Free CGAP MCQ Questions and Answers — Questions and Answers

Question 1: Vouching of _____ refers to the process of verifying the balances of all revenue and expense accounts.

Cash
Sales
Personal ledger.
Impersonal ledger. (Correct answer)

Correct answer: Impersonal ledger.

The impersonal ledger, also known as the nominal ledger, contains all the revenue and expense accounts, as well as asset and liability accounts. Vouching the impersonal ledger involves verifying the balances of these income and expenditure accounts to ensure they are accurately recorded and supported by appropriate documentation. This process is crucial for determining the true profit or loss of the business.

Question 2: The best illustration of ________ is preliminary costs.

floating asset.
wasting asset.
intangible asset.
fictitious asset. (Correct answer)

Correct answer: fictitious asset.

Preliminary costs are expenses incurred before the commencement of business operations, such as legal fees for company formation or underwriting commissions. They are classified as fictitious assets because they do not have any physical existence or realizable value, nor do they generate future economic benefits directly. Instead, they represent deferred revenue expenditures that are gradually written off against profits over several years.

Question 3: Regular auditing is also known as .

Interim audit.
Final audit.
Income statement audit.
Balance sheet audit. (Correct answer)

Correct answer: Balance sheet audit.

Regular auditing, often referred to as a final audit, typically culminates in the examination of the company's financial statements, including the balance sheet and income statement. A balance sheet audit specifically focuses on verifying the assets, liabilities, and equity presented in the balance sheet. In many contexts, a 'regular audit' implies a comprehensive review leading to an opinion on the full set of financial statements, with the balance sheet being a core component.

Question 4: A government company's auditor must be chosen by .

the debenture holders.
the share holders.
the central government. (Correct answer)
the government company itself.

Correct answer: the central government.

For government companies, the appointment of auditors is typically handled by the Comptroller and Auditor General of India (CAG), who acts on behalf of the Central Government. This ensures government oversight and accountability for entities where the government has a significant stake. Therefore, the central government, through the CAG, is responsible for choosing the auditor.

Question 5: The cash book audit's primary goal could be .

to check the bank balance.
to check the internal control system in business.
to verify the assets and liabilities.
to know that all receipts and payments have been properly recorded. (Correct answer)

Correct answer: to know that all receipts and payments have been properly recorded.

The primary goal of auditing the cash book is to ensure the accuracy and completeness of all cash transactions. This involves verifying that every receipt has been properly recorded and deposited, and every payment is authorized, supported by vouchers, and correctly entered. This helps prevent fraud, errors, and misappropriation of cash, which is a highly liquid asset.

Question 6: One of the audit methods used to verify the newly established company's share capital issue is .

the issue of debenture.
the share transfer register.
the memorandum of association and articles of association. (Correct answer)
none of the above.

Correct answer: the memorandum of association and articles of association.

When auditing the share capital issue of a newly established company, the auditor must refer to the Memorandum of Association and Articles of Association. These foundational documents define the company's authorized share capital, the classes of shares it can issue, and the rules and procedures for their issuance. They provide the legal framework against which the actual share issue is verified.

Question 7: The practice of having one clerk's work automatically checked by another is known as _____________ .

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

Correct answer: Internal check.

Internal check is an accounting control system where the duties of employees are arranged so that the work of one person is automatically verified or checked by another. This division of labor minimizes the chances of errors and fraud going undetected, as no single person has complete control over a transaction from start to finish. It's a preventive control built into the operational processes.

Question 8: The company's owners go by the name of _______ .

Debtors
Shareholders (Correct answer)
Debenture holders.
None of the above.

Correct answer: Shareholders

Shareholders are the individuals or entities who own shares in a company, representing their proportional ownership stake. They invest capital in the company and, in return, have rights such as voting on major decisions and receiving dividends. Debtors owe money to the company, and debenture holders are creditors who have lent money to the company.

Question 9: The auditor must operate under the professional skepticism that management is .

neither honest nor dishonest. (Correct answer)
reasonably honest.
dishonest unless proved otherwise.
not necessarily honest.

Correct answer: neither honest nor dishonest.

Professional skepticism requires an auditor to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence. This means the auditor should neither assume that management is absolutely honest nor assume they are dishonest. Instead, they should approach the audit with a neutral, objective, and questioning mindset, critically evaluating all information and evidence presented.

Question 10: The easiest way to guarantee the auditor will have which of the following is to utilize an audit engagement letter?

Management representation letter.
Auditor will obtain sufficient appropriate audit evidence.
Co-operation from other auditors
Access to all books, accounts and vouchers required for audit purpose. (Correct answer)

Correct answer: Access to all books, accounts and vouchers required for audit purpose.

An audit engagement letter formally sets out the terms of the audit engagement between the auditor and the client. A crucial aspect clarified in this letter is the auditor's right to unrestricted access to all books, accounts, vouchers, and other information deemed necessary for the audit. This ensures the auditor has the authority to obtain sufficient appropriate audit evidence.

Question 11: An auditor may be held liable for _______ .

Civil and Criminal. (Correct answer)
Official
Civil
Criminal

Correct answer: Civil and Criminal.

An auditor can be held liable for both civil and criminal offenses. Civil liability arises from negligence, where the auditor fails to exercise due care and skill, leading to financial loss for stakeholders. Criminal liability can arise in cases of fraud, collusion, or knowingly signing off on false financial statements, which can result in fines or imprisonment.

Question 12: A company's internal auditor must be _________ .

ICWA
Cost accountant. (Correct answer)
need not possess any professional qualification.
Chartered accountant.

Correct answer: Cost accountant.

While a Chartered Accountant is highly qualified for internal audit, a Cost Accountant (e.g., an ICWA in India) is also a recognized professional qualification highly suitable for internal audit roles, especially in organizations where cost management and operational efficiency are critical. Internal audit encompasses a broad range of areas, and a cost accountant's expertise is particularly valuable for evaluating cost systems and performance.

Question 13: A vacancy left by an auditor's resignation is filled by ____________ .

central government.
general meeting. (Correct answer)
managing director.
board of directors.

Correct answer: general meeting.

When an auditor resigns, the resulting casual vacancy is typically filled by the general meeting of shareholders. Since the shareholders are the ultimate appointing authority for the company's auditors, they are responsible for approving a new auditor to fill the unexpired term. The Board of Directors may make an interim appointment, but it usually requires ratification by the shareholders.

Question 14: Cost audit falls under the definition of section 233(b) of the Companies Act.

avoidable
advisable (Correct answer)
compulsory
voluntary

Correct answer: advisable

Section 233(B) of the Companies Act (referring to older Indian Companies Act, 1956, or similar legislation) deals with cost audit. While cost audit can be made compulsory for certain industries or companies by the government, the general nature of the provision often makes it 'advisable' or mandatory under specific conditions rather than universally compulsory for all companies. The term 'advisable' here implies that it's a recommended or mandated practice for specific sectors to ensure cost efficiency and compliance.

Question 15: When no auditor is appointed or reappointed at a company's annual general meeting. If so, then

none of these can appoint a person to fill the vacancy.
the managing director of the company appoints a person to fill the vacancy.
the board of directors appoints a person to fill the vacancy.
the central government appoints a person to fill the vacancy (Correct answer)

Correct answer: the central government appoints a person to fill the vacancy

If a company fails to appoint or reappoint an auditor at its Annual General Meeting, a vacuum is created in the audit function. In such a situation, to ensure compliance with statutory requirements and protect stakeholder interests, the Central Government is empowered to appoint a person to fill the vacancy. This prevents the company from operating without a statutory auditor.

Question 16: Based on __________, misstatements are the hardest kind of fraud to identify.

omission of a sales transaction from being recorded. (Correct answer)
the restatement of sales.
related party purchases.
related party sales.

Correct answer: omission of a sales transaction from being recorded.

Misstatements arising from the omission of a sales transaction from being recorded are often the hardest kind of fraud to detect. This is because there is no entry in the accounting records to audit or trace, making it difficult for auditors to identify that a transaction even occurred. In contrast, restatements or related party transactions usually leave a trail in the books, which can be investigated.

Free CGAP MCQ Questions and Answers

Vouching of _____ refers to the process of verifying the balances of all revenue and expense accounts.