Certified Internal Auditor (CIA) Practice Test

What is the primary reason for performing an analytical review of divisional gross margins?

1. Identify procedural failures in divisions

2. Establish new financial policies

3. Assess performance disparities among divisions

4. Verify compliance with accounting standards

The correct answer is: Assess performance disparities among divisions

Performing an analytical review of divisional gross margins primarily aims to assess performance disparities among divisions. This review involves comparing the gross margins of different divisions to identify variations that may indicate differing levels of operational efficiency, cost management, or revenue generation capabilities. By analyzing these margins, management can pinpoint where some divisions may be underperforming compared to others and investigate the reasons behind those disparities. Understanding performance differences is critical for decision-making. When divisions show significant variations in their gross margins, it may lead to deeper analysis of pricing strategies, cost structures, and market conditions affecting divisions differently. Such insights can inform strategic actions to improve overall performance, optimizing resources across the organization to enhance profitability. While identifying procedural failures, establishing new financial policies, or verifying compliance with accounting standards are important objectives in their own right, these are not the primary focus of an analytical review of divisional gross margins. The core intent here is to assess and understand performance differences so that targeted improvements can be made where necessary.