Q.1 What is the primary objective of an internal audit?
To express an opinion on financial statements
To ensure compliance with laws and policies
To prepare financial statements
To manage day-to-day operations
Explanation - The main objective of internal audit is to evaluate and improve the effectiveness of risk management, control, and governance processes, ensuring compliance with laws and policies.
Correct answer is: To ensure compliance with laws and policies
Q.2 Who appoints the internal auditor in an organization?
Shareholders
Board of Directors
External Auditors
Government
Explanation - Internal auditors are appointed by the Board of Directors or the Audit Committee to ensure independence and objectivity in the audit process.
Correct answer is: Board of Directors
Q.3 Which of the following is NOT a function of internal audit?
Detecting fraud
Evaluating internal controls
Certifying statutory financial statements
Recommending operational improvements
Explanation - Certifying statutory financial statements is the role of external auditors. Internal audit focuses on evaluating and improving internal controls and operations.
Correct answer is: Certifying statutory financial statements
Q.4 Internal audit is mainly concerned with:
Financial reporting only
Management efficiency and controls
External compliance audits
Tax audits
Explanation - Internal audit focuses on assessing the efficiency and effectiveness of management processes and internal controls.
Correct answer is: Management efficiency and controls
Q.5 Which of the following best describes a risk-based audit approach?
Auditing only high-value transactions
Focusing on areas with higher risk of error or fraud
Auditing all transactions equally
Ignoring risk assessment entirely
Explanation - A risk-based approach prioritizes audit resources on areas where there is a higher risk of errors, misstatements, or fraud.
Correct answer is: Focusing on areas with higher risk of error or fraud
Q.6 Internal auditors report primarily to:
Shareholders
Board of Directors or Audit Committee
External auditors
Government authorities
Explanation - To maintain independence and objectivity, internal auditors report to the Board of Directors or Audit Committee rather than management.
Correct answer is: Board of Directors or Audit Committee
Q.7 Which of the following is a tool commonly used in internal auditing?
Balance sheet preparation
Internal control questionnaires
Income tax filing
Financial statement certification
Explanation - Internal control questionnaires help internal auditors systematically review and evaluate internal controls within an organization.
Correct answer is: Internal control questionnaires
Q.8 Which statement about internal audit is TRUE?
It is mandatory for all companies by law
It is conducted to support management in decision-making
It replaces external audit requirements
It focuses exclusively on financial transactions
Explanation - Internal audit supports management by providing insights on risk management, control efficiency, and operational improvements.
Correct answer is: It is conducted to support management in decision-making
Q.9 Which of the following is a limitation of internal audit?
May be influenced by management pressure
Cannot evaluate internal controls
Cannot detect fraud
Cannot make recommendations
Explanation - Internal auditors may face pressure from management, which can affect objectivity. Other limitations include resource constraints and reliance on available information.
Correct answer is: May be influenced by management pressure
Q.10 Operational audits conducted by internal auditors focus on:
Efficiency and effectiveness of operations
Preparation of financial statements
External regulatory compliance only
Income tax computation
Explanation - Operational audits aim to improve operational efficiency, resource utilization, and achievement of organizational objectives.
Correct answer is: Efficiency and effectiveness of operations
Q.11 Which of the following best describes 'internal control'?
A system to detect fraud only
A set of procedures to ensure organizational objectives are achieved
A method for preparing financial statements
A checklist for statutory compliance
Explanation - Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives related to operations, reporting, and compliance.
Correct answer is: A set of procedures to ensure organizational objectives are achieved
Q.12 Which of the following types of audits is usually part of internal auditing?
Financial audit
Compliance audit
Operational audit
All of the above
Explanation - Internal audit can encompass financial, compliance, and operational audits to provide comprehensive assurance and advisory services.
Correct answer is: All of the above
Q.13 Internal audit can be both preventive and detective in nature. What does preventive mean?
Detecting errors after they occur
Preventing errors or fraud from occurring
Reporting errors to external auditors
Calculating financial ratios
Explanation - Preventive internal audit measures aim to design controls that prevent errors, fraud, or inefficiencies before they occur.
Correct answer is: Preventing errors or fraud from occurring
Q.14 Which of the following is an example of a control activity in internal audit?
Physical verification of assets
Board meeting attendance
Income tax filing
Preparing trial balance
Explanation - Control activities include procedures like authorization, verification, reconciliation, and physical checks to ensure the reliability of operations and reporting.
Correct answer is: Physical verification of assets
Q.15 What is the key difference between internal and external audit?
Internal audit is mandatory, external is optional
Internal audit focuses on internal controls; external audit focuses on financial statements
Internal audit is done by outsiders, external by employees
There is no difference
Explanation - Internal auditors assess controls, risk management, and operational efficiency, while external auditors express an opinion on the fairness of financial statements.
Correct answer is: Internal audit focuses on internal controls; external audit focuses on financial statements
Q.16 Which of the following skills is most important for an internal auditor?
Programming skills
Analytical and investigative skills
Marketing skills
Legal drafting skills
Explanation - Internal auditors need strong analytical and investigative skills to assess processes, detect anomalies, and provide meaningful recommendations.
Correct answer is: Analytical and investigative skills
Q.17 Internal audit work often includes review of:
Financial reports only
Operational procedures and policies
External audit reports only
Stock market performance
Explanation - Internal auditors evaluate internal policies, procedures, and processes to ensure efficiency, compliance, and risk mitigation.
Correct answer is: Operational procedures and policies
Q.18 Which of the following is a benefit of internal audit?
Helps in early detection of fraud
Reduces external audit fees completely
Prepares statutory financial statements
Acts as a substitute for management
Explanation - Internal audit improves internal controls and helps in identifying errors or fraud early, supporting effective governance.
Correct answer is: Helps in early detection of fraud
Q.19 Internal audit findings are usually communicated through:
Audit report
Board meeting notes
External auditor’s opinion
Financial statements
Explanation - Internal auditors document their findings, recommendations, and observations in an internal audit report submitted to management and the audit committee.
Correct answer is: Audit report
Q.20 Which of the following types of audit focuses specifically on fraud?
Financial audit
Operational audit
Forensic audit
Compliance audit
Explanation - Forensic audits are specialized audits designed to detect, investigate, and prevent fraud and financial misconduct.
Correct answer is: Forensic audit
Q.21 Internal audit is generally considered an independent function because:
It reports to management only
It reports to the Board or Audit Committee
It does not involve any review of operations
It is optional
Explanation - Independence is ensured as internal auditors report to the Board or Audit Committee rather than management, allowing unbiased evaluations.
Correct answer is: It reports to the Board or Audit Committee
Q.22 Which of the following is NOT a responsibility of internal auditors?
Assessing risk management processes
Designing internal controls
Certifying statutory financial statements
Recommending process improvements
Explanation - Certifying financial statements is the responsibility of external auditors; internal auditors focus on reviewing and improving processes and controls.
Correct answer is: Certifying statutory financial statements
Q.23 Internal audit reports are usually directed to:
Government tax authorities
Audit Committee or Board of Directors
Suppliers and creditors
Competitors
Explanation - Internal audit reports are submitted to the Board or Audit Committee to maintain governance and ensure management accountability.
Correct answer is: Audit Committee or Board of Directors
Q.24 Which of the following is an emerging area in internal auditing?
Cybersecurity and IT audits
Cash counting
Manual ledger verification
Physical inventory only
Explanation - With increasing digitization, internal auditors are increasingly focusing on IT systems, cybersecurity, and data protection audits.
Correct answer is: Cybersecurity and IT audits