Below are Case-Based Questions (CIA Part 1 style) on Functions of Different Departments in a Manufacturing Organization, focusing on internal audit observations, discrepancies, irregularities, risk owners, documents, and controls.
Case-Based Questions – Manufacturing Departments (CIA Part 1 Style)
Case 1: Unauthorized Purchase
During an internal audit of the procurement process, the auditor observed that several purchases of raw materials were made without an approved Purchase Order (PO). The materials were received and recorded in inventory based only on supplier invoices.
Question
Which control weakness is MOST evident in this situation?
A. Lack of vendor evaluation
B. Absence of purchase authorization control
C. Ineffective production scheduling
D. Poor inventory valuation method
✅ Answer: B. Absence of purchase authorization control
Explanation:
The purchase order approval process ensures purchases are authorized and necessary. Buying without PO increases risk of fraud, duplicate purchases, or unauthorized procurement.
Case 2: Inventory Discrepancy
During a warehouse audit, the internal auditor noticed that the physical inventory count of raw materials was significantly lower than the quantities recorded in the inventory system. Investigation revealed that materials were frequently issued to production without a Material Requisition Note (MRN).
Question
Which control should be implemented to reduce this risk?
A. Increase production capacity
B. Require authorized material requisition before issuing materials
C. Reduce supplier lead time
D. Increase marketing budget
✅ Answer: B. Require authorized material requisition before issuing materials
Explanation:
The Material Requisition Note documents authorized issuance of materials and helps maintain inventory accountability.
Case 3: Quality Control Failure
An internal audit review found that defective finished goods were shipped to customers because quality inspection reports were not completed before dispatch.
Question
Who should be the primary risk owner for this issue?
A. Procurement Manager
B. Quality Assurance Manager
C. HR Manager
D. Sales Manager
✅ Answer: B. Quality Assurance Manager
Explanation:
The Quality Assurance department is responsible for inspection and ensuring that only approved products reach customers.
Case 4: Segregation of Duties Issue
During an audit of the purchasing cycle, the auditor observed that the same employee creates purchase requisitions, approves purchase orders, and records supplier invoices.
Question
Which internal control principle is being violated?
A. Budgetary control
B. Segregation of duties
C. Preventive maintenance
D. Cost allocation
✅ Answer: B. Segregation of duties
Explanation:
Combining these responsibilities increases the risk of fraud and unauthorized purchases.
Case 5: Production Planning Problem
Internal auditors observed frequent production delays due to shortages of critical raw materials. The procurement department reported that they were not receiving timely production forecasts.
Question
Which department should provide the required information?
A. Human Resources
B. Production Planning Department
C. Finance Department
D. IT Department
✅ Answer: B. Production Planning Department
Explanation:
The Production Planning department prepares production schedules and material requirements forecasts.
Case 6: Obsolete Inventory
An internal audit identified large quantities of obsolete raw materials stored in the warehouse. There was no periodic review of slow-moving inventory.
Question
Which control would BEST mitigate this issue?
A. Increase safety stock levels
B. Implement periodic inventory review and aging analysis
C. Increase production capacity
D. Eliminate quality inspection
✅ Answer: B. Implement periodic inventory review and aging analysis
Explanation:
Inventory aging helps identify slow-moving or obsolete inventory, allowing management to take corrective action.
Case 7: Payroll Irregularities
During an HR audit, the auditor discovered that some employees listed in the payroll register did not appear in the attendance records.
Question
This situation MOST likely indicates:
A. Production inefficiency
B. Ghost employees in payroll
C. Vendor fraud
D. Inventory theft
✅ Answer: B. Ghost employees in payroll
Explanation:
If payroll includes employees not recorded in attendance, it may indicate fraudulent payroll entries.
Case 8: Machine Downtime
The production department reported significant downtime due to machine breakdowns. Internal audit found that preventive maintenance schedules were not followed.
Question
Which department is responsible for managing this risk?
A. Maintenance Department
B. Sales Department
C. HR Department
D. Procurement Department
✅ Answer: A. Maintenance Department
Explanation:
Maintenance is responsible for equipment reliability and preventive maintenance programs.
Case 9: Unapproved Vendor
During the audit of procurement records, the internal auditor noticed that purchases were made from vendors not listed in the approved vendor database.
Question
What is the MOST appropriate control to prevent this risk?
A. Increase warehouse space
B. Restrict purchases to approved vendor list
C. Increase advertising budget
D. Reduce production output
✅ Answer: B. Restrict purchases to approved vendor list
Explanation:
Using approved vendors ensures supplier reliability, quality control, and reduces fraud risk.
Case 10: Missing Shipping Documentation
Internal auditors observed that some finished goods shipments to customers lacked delivery challans or dispatch documentation.
Question
Which risk is MOST significant in this situation?
A. Marketing risk
B. Revenue recognition risk and shipment disputes
C. HR compliance risk
D. IT system failure
✅ Answer: B. Revenue recognition risk and shipment disputes
Explanation:
Shipping documents are essential evidence of delivery and revenue recognition.
Case 11: IT System Access
During an IT audit, it was discovered that warehouse staff had unrestricted access to modify inventory records in the ERP system.
Question
Which control should be implemented?
A. Remove ERP system
B. Implement role-based access controls
C. Increase warehouse staff
D. Increase production targets
✅ Answer: B. Implement role-based access controls
Explanation:
Limiting system access reduces the risk of unauthorized data manipulation.
Case 12: Sales Order Irregularity
Internal auditors found that some sales orders were processed without customer credit approval.
Question
Which department is responsible for managing this risk?
A. Credit Control / Finance Department
B. Production Department
C. Maintenance Department
D. IT Department
✅ Answer: A. Credit Control / Finance Department
Explanation:
Credit control ensures customers are creditworthy before goods are shipped.
✅ These case-based questions are very similar to what appears in the
Certified Internal Auditor (CIA) Part 1 Exam
Topics: Internal Control, Risk Ownership, Governance, Operational Audit
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