CIA Question of the Day: Management Bias in Estimates

Quiz Yazan Ibrahim
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CIA exam practice question — CIA Question of the Day: Management Bias in Estimates

CIA exam practice question: daily practice for the Certified Internal Auditor (CIA) exam — domain: Part 3: Business Knowledge for Internal Auditing.

Question

During an internal audit of accounts receivable, management reduces the allowance for doubtful accounts citing improved collections. As an internal auditor concerned about possible management bias in estimates, what is the most appropriate immediate response?

  • A. Accept management's revised estimate because accounting estimates are management's responsibility and document the rationale for the change.
  • B. Perform additional audit procedures: test subsequent cash receipts, compare the current estimate to historical estimate accuracy, and perform sensitivity analysis on key assumptions to assess reasonableness.
  • C. Escalate the matter immediately to the audit committee and external auditors and suspend further audit work until they respond.
  • D. Issue a formal finding alleging management override of controls and recommend an immediate restatement of prior financial statements.
Show the answer and explanation

Correct answer: B. Perform additional audit procedures: test subsequent cash receipts, compare the current estimate to historical estimate accuracy, and perform sensitivity analysis on key assumptions to assess reasonableness.

The best response is to perform additional audit procedures to obtain sufficient, appropriate evidence supporting or refuting the revised estimate. Testing subsequent receipts, evaluating historical estimate accuracy, and performing sensitivity analysis directly address whether management's assumptions are reasonable and whether bias exists. Simply accepting the estimate (option 1) fails to exercise professional skepticism and does not provide corroborating evidence. Immediate escalation to the audit committee and external auditors (option 3) may be appropriate if evidence remains inconclusive or if a material concern is found, but it is premature before additional procedures. Issuing a finding and recommending restatement (option 4) is a drastic conclusion that requires robust evidence and should not be the initial action.

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