ACCA AA · Chapter 3
Internal audit MCQs with Answers
8 multiple-choice questions on Internal audit for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following correctly distinguishes internal audit from external audit?
- A) Internal audit reports to management and those charged with governance, whereas external audit reports to the shareholders
- B) Internal audit expresses an opinion on the financial statements, whereas external audit reviews operations
- C) Internal audit is required by law for all companies, whereas external audit is voluntary
- D) Internal auditors must be independent of the entity, whereas external auditors may be employees
Show answer & explanation
Answer: A) Internal audit reports to management and those charged with governance, whereas external audit reports to the shareholders
Internal audit is a function within the organisation (or outsourced) that reports to management and the audit committee, and its scope is set by them. External auditors are independent of the entity, are often legally required, and report to shareholders on the financial statements.
Question 2
Which of the following assignments would be appropriate for an internal audit function to perform?
- A) Designing and implementing new controls over the payroll system
- B) A value for money review of the procurement department
- C) Authorising purchase orders above a set value
- D) Expressing an opinion to shareholders on the truth and fairness of the financial statements
Show answer & explanation
Answer: B) A value for money review of the procurement department
Value for money, operational and compliance reviews are typical internal audit work. Expressing an opinion to shareholders is the external auditor's role. Designing controls and authorising transactions are management responsibilities; if internal audit performed them it would later be reviewing its own work, impairing objectivity.
Question 3
Which of the following arrangements would best support the independence of the internal audit function?
- A) The head of internal audit reports functionally to the audit committee
- B) The head of internal audit reports to the finance director
- C) The finance director approves the internal audit plan and its budget
- D) Internal auditors are rotated into the accounts department for six months each year
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Answer: A) The head of internal audit reports functionally to the audit committee
Reporting to the audit committee, made up of independent non-executives, protects internal audit from pressure from the managers whose areas it reviews. Reporting to or being budgeted by the finance director creates a conflict because internal audit regularly reviews the finance function. Rotating internal auditors into operational roles creates self-review threats.
Question 4
Which of the following is an advantage of outsourcing the internal audit function?
- A) Better understanding of the company's culture and systems by the internal auditors
- B) Lower risk of confidential information leaving the organisation
- C) Access to specialist skills that may not be available in-house
- D) Greater control by management over the day-to-day work of each internal auditor
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Answer: C) Access to specialist skills that may not be available in-house
Outsourcing gives access to a wider pool of specialists, flexibility in resourcing and potentially greater objectivity. The other statements describe advantages of an in-house function: outsourced staff may know the business less well, confidentiality risks increase and management has less direct control.
Question 5
Ferrule Co is a listed company. Its external audit firm has offered also to provide the company's outsourced internal audit service, including a review of controls over revenue. Which threat to the external auditor's objectivity is most significant?
- A) Advocacy threat
- B) Self-review threat
- C) Familiarity threat
- D) Intimidation threat
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Answer: B) Self-review threat
If the audit firm reviews or helps design controls over revenue as internal auditor, the external audit team may later place reliance on that same work, so it would be reviewing its own work. Self-interest from increased fees is also relevant, but the dominant threat is self-review. Ethical codes restrict such services for public interest entities.
Question 6
In a value for money review, what does 'efficiency' mean?
- A) Obtaining resources of the appropriate quality at the lowest cost
- B) The extent to which an activity achieves its intended objectives
- C) Complying with all relevant laws and regulations
- D) The relationship between the outputs produced and the resources used to produce them
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Answer: D) The relationship between the outputs produced and the resources used to produce them
The three Es are economy (minimising the cost of inputs), efficiency (maximising output for a given input, or the ratio of outputs to inputs) and effectiveness (achieving objectives). Compliance with laws is the focus of a compliance review rather than a value for money concept.
Question 7
Under ISA 610 Using the Work of Internal Auditors, which of the following is NOT one of the matters the external auditor evaluates in deciding whether the work of the internal audit function can be used?
- A) The size of the internal audit budget relative to the entity's revenue
- B) The level of competence of the function
- C) The extent to which the function's organisational status and policies support its objectivity
- D) Whether the function applies a systematic and disciplined approach, including quality control
Show answer & explanation
Answer: A) The size of the internal audit budget relative to the entity's revenue
ISA 610 requires the external auditor to evaluate the objectivity of the internal audit function, its competence, and whether it applies a systematic and disciplined approach. The size of its budget is not in itself a criterion: a small but objective and competent function may be usable, while a large one may not.
Question 8
Where law permits internal auditors to provide direct assistance to the external auditor, which of the following tasks must the external auditor NOT assign to them under ISA 610?
- A) Agreeing a sample of payroll records to employee contracts as directed
- B) Testing the operation of a control over purchase invoices under the external auditor's direction
- C) Performing a cash count with the procedures specified by the external auditor
- D) Assessing the risks of material misstatement for the audit
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Answer: D) Assessing the risks of material misstatement for the audit
ISA 610 prohibits using internal auditors for direct assistance on procedures that involve significant judgements, such as assessing risks of material misstatement, or that relate to higher assessed risks where judgement is more than limited. Routine, well-specified procedures under the external auditor's direction, supervision and review may be assigned. Some jurisdictions prohibit direct assistance altogether.