Question 1

Under which set of auditing standards is the auditor required to test compliance with laws and regulations that could have a direct and material effect on the financial statements of the entity?

Accepted Answer

The GAO standards, also known as the Generally Accepted Government Auditing Standards (GAGAS), require auditors to test compliance with laws and regulations that could have a direct and material effect on the financial statements.

Question 2

Under which set of auditing standards is the auditor required to express an opinion on compliance with laws and regulations applicable to each major program?

Accepted Answer

OMB standards require auditors to express an opinion on compliance with laws and regulations applicable to each major program, particularly in the context of audits of federal awards.

Question 3

Reports issued by CPAs conducting audits subject to the GAO standards must include all of the following except:

Accepted Answer

Reports issued by CPAs conducting audits subject to the GAO standards must include descriptions of the scope of compliance testing, the scope of internal control testing, and any irregularities and illegal acts found. However, they are not required to include a description of any sampling methodology and sampling plans used. This detail is typically part of the audit methodology and does not need to be explicitly stated in the report.

Question 4

The Single Audit Act distinguishes between major and nonmajor federal programs. One factor that distinguishes a major from a nonmajor program is inherent risk. Which of the following is NOT a characteristic of "inherent risk"?

Accepted Answer

Inherent risk refers to the susceptibility of an assertion about a transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. It is related to the nature of the business or transaction itself, without considering the entity's internal controls or the potential for oversight by external agencies. Thus, lack of oversight by federal agencies is not a characteristic of inherent risk; it is more related to external audit or monitoring processes.

Question 5

An independent CPA is conducting an audit of an entity that receives federal financial assistance and is subject to the GAO standards (GAGAS). The auditor must design the audit to provide reasonable assurance of detecting which of the following?

Accepted Answer

The auditor must design the audit to provide reasonable assurance of detecting noncompliance with the terms of contracts or grant agreements, especially when the entity receives federal financial assistance and is subject to GAO standards (GAGAS).

Question 6

The Schedule of Findings and Questioned Costs should include the following except

Accepted Answer

The Schedule of Findings and Questioned Costs typically includes information on weaknesses in internal control, lists of material noncompliance, and known questioned costs, but it does not include information on the types of opinions expressed on the financial statements.

Question 7

A CPA prepares 'working papers' in an audit of an entity that receives federal financial assistance. Which of the following statements is true with regard to such 'working papers'?

Accepted Answer

The GAO standards concerning working papers are indeed more rigorous than the AICPA standards. This is because the GAO (Government Accountability Office) standards, often referred to as the Yellow Book standards, have specific requirements for documentation in audits of entities receiving federal financial assistance, ensuring accountability and transparency. The AICPA (American Institute of Certified Public Accountants) also emphasizes the importance of working papers in audits but the GAO standards are more detailed and stringent in their requirements.

Question 8

Which of the following groups is responsible for administering the Single Audit Act?

Accepted Answer

The Office of Management and Budget (OMB) is responsible for administering the Single Audit Act, which sets standards for audits of government funds received by non-federal entities.

Question 9

Which of the following is NOT included in the general requirements for which the auditor must test compliance with federal regulations?

Accepted Answer

Drug-free workplace requirements are typically not part of the general compliance requirements that auditors must test for in the context of federal regulations. These requirements are more specific to certain federal contracts and grants, rather than a general compliance requirement for all federal funding.

Question 10

Each federal financial assistance program has specific compliance requirements. Which of the following is not an example of the general nature of the specific compliance requirements?

Accepted Answer

Maximum dollar amounts of expenditures are more related to budgetary constraints and financial management principles rather than specific compliance requirements of federal financial assistance programs. Compliance requirements typically focus on eligibility, allowable costs, and matching funds, rather than setting a maximum expenditure limit.

Question 11

A CPA has conducted an audit of the financial statements of an entity that received federal financial assistance and had one program that qualified as a major program. The CPA's responsibility related to reporting on internal control for this entity is to:

Accepted Answer

The answer of A CPA has conducted an audit of...

Question 12

What amount of continuing professional education would an auditor, who is not a CPA but who is engaged in the audit of a City that receives significant amounts of federal financial assistance, be required to complete?

Accepted Answer

Auditors engaged in audits of entities receiving significant federal financial assistance, such as a city in this case, are generally required to follow the standards set by the Government Auditing Standards (also known as the Yellow Book). These standards require auditors to complete 80 hours of continuing professional education (CPE) every two years, with at least 24 hours directly related to government auditing, the government environment, or the specific or unique environment in which the audited entity operates. This requirement applies regardless of the auditor's CPA status.

Question 13

What is the auditor's responsibility for the Schedule of Expenditures of Federal Awards?

Accepted Answer

The auditor's responsibility for the Schedule of Expenditures of Federal Awards is to express an opinion on the fair presentation of the Schedule in relation to the basic financial statements taken as a whole. This ensures that the Schedule is consistent with the financial statements and accurately reflects the entity's expenditures of federal awards.

Question 14

An independent CPA who conducts audits of entities that receive federal financial assistance has what responsibility related to a peer review?

Accepted Answer

An independent CPA who conducts audits of entities that receive federal financial assistance is required to undergo a peer review at least every three years. This is to ensure the quality and integrity of the audits performed.

Question 15

A CPA has conducted an audit of the financial statements of an entity that received federal financial assistance. The CPA identified one major federal program and four nonmajor federal programs. The CPA's responsibility related to the Schedule of Expenditures of Federal Awards is to:

Accepted Answer

The CPA's responsibility in relation to the Schedule of Expenditures of Federal Awards is to express an opinion as to whether the Schedule is fairly presented in relation to the financial statements taken as a whole. This approach allows the CPA to provide assurance on the schedule based on its relation to the overall financial statements, rather than as a standalone document.

Question 16

Which of the following is an objective of audits under the Single Audit Act? To ensure that

Accepted Answer

The Single Audit Act primarily aims to ensure that entities spending federal funds comply with the laws, regulations, and provisions applicable to each specific federal award, rather than focusing solely on financial statement accuracy, fraud prevention, or the adequacy of internal controls.

Question 17

A CPA has conducted an audit of the financial statements of an entity that received federal financial assistance and had one program that qualified as a major program. The CPA's responsibility related to reporting on compliance for this entity is to

Accepted Answer

In conducting an audit of an entity that has received federal financial assistance and has a major program, the CPA's responsibility includes issuing a report on compliance for the entity as a whole and also providing an opinion on compliance specifically related to the federal program(s) identified as major. This dual reporting approach ensures that both the entity's overall compliance and the compliance related to the major federal program are adequately addressed.

Question 18

An independent auditor has conducted an audit of the financial statements of an entity that receives federal financial assistance, but that is not subject to the OMB standards. What report(s) must the auditor issue at the completion of this engagement?

Accepted Answer

The auditor must issue an opinion on the financial statements, a report on internal control, and a report on compliance, as the entity receives federal financial assistance.

Question 19

An auditor is engaged to audit the Eastern Planning and Development District, a not-for-profit entity that receives federal financial assistance. The auditor designed his audit to provide reasonable assurance of detecting material misstatements resulting from illegal acts. What additional requirements does the auditor have with regard to compliance?

Accepted Answer

The auditor must ensure the audit is designed to provide reasonable assurance of detecting noncompliance with terms of grants and contracts, especially relevant for entities receiving federal financial assistance, to ensure they are using funds appropriately as per the stipulated agreements.

Question 20

An independent CPA is conducting an audit of an entity that is subject to the GAO audit standards, but is not subject to the OMB audit standards. While conducting the audit, the CPA found that the entity had violated a law that had a large, but not material, potential penalty associated with such violation. There was no accrual for the potential penalty or disclosure of the violation. What action(s) must the CPA take with regard to this violation?

Accepted Answer

When auditing an entity subject to the Government Accountability Office (GAO) audit standards, auditors are required to report noncompliance with laws and regulations that could have a direct and material effect on the financial statements. Even if the potential penalty is not material to the financial statements, the GAO standards emphasize the importance of transparency and accountability in public sector audits, necessitating the reporting of such violations.

Quiz 15: Auditing Governments and Not-For-Profit Organizations