Free CGAP Auditing & Corporate Governance Questions and Answers — Questions and Answers

Question 1: The division of labor among employees so that, while a transaction is being carried out, recorded, and processed, the work of one employee is automatically inspected by another.

Internal control
Vouching
Internal check (Correct answer)
Internal audit

Correct answer: Internal check

Internal check is a system where the duties of employees are organized so that the work of one person is automatically verified by another, without any specific additional effort. This division of labor ensures that no single individual has complete control over a transaction, thereby reducing the risk of errors and fraud. It's a built-in control mechanism within the operational processes.

Question 2: Internal auditing's goal is to

To prevent frauds and errors
To detect frauds and errors (Correct answer)
Both (a) and (b)
Both (a) and (b)

Correct answer: To detect frauds and errors

Internal auditing's primary goal is to evaluate and improve the effectiveness of risk management, control, and governance processes. While it indirectly contributes to prevention by recommending improvements, its direct function involves systematically examining operations to detect existing frauds and errors. This detection allows management to implement corrective actions and strengthen controls.

Question 3: The process of looking at a document that backs up a recorded transaction to confirm the legitimacy and validity of that transaction

Internal check
Vouching (Correct answer)
Auditing
Audit planning

Correct answer: Vouching

Vouching is a core auditing procedure where an auditor examines documentary evidence, known as vouchers, that supports a recorded transaction. This process confirms the authenticity, validity, and proper authorization of the transaction. It ensures that entries in the books of accounts are legitimate and backed by appropriate evidence.

Question 4: Which of the following does not apply to the vouching process for cash sales:

Examine cash memos
Examine cash book
Examine balance sheet (Correct answer)
Examine the counterfoil of pay in slops

Correct answer: Examine balance sheet

When vouching cash sales, an auditor focuses on documents directly related to the transaction, such as cash memos, the cash book, and counterfoils of pay-in slips. The balance sheet, however, is a summary financial statement at a specific point in time and does not provide the detailed transactional evidence needed to verify individual cash sales. Therefore, examining the balance sheet is not part of the vouching process for cash sales.

Question 5: Who is in charge of examining the assets?

Director
Auditor (Correct answer)
Management
None of the above

Correct answer: Auditor

The auditor is an independent professional responsible for examining and verifying an entity's financial statements, which includes assessing the existence, valuation, and rights to assets. While management is responsible for safeguarding assets, the auditor's role is to provide an objective opinion on whether these assets are fairly presented in the financial statements.

Question 6: Which of the following items does the auditor not check when examining the liabilities?

Completeness
Existence
Obligation
All of the above (Correct answer)

Correct answer: All of the above

When examining liabilities, an auditor must address all relevant financial statement assertions. This includes completeness (ensuring all liabilities are recorded), existence (verifying that recorded liabilities are real), and obligation (confirming the entity has a legal or constructive duty to settle them). Therefore, an auditor checks for all these aspects to ensure liabilities are accurately presented.

Question 7: When one clerk's work is automatically reviewed by another, it is referred as as

Internal audit.
Internal control.
Internal check. (Correct answer)
None of the above.

Correct answer: Internal check.

Internal check refers to a system where the duties of employees are arranged so that the work of one person is automatically reviewed or verified by another in the ordinary course of business. This inherent segregation of duties helps prevent and detect errors and frauds by ensuring no single individual has complete control over a transaction from start to finish.

Question 8: Which of the following doesn't qualify as an audit?

Continuous, final, Interim, Cash, Cost and Management audit.
Statutory and private audit.
Government and continuous audit.
None of these. (Correct answer)

Correct answer: None of these.

All the options listed (Continuous, final, interim, cash, cost, management, statutory, private, and government audits) are recognized types or classifications of audits. Since the question asks which option does not qualify as an audit, and all provided are valid audit types, 'None of these' is the correct answer.

Question 9: The audit that a statute makes required is known as __________ .

Partial audit.
Statutory audit. (Correct answer)
Continuous audit.
Complete audit.

Correct answer: Statutory audit.

A statutory audit is an audit that is mandated by a specific law or statute, such as company law or banking regulations. Its purpose is to ensure that the financial statements comply with legal requirements and present a true and fair view, thereby protecting the interests of various stakeholders.

Question 10: This type of audit is typically undertaken between two annual audits _______ .

Continuous audit.
Final audit.
Interim audit. (Correct answer)
Internal audit.

Correct answer: Interim audit.

An interim audit is conducted during the financial year, typically between two annual audits, to review transactions and balances up to a certain date. This allows for early detection of errors, facilitates the preparation of interim financial statements, and helps spread the auditor's workload, potentially leading to a quicker final audit.

Question 11: When generally accepted accounting rules are not adhered to when documenting any transaction in the books of accounts, errors may result.

Errors of duplication
Errors of principle (Correct answer)
Compensating errors
Clerical errors

Correct answer: Errors of principle

Errors of principle occur when a transaction is recorded in violation of generally accepted accounting principles (GAAP), even if the debit and credit amounts are numerically correct. For example, incorrectly classifying a capital expenditure as a revenue expenditure is an error of principle. These errors lead to misrepresentation of financial performance and position.

Question 12: It's vital to check monetary transactions.

Check all transaction
Documentary evidence for every transaction
System of internal control
All of the above. (Correct answer)

Correct answer: All of the above.

To thoroughly check monetary transactions, an auditor needs a comprehensive approach. This includes examining all transactions (or a representative sample), verifying each transaction with documentary evidence, and evaluating the effectiveness of the internal control system. All these elements combined ensure the reliability and accuracy of monetary transaction records.

Question 13: The auditor should investigate any sales returns.

Purchase invoices and goods received notes.
Credit notes and delivery challans.
Whether cash has been repaid to the client
Credit notes and goods received notes. (Correct answer)

Correct answer: Credit notes and goods received notes.

When investigating sales returns, an auditor should examine credit notes, which formally acknowledge the return and reduce the customer's outstanding balance. Additionally, goods received notes confirm that the returned items were physically received back into the company's inventory. These two documents provide strong evidence for the legitimacy and proper recording of sales returns.

Question 14: Which of the following is true regarding the value of vouching?

Helps in detection and prevention of errors & frauds
It helps to verify whether entries are passed as per acceptable accounting principles.
Ensures all items are disclosed in the financial statement as per Schedule VI provisions
All the above (Correct answer)

Correct answer: All the above

Vouching is a fundamental audit procedure that offers multiple benefits. It helps in detecting and preventing errors and frauds by verifying transactions against supporting documents. It also ensures that entries comply with acceptable accounting principles and that all relevant items are properly disclosed in financial statements according to regulatory provisions, making all the given options true.

Question 15: The components of auditing consist of:

Stated purpose
Collects and evaluates the evidence
Systematic and independent examination
All of the above (Correct answer)

Correct answer: All of the above

Auditing involves a systematic and independent examination of financial information to express an opinion. This process requires a clearly stated purpose, the collection and objective evaluation of sufficient appropriate evidence, and a systematic and independent approach to ensure objectivity and thoroughness. All these components are essential for a valid and credible audit.

Question 16: An audit known as an interim audit was carried out.

In between two annual audits (Correct answer)
In between one statutory audit, one management audit and one internal audit
In between two different accounting years
None of the above

Correct answer: In between two annual audits

An interim audit is specifically defined as an audit conducted during the financial year, typically to review transactions and balances for a period within that year. Its timing is 'in between two annual audits,' meaning it occurs after the previous annual audit and before the upcoming one. This helps in spreading the audit workload and providing timely financial insights.

Free CGAP Auditing & Corporate Governance Questions and Answers

The division of labor among employees so that, while a transaction is being carried out, recorded, and processed, the work of one employee is automatically inspected by another.