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Financial CIA-III Exam (page: 53)
Financial The Certified Internal Auditor Part 3
Updated on: 17-Feb-2026

Viewing Page 53 of 312
CIA-III PDF 1554 Questions

A company is deciding whether to purchase an automated machine to manufacture one of its products. Expected net cash flows from this decision depend on several factors, interactions among those factors, and the probabilities associated with different levels of those factors.
The method that the company should use to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting from changes in levels of various factors is:

  1. Simulation and sensitivity analysis.
  2. Linear programming.
  3. Correlation analysis.
  4. Differential analysis.

Answer(s): A

Explanation:

Simulation is a technique used to describe the behavior of a real-world system over time. This technique usually employs a computer program to perform the simulation computations. Sensitivity analysis examines how outcomes change as the model parameters change.



In forecasting purchases of inventory for a firm, all of the following are useful except:

  1. Knowledge of the behavior of business cycles.
  2. Internal allocations of costs to different segments of the firm.
  3. Information on the seasonal variations in demand.
  4. Econometric modeling.

Answer(s): B

Explanation:

Internal allocations of costs relate to costs already incurred, that is, to sunk costs. Sunk costs are not relevant to decision making, for example, to forecasting future purchases.



A regression equation:

  1. Estimates the dependent variables.
  2. Encompasses factors outside the relevant range.
  3. Is based on objective and constraint functions.
  4. Estimates the independent variable.

Answer(s): A

Explanation:

Regression analysis is used to find an equation for the linear relationship among variables. The behavior of the dependent variable is explained in terms of one or more independent variables. Regression analysis is often used to estimate a dependent variable such as cost) given a known independent variable such as production).



The correlation coefficient that indicates the weakest linear association between two variables is:

  1. -0.73
  2. -0.11
  3. 0.12
  4. 0.35

Answer(s): B

Explanation:

The correlation coefficient can vary from -1 to +1. A -1 relationship indicates a perfect negative correlation, and a +1 relationship indicates a perfect positive correlation. A zero correlation coefficient would indicate no association between the variables. Thus, the correlation coefficient that is nearest to zero would indicate the weakest linear association. Of the options given in the question, the correlation coefficient that is nearest to zero is -0.11.



Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the coefficient of correlation, r. The best explanation of the value r is that it:

  1. Is always positive.
  2. Interprets variances in terms of the independent variable.
  3. Ranges in size from negative infinity to positive infinity.
  4. Is a measure of the relative relationship between two variables.

Answer(s): D

Explanation:

The coefficient of correlation r) measures the strength of the linear relationship between the dependent and independent variables. The magnitude of r is independent of the scales of measurement of x and y. The coefficient lies between -1.0 and +1.0. A value of zero indicates no linear relationship between the x and y variables. A value of +1.0 indicates a perfectly direct relationship, and a value of-1.0 indicates a perfectly inverse relationship.



Viewing Page 53 of 312



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