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Copyright © 2013 by S. Rao Vallabhaneni. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 9781118120637 (Paperback)
ISBN 9781118515181 (ebk)
ISBN 9781118515228 (ebk)
ISBN 9781118515198 (ebk)
ISBN 9781118120620 (Part 1)
ISBN 9781118120620 (Part 2)
ISBN 9781118120606 (Set)

Preface

The Certified Internal Auditor (CIA) Examination is a program of The Institute of Internal Auditors (IIA), Inc. The CIA Examination certifies a person as a professional internal auditor and is intended to measure the knowledge, skills, and competency required in the field of internal auditing. The CIA designation is the mark of an expert in internal auditing. The new exam syllabus, effective from the middle of 2013, tests knowledge at two levels of comprehension—proficiency and awareness, as indicated in the IIA’s content specifications outlines (www.theiia.org). These levels require allocating more preparation time to proficiency-level topics and less time to awareness-level topics. The scope of the new CIA Exam consists of three parts, which are divided into 14 domains; there are three domains in Part 1, three domains in Part 2, and eight domains in Part 3.

A series of review books has been prepared for the candidate to utilize for all three parts of the new CIA Exam. Each part’s review book includes a comprehensive coverage of the subject matter (theory) based on the new exam syllabus followed by some sample practice multiple-choice (M/C) questions with answers and explanations (practice). The sample practice M/C questions included in the review book are taken from Wiley’s Web-based online test software to show you the flavor of the questions. Each part’s review book contains a glossary section, which is a good source for answering M/C questions on the CIA Exam.

The scope of the Part 3 review book covers internal audit knowledge elements. It has eight domains: Domain 1 deals with governance and business ethics. Domain 2 addresses risk management. Domain 3 covers organizational structure, business processes, and risks. Domain 4 deals with communication. Domain 5 addresses management and leadership principles. Domain 6 focuses on information technology (IT) and business continuity. Domain 7 addresses financial management. Domain 8 focuses on global business environment. The Part 3 review book contains 140 sample practice M/C questions with answers and explanations, and a glossary section.

The objective of this review book is to provide single-source, comprehensive review materials to assist the CIA Exam candidate in successfully preparing for the exam. The major highlights are presented next.

Easy to navigate, comprehend, learn, and apply the subject matter since it was written from a student’s perspective in a textbook style and format.

The review book contains fully developed theories and concepts with complete thoughts as opposed to mere outlines. The candidate needs to know more than outlines to pass the difficult CIA Exam.

Each theoretical domain in the review book is shown with a range of percentages to indicate the relative weights given to that domain in the exam. Candidates are expected to plan their study time in proportion to the relative weights suggested (i.e., more time and effort to higher percentages, and vice versa).

CIA Exam content specifications included at the beginning of the book shows the level of difficulty for each topic in the CIA Exam expressed as (A) for Awareness and (P) for Proficiency. Awareness means candidates must exhibit awareness (i.e., knowledge of terminology and fundamentals) in these topic areas. Proficiency means candidates must exhibit proficiency (i.e., thorough understanding and ability to apply concepts) in these topic areas.

Greater use of comparisons and contrasts of subject matter make the key concepts come alive by providing lasting impressions. These comparisons show interrelationships between key concepts.

These review books focus on the student—the candidate preparing for the CIA exam. It provides a positive learning experience for candidates by helping them to remember what they read and recall the subject matter through the use of tree diagrams, line drawings, memory aids (key concepts to remember), tables, charts, and graphic text boxes. In other words, an attempt has been made to bring life to static words through visual aids and compare and contrast approaches (i.e., which is what). The positive learning experience system provided through visual aids and memories will enable candidates to form long-lasting study impressions of the subject matter in their minds. In short, this book is student-focused and learning-oriented.

The aim of these books is to make learning easier, more convenient, and more enjoyable for our customer, the student. A great deal of planning and thought went into the creation of these books with the single goal of making the student’s study program (whether individual or group) more relevant and more meaningful. It is hoped that these books meet or exceed the student’s expectations in terms of quality, content coverage, and presentation of the subject matter.

We were excited and challenged while writing these books, and we hope that you too will be excited to study, remember, and achieve lifelong benefit from them. We believe that the knowledge gained from these books will remain with the candidate even after passing the CIA Exam, serving as on-the-job reference material as well as a training source.

Our goal is to be responsive to the CIA Exam candidate’s needs and provide customer (student) satisfaction through continuous quality improvement. This goal can be met only through timely feedback from the candidates. Please help us to serve you better—your input counts. You can reach us at ciatestbank@wiley.com.

Administrative Matters

We encourage the new, prospective candidate to obtain a copy of the CIA “Information for Candidates” brochure by writing directly to:

Institute of Internal Auditors

247 Maitland Avenue

Altamonte Springs, FL 32701-4201 USA

Phone: 407-937-1100, Fax: 407-937-1111

Web site: www.theiia.org

This brochure contains everything the candidate needs to know about the CIA Exam (i.e., application form, fees, dates, and sites).

Acknowledgments

The author is indebted to a number of people and organizations that helped to improve the content and quality of this book: Thanks to the Director of Certification at The Institute of Internal Auditors (IIA), Altamonte Springs, Florida, for providing great assistance during the writing of these books. Special thanks to the IIA for providing previous CIA Exam questions, answers, and explanations, IIA Standards, the Code of Ethics, and model exam questions. Many thanks also go to Wiley’s editorial content management and marketing teams for their capable assistance in completing the CIA Exam learning system.

CIA Exam Study Preparation Resources

To succeed in the exam, we recommend the following study plan and three review products for each part of the CIA Exam: Read the each part’s review book (theory).

Practice the Web-based online test bank software (practice).

Reinforce the theoretical concepts by studying the Focus Notes (theory).

A series of review books have been prepared for the candidate to utilize for all three parts of the new CIA Exam. Each part’s review book includes a comprehensive coverage of the subject matter (theory) followed by some sample practice multiple-choice (M/C) questions with answers and explanations (practice). The sample practice M/C questions included in the review book are taken from Wiley’s Web-based online test software to show you the flavor of questions. Each part’s review book contains a glossary section, which is a good source for answering M/C questions on the CIA Exam.

The Web-based online test bank software is a robust review product that simulates the format of the actual CIA Exam in terms of look and feel, thus providing intense practice and greater confidence to the CIA Exam candidates. The thousands of sample practice questions (5,275 plus) included in the online test bank can provide greater confidence and solid assurance to CIA exam candidates that they are preparing well for all the topics required and tested in the exam. All practice questions include explanations for the correct answer and are organized by domain topics within each part. See www.wileycia.com.

A part summary showing the number of sample practice questions included in the online test bank and the number of questions tested in the actual CIA Exam is presented next.

Part Summary | Wiley Sample Practice Questions | CIA Exam Actual Test Questions
Part 1 | 750+ | 125
Part 2 | 725+ | 100
Part 3 | 3,800+ | 100
Total Questions in Three Parts | 5,275+ | 325

Focus Notes provide a quick review and reinforcement of the important theoretical concepts. They are presented in a summary manner taken from the details of the review books. The Focus Notes can be studied just before the exam, during travel time, or any other time. When combined, these three review products provide a great value to CIA Exam students.

We suggest a sequential study approach in four steps for each part of the exam, as follows:

Step 1. Read the glossary section at the end of each part’s review book for a better understanding of key technical terms

Step 2. Study the theory from the each part’s review book

Step 3. Practice the multiple-choice questions from the online test bank for each part

Step 4. Read the Focus Notes for each part for a quick review and reinforcement of the important theoretical concepts

In addition, the CIA Exam candidates should read Practice Guides from IIA because these guides provide detailed guidance for conducting internal audit activities. They include detailed processes and procedures, such as tools and techniques, audit work programs, and step-by-step audit approaches as well as examples of audit deliverables. These Practice Guides are not included in the Wiley Review Books due to their size and the fact that they are available from www.theiia.org.

CIA Exam-Taking Tips and Techniques

The types of questions a candidate can expect to see in the CIA Exam are objective and scenario-based multiple-choice (M/C) questions. Answering the M/C questions requires a good amount of practice and effort.

The following tips and techniques will be helpful in answering the CIA Exam questions.

Stay with your first impression of the correct choice.

Know the subject area or topic. Don’t read too much into the question.

Remember that questions are independent of specific country, products, practices, vendors, hardware, software, or industry.

Read the last sentence of the question first followed by all choices and then the body (stem) of the question.

Read the question twice or read the bolded keywords twice, and watch for tip-off words, such as not, except, all, every, always, never, least, or most, which denote absolute conditions.

Do not project the question into your organizational environment, practices, policies, procedures, standards, and guidelines. The examination is focusing on the IIA’s professional Standards and publications and on the CIA’s exam syllabus (i.e., content specifications).

Try to eliminate wrong choices as quickly as possible. When you get down to two semifinal choices, take a big-picture approach. For example, if choice A and D are the semifinalists, and choice D could be a part of choice A, then select choice A; or if choice D could be a more complete answer, then select choice D.

Don’t spend too much time on one question. If you are not sure of an answer, move on, and go back to it if time permits. The last resort is to guess the answer. There is no penalty for guessing the wrong answer.

Remember that success in any professional examination depends on several factors required of any student, such as time management skills, preparation time and effort levels, education and experience levels, memory recall of the subject matter, state of the mind before or during the exam, and decision-making skills.

CIA Exam Content Specifications

Part 3 of the CIA Exam is called internal audit knowledge elements and the exam duration is 2.0 hours (120 minutes) with 100 multiple-choice questions. A breakdown of topics in the Part 3 follows.

Domain I: Governance and Business Ethics (5–15%)*

A. Corporate/Organizational Governance Principles (A)†

B. Business Ethics (A)

C. Corporate Social Responsibility (A)

Domain II: Risk Management (10–20%)

A. Risk Management Techniques (A)

B. Organizational Use of Risk Frameworks (A)

Domain III: Organizational Structure, Business Processes, and Risks (15–25%)

A. Risk/Control Implications of Different Organizational Structures (A)

B. Structure (e.g., centralized/decentralized) (A)

C. Typical Schemes in Various Business Cycles (e.g., procurement, sales, knowledge, and supply-chain management) (A)

D. Business Process Analysis (e.g., workflow analysis, bottleneck management, and Theory of Constraints) (A)

E. Inventory Management Techniques and Concepts (A)

F. Electronic Funds Transfer and Electronic Data Interchange (EDI) (A)

G. Business Development Life Cycles ((A)

H. International Organization for Standardization Framework (A)

I. Outsourcing Business Processes (A)

Domain IV: Communication (5–10%)

A. Communication (e.g., the process, organizational dynamics, and impact of computerization) (A)

B. Stakeholder Relationships (A)

Domain V: Management and Leadership Principles (10–20%)

A. Strategic Management

Forecasting (A)

Quality management (e.g., TQM and Six Sigma) (A)

Decision analysis (A)

B. Organizational Behavior

Organizational theory (A)

Organizational behavior (e.g., motivation, impact of job design, rewards, and schedules) (A)

Group dynamics (e.g., traits, development stages, organizational politics, and effectiveness) (A)

Knowledge of human resource processes (e.g., individual performance management, supervision, personnel sourcing/staffing, and staff development) (A)

Risk/control implications of different leadership styles (A)

C. Management Skills

Lead, inspire, and guide people, building organizational commitment and entrepreneurial orientation (A)

Create group synergy in pursuing collective goals (A)

D. Conflict Management

Conflict resolution (e.g., competitive, cooperative, and compromise) (A)

Negotiation skills (A)

Conflict management (A)

Added-value negotiating (A)

E. Project Management and Change Management

Change management (A)

Project management techniques (A)

Domain VI: IT and Business Continuity (15–25%)

A. Security

System security (e.g., firewalls and access controls) (A)

Information protection (e.g., viruses and privacy) (A)

Application authentication (A)

Encryption (A)

B. Application Development

End-user computing (A)

Change control (A)

Systems development methodology (A)

Application development (A)

Information systems development (A)

C. System Infrastructure

Workstations (A)

Databases (A)

IT control frameworks (e.g., eSAC and COBIT) (A)

Functional areas of IT operations (e.g., data center operations) (A)

Enterprise-wide resource planning software (e.g., SAP R3) (A)

Data and network communications and connections (e.g., LAN, VAN, and WAN) (A)

Servers (A)

Software licensing (A)

Mainframe (A)

Operating systems (A)

D. Business Continuity

IT contingency planning (A)

Domain VII: Financial Management (13–23%)

A. Financial Accounting and Finance

Basic concepts and underlying principles of financial accounting (e.g., statements, terminology, and relationships) (A)

Intermediate concepts of financial accounting (e.g., bonds, leases, pensions, intangible assets, and research and development) (A)

Advanced concepts of financial accounting (e.g., consolidation, partnerships, and foreign currency transactions) (A)

Financial statement analysis (e.g., ratios) (A)

Types of debt and equity (A)

Financial instruments (e.g., derivatives) (A)

Cash management (e.g., treasury functions) (A)

Valuation models (A)

Business valuation (A)

Inventory valuation (A)

Capital budgeting (e.g., cost of capital evaluation) (A)

Taxation schemes (e.g., tax shelters and VAT) (A)

B. Managerial Accounting

Managerial accounting: general concepts (A)

Costing systems (e.g., activity-based and standard) (A)

Cost concepts (e.g., absorption, variable, and fixed) (A)

Relevant cost (A)

Cost-volume-profit analysis (A)

Transfer pricing (A)

Responsibility accounting (A)

Operating budget (A)

Domain VIII: Global Business Environment (0-10%)

A. Economic/Financial Environments (A)

B. Cultural/Political Environments (A)

C. Legal and Economics: General Concepts (A)

D. Impact of Government Legislation and Regulation on Business (e.g., Trade Legislation) (A)

*Indicates the relative range of weights assigned to this topic area for both theory and practice sections in the CIA Exam.

†Indicates the level of difficulty for each topic in the CIA Exam expressed as (A) for Awareness and (P) for Proficiency. (A) = Candidates must exhibit awareness (i.e., knowledge of terminology and fundamentals) in these topic areas. (P) = Candidates must exhibit proficiency (i.e., thorough understanding and ability to apply concepts) in these topic areas.

DOMAIN 1

Governance and Business Ethics (5–15%)

1.1 Corporate/Organizational Governance Principles

1.2 Business Ethics

1.3 Corporate Social Responsibility

1.4 Sample Practice Questions

1.1 Corporate/Organizational Governance Principles

The issue of corporate governance is a direct outgrowth of the question of legitimacy. For business to be legitimate and to maintain its legitimacy in the eyes of the public, its governance must correspond to the will of the people.

(a) What Is a Corporation?

(i) The Legal Entity

A corporation is a legal entity and is entitled to protection of the Fourteenth Amendment. In cases of piercing the corporate veil, courts have decided three things:

1. There was no right to pierce the veil for a personal injury victim.

2. There was a right to pierce the veil when a girl who drowned in a company’s swimming pool would be compensated, saying that parent companies or shareholders would be treated as liable when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.

3. There was no right to pierce the veil when insiders who become creditors of a company are subordinated to other creditors when the company becomes insolvent (known as the equitable principle or the Deep Rock doctrine).

(ii) Corporate Constitution

The essential elements of a corporate constitution include corporate charter (bylaws), director power and accountability (right to manage), and shareholder rights and duties (approve sale and purchase of company assets in a merger and acquisition). The purpose of a corporation may be anything that is lawful.

(b) What Is Corporate Governance?

The term “corporate governance” refers to the method by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed. Corporate governance is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, labor unions, and others who assert to be stakeholders.

Corporate governance sets the right tone and proper stage for the entire corporation. While there is no standard definition of “corporate governance,” it can broadly be understood to refer to the system by which companies are directed and controlled, including the role of the board of directors, management, shareholders, and other stakeholders. Corporate governance provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.

A weak form of corporate governance is one of the root causes of many problems that corporate management faces today. Corporate governance and corporate ethics should support corporate management.

(c) Components of Corporate Governance

To appreciate fully the legitimacy and corporate governance issues, it is important to understand the major groups that make up the corporate form of business organization. Only by so doing can one appreciate how the system has failed to work according to its intended design.

The four major groups needed in setting the stage are (1) shareholders (owners or stakeholders), (2) board of directors, (3) managers, and (4) employees. Overarching these groups is the charter issued by the state, giving the corporation the right to exist and stipulating the basic terms of its existence.

Under U.S. corporate law, shareholders are the owners of a corporation. As owners, they should have ultimate control over the corporation. This control is manifested primarily in the right to select the board of directors of the company. Generally, the number of shares of stock owned determines the degree of each shareholder’s right.

Because large organizations may have hundreds of thousands of shareholders, they elect a smaller group, known as the board of directors, to govern and oversee the management of the business. The board is responsible for ascertaining that the manager puts the interests of the owners (i.e., shareholders) first. The third major group in the authority hierarchy is management—the group of individuals hired by the board to run the company and manage it on a daily basis. Along with the board, top management establishes overall policy. Middle- and lower-level managers carry out this policy and conduct the daily supervision of the operative employees. Employees are those hired by the company to perform the actual operational work. Managers are employees too, but in this discussion we use the term “employees” to refer to nonmanagerial employees.

(d) Corporate Governance Problems

The major condition embedded in the structure of modern corporations that has contributed to the corporate governance problem has been the separation of ownership from control. In the precorporate period, owners typically were the managers themselves. As the public corporation grew and stock ownership became widely dispersed, a separation of ownership from control became the prevalent condition. The shareholders were owners in a technical sense, but most of them perceived themselves to be investors rather than owners.

Lesen Sie weiter in der vollständigen Ausgabe!

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Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!