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Which of the following best demonstrates the authority of the internal audit activity?
The authority of the internal audit activity is best demonstrated through its ability to determine the scope of internal audit services. This authority, granted by the board and senior management, ensures that internal auditors have the freedom to assess and address risks appropriately across the organization without undue influence, reflecting a key element of internal audit's role in organizational governance. Reference: IIA Standard 1110 - Organizational Independence, which emphasizes the authority of the internal audit activity to define its own scope as a critical aspect of its independence and authority.
Which of the following is a role internal auditors should undertake related to risk management?
Internal auditors play a crucial role in evaluating the effectiveness of an organization's risk management processes. This includes assessing how well key risks are reported within the organization, whether through formal risk reporting mechanisms or less formal communications. Internal auditors review the processes by which these risks are identified, assessed, and managed, and they ensure that the information about these risks is accurately communicated to relevant stakeholders, including senior management and the board. Reference: Institute of Internal Auditors (IIA) - International Professional Practices Framework (IPPF)
Which of the following situations is most likely to prompt the internal audit activity to disclose its nonconformance with the Standards?
The internal audit activity must align its activities with the organization's risks. Not considering high-risk development projects in the audit plan could indicate nonconformance with the Standards, specifically regarding risk-based planning. The Standards require internal audit to consider all significant risks when developing the audit plan, and failing to do so may require disclosure of nonconformance. Reference: The IIA's International Standards for the Professional Practice of Internal Auditing (Standards), specifically Standard 2010 - Planning, and Standard 1300 - Quality Assurance and Improvement Program.
An investment advisory firm purchased professional liability insurance to offer protection from lawsuits brought by customers claiming they received poor or erroneous advice. Which of the following best describes this risk management technique?
Purchasing professional liability insurance as a way to protect against lawsuits from customers claiming poor or erroneous advice represents a risk transfer strategy. By obtaining insurance, the investment advisory firm transfers the financial risk associated with potential legal actions to the insurance provider. This approach does not eliminate the risk but shifts the burden of financial loss. Reference: Risk management techniques in the financial advisory sector
During a review of employee benefits, a staff internal auditor observed an ambiguity in the incentive compensation policy. If reported, it could negatively impact the internal auditor's compensation. Which of the following would encourage the internal auditor to be objective in his work?
Periodic reinforcement of the internal audit activity's code of ethics disclosure practices would encourage the internal auditor to maintain objectivity, even when personal compensation might be affected. The IIA's Code of Ethics emphasizes integrity and objectivity, and regular reinforcement helps auditors adhere to these principles, ensuring that they act impartially and do not allow conflict of interest or undue influence to impair their judgment. Reference: The Institute of Internal Auditors (IIA) - Code of Ethics.
