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

The specific identification method is an inventory costing approach where the actual cost of each individual unit sold is recorded. This method is used when items are uniquely identifiable, such as in industries dealing with luxury goods, automobiles, or custom-manufactured products.

Correct Answer (D - Specific identification)

Under the specific identification method, each inventory unit is tracked separately, and its actual purchase cost is assigned to the cost of goods sold (COGS) when sold.

This method is commonly used for high-value, low-volume items where unique tracking is feasible.

The IIA’s GTAG 8: Audit of Inventory Management explains how different costing methods impact financial reporting and internal controls.

Why Other Options Are Incorrect:

Option A (LIFO - Last-in, First-out):

LIFO assumes that the most recent (last-in) inventory is sold first, but it does not track actual unit cost. Instead, it assigns the cost of the newest inventory to COGS.

LIFO is often used for tax benefits but does not follow actual unit cost identification.

Option B (Average cost):

The weighted average cost method calculates an average cost for all inventory units rather than assigning actual unit costs.

This method smooths out price fluctuations but does not track specific items' costs.

Option C (FIFO - First-in, First-out):

FIFO assumes that the oldest (first-in) inventory is sold first, assigning its cost to COGS.

However, like LIFO, it does not track individual unit costs.

IIA GTAG 8: Audit of Inventory Management – Explains different inventory costing methods, including specific identification.

IIA Practice Guide: Assessing Inventory Risks – Covers inventory valuation and fraud risks.

Step-by-Step Explanation:IIA References for Validation:Thus, the specific identification method (D) is the only one that accounts for the actual cost paid for each unit sold.

Financial leverage refers to the use of borrowed funds to increase potential returns to shareholders. Effective financial leverage occurs when the return on equity (ROE) is higher than the return on assets (ROA), indicating that the company is generating higher returns for shareholders than it costs to finance the assets with debt.

(A) Correct – An organization has a rate of return on equity of 20% and a rate of return on assets of 15%.

ROE > ROA indicates that financial leverage is being used effectively.

A higher ROE suggests that the company is generating more profits for shareholders relative to its equity.

This aligns with the concept that borrowed funds are being used efficiently to increase profitability.

(B) Incorrect – An organization has a current ratio of 2 and an inventory turnover of 12.

The current ratio and inventory turnover relate to liquidity and operational efficiency, not financial leverage.

(C) Incorrect – An organization has a debt to total assets ratio of 0.2 and an interest coverage ratio of 10.

A low debt-to-assets ratio (0.2) indicates low leverage.

A high interest coverage ratio (10) suggests low reliance on debt financing, which contradicts the concept of financial leverage.

(D) Incorrect – An organization has a profit margin of 30% and an asset turnover of 7%.

Profit margin and asset turnover measure profitability and efficiency, not financial leverage.

High asset turnover may indicate operational efficiency but does not directly reflect financial leverage.

IIA’s Global Internal Audit Standards – Managing Financial Risk

Covers financial leverage and its impact on return metrics.

IIA’s Guide on Financial Ratio Analysis

Explains the relationship between ROE, ROA, and leverage.

COSO’s ERM Framework – Risk Assessment in Financial Decision Making

Discusses the use of leverage in maximizing shareholder value.

Analysis of Answer Choices:IIA References and Internal Auditing Standards:

When reporting internal audit findings related to Enterprise Resource Planning (ERP) systems, IT audit findings must be relevant to business objectives. Business leaders may not fully understand technical IT risks, so reports should translate IT risks into business impacts to ensure actionable decision-making.

(A) Draft separate audit reports for business and IT management.

Incorrect: Fragmenting reports could create misalignment, reducing the effectiveness of integrated risk management.

(B) Connect IT audit findings to business issues. (Correct Answer)

IT auditors should explain how IT risks impact operations, financial reporting, and strategic goals.

IIA Standard 2410 – Criteria for Communicating requires audit findings to be clear, relevant, and actionable for all stakeholders.

IIA GTAG 8 – Auditing Application Controls emphasizes aligning IT controls with business risks.

(C) Include technical details to support IT issues.

Incorrect: While technical details help IT teams, business executives need risk-based insights, not just technical specifics.

(D) Include an opinion on financial reporting accuracy and completeness.

Incorrect: While ERP systems impact financial data, IT auditors should focus on system risks, not directly on financial reporting opinions (which is the role of financial auditors).

IIA Standard 2410 – Criteria for Communicating: Requires clear and business-relevant communication of audit findings.

IIA GTAG 8 – Auditing Application Controls: Advises IT auditors to relate technical risks to business objectives.

Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) because IT audit findings should be framed in a way that connects technical risks to business implications, making them more relevant to management.

The Just-in-Time (JIT) method is a managerial accounting and inventory management strategy that focuses on reducing or eliminating excess inventory by receiving goods only as needed.

(A) Theory of constraints.

Incorrect: The theory of constraints focuses on identifying and managing bottlenecks in production, not reducing inventory levels.

(B) Just-in-time method. (Correct Answer)

JIT aims to reduce waste, lower storage costs, and improve efficiency by ensuring that materials and products arrive only when needed.

IIA GTAG 3 – Continuous Auditing suggests monitoring inventory controls to align with JIT principles.

(C) Activity-based costing.

Incorrect: Activity-based costing allocates costs to activities based on usage, not inventory reduction.

(D) Break-even analysis.

Incorrect: Break-even analysis calculates the level of sales needed to cover costs but does not focus on inventory management.

IIA Standard 2120 – Risk Management: Encourages auditors to assess cost-management strategies like JIT.

IIA GTAG 3 – Continuous Auditing: Supports real-time monitoring of inventory to minimize excess stock.

Analysis of Each Option:IIA References Supporting the Answer:Thus, the correct answer is (B) Just-in-Time (JIT) method, as it focuses on achieving low or no inventory to optimize efficiency and reduce costs.