Certified Internal Auditor (CIA) Practice Test

How does variance analysis contribute to internal control systems?

1. It prevents fraud from occurring.

2. It detects and investigates discrepancies.

3. It establishes procedural standards.

4. It monitors compliance with regulations.

The correct answer is: It detects and investigates discrepancies.

Variance analysis is a key tool in the evaluation of an organization’s performance by comparing actual results to budgeted or standard expectations. As internal control systems aim to provide reasonable assurance regarding the effectiveness and efficiency of operations, including the reliability of financial reporting, variance analysis plays a critical role in detecting and investigating discrepancies. When actual performance deviates significantly from what was expected—whether in terms of costs, revenues, or other key metrics—this triggers a need for further investigation. Such discrepancies can indicate underlying issues, such as inefficiencies, unmet operational targets, or even potential fraud. This proactive approach allows organizations to identify negative outcomes early on, assess the reasons behind variances, and implement corrective actions, thereby enhancing the robustness of internal controls. While other options reflect essential aspects of internal controls, they do not specifically highlight the proactive nature of variance analysis in identifying issues: preventing fraud focuses on preemptive measures, establishing procedural standards relates to creating frameworks for operations, and monitoring compliance with regulations ensures adherence but does not inherently involve investigating discrepancies. Hence, the selection of the option emphasizing the detection and investigation of discrepancies encapsulates the primary contribution of variance analysis to the internal control systems.