20.2 Flashcards
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
II only.
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.
According to an additional requirement in Government Auditing Standards, the elements of a finding for a financial audit include
Condition, cause, and effect.
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).
According to the general standards in Government Auditing Standards,
An audit organization must be free of the appearance of an impairment to independence.
Auditors must be independent in mind and appearance.
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?
Auditors should externally report significant deficiencies and material weaknesses in internal control.
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.
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:
Yes
Yes
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.
Under the Single Audit Act, the auditor should report on compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements. This report should also express or disclaim an opinion on whether the auditee complied with laws, etc., that could have a direct and material effect on each major program. In accordance with the act and OMB Audit Requirements for Federal Awards (2 CFR 200) Compliance Supplement, which contains policies, procedures, and guidelines to implement the act, the auditor
Should determine whether the recipient has engaged in activities to which particular types of compliance requirements apply.
OMB guidance lists the types of compliance requirements, e.g., (1) activities allowed or unallowed; (2) allowable costs or cost principles; (3) cash management; (4) eligibility; (5) matching, level of effort, and earmarking; and (6) reporting. The data collection form submitted by the auditee should include, for each federal program, a yes or no statement as to whether there are audit findings for each of the types of compliance requirements and the total of any questioned costs.
An auditor most likely will be responsible for communicating significant deficiencies in the design of internal controls
To specific legislative and regulatory bodies when reporting under Government Auditing Standards.
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. Reporting is to (1) those charged with governance, (2) officials of the audited entity, and (3) oversight bodies or organizations requiring or arranging for the audits.
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
Identify the legislative intent of the program being audited.
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.
A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?
GAS:
GAAS:
Yes
Yes
According to the Single Audit Act, the auditor must conduct the audit in accordance with GAGAS as well as GAAS.
Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material noncompliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to
Issue a qualified compliance report describing the subsequent noncompliance.
In any situation, a material instance of noncompliance occurring before issuance of the report will require disclosure in the report.
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
Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.
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.
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
II only.
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.
In a compliance audit, the auditor’s primary objective is to
Obtain sufficient appropriate evidence to form an opinion on compliance.
The auditor’s objective in a compliance audit is to obtain sufficient appropriate evidence to form an opinion and report at the level specified in the governmental audit requirement on whether the entity complied, in all material respects, with the applicable compliance requirements.
In accordance with Office of Management and Budget audit requirements for audits of non-federal entities expending federal awards, which of the following statements is accurate regarding federal awards expended?
Free rents received as part of an award to carry out a federal program are treated as federal funds expended.
Free rent received as part of an award to carry out a federal program must be included in determining federal awards expended and is subject to audit. But free rent by itself is not considered a federal award expended.
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
I or II.
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.
