Question Details

AUD 6
The
 auditor's report on compliance and internal control over compliance designed to meet the requirements of Government Auditing Standards (the Yellow Book), should include:
I.	The scope of the auditor's testing of internal controls.
II.	Uncorrected misstatements that were determined by management to be immaterial.
 
a.	Neither I nor II.
 
b.	I only.
 
c.	Both I and II.
 
d.	II only.
In performing an audit in accordance with Generally Accepted Government Auditing Standards (the "Yellow Book"), the auditor:
 
a.	Accepts less responsibility in conducting fieldwork than is accepted in a GAAS audit, since the specific requirements of the Generally Accepted Government Auditing Standards reduce required professional judgment.
 
b.	Accepts greater reporting responsibilities than accepted under a GAAS audit, since the auditor must report on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and on the organization's internal control over financial reporting.
 
c.	Accepts equal reporting responsibilities with that accepted under GAAS audits, since compliance evaluation and reporting have implied financial statement implications and require expanded treatment as a material contingency.
 
d.	Accepts shared responsibility with Federal Inspectors General, who are equally responsible for compliance evaluation, control, and reporting. 
Explanation
Government Auditing Standards published by the Government Accountability Office:
 
a.	Only apply to audits of governments receiving federal financial assistance.
 
b.	Primarily apply to audits of federal financial assistance and government organizations.
 
c.	Only apply to audits of federal financial assistance programs operated by state and local governments.
 
d.	Only apply to audits of governments.
Explanation
An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond generally accepted auditing standards. The auditor's expanded responsibilities include:
 
a.	Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.
 
b.	Performance of additional procedures to test for noncompliance with laws, rules and regulations targeted for review by the Office of the Inspector General.
 
c.	Performance of additional procedures to test and report on achievement of program objectives.
 
d.	Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have any effect on federal award programs.

Gearty& Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll Township in accordance with OMB Circular A-133. In connection with that engagement, Gearty& Duffy will determine major programs:
 
a.	By testing enough grants to achieve a single specific coverage percentage.
 
b.	By applying only a specific dollar threshold, where all programs exceeding the threshold would be considered major. 
 
c.	By applying a risk-based approach.
 
d.	Using a list of programs included in the work plan of the Office of the Inspector General.
When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:
I.	Noteworthy accomplishments of the program.
II.	The scope of the auditor's testing of internal controls.
 
a.	I only.
 
b.	Neither I nor II.
 
c.	Both I and II.
 
d.	II only.
Which of the following statements represents a quality control requirement under Government Auditing Standards?
 
a.	An external quality control review of a CPA's practice should include a review of the audit documentation for 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 quality control review report to the party contracting for the audit.
 
d.	A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place.
An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:
 
a.	To shareholders with significant influence (more than 20% equity ownership) when the signficant deficiencies (reportable conditions) are deemed to be material weaknesses.
 
b.	To a court-appointed creditors' committee when the client is operating under Chapter 11 of the Federal Bankruptcy Code.
 
c.	To specific legislative and regulatory bodies when reporting under Government Auditing Standards.
 
d.	To the Securities and Exchange Commission when the client is a publicly-held entity.
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.	A statement of assurance that all controls over fraud and illegal acts were tested.
 
b.	Material instances of fraud and illegal acts that were discovered.
 
c.	The materiality criteria used by the auditor in considering whether instances of noncompliance were significant.
 
d.	An opinion on whether compliance with laws and regulations affected the entity's goals and objectives.
Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express:
 
a.	Reasonable assurance on the compliance tests.
 
b.	No assurance on the compliance tests.
 
c.	A qualified or adverse opinion.
 
d.	An adverse or disclaimer of opinion.
An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of this auditor's report:
 
a.	The pertinent views of the entity's responsible officials concerning the auditor's findings.
 
b.	A statement of the audit objectives and a description of the audit scope.
 
c.	Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.
 
d.	A concurrent opinion on the financial statements taken as a whole.
Explanation
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.	Employed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.
 
b.	Responsibility for understanding and complying with compliance requirements.
 
c.	Implemented internal controls designed to detect all illegal acts.
 
d.	Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.

Which of the following is a documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards?
 
a.	The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste.
 
b.	The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance.
 
c.	Audit documentation should contain sufficient information so that supplementary oral explanations are not required.
 
d.	Audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.
When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's:
 
a.	Understanding of internal control and assessment of control risk.
 
b.	Field work and procedures that substantiated the auditor's specific findings and conclusions.
 
c.	Identification of the causes of performance problems and recommendations for actions to improve operations.
 
d.	Opinion on the entity's attainment of the goals and objectives specified by applicable laws and regulations.
In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should:
 
a.	Provide an opinion on overall compliance with laws and regulations.
 
b.	Describe the laws and regulations that the entity must comply with.
 
c.	State that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the entity's programs.
 
d.	Provide negative assurance of the entity's legal compliance.
Reporting on internal control to meet the requirements of Government Auditing Standards differs from reporting under other generally accepted auditing standards in that Government Auditing Standards requires a:
 
a.	Statement of positive assurance that internal controls designed to detect material errors and fraud were tested.
 
b.	Report describing the scope of the auditor's testing of compliance and of internal control.
 
c.	Written report describing the entity's internal controls specifically designed to prevent fraud, abuse, and illegal acts.
 
d.	Statement of negative assurance that internal controls not tested have an immaterial effect on the entity's financial statements.
For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the Statements on Auditing Standards (SAS) that are issued by the AICPA. GAGAS prescribe additional standards on:
		Direct reporting
of illegal acts	Reporting on
internal controls
 
a.	Yes	Yes
 
b.	No	No
 
c.	Yes	No
 
d.	No	Yes
Explanation
Choice "a" is correct. Generally accepted government auditing standards (GAGAS) prescribe additional standards on the direct reporting of illegal acts. For example, the auditor is required to directly report illegal acts discovered during the audit to federal inspector generals if management fails to disclose such illegal acts to the grantor or fails to take appropriate remedial action. In addition, GAGAS also prescribe additional standards related to internal control reporting, such as requiring that the auditor provide a written report on internal control in every financial statement audit and specific reporting over internal control over compliance.
Choices "c", "d", and "b" are incorrect, based on the above explanation. 
The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?
 
a.	The materiality levels are higher and are determined by the government entities that provide the federal financial assistance to the recipients.
 
b.	The accounts should be 100% verified by substantive tests because certain statistical sampling applications are not permitted.
 
c.	The auditor is required to disclose all situations and transactions that could be indicative of fraud, abuse, and illegal acts to the federal inspector general.
 
d.	The auditor is required to document an understanding of internal control established to provide reasonable assurance of compliance with the applicable laws and regulations.
Explanation
Choice "d" is correct. Auditors engaged to perform audits of federal financial assistance (generally under the provisions of the Single Audit Act) must perform procedures to obtain an understanding of internal control pertaining to compliance, and should document this understanding of internal control.
Choice "c" is incorrect. The auditor is required to disclose actual instances of fraud and illegal acts, not all situations that could be indicative of fraud, abuse, or illegal acts.
Choice "a" is incorrect. Materiality levels of organizations receiving federal financial assistance are set by the auditor, not the government. Materiality levels depend upon auditor judgment and will not fall or rise purely as a result of federal participation.
Choice "b" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required. 
Auditors conducting an audit in accordance with the Single Audit Act use a risk-based approach designed to:
 
a.	Reduce audit risk by providing an equal opportunity for all grants to be tested.
 
b.	Reduce audit risk by providing an equal opportunity for all expended federal dollars to be tested.
 
c.	Focus the audit on grants related to large federal programs.
 
d.	Focus the audit on high-risk programs.
Explanation
Choice "d" is correct. The risk-based approach of the Single Audit Act is designed to focus the auditor's tests of federal financial assistance on the programs with the highest risk.
Choice "c" is incorrect. The risk-based approach does not focus the auditor on larger ("Type A") programs. Although the segregation of programs into larger ("Type A") and smaller ("Type B") programs gives the auditor a basis for determining coverage and evaluating risk, the focus is on the risk, not the size of the program.
Choice "a" is incorrect. The risk-based approach is not an extension of random sampling concepts and is not designed to provide each grant with an equal opportunity of being selected.
Choice "b" is incorrect. The risk-based approach is not an extension of random sampling or PPS sampling concepts and is not designed to provide each Federal dollar expended with an equal opportunity of being selected for testing. 
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 controls either in the report on the financial statements or in:
 
a.	A separate report.
 
b.	A letter to the government funding agency.
 
c.	The report on the performance audit.
 
d.	The notes to the financial statements.
Explanation
Choice "a" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information.
Choice "c" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit.
Choice "d" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements.
Choice "b" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency. 
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 require the auditor to:
 
a.	Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives.
 
b.	Present the results of the auditor's tests of controls.
 
c.	Describe the scope of the auditor's principal substantive tests.
 
d.	Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls.
Explanation
Choice "b" is correct. The report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests.
Choice "a" is incorrect. The auditor's report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity's objectives.
Choice "d" is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness.
Choice "c" is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting. 
According to the Statement on Auditing Standards No. 117, Compliance Audits, a compliance audit is based on management's assumption of responsibility for all of the following, except:
 
a.	Maintaining effective controls that provide absolute assurance that the entity administers programs in compliance with related requirements.
 
b.	Identification of the government's programs and understanding and fulfilling compliance requirements.
 
c.	Taking appropriate corrective actions on audit findings.
 
d.	Ongoing evaluation and monitoring of the entity's compliance with program requirements.
Explanation
Choice "a" is correct. Management takes responsibility for providing reasonable, not absolute, assurance that programs are operated in compliance with requirements.
Choice "b" is incorrect. Management is presumed to take responsibility for identifying programs and understanding and complying with requirements.
Choice "d" is incorrect. Entity compliance with compliance requirements is presumed to be evaluated and monitored by management on an ongoing basis.
Choice "c" is incorrect. Management's proactive efforts to timely and effectively address compliance findings in audits is presumed
In its tests of controls over the Tarbet Township Housing Assistance Program, Black, CPA, has found that the clerk assigned to monitor and limit participation in the housing program to a target population of individuals meeting income criteria is routinely overruled by his supervisor in order to meet volume based level of effort requirements. Ineligible participants whose income exceeds program limits are routinely admitted to the program. Black would characterize this as a(n):
 
a.	Audit risk of noncompliance.
 
b.	Deficiency in the design of internal control.
 
c.	Inherent risk of noncompliance.
 
d.	Deficiency in the operation of internal control.
Explanation
Choice "d" is correct. Deficiency in operation exists when a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control. In this case, the clerk did not have the necessary authority to follow through on the control.
Choice "b" is incorrect. Deficiency in design exists when noncompliance occurs even when the control operates as designed. The control contemplates a clerical determination of income eligibility (which occurs). If the control were not overridden, it would be effective.
Choice "a" is incorrect. Audit risk of noncompliance is a planning concept that represents the risk the auditor might express an inappropriate audit opinion on the entity's compliance when material noncompliance exists. Findings associated with tests of controls would not be characterized as audit risk of noncompliance.
Choice "c" is incorrect. Inherent risk of noncompliance is the susceptibility of a requirement to noncompliance and is a component of the risk of material noncompliance. It exists prior to the audit and would not be a characterization that would be applied to the results of tests of controls. 
Management's written representation to the auditor in connection with a governmental audit would most likely include:
 
a.	Identification of management's interpretation of compliance requirements that are subject to different interpretations.
 
b.	A statement that management had identified and disclosed all material government programs to the auditor.
 
c.	Negative assurance that the government has complied with compliance requirements.
 
d.	Representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist.
Explanation
Choice "a" is correct. The management letter will include identification of management's interpretation of compliance requirements that are subject to different interpretations.
Choice "b" is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor.
Choice "d" is incorrect. Management will assert that they have disclosed all known noncompliance or state that there was no such noncompliance.
Choice "c" is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements, not negative assurance. 
A report on compliance would include:
 
a.	A disclaimer of opinion on compliance.
 
b.	A representation that findings that do not result in any report modification are not otherwise disclosed.
 
c.	A statement that generally accepted auditing standards includes all governmental audit standards by reference.
 
d.	An opinion on whether the entity complied, in all material respects, with the applicable compliance requirements.
Explanation
Choice "d" is correct. The auditor will express an opinion at the level specified by the governmental audit requirement.
Choice "a" is incorrect. The auditor will express an opinion at the level specified by the governmental audit requirement.
Choice "b" is incorrect. Findings that do not impact the opinion are displayed in the report or referenced to a separate report.
Choice "c" is incorrect. The report should state that the audit was conducted in compliance with GAAS, GAGAS (Yellow Book), and any other specific governmental audit requirement. 
Gearty& Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:
 
a.	An inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award.
 
b.	An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.
 
c.	An audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.
 
d.	An audit of annual activity of only federal financial assistance programs over the course of the town's fiscal year.
Explanation
Choice "b" is correct. A single audit represents a combined audit of both an entity's financial statements and federal financial assistance programs. The single audit provides audited organizations with the opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit. Auditors are governed by the Single Audit Act and OMB Circular A-133.
Choice "d" is incorrect. A single audit is not simply an audit of federal financial assistance.
Choice "a" is incorrect. A single audit is not simply an audit of federal financial assistance.
Choice "c" is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of financial statements. It also is designed to report on compliance with laws, rules, and regulations. 
A report on internal control over compliance will include which of the following assertions?
 
a.	Identification of material weakness in the event an adverse opinion is expressed.
 
b.	An opinion as to whether internal controls were adequate to provide reasonable assurance that the organization would comply, in all material respects, with laws rules and regulations.
 
c.	Disclaimer of opinion in the event that significant weaknesses are identified.
 
d.	A disclaimer of opinion on internal control over compliance.
Explanation
Choice "d" is correct. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.
Choice "b" is incorrect. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.
Choice "a" is incorrect. Material weaknesses are identified as part of the report on internal control over compliance. No opinion on internal control over compliance (unqualified or adverse) is expressed.
Choice "c" is incorrect. The report disclaims an opinion on the effectiveness of internal control over compliance regardless of the status of reported weaknesses. Significant weaknesses are disclosed or referenced in a separate report. 
Compliance audit workpapers will include all of the following documentation, except:
 
a.	Final basis for the opinion on the effectiveness of internal control over compliance.
 
b.	Responses to the assessed risk of noncompliance including tests of compliance and tests of controls
 
c.	Materiality levels.
 
d.	Risk assessment procedures performed including those related to gaining an understanding of the internal control over compliance.
Explanation
Choice "a" is correct. The auditor will not express an opinion on the effectiveness of internal control over compliance. Documentation of conclusions for an opinion would not be appropriate.
Choice "d" is incorrect. Documentation should include the risk assessment over internal control over compliance.
Choice "b" is incorrect. Responses to control assessments including both tests and test results should be documented.
Choice "c" is incorrect. Materiality levels should be documented. 
The auditors' purpose in establishing materiality levels in a compliance audit includes all of the following, except:
 
a.	Determining the nature and extent of risk assessment procedures.
 
b.	Establishing the basis for the opinion on effectiveness of internal control over compliance.
 
c.	Evaluate whether the entity has complied with applicable requirements.
 
d.	Determining the nature, timing and extent of additional audit procedures.
Explanation
Choice "b" is correct. The auditor does not express an opinion on the effectiveness of internal control over compliance. Materiality limits would not contribute to that nonexistent objective.
Choice "a" is incorrect. Materiality limits are used in conjunction with planning risk assessment procedures.
Choice "d" is incorrect. Materiality limits are used to plan audit timing, procedures and volume of testing.
Choice "c" is incorrect. Materiality is significant in allowing the auditor to formulate an opinion on compliance. 
The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?
 
a.	All changes in the audit program from the prior year should be reported to the entity's audit committee.
 
b.	Any privileged or confidential information discovered should be reported to the organization that arranged for the audit.
 
c.	Material indications of illegal acts should be reported in a document distributed only to the entity's senior officials.
 
d.	Auditors should report the scope of their testing of compliance with laws and regulations and of internal controls.
Explanation
Choice "d" is correct. The auditor's report on compliance and on internal control over financial recording (based on an audit) must include the scope of testing of compliance and internal control.
Choice "c" is incorrect. Material indications of illegal acts are not only reported to the members of the governing body of the audited entity and their senior staff officials but, in some circumstances, auditors should report illegal acts directly to external parties (such as the grantor agency).
Choice "a" is incorrect. Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to individuals contracting for the audit, reporting of all changes is not required. (For example, immaterial changes to the audit program need not be reported.)
Choice "b" is incorrect. Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report. The report should, however, disclose the nature of the information omitted and the requirement that makes an opinion necessary. 
How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-profit Organizations, define a subrecipient?
 
a.	As a nonfederal entity that expends federal awards received from another entity to carry out a federal program.
 
b.	As a dealer, distributor, merchant, or other seller providing goods or services that are required for the conduct of a federal program.
 
c.	As an individual who receives and expends federal awards received from a pass-through entity.
 
d.	As a nonfederal entity that provides a federal award to another entity to carry out a federal program.
Explanation
Choice "a" is correct. A nonfederal entity that expends federal financial assistance administered by another entity is a sub recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The not-for-profit organization would be the sub recipient. 
Choice "d" is incorrect. A nonfederal entity that receives a grant award and, in turn, contracts or provides that award to another entity to carry out the program would be a recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The state would be the grant recipient while the not-for-profit organization would be the sub recipient. 
Choice "c" is incorrect. An individual who receives and expends federal awards received from a pass-through entity is a recipient.
Choice "b" is incorrect. A nonfederal entity compensated for goods or services with federal monies is a vendor.
Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?
 
a.	The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.
 
b.	The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.
 
c.	The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively.
 
d.	The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.
Explanation
Choice "a" is correct. Audits of federal financial assistance under the Single Audit Act require that the auditor determine if the auditee has complied with laws, regulations, and provisions of the contracts or grant agreements.
Choice "b" is incorrect. Materiality in audits of federal financial assistance is s