AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 781:

  An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:

  A. To the Securities and Exchange Commission when the client is a publicly-held entity.

  B. To specific legislative and regulatory bodies when reporting under Government Auditing Standards.

  C. To a court-appointed creditors' committee when the client is operating under Chapter 11 of the Federal Bankruptcy Code.

  D. To shareholders with significant influence (more than 20% equity ownership) when the significant deficiencies (reportable conditions) are deemed to be material weaknesses.

  Correct Answer: B

  Explanation: Choice "b" is correct. When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies. Choice "a" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to the SEC by the Code of Professional Conduct. Choice "c" is incorrect. When there is no audit committee, the auditor would report significant deficiencies in the design of the client's internal control to an otherwise formally designated committee with oversight over the financial reporting process, not necessarily to a court-appointed creditors' committee. Choice "d" is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to significant shareholders by the Code of Professional Conduct.

• Question 782:

  In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report:

  A. A statement of assurance that all controls over fraud and illegal acts were tested.

  B. Material instances of fraud and illegal acts that were discovered.

  C. The materiality criteria used by the auditor in considering whether instances of noncompliance were significant.

  D. An opinion on whether compliance with laws and regulations affected the entity's goals and objectives.

  Correct Answer: B

  Explanation: Choice "b" is correct. Only material instances of fraud and illegal acts discovered need to be communicated in the auditor's report on compliance. If applicable, the report should state that other instances of noncompliance were communicated to management in a separate letter. Choice "a" is incorrect. The report would state that consideration of internal control over compliance would not necessarily disclose all significant deficiencies (reportable conditions). Not only would there be no assurance that all controls were tested, the auditor would assert the exact opposite. Choice "c" is incorrect. The auditor would not disclose the materiality criteria used in considering whether instances of noncompliance were significant. Choice "d" is incorrect. The auditor does not express an opinion on whether the compliance affected the entity's goals and objectives.

• Question 783:

  Which of the following statements represents a quality control requirement under Government Auditing Standards?

  A. A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place.

  B. A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external quality control review report to the party contracting for the audit.

  C. An external quality control review of a CPA's practice should include a review of the audit documentation for each government audit performed since the prior external quality control review.

  D. A CPA who conducts government audits may not make the CPA's external quality control review report available to the public.

  Correct Answer: B

  Explanation: Choice "b" is correct. Audit organizations seeking to enter into a contract to perform an audit in accordance with government auditing standards should provide their most recent external quality control review report to the party contracting for the audit. Choice "a" is incorrect. Each audit organization conducting audits in accordance with governmental auditing standards should have an appropriate internal quality control system in place and undergo an external quality control review. Choice "c" is incorrect. It is not necessary to review all government audits performed since the last external quality control review. Reviewers should select audits that provide a reasonable cross-section of

  engagements performed since the last review.

  Choice "d" is incorrect. It is recommended that the report be made available to the public.

• Question 784:

  When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:

  I. Noteworthy accomplishments of the program.

  II.

  The scope of the auditor's testing of internal controls.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. When auditing an entity's financial statements in accordance with Government

  Auditing Standards, an auditor is required to report on the scope of the auditor's testing of internal control,

  but not on noteworthy accomplishments of the program.

  Choices "a", "c", and "d" are incorrect, based on the above Explanation.

• Question 785:

  When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:

  I. Recommendations for actions to improve operations.

  II.

  The scope of the auditor's tests of compliance with laws and regulations.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. When auditing an entity's financial statements in accordance with Government

  Auditing Standards, an auditor is required to report on the scope of the auditor's testing of compliance with

  laws and regulations, but not on recommendations for actions to improve operations.

  Choices "a", "c", and "d" are incorrect based on the above Explanation.

• Question 786:

  Gearty and Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll Township in accordance with OMB Circular A-133. In connection with that engagement, Gearty and Duffy will determine major programs:

  A. Using a list of programs included in the work plan of the Office of the Inspector General.

  B. By applying only a specific dollar threshold, where all programs exceeding the threshold would be considered major.

  C. By applying a risk-based approach.

  D. By testing enough grants to achieve a single specific coverage percentage.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. OMB Circular A-133 allows auditors to use a risk-based approach to determine major

  grants.

  Choice "a" is incorrect. The judgment of the Office of the Inspector General would not exclusively influence

  the selection of major programs.

  Choice "b" is incorrect. Programs in excess of $300,000 are generally considered to be major grants;

  however, the dollar threshold is not the exclusive determinant of major programs.

  Choice "d" is incorrect. Risk-based auditing allows auditors to test as little as 25 percent of total federal

  programs or as much as 50 percent of total federal programs, depending on circumstances and on the

  auditor's judgment.

• Question 787:

  An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond generally accepted auditing standards. The auditor's expanded responsibilities include:

  A. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have any effect on federal award programs.

  B. Performance of additional procedures to test for noncompliance with laws, rules and regulations targeted for review by the Office of the Inspector General.

  C. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.

  D. Performance of additional procedures to test and report on achievement of program objectives.

  Correct Answer: C

  Explanation: Choice "c" is correct. OMB Circular A-133 expands the auditor's responsibilities to include procedures designed to test and report on compliance matters having a direct and material effect on major federal award programs. Choice "a" is incorrect. OMB Circular A-133 expands procedures to major programs as defined by the Circular, not to all programs. Choice "b" is incorrect. OMB Circular A-133 audit objectives relate to management's assertions regarding compliance with laws, rules, and regulations, not to noncompliance issues identified by the Office of the Inspector General. Choice "d" is incorrect. OMB Circular A-133 relates to the financial and compliance audits of major federal financial assistance programs, not to the achievement of program objectives.

• Question 788:

  Government Auditing Standards published by the Government Accountability Office:

  A. Only apply to audits of governments.

  B. Only apply to audits of governments receiving federal financial assistance.

  C. Primarily apply to audits of federal financial assistance.

  D. Only apply to audits of federal financial assistance programs operated by state and local governments.

  Correct Answer: C

  Explanation: Choice "c" is correct. Generally Accepted Government Auditing Standards primarily apply to audits of federal financial assistance but have been adopted by some states for audits of state financial assistance. Choice "a" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations. GAGAS may also extend to other financial assistance depending on whether those standards have been adopted by the state providing the assistance. Choice "b" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments. Choice "d" is incorrect. Government Auditing Standards will apply to federal financial assistance received by governments, not-for-profit organizations, or other organizations, not only to governments.

• Question 789:

  Gearty and Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:

  A. An audit of annual activity of only federal financial assistance programs over the course of the town's fiscal year.

  B. An inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award.

  C. An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.

  D. An audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A single audit represents a combined audit of both an entity's financial statements

  and federal financial assistance programs. The single audit provides audited organizations with the

  opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit.

  Auditors are governed by the Single Audit Act and OMB Circular A-133.

  Choice "a" is incorrect. A single audit is not simply an audit of federal financial assistance.

  Choice "b" is incorrect. A single audit is not simply an audit of federal financial assistance.

  Choice "d" is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of

  financial statements. It also is designed to report on compliance with laws, rules, and regulations.

• Question 790:

  In performing an audit in accordance with Generally Accepted Government Auditing Standards (the "Yellow Book"), the auditor:

  A. Accepts less responsibility in conducting fieldwork than is accepted in a GAAS audit, since the specific requirements of the Generally Accepted Government Auditing Standards reduce required professional judgment.

  B. Accepts shared responsibility with Federal Inspectors General, who are equally responsible for compliance evaluation, control, and reporting.

  C. Accepts greater reporting responsibilities than accepted under a GAAS audit, since the auditor must report on compliance with laws, rules, and regulations, violations of which may affect financial statement amounts, and on the organization's internal control over financial reporting.

  D. Accepts equal reporting responsibilities with that accepted under GAAS audits, since compliance evaluation and reporting have implied financial statement implications and require expanded treatment as a material contingency.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. An auditor's reporting requirements under Generally Accepted Government Auditing

  Standards (GAGAS or the Yellow Book) are expanded to include reports on the audited entity's

  compliance with laws, rules, and regulations that have a material impact on the financial statements and on

  internal controls over financial reporting.

  Rule: Reporting responsibilities under GAGAS are expanded to include:

  1.

  Reports on compliance with laws, rules, and regulations, violations of which may affect financial

  statement amounts, and

  2.

  Reports on internal control over financial reporting.

  Choice "a" is incorrect. Specific reporting requirements and other expanded audit standards associated

  with Yellow Book audits do not reduce professional judgment.

  Choice "b" is incorrect. Federal Inspectors General do not split their responsibilities with independent public accountants performing Yellow Book Audits. Choice "d" is incorrect. Although Yellow Book requirements represent logical extensions of generally accepted auditing standards, the specific responsibilities undertaken in an audit that requires application of the Yellow Book would not surface as a result of an audit under generally accepted auditing standards.