Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 192

The comparable uncontrolled price (CUP) method may be used when setting transfer prices in an organization. What is a common limitation of the CUP method?

Answer options

• A. It may be difficult to find a transaction between independent companies that is similar enough to a controlled transaction
• B. The CUP method is likely to lead to management decisions that are not optimal for the company
• C. This approach to setting transfer prices is not flexible, as the CUP method does not allow for adjustments
• D. It offers only an indirect way of ascertaining an arm’s-length price of a controlled transaction

Correct answer: B

Explanation

The correct answer, B, identifies that the CUP method can result in suboptimal management decisions due to its reliance on external data. Options A and C highlight issues with finding comparable transactions and flexibility, respectively, but these do not directly address the impact on management decisions. Option D mentions the indirect nature of the method, which is also not the primary limitation related to decision-making.