Pass IIA-CIA-Part2 Exam Guide

When the CAE determines whether the internal audit activity has confirmed the status of all management's corrective actions, it helps in assessing residual risk. Residual risk is the risk that remains after management's actions to mitigate inherent risk. By confirming the status of corrective actions, the CAE can evaluate whether the risks identified during the audit have been adequately addressed and what level of risk still exists, ensuring that the internal control environment is effective and that management's risk responses are appropriate.References: COSO's Enterprise Risk Management Framework and The IIA's International Standards for the Professional Practice of Internal Auditing.

The most critical factor in determining which engagements should be included in the annual internal audit plan is the organization's annual risk management strategy. This strategy identifies the key risks facing the organization and ensures that the internal audit plan aligns with the areas of highest risk. This prioritization helps ensure that internal audit resources are focused on areas that could have the most significant impact on the organization. References:

"Internal Auditing: Assurance & Advisory Services" (The Institute of Internal Auditors)

"Risk-Based Internal Auditing" (IIA Practice Guide)

The primary reasons for outsourcing internal audit activities typically include accessing a wider range of skills and competencies, complementing existing expertise for specific engagements, and strengthening core audit functions. Contingency planning, while beneficial, is not a primary reason for outsourcing internal audit activities as it pertains more to risk management strategies rather than the core objectives of outsourcing. References: = IIA’s Practice Advisory 1210.A1-1: Obtaining External Service Providers to Support or Complement the Internal Audit Activity.

When management decides not to implement a critical recommendation, especially one related to regulatory compliance and potential reputational risk, it is essential for the chief audit executive (CAE) to escalate the issue to senior management. This step ensures that management fully understands the risks involved and can make an informed decision.

IIA Standard 2600 – Communicating the Acceptance of Risks:

This standard requires the CAE to communicate to senior management and the board when management has accepted a level of risk that the CAE believes is unacceptable. The CAE must ensure that the decision-makers are aware of the potential consequences.

Importance of Escalation:

By convening a meeting with senior management, the CAE can discuss the risks of non-compliance, including potential regulatory sanctions and reputational damage. This discussion provides an opportunity for senior management to reassess the decision in light of these risks.

IIA Practice Advisory 2600-1:

The advisory suggests that when significant risks are not being addressed by management, the CAE should communicate these concerns to higher levels of the organization. This ensures that the risks are not ignored and that appropriate action can be taken.

Option A (Do nothing): This is not appropriate, as the CAE has a responsibility to escalate significant risks.

Option B (Contact regulatory agency): This is an extreme step and should not be the first course of action. The issue should be discussed internally before involving external regulators.

Option D (Highlight to external auditors): While external auditors might need to be informed, the issue should first be addressed within the organization.

Detailed Explanation:Why Not Other Options?