IIA IIA-CIA-Part3 Questions Answers

A capital lease (now referred to as a finance lease under IFRS 16 and ASC 842) is a leasing arrangement where an organization records the leased asset and liability on its balance sheet as if it were owned. Organizations enter into capital leases to improve financial metrics, including free cash flow from operations.

Let’s analyze each option:

Option A: To increase the ability to borrow additional funds from creditors

Incorrect. A capital lease creates a liability on the balance sheet, which may reduce borrowing capacity rather than increase it.

Option B: To reduce the organization's free cash flow from operations

Incorrect.

Operating leases impact operating cash flow because lease payments are treated as operating expenses.

Capital leases (finance leases) shift payments to financing activities, improving operating cash flow since lease obligations are classified as debt.

Option C: To improve the organization's free cash flow from operations

Correct.

Capital lease payments are classified under financing activities rather than operating activities, which increases free cash flow from operations.

This improves financial ratios and liquidity metrics, making the organization appear more attractive to investors.

IIA Reference: Internal auditors assess lease accounting and financial reporting impacts under IFRS 16 (Leases) and ASC 842 (Leases). (IIA Practice Guide: Auditing Financial Reporting Risks)

Option D: To acquire the asset at the end of the lease period at a price lower than the fair market value

Incorrect. While some capital leases include a bargain purchase option, the primary reason for entering into a capital lease is financial reporting benefits, not necessarily acquiring the asset.

Thus, the verified answer is C. To improve the organization's free cash flow from operations.

Understanding E-Commerce Systems and Their Financial Impact

E-commerce systems, including electronic data interchange (EDI) and electronic funds transfer (EFT), streamline procurement and payment processes.

The main financial effect of implementing such a system is the acceleration of accounts payable transactions.

This is because automated purchasing systems allow businesses to place orders faster and in larger volumes, leading to an increase in outstanding liabilities (accounts payable) before payments are settled.

Why Option D is Correct?

Higher accounts payable occur because:

EDI automates order placement, leading to more frequent and possibly larger purchases before payments are processed.

EFT may improve payment processing speed, but it does not eliminate outstanding payables immediately.

Suppliers may extend credit terms, increasing the organization's short-term liabilities under accounts payable.

IIA Standard 2110 – Governance requires internal auditors to evaluate how technology changes impact financial controls, including accounts payable management.

COBIT 5 Framework – AP Processes emphasizes that auditors should monitor financial system integration risks, including liabilities like accounts payable.

Why Other Options Are Incorrect?

Option A (Higher cash flow and treasury balances):

E-commerce improves transaction efficiency but does not necessarily increase cash flow. It may even reduce available cash due to frequent automated purchases.

Option B (Higher inventory balances):

EDI can reduce inventory levels due to just-in-time (JIT) ordering, rather than increasing them.

Option C (Higher accounts receivable):

Accounts receivable refers to money owed to the organization, but e-commerce impacts payables (money owed by the organization) more directly.

E-commerce accelerates order processing and supplier payments, increasing accounts payable balances before payment cycles are completed.

IIA Standard 2110 and COBIT 5 stress financial controls, including monitoring accounts payable risks.

Final Justification:IIA References:

IPPF Standard 2110 – Governance

COBIT 5 – Accounts Payable Controls & Risks

ISO 20022 – Financial Messaging Standards (for EDI & EFT Transactions)

A decentralized organizational structure distributes decision-making authority across different business units or geographic regions. One major advantage is the ability to tap into a larger talent pool, as decision-making is not restricted to headquarters, and leadership opportunities exist at multiple levels.

(A) Greater cost-effectiveness.

Incorrect. A decentralized structure often increases costs due to duplicate resources, additional oversight, and inefficiencies from fragmented decision-making.

(B) Increased economies of scale.

Incorrect. Centralized organizations benefit more from economies of scale because they can standardize processes and consolidate purchasing power. Decentralization reduces these benefits by spreading decision-making across multiple locations.

(C) Larger talent pool. ✅

Correct. Decentralization allows organizations to recruit, develop, and retain talent in different locations, rather than relying solely on headquarters for leadership roles.

This aligns with IIA Standard 2110 – Governance, which emphasizes the importance of leadership distribution and talent management in organizations.

(D) Strong internal controls.

Incorrect. Centralized structures typically have stronger internal controls, as decision-making and risk management are closely monitored. Decentralization increases the risk of inconsistent controls across different units.

IIA Standard 2110 – Governance

COSO Framework – Organizational Structure and Risk Management

IIA GTAG – "Auditing Business Strategy Alignment"

Analysis of Answer Choices:IIA References:Thus, the correct answer is C, as decentralization expands the talent pool by enabling local decision-making and leadership development.

Electronic Data Interchange (EDI) is a system that allows businesses to exchange documents (purchase orders, invoices, shipping notices) electronically, improving efficiency and accuracy.

Correct Answer (A - A Just-in-Time Purchasing Environment)

Just-in-time (JIT) purchasing requires real-time inventory management to reduce waste and costs.

EDI improves JIT by automating purchase orders, reducing lead times, and preventing stockouts.

The IIA GTAG 8: Audit of Inventory Management highlights that JIT purchasing benefits the most from automation through EDI.

Why Other Options Are Incorrect:

Option B (A large volume of custom purchases):

Custom purchases vary significantly in specifications, making standard EDI transactions less effective.

Option C (A variable volume sensitive to material cost):

While EDI helps with volume fluctuations, cost-sensitive purchasing requires additional financial analysis beyond EDI automation.

Option D (A currently inefficient purchasing process):

EDI improves efficiency, but implementing it in a failing process without first optimizing procedures could lead to automation of inefficiencies.

IIA GTAG 8: Audit of Inventory Management – Discusses automation benefits in JIT purchasing.

IIA Practice Guide: Auditing IT Controls – Covers EDI as a key tool for procurement efficiency.

Step-by-Step Explanation:IIA References for Validation:Thus, the greatest benefit from EDI is in a Just-in-Time (JIT) purchasing environment (A).