CGAP MCQ 3 — Questions and Answers
Question 1: Which of the following best describes 'inherent risk' in a government audit context?
- Risk that internal controls will fail to detect errors
- Risk of material misstatement absent any controls (Correct answer)
- Risk that the auditor will issue an incorrect opinion
- Risk arising from the audit sampling method
Correct answer: Risk of material misstatement absent any controls
Inherent risk is the susceptibility of an assertion to misstatement before considering any related internal controls.
Question 2: A government auditor uses stratified sampling to test grant disbursements. The primary advantage of this approach is:
- It eliminates sampling risk entirely
- It ensures every item has an equal chance of selection
- It allows more efficient coverage of high-risk strata (Correct answer)
- It reduces the need for professional judgment
Correct answer: It allows more efficient coverage of high-risk strata
Stratified sampling divides the population into subgroups so auditors can apply greater scrutiny to higher-risk or higher-value items.
Question 3: Under the Single Audit Act, the threshold for a program to be considered a major federal program is based on:
- The number of beneficiaries served
- Federal expenditures as a percentage of total expenditures
- The program's risk classification combined with expenditure thresholds (Correct answer)
- The age of the federal award
Correct answer: The program's risk classification combined with expenditure thresholds
Major program determination under the Uniform Guidance uses a risk-based approach combining Type A/B classification with risk assessment and expenditure coverage percentages.
Question 4: Which ethical principle requires a CGAP auditor to avoid situations where personal relationships could compromise audit judgment?
- Competence
- Independence (Correct answer)
- Confidentiality
- Due professional care
Correct answer: Independence
Independence requires auditors to be free from personal, external, and organizational impairments that could compromise their objectivity.
Question 5: A government entity uses fund accounting primarily to:
- Maximize investment returns on public funds
- Demonstrate compliance with legal restrictions on resource use (Correct answer)
- Simplify tax reporting requirements
- Consolidate all government activities into one statement
Correct answer: Demonstrate compliance with legal restrictions on resource use
Fund accounting segregates resources into separate accounting entities to demonstrate that legally restricted funds are used only for their intended purposes.
Question 6: When auditing a government entity, the auditor discovers that the entity failed to disclose a contingent liability for pending litigation. This omission would most likely affect the:
- Opinion on internal controls only
- Compliance opinion only
- Financial statement opinion (Correct answer)
- Neither, as contingencies are not auditable
Correct answer: Financial statement opinion
Omission of a material contingent liability is a financial statement misstatement that affects the fair presentation opinion.
Question 7: In assessing control risk, a government auditor concludes that controls are effective. This would allow the auditor to:
- Eliminate substantive testing entirely
- Reduce the extent of substantive testing (Correct answer)
- Increase the overall materiality threshold
- Bypass tests of controls for the next audit cycle
Correct answer: Reduce the extent of substantive testing
When control risk is assessed as low, auditors can reduce the scope of substantive procedures because they rely on controls to detect misstatements.
CGAP MCQ 3
Which of the following best describes 'inherent risk' in a government audit context?