20.1.

Question 1

Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or provide a special explanation for not doing so?

Answer 1

Presumptively mandatory requirement.

Auditors and audit organizations must comply with a presumptively mandatory requirement whenever it is relevant except in rare circumstances. GAGAS use the word should to indicate a presumptively mandatory requirement. When auditors and audit organizations determine that a departure from a relevant presumptively mandatory requirement is necessary, auditors should perform alternative procedures to achieve the intent of the requirement. The need to depart from a relevant presumptively mandatory requirement is expected to arise only when (1) it is for a specific procedure to be performed and (2), in the specific circumstances, the procedure would be ineffective in achieving the intent of the requirement. The auditors must document their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement.

Question 2

The Single Audit Act is intended to be the definitive legislation concerning the audit of federal awards administered by nonfederal entities. Which of the following statements is a false statement about the act?

Answer 2

The auditor must designate one of the grant providers as a cognizant agency to act as a liaison between the auditee and the federal agencies providing funds.

A recipient expending more than $50 million per year in federal awards must have a cognizant agency for audit. The designated agency is the federal awarding agency that provides the predominant amount of direct funding, unless the OMB specifies another cognizant agency or the cognizant agency reassigns cognizance to another federal awarding agency. The cognizant agency overseeing the audit process acts as a liaison among the auditor, the auditee, and the granting agencies. Guidance for the application of the Single Audit Act is provided in OMB Audit Requirements for Federal Awards (2 CFR 200). Generally accepted governmental auditing standards (GAGAS) and generally accepted auditing standards (GAAS) apply when appropriate.

Question 3

A material weakness in internal control over compliance arises when

Answer 3

A reasonable possibility exists that material noncompliance will not be prevented or timely detected and corrected.

A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance that results in a reasonable possibility that material noncompliance with a compliance requirement will not be prevented, or detected and corrected, on a timely basis.

Question 4

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

Answer 4

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

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 methods used to test the controls. Nevertheless, when presenting material fraud, auditors might consider the report content 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.

Question 5

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:

Answer 5

Yes
Yes
Yes

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.

Question 6

After performing a compliance audit of an entity that received federal funds, what conclusion would the auditor draw if the entity does not have adequate documentation to support $5 million in operating expenses paid from federal program funds?

Answer 6

Questioned costs of $5 million for operating expenses have been identified.

Under the Single Audit Act, the auditor must report a schedule of findings and questioned costs. Questioned costs result from an audit finding of (1) a violation or possible violation of a law, regulation, contract, grant, or agreement or document governing the use of federal funds, including matching funds; (2) inadequate documentation of costs at the time of the audit; or (3) costs that appear unreasonable and do not reflect the actions a prudent person would take in the circumstances.

Question 7

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

Answer 7

Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

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).

Question 8

How does Office of Management and Budget Audit Requirements for Federal Awards (2 CFR 200) define a subrecipient?

Answer 8

As a nonfederal entity that expends federal awards received from another entity to carry out a federal program.

OMB Audit Requirements for Federal Awards (2 CFR 200) defines a subrecipient as a nonfederal entity that expends federal awards received from another entity, often another governmental body, to carry out a federal program.

Question 9

A CPA has performed an examination of the general-purpose financial statements of Big City. The examination scope included the additional requirements of the Single Audit Act. When reporting on Big City’s internal control over the administration of federal awards, the CPA should

Answer 9

Communicate significant deficiencies and material weaknesses that are material in relation to a type of compliance requirement for the federal program.

Under the Single Audit Act, the auditor’s determination of whether a deficiency in internal control is a significant deficiency or material weakness is in relation to a type of compliance requirement for a major program or an audit objective identified in the OMB Audit Requirements for Federal Awards (2 CFR 200) Compliance Supplement. The auditor also should identify all significant deficiencies and weaknesses.

Question 10

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

Answer 10

Place the findings in proper prospective.

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.

Question 11

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

Answer 11

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

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.

Question 12

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

Answer 12

Reasonable assurance of detecting misstatements that are material to the financial statements.

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 material effect on the financial statements.

Question 13

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

Program audits:
Attestation engagements:
Economy & efficiency audits:

Answer 13

Yes
Yes
Yes

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.

Question 14

Which of the following is not a step performed in a compliance audit?

Answer 14

Perform external background checks on members of management.

Performing a background check on management is not a normal step in a compliance audit.

Question 15

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)?

Answer 15

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

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.

Question 16

Which of the following statements represents a quality control requirement under government auditing standards?

Answer 16

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.

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.

Question 17

In an audit of compliance with requirements governing awards under major federal programs performed in accordance with the Single Audit Act, the auditor’s consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality for the purpose of reporting an audit finding is

Answer 17

Determined in relation to a type of compliance requirement for a major program.

Under the Single Audit Act, the emphasis of the audit effort is on major programs related to federal awards administered by nonfederal entities. According to OMB Audit Requirements for Federal Awards (2 CFR 200) Compliance Supplement adopted under the Single Audit Act, the schedule of findings and questioned costs includes instances of material noncompliance with laws, regulations, contracts, or grant agreements related to a major program. The auditor’s determination of whether a noncompliance is material for the purpose of reporting an audit finding is in relation to a type of compliance requirement for a major program or an audit objective identified in the OMB 2 (CFR 200) Compliance Supplement. Examples of types of compliance requirements include (1) activities allowed or unallowed; (2) allowable costs/cost principles; (3) cash management; (4) eligibility; (5) matching, level of effort, and earmarking; and (6) reporting.

Question 18

The Single Audit Act concerns the audit of federal assistance expended by state and local governments. Under the act, the auditor should follow

Answer 18

Guidance provided by the Office of Management and Budget (OMB) and the Government Accountability Office (GAO).

The Single Audit Act establishes audit requirements for recipients of federal financial assistance. The act requires that audits of such entities be in accordance with Government Auditing Standards issued by the GAO. OMB Audit Requirements for Federal Awards (2 CFR 200) and the related Compliance Supplement also apply. The act and the circular state certain requirements that exceed those of the GAO.

Question 19

In auditing a not-for-profit entity that receives governmental awards, the auditor has a responsibility to

Answer 19

Assess whether management has identified laws and regulations that have a material effect on the entity’s financial statements.

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 material effects on the financial statements and to assess whether management has identified such laws and regulations.

Question 20

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization

Answer 20

Is sufficiently removed from political pressures to conduct audits objectively, without fear of political reprisal.

A government audit organization is presumed to be free from organizational impairments to independence when reporting internally if its head (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 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.

Question 21

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

Answer 21

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

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 supervisory review, before the report release date, of the evidence that supports the findings, conclusions, and recommendations contained in the auditors’ report. Also documented are 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 (1) law, (2) regulation, (3) scope limitations, (4) restrictions on access to records, or (5) other issues.