IIA IIA-CIA-Part3 Dumps Questions Answers

Financial leverage refers to the use of borrowed funds to increase potential returns to shareholders. Effective financial leverage occurs when the return on equity (ROE) is higher than the return on assets (ROA), indicating that the company is generating higher returns for shareholders than it costs to finance the assets with debt.

(A) Correct – An organization has a rate of return on equity of 20% and a rate of return on assets of 15%.

ROE > ROA indicates that financial leverage is being used effectively.

A higher ROE suggests that the company is generating more profits for shareholders relative to its equity.

This aligns with the concept that borrowed funds are being used efficiently to increase profitability.

(B) Incorrect – An organization has a current ratio of 2 and an inventory turnover of 12.

The current ratio and inventory turnover relate to liquidity and operational efficiency, not financial leverage.

(C) Incorrect – An organization has a debt to total assets ratio of 0.2 and an interest coverage ratio of 10.

A low debt-to-assets ratio (0.2) indicates low leverage.

A high interest coverage ratio (10) suggests low reliance on debt financing, which contradicts the concept of financial leverage.

(D) Incorrect – An organization has a profit margin of 30% and an asset turnover of 7%.

Profit margin and asset turnover measure profitability and efficiency, not financial leverage.

High asset turnover may indicate operational efficiency but does not directly reflect financial leverage.

IIA’s Global Internal Audit Standards – Managing Financial Risk

Covers financial leverage and its impact on return metrics.

IIA’s Guide on Financial Ratio Analysis

Explains the relationship between ROE, ROA, and leverage.

COSO’s ERM Framework – Risk Assessment in Financial Decision Making

Discusses the use of leverage in maximizing shareholder value.

Analysis of Answer Choices:IIA References and Internal Auditing Standards:

According to IIA guidance, the CAE must escalate to the board when significant risks remain unaddressed. The most critical concern here is that no resources or budget were allocated to implement corrective measures. This indicates that management is not taking the risk seriously, and the exposure to noncompliance with data protection laws remains high.

Option A relates to customer satisfaction, not regulatory compliance. Option C is an issue of communication but not as critical as failing to allocate resources. Option D shows resistance but can be managed if resources are in place.

Thus, the condition that best justifies escalation is Option B: lack of allocated resources.

When prioritizing the audit universe, the CAE typically uses a risk-factor approach. This includes a combination of likelihood, impact, control effectiveness, and other relevant criteria. Solely relying on impact (Option C) or likelihood (Option B) is insufficient. Heat maps (Option D) may be tools used within the process, but they are not the actual method of prioritization.

Thus, the correct description is the risk-factor approach (Option A).