Summary:
This question focuses on a key limitation of the test data method, an audit technique where the auditor processes a set of fictitious transactions through the client's live system. The primary weakness is that this method only verifies the specific controls the auditor thinks to test. It does not provide assurance that the system is functioning correctly for all possible conditions or transaction types.

Correct Option:

B. Conditions that were not specifically considered by the auditor may go untested.
This is the fundamental inherent weakness of the test data method. The auditor designs the test data based on their understanding of the system. If the auditor is unaware of a specific control, a particular type of error, or a unique transaction path, they will not include it in their test data. Consequently, any weaknesses or control failures related to these unconsidered conditions will remain undetected.

Incorrect Option:

A. The auditor must test many transactions with the same condition in order to achieve assurance that the condition is being detected.
This is not a specific weakness of the test data method. In many audit procedures, both manual and automated, testing a representative sample is standard practice. The test data method is efficient because a single well-designed test transaction can effectively demonstrate that a specific control (e.g., a credit limit check) is operating.

C. The approach requires the creation of "dummy companies," possibly destroying or altering actual company data in the process.
This describes a risk of the method, not an inherent weakness in its testing capability. This risk can be and is routinely mitigated by running the test data in a controlled environment, such as a copy of the production system or a specially created test division, to prevent contamination of live data.

D. Inclusion of atypical data in the test data may cause errors to be noted on the exception report.
This is actually the intended purpose of the test data method. The auditor wants to include invalid or atypical data to verify that the system's application controls (like edit checks and validation routines) correctly identify and report these errors. This is a strength of the method, not a weakness.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." The guidance on using CAATs (Computer-Assisted Audit Techniques) like the test data method highlights the need for the auditor to understand their specific capabilities and limitations, including the risk of providing a false sense of assurance if the test data is not comprehensive.

Summary:
This question asks for the most efficient tool to identify a specific pattern of potential fraud across a large database of welfare claims. The task requires examining all records in a population to find duplicate addresses associated with different names. This necessitates a tool that can quickly read, sort, and compare large volumes of data, which is a core function of specialized audit software.

Correct Option:

B. Generalized audit software.
This is the most helpful tool. Generalized Audit Software (GAS) is specifically designed to interrogate large data files. An auditor could use it to import the entire welfare claims database, sort or index the records by address, and then identify all instances where the same address is associated with multiple different claimant names. This provides a complete and efficient population analysis.

Incorrect Option:

A. Tagging and tracing.
This technique involves embedding an audit module in a live system to track the processing of specific, individual transactions. It is useful for testing controls and transaction integrity for a sample of items, but it is not designed to search the entire database for patterns or duplicates, making it inefficient for this task.

C. Integrated test facility.
This method involves creating a fictitious entity (e.g., a dummy welfare claimant) within a live system and processing test transactions against it. It is excellent for testing the system's controls and processing logic but, like tagging and tracing, is not a tool for analyzing the entire existing population of data to find duplicates.

D. Spreadsheet analysis.
While spreadsheet software can sort and filter data, it is often impractical for the very large datasets typical of governmental welfare systems. Spreadsheets can become slow, unstable, or hit row limitations when handling massive files. GAS is a more robust, efficient, and purpose-built tool for this kind of large-scale data analysis.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." The use of technology-based audit techniques, including Generalized Audit Software, is supported by the IPPF as part of applying due professional care (Standard 1220) and achieving audit objectives efficiently, especially when analyzing large populations.

Summary:
This question asks for the primary tool an auditor uses to assess the collectability of accounts receivable. Collectability refers to the likelihood that outstanding customer balances will be paid. The most direct evidence for this assessment comes from analyzing the age of the debts, as older balances are statistically less likely to be collected. This analysis is summarized in a specific, standard report.

Correct Option:

D. An aged accounts receivable listing.
This is the primary tool for determining collectability. An aged trial balance (or "aging report") categorizes receivable balances based on the length of time they have been outstanding (e.g., 0-30 days, 31-60 days, 61-90 days, over 90 days). This aging is the most critical evidence for estimating the allowance for doubtful accounts, as it directly correlates with the risk of non-payment; the older a balance, the less likely it is to be collected.

Incorrect Option:

A. The file of related shipping documents.
Shipping documents provide evidence that a sale occurred and goods were delivered, which supports the validity and valuation of the original sale. However, they provide no direct evidence about the customer's current ability or willingness to pay the outstanding balance, which is the core of collectability.

B. Negative accounts receivable confirmations.
Negative confirmations request a response only if the customer disagrees with the balance. A non-response is taken as evidence of accuracy. This is considered less reliable evidence than positive confirmations and is less effective for specifically assessing collectability, as it does not proactively confirm the customer's acknowledgment of the debt or their intent to pay.

C. Positive accounts receivable confirmations.
Positive confirmations, which require the customer to respond directly to the auditor, are excellent evidence for verifying the existence and accuracy of a receivable balance. While a customer's refusal to confirm might indicate a collectability issue, the aged listing is a more systematic and comprehensive tool applied to the entire population to estimate uncollectible amounts.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." While a specific standard is not cited, this is a fundamental audit procedure related to the valuation assertion. The use of an aged trial balance to assess the allowance for doubtful accounts is a standard practice in financial auditing.

Summary:
This question asks for the best evidence to verify compliance with a specific time-based operational standard. The objective is to confirm that the activity (refueling and cleaning) is completed within a specified time frame. The most direct and reliable evidence is first-hand observation that captures the actual start and end times of the process, providing undeniable proof of the elapsed duration.

Correct Option:

C. Observation of selected aircraft while they are being refueled and cleaned.
This provides the best evidence. Direct observation by the auditor allows for the precise timing of the entire process from start to finish. This method provides independent, real-time, and objective evidence that the work was performed and, most importantly, that it was completed within the required time standard. It is not subject to the inaccuracies or potential manipulation of documents.

Incorrect Option:

A. Vendor fuel invoices that have been reconciled to inventory records.
This evidence verifies that fuel was purchased and received, supporting the occurrence and accuracy of the fuel transaction. However, it provides no evidence whatsoever about the timing of the refueling activity or the cleaning process.

B. Time cards completed by aircraft cleaning and fueling crews.
Time cards are a form of internal documentation that is less reliable than direct observation. They can be easily inflated, misreported, or completed inaccurately by the crews themselves. An auditor cannot rely on them for precise timing evidence of a specific aircraft's turnaround.

D. Comparison of the standard hourly labor costs for cleaning and fueling personnel with actual labor charges.
This is a test of labor cost variances, not a test of time compliance for a specific operational task. It deals with financial efficiency (cost) rather than operational efficiency (time). The actual labor charges do not prove how long it took to service any individual aircraft.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." Standard 2300 on Performing the Engagement requires internal auditors to obtain sufficient, reliable, relevant, and useful evidence to achieve engagement objectives. For a time-based operational standard, observation provides the most relevant and reliable evidence.

Summary:
This question asks for the most persuasive evidence that a "fair and consistent" treatment policy is being followed. The key is to find an audit procedure that directly compares the terms offered to different customers. Financial metrics like aging or credit limits may vary based on risk, but discretionary elements like sales discounts are a direct indicator of the consistency and fairness of the company's pricing and negotiation practices.

Correct Option:

D. Compare the sales discounts offered to each customer.
This provides the most persuasive evidence. Sales discounts are often a matter of negotiation and discretion. Comparing the discounts offered to different customers for similar products, volumes, and terms directly tests whether the company applies its policies consistently and fairly, or if it gives preferential treatment to some customers over others without a valid business reason.

Incorrect Option:

A. Compare the aging of outstanding receivables due from each customer.
The aging of receivables is an outcome of customer payment behavior and collection efforts, not a direct measure of how the company initially treats the customer. Different aging profiles are expected based on a customer's creditworthiness and payment history.

B. Compare credit reports with annual sales for a sample of customers.
This tests the reasonableness of the credit-granting process (i.e., whether sales volume is appropriate for the customer's creditworthiness). It is a test of credit risk management, not a direct test of fair and consistent treatment across the customer base.

C. Compare the ratio of outstanding receivables to the authorized credit limit for each customer.
This tests compliance with credit limits, which is a control activity. It ensures customers are not exceeding their approved borrowing capacity. Like option B, it is a test of credit risk control, not a measure of equitable treatment in terms of pricing, discounts, or service.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." The underlying principle is from Standard 2320 on Analysis and Evaluation, which requires auditors to base conclusions on appropriate analyses and evaluations. Comparing discretionary discounts is the most direct analytical procedure to evaluate consistency of treatment.

Summary:
This question evaluates the auditor's approach to analyzing customer satisfaction. The approach uses three different data sources to form a conclusion. The correct answer identifies a fundamental limitation in the scope of one of these sources—the customer survey—which, by its design, excludes a specific segment of the customer base and therefore may not provide a complete picture.

Correct Option:

B. The survey would not consider customers who did not make purchases in the last three months.
This statement is correct. By surveying only customers who made purchases in the last three months, the audit approach systematically excludes former or lapsed customers. This group is critical to understanding satisfaction, as their decision to stop purchasing may be a direct result of dissatisfaction. Their absence from the survey creates a potential for sample bias and an incomplete analysis.

Incorrect Option:

A. Although useful, such an analysis does not address any risk factors.
This is incorrect. Poor customer satisfaction is a significant operational and strategic risk. It directly impacts future revenue, brand reputation, and competitive position. The entire analysis is designed to assess this very risk.

C. Steps 1 and 2 of the analysis are not necessary or cost-effective if the customer survey is comprehensive.
This is incorrect. A comprehensive audit analysis uses multiple sources of evidence (triangulation) to validate findings. Complaints and returns are objective, actual data, while a survey is subjective and self-reported. Relying solely on a survey would be less robust, as it may not capture the full extent of problems reflected in the hard data from complaints and returns.

D. Analysis of three months' activity would not evaluate customer satisfaction.
This is incorrect. Analyzing three months of data is a reasonable and common audit timeframe to evaluate a recent trend or current state. While a longer period could provide more context, a three-month analysis can certainly provide valid evidence about customer satisfaction levels during that period.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." Standard 2320, "Analysis and Evaluation," requires auditors to base conclusions on sufficient, reliable, relevant, and useful information. This includes understanding the limitations of the evidence gathered, such as the sampling bias identified in option B.

Summary:
This question tests logical inference regarding a corporate code of ethics. The key is to distinguish between what a code of ethics is (a formal policy establishing standards) and what its mere existence proves about the organization's actual ethical climate. An audit can be performed with or without a formal code by using other criteria.

Correct Option:

A. II only

II. Company A has established objective criteria by which an employee's actions can be evaluated.
This can be logically inferred. A formal, comprehensive code of ethics serves as a published set of standards and rules. By its nature, it provides objective criteria against which employee conduct can be measured and evaluated for compliance.

Incorrect Option:

I. Company A exhibits a higher standard of ethical behavior than does company B.
This cannot be logically inferred. The existence of a formal code indicates an intent to promote ethical behavior, but it does not guarantee that the actual ethical behavior or culture of Company A is superior to that of Company B. An organization without a formal code could still have a strong, informal ethical culture, while a company with a code could have widespread non-compliance.

III. The absence of a formal corporate code of ethics in company B would prevent a successful audit of ethical behavior in that company.
This is incorrect. An audit of ethical behavior can still be performed in Company B. The auditor could use other criteria for evaluation, such as societal norms, industry standards, general legal principles, or internal policies that imply ethical conduct. The absence of a single document (the code) makes the audit more challenging but not impossible.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." While not citing a specific standard, this logic is central to the practice of auditing. Auditors must assess the control environment, which includes ethical values, through various means, not solely the existence of a formal document.

Summary:
This question addresses the audit objective of completeness for the revenue cycle—ensuring that all shipments of goods result in a customer invoice. To test this, the auditor must start with a record of all goods that were shipped (the population of what should be billed) and trace them forward to the billing records to ensure each one was invoiced.

Correct Option:

C. Pre-numbered shipping documents.
This is the best source. A file of pre-numbered shipping documents provides a complete, sequential record of all goods that have left the warehouse. By tracing a sequence of these shipping documents forward to the billing records, the auditor can obtain direct evidence that every shipment was subsequently billed, which is a test for the completeness of sales.

Incorrect Option:

A. Pre-numbered customer invoices.
Tracing from invoices (billing records) to shipping documents tests for the occurrence or validity of recorded sales—that is, whether every recorded sale was supported by an actual shipment. It does not test if all shipments were billed.

B. Accounts receivable transactions.
This is another record of what has already been billed. Tracing from accounts receivable (the result of billing) back to shipping documents would also be a test for the occurrence of recorded sales, not the completeness of billing for all shipments.

D. Customer purchase orders.
Purchase orders represent customer demand, not proof that goods were shipped. A company may have purchase orders for goods not yet shipped, or it may ship goods without a formal purchase order (e.g., based on a contract). They are not a reliable record of completed shipments.

Reference:
The Institute of Internal Auditors. "International Professional Practices Framework (IPPF)." The underlying principle relates to designing tests of controls and substantive procedures to meet specific audit objectives, such as testing completeness. Standard 2320, "Analysis and Evaluation," requires basing conclusions on sufficient, reliable evidence, which in this case is the population of shipping documents.

Value analysis.

Explain that the auditor's reputation for integrity, which is vital to the auditor's business success,
would be seriously damaged if confidentiality were breached.

Check tampering by an employee.

Operating ratio.