Gleim 20.1 - Government Auditing Standards Flashcards
Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has
A. Implemented internal controls designed to detect all noncompliance with laws and regulations.
B. Reported all known noncompliance with laws and regulations and material weaknesses in internal control to the funding agency or regulatory body.
C. Documented the procedures performed to evaluate the governmental unit’s compliance with laws and regulations.
D. Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.
D. Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.
Answer D is correct.
GAGAS incorporate all Statements on Auditing Standards issued by the AICPA. Thus, an auditor should obtain written representations from management as part of an audit in accordance with GAGAS as well as GAAS. They include disclosure of all instances of identified or suspected noncompliance with laws and regulations that should be considered when preparing the financial statements (AU-C 580). The auditor’s specific responsibility for noncompliance is to obtain sufficient appropriate evidence about material amounts and disclosures that are determined by the provisions of those laws and regulations generally recognized to have a direct effect on their determination. An example is tax law (AU-C 250).
When engaged to audit a governmental entity in accordance with Government Auditing Standards, an auditor prepares a written report on internal control over financial reporting
A. Only when the auditor has noted significant deficiencies.
B. Only when requested by the governmental entity being audited.
C. In all financial audits, regardless of circumstances.
D. Only when requested by the federal government funding agency.
C. In all financial audits, regardless of circumstances.
Answer C is correct.
Government Auditing Standards imposes more stringent reporting requirements than GAAS. For example, it mandates a written report on internal control over financial reporting in every audit. Furthermore, issuers must report on internal control. In contrast, GAAS require communication only if significant deficiencies or material weaknesses have been observed.
An objective of a performance audit is to determine whether an entity’s
A. Operational information is in accordance with generally accepted government auditing standards.
B. Performance information is presented fairly.
C. Specific operating units are functioning economically and efficiently.
D. Financial statements present fairly the results of operations.
C. Specific operating units are functioning economically and efficiently.
Answer C is correct.
Performance audits include economy and efficiency audits. The objectives of these audits are to determine (1) whether the entity is acquiring, protecting, and using its resources economically and efficiently; (2) the causes of any inefficiencies; and (3) whether the entity has complied with laws and regulations concerning matters of economy and efficiency.
The services provided by government auditors may extend beyond the expression of an opinion on the fairness of financial presentation to include reporting on
Performance…Compliance…Economy & Efficiency
A. Yes…Yes…No
B. Yes…No…Yes
C. No…Yes…Yes
D. Yes…Yes…Yes
D. Yes…Yes…Yes
Answer D is correct.
Under Government Auditing Standards, the types of engagements addressed include (1) financial audits (financial statement audits and other types, such as compliance with specified regulations for federal award expenditures), (2) performance audits, and (3) attestation engagements (e.g., reporting on compliance with specified laws, regulations, rules, contracts, or grant agreements). Performance audits include many objectives, such as assessing (1) program effectiveness and results, (2) economy and efficiency, (3) internal control, and (4) compliance with legal requirements.
According to the additional requirements for financial audits in Government Auditing Standards,
A. The audit report should state that the audit was performed in accordance with GAAS.
B. If public disclosure of pertinent information is prohibited, the report should not disclose the omission.
C. The audit report should not emphasize a matter that does not require a modification of the opinion or a disclaimer.
D. The auditors should report the views of responsible officials if their report discloses fraud.
D. The auditors should report the views of responsible officials if their report discloses fraud.
Answer D is correct.
The auditors’ report may disclose (1) deficiencies in internal control; (2) fraud; (3) noncompliance with provisions of laws, regulations, contracts, or grant agreements; or (4) abuse. In these cases, the auditors should obtain and report the views of responsible officials about the findings, conclusions, and recommendations, as well as planned corrective actions.
The purpose of performance auditing is to determine if the desired results of a program are being achieved. The first step in conducting such an audit is to
A. Determine the time frame to be audited.
B. Evaluate the system used to measure results.
C. Identify the legislative intent of the program being audited.
D. Collect quantifiable data on the program’s success or failure.
C. Identify the legislative intent of the program being audited.
Answer C is correct.
Performance audits provide findings or conclusions based on an evaluation of sufficient appropriate evidence against stated criteria, such as specific requirements, measures, or defined business practices. Performance audit objectives vary widely. One example is assessing the extent to which legislative goals are being achieved. It attempts to measure the accomplishments and relative success of the undertaking. However, this measurement depends on the actual intent of the legislation that established the program.
In performing a financial statement audit in accordance with Government Auditing Standards, auditors are required to report on the entity’s compliance with laws and regulations. This report should
A. Describe the scope of the auditor’s testing of compliance.
B. Describe the laws and regulations that the entity must comply with.
C. Express an opinion on overall compliance with laws and regulations.
D. Indicate that the auditors do not possess legal skills and cannot make legal judgments.
A. Describe the scope of the auditor’s testing of compliance.
Answer A is correct.
According to Government Auditing Standards, the report should describe the scope of the auditor’s testing of compliance with laws and regulations and internal control over financial reporting. Thus, the report states whether (1) tests provided sufficient evidence to support an opinion on compliance or internal control over financial reporting and (2) such opinions are provided.
Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)?
A. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.
B. An auditor should report recommendations for actions to correct problems and improve operations.
C. An auditor should report on the scope of the auditor’s testing of compliance with laws and regulations.
D. An auditor should determine the extent to which the entity’s programs achieve the desired results.
C. An auditor should report on the scope of the auditor’s testing of compliance with laws and regulations.
Answer C is correct.
According to additional government standards for financial statement audits, the report on the financial statements should either (1) describe the scope of the auditor’s testing of compliance with laws and regulations and internal controls over financial reporting and present the results of those tests or (2) refer to separate report(s) containing that information. If the scope of the work performed is sufficient, an opinion on internal control and compliance can be expressed. In presenting the results of those tests, auditors should report (1) significant deficiencies and material weaknesses in internal control; (2) instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the audit and any other instances that warrant the attention of those charged with governance; (3) noncompliance with provisions of contracts or grant agreements that has a material effect on the audit; and (4) abuse that has a material effect on the audit. In some circumstances, auditors should report fraud and noncompliance directly to parties external to the audited entity.
In a financial statement audit in accordance with Government Auditing Standards, an auditor should report on the auditor’s tests of the entity’s compliance with applicable laws and regulations. Thus, the audit should be designed to provide
A. Reasonable assurance of detecting misstatements that are material to the financial statements.
B. Limited assurance that internal control designed by management will prevent or detect errors, fraud, and noncompliance.
C. Positive assurance that the internal controls tested by the auditor are operating as prescribed.
D. Negative assurance that significant deficiencies in internal control communicated during the audit do not prevent the auditor from expressing an opinion.
A. Reasonable assurance of detecting misstatements that are material to the financial statements.
Answer A is correct.
According to Government Auditing Standards for financial audits, the auditor should test compliance with applicable laws and regulations. As part of the process, the auditor should design the audit to provide reasonable assurance of detecting errors, fraud, and noncompliance that could have a direct and material effect on the financial statements. The auditor should also be aware of other noncompliance having indirect and material effects.
In auditing a not-for-profit entity that receives governmental awards, the auditor has a responsibility to
A. Express an opinion concerning the entity’s continued eligibility for the governmental awards.
B. Notify the governmental agency providing the awards that the audit is not designed to provide any assurance of detecting errors and fraud.
C. Assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements.
D. Issue a separate report that describes the expected benefits and related costs of the auditor’s suggested changes to the entity’s internal control.
C. Assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements.
Answer C is correct.
Management is responsible for ensuring compliance with laws and regulations. The auditor’s responsibility is to understand the possible effects of laws and regulations having direct and material effects on the financial statements and to assess whether management has identified such laws and regulations.
Under Government Auditing Standards, an engagement may be a(n)
Attestation Engagement…Performance
Audit
A. Yes…Yes
B. Yes…No
C. No…Yes
D. No…No
A. Yes…Yes
Answer A is correct.
The General Accounting Office (GAO) promulgates Government Auditing Standards (the Yellow Book). Engagements include financial audits, attestation engagements, and performance audits. Generally accepted government auditing standards (GAGAS) incorporate GAAS for financial audits and also state additional standards.
Which of the following statements is a requirement applicable to financial statement audits in accordance with Government Auditing Standards?
A. An auditor should briefly describe in the auditor’s report the method of statistical sampling used in performing tests of controls and substantive tests.
B. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.
C. An auditor should report on the scope of the auditor’s testing of internal control over financial reporting.
D. An auditor should determine the extent to which the entity’s programs achieve the desired level of results.
C. An auditor should report on the scope of the auditor’s testing of internal control over financial reporting.
Answer C is correct.
The report on financial statements (or separate reports) should describe the scope of the auditor’s testing of internal control over financial reporting and compliance with laws and regulations and grant or contract provisions. Auditors also should state whether their tests provided sufficient appropriate evidence for opinions on the effectiveness of internal control and compliance.
Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a
A. Statement of positive assurance that internal control activities designed to detect material errors and fraud were tested.
B. Statement of negative assurance that the internal control activities not tested have an immaterial effect on the entity’s financial statements.
C. Written report describing the entity’s internal control activities specifically designed to prevent fraud and noncompliance.
D. Written report included with the audit report on financial statements describing significant deficiencies and material weaknesses in internal control.
D. Written report included with the audit report on financial statements describing significant deficiencies and material weaknesses in internal control.
Answer D is correct.
According to Government Auditing Standards, the report on the financial statements or a separate report should present any significant deficiencies and material weaknesses in internal control. However, the report need not provide any assurance on internal control design or effectiveness.
According to the general standards in Government Auditing Standards,
A. The audit organization, but not the auditor, may provide any nonaudit services.
B. Performing nonaudit services creates an inherent impairment of independence.
C. An audit organization must be free of the appearance of an impairment to independence.
D. An audit organization performing audits under GAGAS must have an external peer review every 5 years.
C. An audit organization must be free of the appearance of an impairment to independence.
Answer C is correct.
Auditors must be independent in mind and appearance.
Which of the following statements represents a quality control requirement under government auditing standards?
A. An external peer review of a CPA’s practice should include a review of the working papers of each government audit performed since the prior external quality control review.
B. A CPA who conducts government audits may not make the CPA’s external quality control review report available to the public.
C. A CPA seeking to enter into a contract to perform an audit should provide the CPA’s most recent external peer review report to the party contracting for the audit.
D. A CPA who conducts government audits is required to undergo an annual external peer review when an appropriate internal quality control system is not in place.
C. A CPA seeking to enter into a contract to perform an audit should provide the CPA’s most recent external peer review report to the party contracting for the audit.
Answer C is correct.
According to Government Auditing Standards, an audit organization conducting an audit in accordance with these standards must have an appropriate internal quality control system in place and undergo an external peer review at least every 3 years. For example, a CPA seeking to enter into a contract to perform an audit should provide the CPA’s most recent external peer review report to the party contracting for the audit.
The GAO standards of reporting for governmental financial audits incorporate the AICPA standards and prescribe additional requirements to satisfy the unique needs of governmental audits. Which of the following is a reporting requirement for governmental financial audits?
A. A written report providing negative assurance on compliance with laws and regulations should be prepared.
B. A written report providing positive assurance on compliance with laws and regulations should be prepared.
C. Auditors should externally report significant deficiencies and material weaknesses in internal control.
D. Material indications of noncompliance with laws and regulations should be reported in a document with distribution restricted to senior officials of the entity audited.
C. Auditors should externally report significant deficiencies and material weaknesses in internal control.
Answer C is correct.
Auditors who have performed a financial audit should report (1) significant deficiencies or material weaknesses in internal control, (2) instances of material fraud and noncompliance with laws and regulations and other instances warranting the attention of those charged with governance, (3) material noncompliance with contracts and grant agreements, and (4) material abuse.
An auditor most likely will be responsible for communicating significant deficiencies in the design of internal controls
A. To the Securities and Exchange Commission when the client is a publicly held entity.
B. To specific legislative and regulatory bodies when reporting under Government Auditing Standards.
C. To a court-appointed creditors’ committee when the client is operating under Chapter 11 of the Federal Bankruptcy Code.
D. To shareholders with significant influence (more than 20% equity ownership) when the deficiencies are deemed to be material weaknesses.
B. To specific legislative and regulatory bodies when reporting under Government Auditing Standards.
Answer B is correct.
An auditor is required to include significant deficiencies and material weaknesses in internal control over financial reporting in a report prepared under Government Auditing Standards. The report is required to be distributed to those charged with governance, to the appropriate officials of the audited entity, and to the appropriate oversight bodies or organizations requiring or arranging for the audits.
A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization
A. Performs auditing procedures that are consistent with generally accepted accounting principles.
B. Is not accountable to those charged with governance.
C. Is a line-manager of the unit under audit.
D. Is sufficiently removed from political pressures to conduct audits objectively, without fear of political reprisal.
D. Is sufficiently removed from political pressures to conduct audits objectively, without fear of political reprisal.
Answer D is correct.
A government audit organization can be presumed to be free from organizational impairments to independence when reporting internally if the head of the audit organization meets all of the following criteria: (1) is accountable to the head or deputy head of the government entity or to those charged with governance; (2) reports the audit results both to the head or deputy head of the government entity and to those charged with governance; (3) is located organizationally outside the staff or line-management function of the unit under audit; (4) has access to those charged with governance; and (5) is sufficiently removed from political pressures to conduct audits and report findings, opinions, and conclusions objectively, without fear of political reprisal.
When auditing an entity’s financial statements in accordance with generally accepted government auditing standards, an auditor should prepare a written report on the auditor’s
A. Field work and procedures that substantiated the auditor’s specific findings and conclusions.
B. Identification of the causes of performance problems and recommendations for actions to improve operations.
C. Testing of internal control.
D. Opinion on the entity’s attainment of the goals and objectives specified by applicable laws and regulations.
C. Testing of internal control.
Answer C is correct.
The report on financial statements (or separate reports) should describe the scope of the auditor’s testing of internal control over financial reporting and compliance with laws and regulations and grant or contract provisions. Auditors also should state whether their tests provided sufficient appropriate evidence for opinions on the effectiveness of internal control and compliance.