Gleim 20.1 - Government Auditing Standards Flashcards Preview

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Flashcards in Gleim 20.1 - Government Auditing Standards Deck (49):
1

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).

2

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.

3

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.

4

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.

5

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.

6

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.

7

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.

8

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.

9

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.

10

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.

11

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.

12

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.

13

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.

14

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.

15

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.

16

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.

17

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.

18

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.

19

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.

20

In accordance with the general standard on independence stated in Government Auditing Standards, an audit organization may perform nonaudit services that do not violate the overarching principles that the standard is based on. Thus, the audit organization most likely may do which of the following without impairing its independence with respect to the audited entity?

A. Prepare tax filings.

B. Prepare accounting records.

C. Perform internal audit services.

D. Operate the audited entity’s information technology system.

A. Prepare tax filings.

Answer A is correct.
The audit organization and the individual auditor, whether government or public, should be independent in mind and appearance. Audit organizations should not provide nonaudit services involving management functions or making management decisions, and audit organizations should not audit their own work or provide nonaudit services when the services are significant or material to the subject matter of the audits. Accordingly, an audit organization may, for example, prepare and draft financial statements if prepared by management, prepare routine tax filings, advise on IT system design, or advise on control self-assessment.

21

Government Auditing Standards relates to which of the services provided to government entities, programs, activities, and functions?

Financial Audits...Nonaudit Services...Performance Audits

A. Yes...Yes...Yes

B. Yes...Yes...No

C. Yes...No...Yes

D. No...No...Yes

C. Yes...No...Yes

Answer C is correct.
Government Auditing Standards relates to financial audits and attestation engagements. Moreover, it relates to performance audits of (1) government entities, programs, activities, and functions and (2) government assistance administered by contractors, not-for-profit entities, and other nongovernmental activities. Although GAGAS are not applicable to nonaudit services, they state independence standards and describe the impact of nonaudit services on auditor independence.

22

Tell, CPA, is auditing the financial statements of Youth Services Co. (YSC), a not-for-profit organization, in accordance with GAGAS as promulgated in Government Auditing Standards. Tell’s report on YSC’s compliance with laws and regulations is required to contain statements of

Positive Assurance...Negative Assurance

A. No...Yes

B. Yes...Yes

C. Yes...No

D. No...No

D. No...No


Answer D is correct.
An additional GAGAS requirement for reporting on financial audits states, in part, that the report should either (1) describe the scope of the auditors’ testing of internal control over financial reporting and of compliance with laws and regulations and present the results of those tests or (2) refer to a separate report containing that information. No statement of assurance is required. However, the auditor should report whether tests provide sufficient appropriate evidence to support an opinion on internal control and on compliance, etc.

23

An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require the auditor to report

A. The views of the audited program’s responsible officials concerning the auditor’s findings.

B. All significant instances of noncompliance and instances of abuse.

C. The audit objectives and the audit scope and methodology.

D. A concurrent opinion on the financial statements taken as a whole.

D. A concurrent opinion on the financial statements taken as a whole.

Answer D is correct.
Performance audits relate to assessing (1) program effectiveness and results; (2) economy and efficiency; (3) internal control; (4) compliance with legal requirements; or (5) providing prospective analysis, guidance, or summary information. There is no requirement that a financial audit be conducted simultaneously or concurrently with a performance audit.

24

In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management’s misappropriation of assets directly to a federal inspector general when the fraudulent activities are

A. Reported to the entity’s governing body and the governing body fails to make a required report to the federal inspector general.

B. Accompanied by fraudulent financial reporting that results in material misstatements of asset balances.

C. Perpetrated by several levels of management in a scheme that is likely to continue in future years.

D. Concealed by management by circumventing specific internal controls designed to safeguard those assets.

A. Reported to the entity’s governing body and the governing body fails to make a required report to the federal inspector general.

Answer A is correct.
Auditors should report known or likely (1) fraud; (2) noncompliance with provisions of laws, regulations, contracts, or grant agreements; or (3) abuse directly to parties outside the audited entity in two circumstances. First, when management does not satisfy legal or regulatory requirements to report such information to specified external parties (e.g., a federal inspector general or a state attorney general), auditors should communicate the failure to report such information to those charged with governance. If the entity still does not report this information to the specified external parties as soon as practicable, the auditors should report directly to the specified external parties. Second, when management does not take timely and appropriate steps to respond to known or likely fraud, etc., that (1) is material and (2) involves funding received directly or indirectly from a government, auditors should report this to failure to those charged with governance. If the entity still does not take appropriate steps as soon as practicable, the auditors should report the entity’s failure directly to the funding agency.

25

Which of the following is correct about reporting on compliance with laws and regulations in a financial audit under Government Auditing Standards (the Yellow Book)?

A. The reporting standards in a governmental audit modify the auditor’s responsibilities under generally accepted auditing standards.

B. Auditors are not required to report fraud and material noncompliance in the audit report.

C. In some circumstances, auditors are required to report fraud and noncompliance directly to parties external to the audited entity.

D. The auditor’s key findings of the audit of the financial statements should be communicated in a separate report.

C. In some circumstances, auditors are required to report fraud and noncompliance directly to parties external to the audited entity.

Answer C is correct.
Auditors should report known or likely (1) fraud; (2) noncompliance with provisions of laws, regulations, contracts, or grant agreements; or (3) abuse directly to parties outside the audited entity in two circumstances. First, when management does not satisfy legal or regulatory requirements to report such information to specified external parties (e.g., a federal inspector general or a state attorney general), auditors should communicate the failure to report such information to those charged with governance. If the entity still does not report this information to the specified external parties as soon as practicable, the auditors should report directly to the specified external parties. Second, when management does not take timely and appropriate steps to respond to known or likely fraud, etc., that (1) is material and (2) involves funding received directly or indirectly from a government, auditors should report this failure to those charged with governance. If the entity still does not take appropriate steps as soon as practicable, the auditors should report the entity’s failure directly to the funding agency.

26

When auditing an entity’s financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on
I. Recommendations for actions to improve operations
II. The scope of the auditor’s tests of compliance with laws and regulations

A. I only.

B. Both I and II.

C. Neither I nor II.

D. II only.

D. II only.

Answer D is correct.
Government Auditing Standards imposes more stringent reporting requirements than GAAS. Under GAGAS, the report on the financial statements should describe (in the same report or a separate report) the scope of the auditor’s testing of (1) compliance with laws and regulations and grant or contract provisions and (2) internal control over financial reporting. Auditors also should state whether the tests provided sufficient appropriate evidence to support opinions on internal control and compliance. The 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, noncompliance, or abuse directly to parties external to the audited entity. Auditors should report recommendations for actions to correct problems and to improve operations in a performance audit, not in a financial audit.

27

For financial audits, generally accepted government auditing standards (GAGAS) incorporate AICPA standards. GAGAS prescribe additional requirements for reporting on

Laws, Regulations, Contracts, and Grants...Reporting on Internal Control

A. Yes...No

B. No...Yes

C. No...No

D. Yes...Yes

D. Yes...Yes

Answer D 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.

28

In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is

A. Reported by the auditor to the audit committee as a significant deficiency in internal control.

B. Discovered after the auditor’s report has been made available to the federal inspector general and to the public.

C. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.

D. Voluntarily disclosed to the auditor by low-level personnel as a result of the auditor’s inquiries.

C. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.

Answer C is correct.
Under Government Auditing Standards, auditors should report fraud, noncompliance, and abuse directly to parties outside the auditee (for example, to a federal inspector general or a state attorney general) in two circumstances. These requirements are in addition to any legal requirements for direct reporting. First, if auditors have communicated such fraud, noncompliance, or abuse to the auditee and (s)he fails to report them, the auditors should communicate their awareness of that failure to the auditee’s governing body. If the auditee does not make the required report as soon as practicable after the auditor’s communication with its governing body, the auditors should report the fraud, noncompliance, or abuse directly to the external party specified in the law or regulation. Second, management is responsible for taking timely and appropriate steps to remedy fraud, noncompliance, or abuse that auditors report to it. When fraud, noncompliance, or abuse involves assistance received directly or indirectly from a government agency, auditors may have a duty to report it directly if management fails to take remedial steps. If auditors conclude that such failure is likely to cause them to depart from the standard report or resign from the audit, they should communicate that conclusion to the auditee’s governing body. Then, if the auditee does not report the fraud, noncompliance, or abuse as soon as practicable to the entity that provided the government assistance, the auditors should report directly to that entity.

29

When reporting on an entity’s internal control over financial reporting in compliance with generally accepted government auditing standards, an auditor should issue a written report that includes a

A. Statement of negative assurance that nothing came to the auditor’s attention that caused the auditor to believe significant deficiencies were present.

B. Statement of positive assurance that the results of tests indicate that internal control either can, or cannot, be relied on to reduce control risk to an acceptable level.

C. Description of the material weaknesses and the strengths that the auditor can rely on in reducing the extent of substantive testing.

D. Description of the scope of the auditor’s testing of internal control.

D. Description of the scope of the auditor’s testing of internal control.

Answer D is correct.
An auditor should describe the scope of the testing of internal control over financial reporting. The report also states whether the tests provided sufficient appropriate evidence to support an opinion on internal control. The auditor also should report significant deficiencies in internal control, separately identifying material weaknesses.

30

An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise’s internal control, either in the report on the financial statements or in

A. A separate report.

B. The notes to the financial statements.

C. A letter to the government funding agency.

D. The report on the performance audit.

A. A separate report.

Answer A is correct.
An auditor is required to follow Government Auditing Standards, which impose more stringent reporting requirements than GAAS, when reporting on the internal control of an entity that receives governmental funding. For example, it mandates a written report on internal control over financial reporting in every audit. In contrast, GAAS require communication in writing only if significant deficiencies or material weaknesses have been observed (AU-C 265). The report on internal control should be included in either the report on the financial statements or in a separate report.

31

In accordance with Government Auditing Standards, which set of documentation from a financial statement audit should contain sufficient information to enable an experienced auditor having no previous connection with the audit to conclude that sufficient evidence was collected?

A. Client’s financial statements.

B. Auditor’s engagement letter.

C. Client’s procedures manual.

D. Auditor’s working papers.

D. Auditor’s working papers.

Answer D is correct.
Audit documentation (also known as working papers) should be sufficient to permit an experienced auditor with no prior connection to the audit to understand (1) the audit procedures performed to comply with GAAS and other requirements, (2) the results of the procedures, (3) the evidence obtained, (4) significant audit findings or issues, (5) the conclusions reached, and (6) significant judgments made in drawing the conclusions (AU-C 230).

32

Governmental auditing may extend beyond expressions of opinion on the fairness of financial presentation to include

Program Audits...Attestation Engagements...Economy & Efficiency Audits

A. Yes...Yes...No
B. Yes...Yes...Yes
C. No...Yes...Yes
D. Yes...No...Yes

B. Yes...Yes...Yes

Answer B is correct.
Under Government Auditing Standards, an audit may be a financial audit, an attestation engagement, or a performance audit. Financial audits primarily address whether reported financial information is fairly presented in accordance with recognized criteria. Attestation engagements involve examining, reviewing, or performing agreed-upon procedures on a subject matter or an assertion about a subject matter and reporting on the results. Performance audits may have many objectives, for example, assessing (1) program effectiveness and results, (2) economy and efficiency, (3) internal control, (4) compliance, and (5) prospective analyses.

33

Which of the following is a documentation requirement that an auditor should follow in a financial audit in accordance with Government Auditing Standards?

A. The auditor should document the supervisory review of the evidence that supports the findings, conclusions, and recommendations contained in the auditors’ report.

B. The audit documentation should contain copies of documents examined.

C. The audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.

D. The auditor should document all deficiencies in internal control discovered during the audit.

A. The auditor should document the supervisory review of the evidence that supports the findings, conclusions, and recommendations contained in the auditors’ report.

Answer A is correct.
In addition to the AICPA requirements for audit documentation, auditors should comply with certain requirements when performing a GAGAS financial audit. These requirements include documenting (1) supervisory review, before the report release date, of the evidence that supports the findings, conclusions, and recommendations contained in the auditors’ report and (2) any departures from GAGAS and the effects on the audit and on the auditors’ conclusions when the audit does not comply with GAGAS due to (a) law, (b) regulation, (c) scope limitations, (d) restrictions on access to records, or (e) other issues.

34

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor’s report

A. Material instances of fraud and noncompliance that were discovered.

B. The materiality criteria used by the auditor in considering whether instances of noncompliance were significant.

C. An opinion on whether compliance with laws and regulations affected the entity’s goals and objectives.

D. A statement of assurance that all controls over fraud and compliance were tested.

A. Material instances of fraud and noncompliance that were discovered.

Answer A is correct.
An auditor’s report, in accordance with Government Auditing Standards, should present (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.

35

The report on a financial statement audit performed in accordance with generally accepted governmental auditing standards (GAGAS) should
I. Describe the scope of tests of compliance with laws and regulations
II. Refer to a separate report describing the scope of compliance tests
III. Provide positive assurance about compliance with laws and regulations

A. I or II.

B. I and III.

C. II and III.

D. II only.

A. I or II.

Answer A is correct.
The report (or separate reports) on financial statements 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. The report should state whether the tests provided sufficient appropriate evidence to support opinions on internal control and on compliance. Auditors should report all of the following: (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. But an opinion may be expressed if sufficient appropriate evidence is obtained.

36

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 report all instances of fraud, noncompliance with laws and regulations, violations of provisions of contracts or grant agreements, and abuse.

B. An auditor should report on the scope of the auditor’s testing of internal controls.

C. Internal control activities designed to detect or prevent fraud should be reported to the inspector general.

D. An auditor should report the views of the public about the auditor’s findings.

B. An auditor should report on the scope of the auditor’s testing of internal controls.

Answer B is correct.
According to Government Auditing Standards for financial statement audits, the report on the financial statements should describe (in the same report or a separate report) the scope of the auditor’s testing of (1) compliance with laws and regulations and grant or contract provisions and (2) internal control over financial reporting. Auditors also should state whether the tests provided sufficient appropriate evidence to support opinions on internal control and compliance. The 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, noncompliance, or abuse directly to parties external to the audited entity.

37

According to Government Auditing Standards, governmental auditors are required to acquire the following CPE hours every 2 years:

Total of 80 Hours...24 Hours Related to GAGAS

A. Yes...No

B. No...No

C. Yes...Yes

D. No...Yes

C. Yes...Yes

Answer C is correct.
Auditors who are involved in any amount of planning, directing, performing, or reporting on GAGAS audits are required to obtain 80 hours of continuing education in related topics every 2 years. At least 24 hours of CPE should directly relate to governmental auditing.

38

n a financial audit under Government Auditing Standards, procedures have disclosed material instances of noncompliance with regulations. The report should

A. Express a qualified opinion.

B. Place the findings in proper perspective.

C. Indicate that the audit was designed to provide reasonable assurance that noncompliance that could result in criminal prosecution would be detected.

D. Also disclose immaterial instances of noncompliance.

B. Place the findings in proper perspective.

Answer B is correct.
To give the reader a basis for judging the prevalence and consequences of deficiencies in internal control, fraud, noncompliance, and abuse, the instances identified should be related to the population or the number of cases examined and be quantified in terms of monetary amounts, if appropriate.

39

Financial audits of certain governmental entities are required to be performed in accordance with generally accepted government auditing standards (GAGAS) as issued in Government Auditing Standards. These standards do not require, as part of an auditor’s report, the inclusion of

A. The significant deficiencies, with identification of material weaknesses.

B. A description of the scope of testing of internal control over financial reporting.

C. Sampling methods used to test the controls designed to detect fraud whether or not material fraud is found.

D. A statement as to whether the tests performed provide sufficient appropriate evidence to support an opinion on internal control over financial reporting.

C. Sampling methods used to test the controls designed to detect fraud whether or not material fraud is found.

Answer C is correct.
The Government Accountability Office (GAO) issues Government Auditing Standards (the Yellow Book). GAGAS apply to financial audits, attestation engagements, and performance audits. GAGAS for financial audits incorporate by reference the AICPA’s Statements on Auditing Standards (SAS) and also state requirements. However, they do not require that the report identify specific sampling techniques used to test the controls. Nevertheless, when presenting material fraud, auditors might consider the report contents standards for performance audits that pertain to, among other things, methodology. Thus, if sampling significantly supports the findings, the auditor might describe the sample design and state why it was chosen.

40

An internal auditor is required to include significant deficiencies and material weakness in internal control in a report prepared under Government Auditing Standards. The auditor is not required to distribute the report to

A. The Securities and Exchange Commission.

B. Officials of the organizations being audited who required or arranged for the audit.

C. Specific legislative and regulatory bodies.

D. The appropriate officials of the organization audited.

A. The Securities and Exchange Commission.

Answer A is correct.
Audit organizations in government entities should distribute auditors’ reports to (1) those charged with governance, (2) the appropriate audited entity officials, and (3) the appropriate oversight bodies or organizations requiring or arranging for the audits. As appropriate, auditors also should distribute copies of the reports to (1) other officials who (a) have legal oversight authority or (b) may be responsible for acting on audit findings and recommendations and (2) others authorized to receive such reports. But financial statements are submitted to the SEC by management, not by internal auditors.

41

Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards requires the auditor to

A. Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls.

B. Present the results of the auditor’s tests of controls.

C. Provide positive assurance that control activities regarding segregation of duties are consistent with the entity’s control objectives.

D. Describe the scope of the auditor’s principal substantive tests.

B. Present the results of the auditor’s tests of controls.

Answer B is correct.
GAGAS contain standards for audits of government entities. GAGAS incorporate AICPA standards but include additional reporting requirements for internal control. 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. Furthermore, the auditor should communicate in the report on internal control significant deficiencies and material weaknesses in internal control.

42

Attestation engagements under Government Auditing Standards include

A. Opinions on specified elements of a financial statement.

B. Reporting on program effectiveness.

C. Reporting on interim financial information.

D. Reporting on the reliability of performance measures.

D. Reporting on the reliability of performance measures.

Answer D is correct.
Attestation engagements involve examining, reviewing, or performing agreed-upon procedures on a subject matter or an assertion about a subject matter that is the responsibility of another party. Examples include reporting on (1) an entity’s internal control over financial reporting; (2) an entity’s compliance with requirements of specified laws, regulations, policies, contracts, or grants; (3) management discussion and analysis (MD&A); (4) prospective financial or performance information; (5) the accuracy or reliability of performance measures; (6) allowable, reasonable, or final contract cost; or (7) the quantity, condition, or valuation of inventory or assets.

43

Which of the following is a documentation requirement that an auditor should follow in a financial statement audit in accordance with Government Auditing Standards?

A. The audit documentation should contain copies of documents examined.

B. Audit documentation should be considered the personal property of the auditor and should not be shared.

C. The audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.

D. The audit documentation should contain sufficient information to permit another auditor to ascertain the evidence that supports audit conclusions and judgments.

D. The audit documentation should contain sufficient information to permit another auditor to ascertain the evidence that supports audit conclusions and judgments.

Answer D is correct.
Government Auditing Standards incorporate AICPA auditing standards, which state that audit documentation should contain sufficient information to enable an experienced auditor having no previous connection with the audit to ascertain from them the evidence that supports the auditor’s significant conclusions and judgments.

44

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe additional requirements to satisfy the unique needs of governmental audits. Which of the following is an additional requirement for governmental financial audits?

A. Any privileged or confidential information discovered should be reported to the organization that arranged for the audit.

B. All changes in the audit program from the prior year should be reported to the entity’s audit committee.

C. Auditors should report the scope of their testing of compliance with laws and regulations and of internal control.

D. Material indications of noncompliance with laws and regulations should be reported in a document distributed only to the entity’s senior officials.

C. Auditors should report the scope of their testing of compliance with laws and regulations and 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.

45

According to an additional requirement in Government Auditing Standards, the elements of a finding for a financial audit include

A. Criteria, report distribution, and an opinion.

B. Condition, effect, and an opinion.

C. Criteria, condition, and an opinion.

D. Condition, cause, and effect.

D. Condition, cause, and effect.

Answer D is correct.
The elements needed for a finding depend on the objectives of the audit but include criteria, condition, cause, and effect or potential effect. The criteria element is the required or desired state (e.g., law or contract) or expectation with respect to the program or operation. The condition element is a situation that exists. The cause element is the reason or explanation for the condition. The effect or potential effect element is a clear, logical link to establish the impact or potential impact of the difference between the situation that exists (condition) and the required or desired state (criteria).

46

In a financial statement audit, the audit report on compliance with requirements applicable to a governmental entity should address

Scope of Testing...Sufficiency and Appropriateness of Evidence

A. No...No

B. Yes...Yes

C. No...Yes

D. Yes...No

B. Yes...Yes

Answer B is correct.
Government Auditing Standards for financial statement audits states that the report should (1) describe the scope of the auditors’ testing of compliance with laws, regulations, contracts, or grant agreements that have a material effect on the statements; and (2) state whether tests provided sufficient appropriate evidence. This information may be included in a separate report. The report also should state whether the tests performed provided sufficient appropriate evidence to support the opinion on compliance.

47

Under Government Auditing Standards, the report on a financial statement audit should

A. Include a statement providing negative assurance on internal control.

B. State whether the evidence supports an opinion on internal control.

C. State that the auditor is not aware of any material modifications that must be made to internal control.

D. Express an opinion on internal control.

B. State whether the evidence supports an opinion on internal control.

Answer B is correct.
The report (or separate reports) on financial statements 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. The report also should (1) state whether the tests provided sufficient appropriate evidence to support opinions on internal control and on compliance and (2) include significant deficiencies and material weaknesses in internal control. But an opinion on internal control is not expressed unless sufficient appropriate evidence is obtained.

48

An auditor who is engaged to audit the financial statements of a governmental entity should

A. Assess control risk with respect to each component of internal control.

B. Obtain an understanding of the possible financial statement effects of laws and regulations having direct and material effects on amounts reported.

C. Design the audit to provide reasonable assurance that the statements are free of material misstatements resulting from noncompliance with laws and regulations having direct or indirect effects.

D. Assume responsibility for assuring that the entity complies with applicable laws and regulations.

B. Obtain an understanding of the possible financial statement effects of laws and regulations having direct and material effects on amounts reported.

Answer B is correct.
Government Auditing Standards incorporate all SASs. Thus, the auditor’s responsibility for noncompliance is to obtain sufficient appropriate evidence about material amounts and disclosures in the statements 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. Other laws and regulations, for example, those relating principally to operations, do not have a direct effect. An audit usually includes only limited procedures specifically designed to detect noncompliance with such other laws and regulations (AU-C 250).

49

When auditing an entity’s financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on

I. Positive aspects of the program applicable to audit objectives
II. The scope of the auditor’s testing of internal controls

A. II only.

B. Both I and II.

C. Neither I nor II.

D. I only.

A. II only.

Answer A is correct.
Government Auditing Standards imposes more stringent reporting requirements than GAAS. Under GAGAS, the report on the financial statements should describe (in the same report or a separate report) the scope of the auditor’s testing of (1) compliance with laws and regulations and grant or contract provisions and (2) internal control over financial reporting. Auditors also should state whether the tests provided sufficient appropriate evidence to support opinions on internal control and compliance. The 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, noncompliance, or abuse directly to parties external to the audited entity. The report on internal control should identify significant deficiencies and material weaknesses but need not provide any assurance on internal control design or effectiveness. Accomplishments of the program, especially those management improvements in one area that may be applicable elsewhere, should be reported in a performance audit, not a financial audit, if they relate to audit objectives.