Question 1

Net Asset classification for a tax-exempt organization are consistent with GASB standards.

Accepted Answer

Tax-exempt organizations typically follow FASB standards, not GASB, which is for governmental entities.

Question 2

Tax-exempt organizations are required to disclose the compensation of its officers,directors,trustees and highest paid employees and independent contractors.

Accepted Answer

This is true according to the IRS regulations. Nonprofit organizations are required to report the compensation of the highest-paid employees on their Form 990 as a part of their annual tax returns, which is available for public inspection. Failure to disclose this information may result in penalties and fines.

Question 3

The purpose of audits conducted under the Single Audit Act is to provide assurance that federal and state funds are expended in accordance with grant agreements,and with financial management and other standards promulgated by the federal government.

Accepted Answer

Audits conducted under the Single Audit Act are indeed intended to ensure that federal and state funds are being used properly and in compliance with relevant standards and agreements.

Question 4

The Government Accountability Office has authority for issuing Governmental Auditing Standards.

Accepted Answer

The Government Accountability Office (GAO) has the authority to issue Governmental Auditing Standards (also known as "Yellow Book"), which provide guidance for auditors in conducting audits of government organizations, programs, activities and functions.

Question 5

While the principal users of corporate audit reports are investors and creditors,the main user of Single Audit reports is the federal government.

Accepted Answer

Single Audit reports are prepared in accordance with the Single Audit Act and Uniform Guidance and are primarily intended for use by federal agencies and pass-through entities that provide federal funds to state and local governments and nonprofit organizations. The main purpose of the Single Audit is to ensure that the federal funds are spent in accordance with applicable laws, regulations, and grant requirements. Therefore, the main users of Single Audit reports are the federal government and the pass-through entities.

Question 6

The IRS announced that it considers tax-exempt organizations to be one of its four highest enforcement priorities.

Accepted Answer

The IRS has announced that tax-exempt organizations are one of its four top enforcement priorities. This means that the IRS will focus on identifying and addressing potential violations by these organizations, including issues related to fraud, abuse, and noncompliance with tax laws.

Question 7

Governments and other nonprofits receiving federal funds follow Governmental Auditing Standards and do not have to comply with AICPA Statements of Auditing Standards.

Accepted Answer

Governmental units and many not-for-profit organizations are subject to Government Auditing Standards which are issued by the U.S. Government Accountability Office GAO in addition to the Statements on Auditing Standards, issued by the American Institute of Certified Public Accountants AICPA.
Government Auditing Standards, published in a document commonly known as the Yellow Book, incorporate the AICPA standards and provide extensions that are necessary due to the unique nature of public entities.

Question 8

If a tax-exempt organization is found by the IRS to have paid excessive benefits,the organization must pay a tax penalty of 25% of the excess benefit and the employee must pay a 10% penalty,but the employee is entitled to keep the benefits.

Accepted Answer

If a tax-exempt organization is found to have paid excessive benefits, the organization must be corrected the excess benefit. The tax penalty for the organization could be up to 200% of the excess benefit. The employee who received the excessive benefit may also be subject to a penalty of 25% of the excess benefit if they knowingly participated in the transaction. The employee may also be required to return the excessive benefit to the organization.

Question 9

Tax exempt organizations are required to pay tax at the corporate or trust rate on the income generated from any trade or business activities unless the money is used to carry out the entity's tax-exempt purposes.

Accepted Answer

The answer of Tax exempt organizations are required to pay...

Question 10

If a government failed to report infrastructure assets,the auditor could still express an unqualified opinion on the fund level financial statements.

Accepted Answer

The answer of If a government failed to report infrastructure...

Question 11

Tax exempt organizations are required to pay tax at the corporate or trust rate on the income generated from any trade or business activities unrelated to the entity's tax-exempt purposes.

Accepted Answer

This is known as unrelated business income tax (UBIT), and tax-exempt organizations must report and pay taxes on such income.

Question 12

The Taxpayer Bill of Rights requires tax-exempt organizations to provide copies,upon request,of the five most recent annual form 990s.

Accepted Answer

The answer of The Taxpayer Bill of Rights requires tax-exempt...

Question 13

The single audit requirements apply only to state and local governments.Private not-for-profits do not have to comply with these requirements,even if they receive federal grants.

Accepted Answer

Private not-for-profits that receive more than $750,000 in federal funding in a year are also subject to single audit requirements.

Question 14

Entities that are tax exempt under IRS Section 501(c)3 are prohibited from having surpluses (revenues exceed expenses).

Accepted Answer

Entities that are tax exempt under IRS Section 501(c)3 are allowed to have surpluses, but these surpluses must be used for exempt purposes, such as furthering the organization's mission or advancing its exempt activities. However, excessive surpluses can endanger an organization's exempt status.

Question 15

The program expense ratio for a not-for-profit organization will improve if the organization shifts costs from fund raising to program expenses.

Accepted Answer

The program expense ratio is calculated by dividing program expenses by total expenses. So if an organization shifts more of its expenses towards program expenses, the ratio will improve (i.e. increase). Fundraising expenses do not count as program expenses, so shifting costs away from fundraising and towards program expenses will increase the program expense ratio.

Question 16

Attestation engagements must comply with the Government Auditing Standards but are exempt from compliance with the AICPA's attestation standards.

Accepted Answer

Attestation engagements must comply with both the Government Auditing Standards and the AICPA's attestation standards.

Question 17

Entities that are tax exempt under Section 501(c)3 of the Internal Revenue Code do not have to pay income taxes,even if some of their activities compete with commercial enterprises.

Accepted Answer

are required to pay tax at the corporate rate on the income generated from any trade or business activities unrelated to the entity's tax-exempt purposes. The purpose of this requirement is to eliminate advantages that have over profit-making organizations.

Question 18

While the Sarbanes-Oxley Act applies only to corporations filing with the Securities and Exchange Commission,several provisions of the Act already existed in governmental auditing standards,and others are being voluntarily adopted by not-for-profit organizations

Accepted Answer

The statement is true.

Question 19

Unrelated Business Income Tax is an excise tax,applied to the gross receipts of a business activity.Therefore allocations of expenses incurred in generating the income are irrelevant.

Accepted Answer

Unrelated Business Income Tax is income tax that are required to pay on income generated from any trade or business activities unrelated to the entity's tax-exempt purposes. Unrelated business income is taxed at the corporate rate.

Question 20

The purpose of the Unrelated Business Income Tax is to eliminate advantages that tax-exempt organizations have over commercial enterprises providing goods or services for sale.

Accepted Answer

The purpose of the Unrelated Business Income Tax is to level the playing field between tax-exempt organizations and commercial enterprises, by ensuring that tax-exempt organizations pay taxes on any income generated from unrelated business activities. This helps to prevent tax-exempt organizations from having an unfair advantage over for-profit businesses.

Quiz 13: Auditing, tax-Exempt Organizations, and Evaluating Performance