intrusions.

Compliance Requirements: Many regulatory frameworks (e.g., ISO 27001, NIST 800-53, GDPR, PCI-DSS, SOX) require logging for security monitoring and auditability.

Threat Detection: Logs help in identifying malicious activities, unauthorized access, and data breaches.

Accountability: Ensures that actions taken within the system can be traced back to specific users or administrators.

Option A (The organization will be unable to develop preventative actions based on analytics): While logging helps in analytics, its primary function is incident detection and forensic investigation.

Option B (The organization will not be able to trace and monitor the activities of database administrators): This is partially correct, but logging is not just for administrators—it is essential for monitoring all system activities, including unauthorized access attempts.

Option D (The organization will be unable to upgrade the system to newer versions): Logging does not impact system upgrades; upgrades are related to software lifecycle management, not logging practices.

IIA’s Global Technology Audit Guide (GTAG) – Information Security Controls recommends logging as a fundamental security control.

IIA Standard 2110 – IT Governance: Emphasizes the need for adequate IT risk management, including logging.

COSO Framework (Monitoring Component): Highlights the importance of system monitoring, which includes logging.

Why Option C is Correct:Why Other Options Are Incorrect:IIA References:Thus, the most appropriate answer is C. The organization will be unable to determine why intrusions and cyber incidents took place.

To determine whether risk mitigation exists in change management, the internal auditor should validate the core change controls: authorization, segregation of duties, testing, and approval before migration to production. These controls reduce the risk of unauthorized, untested, or poorly designed changes disrupting operations or compromising data integrity. Option A is inappropriate because internal audit should not develop and enforce management policies. Option B is partly relevant but too general and includes “impose,” which is not internal audit’s role. Option C is also insufficient because a threat analysis alone does not prove that change controls operate. Internal audit should test whether changes are requested, documented, approved, tested, migrated, and reviewed. Therefore, Option D is correct.

In decentralized organizations, decision-making authority is dispersed to lower levels, regions, divisions, or operating units. This structure often relies on local managers’ knowledge of markets, customers, regulations, and operational conditions. Option A is more characteristic of centralized or mechanistic structures, where formal rules and uniform procedures are emphasized. Option B is not generally true because centralized structures can slow decisions due to approval layers. Option C is incorrect because centralized organizations usually retain more control at top management level. Internal auditors evaluating organizational structure should consider whether authority, accountability, reporting lines, and control mechanisms are appropriate for the organization’s strategy and risk profile. Therefore, Option D is correct.

A highly centralized organization is one where decision-making authority is concentrated at the top management level, with lower levels having minimal autonomy. This change means that most critical decisions are made at the corporate level, and lower-level managers have limited decision-making power.

(A) Incorrect – Top management does little monitoring of the decisions made at lower levels.

In a centralized organization, top management monitors and controls most decisions.

This statement applies more to decentralized structures where decision-making is distributed.

(B) Incorrect – The decisions made at the lower levels of management are considered very important.

In a centralized structure, decisions made at lower levels hold less significance since authority is concentrated at the top.

(C) Correct – Decisions made at lower levels in the organizational structure are few.

Centralized structures limit decision-making power at lower levels, keeping control with top executives.

Lower-level managers mostly follow directives from upper management rather than making independent decisions.

(D) Incorrect – Reliance is placed on top management decision-making by few of the organization’s departments.

In a centralized system, most (not just a few) departments rely on top management for decision-making.

IIA’s Global Internal Audit Standards – Organizational Governance and Decision-Making

Explains centralized vs. decentralized structures and their impact on risk management.

COSO’s ERM Framework – Governance and Decision Authority

Discusses the implications of centralization on strategic decision-making.

IIA’s Guide on Corporate Governance and Internal Control Frameworks

Highlights the effect of centralization on accountability, oversight, and risk management.

Analysis of Answer Choices:IIA References and Internal Auditing Standards:

A major risk when upgrading an IT network after a ransomware incident is that new access controls, monitoring rules, security procedures, or user restrictions may be perceived as burdensome by employees. If users believe the new processes slow work or are overly restrictive, they may bypass controls, resist implementation, or fail to comply consistently. Option A relates to project governance, but the scenario focuses on operational and user impact of the network change. Option B is not a risk created by the change itself. Option D describes service-quality consequences but is less directly tied to the policy and control changes introduced after ransomware. Internal audit should review change management, user communication, training, access redesign, and control adoption. Therefore, Option C is correct.

Understanding the Margin of Safety Concept:

Margin of Safety (MoS) measures how much sales can drop before the business reaches its break-even point.

It is calculated as: Margin of Safety Sales=Actual Sales−Break-even Sales\text{Margin of Safety Sales} = \text{Actual Sales} - \text{Break-even Sales}Margin of Safety Sales=Actual Sales−Break-even Sales

Applying the Formula:

Selling Price per Shirt: $8

Break-even Sales Volume: 25,000 shirts

Break-even Sales Value: 25,000×8=200,00025,000 \times 8 = 200,00025,000×8=200,000

Actual Sales Revenue: $300,000

Margin of Safety: 300,000−100,000=200,000300,000 - 100,000 = 200,000300,000−100,000=200,000

Why Option B ($200,000) Is Correct?

The margin of safety is the difference between actual and break-even sales.

The correct calculation confirms $200,000 as the margin of safety.

IIA Standard 2120 – Risk Management supports financial risk analysis, including break-even and margin of safety evaluations.

Why Other Options Are Incorrect?

Option A ($100,000): Incorrect subtraction.

Option C ($275,000): Incorrect calculation, not based on break-even sales.

Option D ($500,000): Irrelevant and exceeds actual sales.

The correct margin of safety is $200,000, calculated using standard break-even analysis.

IIA Standard 2120 emphasizes financial risk evaluation in decision-making.

Final Justification:IIA References:

IPPF Standard 2120 – Risk Management (Financial Performance & Cost Analysis)

COSO ERM – Financial Stability & Revenue Risk

Management Accounting Best Practices – Break-even & Margin of Safety Calculations