Deck 11: Auditing of Governmental and Not-For-Profit Organizations

Question 1

Required supplementary information (RSI),such as the MD&A and budgetary comparison schedules,are covered under a financial statement audit.

Answer 1

False
Explanation: Required supplementary information (RSI), such as the MD&A and budgetary comparison schedules, are outside the scope of the financial statement audit. Auditors apply certain limited procedures in connection with RSI to provide assurance that they are fairly presented in relation to the basic financial statements.

Question 2

Under GAGAS,safeguards are controls designed to eliminate threats to independence.

Answer 2

False
Explanation: Safeguards are controls designed to eliminate OR reduce threats to independence.

Question 3

Though used historically by corporate boards of directors,audit committees have great potential in a government setting to improve the quality of financial reporting through the audit process.

Answer 3

True
Explanation: When properly organized and utilized an audit committee of a government can strengthen the stewardship function of the governing board, improve communication between the auditor and responsible officials, and enhance the auditor's independence by serving as an objective buffer between the auditor and management.

Question 4

In evaluating an entity's system of internal controls a significant deficiency is a deficiency in the design or operation of internal controls of such magnitude that the internal control components do not reduce the risk of detection or prevention of material misstatement to an acceptably low level.

Question 5

Audits of governments' financial statements are performed to determine if the financial statements are correct and in accordance with generally accepted accounting principles,but not to determine if there is compliance with laws and regulations.

Question 6

An audit of a government's financial statements,conducted in accordance with generally accepted government auditing standards (GAGAS),includes

A) A determination of efficiency and effectiveness.
B) An examination of the financial statements and underlying records for conformance with generally accepted accounting principles (GAAP).
C) Tests for compliance with laws and regulations.
D) An examination of the financial statements and underlying records for conformance with GAAP and tests for compliance with laws and regulations.

Question 7

In auditing compliance with laws and regulations as part of a single audit,the auditor must render an opinion on the specific requirements applicable to each program for which the entity receives federal financial assistance.

Question 8

The AICPA's Audit and Accounting Guide,State and Local Governments requires auditors to make separate materiality determinations for each opinion unit.

Question 9

Only state and local governments and their component units must have single audits; colleges and universities and other not-for-profit organizations that expend federal financial awards are not required to have single audits.

Question 10

Performance audits provide findings or conclusions based on an evaluation of sufficient,appropriate evidence against criteria.

Question 11

If the auditor determines that the financial statements contain a departure from GAAP,the effect of which is material,or there has been a material change between periods in accounting principles,or in the method of their application,the auditor should express an unqualified opinion.

Question 12

Generally accepted government auditing standards (GAGAS)apply to audits of state and local governments only if they expend $500,000 or more in federal financial assistance.

Question 13

The scope paragraph of an audit report identifies the audit standards used in performing the audit and describes any limitations imposed on the audit.

Question 14

The introductory paragraph of an audit report introduces the auditor and his/her background and qualifications to perform the auditor.

Question 15

The opinion paragraph of the independent auditor's standard report states the auditor's opinion that the financial statements are free of errors.

Question 16

Audits of state and local governments may be performed by all of the following except

A) Independent CPAs.
B) State audit agencies.
C) Federal grantor agencies.
D) The Office of Management and Budget (OMB).

Question 17

Since it is impossible to define every situation that creates threats to independence,the yellow book standards (i.e.,GAGAS)establish a conceptual framework that requires auditors to identify,evaluate,and apply safeguards to appropriately address threats to independence.

Question 18

Governments often engage one auditor to audit the primary government and other auditors to audit certain component units.In such cases the auditor of the primary government is permitted under generally accepted auditing standards (GAAS)to rely on the work of the other auditors.

Question 19

Before an auditor agrees to provide a nonaudit service to an audited entity,the auditor should determine whether providing such a service would create a threat to independence with respect to any GAGAS audit or attestation engagement it performs.

Question 20

Governments and not-for-profit entities may be subject to each of the following levels of audit except

A) Requirements under AICPA generally accepted auditing standards.
B) Requirements under GAO generally accepted governmental auditing standards.
C) Requirements under OMB compliance standards.
D) Requirements under the Single Audit Act.

Question 21

Government Auditing Standards (GAS)issued by the U.S.Comptroller General,also referred to as generally accepted government auditing standards (GAGAS),apply to all of the following audits,except

A) Financial statement audits of federal organizations made by the Government Accountability Office.
B) Financial audits of not-for-profit organizations that do not receive or expend federal financial awards.
C) Financial audits of federal grants made by independent CPAs.
D) Financial statement audits of federal programs made by state auditors.

Question 22

An auditor would not render an opinion on a(an)

A) Financial audit of financial statements.
B) Performance audit.
C) Audit to determine whether the entity has adhered to specific compliance requirements applicable to a major program.
D) Audit to determine whether a governmental department's financial information complies with specific state regulatory requirements.

Question 23

A single audit conducted pursuant to the Single Audit Act Amendments of 1996 requires which of the following types of audits?

A) Financial Audit: Yes; Performance Audit: No
B) Financial Audit: No; Performance Audit: No
C) Financial Audit: No; Performance Audit: Yes
D) Financial Audit: Yes; Performance Audit: Yes

Question 24

One of the primary purposes of the Single Audit Act of 1984 (amended in 1996)is to

A) Detect fraud,waste and abuse in government entities.
B) Promote the efficient and effective use of audit resources by consolidating audit activity into one organization-wide audit.
C) Make audit activity legal at the federal level.
D) Allow federal auditors greater access to government entities receiving federal funds.

Question 25

In which paragraph of the standard audit report does the auditor communicate to the user that certain combining fund information in the financial statements is not part of the basic financial statements,but that such information has been subjected to auditing procedures and,in his or her opinion,is fairly presented in all material respects in relation to the basic financial statements?

A) Explanatory paragraph.
B) Scope paragraph.
C) Opening paragraph.
D) Opinion paragraph.

Question 26

Typical objectives of a performance audit include

A) Determining whether financial statements fairly present the entity's operational results.
B) Judging the appropriateness of an entity's program goals.
C) Determining whether financial statements fairly present in conformity with GAAP.
D) Assessing effectiveness and results,economy and efficiency,and internal controls and compliance with laws and regulations.

Question 27

Which of the following best describes the relationship between generally accepted auditing standards (GAAS)and generally accepted government auditing standards (GAGAS)?

A) GAAS apply to independent CPA auditors; GAGAS apply to governmental auditors.
B) Audits conducted in conformity with GAGAS may also require the auditor to conform to GAAS.
C) Audits done in accordance with GAAS must also be done in accordance with GAGAS.
D) Audits of state and local governments always required that the audit be conducted in accordance with both GAAS and GAGAS.

Question 28

Circumstances that could impair independence and therefore should be evaluated are called

A) Material weaknesses.
B) Significant deficiencies.
C) Threats to independence.
D) Reportable conditions.

Question 29

All of the following reports are included in the reporting package resulting from the single audit except

A) Financial statements and schedule of expenditures of federal awards.
B) Summary schedule of prior audit findings.
C) Report on efficiency and effectiveness.
D) Corrective action plan.

Question 30

Which of the following statements concerning the Single Audit Act of 1984 (with 1996 Amendments)is correct?

A) Only those entities receiving over $500,000 a year in federal financial assistance are required to have a single audit.
B) Those entities expending under $500,000 a year in federal awards are exempt from single audit requirements.
C) The Single Audit Act only applies if an entity has high risk programs.
D) The single audit is optional for all entities receiving federal awards.

Question 31

Under the existing GAAP hierarchy for state and local government financial reporting,the GASB Implementation guides are

A) More authoritative than GASB Statements.
B) Less authoritative than GASB Technical Bulletins.
C) More authoritative than the AICPA state and local government audit guide.
D) Equally authoritative to GASB Statements.

Question 32

A condition whereby the design or operation of a control does not allow management or employees,in the normal course of performing their assigned functions,to prevent,or detect and correct misstatements on a timely basis is called a(an)

A) Deficiency.
B) System design weakness.
C) Unacceptable reportable condition.
D) Audit alert item.

Question 33

Generally accepted government auditing standards (GAGAS)

A) Establish the same scope as GAAS,but use wording appropriate to governmental entities instead of business organizations.
B) Are set forth in the Federal Government Compliance Supplement.
C) Establish more standards that are broader in scope than those found in GAAS.
D) Establish standard wording of auditor's reports on governmental financial statements.

Question 34

Which of the following is not a required audit report for a single audit?

A) A report on the entity's compliance with laws and regulations.
B) A report on internal controls related to the financial statements and major programs.
C) A report on the entity's financial statements and conformity with GAAP.
D) A report from the cognizant agency on auditee compliance.

Question 35

Threats to independence include all of the following except

A) Bias threat.
B) Familiarity threat.
C) Undue influence threat.
D) Management representation threat.

Question 36

The scope paragraph of an independent auditor's report on a financial audit of a local government

A) Identifies the statutes the auditor determined to be relevant to the financial activities of the government.
B) Identifies the financial statements that the auditor has examined.
C) Identifies all applicable accounting records that were located and examined.
D) Identifies the standards used in performing the audit.

Question 37

An unqualified audit opinion rendered on a governmental unit's general purpose external financial statements means those statements

A) Contain departures from GAAP that may make them misleading.
B) Have been audited by an auditor with limited qualifications.
C) Present the entity's financial position fairly in conformity with GAAP.
D) Have been certified as free from error.

Question 38

In the auditor's report the financial statements on which the opinion is being expressed are specified in the

A) Introductory paragraph.
B) Opinion paragraph.
C) Scope paragraph.
D) Explanatory paragraph.

Question 39

In audits of state and local government units which of the following paragraphs may not be required in the auditor's report for every audit?

A) Introductory paragraph.
B) Scope paragraph.
C) Explanatory paragraph.
D) Opinion paragraph.

Question 40

The single audit requirement applies to

A) All audits of state and local government reporting entities.
B) Audits to determine efficiency and economy.
C) Audits following the Single Audit Act of 1984 (with 1996 Amendments)and the revised OMB Circular A-133.
D) Financial and performance audits,and attestation engagements.

Question 41

Contrast and compare a financial audit to a performance audit,as defined in the GAO's Government Auditing Standards (yellow book).

Question 42

Attestation engagements include

A) Assessment of the extent to which entity programs met their objectives.
B) Reviews of interim financial information.
C) Services that provide various levels of assurance on such matters as internal control,compliance,MD&A presentation,and reliability of performance measures.
D) Examining whether the entity's financial statements fairly present in conformity with GAAP.

Question 43

A common reason why a government might receive a "qualified opinion" from the external auditors is

A) A violation of generally accepted accounting principles that does not cause material misstatement of the financial statements.
B) A fund balance deficit in the General Fund.
C) Poor internal controls such that the accounting records could not be audited.
D) Liabilities exceed assets in the General Fund.

Question 44

The following are key terms in Chapter 11 that relate to single audits:
A.Risk-based approach
B.Single audit
C.Questioned cost
D.Material weakness
E.Oversight agency
F.Major programs
G.Cognizant agency
H.Significant deficiency

Question 45

What are the major types of auditor services described in the Government Accountability Office's Government Auditing Standards (yellow book),and how do they differ?

Question 46

Which of the following would be considered Category (b)GAAP for state and local government auditees?

A) AICPA Practice Bulletins if specifically made applicable to state and local governments by the AICPA and cleared by the GASB.
B) GASB Technical Bulletins.
C) GASB Statements and Interpretations.
D) GASB Implementation Guides.

Question 47

"The guidance provided by OMB Circular A-133,the OMB Compliance Supplement,and AICPA publications has resulted in an extraordinarily high level of single audit quality." Do you agree or disagree? Why?

Question 48

Which of the following kinds of information is not included within the scope of a financial statement audit of a state or local government?

A) Governmental activities financial information.
B) Management's discussion and analysis (MD&A).
C) Major funds financial information.
D) Business-type activities financial information.

Question 49

Under a single audit

A) An annual audit must be performed encompassing the nonfederal entity's financial statements and schedule of expenditures of federal awards.
B) The audit must be conducted by an independent auditor in accordance with generally accepted government auditing standards (GAGAS)and cover the operations of the entire nonfederal entity.
C) For each major program,the auditor must obtain an understanding of the internal controls pertaining to the compliance requirements for the program,assess control risk,and perform tests of controls,unless the controls are deemed to be ineffective.
D) All of the above statements regarding a single audit are true.

Question 50

When conducting a single audit

A) All federal grant programs must be audited.
B) All major programs must be audited.
C) At a minimum,all Type A major programs not identified as low risk and certain high-risk Type B programs must be considered for audit.
D) All programs not identified as low risk must be audited.

Question 51

Which of the following statements regarding generally accepted government auditing standards (GAGAS)is not true?

A) GAGAS incorporate AICPA auditing standards and specifie additional general,performance,and reporting standards.
B) GAGAS must be used on all audits of governmental entities.
C) GAGAS are issued by the Government Accountability Office.
D) GAGAS cover both financial and performance audits.

Question 52

The following are key terms in Chapter 11 that relate to auditing of governmental and not-for-profit organizations:
A.Attestation engagement
B.Generally accepted auditing standards (GAAS)
C.Opinion units
D.Materiality
E.Financial audit
F.Generally accepted government auditing standards (GAGAS)
G.Nonaudit work
H.Performance audits

Question 53

When conducting a governmental financial statement audit,how does the auditor determine the appropriate auditing standards for the engagement?

Question 54

What are the objectives of the Single Audit Act Amendments of 1996 (and original Single Audit Act of 1984),and to whom is it applicable?

Question 55

"An unqualified opinion on the financial statements of a local government means that all statements in the comprehensive annual financial report (CAFR)have been audited and conform with GAAP." Do you agree or disagree? Why?

Question 56

Audit objectives set forth by the United States Comptroller General in Government Auditing Standards (GAS or GAGAS)differ from the AICPA view (GAAS)as discussed in Chapter 11.Explain briefly how GAS audits might meet the information needs of taxpayers better than GAAS audits.Make clear what the two sets of objectives cover.

Question 57

Which of the following is not one of the types of opinions an auditor may render in accordance with generally accepted auditing standards?

A) Satisfactory.
B) Qualified.
C) Unqualified.
D) Adverse.

Question 58

What are the benefits to a state or local government of establishing an audit committee?

Question 59

Which of the following is the highest in the hierarchy of generally accepted accounting principles for federal government entities?

A) AICPA Audit and Accounting Guide.
B) FASB emerging issues task force reports.
C) GASB statements.
D) FASAB statements.

Question 60

An auditor performing nonaudit work for a client may be in danger of violating the independence rules in Government Auditing Standards when he or she

A) Conducts a search and recommends a particular person for a management position for the client.
B) Provides advice on establishing or improving internal controls.
C) Provides the client with benchmarking information.
D) Answers technical questions for the client.

Question 61

Answer the following questions relating to the provisions of the Single Audit Act of 1984 and 1996 Amendments.
(a)What is a single audit?
(b)How do you determine if your government must have a single audit?
(c)Where would you find authoritative guidance on conducting a single audit?

Question 62

Describe the importance of materiality for auditors and explain how materiality is determined in audits of state and local governments that follow GASB standards.

Question 63

Explain what an "attestation engagement" is and contrast that to financial audits and performance audits.

Question 64

In the standard auditor's report for a state or local government,the introductory paragraph identifies the opinion units on which the auditor is expressing an opinion and refers to the accompanying financial statements of those units.Name or describe the financial statements that are usually accompanying the standard report.

Question 65

How is an OMB Circular A-133 audit related to a GAGAS audit? How is an OMB Circular A-133 audit different from a GAGAS audit?

Question 66

Explain how federal award programs are selected for audit under the risk-based approach.