Certified Internal Auditor (CIA) Part 2: Practice of Internal Auditing — Question 294

At a construction company, an internal auditor is planning an audit of the company's process for designing and building grid connections. The process involves customers making payments in three parts:

- The first payment of 10% after approval of the customer's application.
- The second payment of 70% prior to construction.
- The third payment of 20% after construction is complete.

Which of the following key controls should the auditor test to ensure that the company is not taking any unwanted credit risks?

Answer options

• A. Controls that ensure that grid connection design is finalized before construction is approved to begin.
• B. Controls that ensure construction orders are initiated after the second invoice is paid.
• C. Controls that ensure all three invoices are calculated correctly according to the total project cost.
• D. Controls that ensure that applications are verified for approval prior to initiating design and construction.

Correct answer: B

Explanation

The correct answer is B because ensuring that construction orders are initiated only after the second invoice is paid mitigates the risk of the company incurring costs without having received sufficient payments. Option A is incorrect as finalizing the design does not directly prevent credit risks. Option C is not relevant to credit risk management, and option D, while important for process validation, does not specifically address the timing of payments relative to construction initiation.