IIA Updated IIA-CIA-Part3 Exam Questions and Answers by evie-mae

When evaluating a special order, the manufacturer must determine if accepting it will be profitable without disrupting normal operations. The key consideration is whether the company has spare production capacity to handle the order without increasing fixed costs.

Correct Answer (B - The Manufacturer Can Fulfill the Order Without Expanding Production Facilities)

Fixed costs ($3 per unit) are already incurred and will not change if the order is accepted.

The special price ($7 per unit) covers the variable costs ($5 per unit), contributing $2 per unit to profit.

If the manufacturer has excess production capacity, the order is profitable.

The IIA Practice Guide: Auditing Financial Performance emphasizes that special order decisions should be based on incremental cost analysis, ensuring no need for capacity expansion.

Why Other Options Are Incorrect:

Option A (Fixed and Variable Manufacturing Costs Are Less Than the Special Offer Selling Price):

Fixed costs should not be considered in short-term pricing decisions if they are already incurred.

Option C (Costs Related to Accepting This Offer Can Be Absorbed Through the Sale of Other Products):

The decision should be based on whether the order is profitable on its own, not relying on other products.

Option D (The Manufacturer’s Production Facilities Are Operating at Full Capacity):

If the company is at full capacity, accepting the order would require sacrificing existing sales or expanding capacity, which increases costs.

IIA Practice Guide: Auditing Financial Performance – Discusses cost analysis for special pricing decisions.

IIA GTAG 13: Business Performance – Covers incremental cost and profitability analysis in pricing decisions.

Step-by-Step Explanation:IIA References for Validation:Thus, B is the correct answer because accepting the order is only profitable if the manufacturer has excess capacity.

The internal audit plan should be risk-based. To achieve this, the CAE should develop an audit universe that lists all auditable units (processes, functions, systems, etc.) and use it as the foundation for risk assessment and prioritization.

Option B is too narrow (monetary value is just one factor). Option C is incomplete since senior management’s input is important but not the sole basis. Option D is incorrect because eliminating units not mandated by law ignores risk-based planning requirements.

Thus, the most appropriate approach is Option A: establishing an audit universe.

When management disagrees with audit findings, the auditor should escalate the matter to the CAE. The CAE can determine whether to include both perspectives in the report or escalate further if unresolved. This ensures objectivity and fair representation.

Option A (escalation to CEO) is premature. Option B ignores management’s input, reducing objectivity. Option D (reperforming work) is only necessary if there is evidence the work was flawed, not simply because of disagreement.