CGAP Flashcards

A thorough investigation of a company's books and records is called a .

Answer: Auditing

Auditing is the systematic and independent examination of a company's financial records, accounts, and other documents. Its purpose is to verify their accuracy, completeness, and compliance with established standards and regulations, providing an opinion on the fairness of financial statements.

Which of the following doesn't qualify as an audit?

Answer: None of these.

All the options listed (Government, continuous, final, interim, cash, cost, management, statutory, and private audits) are recognized and distinct types or classifications of audits. Therefore, none of the provided choices represent something that does not qualify as an audit.

The controller and auditor general of India issued a directive for an audit.

Answer: government audit.

The Comptroller and Auditor General (CAG) of India is the constitutional authority responsible for auditing all receipts and expenditures of the Union and State Governments. Therefore, any directive issued by this office for an audit would pertain to a government audit, falling within its mandate to ensure public accountability.

This type of audit is typically undertaken between two annual audits.

Answer: interim audit.

An interim audit is specifically designed to be conducted during the course of a financial year, typically between two annual audits. Its purpose is to review transactions and balances up to a certain date, allowing for early error detection and facilitating the timely preparation of interim financial statements.

The auditor sets out the entire audit process before work on it begins, and this process is known as .

Answer: Audit programme.

An audit programme is a detailed plan or set of instructions prepared by the auditor before commencing the audit work. It outlines the scope, objectives, and procedures to be followed, ensuring a systematic, comprehensive, and efficient approach to the entire audit process.

The first auditor of a corporation is chosen by the board of directors.

Answer: within one month of incorporation of the company.

According to company law in many jurisdictions, including India, the first auditor of a company is appointed by the Board of Directors within a specific timeframe after the company's incorporation. This ensures that the company has an auditor in place to oversee its financial records from its initial stages.

The internal auditor is chosen by .

Answer: the management.

Internal auditors are employees of the organization they audit, and their appointment is typically made by the company's management or its audit committee. Their role is to provide independent and objective assurance and consulting services to management, helping to improve organizational operations and risk management.

Where _____ ends, auditing begins.

Answer: Accounting

Accounting is the process of recording, classifying, and summarizing financial transactions to produce financial statements. Auditing then begins where accounting ends, by examining and verifying these prepared financial statements and records to ensure their accuracy, fairness, and compliance with relevant standards and laws.

Which of the following sections addresses the auditor's qualifications?

Answer: Section 226(1) and Section 226(2).

Sections 226(1) and 226(2) of the Companies Act (referring to older Indian Companies Act, 1956, or similar legislation) specifically outline the qualifications and disqualifications for a person to be appointed as a company auditor. These sections typically state that only a Chartered Accountant in practice can be an auditor, and list conditions under which a person is ineligible, such as being an officer or employee of the company, or indebted to it. Therefore, these sections directly address the auditor's eligibility criteria.

The audit that is required by law is known as .

Answer: Statutory audit.

A statutory audit is an audit that is legally required by a statute or law, such as the Companies Act, for certain entities like public companies. Its primary purpose is to ensure that the company's financial statements provide a true and fair view of its financial position and performance. This type of audit is mandatory and not optional, distinguishing it from other types of audits.

Who among the following can be chosen to serve as a company's auditor?

Answer: Mr. Z the holder of C.A certificate.

According to company law, only a qualified Chartered Accountant (C.A.) holding a certificate of practice is eligible to be appointed as a company's auditor. The other options represent disqualifications: a partner or director has a conflict of interest, a person of unsound mind lacks legal capacity, and someone indebted to the company is not independent. Therefore, Mr. Z, a C.A. certificate holder, is the only eligible candidate.

The court must be confirmed in order for .

Answer: reduction of share capital.

The reduction of share capital directly impacts the company's financial structure and, more importantly, the security available to its creditors. To protect the interests of creditors and ensure fairness, company law mandates that any proposal for reducing share capital must be confirmed by the court. This judicial oversight ensures that the reduction is carried out properly and does not prejudice stakeholders.

The auditor is required to provide a report on the accounts they examined.

Answer: to the shareholders.

The auditor is appointed by the shareholders (or in some cases, the Board of Directors, subject to shareholder approval) to examine the company's financial statements on their behalf. Therefore, the auditor's report, which expresses an opinion on the truth and fairness of these accounts, is primarily addressed and submitted to the shareholders. This allows the owners to assess the financial health and management of their company.

Errors are referred to as ________ when a transaction has not been fully or partially documented in the books of account.

Answer: Error of omission.

An error of omission occurs when a transaction is completely or partially left out of the books of account. This means the transaction was never recorded, either in the journal or ledger. For example, if a sale was made but never entered into the sales day book, it's an error of omission.

It is known as ________ to verify the worth of a firm's assets, liabilities, reserve balance, provision, and amount of profit made or loss incurred.

Answer: Balance sheet audit.

A balance sheet audit specifically focuses on verifying the accuracy and fairness of the items presented in the balance sheet. This includes examining the valuation of assets, the completeness of liabilities, the proper accounting for reserves and provisions, and the resulting profit or loss figure. Its main objective is to provide assurance on the company's financial position at a specific point in time.

Which of the following claims about the first auditor's removal before the term's end is untrue?

Answer: The approval of the central government is required for such removal.

The removal of the first auditor before the expiry of their term is typically a power vested in the shareholders, who can do so at a general meeting. While specific sections of company law (like Section 224(7) in older Indian Companies Act) address this, the approval of the central government is generally not required for such removal. Government approval is usually reserved for the removal of subsequent auditors or in specific circumstances, not for the first auditor.