Risk Assessment: Before developing audit engagement objectives, a thorough risk assessment should

be conducted. This step helps identify and prioritize the areas of highest risk, ensuring that the audit

focuses on the most critical issues.

Establishing Objectives: The results of the risk assessment guide the development of specific,

relevant, and focused audit objectives. This ensures that the engagement addresses key risk areas

and adds value to the organization.

Sequential Steps: Identification of controls, scope establishment, and review of resources are

important steps but typically follow the initial risk assessment to ensure the audit is aligned with the

organization's risk profile.

Reference: IIA Standard 2200 - Engagement Planning.

 Inherent Risk: Inherent risk refers to the exposure to risk in its natural state, without considering any

controls or mitigation measures. It is the risk that exists before any action is taken to manage it.

Example: In the scenario of a snow removal company, the significant reduction in annual snowfall

represents an inherent risk as it is a natural condition that affects the company's operations.

 Other Risk Types:

Residual Risk: This is the risk that remains after controls and mitigation strategies have been applied.

Net Risk: Similar to residual risk, it is the risk that remains after considering existing controls.

Accepted Risk: This is the risk that the organization knowingly accepts after evaluating its impact and

likelihood.

 Scenario Planning: The exercise of considering the impacts of reduced snowfall helps the company

understand its inherent risks and prepare for potential adverse outcomes.

Introduction:

Heat maps are tools used in risk management to visualize the impact and likelihood of risks.

Limitations of Heat Maps:

Despite their usefulness, heat maps have several limitations, including difficulties in prioritizing risks

when impact and likelihood are closely matched.

Options Analysis:

Option A: Impact can be represented qualitatively as well, not just in financial terms.

Option B: Differentiating the relative importance of impact versus likelihood can be challenging,

leading to potential misinterpretation of risk priorities.

Option C: Heat maps can be used without a risk and control matrix, although such a matrix enhances

their effectiveness.

Option D: Qualitative factors can be incorporated into heat maps, adding depth to the analysis.

Conclusion:

The limitation of a heat map is that at times, impact and likelihood cannot be differentiated as to

which is more important, making it difficult to prioritize risks accurately.

Reference:

Internal Audit Standards and Practice Guides .

To determine which internal audit activity is performed in the design evaluation phase, it's essential

to understand what each phase in the audit process entails. The design evaluation phase involves

assessing whether the design of controls is adequate to mitigate risks to acceptable levels.

Explanation:

Option A: The internal auditor reviews prior audits and workpapers.

This activity typically occurs during the planning phase of an audit. Reviewing prior audits and

workpapers helps the auditor understand the scope, findings, and context of previous audits,

providing valuable information for planning the current audit.

Option B: The internal auditor identifies the controls over segregation of duties.

Identifying controls, particularly those related to segregation of duties, is a key part of the design

evaluation phase. In this phase, the auditor assesses whether the control design, including

segregation of duties, is sufficient to prevent or detect errors and fraud.

Option C: The internal auditor checks a process for completeness.

Checking a process for completeness is more aligned with the testing phase, where the auditor

evaluates the operational effectiveness of controls. During this phase, the auditor ensures that all

parts of a process are functioning as intended.

Option D: The internal auditor communicates the audit results to management.

Communicating audit results occurs in the reporting phase, after the audit fieldwork is complete. In

this phase, the auditor summarizes findings, conclusions, and recommendations and presents them

to management.

Reference:

According to the Institute of Internal Auditors (IIA) Standards and the guidelines in the IPPF

(International Professional Practices Framework), during the design evaluation phase, internal

auditors assess the adequacy of control designs. This includes evaluating whether controls like

segregation of duties are properly designed to mitigate identified risks. Identifying controls over

segregation of duties is a fundamental aspect of assessing the adequacy of the control environment

and its design to ensure it can effectively prevent and detect errors and fraud.

Introduction:

When a compensating control is not considered, it can affect various aspects of the audit findings

and conclusions.

Impact on Workpapers:

Effect of the Control Weakness: The impact of the control weakness needs to be reassessed

considering the compensating control.

Conclusion on the Control Weakness: The overall conclusion about the severity of the control

weakness may change.

Recommendation for the Control Weakness: Recommendations may need to be adjusted based on

the new assessment.

Options Analysis:

Option A: Includes the effect, cause, and conclusion, but the cause might not change if it remains

relevant regardless of compensating controls.

Option B: Includes the effect, cause, and recommendation, but the cause might not change.

Option C: The effect, conclusion, and recommendation would likely need adjustments.

Option D: Includes cause, conclusion, and recommendation, but the cause might remain unchanged.

Conclusion:

The sections of the workpapers that most likely require changes are the effect of the control

weakness, the conclusion on the control weakness, and the recommendation for the control

weakness.

Reference:

Internal Audit Standards and Practice Guides

 The internal audit charter outlines the internal audit activity's purpose, authority, and responsibility

within the organization.

 It defines the internal audit activity’s position within the organization, including reporting lines,

independence, and access to records, personnel, and physical properties relevant to the

performance of engagements.

 This clarity helps ensure that the internal audit activity can operate independently and effectively

 Engagement Supervision Objectives:

Assign Responsibilities: Supervisors must clearly assign tasks and responsibilities to individual

auditors to ensure clarity and accountability during the engagement.

Approve Engagement Program: The supervisor is responsible for reviewing and approving the

engagement program, ensuring that it aligns with the engagement objectives and internal audit

standards.

Training and Development: Supervision also involves mentoring and developing audit staff, providing

guidance and feedback to enhance their skills and performance.

 IIA Standards:

Standard 2340 – Engagement Supervision: Internal audit engagements must be properly supervised

to ensure objectives are achieved, quality is maintained, and staff are developed.

 Primary Objectives:

Clarity and Accountability: Assigning responsibilities ensures that each auditor knows their role and

tasks.

Quality and Compliance: Approving the engagement program ensures that the audit plan is robust

and compliant with standards.

Professional Development: Enabling training and development helps build a competent and skilled

audit team.

 Reference:

Effective engagement supervision involves assigning responsibilities, approving the engagement

program, and facilitating training and development, ensuring a successful audit engagement and

continuous staff improvement.

Introduction:

The chief audit executive (CAE) must ensure that audit recommendations are appropriately

addressed and that any disagreements with management’s decisions are resolved effectively.

Escalation Process:

If the CAE disagrees with management’s decision to not implement certain action plans, it is

important to escalate the issue to the board to ensure that risks are properly managed and that there

is accountability.

Options Analysis:

Option A: Discussing with senior management is a preliminary step but may not resolve the issue if

there is still disagreement.

Option B: Discussing with key shareholders is not typically within the CAE’s direct line of reporting

and may not be appropriate.

Option C: Legal counsel can provide advice, but the final decision on audit matters typically rests with

the board.

Option D: The most appropriate step is for the CAE to discuss the matter with the board, as they have

the ultimate oversight responsibility and can ensure that management’s decisions align with the

organization’s risk management and governance frameworks.

Conclusion:

The CAE should discuss the matter with the board to ensure that management’s decision is aligned

with the organization’s risk management strategy and to address any unresolved issues.

Reference:

Internal Audit Standards and Practice Guides .

Introduction:

Developing professional competencies requires a structured approach to identify gaps and plan for

targeted improvements.

Commitment to Development:

Conducting a skills assessment and creating a development plan demonstrates a proactive and

strategic approach to professional growth.

Options Analysis:

Option A: Requesting to be part of all engagements shows enthusiasm but does not ensure targeted

competency development.

Option B: Attending training courses is beneficial but without a targeted plan, it may not address

specific needs.

Option C: Completing a skills assessment and development plan directly addresses individual training

needs and sets a clear path for professional growth.

Option D: Attending webinars is useful but should be part of a broader development strategy.

Conclusion:

The best demonstration of an internal auditor's commitment to developing professional

competencies is completing a skills assessment and development plan for targeted training needs.

Reference:

Internal Audit Standards and Practice Guides

When determining the level of staff and resources to dedicate to an assurance engagement, the

most critical factor for the chief audit executive (CAE) is ensuring that the available resources possess

the specific skill sets required for the engagement. This ensures that the internal audit team can

effectively address the unique challenges and risks associated with the audit.

Skill Set Relevance: The CAE must match the skills and knowledge of the audit team to the specific

requirements of the audit engagement. This includes technical expertise, industry knowledge, and

any specialized skills needed for the audit.

Resource Allocation: Effective allocation involves not just the number of auditors but ensuring they

have the right competencies to perform the audit tasks proficiently.

Impact on Audit Quality: Allocating resources with the appropriate skill set ensures the audit is

thorough and of high quality, reducing the risk of overlooking critical issues.

Reference:

"Managing Internal Audit Activities," which discusses the importance of aligning audit resources with

the necessary skills for specific engagements .