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

Question 1

To "attest" means to confirm that something is true, correct, or genuine.

Answer 1

True

Question 2

Under GAO (GAGAS) standards, independent auditors must report all instances of fraud or illegal acts that they discover during the course of an audit.

Answer 2

False

Question 3

The AICPA originally established auditing standards for federal single audits.

Answer 3

False

Question 4

Which of the following is NOT included in the general standards of GAGAS?

A) Qualifications.
B) Quality control.
C) Planning.
D) Independence.

Question 5

GAO independence guidelines permit CPA firms to determine the estimated useful lives of their clients' assets.

Question 6

Per OMB Circular A-133, "questioned costs" are those that should not be reimbursed under a federal grant because they are in violation of laws of provisions pertaining to the grant.

Question 7

Which of the following is an example of a financial audit?

A) An audit of financial statements to determine if they are presented fairly in accordance with generally accepted accounting principles.
B) An audit to determine whether the objectives of a new program are suitable and relevant and whether the entity has complied with laws and regulations that may have a material effect on the financial statements.
C) An audit of the financial report on the Noxious Weed Special Revenue Fund to determine whether the entity has complied with specific finance-related requirements.
D) An audit to determine whether an entity is acquiring its resources economically and efficiently.

Question 8

Which the following is not included in the GAO auditing standards for financial statement audits?

A) General standards.
B) Field work standards.
C) Reporting standards.
D) Statistical sampling standards.

Question 9

A program audit would include which of the following?

A) Determining if sound procurement policies are being practiced.
B) Determining if efficient operating procedures are being used.
C) Determining if resources are being used efficiently.
D) Determining the factors inhibiting satisfactory performance.

Question 10

Regarding the single audit process, required supplemental information is considered to be within the scope of the audit.

Question 11

The Single Audit Act of 1984 was passed to eliminate the costly practice of requiring separate audits for each federal program in which an organization participated.

Question 12

The Yellow Book is an informal term for the compendium of all AICPA audit standards.

Question 13

An audit of a government or not-for-profit under the Single Audit Act has two main components: an audit of the financial statements under general accepted auditing standards (GAAS) and an audit of federal financial awards.

Question 14

The GAO publication Government Auditing Standards (commonly known as the Yellow Book) is applicable in which of the following audit situations?

A) To independent CPAs conducting a performance audit of a government that receives no federal financial assistance.
B) To independent CPAs auditing a nongovernment entity that receives federal financial assistance.
C) To independent CPAs auditing a government that receives no federal financial assistance.
D) To state auditors auditing a local government that does not receive federal financial assistance.

Question 15

Newly installed computer programs are one indicator that a government's participation in a federal program may be at high risk of noncompliance.

Question 16

An auditor of any government or not-for-profit that receives federal monies must include a report on the entity's internal control structure within their audit report or provide a cross-reference to that report.

Question 17

An attestation engagement might include examination of prospective or pro-forma financial statements.

Question 18

Performance audits must be conducted by independent auditors.

Question 19

Performance audits are sometimes referred to as "operational" audits.

Question 20

A "cognizant agency" can be an employee of either a federal agency or an independent accounting firm.

Question 21

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?

A) AICPA standards.
B) GAO standards.
C) OMB standards.
D) All of the above.

Question 22

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?

A) AICPA standards.
B) GAO standards.
C) OMB standards.
D) All of the above.

Question 23

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

A) A description of the scope of compliance testing.
B) A description of the scope of internal control testing.
C) A description of any irregularities and illegal acts found.
D) A description of any sampling methodology and sampling plans used.

Question 24

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"?

A) Significant prior audit findings.
B) Significant violation of the terms of a specific grant due to a misunderstanding of the requirements.
C) Weakness in the entity's internal controls.
D) Lack of oversight by federal agencies.

Question 25

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?

A) Immaterial misstatements, if they result from illegal acts.
B) Noncompliance with entity policies and procedures.
C) Noncompliance with the terms of contracts or grant agreements.
D) All of the above.

Question 26

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

A) Information on types of opinions expressed on the financial statement.
B) Information on all weaknesses in internal control.
C) List of material noncompliance.
D) Known questioned costs.

Question 27

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'?

A) There is no specific standard requiring working papers.
B) The AICPA has no specific standard requiring working papers, but the GAO standards require working papers.
C) The AICPA and the GAO standards concerning working papers are the same.
D) The GAO standards concerning working papers are more rigorous than the AICPA standards.

Question 28

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

A) OMB.
B) GAO.
C) AICPA.
D) State Boards of Accountancy.

Question 29

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

A) Matching funds.
B) Drug-free workplace.
C) Political activity.
D) Prevailing wage.

Question 30

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?

A) Eligibility of individuals or groups to participate in the program.
B) Allowability of certain types of goods or services that may be acquired.
C) Maximum dollar amounts of expenditures.
D) Matching fund requirements.

Question 31

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:

A) Issue a report on internal control relating to the financial statements.
B) Issue an opinion on internal control relating to the financial statements.
C) Issue a report on internal control relating to the financial statements and a report on internal control related to the federal program(s).
D) Issue a report on internal control relating to the financial statements and an opinion on internal control related to the major program.

Question 32

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?

A) Twenty-four hours every two years.
B) Forty hours a year.
C) Eighty hours every two years.
D) None because the auditor is not a CPA.

Question 33

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

A) No responsibility for this Schedule.
B) Report on the Schedule without issuing an opinion.
C) Express an opinion on the fair presentation of the Schedule.
D) Express an opinion on the fair presentation of the Schedule in relation to the basic financial statements taken as a whole.

Question 34

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

A) Does not have to have one unless he/she belongs to the AICPA Private Companies Practice Section.
B) Must have one every year.
C) Must have one at least every two years.
D) Must have one at least every three years.

Question 35

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:

A) Express an opinion as to whether the Schedule is fairly presented.
B) Express an opinion as to whether the Schedule is fairly presented in relation to the financial statements taken as a whole.
C) Express negative assurance on the Schedule.
D) The CPA has no responsibility with regard to the Schedule.

Question 36

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

A) The entity's financial statements are not affected by immaterial errors or misstatements.
B) The entity has not committed fraud.
C) The entity has in place a system of internal control sufficient to ensure that financial statements are prepared in accordance with generally accepted accounting principles.
D) The entity is satisfying the laws, regulations, and provisions that apply to each specific federal award.

Question 37

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

A) Issue a report on compliance related to the entity.
B) Issue an opinion on compliance related to the entity.
C) Issue a report on compliance related to the entity and a report on compliance related to the federal program(s).
D) Issue a report on compliance related to the entity and an opinion on compliance related to the federal program(s).

Question 38

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?

A) Only an opinion (or disclaimer of opinion) on the financial statements.
B) An opinion (or disclaimer of opinion) on the financial statements and a report on internal control.
C) An opinion (or disclaimer of opinion) on the financial statements, a report on internal control, and a report on compliance.
D) An opinion (or disclaimer of opinion) on the financial statements, a report on internal control, and an opinion (or disclaimer of opinion) on compliance.

Question 39

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?

A) None.
B) The auditor must design the audit to provide reasonable assurance of detecting noncompliance with terms of grants and contracts.
C) The auditor must design the audit to provide reasonable assurance of detecting all misstatements resulting from illegal acts.
D) The auditor must design the audit to provide reasonable assurance of detecting any fraud.

Question 40

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?

A) Nothing, since the financial statements are not materially misstated.
B) Must issue an adverse opinion if the financial statements are not changed to reflect the violation.
C) Must issue a report that details the violation and the potential dollar effect.
D) Must report the incident to the local law enforcement agency.

Question 41

In a performance audit of a not-for-profit organization, procedures that auditors would follow to gain an understanding of management controls would NOT include

A) Reviewing policy manuals.
B) Sending questionnaires to clients.
C) Discussing controls with employees.
D) Flowcharting appropriate systems.
ANSWERS TO MULTIPLE CHOICE (CHAPTER 15)

Question 42

Financial audits generally are conducted annually. Performance audits generally are conducted

A) Every year.
B) Every two years.
C) Every five years.
D) On an irregular basis.

Question 43

An elected state auditor, employed by the state, would NOT be considered independent when auditing which of the following entities?

A) A component unit of the state.
B) An agency of the state.
C) The office of the state auditor.
D) All of the above.

Question 44

An independent CPA is engaged to audit the financial statements of Holland City . The city has a variety of revenue sources including a $350,000 grant from the U.S. Department of Housing and Urban Development. Which of the following audit standards must the CPA use when conducting the audit?

A) The AICPA audit standards.
B) The GAO audit standards.
C) The OMB audit standards.
D) All of the above.

Question 45

Which of the following is NOT a consideration in resolving an ethical dilemma?

A) What are the facts?
B) Who is affected?
C) Who will know about this action?
D) What are the alternative courses of action?

Question 46

Which of the following is not a unique characteristic that distinguishes ethical decisions made by employees of governments from those made by employees of for-profit entities?

A) The public holds employees of governments to a higher standard of conduct than those of businesses.
B) Governments are guardians of public funds and are accountable to the public as to how they use them.
C) Government employees must safeguard assets.
D) Government activities are carried out in open view.

Question 47

Which of the following is NOT a necessary condition for a performance audit?

A) The auditor must delineate specifically the activities and outcomes to be addressed.
B) Entity management must have clearly defined operational objectives.
C) The auditor must obtain an understanding of management controls relevant to the audit.
D) There must be a schedule of disbursements related to the program.

Question 48

GAO performance audit standards do NOT include which of the following?

A) The auditor should be independent of the entity being audited.
B) The work should be adequately planned.
C) The auditor should prepare written work papers.
D) The auditor should obtain an understanding of management controls relevant to the audit.

Question 49

Which of the following is NOT true of an attestation engagement?

A) It should not be performed if the reliability of the entity's performance measures is questionable.
B) An important part of the engagement scope is to examine compliance with rules, regulations, or terms of contracts.
C) It should examine management's assertions in relation to the entity's administrative controls.
D) It may include examination of prospective or pro-forma financial statements.

Question 50

In a highly controversial move, the mayor and city council approved the purchase of the Swim and Gym, a local private facility that was facing bankruptcy. The mayor promised the public that the facility would be operated on a business-like basis and would be fully supported by user fees. No city money was to be spent on the Swim and Gym. Critics of the purchase complain that city laborers are frequently seen at the facility, the facility was re-roofed during the first year, and employees at the facility are considered city employees and earn the same benefits as other city employees. To quiet the vocal opponents to the operation of the Swim and Gym, the mayor asked the internal audit department to conduct an audit of the operation. You are assigned to the task.
REQUIRED:
What are the issues you want to address in this audit?

Question 51

Which of the following is NOT a technique used by an auditor in a performance audit engagement to gain an understanding of the controls in place to ensure that a program meets its objective?

A) Reading the legislation.
B) Making inquiries of employees.
C) Flow-charting appropriate systems.
D) Preparing and administering questionnaires.

Question 52

Which of the following is NOT a key difference between financial and performance audits?

A) Financial statement audits focus on the entity as a whole whereas performance audits generally focus on a specific program or activity.
B) Financial statement audits generally are conducted annually whereas performance audits generally are conducted irregularly.
C) Financial statement audits are conducted using very well defined standards whereas performance audits are conducted without reference to any standards.
D) Specialists in accounting generally conduct financial statement audits whereas performance audits may require more program-specific knowledge and fewer accounting skills.

Question 53

Which of the following is true about the public availability of audit reports prepared under GAGAS?

A) Only financial statements should be publicly available.
B) Only performance audits should be publicly available.
C) Neither financial statement audits nor performance audits should be publicly available.
D) Both financial statement audits and performance audits should be publicly available.

Question 54

Which of the following statements about the GAO is NOT true?

A) It is an agency within the executive branch of the federal government.
B) It is the author of Government Auditing Standards (GAGAS).
C) It is responsible for auditing all federal agencies and programs.
D) Its head, the Comptroller General of the United States, is appointed by the President.

Question 55

Under the Single Audit Act, the required report on compliance and on internal control over financial reporting

A) Is based on the audit requirements of the GAO's Government Auditing Standards.
B) Need not be issued if the auditors do not identify internal control deficiencies or instances of noncompliance.
C) Must be countersigned by the inspector general of the cognizant agency.
D) Should describe the scope of the auditors' testing.

Question 56

The following descriptions relate to an independent public accounting firm that has as clients some governments and not-for-profit entities that receive federal financial assistance.
REQUIRED:
For each of the following independent situations, describe the possible violations of GAO standards (Government Auditing Standards) and conclude whether or not the situation is a violation.
a) A college graduate who is not a CPA is assigned by her firm to the audit of Grover County. Because she is not a CPA, the firm did not send her to any continuing education courses this year or last year.
b) An auditor has prepared working papers using a new computer software package. The financial statements and audit reports generated by the software are well designed and incorporate all required accounting and auditing standards. Because the program is so powerful, it is also quite complex. Printouts of the financial statements and supporting schedules do not include much of the information necessary to determine that the auditor was justified in his/her conclusion. Most of that information is part of the computer program, however.
c) While auditing a not-for-profit entity, the auditor discovered that a secretary had been embezzling money from the petty cash fund. In relation to the financial statements taken as a whole, the amount stolen was not material. The auditor discussed the issue with the entity's management. The theft was reported to the appropriate law enforcement personnel and the bonding company reimbursed the not-for-profit entity for the full amount of its loss. Since there was no effect on the financial statements, the theft was not mentioned in the auditor's report.
d) The internal auditor of Sunningdale City reports to the city's chief financial officer. The internal auditor audited the city's health and welfare division for purposes of expressing an opinion on the financial statements prepared by that division and submitted to a federal agency.

Question 57

The three categories of government auditing standards are

A) General, field work, and control standards.
B) General, independence, and reporting standards.
C) General, field work, and reporting standards.
D) General, compliance, and documentation standards.

Question 58

Circular A-133, issued by the Office of Management and Budget,

A) Applies only to state and local governments
B) Applies only to not-for-profit organizations
C) Applies to both
D) Applies to neither

Question 59

GAO standards specify that performance audit reports should be timely and include several items. Which of the following items is NOT required under the GAO standards?

A) Significant audit findings.
B) Recommendation as to how to correct problems.
C) Explanation of the audit's objectives and of its scope and methodology.
D) Details about the number of items tested and the sampling techniques used.

Question 60

If a program to be subjected to a performance audit lacks clearly defined objectives, what can the auditor do?

A) Decline the audit until the entity defines its objectives.
B) Personally discern the objectives based on the auditor's opinion.
C) Examine the legislation to see if the legislation articulated the goals and objectives of the program.
D) Create a list of goals and objectives.

Question 61

The federal government (and other governments) is known for an affinity for "alphabet soup"-- a proliferation of acronyms to refer to agencies, departments, legislation, programs, and even lawsuits.
REQUIRED:
What do the following acronyms stand for? Briefly, what is each organization responsible for in relation to auditing?
a) OMB
b) GAO
c) AICPA
d) PCAOB
e) GASB
f) FASB
g) FASAB

Question 62

Your audit firm has been asked to perform a Single Audit of the Carrington Public Transportation Authority. The authority receives well over half of its $25 million in revenues from federal transportation grants and other federal programs. The authority has a new controller, whose last position was in private industry. You have been asked to brief the new controller on the criteria for determining major programs for purposes of your audit.
REQUIRED:
Include in your response an explanation of what is meant by "major programs" and the criteria that should be used in selecting them for audit.