AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 771:

  Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:

  A. Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives.

  B. Present the results of the auditor's tests of controls.

  C. Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls.

  D. Describe the scope of the auditor's principal substantive tests.

  Correct Answer: B

  Explanation: Choice "b" is correct. The report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests. Choice "a" is incorrect. The auditor's report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity's objectives. Choice "c" is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness. Choice "d" is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting.

• Question 772:

  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:

  A. The report on the performance audit.

  B. The notes to the financial statements.

  C. A letter to the government funding agency.

  D. A separate report.

  Correct Answer: D

  Explanation: Choice "d" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information. Choice "a" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit. Choice "b" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements. Choice "c" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency.

• Question 773:

  The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?

  A. The auditor is required to disclose all situations and transactions that could be indicative of fraud, abuse, and illegal acts to the federal inspector general.

  B. The materiality levels are higher and are determined by the government entities that provide the federal financial assistance to the recipients.

  C. The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations.

  D. The accounts should be 100% verified by substantive tests because certain statistical sampling applications are not permitted.

  Correct Answer: C

  Explanation: Choice "c" is correct. Auditors engaged to perform audits of federal financial assistance (generally under the provisions of the Single Audit Act) must perform procedures to obtain an understanding of internal control pertaining to compliance, and should document this understanding of internal control. Choice "a" is incorrect. The auditor is required to disclose actual instances of fraud and illegal acts, not all situations that could be indicative of fraud, abuse, or illegal acts. Choice "b" is incorrect. Materiality levels of organizations receiving federal financial assistance are set by the auditor, not the government. Materiality levels depend upon auditor judgment and will not fall or rise purely as a result of federal participation. Choice "d" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required.

• Question 774:

  Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a:

  A. Written report describing the entity's internal controls specifically designed to prevent fraud, abuse, and illegal acts.

  B. Report describing the scope of the auditor's testing of compliance and of internal control.

  C. Statement of negative assurance that internal controls not tested have an immaterial effect on the entity's financial statements.

  D. Statement of positive assurance that internal controls designed to detect material errors and fraud were tested.

  Correct Answer: B

  Explanation: Choice "b" is correct. Government Auditing Standards require a description of the scope of the auditor's testing of compliance and of internal control. This is not required under generally accepted auditing standards. Choice "a" is incorrect. Although a written report on internal control is required, the auditor does not have to identify procedures specifically designed to prevent fraud, abuse, and illegal acts. Choice "c" is incorrect. Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant, because the grant money received can only be spent for certain purposes. However, neither GAGAS nor GAAS requires that negative assurance be given with respect to internal controls. Choice "d" is incorrect. Although Government Auditing Standards require tests of compliance with applicable laws and regulations governing a particular grant (the grant money received can only be spent for certain purposes), auditors are not required to give positive assurance that internal controls designed to detect material errors and fraud were tested under either GAGAS or GAAS.

• Question 775:

  In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should:

  A. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement.

  B. Describe the laws and regulations that the entity must comply with.

  C. Provide an opinion on overall compliance with laws and regulations.

  D. Indicate that the auditor does not possess legal skills and cannot make legal judgments.

  Correct Answer: A

  Explanation: Choice "a" is correct. Basic elements of a report on compliance include a statement that tests of compliance with laws, regulations, contracts, and grants that have a direct and material effect on the financial statements is part of obtaining reasonable assurance that the financial statements are free of material misstatement. Choice "b" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply. Choice "c" is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations. Choice "d" is incorrect. While the auditor does not possess legal skills and cannot make legal judgments, it is not necessary to disclose this in the report.

• Question 776:

  When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report of the audit:

  A. Identification of the causes of performance problems and recommendations for actions to improve operations.

  B. Understanding of internal control and assessment of control risk.

  C. Field work and procedures that substantiated the auditor's specific findings and conclusions.

  D. Opinion on the entity's attainment of the goals and objectives specified by applicable laws and regulations.

  Correct Answer: B

  Explanation: Choice "b" is correct. Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the scope of the auditor's work in obtaining an understanding of internal control and his or her assessment of control risk. Choice "a" is incorrect. In the report, the auditor would identify significant deficiencies (reportable conditions) and material weaknesses (not performance problems) found in the examination of the entity's internal control. Choice "c" is incorrect. A report on fieldwork and procedures that substantiated the auditor's specific findings and conclusions would not be prepared as part of a GAGAS audit. Choice "d" is incorrect. The objective of the audit of the financial statements is to provide an opinion on the financial statements, not on the entity's attainment of goals and objectives.

• Question 777:

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

  A. The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste.

  B. Audit documentation should contain sufficient information so that supplementary oral explanations are not required.

  C. The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance.

  D. Audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Per Government Auditing Standards, audit documentation should contain sufficient

  information so that supplementary oral explanations are not required.

  Choice "a" is incorrect. The auditor should obtain written representation from management acknowledging

  responsibility for "violations or possible violations of laws or regulations whose effects should be

  considered for disclosure in the financial statements or as a basis for recording a loss contingency."

  Choice "c" is incorrect. The auditor should document procedures performed to evaluate compliance with

  laws and regulations that have a direct and material effect on the determination of financial statement

  amounts.

  Choice "d" is incorrect. There is no such requirement that audit documentation contain this caveat.

• Question 778:

  Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has:

  A. Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

  B. Implemented internal controls designed to detect all illegal acts.

  C. Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.

  D. Employed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The auditor should obtain written representation that management has disclosed all

  laws and regulations that have a direct and material effect on its financial statements.

  Choice "b" is incorrect. Management need not acknowledge that it has implemented internal control

  activities to detect all illegal acts.

  Choice "c" is incorrect. Management should state that it is responsible for compliance with all laws and

  regulations.

  Choice "d" is incorrect. Management need not employ internal auditors.

• Question 779:

  For an entity that does financial statements generally would not refer to:

  A. Significant estimates made by management.

  B. An assessment of the entity's accounting principles.

  C. Management's responsibility for the financial statements.

  D. The entity's internal control.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The auditor's standard report does not refer to the entity's internal control.

  Choice "a" is incorrect. The auditor's standard report refers to "significant estimates made by management"

  in the scope paragraph.

  Choice "b" is incorrect. The auditor's standard report refers to "assessments of the entity's accounting

  principles" in the scope paragraph.

  Choice "c" is incorrect. The auditor's standard report states management's responsibility for the financial

  statements in the introductory paragraph.

• Question 780:

  An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of this auditor's report: A. A statement of the audit objectives and a description of the audit scope.

  B. Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.

  C. The pertinent views of the entity's responsible officials concerning the auditor's findings.

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

  Correct Answer: D

  Explanation:

  Choice "d" is correct. A concurrent opinion on the financial statements taken as a whole is not a required

  part of the auditor's report.

  Choice "a" is incorrect. A statement of the audit objectives and a description of the audit scope are

  required parts of the auditor's report.

  Choice "b" is incorrect. The auditor would provide indications of illegal acts discovered during the audit.

  Choice "c" is incorrect. The pertinent views of the entity's responsible officials concerning the auditor's

  findings are generally part of the auditor's report.