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

Question 1

The introductory paragraph of the auditor's report should identify the financial statements being audited and,in particular,refer to the audit of the financial statements of each opinion unit.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

If the auditor determines that the financial statements contain a departure from GAAP,the effect of which is material,the auditor should express an unqualified opinion.

Answer 3

False

Question 4

Auditing standards issued by the U.S.General Accountability Office include specific reference to ethical requirements relating to an audit of financial statements,however,auditing standards issued by the Auditing Standards Board do not address ethics.

Question 5

Generally accepted government auditing standards (GAGAS)require that auditors conducting a GAGAS audit complete at least 80 hours of continuing professional education (CPE)that directly contributes to the auditor's professional proficiency to perform such audit work.

Question 6

Performance audits are independent assessments of performance against objective criteria.

Question 7

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 8

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 9

Governments may engage one auditor to audit the primary government and other auditors to audit certain component units.

Question 10

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

Question 11

Guidelines for grant accounting and reporting is contained within Uniform Administrative Requirements,Cost Principles,and Audit Requirements for Federal Awards,issued by the AICPA.

Question 12

The section headed "Auditor's Responsibility" in the audit report will specify whether the audit is conducted under generally accepted auditing standards or generally accepted government auditing standards.

Question 13

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

Question 14

Some of the auditing issues and standards used by auditors of governmental and not-for-profit entities are unique to the public sector.

Question 15

Generally accepted government auditing standards (GAGAS)apply to financial audits of state and local governments only if they expend $750,000 or more in federal financial assistance.

Question 16

To help identify threats to independence,generally accepted government auditing standards establish a conceptual framework that requires auditors to identify,evaluate,and apply safeguards to appropriately address threats to independence.

Question 17

Under generally accepted government auditing standards,safeguards are controls designed to reduce or eliminate threats to independence.

Question 18

Generally accepted government auditing standards require the auditor to report on internal control over financial reporting and compliance with laws,regulations,and provisions of contracts or grant agreements.

Question 19

In order for users of financial statements to have the assurance that the statements have been prepared in conformity with accounting and financial reporting standards established by authoritative bodies,and that all material facts have been disclosed,the statements should be accompanied by the report of an independent auditor.

Question 20

The U.S.Office of Management and Budget issues generally accepted auditing standards which provide general guidelines for governmental audits and address the minimum responsibilities of the auditor.

Question 21

The goal(s)of a performance audit include(s)assessment of:

A) Program effectiveness.
B) Economy.
C) Internal control compliance.
D) All of the above.

Question 22

Generally accepted government auditing standards (GAGAS)apply to all of the following audits except:

A) Financial statement audits of federal organizations.
B) Financial audits of not-for-profit organizations that do not receive or expend federal financial awards.
C) Financial audits of governments receiving and expending federal grants.
D) Performance audits of federal programs.

Question 23

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

A) Only those entities receiving over $750,000 a year in federal financial assistance are required to have a single audit.
B) Those entities expending under $750,000 a year in federal awards may be 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 24

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 25

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 26

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 27

An unmodified audit opinion rendered on a governmental unit's basic financial statements means those statements:

A) Have been certified as free from error.
B) Did not require modifications by the auditor.
C) Present the entity's financial position fairly in conformity with GAAP.
D) All of the above.

Question 28

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 AICPA Practice Bulletins.

Question 29

In which section of the standard audit report does the auditor inform financial statement users that certain information,such as combining statements or budgetary comparison schedules may not have been subject to the comprehensive audit procedures?

A) Auditor's Opinion section.
B) Other Matters section.
C) Other Information section
D) Auditor's Responsibility section.

Question 30

Which of the following is a statement about the relationship between generally accepted government auditing standards (GAGAS)and generally accepted auditing standards (GAAS)?

A) GAGAS and GAAS provide standards for financial audits, attestation engagements, and performance audits.
B) GAGAS encompass GAAS and supplement certain GAAS.
C) Single audits must be performed using GAGAS and GAAS.
D) GAGAS are promulgated by the Government Accountability Office and GAAS are promulgated by the Governmental Accounting Standards Board.

Question 31

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 32

Threats to independence include all of the following except:

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

Question 33

The purpose of an attestation engagement may include all of the following,except:

A) Expressing an opinion on whether the subject matter examined is in conformity with recognized criteria.
B) Expressing a conclusion about whether any information came to the attention of the auditor indicating that the subject matter reviewed is not based on recognized criteria.
C) Providing an agreed-upon procedure report on an assertion about a subject matter.
D) Providing a due diligence report on compliance with laws and regulations.

Question 34

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 35

The single audit requirement applies to:

A) All audits of state and local government reporting entities.
B) Financial audits of all not-for-profit entities.
C) Most audits of state and local governments expending federal grant funds.
D) Only those governments and not-for-profit entities that are audited by a federal audit agency.

Question 36

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

A) Auditor's Opinion section.
B) Other Matters section.
C) Other Information section
D) Auditor's Responsibility section.

Question 37

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 38

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 39

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.

Question 40

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.
C) Make audit activity legal at the federal level.
D) Allow federal auditors greater access to government entities receiving federal funds.

Question 41

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.What are some of the differences?

Question 42

What are the major types of audits and audit engagements described in the Government Accountability Office's Government Auditing Standards or generally accepted government auditing standards (GAGAS),and how do they differ?

Question 43

Under a single audit,low-risk Type A programs are identified as those:

A) Audited in at least one of the two most recent audit periods as a major program.
B) With no significant changes in personnel or systems that would have significantly increased risk.
C) Considered low-risk in the auditor's professional judgment.
D) All of the above.

Question 44

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

A) A violation of generally accepted accounting principles was noted 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) Expenditures exceeded appropriations in the General Fund.

Question 45

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
For each of the following definitions,indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.
_____ 1. The federal agency that makes the predominant amount of direct funding to the nonfederal entity receiving less than $50 million in federal awards
_____ 2. A deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented,or detected and corrected on a timely basis
_____ 3. An audit prescribed by federal law for state and local governments and not-for-profit organizations that expend more than $750,000 in a fiscal year
_____ 4. Used by auditors to determine which programs will be audited as part of the single audit
_____ 5. A monetary item identified by an auditor in an audit finding that generally relates to noncompliance with a law,regulation,or agreement,where the costs are either not supported by adequate documentation or appear unreasonable

Question 46

The fundamental ethical principles identified under generally accepted government auditing standards (GAGAS)include all of the following except:

A) Public interest.
B) Proper use of government information, resources, and position.
C) Oath of office.
D) Professional behavior.

Question 47

Which of the following statements regarding audit findings is ?

A) A significant deficiency is a deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.
B) A material weakness is a deficiency in internal control important enough to merit attention by those charged with governance.
C) A deficiency exists when the design or operation of a control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis.
D) All of the above are true.

Question 48

Which of the following is not considered an opinion unit requiring a materiality determination associated with a financial statement audit of a state or local government?

A) Aggregate discretely presented component units.
B) Management's discussion and analysis (MD&A).
C) Each major governmental fund.
D) Business-type activities.

Question 49

"An unmodified 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 50

What are clarified auditing standards? Do they apply to audits of governments and not-for-profit organizations?

Question 51

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 52

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 require that the audit be conducted in accordance with both GAAS and GAGAS.

Question 53

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 54

When compared to generally accepted auditing standards (GAAS),generally accepted government auditing standards (GAGAS)include additional General Standard requirements for financial audits related to all of the following except:

A) Independence.
B) Quality control and assurance.
C) Audit opinions
D) Competence.

Question 55

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 56

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 provides:

A) Valuation services.
B) Advice on establishing or improving internal controls.
C) Benchmarking information to the client.
D) The client with answers to technical questions.

Question 57

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

A) A report on internal control over financial reporting and compliance with federal statutes, regulations, and the terms and conditions of the federal award.
B) An opinion on the completeness of the schedule of expenditures.
C) A report on compliance for each major program and on internal control over compliance.
D) A schedule of findings and questioned costs.

Question 58

Cognizant agencies:

A) Are responsible for conducting governmental single audits.
B) Are assigned to each nonfederal agency expending more than $50 million of federal funds per year.
C) Are also referred to as oversight agencies.
D) Are responsible for issuing Government Auditing Standards.

Question 59

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. Performance audits
For each of the following definitions,indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.
_____ 1. A process that culminates in an opinion that financial statements present fairly an entity's financial position and results of operations in conformity with GAAP
_____ 2. An auditor's judgment as to the level at which the quantitative or qualitative effects of misstatements will have a significant impact on user's evaluations
_____ 3. Standards prescribed by the AICPA to provide guidance for planning,conducting,and reporting on audits by CPAs
_____ 4. Professional services related to internal control,compliance,MD&A presentation,allowability and reasonableness of proposed contract amounts,final contract costs,and reliability of performance measures
_____ 5. Units of the government on which the auditor expresses an opinion (e.g.,governmental activities,each major governmental fund,etc.)

Question 60

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 61

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

Question 62

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

Question 63

Answer the following questions relating to the provisions of the Single Audit Act of 1984 and 1996 Amendments.
(a)What is a single audit?

Question 64

Explain how federal award programs are selected for audit under the risk-based approach.
A." All other programs are identified as "Type B" programs. Second, any low risk Type A programs are identified. This involves auditor judgment after fully considering the factors discussed in Chapter 11. Third, high risk Type B programs are identified. However, the auditor is not expected to perform risk assessments on relatively small federal programs, as defined in Chapter 11. At a minimum, the auditor should audit as major programs all Type A programs not identified as low risk and certain of the high risk Type B programs. The auditor is not required to identify more high-risk Type B programs than one fourth the number of low-risk Type A programs. As many major programs as necessary must be audited to ensure that at least 40% of total federal awards expended are audited.

Question 65

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