1
Chapter 16
Auditing Governments and Not-for-Profit Organizations
TRUE/FALSE (CHAPTER 16)
1. A “cognizant agency” can be an employee of either a federal agency or an independent
accounting firm.
2. The Single Audit Act of 1984 was passed to eliminate the costly practice of requiring
separate audits for each federal program in which an organization participated.
3. Performance audits are sometimes referred to as “operational” audits.
4. Performance audits must be conducted by independent auditors.
5. To “attest” means to confirm that something is true, correct, or genuine.
6. An auditor of any government or not-for-profit that receives federal monies must include a
report on the entity’s internal control structure within their audit report or provide a cross–
reference to that report.
7. The AICPA originally established auditing standards for federal single audits.
8. Newly installed computer programs are one indicator that a government’s participation in a
federal program may be at high risk of noncompliance.
9. GAO independence guidelines permit CPA firms to determine the estimated useful lives of
their clients’ assets.
10. Under GAO (GAGAS) standards, independent auditors must report all instances of fraud or
illegal acts that they discover during the course of an audit.
11. Regarding the single audit process, required supplemental information is considered to be
within the scope of the audit.
12. Per OMB Circular A-133, “questioned costs” are those that should not be reimbursed under a
federal grant because they are in violation of laws of provisions pertaining to the grant.
13. The Yellow Book is an informal term for the compendium of all AICPA audit standards.
14. An audit of a government or not-for-profit under the Single Audit Act has two main
components: an audit of the financial statements under general accepted auditing standards
(GAAS) and an audit of federal financial awards.
15. An attestation engagement might include examination of prospective or pro-forma financial
statements.
2
MULTIPLE CHOICE (CHAPTER 16)
1. The GAO publication Government Auditing Standards (commonly known as the Yellow
Book) is applicable in which of the following audit situations?
a) To independent CPAs conducting a performance audit of a government that receives no
federal financial assistance.
b) To independent CPAs auditing a nongovernment entity that receives federal financial
assistance.
c) To independent CPAs auditing a government that receives no federal financial assistance.
d) To state auditors auditing a local government that does not receive federal financial
assistance.
2. Which of the following is an example of a financial audit?
a) An audit of financial statements to determine if they are presented fairly in accordance
with generally accepted accounting principles.
b) An audit to determine whether the objectives of a new program are suitable and relevant
and whether the entity has complied with laws and regulations that may have a material
effect on the financial statements.
c) An audit of the financial report on the Noxious Weed Special Revenue Fund to determine
whether the entity has complied with specific finance-related requirements.
d) An audit to determine whether an entity is acquiring its resources economically and
efficiently.
3. A performance audit includes which of the following?
a) Economy and efficiency audit.
b) Program audits.
c) Both a) and b).
d) None of the above.
4. A program audit would include which of the following?
a) Determining if sound procurement policies are being practiced.
b) Determining if efficient operating procedures are being used.
c) Determining if resources are being used efficiently.
d) Determining the factors inhibiting satisfactory performance.
5. Which the following is not included in the GAO auditing standards for financial statement
audits?
a) General standards.
b) Field work standards.
c) Reporting standards.
d) Statistical sampling standards.
6. Which of the following is NOT included in the general standards of GAGAS?
a) Qualifications.
b) Quality control.
c) Planning.
d) Independence.
3
7. What amount of continuing professional education would an auditor, who is not a CPA but
who is engaged in the audit of a City that receives significant amounts of federal financial
assistance, be required to complete?
a) Twenty-four hours every two years.
b) Forty hours a year.
c) Eighty hours every two years.
d) None because the auditor is not a CPA.
8. An independent CPA who conducts audits of entities that receive federal financial assistance
has what responsibility related to a peer review?
a) Does not have to have one unless he/she belongs to the AICPA Private Companies
Practice Section.
b) Must have one every year.
c) Must have one at least every two years.
d) Must have one at least every three years.
9. An independent CPA is conducting an audit of an entity that receives federal financial
assistance and is subject to the GAO standards (GAGAS). The auditor must design the audit
to provide reasonable assurance of detecting which of the following?
a) Immaterial misstatements, if they result from illegal acts.
b) Noncompliance with entity policies and procedures.
c) Noncompliance with the terms of contracts or grant agreements.
d) All of the above.
10. An auditor is engaged to audit the Eastern Planning and Development District, a not-for-
profit entity that receives federal financial assistance. The auditor designed his audit to
provide reasonable assurance of detecting material misstatements resulting from illegal acts.
What additional requirements does the auditor have with regard to compliance?
a) None.
b) The auditor must design the audit to provide reasonable assurance of detecting
noncompliance with terms of grants and contracts.
c) The auditor must design the audit to provide reasonable assurance of detecting all
misstatements resulting from illegal acts.
d) The auditor must design the audit to provide reasonable assurance of detecting any fraud.
11. A CPA prepares ‘working papers’ in an audit of an entity that receives federal financial
assistance. Which of the following statements is true with regard to such ‘working papers’?
a) There is no specific standard requiring working papers.
b) The AICPA has no specific standard requiring working papers, but the GAO standards
require working papers.
c) The AICPA and the GAO standards concerning working papers are the same.
d) The GAO standards concerning working papers are more rigorous than the AICPA
standards.
4
12. An independent CPA is conducting an audit of an entity that is subject to the GAO audit
standards, but is not subject to the OMB audit standards. While conducting the audit, the
CPA found that the entity had violated a law that had a large, but not material, potential
penalty associated with such violation. There was no accrual for the potential penalty or
disclosure of the violation. What action(s) must the CPA take with regard to this violation?
a) Nothing, since the financial statements are not materially misstated.
b) Must issue an adverse opinion if the financial statements are not changed to reflect the
violation.
c) Must issue a report that details the violation and the potential dollar effect.
d) Must report the incident to the local law enforcement agency.
13. An independent auditor has conducted an audit of the financial statements of an entity that
receives federal financial assistance, but that is not subject to the OMB standards. What
report(s) must the auditor issue at the completion of this engagement?
a) Only an opinion (or disclaimer of opinion) on the financial statements.
b) An opinion (or disclaimer of opinion) on the financial statements and a report on internal
control.
c) An opinion (or disclaimer of opinion) on the financial statements, a report on internal
control, and a report on compliance.
d) An opinion (or disclaimer of opinion) on the financial statements, a report on internal
control, and an opinion (or disclaimer of opinion) on compliance.
14. Reports issued by CPAs conducting audits subject to the GAO standards must include all of
the following except:
a) A description of the scope of compliance testing.
b) A description of the scope of internal control testing.
c) A description of any irregularities and illegal acts found.
d) A description of any sampling methodology and sampling plans used.
15. A CPA has conducted an audit of the financial statements of an entity that received federal
financial assistance. The CPA identified one major federal program and four nonmajor
federal programs. The CPA’s responsibility related to the Schedule of Expenditures of
Federal Awards is to:
a) Express an opinion as to whether the Schedule is fairly presented.
b) Express an opinion as to whether the Schedule is fairly presented in relation to the
financial statements taken as a whole.
c) Express negative assurance on the Schedule.
d) The CPA has no responsibility with regard to the Schedule.
16. Which of the following is an objective of audits under the Single Audit Act? To ensure that
a) The entity’s financial statements are not affected by immaterial errors or misstatements.
b) The entity has not committed fraud.
c) The entity has in place a system of internal control sufficient to ensure that financial
statements are prepared in accordance with generally accepted accounting principles.
d) The entity is satisfying the laws, regulations, and provisions that apply to each specific
federal award.
5
17. Which of the following groups is responsible for administering the Single Audit Act?
a) OMB.
b) GAO.
c) AICPA.
d) State Boards of Accountancy.
18. A CPA has conducted an audit of the financial statements of an entity that received federal
financial assistance and had one program that qualified as a major program. The CPA’s
responsibility related to reporting on internal control for this entity is to:
a) Issue a report on internal control relating to the financial statements.
b) Issue an opinion on internal control relating to the financial statements.
c) Issue a report on internal control relating to the financial statements and a report on
internal control related to the federal program(s).
d) Issue a report on internal control relating to the financial statements and an opinion on
internal control related to the major program.
19. A CPA has conducted an audit of the financial statements of an entity that received federal
financial assistance and had one program that qualified as a major program. The CPA’s
responsibility related to reporting on compliance for this entity is to
a) Issue a report on compliance related to the entity.
b) Issue an opinion on compliance related to the entity.
c) Issue a report on compliance related to the entity and a report on compliance related to
the federal program(s).
d) Issue a report on compliance related to the entity and an opinion on compliance related to
the federal program(s).
20. The Single Audit Act distinguishes between major and nonmajor federal programs. One
factor that distinguishes a major from a nonmajor program is inherent risk. Which of the
following is NOT a characteristic of “inherent risk”?
a) Significant prior audit findings.
b) Significant violation of the terms of a specific grant due to a misunderstanding of the
requirements.
c) Weakness in the entity’s internal controls.
d) Lack of oversight by federal agencies.
21. Which of the following is NOT included in the general requirements for which the auditor
must test compliance with federal regulations?
a) Matching funds.
b) Drug-free workplace.
c) Political activity.
d) Prevailing wage.
22. Each federal financial assistance program has specific compliance requirements. Which of
the following is not an example of the general nature of the specific compliance
requirements?
a) Eligibility of individuals or groups to participate in the program.
b) Allowability of certain types of goods or services that may be acquired.
c) Maximum dollar amounts of expenditures.
d) Matching fund requirements.
6
23. What is the auditor’s responsibility for the Schedule of Expenditures of Federal Awards?
a) No responsibility for this Schedule.
b) Report on the Schedule without issuing an opinion.
c) Express an opinion on the fair presentation of the Schedule.
d) Express an opinion on the fair presentation of the Schedule in relation to the basic
financial statements taken as a whole.
24. Under which set of auditing standards is the auditor required to test compliance with laws and
regulations that could have a direct and material effect on the financial statements of the
entity?
a) AICPA standards.
b) GAO standards.
c) OMB standards.
d) All of the above.
25. Under which set of auditing standards is the auditor required to express an opinion on
compliance with laws and regulations applicable to each major program?
a) AICPA standards.
b) GAO standards.
c) OMB standards.
d) All of the above.
26. The Schedule of Findings and Questioned Costs should include all of the following except
a) Information on types of opinions expressed on the financial statement.
b) Information on all weaknesses in internal control.
c) List of material noncompliance.
d) Known questioned costs.
27. Which of the following is NOT a necessary condition for a performance audit?
a) The auditor must delineate specifically the activities and outcomes to be addressed.
b) Entity management must have clearly defined operational objectives.
c) The auditor must obtain an understanding of management controls relevant to the audit.
d) There must be a schedule of disbursements related to the program.
28. GAO performance audit standards do NOT include which of the following?
a) The auditor should be independent of the entity being audited.
b) The work should be adequately planned.
c) The auditor should prepare written work papers.
d) The auditor should obtain an understanding of management controls relevant to the audit.
29. Which of the following is NOT a key difference between financial and performance audits?
a) Financial statement audits focus on the entity as a whole whereas performance audits
generally focus on a specific program or activity.
b) Financial statement audits generally are conducted annually whereas performance audits
generally are conducted irregularly.
c) Financial statement audits are conducted using very well defined standards whereas
performance audits are conducted without reference to any standards.
d) Specialists in accounting generally conduct financial statement audits whereas
performance audits may require more program-specific knowledge and fewer accounting
skills.
7
30. If a program to be subjected to a performance audit lacks clearly defined objectives, what can
the auditor do?
a) Decline the audit until the entity defines its objectives.
b) Personally discern the objectives based on the auditor’s opinion.
c) Examine the legislation to see if the legislation articulated the goals and objectives of the
program.
d) Create a list of goals and objectives.
31. Which of the following is NOT a technique used by an auditor in a performance audit
engagement to gain an understanding of the controls in place to ensure that a program meets
its objective?
a) Reading the legislation.
b) Making inquiries of employees.
c) Flow-charting appropriate systems.
d) Preparing and administering questionnaires.
32. GAO standards specify that performance audit reports should be timely and include several
items. Which of the following items is NOT required under the GAO standards?
a) Significant audit findings.
b) Recommendation as to how to correct problems.
c) Explanation of the audit’s objectives and of its scope and methodology.
d) Details about the number of items tested and the sampling techniques used.
33. Which of the following is true about the public availability of audit reports prepared under
GAGAS?
a) Only financial statements should be publicly available.
b) Only performance audits should be publicly available.
c) Neither financial statement audits nor performance audits should be publicly available.
d) Both financial statement audits and performance audits should be publicly available.
34. Which of the following is not a unique characteristic that distinguishes ethical decisions made
by employees of governments from those made by employees of for-profit entities?
a) The public holds employees of governments to a higher standard of conduct than those of
businesses.
b) Governments are guardians of public funds and are accountable to the public as to how
they use them.
c) Government employees must safeguard assets.
d) Government activities are carried out in open view.
35. Which of the following is NOT a consideration in resolving an ethical dilemma?
a) What are the facts?
b) Who is affected?
c) Who will know about this action?
d) What are the alternative courses of action?
36. An elected state auditor, employed by the state, would NOT be considered independent when
auditing which of the following entities?
a) A component unit of the state.
b) An agency of the state.
c) The office of the state auditor.
d) All of the above.
8
37. An independent CPA is engaged to audit the financial statements of Holland City . The city
has a variety of revenue sources including a $350,000 grant from the U.S. Department of
Housing and Urban Development. Which of the following audit standards must the CPA use
when conducting the audit?
a) The AICPA audit standards.
b) The GAO audit standards.
c) The OMB audit standards.
d) All of the above.
38. Circular A-133, issued by the Office of Management and Budget,
a) Applies only to state and local governments
b) Applies only to not-for-profit organizations
c) Applies to both
d) Applies to neither
39. Which of the following must have an audit under GAGAS?
a) A state government that receives more than $500,000 in federal awards during the year.
b) A local government that receives more than $501,000 in federal awards during two years.
c) A state government that expends more than $500,000 in federal awards during the year.
d) A local government that expends more than $501,000 in federal awards during two years.
40. Which of the following is NOT true of an attestation engagement?
a) It should not be performed if the reliability of the entity’s performance measures is
questionable.
b) An important part of the engagement scope is to examine compliance with rules,
regulations, or terms of contracts.
c) It should examine management’s assertions in relation to the entity’s administrative
controls.
d) It may include examination of prospective or pro-forma financial statements.
41. The three categories of government auditing standards are
a) General, field work, and control standards.
b) General, independence, and reporting standards.
c) General, field work, and reporting standards.
d) General, compliance, and documentation standards.
42. Which of the following statements about the GAO is NOT true?
a) It is an agency within the executive branch of the federal government.
b) It is the author of Government Auditing Standards (GAGAS).
c) It is responsible for auditing all federal agencies and programs.
d) Its head, the Comptroller General of the United States, is appointed by the President.
43. Under the Single Audit Act, the required report on compliance and on internal control over
financial reporting
a) Is based on the audit requirements of the GAO’s Government Auditing Standards.
b) Need not be issued if the auditors do not identify internal control deficiencies or instances
of noncompliance.
c) Must be countersigned by the inspector general of the cognizant agency.
d) Should describe the scope of the auditors’ testing.
9
44. Financial audits generally are conducted annually. Performance audits generally are
conducted
a) Every year.
b)_ Every two years.
c) Every five years.
d) On an irregular basis.
45. In a performance audit of a not-for-profit organization, procedures that auditors would follow
to gain an understanding of management controls would NOT include
a) Reviewing policy manuals.
b) Sending questionnaires to clients.
c) Discussing controls with employees.
d) Flowcharting appropriate systems.
10
PROBLEMS (CHAPTER 16)
1. The following descriptions relate to an independent public accounting firm that has as clients
some governments and not-for-profit entities that receive federal financial assistance. For
each of the following independent situations, describe the possible violations of GAO
standards (Government Auditing Standards) and conclude whether or not the situation is a
violation.
a) A college graduate who is not a CPA is assigned by her firm to the audit of Grover
County. Because she is not a CPA, the firm did not send her to any continuing education
courses this year or last year.
b) An auditor has prepared working papers using a new computer software package. The
financial statements and audit reports generated by the software are well designed and
incorporate all required accounting and auditing standards. Because the program is so
powerful, it is also quite complex. Printouts of the financial statements and supporting
schedules do not include much of the information necessary to determine that the auditor
was justified in his/her conclusion. Most of that information is part of the computer
program, however.
c) While auditing a not-for-profit entity, the auditor discovered that a secretary had been
embezzling money from the petty cash fund. In relation to the financial statements taken
as a whole, the amount stolen was not material. The auditor discussed the issue with the
entity’s management. The theft was reported to the appropriate law enforcement
personnel and the bonding company reimbursed the not-for-profit entity for the full
amount of its loss. Since there was no effect on the financial statements, the theft was not
mentioned in the auditor’s report.
d) The internal auditor of Sunningdale City reports to the city’s chief financial officer. The
internal auditor audited the city’s health and welfare division for purposes of expressing an
opinion on the financial statements prepared by that division and submitted to a federal agency.
2. As a staff member of the internal audit department of Garden City, you have been asked to
write an audit program for a performance audit of the Neighborhood Housing Authority, a
not-for-profit entity that is included in the city’s financial reporting entity. Critics of the
authority have been relentless in their opposition to the authority and its executive director.
Prepare a list of questions to which you would want answers before beginning the evidence-
gathering phase of the audit.
11
3. In a highly controversial move, the mayor and city council approved the purchase of the
Swim and Gym, a local private facility that was facing bankruptcy. The mayor promised the
public that the facility would be operated on a business-like basis and would be fully
supported by user fees. No city money was to be spent on the Swim and Gym. Critics of the
purchase complain that city laborers are frequently seen at the facility, the facility was re-
roofed during the first year, and employees at the facility are considered city employees and
earn the same benefits as other city employees. To quiet the vocal opponents to the operation
of the Swim and Gym, the mayor asked the internal audit department to conduct an audit of
the operation. You are assigned to the task. What are the issues you want to address in this
audit?
4. Your audit firm has been asked to perform a Single Audit of the Carrington Public
Transportation Authority. The authority receives well over half of its $25 million in revenues
from federal transportation grants and other federal programs. The authority has a new
controller, whose last position was in private industry. You have been asked to brief the new
controller on the criteria for determining major programs for purposes of your audit. Include
in your response an explanation of what is meant by “major programs” and the criteria that
should be used in selecting them for audit.
5. The federal government (and other governments) is known for an affinity for “alphabet
soup”— a proliferation of acronyms to refer to agencies, departments, legislation, programs,
and even lawsuits. What do the following acronyms stand for? Briefly, what is each
organization responsible for in relation to auditing?
a) OMB
b) GAO
c) AICPA
d) PCAOB
e) GASB
f) FASB
g) FASAB
12
ESSAYS (CHAPTER 16)
1. What is the Single Audit Act? Your answer should address at least the following
questions. What is its purpose? How does it affect audits of entities that receive federal
financial assistance? How do its requirements differ from AICPA audit requirements?
2. What are performance audits and how do they differ from financial statement audits?
Your answer should address the role of performance audits in government financial
management, the purpose of performance audits, and significant differences between
performance audits and financial statement audits.
3. A certain state government accounts for the operations of its airplanes in a special
revenue fund. The airplanes are reported in the government-wide statement of net
position, but not in the fund statements. GAAP allow an entity relative flexibility in
accounting for this type of activity in either a special revenue fund or an internal service
fund. Departments and agencies of the state government are charged for the use of the
airplanes on a schedule that allows the special revenue fund to break even each year.
When criticized for allowing state employees to fly, rather than drive, to various sites
around the state, the governor responded that department use of the airplanes doesn’t cost
the state anything because the departments and agencies reimburse the special revenue
fund for the full cost of operating the airplanes. When criticized by some outspoken
citizens, the governor referred them to the state accountant for a further explanation. The
governor and the accountant are members of different political parties. What are the
practical issues in this situation and what are the ethical issues?
4. You are assigned to head up a financial audit of the Russell City Public Housing
Authority, which receives nearly all of its operating resources from participating in
federal grant programs. The authority’s controller calls to complain that your audit staff
is asking questions about cost reimbursements made to the authority’s administrators for
attending a fundraiser for Russell City’s incumbent mayor. The controller explains that
the mayor’s office had requested the administrators’ attendance. He also comments that
you have been asked to perform a financial audit, not a grants audit. How do you reply?
13
ANSWERS TO TRUE/FALSE (CHAPTER 16)
14
ANSWERS TO MULTIPLE CHOICE (CHAPTER 16)
15
ANSWERS TO PROBLEMS (CHAPTER 16)
16
18
ANSWERS TO ESSAYS (CHAPTER 16)
20