IIA-CHAL-QISA practice question 2 of 25

When taken by a chief audit executive, which of the following actions would be most likely to prevent division management from exaggerating sales…

Choose your answer, then check it against the explanation and the full breakdown below.

When taken by a chief audit executive, which of the following actions would be most likely to prevent division management from exaggerating sales reports 1. Announcing a series of internal audit engagements focusing on compliance with corporate sales-reporting policies. 2. Asking the president and the board to issue a statement of corporate policy stressing the importance of accurate management reporting and the negative consequences of intentional misreporting 3. Setting up a hotline for employees to report fraudulent behavior anonymously. 4. Assisting the controller in developing and monitoring a series of business process indicators, which are historically correlated with, but independent of. sales.

Answer options

Question 2 of 25

Question breakdown

Tests: Identify preventive measures against management fraud in reporting
Difficulty: Medium

Key idea: Reporting fraud is best prevented by a strong tone at the top combined with independent analytical indicators that make inflated figures likely to be noticed.

How to reach the answer

The decisive word is 'prevent', and the perpetrator is division management.
A board and president policy statement sets tone at the top and states the consequences, which deters misconduct before it happens.
Independent indicators that historically move with sales would expose inflated sales figures, so the expected chance of being caught rises and deters the act.
A hotline mainly detects fraud after it occurs, and announced audits cover only policy compliance for a limited period, so items 2 and 4 are the strongest pair.

Each option

AIncorrect. Announced compliance audits are periodic and narrow, so they deter less than continuous independent indicators.
BIncorrect. A hotline is primarily a detection mechanism and relies on employees reporting what management does.
CCorrect. Tone at the top together with continuously monitored independent indicators gives the strongest preventive deterrent against exaggerated sales.
DIncorrect. Item 4 is useful, but pairing it with the hotline brings in a detection tool and leaves out the tone-at-the-top statement.

Common trap: Anonymous hotlines are widely praised as the top fraud control, which makes D attractive even though they detect fraud rather than prevent it.

In practice: Auditors and controllers use non-financial correlates such as shipments, freight costs, or commissions to test whether reported revenue is reasonable and to discourage manipulation.

Remember: To prevent management misreporting, combine tone at the top with independent data that makes manipulation visible.

Drafted with AI assistance and checked against the answer key.

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