Contents

Preface

CIA Exam Study Preparation Resources

CIA Exam-Taking Tips and Techniques

CIA Exam Content Specifications

Domain 1: Focus on: Governance and Business Ethics (5–15%)

Corporate/Organizational Governance Principles

Roles and Responsibilities of the Audit Committee

Business Ethics

Corporate Social Responsibility

Domain 2: Focus on: Risk Management (10–20%)

Corporate Risk Management

Enterprise Risk Management

Domain 3: Focus on: Organizational Structures, Business Processes, and Risks (15–25%)

Risk/Control Implications of Different Organizational Structures

Types of Organizational Structures

Schemes in Various Business Cycles

Business Process Analysis

Business Process Reengineering and Business Process Improvement

Benchmarking

Production Process Flows

Design of Performance Measurement Systems

Performance

Productivity

Components of Productivity Measurement

Criteria for Productivity Improvement

Balanced Scorecard System

Inventory Management Techniques and Concepts

Electronic Data Systems

Business Development Life Cycles

International Organization for Standardization Framework

Outsourcing Business Processes

Domain 4: Focus on: Communication (5–10%)

Communication Skills

Stakeholder Relationships

Domain 5: Focus on: Management and Leadership Principles (10–20%)

Strategic Management

Strategic Planning Process

Global Analytical Techniques

Porter’s Competitive Strategies

Industry Environments

Evolution of Global Markets

Strategic Decisions

Portfolio Techniques of Competitive Analysis

Forecasting

Quality Management

Decision Analysis

Decision Making

Organizational Behavior

Group Dynamics

Human Resource Management

Risk/Control Implications of Different Leadership Styles

Management Skills

Team Building

Negotiation and Conflict Management

Project Management and Change Management

Change Management Techniques

Domain 6: Focus on: Information Technology and Business Continuity (15–25%)

Security

System Security

Firewalls

Routers

Sensors

Hardware and Software Guards

Demilitarized Zones

Information Protection

Identification and Authentication

Encryption

Application Development

System Infrastructure

Database Systems

Enterprise-Wide Resource Planning System, Customer-Relationship Management System, and Software Licensing and Piracy Management

Business Continuity

Domain 7: Focus on: Financial Management (13–23%)

Financial Accounting and Finance: Basic Concepts of Financial Accounting

Intermediate Concepts of Financial Accounting

Advanced Concepts of Financial Accounting

Financial Statement Analysis

Types of Debt and Equity

Financial Instruments

Cash Management

Valuation Models

Capital Budgeting

Cost of Capital Evaluation

Taxation Schemes

Mergers, Acquisitions, and Divestitures

Managerial Accounting: General Concepts

Costing Systems

Cost Concepts

Relevant Costs

Cost-Volume-Profit Analysis

Transfer Pricing

Responsibility Accounting

Operating Budgets

Domain 8: Focus on: Global Business Environment (0–10%)

Economic/Financial Environments

Cultural/Political Environments

Legal and Economic Concepts

Impact of Government Legislation and Regulation on Business

Appendix: Sarbanes-Oxley Act of 2002

About the Author

Index

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Cover design: John Wiley & Sons, Inc.

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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ISBN 978-1-118-12056-9 (Part 2)

ISBN 978-1-118-12055-2 (Set)

Preface

The Wiley CIA Exam Review Focus Notes 2013 are developed for each of the three parts of the Certified Internal Auditor (CIA) exam 2013 sponsored by the Institute of Internal Auditors (IIA). The purpose of the Focus Notes is to digest and assimilate the vast amounts of knowledge, skills, and abilities tested on the CIA exam in a clear, concise, easy-to-read, and easy-to-use format anywhere and anytime to achieve success in the exam.

Each of the Focus Notes book topics is organized in the same way as the Wiley CIA Exam Review book topics, that is, one Focus Notes book for each of the three-part review books. This clear linkage makes the exam study time more efficient and long-lasting, and provides the ability to recall important concepts, tools, and techniques, and the IIA Standards tested on the CIA exams. The Focus Notes can be used with any other study materials that you have determined works best for you to prepare for the CIA Exam. The Focus Notes provide a quick and easy refresher to the material that you are studying.

The Wiley Focus Notes are similar to index cards and flash cards in terms of purpose. The Focus Notes complement and supplement, not substitute for, the Wiley Review books, where the former provides a summarized theory and the latter provides a detailed theory.

For those students who are exclusively studying with Wiley’s preparation resources, we sincerely recommend the CIA Exam candidate study the Focus Notes and Glossary section for each part a few weeks prior to taking the actual exam for maximum retention and recall of the subject matter, assuming that the candidate has previously studied the Wiley CIA Exam Review books.

The Focus Notes books will be especially useful to auditors who are traveling on an audit assignment, as well as others who are not traveling, due to their small and compact size, giving portability. The simplified summaries included in this material will help you learn the essential knowledge as well as help you retain them for years to come. The Focus Notes book can also be used as a desk reference on a post-exam basis, similar to a dictionary.

CIA Exam Study Preparation Resources

We recommend the following study plan and three review products for each Part of the CIA Exam to succeed in the exam:

Read 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 in that they are preparing well for all the required topics tested in the exam. All practice questions include explanations for the correct answer and are organized by domain topics within each part. Visit www.wileycia.com.

The following is 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.

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, which 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 available to the student.

When combined, these three review products provide a great value to CIA Exam students and we are positive that they will recognize the value when they see it, feel it, and experience it.

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 the 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 voluminous 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 underlined or circled 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. The following is a breakdown of topics in this Part.

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

A. Corporate/organizational governance principles (A)**

B. Environmental and social safeguards (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 (EFT) and electronic data interchange (EDI) (A)

G. Business development life cycles ((A)

H. The International Organization for Standardization (ISO) 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 (ERP) 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 (e.g., contracts) (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

Focus on: Governance and Business Ethics (5–15%)

CORPORATE/ORGANIZATIONAL GOVERNANCE PRINCIPLES

Corporate Governance Definition

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. It is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and others who assert to be stakeholders.

Corporate Governance Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

Principle II: The Rights of Shareholders and Key Ownership Functions

Principle III: The Equitable Treatment of Shareholders

Principle IV: The Role of Stakeholders in Corporate Governance

Principle V: Disclosure and Transparency

Principle VI: The Responsibilities of the Board

Corporate Governance Issues

Components of corporate governance (i.e., shareholders, board of directors, management, and employees).

Separation of ownership from control.

Role of the board of directors.

Need for board independence.

Issues surrounding compensation. Major issues include CEO compensation (e.g., salaries, bonuses, stock options, and perks) and outside director compensation.

Consequences of merger, acquisition, and takeover wave and divestiture of assets.

Insider trading scandals.

Board member liability.

Lack of strong voice for board of directors due to their submissive behaviors

Improving corporate governance: (1) changes in boards of directors to include more outside directors and (2) increased role of shareholders in the governance process.

Board of Directors’ Duties

The board of directors has three fiduciary duties (1) duty of care (i.e., business judgment rule), (2) self dealing (i.e., fair to the company), and (3) corporate opportunities (e.g., mergers, acquisitions, and divestitures).

The business judgment rule is a legal presumption that the directors and officers of the corporation have exercised duty of care by acting on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the corporation. Unless a plaintiff can give persuasive evidence against at least one of the criteria, corporate directors and officers are insulated from liability for breach of the duty of care.

Regarding self dealing, corporate directors and officers may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically “fair” to the corporation (i.e., the transaction is initiated and completed in an arms-length distance). A plaintiff must start by alleging the director or officer stood to gain a material economic benefit. The burden then shifts to the defendant to show the fairness of the transaction. The court considers both the terms and the process for the bargain (i.e., both a fair price and fair dealing). However, if the director shows that full disclosure was made to disinterested directors or disinterested shareholders, then the burden remains on the plaintiff.

As a part of fiduciary duties, it is acceptable for a director to inform one another of corporate opportunities which arise. Examples of these opportunities include identifying candidates for mergers, acquisitions, and divestitures; introducing new products, new suppliers, new customers, new contractors, new technologies, and new business ventures; and brining awareness of new laws and regulations.

Basic Ethical and Legal Principles for Managers, Executives, Officers, and Board of Directors

Basic ethical and legal principles guide managers, executives, officers, and board of directors in handling legal and ethical problems and issues on a day-to-day basis. When these principles are understood and implemented, they can reduce legal risks and ethical embarrassments, and protect reputation in the eyes of the general public. For example, officers and directors need to follow duty of due care, duty of loyalty, and duty of obedience, not duty of absolute care or duty of utmost care. Only reasonable and ordinary care is expected of the officers and the board of directors because no one can anticipate all problems or protect from all disasters or losses. Especially, officers and board of directors are expected to follow the highest levels of ethical and legal principles due to their fiduciary and governance responsibilities (i.e., duty of loyalty and duty of obedience).

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!