IIA Updated IIA-CIA-Part3 Exam Questions and Answers by aarav

The direct write-off method records bad debts only when an account is deemed uncollectible, meaning there is no estimation of bad debts in advance. This method is typically used when bad debts are immaterial (insignificant) because it does not adhere to the matching principle of accounting.

Simplicity and Practicality:

The direct write-off method is straightforward and only requires writing off bad debts as they occur.

It is best suited for companies where bad debt losses are minimal or rare.

Acceptable for Insignificant Losses:

If bad debts are not material, then estimating and recording an allowance in advance (as in the allowance method) may not be necessary.

Used by Small Businesses and Tax Accounting:

The IRS allows the direct write-off method for tax purposes because it recognizes expenses only when they occur.

Not Aligned with GAAP for Significant Losses:

Generally Accepted Accounting Principles (GAAP) prefer the allowance method, which estimates bad debts in advance to match expenses with related revenues.

B. It provides a better alignment with revenue:

Incorrect because the allowance method provides a better revenue-expense matching approach, not the direct write-off method.

C. It is the preferred method according to The IIA:

The IIA does not have a stated preference between the two methods; however, GAAP prefers the allowance method.

D. It states receivables at net realizable value on the balance sheet:

The allowance method states receivables at net realizable value (NRV) by estimating bad debts in advance, while the direct write-off method does not adjust receivables until a loss occurs.

IIA Standard 2120 - Risk Management: Internal auditors must assess financial risks, including credit risks and bad debt write-offs.

COSO Internal Control Framework - Financial Reporting Component: Emphasizes accurate financial reporting, where the allowance method is generally preferred for better estimation.

Key Reasons Why Option A is Correct:Why Other Options Are Incorrect:IIA References:Thus, the correct answer is A. It is useful when losses are considered insignificant.

Vertical analysis expresses each financial statement item as a percentage of a base figure (e.g., revenue). In this case, the internal auditor calculates electricity and depreciation expenses as a percentage of revenue, which is a clear application of vertical analysis.

(A) Horizontal analysis:

Compares financial data across different periods to identify trends and growth.

The given scenario does not compare financial statements over time, making this incorrect.

(B) Vertical analysis (Correct Answer):

Expresses each line item as a percentage of a base figure (e.g., revenue for income statements, total assets for balance sheets).

In this case, electricity and depreciation expenses are calculated as a percentage of revenue, confirming vertical analysis.

(C) Ratio analysis:

Involves calculating financial ratios (e.g., profitability, liquidity, efficiency).

This scenario does not involve ratios but rather percentage-based comparisons, making it incorrect.

(D) Trend analysis:

Identifies patterns over multiple periods (e.g., revenue growth over five years).

The question does not involve time-based comparisons, so this answer is incorrect.

IIA Practice Guide: Internal Audit and Financial Reporting – Recommends vertical analysis for financial statement assessment.

IIA Standard 2320 – Analysis and Evaluation – Requires auditors to apply relevant analytical techniques, including percentage-based evaluations.

COSO Internal Control Framework – Financial Reporting Component – Supports financial data analysis techniques such as vertical and horizontal analysis.

Analysis of Each Option:IIA References:Conclusion:Since the auditor expressed financial statement items as a percentage of revenue, option (B) is the correct answer.

Change management is a structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state while minimizing risk and disruption.

Definition of Change Management:

Change management ensures that all modifications to IT systems, processes, and applications are controlled and documented.

As per the IIA GTAG on Change Management, an effective change management process should be repeatable, defined, and predictable to reduce errors and system failures.

Why Change Management Must Be Structured?

Uncontrolled changes increase risks such as security vulnerabilities, data loss, and system downtime.

Best practices (e.g., ITIL, COBIT) require organizations to follow a consistent change management process to protect the production environment.

A structured approach includes:

Documenting change requests

Testing in non-production environments

Gaining approvals before deployment

Why Not Other Options?

A. The degree of risk associated with a proposed change determines whether the change request requires authorization:

All changes should require authorization, not just high-risk ones.

B. Program changes generally are developed and tested in the production environment:

Changes should never be tested in production due to risk exposure. Best practice is to test in a development or staging environment first.

C. Changes are only required by software programs:

Change management applies broadly to IT infrastructure, business processes, security protocols, and governance frameworks, not just software.

IIA GTAG – Change Management Controls

COBIT 2019 – Change Management Best Practices

ITIL Change Management Framework

IIA Standard 2120 – Risk Management

Step-by-Step Justification:IIA References:Thus, the correct and verified answer is D. To protect the production environment, changes must be managed in a repeatable, defined, and predictable manner.

Organizations must comply with privacy principles that emphasize data retention limitations. Keeping personal data indefinitely violates privacy laws and regulations such as the General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA).

Privacy Regulations Require Data Minimization:

GDPR Article 5(1)(e) states that personal data should only be kept for as long as necessary for the intended purpose.

IIA GTAG 4: Management of IT Auditing also advises against excessive data retention.

Security and Risk Concerns:

Storing data indefinitely increases the risk of data breaches.

IIA Standard 2110 – Governance emphasizes the need for proper information security governance to protect personal data.

Legal and Compliance Issues:

Organizations are required to define retention policies to prevent unauthorized or unnecessary storage of personal data.

A. Customers can access and update personal information when needed. (Incorrect)

Reason: Allowing customers to access and update their information aligns with privacy principles such as data accuracy and transparency.

C. Customers reserve the right to reject sharing personal information with third parties. (Incorrect)

Reason: This supports data control rights, which is consistent with privacy standards like opt-in and opt-out policies.

D. The organization performs regular maintenance on customers' personal information. (Incorrect)

Reason: Regular maintenance (e.g., updates, corrections, deletions) enhances data accuracy and security, aligning with privacy best practices.

IIA Global Technology Audit Guide (GTAG) 4: Management of IT Auditing – Discusses data privacy principles.

IIA Standard 2110 – Governance – Ensures data security and regulatory compliance.

IIA GTAG 8: Auditing Application Controls – Covers data retention policies and privacy compliance.

Privacy Regulations: GDPR (Article 5), CCPA (Section 1798.105) – Require organizations to delete data once it is no longer needed.

Why is Indefinite Retention a Violation?Analysis of Incorrect Answers:IIA References:Thus, the correct answer is B. The organization retains customers' personal information indefinitely.