GAP Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Under a GAP audit framework, what does 'dual control' refer to in the context of claims processing?
- Two separate insurance policies covering the same vehicle
- Requiring two authorized individuals to approve or process a transaction (Correct answer)
- A vehicle with both GAP and extended warranty coverage
- The auditor and dealer jointly signing the audit report
Correct answer: Requiring two authorized individuals to approve or process a transaction
Dual control is an internal control requiring two authorized individuals to review or approve transactions, reducing the risk of fraud or error in claims processing.
Question 2: Which of the following is a key indicator of potential misrepresentation that a GAP auditor should flag during contract review?
- A customer signature dated the same day as the purchase
- A vehicle purchase price significantly below book value with no explanation (Correct answer)
- A GAP term matching the loan term
- A primary insurer listed on the contract
Correct answer: A vehicle purchase price significantly below book value with no explanation
A vehicle purchase price significantly below market value without documentation raises a red flag for potential misrepresentation or fraud in the underlying transaction.
Question 3: What is the auditor's responsibility when they discover a potential violation of state insurance regulations during a GAP program audit?
- Correct the violation themselves without documenting it
- Document the finding and escalate it to appropriate compliance or legal personnel (Correct answer)
- Advise the dealer to fix it quietly before regulators notice
- Disregard it if the violation appears minor
Correct answer: Document the finding and escalate it to appropriate compliance or legal personnel
Auditors must document all findings, including potential regulatory violations, and escalate them to compliance or legal personnel who can determine the appropriate response.
Question 4: In GAP auditing, what does 'stratification' of a contract population help an auditor accomplish?
- Rank dealers by sales volume for bonus purposes
- Divide contracts into subgroups by characteristics (e.g., loan term, LTV) to target sampling more effectively (Correct answer)
- Alphabetize customer records for easier retrieval
- Calculate total premiums earned during the audit period
Correct answer: Divide contracts into subgroups by characteristics (e.g., loan term, LTV) to target sampling more effectively
Stratification groups contracts by shared characteristics so auditors can design samples that adequately represent higher-risk subgroups within the overall population.
Question 5: Which internal control is most effective at preventing a GAP certificate from being issued after a total loss has already occurred?
- Requiring customers to sign a disclosure form
- System-level date validation that cross-checks certificate issuance date against the reported loss date (Correct answer)
- Having the dealer verbally confirm the vehicle is not totaled
- Auditing claims once per year
Correct answer: System-level date validation that cross-checks certificate issuance date against the reported loss date
Automated date validation controls prevent back-dating by cross-referencing the issuance date against loss dates, making post-loss enrollment technically impossible.
Question 6: A GAP auditor calculates the 'deficiency balance' for a sample claim. What two figures are subtracted to arrive at this amount?
- Loan payoff minus vehicle purchase price
- Outstanding loan balance minus actual cash value (ACV) of the vehicle (Correct answer)
- GAP benefit paid minus insurance deductible
- Purchase price minus down payment
Correct answer: Outstanding loan balance minus actual cash value (ACV) of the vehicle
The deficiency balance equals the outstanding loan balance minus the vehicle's actual cash value (ACV), which is the core amount GAP coverage is designed to address.
Question 7: When an audit reveals that a dealer has been charging customers a GAP premium higher than the rate filed with the administrator, what type of violation has occurred?
- An underwriting guideline breach
- A rate/pricing compliance violation (Correct answer)
- A title defect issue
- A lender participation agreement breach
Correct answer: A rate/pricing compliance violation
Charging a premium rate different from the rate filed and approved by the program administrator constitutes a rate/pricing compliance violation.
GAP Auditing Principles & Procedures 3
Under a GAP audit framework, what does 'dual control' refer to in the context of claims processing?