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Financial CIA-III Exam (page: 4)
Financial The Certified Internal Auditor Part 3
Updated on: 12-Feb-2026

Viewing Page 4 of 312
CIA-III PDF 1554 Questions

Listed below are selected line items from the cost-of-quality report for Company B for last month Category:


What is Company B's total prevention and appraisal cost for last month?

  1. US$786
  2. US$1,154
  3. US$1,940
  4. US$2,665

Answer(s): C

Explanation:

Answer C is correct. Prevention costs are incurred to prevent defects from occurring. An example is equipment maintenance. Appraisal costs are incurred to detect defective output during and after the production process. An example is product testing. Thus, total prevention and appraisal cost for the month equals US $1,940 (US$1,154 + US $786).



All of the following are generally included in a cost-of-quality report except:

  1. Warranty claims.
  2. Design engineering.
  3. Supplier evaluations.
  4. Lost contribution margin.

Answer(s): D

Explanation:

A cost-of-quality report includes most costs related to quality, specifically the costs of prevention, appraisal, internal failure, and external failure.



In Year 2, a manufacturing company instituted a total quality management (TQM) program producing the following report:

On the basis of this report, which one of the following statements is most likely true?

  1. An increase in prevention and appraisal costs resulted in a higher quality product and therefore resulted in a decrease in failure costs.
  2. An increase in inspection costs was solely responsible for the decrease in quality costs.
  3. Quality costs, such as scrap and rework, decreased by 48%.
  4. Quality costs, such as returns and repairs under warranty, decreased by 40%.

Answer(s): A

Explanation:

Answer A is correct. Prevention and appraisal costs increased substantially, but internal and external failure costs decreased. Thus, the soundest conclusion is that the increase in prevention and appraisal costs resulted in a higher-quality product.



Quality cost indices are often used to measure and analyze the cost of maintaining a given level of quality. One example of a quality cost index, which uses a direct labor base, is computed as:


Based upon these cost data, the quality cost index:

  1. Decreased four points from May to June.
  2. Was unchanged from May to June.
  3. Increased 10 points from May to June.
  4. Decreased 10 points from May to June.

Answer(s): A

Explanation:

The index for May was 40 [(US $4,000 + $6,000 + $12,000 + $14,000) + $90,000], and the index for June was 36 [(US $5,000 + $5,000 + $15,000 + $11.000) + $100,000].



Quality cost indices are often used to measure and analyze the cost of maintaining or improving the level of quality. Such indices are computed by dividing the total cost of quality over a given period by some measure of activity during that period (for example, sales dollars). The following cost data are available for a company for the month of March. The company's quality cost index is calculated using total cost of quality divided by sales dollars.



The quality cost index for March is:

  1. 7.5
  2. 6.5
  3. 22.0
  4. 5.9

Answer(s): A

Explanation:

The total cost of quality equals the sum of prevention costs (quality planning), appraisal costs (inspection and testing), internal failure costs (scrap and rework), and external failure costs (customer complaints and returns), or US $30,000 ($2,800 + $6,400 + $16,800 + $4,000). Thus, the quality cost index for March is 7.5 [(US $30,000 - US $400,000) x 100].



Viewing Page 4 of 312



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