Online IIA-CIA-Part3 Questions Video

When a company invests in common stock, it can earn income in two primary ways:

Dividend income: When the company receives dividends, it recognizes the income.

Capital gains: When the stock is sold for a higher price than its purchase price, it results in a gain.

Why Option C (Receives dividends) is Correct:

Dividends represent income from an investment in common stock when declared and paid by the issuing company.

Under GAAP and IFRS, dividend income is recognized when received, not when declared.

Companies record dividends as investment income in their income statement.

Why Other Options Are Incorrect:

Option A (Purchases bonds):

Incorrect because purchasing bonds is an investment transaction, not income recognition.

Option B (Receives interest):

Incorrect because interest income applies to bond investments, loans, or deposits, not common stock investments.

Option D (Sells bonds):

Incorrect because selling bonds results in capital gains or losses, not regular investment income from common stock.

IIA Practice Guide – "Auditing Investment & Treasury Activities": Discusses the recognition of investment income.

IFRS 9 (Financial Instruments) & GAAP Standards: Provide guidance on recording dividends as investment income.

COSO Internal Control – Integrated Framework: Emphasizes proper financial reporting and income recognition.

IIA References:

A project is a temporary initiative with a defined start and end date, specific objectives, and unique deliverables. Unlike ongoing business processes, projects have distinct goals, require coordination across various resources, and are not repeated continuously.

Let’s analyze each option:

Option A: A clothing company designs, makes, and sells a new item.

Incorrect.

While designing a new clothing item could be a project, the production and sale of the item are ongoing processes, not a one-time project.

Option B: A commercial construction company is hired to build a warehouse.

Correct.

Construction projects are classic examples of project-based work because:

They have a defined beginning and end.

They involve unique deliverables (a specific warehouse).

They require temporary coordination of resources.

IIA Reference: Internal auditors assess project management frameworks to ensure compliance with organizational and financial controls. (IIA Practice Guide: Auditing Project Management)

Option C: A city department sets up a new firefighter training program.

Incorrect.

If the training program is a one-time initiative, it could be considered a project. However, if the program is recurring (e.g., new firefighter training every year), it would be a process, not a project.

Option D: A manufacturing organization acquires component parts from a contracted vendor.

Incorrect.

Procurement of component parts is a continuous operational process, not a project.

Thus, the verified answer is B. A commercial construction company is hired to build a warehouse.

Understanding the Three Lines of Defense Model:

First Line of Defense (Operational Management): Performs daily IT security tasks, such as blocking unauthorized traffic and encrypting data.

Second Line of Defense (Risk Management & Compliance): Monitors and reviews security controls, including disaster recovery testing and risk management activities.

Third Line of Defense (Internal Audit): Provides an independent assessment of IT security controls.

Why Option C (Review Disaster Recovery Test Results) Is Correct?

The second line of defense is responsible for monitoring and evaluating IT risk management processes, including disaster recovery and business continuity planning.

Reviewing disaster recovery test results ensures that the organization is prepared for IT disruptions and meets compliance requirements.

IIA Standard 2110 – Governance requires auditors to evaluate whether IT risk management activities (such as disaster recovery) are being effectively monitored.

Why Other Options Are Incorrect?

Option A (Block unauthorized traffic):

This is a first-line defense task, typically handled by IT security teams (e.g., firewall and intrusion detection system monitoring).

Option B (Encrypt data):

Encryption is part of daily IT security operations and is handled by the first line of defense.

Option D (Provide an independent assessment of IT security):

Independent assessments are the responsibility of internal audit (third line of defense), not the second line.

The second line of defense focuses on monitoring IT risk, making disaster recovery test review a key responsibility.

IIA Standard 2110 and the Three Lines of Defense Model confirm this role.

Final Justification:IIA References:

IPPF Standard 2110 – Governance (IT Risk Management)

IIA Three Lines of Defense Model

COBIT Framework – IT Governance & Risk Management

Understanding IT Backup Risks in Disaster Recovery:

Disaster recovery plans rely on backup data to restore operations after a system failure.

An ineffective backup system increases the risk of data loss, operational downtime, and regulatory non-compliance.

Why Option B (Empty Backup Tapes) Is Correct?

If backup tapes contain empty spaces, it indicates data corruption or incomplete backups, leading to unrecoverable data loss in a disaster.

IIA GTAG 16 – Data Management and IT Auditing emphasizes that backups must be tested for integrity and completeness.

ISO 27001 and NIST SP 800-34 recommend periodic verification of backup data to prevent critical failures.

Why Other Options Are Incorrect?

Option A (Delayed return of backup tapes):

While delayed tape retrieval affects recovery speed, it does not indicate data loss.

Option C (More frequent backups than required):

Frequent backups improve data protection, not cause unacceptable loss.

Option D (Less frequent offsite backups):

While infrequent backups increase risk, they do not directly indicate data loss upon testing.

Backup tapes containing empty spaces indicate potential data loss, making it the most critical disaster recovery risk.

IIA GTAG 16, ISO 27001, and NIST SP 800-34 highlight the need for validated backup integrity.

Final Justification:IIA References:

IIA GTAG 16 – Data Management and IT Auditing

ISO 27001 – Information Security Backup Standards

NIST SP 800-34 – Contingency Planning for IT Systems