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

Activity-Based Costing (ABC) is a cost allocation method that assigns overhead costs based on activities that drive costs rather than using a single volume-based measure like labor hours or machine hours. It provides a more accurate allocation of indirect costs to products or services.

ABC Costing and Its Flexibility (Correct Answer: C)

ABC can be applied to both job order costing (which tracks costs for individual products or projects) and process costing (which tracks costs across continuous production processes).

IIA Standard 2120 – Risk Management suggests that internal auditors evaluate whether cost allocation methodologies align with business objectives and financial accuracy.

ABC improves cost accuracy by assigning overhead to specific activities, making it useful in different costing systems.

Why the Other Options Are Incorrect:

A. "ABC is similar to conventional costing in how it treats overhead allocation." (Incorrect)

Traditional costing allocates overhead based on a single cost driver, such as direct labor or machine hours.

ABC allocates overhead based on multiple activity drivers, making it more precise.

B. "ABC uses a single unit-level basis to allocate overhead." (Incorrect)

ABC does not rely on a single unit-level measure.

Instead, it uses multiple cost drivers at different levels (unit-level, batch-level, product-level, and facility-level).

D. "The primary disadvantage of ABC is less accurate product costing." (Incorrect)

ABC is actually more accurate than traditional costing in assigning overhead costs.

The primary disadvantages of ABC are its complexity and cost of implementation, not reduced accuracy.

IIA Standard 2120 – Risk Management (Assessing the appropriateness of costing methodologies)

IIA Standard 2130 – Compliance (Ensuring financial management practices align with standards)

IIA Standard 2210 – Engagement Objectives (Evaluating financial controls and cost allocation methods)

Step-by-Step Justification:IIA References for This Answer:Thus, the best answer is C. An ABC costing system may be used with either a job order or a process cost accounting system, as ABC is flexible and can be applied in both costing environments.

When reviewing personal data consent and opt-in/opt-out management processes, internal auditors should focus on ensuring compliance with data protection regulations, such as the General Data Protection Regulation (GDPR) and other applicable data privacy laws. The most critical aspect is ensuring that personal data is processed strictly in line with the consent obtained from individuals.

Data Processing in Accordance with Consent (Correct Choice: B)

IIA Standard 2110 – Governance requires internal auditors to assess whether the organization has effective processes for ensuring compliance with laws and regulations, including data privacy obligations.

GDPR Article 5(1)(b) (Purpose Limitation Principle) mandates that personal data must be collected for specified, explicit, and legitimate purposes and must not be further processed in a manner incompatible with those purposes.

Internal auditors should verify that the organization adheres to this principle by ensuring that data is only used for the purpose for which consent was granted.

Why the Other Options Are Incorrect:

Option A: "Whether customers are asked to renew their consent for their data processing at least quarterly." (Incorrect)

GDPR does not mandate a quarterly renewal of consent. Instead, it requires that consent be freely given, specific, informed, and unambiguous. Periodic renewal may be advisable in some cases, but it is not a strict regulatory requirement.

IIA Standard 2120 – Risk Management requires auditors to evaluate compliance risk exposure, but excessive consent renewals could lead to inefficiencies without adding value.

Option C: "Whether the organization has established explicit and entitywide policies on data transfer to third parties." (Incorrect)

While data transfer policies are critical (as required under GDPR Articles 44-50 on international data transfers), they do not directly relate to the opt-in/opt-out process or consent management.

IIA Standard 2201 – Engagement Planning encourages reviewing policies, but the key focus should be on processing data according to the purpose of consent.

Option D: "Whether customers have an opportunity to opt-out the right to be forgotten from organizational records and systems." (Incorrect)

The right to be forgotten (GDPR Article 17) allows individuals to request data deletion, but it is not an opt-out feature in the traditional sense. Organizations must evaluate each request based on legal grounds before erasing data.

IIA Standard 2130 – Compliance requires verifying whether the organization ensures compliance with data privacy rights, but an opt-out for the right to be forgotten is not a primary audit focus.

IIA Standard 2110 – Governance (Ensuring regulatory compliance)

IIA Standard 2120 – Risk Management (Managing data privacy risks)

IIA Standard 2130 – Compliance (Reviewing legal obligations on personal data)

IIA Standard 2201 – Engagement Planning (Evaluating policies and controls)

GDPR Article 5(1)(b) – Purpose Limitation Principle (Processing data as per consent)

GDPR Articles 17, 44-50 (Data protection and right to be forgotten considerations)

Step-by-Step Justification for the Answer:IIA References for This Answer:Thus, Option B is the correct choice as it aligns with the purpose limitation principle and internal audit’s role in assessing compliance with data protection laws.

Malware Defense as a Cybersecurity Monitoring Activity:

Malware defense refers to the use of antivirus software, endpoint detection and response (EDR), behavior analysis, and real-time monitoring to detect and block malicious code before it can be installed on an organization's systems.

It helps prevent infections from viruses, ransomware, spyware, trojans, and worms that can disrupt business operations.

IIA GTAG (Global Technology Audit Guide) on Cybersecurity states that monitoring tools should proactively detect and neutralize threats before they can execute malicious actions.

A. Boundary defense (Incorrect)

Boundary defense includes firewalls, intrusion detection/prevention systems (IDS/IPS), and network segmentation, which control external access but do not directly monitor and remove malware.

Malware can still enter through phishing emails, infected USB drives, or compromised internal systems.

C. Penetration tests (Incorrect)

Penetration tests simulate attacks to identify vulnerabilities, but they do not actively monitor and prevent malware from being installed.

They help improve security but are not a continuous monitoring activity.

D. Wireless access controls (Incorrect)

Wireless security helps prevent unauthorized network access, but it does not specifically monitor and block malware installation.

Malware can still spread via legitimate access points, infected devices, or phishing attacks.

Explanation of Answer Choice B (Correct Answer):Explanation of Incorrect Answers:Conclusion:To deter disruptive codes (malware) from being installed, organizations should implement continuous malware defense (Option B), including antivirus software, endpoint security, and behavioral analytics.

IIA References:

IIA GTAG - Cybersecurity

IIA Standard 2120 - Risk Management

The acid-test (quick) ratio is a more dependable liquidity indicator than working capital because it excludes inventory, which may not be easily converted to cash in the short term. This ratio measures a company’s ability to pay its short-term liabilities using only its most liquid assets (cash, marketable securities, and accounts receivable).

Formula for the Acid-Test Ratio:Acid-Test Ratio=Current Assets−InventoryCurrent Liabilities\text{Acid-Test Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}Acid-Test Ratio=Current LiabilitiesCurrent Assets−Inventory​

This ratio is more reliable than working capital since it removes inventory, which may be difficult to liquidate quickly in financial distress.

A. Acid-test (quick) ratio (Correct Answer) – This provides a stronger measure of liquidity because it excludes inventory, which might not be quickly converted to cash.

B. Average collection period – This measures the efficiency of accounts receivable collections, but it does not directly measure overall liquidity.

C. Current ratio – While this ratio is commonly used, it includes inventory, which can distort liquidity assessments if inventory is not easily sold.

D. Inventory turnover – This measures how quickly inventory is sold, but it does not directly assess liquidity.

IIA IPPF Standard 2130 – Control emphasizes liquidity monitoring as a key financial control.

COSO ERM Framework – Financial Performance Measures discusses acid-test ratio as a critical liquidity metric.

IFRS 7 – Financial Instruments Disclosures outlines the importance of liquidity risk assessments.

Explanation of Each Option:IIA References:

When conducting a cybersecurity risk assessment, an internal auditor must evaluate the most significant threats based on their potential impact on the organization. In the pharmaceutical industry, intellectual property (IP), such as research and development (R&D) data, is one of the most valuable and sensitive assets.

(A) Cybercriminals hacking into the organization's time and expense system to collect employee personal data:While the loss of employee personal data is a serious concern due to privacy and regulatory implications (e.g., GDPR, CCPA), it does not pose as critical a threat as the loss of proprietary pharmaceutical research.

(B) Hackers breaching the organization's network to access research and development reports (Correct Answer):R&D reports contain proprietary drug formulas, clinical trial results, and patent-pending innovations, making them highly valuable to competitors and cybercriminals. A breach could lead to intellectual property theft, financial losses, loss of competitive advantage, and regulatory non-compliance (e.g., FDA, EMA requirements). This is considered the most significant threat because:

It could result in billions of dollars in lost revenue.

Competitors or state-sponsored hackers could exploit stolen research.

It could disrupt drug development and approval processes.

(C) A denial-of-service (DoS) attack that prevents access to the organization's website:While DoS attacks can damage an organization's reputation and disrupt operations, they generally do not cause the same level of financial or strategic harm as the loss of critical R&D data. Most organizations have cybersecurity measures (e.g., load balancers, CDNs) to mitigate DoS risks.

(D) A hacker accessing the financial information of the company:Unauthorized access to financial data can be serious, leading to fraud or reputational damage. However, publicly traded companies already disclose much of their financial data, and financial breaches typically have a lower long-term impact compared to intellectual property theft.

IIA Global Technology Audit Guide (GTAG) 15: Information Security Governance: Recommends that internal auditors prioritize risks that impact strategic assets, such as intellectual property.

IIA Standard 2120 - Risk Management: Requires internal auditors to evaluate the organization’s risk management processes, emphasizing risks with significant financial and operational consequences.

IIA Practice Advisory 2110-2: Assessing the Adequacy of Risk Management Processes: Highlights that internal auditors must identify risks that could threaten the organization’s long-term objectives, such as IP theft.

COSO ERM Framework: Encourages prioritization of risks that have high impact on an organization’s value and strategic objectives, such as cyber threats to proprietary research.

Analysis of Each Option:IIA References:Conclusion:Given the pharmaceutical industry's reliance on proprietary R&D, a breach compromising research reports represents the most significant cyber threat. Therefore, option (B) is the correct answer.

Effective IT Change Management Principles:

Change management ensures that modifications to IT systems are controlled, tested, and implemented in a way that reduces risks.

A structured and consistent process is required to prevent disruptions, maintain system integrity, and comply with governance requirements.

IIA Standard 2110 - Governance:

IT governance must include structured change management processes.

Change management should be repeatable and standardized to ensure effectiveness.

IIA GTAG (Global Technology Audit Guide) on Change Management:

Change management must be conducted in a controlled environment to minimize unintended consequences and security risks.

A. The sole responsibility for change management is assigned to an experienced and competent IT team. (Incorrect)

While IT plays a key role, change management should involve multiple stakeholders, including business units, security, compliance, and risk management teams.

IIA Standard 2120 - Risk Management states that risk oversight should not be assigned to a single function.

C. Internal audit participates in the implementation of change management throughout the organization. (Incorrect)

Internal audit evaluates change management but does not implement it.

IIA Standard 1000 - Purpose, Authority, and Responsibility emphasizes that internal audit provides independent assurance rather than operational involvement.

D. All changes to systems must be approved by the highest level of authority within an organization. (Incorrect)

Approvals should be based on a risk-based hierarchy rather than requiring executive-level approval for all changes.

IIA GTAG - Change Management recommends a tiered approval system based on change complexity and risk impact.

Explanation of Incorrect Answers:Conclusion:The most critical factor in effective IT change management is having a consistent, controlled process (Option B).

IIA References:

IIA Standard 2110 - Governance

IIA Standard 2120 - Risk Management

IIA Standard 1000 - Purpose, Authority, and Responsibility

IIA GTAG - Change Management

Indirect labor costs incurred in the production process are treated as part of manufacturing overhead. Since the cost was incurred on the last day of the year, it is likely that the related products are still in inventory rather than being sold.

Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), indirect labor costs associated with manufacturing should be included in the cost of inventory until the related goods are sold.

Once the goods are sold, the cost will be transferred to the cost of goods sold (COGS) in the income statement.

A. It should be reported as an administrative expense on the income statement. (Incorrect)

Indirect labor related to manufacturing is classified as part of manufacturing overhead, not an administrative expense.

B. It should be reported as a period cost other than a product cost on the management accounts. (Incorrect)

Indirect labor in production is a product cost (i.e., a cost that is included in inventory and matched with revenues when the product is sold).

Period costs refer to expenses like selling and administrative costs, which are expensed immediately.

C. It should be reported as cost of goods sold on the income statement. (Incorrect)

Since the cost was incurred on the last day of the year, the related products have likely not yet been sold, meaning the cost remains in inventory.

D. It should be reported on the balance sheet as part of inventory. (Correct)

Manufacturing overhead, including indirect labor, is included in inventory (work-in-process or finished goods) on the balance sheet until the goods are sold.

IIA Practice Guide: Auditing Inventory Management emphasizes that manufacturing costs, including indirect labor, should be allocated properly to inventory.

IIA Standard 2330 – Documenting Information requires auditors to ensure proper financial reporting of costs in accordance with GAAP/IFRS inventory valuation principles.

IFRS (IAS 2 – Inventories) and GAAP (ASC 330 – Inventory) state that indirect production costs must be capitalized as inventory until sold.

Explanation of Answer Choices:IIA References:Thus, the correct answer is D. It should be reported on the balance sheet as part of inventory.

Database administrators (DBAs) have privileged access, meaning they can make unauthorized or hidden changes to data, database structures, and security settings without detection. This presents a high risk of fraud, data manipulation, and security breaches.

A. The risk that database administrators will disagree with temporarily preventing user access to the database for auditing purposes. (Incorrect)

While resistance from DBAs during an audit can be a challenge, it is not a significant risk compared to the ability to manipulate data unnoticed.

B. The risk that database administrators do not receive new patches from vendors that support database software in a timely fashion. (Incorrect)

Patch management is a security concern but does not directly relate to the unique risk of DBAs abusing privileged access.

C. The risk that database administrators set up personalized accounts for themselves, making the audit time-consuming. (Incorrect)

While personal accounts can complicate audits, the greater risk is that DBAs can make changes without detection.

IIA GTAG 4 – Management of IT Auditing emphasizes the need for controls over privileged access to prevent unauthorized database modifications.

IIA Standard 2110 – Governance requires internal auditors to assess risks related to IT governance and privileged access management.

IIA GTAG 8 – Auditing Application Controls highlights that auditors must review DBA activity logs and ensure segregation of duties.

Explanation of Answer Choices:IIA References:Thus, the correct answer is D. The risk that database administrators could make hidden changes using privileged access.

To maximize profit with a limited material supply of 500 kg per month, the company should prioritize producing the product that generates the highest contribution margin per kg of material used.

Step 1: Calculate Contribution Margin Per Unit for Each ProductSince fixed costs are not relevant in this decision, we focus on the contribution margin per unit of raw material:

Selling price per unit = $10

Material cost per unit = 2 kg × $1/kg = $2

Contribution margin per unit = $10 - $2 = $8

Contribution margin per kg = $8 ÷ 2 kg = $4 per kg

Selling price per unit = $13

Material cost per unit = 6 kg × $1/kg = $6

Contribution margin per unit = $13 - $6 = $7

Contribution margin per kg = $7 ÷ 6 kg = $1.17 per kg

Product X ($4 per kg) is more profitable per kg than Product Y ($1.17 per kg).

To maximize profit, produce as many units of Product X as possible first, then allocate the remaining material to Product Y.

First, maximize production of Product X

Each unit of Product X requires 2 kg.

Maximum units of Product X = 500 kg ÷ 2 kg per unit = 250 units.

However, demand is only 70 units, so produce 70 units of Product X.

Material used for 70 units of X = 70 × 2 kg = 140 kg.

Material remaining = 500 kg - 140 kg = 360 kg.

Use remaining material for Product Y

Each unit of Product Y requires 6 kg.

Maximum units of Product Y = 360 kg ÷ 6 kg per unit = 60 units.

Produce 70 units of Product X (to meet demand).

Produce 60 units of Product Y (using the remaining material).

IIA GTAG 13: Business Performance Management – Discusses maximizing profit by prioritizing high contribution margin products.

IIA Practice Guide: Cost Analysis for Decision-Making – Covers constraints and resource allocation for maximizing profitability.

Product XProduct YStep 2: Prioritize Product with Higher Contribution Margin Per KgStep 3: Allocate Limited Material (500 kg)Final Decision:IIA References for Validation:Thus, B (60 units) is the correct answer because it optimally allocates the 500 kg of material to maximize profit.

Accounting Treatment for Investments with Little Influence:

When an investee has little or no influence over an entity, it uses the cost method (or fair value method, if applicable) to account for the investment.

Under the cost method, cash dividends received are recorded as dividend revenue rather than adjusting the investment account.

IIA Standard 2120 - Risk Management:

Internal auditors must ensure that financial reporting aligns with applicable accounting standards.

Applicable Accounting Standards:

IFRS 9 (Financial Instruments) and U.S. GAAP (ASC 320 - Investments in Equity Securities) state that dividends received should be recognized as income in the period received.

A. The cash dividends received increase the investee investment account accordingly. (Incorrect)

This applies to the equity method, used when an entity has significant influence (usually 20-50% ownership).

Under the cost method, dividend income is recognized as revenue, not as an increase in the investment account.

B. The investee must adjust the investment account by the ownership interest. (Incorrect)

Adjusting the investment account for ownership percentage is a feature of the equity method, not the cost method.

C. The investment account is adjusted downward by the percentage of ownership. (Incorrect)

A downward adjustment only occurs under the equity method when dividends exceed earnings, indicating a return of capital.

Under the cost method, dividends are recorded as revenue.

Explanation of Answer Choice D (Correct Answer):Explanation of Incorrect Answers:Conclusion:When an investee has little influence, dividends are recorded as revenue (Option D), following IFRS 9 and U.S. GAAP standards.

IIA References:

IIA Standard 2120 - Risk Management

IFRS 9 - Financial Instruments

U.S. GAAP ASC 320 - Investments in Equity Securities