Weekly Review Quiz #374 – AUD: Government Auditing Standards
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How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, define a subrecipient?
- As a nonfederal entity that provides a federal award to another entity to carry out a federal program.
- As an individual who receives and expends federal awards received from a pass-through entity.
- As a dealer, distributor, merchant, or other seller providing goods or services that are required for the conduct of a federal program.
- As a nonfederal entity that expends federal awards received from another entity to carry out a federal program.
The correct answer is: D.
A. Incorrect… This is the definition of a “pass-through” entity — the entity which provides funding to a subrecipient.
B. Incorrect… The definition of a subrecipient does not refer to an individual but to an entity.
C. Incorrect… These are third parties who may be paid by the subrecipient.
D. Correct! Per OMB Circular A-133 Compliance Supplement, “a subrecipient relationship exists when funding from a pass-through entity is provided to perform a portion of the scope of work or objectives of the pass-through entity’s award agreement with the … awarding agency.” In other words, an entity that expends awards received from another entity to carry out a program.
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
- The report on the performance audit.
- The notes to the financial statements.
- A letter to the government funding agency.
- A separate report.
The correct answer is: D.
A. Incorrect… A performance audit (also known as an operational audit) involves a review of an entity’s activities in order to evaluate the efficient and effective use of resources. It would not be combined with a financial statement audit and examination of internal controls.
B. Incorrect… The notes to the financial statements are an integral part of the financial statements. Thus, they are part of what is being reported on and are the responsibility of management. The report on internal control is the responsibility of the auditor and would appear as a separate report or be combined with the audit report on the financial statements.
C. Incorrect… While the government funding agency would typically receive the results of the audit including a report on internal controls, the results would be reported in the form of a combined audit and internal control report (or separate reports), not a letter.
D. Correct! In a governmental audit, the auditor has the choice of issuing a combined audit and internal control report or issuing separate reports.
When auditing an entity’s financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor’s
- Identification of the causes of performance problems and recommendations for actions to improve operations.
- Understanding of the internal control structure and assessment of control risk.
- Fieldwork and procedures that substantiated the auditor’s specific findings and conclusions.
- Opinion on the entity’s attainment of the goals and objectives specified by applicable laws and regulations.
The correct answer is: B.
A. Incorrect… The auditor is not required to prepare a written report on the causes of performance problems and recommendations for actions to improve operations. Instead the auditor would identify significant deficiencies and material weaknesses noted in the consideration of the internal control structure.
B. Correct! When auditing under Government Auditing Standards, the auditor is required to prepare a written report on internal control. Specifically, the auditor must address his/her consideration of the internal control structure related to financial reporting.
C. Incorrect… The fieldwork and procedures that substantiated the auditor’s findings and conclusions would be recorded in the audit documentation. It is not required that a written report be prepared.
D. Incorrect… When auditing in accordance with Government Auditing Standards, the auditor prepares a written report on internal control and on compliance with applicable laws and regulations. The objective of the audit is to provide an opinion on the financial statements. A performance audit, not a financial statement audit, would provide an opinion as to the entity’s attainment of goals and objectives.
In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to
- Issue a separate report that describes the expected benefits and related costs of the auditor’s suggested changes to the entity’s internal control structure.
- Assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements.
- Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting errors and irregularities.
- Render an opinion concerning the entity’s continued eligibility for the governmental financial assistance.
The correct answer is: B.
A. Incorrect… While auditees would dearly love to make the auditor responsible for this, the auditor is not required to issue a separate report that describes the expected benefits and related costs of suggested changes to the entity’s internal control. The auditor is required only to report on the consideration of the entity’s internal control established to ensure compliance with relevant laws and regulations.
B. Correct! Recipients of governmental financial assistance are subject to additional laws and regulations. As a result, auditors of these entities must assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements and obtain an understanding of the possible effects on the financial statements..
C. Incorrect… The auditor has a responsibility to plan the audit to provide reasonable assurance of detecting material misstatements in the financial statements (arising from error or irregularity).
D. Incorrect… The auditor would not report on the entity’s continued eligibility for governmental financial assistance. That is a decision for the appropriate governmental agency to make. The auditor can report only on the entity’s compliance with specific and general requirements.
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)?
- Auditors are not required to report fraud, illegal acts, and other material noncompliance in the audit report.
- In some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity.
- The auditor’s key findings of the audit of the financial statements should be communicated in a separate report.
- The reporting standards in a governmental audit are identical to the auditor’s responsibilities under generally accepted auditing standards.
The correct answer is: B.
A. Incorrect… Auditors ARE required to report all instances of fraud and illegal acts, unless inconsequential, and violations of contract or grant provisions and abuse that could materially affect the financial statements.
B. Correct! Auditors are required to report known or likely fraud, illegal acts, violations of contracts or grants, or abuse directly to outside parties when: 1) management fails to report such information as required by law or regulation; or 2) when management fails to take timely and appropriate action to respond to fraud, illegal acts, violations, or abuse that is likely to be material to the financial statements and involves government agency funding.
C. Incorrect… The auditor’s key findings may either be reported in the audit report OR reported separately.
D. Incorrect… The auditor’s reporting-related responsibilities for compliance issues under GAAS are increased by the Generally Accepted Government Auditing Standards (GAGAS) applicable to a governmental audit.
End of Quiz
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