Question

Fact Pattern: The chief audit executive is reviewing some of the basic concepts inherent in the performance of an engagement with three internal auditors who are on a rotation assignment. After 6 months in the internal audit activity, they will move back to line positions. Each of them has fairly extensive organizational experience and is on a fast track to a high-level management line position. To develop their analytical decision-making abilities, the CAE pulls some old engagement working papers, holding back the review notes and clearing comments. The CAE asks the team to indicate the informational criteria that are violated.

Question: 48 The organization's inventories are under the administration of three production managers. The internal auditors perform a standard limited test of finished goods inventory balances every year. During this year's engagement concerning inventories, the internal auditors noted finished goods inventories were abnormally high, sales were consistent with prior years, and returns and allowances appeared normal. The internal auditors performed the usual random sample recount of several finished goods inventory cards without discrepancy and then extended the testing to include 10 raw materials and 10 work-in-process cards, noting no exceptions. The following statement was included in the engagement working papers:

"Our standard test of finished goods inventories revealed no exceptions to the inventory count. We extended our tests this year to include both raw materials and work-in-process without exception. At the time of our engagement, the supervising inventory managers were not available; however, the division secretary indicated that performance standards were on file. It appears that there is adequate awareness and understanding of the performance standards."

Which of the following informational criteria is not violated?

A. Sufficiency.
B. Reliability.
C. Relevance.
D. All criteria are violated.

Answer 1

Upon review of the working papers and the engagement's procedures, none of the informational criteria - sufficiency, reliability, or relevance - appear to be violated. The auditors collected adequate data (sufficiency), from reliable practices (reliability), and the information was pertinent to the inventory engagement (relevance).

Step-by-step explanation:

Given the scenario described in the fact pattern, the internal auditors are reviewing inventory counts and have extended their testing beyond the usual finished goods inventory to include raw materials and work-in-progress. The informational criteria we are examining are sufficiency, reliability, and relevance in relation to the engagement working papers presented.

Sufficiency relates to the quantity of information. In this case, the internal auditors have performed their standard tests and extended them further, which suggests that the quantity of information gathered is adequate, thus sufficiency is not violated.

Reliability pertains to the quality, source, and consistency of the information. Since the information was gathered through standard, consistent practices without discrepancies being noted, we have no reason to believe reliability is violated based on the information provided.

Relevance is about the information being pertinent to the engagement and its objectives. The engagement was focused on the inventory, and the tests were related to this objective, suggesting that relevance was maintained.

From the options given, All criteria that are violated would be incorrect as there is no clear evidence provided that suggests any of the criteria - sufficiency, reliability, or relevance - were violated based on the internal auditors' tests and conclusions drawn from the working papers.