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

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

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.

Answer 3

True

Question 4

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

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.

Question 6

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

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.

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.

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.

Question 10

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

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.

Question 12

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

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.

Question 14

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

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.

Question 16

Attestation engagements must comply with the Government Auditing Standards but are exempt from compliance with 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.

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

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.

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.

Question 21

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

Question 22

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 23

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 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

The GASB has issued standards for Service Efforts and Accomplishments Reporting.

Question 41

The statements required to be filed on Form 990 include which of the following?

A) Statement of Revenues, Statement of Functional Expenses and Balance Sheet
B) Income Statement, Balance Sheet and Statement of Cash Flows
C) Statement of Revenues, Statement of Operational Expenses and Balance Sheet
D) Statement of Revenues, Expenses and Fund Balance and Statement of Net Assets

Question 42

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

Question 43

Entities receiving $500,000 or more of federal funds are generally required to have a single audit.

Question 44

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

Question 45

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

Question 46

Performance audits of a tax-exempt organization are undertaken to assess which of the following?

A) Internal controls as they relate to program management and reporting.
B) Compliance with legal requirements and other program matters.
C) Economy and efficiency.
D) All of the above.

Question 47

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

Question 48

Government financial audits are subject to both GAAS and GAGAS.

Question 49

Form 990,Return of Organization Exempt From Income Tax,requires all of the following except:

A) Statement of Program Accomplishments
B) Governance, Management and Disclosures
C) Compensation Schedules
D) Statement of Cash Flows

Question 50

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

Question 51

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

Question 52

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

Question 53

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 54

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

Question 55

Government Auditing Standards,published in a document called the Yellow Book incorporate the AICPA standards and provide extensions that are necessary due to the unique nature of public entities.Which of the following is not one of the extensions?

A) Requirement that auditors have knowledge of government accounting and auditing
B) Higher materiality thresholds than in the private sector
C) Public availability of audit reports
D) Written evaluation of internal controls

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

Which of the following is not correct regarding executive compensation at tax-exempt organizations?

A) If the IRs deems wages and benefits to be in excess of reasonable amounts, the IRs may impose sanctions on the individual receiving the benefits.
B) If the IRs deems wages and benefits to be in excess of reasonable amounts, the IRs may impose sanctions on the managers who approved the wages and benefits.
C) If the compensation is found to be unreasonable, the executive is required to pay back the amount of compensation deemed excessive plus a 10% penalty.
D) Benefits include salaries, deferred compensation, insurance, loans and medical benefits.

Question 61

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 62

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 63

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 64

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 65

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 66

Which of the following are not required disclosures in a Form 990?

A) A Statement of Functional Expense.
B) A discussion of program effectiveness.
C) A Statement of Revenues, Expenses and Changes in Net Assets.
D) None of the above. They are all required disclosures.

Question 67

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 68

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 69

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 70

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 71

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 72

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 73

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 74

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 75

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 76

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

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 77

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 78

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 79

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 80

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