When inventory is understated (not included in the physical count) at year-end, the financial impact affects both cost of sales (COGS) and net income as follows:
* Correct Answer (C - Cost of Sales is Understated and Net Income is Overstated)
* The ending inventory is part of the formula used to calculate the cost of goods sold (COGS):
COGS=BeginningInventory+Purchases#EndingInventoryCOGS = Beginning Inventory + Purchases - Ending InventoryCOGS=BeginningInventory+Purchases#EndingInventory
* If ending inventory is understated, then:
* COGS will be understated (because inventory that should have been counted as sold was omitted).
* Net income will be overstated because COGS is lower than it should be, making profits appear higher.
* This error causes financial misstatements, violating IIA auditing standards for financial accuracy.
* Why Other Options Are Incorrect:
* Option A (Cost of sales and net income are understated):
* Net income would not be understated-it would be overstated because the cost of goods sold is too low.
* Option B (Cost of sales and net income are overstated):
* COGS would be understated, not overstated. If COGS were overstated, net income would be understated.
* Option D (Cost of sales is overstated and net income is understated):
* The opposite happens-COGS is understated and net income is overstated.
* IIA GTAG 8: Audit of Inventory Management - Covers financial impact of inventory misstatements.
* IIA Practice Guide: Auditing Financial Statements - Addresses common inventory errors and financial reporting impacts.
Step-by-Step Explanation:IIA References for Validation:Thus, C is the correct answer because an understated inventory reduces COGS and inflates net income.

The IIA requires internal audit functions to have an external quality assessment at least once every five years.
External quality assurance feedback provides the most independent, objective, and reliable assurance to the board regarding whether the internal audit function conforms with standards and is positioned to achieve its objectives.
Option A measures productivity but not quality. Option B provides useful insights but is subjective. Option D indicates staffing health but does not directly assess ability to meet objectives.
Reference:
IIA Standards - Standard 1312: External Assessments.

In organizations, authority types define how power and influence are exercised. Since the technician is prioritizing projects, their authority comes from their specialized knowledge or expertise, making this an example of expert authority.
* Why Option D (Expert Authority) is Correct:
* Expert authority is based on specialized knowledge, skills, or expertise rather than formal position or hierarchical power.
* The technician is trusted to prioritize projects because of their technical knowledge and understanding of project impact.
* Expert authority is commonly seen in IT specialists, consultants, and industry professionals who guide decision-making based on expertise.
* Why Other Options Are Incorrect:
* Option A (Legitimate Authority):
* Incorrect because legitimate authority is derived from a formal position or title within an organizational hierarchy (e.g., CEO, manager).
* Option B (Coercive Authority):
* Incorrect because coercive authority relies on threats, punishment, or force, which is not applicable in this scenario.
* Option C (Referent Authority):
* Incorrect because referent authority is based on personal influence, charisma, or relationships, rather than expertise.
* IIA Practice Guide - "Auditing Organizational Governance": Discusses different types of authority in decision-making.
* COSO ERM Framework - "Risk Governance & Decision-Making": Recognizes expert authority as a key factor in risk-based project prioritization.
* IIA's GTAG - "Auditing IT Governance": Highlights the role of expert authority in IT project prioritization and governance.
IIA References: