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  3. CIA-III

Financial CIA-III Exam (page: 52)
Financial The Certified Internal Auditor Part 3
Updated on: 17-Feb-2026

Viewing Page 52 of 312
CIA-III PDF 1554 Questions

An account executive has just designed a Monte Carlo model to estimate the costs of a particular type of project. Validating the model could include all except:

  1. Checking for errors in the computer programming.
  2. Checking that assumed probability distributions are reasonable.
  3. Comparing test results with previously validated models.
  4. Applying the model.

Answer(s): D

Explanation:

The Monte Carlo technique is used in a simulation to generate the individual values for a random value. An essential step in the simulation procedure is to validate the mathematical model used. This process involves not only searching for errors but also verifying the assumptions. It also should provide some assurance that the results of the experiment will be realistic. This assurance is often obtained using historical data. If the model gives results equivalent to what actually happened, the model is historically valid. There is still some risk, however, that changes could make the model invalid for the future. The model should not be implemented until this validation process is complete.



A large fishing operation has information on the interval, time, and probabilities of shrimp schools staying beneath their fishing boats. In order to use this information to predict when and where to send their boats, which of the following techniques should be used?

  1. Simulation.
  2. Least squares.
  3. Queuing theory.
  4. Exponential smoothing.

Answer(s): A

Explanation:

Simulation Monte Carlo simulation) is a technique for experimenting with logical/mathematical models using a computer. Despite the power of mathematics, many problems cannot be solved by known analytical methods because of the behavior of the variables and the complexity of their interactions. However, the performance of a quantitative model under uncertainty may be investigated by randomly selecting values for each variable in the model based on its probability distribution) and then calculating the value of the solution. If this process is performed many times, the distribution of results from the model will be obtained.



Which of the following is not true about simu-lation models?

  1. They are deterministic in nature.
  2. The may involve sampling.
  3. They mathematically estimate what actual performance would be.
  4. They emulate stochastic systems.

Answer(s): A

Explanation:

Simulation is a technique for experimenting with logical/mathematical models using a computer. The simulation procedure has five steps: define the objectives, formulate the model, validate the model, design the experiment, and conduct the simulation and evaluate the results. A simulation uses the laws of probability to generate values for random variables.
Thus, simulation models are probabilistic, not deterministic.



A cost-volume-profit model developed in a dynamic environment determined that the estimated parameters used may vary between limits. Subsequent testing of the model with respect to all possible values of the estimated parameters is termed:

  1. A sensitivity analysis.
  2. Statistical estimation.
  3. Statistical hypothesis testing.
  4. A time-series study.

Answer(s): A

Explanation:

After a problem has been formulated into any mathematical model, it may be subjected to sensitivity analysis. Sensitivity analysis is a method for studying the effects of changes in one or more variables on the results of a decision model.



An investment company is attempting to allocate its available funds between two investment alternatives, stocks and bonds, which differ in terms of expected return and risk. The company would like to minimize its risk while earning an expected return of at least 10% and investing no more than 70% in either of the investment alternatives. An appropriate technique for allocating its funds between stocks and bonds is:

  1. Linear programming.
  2. Capital budgeting.
  3. Differential analysis.
  4. Queuing theory.

Answer(s): A

Explanation:

Linear programming is a mathematical technique for planning resource allocation that optimizes a given objective function that is subject to certain constraints. In this case, the maximum investment is constrained by a 70% limit on either investment choice.



Viewing Page 52 of 312



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