Certified Internal Auditor (CIA) Part 2: Practice of Internal Auditing — Question 41

A company has recently incurred significant cost overruns on one of its construction projects. Management suspects that these overruns were caused by the contractor improperly accounting for costs related to contract change orders. Which of the following procedures would be appropriate for testing this suspicion?
I. Verify that the contractor has not charged change orders with costs that have already been billed to the original contract.
II. Determine if the contractor has billed for original contract work that was canceled as a result of change orders.
III. Verify that the change orders were properly approved by management.

Answer options

• A. I only
• B. III only
• C. I and II only
• D. I and III only

Correct answer: C

Explanation

The correct answer is C because verifying that the contractor has not double-billed costs (I) and determining if canceled work was charged (II) are both crucial to identifying improper accounting practices. Option III is less relevant as it does not directly address the specific cost overruns related to change orders.