20.4

Question 1

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

Answer 1

In all financial audits, regardless of circumstances.

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 financial audit. Furthermore, issuers must report on internal control. In contrast, GAAS require communication only if significant deficiencies or material weaknesses have been observed.

Question 2

According to the additional requirements for financial audits in Government Auditing Standards,

Answer 2

The auditors should report the views of responsible officials if their report discloses fraud.

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.

Question 3

Under Government Auditing Standards, an engagement may be a(n)

Attestation engagement:
Performance audits:

Answer 3

Yes
Yes

The Government Accountability 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.

Question 4

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

Answer 4

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

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.

Question 5

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)?

Answer 5

An auditor should report on the scope of the auditor’s testing of compliance with laws and regulations.

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.

Question 6

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

Answer 6

Place the findings in the 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 7

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

Answer 7

The SEC

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.

Question 8

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

Program audits:
Attestation engagements:
Economy & efficiency audits:

Answer 8

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 9

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

Answer 9

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

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. But Government Auditing Standards do not require a financial audit to be conducted concurrently with a performance audit.

Question 10

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:

Answer 10

Yes
Yes

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.

Question 11

A material weakness in internal control over compliance arises when

Answer 11

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 12

In an audit of an entity’s compliance with applicable compliance requirements, an auditor obtains written representations from management acknowledging

Answer 12

Its responsibilities for compliance, including disclosure of noncompliance.

The auditor obtains written representations from management about its responsibilities for (1) understanding and complying with the compliance requirements and (2) establishing and maintaining controls that provide reasonable assurance that the entity administers government programs in accordance with the compliance requirements. Among other things, the auditor also requests representations that management has disclosed all known noncompliance with the applicable compliance requirements, including that subsequent to the period covered by the auditor’s report.

Question 13

Which of the following statements is a requirement applicable to financial statement audits in accordance with Government Auditing Standards?

Answer 13

An auditor should report on the scope of the auditor’s testing of internal control over financial reporting.

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.

Question 14

An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client’s management refuses to acknowledge the fraud. Which of the following parties should the auditor contact first?

Answer 14

The agency that provided the grants.

Inconsequential fraud should be communicated to the appropriate level of management. Other fraud should be reported directly to those charged with governance. In determining a responsibility to report fraud outside the entity, the auditor’s legal obligation may, in some circumstances, override the duty of confidentiality. Thus, the auditor should contact the agency that provided the grant because management refuses to acknowledge the fraud.

Question 15

An auditor most likely will be responsible for communicating significant deficiencies in the design of internal controls

Answer 15

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.

Question 16

Under the Single Audit Act, the single audit replaces any financial audit required under a federal award. The auditor

Answer 16

Prepares a schedule of audit findings and questioned costs.

The schedule of audit findings and questioned costs includes any instances of (1) known questioned costs greater than $25,000 or (2) known questioned costs when likely questioned costs exceed $25,000 for compliance requirements for a major program. Likely questioned costs (a projection) also must be considered when evaluating the effects of questioned costs on the audit opinion.

Question 17

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

Financial audits:
Nonaudit services:
Performance audits:

Answer 17

Yes
No
Yes

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 effects of nonaudit services on auditor independence.

Question 18

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

Answer 18

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.

Question 19

Each of the following is an ethical principle that should guide the work of auditors in the conduct of audits under government auditing standards, except

Answer 19

Materiality.

GAGAS incorporate by reference the AICPA’s Statements on Auditing Standards (GAAS). According to GAAS, materiality is a matter of professional judgment and is affected by the auditor’s perception of the financial information needs of users of the statements. For example, misstatements are material if, individually or aggregated, they could reasonably be expected to influence the economic decisions of users. Thus, materiality is not an ethical principle. The ethical principles that guide the work of auditors who conduct audits in accordance with GAGAS are (1) the public interest; (2) integrity; (3) objectivity; (4) proper use of government information, resources, and positions; and (5) professional behavior.

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.