IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 391:

  The first stage in the development of a crisis management program is to:

  A. Formulate contingency plans.

  B. Conduct a risk analysis.

  C. Create a crisis management team.

  D. Practice the response to a crisis.

  Correct Answer: B

• Question 392:

  Which of the following statements is correct regarding corporate compensation systems and related bonuses?

  1.

  A bonus system should be considered part of the control environment of an organization and should be considered in formulating a report on internal control.

  2.

  Compensation systems are not part of an organization's control system and should not be reported as such.

  3.

  An audit of an organization's compensation system should be performed independently of an audit of the control system over other functions that impact corporate bonuses.

  A. 1 only

  B. 2 only

  C. 3 only

  D. 2 and 3 only

  Correct Answer: A

• Question 393:

  Which is the least effective form of risk management?

  A. Systems-based preventive control.

  B. People-based preventive control.

  C. Systems-based detective control.

  D. People-based detective control.

  Correct Answer: D

• Question 394:

  Which of the following is a role of the board of directors in the governance process?

  A. Conduct periodic assessments of the organization's governance systems.

  B. Obtain assurance concerning the effectiveness of the organization's governance systems.

  C. Implement an effective system of internal controls to support the organization's governance systems.

  D. Review and approve operational goals and objectives.

  Correct Answer: B

• Question 395:

  Which of the following statements regarding organizational governance is not correct?

  A. An effective internal audit function is one of the four cornerstones of good governance.

  B. Those performing governance activities are accountable to the customer.

  C. Accountability is one of the key elements of organizational governance.

  D. Governance principles and the need for an internal audit function are applicable to governmental and not-for-profit activities.

  Correct Answer: B

• Question 396:

  Which of the following statements is correct regarding risk analysis?

  A. The extent to which management judgments are required in an area could serve as a risk factor in assisting the auditor in making a comparative risk analysis.

  B. The highest risk assessment should always be assigned to the area with the largest potential loss.

  C. The highest risk assessment should always be assigned to the area with the highest probability of occurrence.

  D. Risk analysis must be reduced to quantitative terms in order to provide meaningful comparisons across an organization.

  Correct Answer: A

• Question 397:

  Entry into a new business may be made by acquisition. The analysis differs from that for entry by internal development. A key point is that prices are set in the market for acquisitions. Accordingly, a buyer should most likely expect to make above- average profits when the

  A. Market is active and well organized.

  B. Seller can choose to continue operating the business.

  C. Market for acquisitions is imperfect.

  D. Buyer adopts a sequential entry strategy.

  Correct Answer: C

  Acquisitions are more likely to earn above-average profits when the expected present value to the seller of continuing operations is low, e.g., because the seller needs funds, has capital limits, or has management weaknesses. Above-average profits also are more likely when the market for acquisitions is imperfect. For example, (1) the buyer may have better information, (2) there are few bidders, (3) the economy is weak,

  (4) the seller is weak, or (5) the seller has reasons to sell other than profit maximization. Moreover, the buyer may have a unique ability to operate the seller.

• Question 398:

  Entry into a new business may be made by internal development or acquisition. Entry through internal development usually involves creation of a full-fledged new business entity. The costs likely to be incurred by an internal entrant include:

  I.Investments to overcome entry barriers

  II. Change in the equilibrium level of supply and demand

  III. Lower prices charged by competitors

  IV.

  Higher marketing costs

  A.

  I and II only.

  B.

  I and IV only.

  C.

  II, Ill, and IV only.

  D.

  I, II, Ill, and IV.

  Correct Answer: D

  An internal entrant must cope with structural barriers and retaliation by existing firms. Costs incurred by the internal entrant include initial investments to overcome entry barriers (facilities, inventory, branding, technology, distribution channels, sources of materials, etc.), operating losses in the start-up phase, and the effects of retaliation (e.g., higher marketing costs, capacity expansion, or lower prices). Other costs include the price increases for factors of production that may result because of the new entry. Also, the capacity added to the industry by the entrant may affect the equilibrium level of supply and demand. The result may be additional competitive costs as firms with excess capacity cut prices.

• Question 399:

  What condition is most likely necessary to the success of a strategy of preemptive expansion?

  A. Competitors believe that the move is preemptive.

  B. The result is intense industry conflict.

  C. The firm does not know the expectations of competitors about the market.

  D. The learning-curve effect is small.

  Correct Answer: A

  Competitors must believe that the move is preemptive. Hence, the firm should know competitors' expectations about the market or be able to influence them favorably. Moreover, the preempting firm must have credibility, such as resources, technology, and a history of credibility, to support its statements and moves.

• Question 400:

  Which factor is most likely to limit expansion of a firm's productive capacity?

  A. Senior managers have production backgrounds.

  B. The firm operates in one industry.

  C. Current technology will soon be obsolete.

  D. Demand uncertainty is low.

  Correct Answer: C

  A firm's behavior may send signals to competitors that building is unwise. For example, it may announce an expansion project or indicate in some way that forecasts of demand are unfavorable or that current technology will soon be obsolete.