IIA-CIA-Part3 Exam Dumps : Business Knowledge for Internal Auditing

A capital lease (now referred to as a finance lease under IFRS 16 and ASC 842) is a leasing arrangement where an organization records the leased asset and liability on its balance sheet as if it were owned. Organizations enter into capital leases to improve financial metrics, including free cash flow from operations.

Let’s analyze each option:

Option A: To increase the ability to borrow additional funds from creditors

Incorrect. A capital lease creates a liability on the balance sheet, which may reduce borrowing capacity rather than increase it.

Option B: To reduce the organization's free cash flow from operations

Incorrect.

Operating leases impact operating cash flow because lease payments are treated as operating expenses.

Capital leases (finance leases) shift payments to financing activities, improving operating cash flow since lease obligations are classified as debt.

Option C: To improve the organization's free cash flow from operations

Correct.

Capital lease payments are classified under financing activities rather than operating activities, which increases free cash flow from operations.

This improves financial ratios and liquidity metrics, making the organization appear more attractive to investors.

IIA Reference: Internal auditors assess lease accounting and financial reporting impacts under IFRS 16 (Leases) and ASC 842 (Leases). (IIA Practice Guide: Auditing Financial Reporting Risks)

Option D: To acquire the asset at the end of the lease period at a price lower than the fair market value

Incorrect. While some capital leases include a bargain purchase option, the primary reason for entering into a capital lease is financial reporting benefits, not necessarily acquiring the asset.

Thus, the verified answer is C. To improve the organization's free cash flow from operations.

Data governance refers to the policies, processes, and controls an organization implements to ensure data integrity, security, and compliance. When an organization has a weak data governance culture, the most compromised attribute of data is "veracity," which refers to the accuracy, reliability, and trustworthiness of data.

Why Option D (Veracity) is Correct:

Weak data governance leads to poor data quality, inconsistencies, and errors, reducing data veracity (trustworthiness and accuracy).

Without strong governance, data may be incomplete, outdated, or manipulated, leading to flawed decision-making.

Data veracity is critical for risk management, internal audit, and regulatory compliance, as unreliable data can lead to financial misstatements and operational risks.

Why Other Options Are Incorrect:

Option A (Variety):

Variety refers to different types and sources of data (structured, unstructured, semi-structured).

A weak data governance culture does not necessarily affect the diversity of data sources.

Option B (Velocity):

Velocity refers to the speed at which data is generated, processed, and analyzed.

Weak governance impacts data quality more than processing speed.

Option C (Volume):

Volume refers to the quantity of data being processed and stored.

Weak data governance might lead to data duplication or loss but does not directly impact data volume.

IIA GTAG – "Auditing Data Governance": Emphasizes the importance of data veracity in decision-making.

COSO Internal Control Framework: Highlights the role of data integrity in financial and operational controls.

IIA’s Global Technology Audit Guide on Data Analytics: Discusses the risks of poor data governance affecting veracity.

IIA References:

At the end of an accounting period, certain accounts must be closed to prepare financial statements and reset balances for the next period. The accounts that must be closed are temporary accounts, which include all income statement accounts (revenues, expenses, and gains/losses).

Why Option A (Income statement accounts) is Correct:

Income statement accounts (revenues, expenses, gains, and losses) are temporary accounts that track financial performance for a specific period.

At the end of the period, these accounts are closed to the retained earnings account to reset them to zero for the next period.

Why Other Options Are Incorrect:

Option B (Balance sheet accounts):

Incorrect because balance sheet accounts (assets, liabilities, and equity) are permanent accounts that carry their balances forward to the next period.

Option C (Permanent accounts):

Incorrect because permanent accounts include all balance sheet accounts, which are never closed.

Option D (Real accounts):

Incorrect because real accounts refer to balance sheet accounts (assets, liabilities, and equity), which remain open.

IIA GTAG – "Auditing Financial Close Processes": Discusses the closing of temporary accounts at the period end.

COSO Internal Control – Integrated Framework: Recommends proper financial reporting controls, including account closures.

IFRS & GAAP Accounting Standards: Define temporary and permanent accounts in financial reporting.

IIA References:Thus, the correct answer is A. Income statement accounts.