CIA Auditing Principles & Procedures 3

Question 1

Which internal control is most effective at preventing unauthorized changes to policyholder premium rates?

Accepted Answer

Requiring dual authorization for rate changes in the policy system

Answer

Dual authorization (segregation of duties) ensures no single employee can unilaterally alter premium rates.

Question 2

Audit risk is defined as the risk that:

Accepted Answer

The auditor issues an incorrect opinion on materially misstated financial statements

Answer

Audit risk is the probability that the auditor expresses an inappropriate opinion when the financial statements contain material misstatement.

Question 3

In the context of insurance fraud detection during an audit, 'red flags' most commonly include:

Accepted Answer

Claims filed within 30 days of policy inception with unusually high values

Answer

Claims filed shortly after policy issuance for large amounts are classic indicators of potential fraud that warrant further investigation.

Question 4

Control risk in an insurance audit is the risk that:

Accepted Answer

Internal controls fail to prevent or detect a material misstatement

Answer

Control risk measures the likelihood that the client's internal controls will fail to catch a material error or fraud.

Question 5

When assessing inherent risk in an insurance company audit, which factor would MOST increase inherent risk?

Accepted Answer

Complex long-tail liability lines requiring subjective reserve estimates

Answer

Long-tail liability lines involve highly subjective reserve estimates that are susceptible to significant management bias, increasing inherent risk.

(CIA) Certified Insurance Appraiser Practice Test