Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-1
CHAPTER 11: AUDITING OF GOVERNMENTAL AND NOT-FOR-
PROFIT ORGANIZATIONS
OUTLINE
Number
Topic
Type/Task
Status
(re: 16/e)
Questions:
11-1
Definition of audit, standard setters
Define, explain
11-1 revised
11-2
GAGAS audit services
Define, explain
New
11-3
Opinion units
Explain
11-3 revised
11-4
GAAP hierarchy
Explain
Same
11-5
Single Audit guidance
Compare
11-5 revised
11-6
Government audit report
Explain
New
11-7
GAGAS versus GAAS
Explain
Same
11-8
Ethics and independence under GAGAS
Explain
New
11-9
Risk-based approach
Explain
Same
11-10
Audit committee
Describe
Same
Cases:
11-11
Audit engagement
Evaluate
11-2 revised
11-12
Audit considerations
Evaluate
11-3
11-13
Research Case⎯Single Audit
Analysis
New
11-14
Auditing a federal program
Analysis
11-4
11-15
Auditor selection and independence
Evaluate
11-6
11-16
GAAP Hierarchy
Explain
New
11-17
Audit committees
Locate
11-7
Exercises/Problems:
11-18
Examine the CAFR
Examine
11-1 revised
11-19
Various
Multiple Choice
11-2 revised
11-20
Continuing professional education
Analysis
11-3 revised
11-21
Single audit
Analysis
New
11-22
GAAS versus GAGAS standards
Analysis
11-5 revised
11-23
Audit report
Error analysis
New
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-2
CHAPTER 11: AUDITING OF GOVERNMENTAL AND NOT-FOR-
PROFIT ORGANIZATIONS
Answers to Questions
11-1. An audit involves an independent review of information or processes by an external party
for the purpose of evaluating the validity and reliability of information or assessing a
General Problem Information: Definition of audit, standard setters
Learning Objective: 11-1
Learning Objective: 11-3
Topic: Financial Audits by Independent CPAs
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
11-2. The Government Auditing Standards defines three major types of services performed by
auditors: financial statement audits, attestation engagements, and performance audits.
Financial audits provide an auditor’s opinion that financial statements present fairly an
General Problem Information: GAGAS audit services
Learning Objective: 11-3
Topic: Government Auditing Standards
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-3
Ch. 11, Answers (Cont’d)
11-3. An opinion unit is related to the financial reporting format of governments. Opinion
units include: governmental activities, business-type activities, aggregate discretely
General Problem Information: Opinion Units
Learning Objective: 11-1
Topic: Materiality for Government Audits
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
11-4. Referring to Illustration 11-3, state and local governments and federal government
entities possess officially established accounting principles, including statements and
General Problem Information: GAAP hierarchy
Learning Objective: 11-1
Topic: The Audit Process
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
11-5. An auditor performing a single audit should be familiar with the unique purpose served
by each of these resources. OMB Uniform Administrative Requirements, Cost Principles,
and Audit Requirements for Federal Awards (Uniform Guidance) provides information
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-4
Ch. 11, Answers, 11-5 (Cont’d)
General Problem Information: Single audit guidance
Learning Objective: 11-4
Topic: Single Audits
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
11-6. An audit report for a governmental entity contains additional information and sections not
required in a for-profit audit report. The introductory paragraph of the report will refer to
General Problem Information: Government audit repot
Learning Objective: 11-1
Topic: Format of the Audit Report
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
11-7. GAGAS is the acronym for generally accepted government auditing standards (also
referred to as GAS), the standards set forth by the Comptroller General in Government
General Problem Information: GAGAS versus GAAS
Learning Objective: 11-2
Topic: Government Auditing Standards
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-5
Ch. 11, Answers (Cont’d)
11-8. The ethical principles identified are public interest; integrity; objectivity; proper use of
government information, resources and position; and professional behavior. The primary
considerations addressed regarding independence are (1) a conceptual framework to
General Problem Information: Ethics and independence under GAGAS
Learning Objective: 11-1
Topic: Ethics and Independence
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
11-9. The risk-based approach (see Illustration 11-9) is applied as follows. First, the “larger”
(per the sliding scale presented in Chapter 11) federal programs are identified as “Type
General Problem Information: Risk-based approach
Learning Objective: 11-1
Topic: Selecting Programs for Audit
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-6
Ch. 11, Answers (Cont’d)
11-10. Audit committees, when properly organized and utilized, can provide substantial benefit
to all concerned parties. These benefits include: (1) strengthening the stewardship
reporting function of the governing board, (2) improving communication between the
General Problem Information: Audit committee
Learning Objective: 11-5
Topic: The Impact of Sox
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Solutions to Cases
11-11. This case addresses the issue of properly defining an audit engagement. In particular,
students must assess whether a financial audit is sufficient, or whether an organization
Item Federal Awards Expended
1. Grant from City $ 75,000 (50% of $150,000 expended)
2. Private gifts – 0 – (not applicable)
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-7
Ch. 11, Solutions, Case 11-11 (Cont’d)
b. Based upon the conclusion in part a and the information provided in the
background, one could conclude that Mr. Wise would be unwise to accept this
Personnel of a newly-formed not-for-profit might not be familiar with single audit
c. Maybe. Mr. Wise would be required to reference the GAGAS conceptual
General Problem Information: Single Audit
Learning Objective: 11-1
Topic: The Audit Process
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
11-12. There is a great deal more information you will want before making your bid; however,
some of the factors affecting price that you might have on your list include:
1. Number of major programs and component units. The larger the number of major
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-8
Ch. 11, Solutions, Case 11-12 (Cont’d)
2. Predecessor auditor. When a prior auditor chooses not to pursue an audit engagement
it may indicate that there is an element of audit risk involved. An incoming auditor
3. The amount of aid received from the federal government. If the city expends over
4. The number of federal programs and the amount of funds expended by each program.
5. Specifics of the former wastewater employee lawsuit and allegations of improper
6. In addition to the new administration and the lawsuit, other potential risk factors
General Problem Information: Government audit considerations
Learning Objective: 11-1
Learning Objective: 11-5
Topic: The Audit Process, Special Topics Related to Audits of Governments and Not-
for-Profits
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 11 – Auditing of Governmental and Not-for-Profit Organizations
11-9
Ch. 11, Solutions (Cont’d)
11-13. The objectives of this case are to familiarize students with government audit resources
available on the Internet and to illustrate the process for selecting major programs for
10.553), and the Special Milk Program for Children (CFDA 10.559) are sponsored by
the Department of Agriculture. The Special Education—Grants for infants and
Families (CFDA 84.181) is under the Department of Education.
d. Based on size alone, it would be reasonable to select the Head Start program. Head
Start is a Type A program and the resources expended are over 40% of those received
e. This is a difficult question. Notice that the only way the 40 percent coverage rule can
be met is by auditing the Head Start program. One single audit problem that OMB
and GAO have identified in the past relates to the same programs always being
General Problem Information: Single audit and major programs
Learning Objective: 11-4
Topic: Section from Chapter
Bloom’s Taxonomy: Apply