Deck 13: Auditing, Tax-Exempt Organizations, and Evaluating Performance

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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.

Question 7

Entities that are tax exempt under IRS Section 501(c)3 are required to provide copies, upon request, of the three most recent Form 990 returns.

Question 8

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

Question 9

Entities that are tax exempt under IRS Section 501(c)3 are prohibited from endorsing political candidates or attempting to influence legislation.

Question 10

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.

Question 11

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

Question 12

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.

Question 13

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

Question 14

If one wished to compute the net debt of a government, this could be found in the governmental fund financial statements.

Question 15

When computing Unrelated Business Income Tax, charities are permitted to deduct ordinary and necessary business related expenses and the first $1,000 of income is not taxed.

Question 16

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.

Question 17

Bonds which carry the full faith and credit of a government are called general obligation bonds.

Question 18

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.

Question 19

The three major user groups identified by the GASB are (1) citizen groups, (2) legislative and oversight officials and (3) investors and creditors.

Question 20

The GASB has authority to issue standards for Service Efforts and Accomplishments Reporting.

Question 21

Supporting expenses are included in the denominator of the program expense ratio

Question 22

Governmental Auditing Standards identifies four categories of professional engagements: financial audits, performance audits, attestation engagements and non-audit services.

Question 23

Fundraising efficiency is a measure of performance that expresses how much an organization spends in raising a dollar of donations.

Question 24

Government financial audits are subject to both GAAS and GAGAS.

Question 25

Section 501(c)(3), exempt organizations are prohibited from supporting political candidates or campaigning to influence legislation.

Question 26

Beginning in 2004, the requirement for a single audit for organizations receiving federal funds received increased from $300,000 to $500,000

Question 27

The program expense ratio is calculated as follows: Total expenses / Program service expenses + supporting service expenses

Question 28

In a governmental audit the auditor is required to report directly to appropriate officials in addition to the board or audit committee.

Question 29

Tax exempt entities are not allowed to make contributions to political campaigns or they may loose their tax exempt status

Question 30

Supporting expenses are not included in the numerator of the program expense ratio

Question 31

The program expense ratio is calculated as Program service expenses / Total expenses

Question 32

Service Efforts and Accomplishments Reporting is best completed by using a variety of measures, which are reported consistently.

Question 33

The use of opinion units allows an auditor to issue different opinions on different statements, instead of issuing one opinion.

Question 34

To apply for tax-exempt status, an organization must complete an IRS Form 1023

Question 35

In a governmental audit the auditor is only required to report to the board or audit committee

Question 36

The single audit act is intended to provide assurance to the federal government that federal funds have been expended in accordance with laws and regulations

Question 37

The program expense ratio is calculated as Program service expenses + supporting service expenses / Total expenses

Question 38

In a governmental audit the auditor is only required to report directly to the appropriate officials

Question 39

The single audit act provides assurance to the federal government that federal funds are protected through a system of internal controls and sound financial management practices

Question 40

The program expense ratio is calculated as follows: Total expenses / Program service expenses

Question 41

Under the terms of the Single Audit Act and its amendments, what percentage of federal awards expenditures must be selected for audit?

A) High Risk Auditee: 100%; Low Risk Auditee: 50%
B) High Risk Auditee: 100%; Low Risk Auditee: 25%
C) High Risk Auditee: 50%; Low Risk Auditee: 25%
D) High Risk Auditee: 50%; Low Risk Auditee: 0%

Question 42

A disclaimer of opinion is the appropriate audit opinion when the auditor is not independent.

Question 43

Public sector audits differ from those of commercial businesses in which of the following ways?

A) The auditor is not required to be independent
B) The auditor reports to outside agencies as well as management of the organization
C) Auditor do not use sampling
D) All of the above

Question 44

Service Efforts and Accomplishments Reporting is mandatory for not-for-profit organizations

Question 45

Which of the following would be an example of an attestation engagement?

A) Report on cost under contract
B) Report on prospective financial information
C) Report on internal controls
D) All of the above

Question 46

Governmental Audit Reports are due nine months after the end of the fiscal year.

Question 47

Which of the following is true regarding the Single Audit Act and its amendments?

A) Major programs selected for audit must equal 50 percent or more of federal expenditures, in all cases
B) Separate reports are filed with every federal agency from which the audited organization receives funds
C) Both of the above
D) Neither of the above

Question 48

Tax-exempt organizations are required to file Form 990 by the 15^th day of the 5^th month following the organization's taxable year.

Question 49

Which of the following would be considered a performance audit under the Government Auditing Standards?

A) An investigation into whether a purchasing department of a government was operated efficiently
B) An investigation into whether a social service agency of a state government improved the lives of its clients
C) Both of the above
D) Neither of the above

Question 50

Which of the following is true regarding the Single Audit Act and its amendments?

A) Governments and not-for-profit organizations that exceed $ 50 million in federal awards are normally assigned a cognizant agency to provide guidance; smaller governments are expected to use oversight agencies, the agencies providing more funding than any other agency
B) A risk-based approach (risk to the auditor) is used to determine which programs are selected by the auditor to audit
C) Both of the above
D) Neither of the above

Question 51

Which of the following is true regarding the Single Audit Act and its amendments?

A) All governmental entities with expenditures of federal funds in excess of $500,000 must have a single audit, if more than one program exists
B) An audit must be designed to cover 50 percent of federal funds expended, in all cases
C) Both of the above
D) Neither of the above

Question 52

Service Efforts and Accomplishments Reporting is voluntary for not-for-profit organizations

Question 53

Which of the following is true regarding the Single Audit Act and its amendments?

A) A risk-based approach is used
B) An opinion is required on compliance of all programs
C) Both of the above
D) Neither of the above

Question 54

Assuming an auditee is not considered low-risk, the auditor is required to express an opinion on compliance on major programs, which must add up to 50 percent of federal funds expended by the auditee.

Question 55

Which of the following is true regarding the Single Audit Act and its amendments?

A) An auditor is expected to express an opinion on "major programs," which are chosen based on size
B) An auditor is required to select all "Type A" programs as major programs
C) Both of the above
D) Neither of the above

Question 56

Which organization promulgates the Government Auditing Standards?

A) The American Institute of Certified Public Accountants
B) The U.S. Office of Management and Budget
C) The Securities and Exchange Commission
D) The U.S. Government Accountability Office

Question 57

A tax-exempt organization must pay income taxes on income generated from any trade or business activities unrelated to the entity's tax-exempt purposes.

Question 58

Tax exempt entities do not have retained earnings in the equity section of their financial statements.

Question 59

In a disclaimer of opinion, the auditor states that no opinion is being expressed.

Question 60

Which of the following would be a financial audit (or a part of a financial audit) under the Government Auditing Standards?

A) An audit expressing an opinion on the basic financial statements of a state or local government audit
B) An examination to determine whether purchasing procedures are appropriately designed to assure program supplies meet standards
C) Both of the above
D) Neither of the above

Question 61

Which of the following is true regarding the Internal Revenue Service's concern regarding tax-exempt organizations?

A) Organizations are charging many of their program expenses to fundraising
B) Executives of tax-exempt organizations are receiving excessive salaries and benefits
C) Both (a) and (b)
D) Neither (a) nor (b)

Question 62

What is the principle advantage of obtaining section 501(c)3 status?

A) The charitable organization is permitted to engage in a trade or business unrelated to its mission without having to pay income taxes
B) Donors to the charitable organization are permitted to deduct contributions to the organization in computing their income taxes
C) Both (a) and (b) above
D) Neither (a) nor (b) above

Question 63

In order to compute the ratio unreserved fund balance/revenues-General Fund, one would look in the CAFR at the:

A) Governmental funds Balance Sheet and the Governmental funds Statement of Revenues, Expenditures and Changes in Fund Balances
B) Government-wide Statement of Net Assets and government-wide Statement of Activities
C) Governmental funds Balance Sheet
D) Governmental funds Statement of Revenues, Expenditures and Changes in Fund Balance

Question 64

The term "opinion unit" refers to which of the following:

A) A state or local government together with its component units
B) A level of reporting of a government that requires a separate materiality level
C) A division of a CPA firm
D) One of the four statements required in the second paragraph of an unqualified audit opinion

Question 65

Which of the following activities may give rise to Unrelated Business Income Tax?

A) Investment income arising from investment of unrestricted funds
B) Sale of donated merchandise
C) Advertising revenues from advertisements in a newsletter
D) None of the above would give rise to unrelated business income

Question 66

To compute the unreserved fund balance/revenues-General Fund, one would need to look in the CAFR for the:

A) Governmental funds Balance Sheet
B) Governmental funds Statement of Revenues, Expenditures and Changes in Fund Balances
C) Both of the above
D) Neither of the above

Question 67

To compute the operating ratio-enterprise funds, one would need to look in the CAFR for the:

A) Government-wide Statement of Net Assets
B) Proprietary funds Statement of Revenues, Expenses and Changes in Fund Net Assets
C) Both of the above
D) Neither of the above

Question 68

Which of the following provisions of the Sarbanes-Oxley Act already existed in governmental auditing standards?

A) Auditors are required to report deficiencies in the design or operation of internal controls
B) Not-for-profit organizations are required to establish audit committees composed of non-management board members.
C) All nonaudit services performed by the auditors must be approved by the audit committee
D) All of the above

Question 69

Which of the following items, helpful for analysis, could be found in the statistical section of the CAFR?

A) Assessed and actual (market) value of property
B) Population trends
C) Debt limit and margin
D) All of the above

Question 70

Which of the following tax-exempt organizations would be required to file a form 990?

A) A charity with gross receipts of > $25,000
B) A church with gross receipts of > $25,000
C) Both (a) and (b)
D) Neither (a) nor (b)

Question 71

In order to compute the operating ratio-enterprise funds, one would look in the CAFR in which of the following sections?

A) In the government-wide Statement of Net Assets
B) In the proprietary funds Statement of Net Assets
C) In the proprietary funds Statement of Revenues, Expenses and Changes in Net Assets
D) In the proprietary funds Statement of Cash Flows

Question 72

Which of the following audit opinions is issued when a government fails to comply with generally accepted accounting principles?

A) Qualified
B) Adverse
C) Either of the above, depending on the severity of the noncompliance
D) Neither (a) or (b) above

Question 73

To compute the net debt per capita, a user of financial statements would need to look at (in the CAFR):

A) The debt in the government-wide Statement of Net Assets, the amount available to pay that debt in the governmental funds Balance Sheet and the population from the statistical section
B) The debt and the amount available to pay that debt in the governmental funds Balance Sheet and the population from the statistical section
C) The debt in the governmental funds Balance Sheet, the amount available in the government-wide Statement of Net Assets and the population from the statistical section
D) All three items from the government-wide Statement of Net Assets

Question 74

The document often relied on for financial analysis by investors and creditors for bonds in the secondary market is:

A) The official statement issued by the government issuing the bonds
B) The comprehensive annual financial report
C) An analysis prepared by the government's auditor
D) None of the above

Question 75

Which of the following is not part of a financial audit?

A) Forming judgments about internal controls
B) Testing compliance with laws and regulations
C) Assessing the degree to which program objectives have been met
D) All of the above

Question 76

Which of the following is not considered to be a major user group by the GASB?

A) Citizen groups
B) Investors and creditors
C) Legislative and oversight officials
D) Government executive branch officials

Question 77

The highest bond rating assigned by Moody's is:

A) A+
B) A
C) AAA
D) AAA+

Question 78

Which of the following may be deducted in computing income from unrelated business activities?

A) Ordinary and necessary business expenses
B) $1,000 exemption
C) Charitable contributions
D) All of the above

Question 79

Which of the following is not prohibited of organizations receiving tax exempt status under IRS Section 501(c)3?

A) Earning a profit (increase in net assets)
B) Endorsing political candidates or attempting to influence legislation
C) Distributing earnings to the benefit of members or officers
D) None of the above. All of these are prohibited of Tax Exempt organizations

Question 80

In order to compute the interest coverage on revenue bonds, one would look in the CAFR at the:

A) Government-wide Statement of Activities
B) Enterprise funds Statement of Revenues, Expenses and Changes in Net Assets
C) Budgetary Comparison Schedule
D) Government-wide Statement of Activities