The auditor's report on compliance and internal control over compliance designed to meet the requirements of Government Auditing Standards (the Yellow Book), should include:I.The scope of the auditor's testing of internal controls.

II.Uncorrected misstatements that were determined by management to be immaterial.

a.Neither I nor II.

b.I only.

c.Both I and II.

d.II only.

ExplanationChoice "b" is correct. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).Choices "d" and "c" are incorrect. Immaterial uncorrected misstatements are not included in the auditor's report on internal controls and compliance with laws and regulations. Immaterial uncorrected misstatements may be brought to the attention of management.Choice "a" is incorrect. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book). 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 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.

c.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.

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

ExplanationChoice "b" 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, and2. 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 "d" is incorrect. Federal Inspectors General do not split their responsibilities with independent public accountants performing Yellow Book Audits.Choice "c" 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. Government Auditing Standards published by the Government Accountability Office:a.Only apply to audits of governments receiving federal financial assistance.

b.Primarily apply to audits of federal financial assistance and government organizations.

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

d.Only apply to audits of governments.

ExplanationChoice "b" is correct. Generally Accepted Government Auditing Standards primarily apply to audits of federal financial assistance and government organizations but have been adopted by some states for audits of state financial assistance and other governmental funding.Choice "d" 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 "a" 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 "c" 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.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 a direct and material effect on major 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 achievement of program objectives.

d.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.

ExplanationChoice "a" 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 "d" 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 "c" 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. Gearty & 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 & Duffy will determine major programs:a.By testing enough grants to achieve a single specific coverage percentage.

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

ExplanationChoice "c" is correct. OMB Circular A-133 allows auditors to use a risk-based approach to determine major grants.Choice "d" 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 "a" 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. 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.Neither I nor II.

c.Both I and II.

d.II only.

ExplanationChoice "d" 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 "b" are incorrect, based on the above explanation. Which of the following statements represents a quality control requirement under Government Auditing Standards?a.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.

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

c.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.

d.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.

ExplanationChoice "c" 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. The audit organization should make its most recent peer review report publicly available by posting to an external website or through similar means.Choice "d" 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 "a" 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 "b" is incorrect. It is recommended that the report be made available to the public. An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:a.To shareholders with significant influence (more than 20% equity ownership) when the signficant deficiencies (reportable conditions) are deemed to be material weaknesses.

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

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

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

ExplanationChoice "c" 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 "d" 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 "b" 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 "a" 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. 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.

ExplanationChoice "b" is correct. 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 deficiencies, significant deficiencies or material weaknesses in internal control over compliance. 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. Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express:a.Reasonable assurance on the compliance tests.

b.No assurance on the compliance tests.

c.A qualified or adverse opinion.

d.An adverse or disclaimer of opinion.

ExplanationChoice "c" is correct. If material instances of noncompliance are identified, the auditor should express either a qualified or adverse opinion on compliance.Choice "b" is incorrect. The auditor's report directs the reader to a separate schedule of findings after stating the importance of compliance testing and indicating that providing an opinion on compliance is not an objective of the audit.Choice "a" is incorrect. The auditor's report directs the reader to a separate schedule of findings after stating the importance of compliance testing and indicating that providing an opinion on compliance is not an objective of the audit.Choice "d" is incorrect. If material instances of noncompliance are identified, a disclaimer of opinion is not appropriate. 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.The pertinent views of the entity's responsible officials concerning the auditor's findings.

b.A statement of the audit objectives and a description of the audit scope.

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

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

ExplanationChoice "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 "b" is incorrect. A statement of the audit objectives and a description of the audit scope are required parts of the auditor's report.Choice "c" is incorrect. The auditor would provide indications of illegal acts discovered during the audit.Choice "a" is incorrect. The pertinent views of the entity's responsible officials concerning the auditor's findings are generally part of the auditor's report. 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.Employed internal auditors who can report their findings, opinions, and conclusions objectively without fear of political repercussion.

b.Responsibility for understanding and complying with compliance requirements.

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

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

ExplanationChoice "b" is correct. The auditor should obtain written representation that management has responsibility for understanding and complying with compliance requirements.Choice "c" is incorrect. Management need not acknowledge that it has implemented internal control activities to detect all illegal acts.Choice "d" is incorrect. Management should state that it is responsible for compliance with all laws and regulations.Choice "a" is incorrect. Management need not employ internal auditors. 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.The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance.

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

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

ExplanationChoice "c" 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 stating that management is responsible for taking corrective action on audit findings of the compliance audit.Choice "b" 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. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's:a.Understanding of internal control and assessment of control risk.

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

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

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

ExplanationChoice "a" 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 "c" is incorrect. In the report, the auditor would identify deficiencies, significant deficiencies, and material weaknesses in internal control over compliance (not performance problems) found in the examination of the entity's internal control.Choice "b" 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. 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.Provide an opinion on overall compliance with laws and regulations.

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

c.State that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the entity's programs.

d.Provide negative assurance of the entity's legal compliance.

ExplanationChoice "c" is correct. Basic elements of a report on compliance include a statement that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the programs audited.Choice "b" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply.Choice "a" 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. The report should specifically state that a compliance audit does not provide a legal determination of the entity's compliance. Reporting on internal control to meet the requirements of Government Auditing Standards differs from reporting under other generally accepted auditing standards in that Government Auditing Standards requires a:a.Statement of positive assurance that internal controls designed to detect material errors and fraud were tested.

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

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

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

ExplanationChoice "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 "c" 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 "d" 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 "a" 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. For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the Statements on Auditing Standards (SAS) that are issued by the AICPA. GAGAS prescribe additional standards on:Direct reportingof illegal actsReporting oninternal controls

a.YesYes

b.NoNo

c.YesNo

d.NoYes

ExplanationChoice "a" is correct. Generally accepted government auditing standards (GAGAS) prescribe additional standards on the direct reporting of illegal acts. For example, the auditor is required to directly report illegal acts discovered during the audit to federal inspector generals if management fails to disclose such illegal acts to the grantor or fails to take appropriate remedial action. In addition, GAGAS also prescribe additional standards related to internal control reporting, such as requiring that the auditor provide a written report on internal control in every financial statement audit and specific reporting over internal control over compliance.Choices "c", "d", and "b" are incorrect, based on the above explanation. 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 materiality levels are higher and are determined by the government entities that provide the federal financial assistance to the recipients.

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

c.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.

d.The auditor is required to document an understanding of internal control established to provide reasonable assurance of compliance with the applicable laws and regulations.

ExplanationChoice "d" 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 "c" 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 "a" 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 "b" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required. Auditors conducting an audit in accordance with the Single Audit Act use a risk-based approach designed to:a.Reduce audit risk by providing an equal opportunity for all grants to be tested.

b.Reduce audit risk by providing an equal opportunity for all expended federal dollars to be tested.

c.Focus the audit on grants related to large federal programs.

d.Focus the audit on high-risk programs.

ExplanationChoice "d" is correct. The risk-based approach of the Single Audit Act is designed to focus the auditor's tests of federal financial assistance on the programs with the highest risk.Choice "c" is incorrect. The risk-based approach does not focus the auditor on larger ("Type A") programs. Although the segregation of programs into larger ("Type A") and smaller ("Type B") programs gives the auditor a basis for determining coverage and evaluating risk, the focus is on the risk, not the size of the program.Choice "a" is incorrect. The risk-based approach is not an extension of random sampling concepts and is not designed to provide each grant with an equal opportunity of being selected.Choice "b" is incorrect. The risk-based approach is not an extension of random sampling or PPS sampling concepts and is not designed to provide each Federal dollar expended with an equal opportunity of being selected for testing. 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.A separate report.

b.A letter to the government funding agency.

c.The report on the performance audit.

d.The notes to the financial statements.

ExplanationChoice "a" 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 "c" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit.Choice "d" 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 "b" 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. 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.Describe the scope of the auditor's principal substantive tests.

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

ExplanationChoice "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 "d" 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 "c" 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. According to the Statement on Auditing Standards No. 117, Compliance Audits, a compliance audit is based on management's assumption of responsibility for all of the following, except:a.Maintaining effective controls that provide absolute assurance that the entity administers programs in compliance with related requirements.

b.Identification of the government's programs and understanding and fulfilling compliance requirements.

c.Taking appropriate corrective actions on audit findings.

d.Ongoing evaluation and monitoring of the entity's compliance with program requirements.

ExplanationChoice "a" is correct. Management takes responsibility for providing reasonable, not absolute, assurance that programs are operated in compliance with requirements.Choice "b" is incorrect. Management is presumed to take responsibility for identifying programs and understanding and complying with requirements.Choice "d" is incorrect. Entity compliance with compliance requirements is presumed to be evaluated and monitored by management on an ongoing basis.Choice "c" is incorrect. Management's proactive efforts to timely and effectively address compliance findings in audits is presumedIn its tests of controls over the Tarbet Township Housing Assistance Program, Black, CPA, has found that the clerk assigned to monitor and limit participation in the housing program to a target population of individuals meeting income criteria is routinely overruled by his supervisor in order to meet volume based level of effort requirements. Ineligible participants whose income exceeds program limits are routinely admitted to the program. Black would characterize this as a(n):a.Audit risk of noncompliance.

b.Deficiency in the design of internal control.

c.Inherent risk of noncompliance.

d.Deficiency in the operation of internal control.

ExplanationChoice "d" is correct. Deficiency in operation exists when a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control. In this case, the clerk did not have the necessary authority to follow through on the control.Choice "b" is incorrect. Deficiency in design exists when noncompliance occurs even when the control operates as designed. The control contemplates a clerical determination of income eligibility (which occurs). If the control were not overridden, it would be effective.Choice "a" is incorrect. Audit risk of noncompliance is a planning concept that represents the risk the auditor might express an inappropriate audit opinion on the entity's compliance when material noncompliance exists. Findings associated with tests of controls would not be characterized as audit risk of noncompliance.Choice "c" is incorrect. Inherent risk of noncompliance is the susceptibility of a requirement to noncompliance and is a component of the risk of material noncompliance. It exists prior to the audit and would not be a characterization that would be applied to the results of tests of controls. Management's written representation to the auditor in connection with a governmental audit would most likely include:a.Identification of management's interpretation of compliance requirements that are subject to different interpretations.

b.A statement that management had identified and disclosed all material government programs to the auditor.

c.Negative assurance that the government has complied with compliance requirements.

d.Representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist.

ExplanationChoice "a" is correct. The management letter will include identification of management's interpretation of compliance requirements that are subject to different interpretations.Choice "b" is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor.Choice "d" is incorrect. Management will assert that they have disclosed all known noncompliance or state that there was no such noncompliance.Choice "c" is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements, not negative assurance. A report on compliance would include:a.A disclaimer of opinion on compliance.

b.A representation that findings that do not result in any report modification are not otherwise disclosed.

c.A statement that generally accepted auditing standards includes all governmental audit standards by reference.

d.An opinion on whether the entity complied, in all material respects, with the applicable compliance requirements.

ExplanationChoice "d" is correct. The auditor will express an opinion at the level specified by the governmental audit requirement.Choice "a" is incorrect. The auditor will express an opinion at the level specified by the governmental audit requirement.Choice "b" is incorrect. Findings that do not impact the opinion are displayed in the report or referenced to a separate report.Choice "c" is incorrect. The report should state that the audit was conducted in compliance with GAAS, GAGAS (Yellow Book), and any other specific governmental audit requirement. Gearty & 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 inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award.

b.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.

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

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

ExplanationChoice "b" 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 "d" is incorrect. A single audit is not simply an audit of federal financial assistance.Choice "a" is incorrect. A single audit is not simply an audit of federal financial assistance.Choice "c" 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. A report on internal control over compliance will include which of the following assertions?a.Identification of material weakness in the event an adverse opinion is expressed.

b.An opinion as to whether internal controls were adequate to provide reasonable assurance that the organization would comply, in all material respects, with laws rules and regulations.

c.Disclaimer of opinion in the event that significant weaknesses are identified.

d.A disclaimer of opinion on internal control over compliance.

ExplanationChoice "d" is correct. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.Choice "b" is incorrect. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.Choice "a" is incorrect. Material weaknesses are identified as part of the report on internal control over compliance. No opinion on internal control over compliance (unqualified or adverse) is expressed.Choice "c" is incorrect. The report disclaims an opinion on the effectiveness of internal control over compliance regardless of the status of reported weaknesses. Significant weaknesses are disclosed or referenced in a separate report. Compliance audit workpapers will include all of the following documentation, except:a.Final basis for the opinion on the effectiveness of internal control over compliance.

b.Responses to the assessed risk of noncompliance including tests of compliance and tests of controls

c.Materiality levels.

d.Risk assessment procedures performed including those related to gaining an understanding of the internal control over compliance.

ExplanationChoice "a" is correct. The auditor will not express an opinion on the effectiveness of internal control over compliance. Documentation of conclusions for an opinion would not be appropriate.Choice "d" is incorrect. Documentation should include the risk assessment over internal control over compliance.Choice "b" is incorrect. Responses to control assessments including both tests and test results should be documented.Choice "c" is incorrect. Materiality levels should be documented. The auditors' purpose in establishing materiality levels in a compliance audit includes all of the following, except:a.Determining the nature and extent of risk assessment procedures.

b.Establishing the basis for the opinion on effectiveness of internal control over compliance.

c.Evaluate whether the entity has complied with applicable requirements.

d.Determining the nature, timing and extent of additional audit procedures.

ExplanationChoice "b" is correct. The auditor does not express an opinion on the effectiveness of internal control over compliance. Materiality limits would not contribute to that nonexistent objective.Choice "a" is incorrect. Materiality limits are used in conjunction with planning risk assessment procedures.Choice "d" is incorrect. Materiality limits are used to plan audit timing, procedures and volume of testing.Choice "c" is incorrect. Materiality is significant in allowing the auditor to formulate an opinion on compliance. The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?a.All changes in the audit program from the prior year should be reported to the entity's audit committee.

b.Any privileged or confidential information discovered should be reported to the organization that arranged for the audit.

c.Material indications of illegal acts should be reported in a document distributed only to the entity's senior officials.

d.Auditors should report the scope of their testing of compliance with laws and regulations and of internal controls.

ExplanationChoice "d" is correct. The auditor's report on compliance and on internal control over financial recording (based on an audit) must include the scope of testing of compliance and internal control.Choice "c" is incorrect. Material indications of illegal acts are not only reported to the members of the governing body of the audited entity and their senior staff officials but, in some circumstances, auditors should report illegal acts directly to external parties (such as the grantor agency).Choice "a" is incorrect. Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to individuals contracting for the audit, reporting of all changes is not required. (For example, immaterial changes to the audit program need not be reported.)Choice "b" is incorrect. Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report. The report should, however, disclose the nature of the information omitted and the requirement that makes an opinion necessary. How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-profit Organizations, define a subrecipient?a.As a nonfederal entity that expends federal awards received from another entity to carry out a federal program.

b.As a dealer, distributor, merchant, or other seller providing goods or services that are required for the conduct of a federal program.

c.As an individual who receives and expends federal awards received from a pass-through entity.

d.As a nonfederal entity that provides a federal award to another entity to carry out a federal program.

ExplanationChoice "a" is correct. A nonfederal entity that expends federal financial assistance administered by another entity is a sub recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The not-for-profit organization would be the sub recipient. Choice "d" is incorrect. A nonfederal entity that receives a grant award and, in turn, contracts or provides that award to another entity to carry out the program would be a recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The state would be the grant recipient while the not-for-profit organization would be the sub recipient. Choice "c" is incorrect. An individual who receives and expends federal awards received from a pass-through entity is a recipient.Choice "b" is incorrect. A nonfederal entity compensated for goods or services with federal monies is a vendor.Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?a.The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

b.The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

c.The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively.

d.The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.

ExplanationChoice "a" is correct. Audits of federal financial assistance under the Single Audit Act require that the auditor determine if the auditee has complied with laws, regulations, and provisions of the contracts or grant agreements.Choice "b" is incorrect. Materiality in audits of federal financial assistance is set at the program level and is not determined by the government entities that provided the federal financial assistance to the recipient.Choice "c" is incorrect. An external auditor need not be involved in the internal audit, and no written management representations regarding the internal auditors need be obtained.Choice "d" is incorrect. In audits of federal financial assistance under the Single Audit Act, the auditor does not express negative assurance on items not tested. In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to:a.Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements.

b.Issue a separate report that describes the expected benefits and related costs of the auditor's suggested changes to the entity's internal control.

c.Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting errors and fraud.

d.Render an opinion concerning the entity's continued eligibility for the governmental financial assistance.

ExplanationChoice "a" is correct. The auditor must assess whether management has identified laws and regulations that have a direct and material effect on the determination of amounts in an entity's financial statements and obtain an understanding of the possible effects on the financial statements of such laws and regulations.Choice "b" is incorrect. The auditor must issue a separate report on the consideration of the entity's internal control, not on the expected benefits and related costs.Choice "c" is incorrect. Government Auditing Standards (the Yellow Book) specify that the auditor should design the audit to provide reasonable assurance that material errors and fraud are detected.Choice "d" is incorrect. The auditor may be required to express an opinion on whether the entity has complied with the requirements applicable to its major federal financial assistance programs, but not whether it is still eligible to receive assistance. Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards?a.An auditor should briefly describe in the auditor's report the method of statistical sampling used in performing tests of controls and substantive tests.

b.An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.

c.An auditor should report on the scope of the auditor's testing of internal controls.

d.An auditor should determine the extent to which the entity's programs achieve the desired level of results.

ExplanationChoice "c" is correct. Auditors should report on the scope of their testing of compliance with laws and regulations and of internal controls.Choice "b" is incorrect. The auditor would assess whether the entity has reportable measures of economy and efficiency that are valid and reliable as part of an economy and efficiency (performance) audit, not a financial statement audit.Choice "a" is incorrect. The auditor may report the methods of statistical sampling used as part of a performance audit.Choice "d" is incorrect. A program audit would determine the extent to which the entity's programs achieve the desired level of results. 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)?a.In some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity.

b.The reporting standards in a governmental audit modify the auditor's responsibilities under generally accepted auditing standards.

c.The auditor's key findings of the audit of the financial statements should be communicated in a separate report.

d.Auditors are not required to report fraud, illegal acts, and other material noncompliance in the audit report.

ExplanationChoice "a" is correct. In a variety of circumstances, auditors may be required to report directly to an entity external to the audited entity (e.g., the grantor, inspectors general, etc.). Instances that require external reporting might include situations in which management is unwilling to take corrective action with regard to illegal acts, fraud or material non compliance or circumstances in which a specific requirement is imposed by the grantor that requires that any discovery of illegal acts, fraud or material non compliance by the auditor be reported to the grantor or others.Choice "d" is incorrect. Auditors must report fraud, illegal acts and material non compliance in the audit report.Choice "c" is incorrect. Although the key findings associated with the audit of governmental financial statements may be communicated in a separate report, the auditor has the latitude to include specific findings and conclusions in the same report.Choice "b" is incorrect. The reporting standard under GAGAS augment the standards associated with reports on audited financial statements in several ways including a requirement that the auditor specifically mention adherence to GAGAS. These standards do not, however, change or modify GAAS reporting responsibilities. In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is:a.Ignored, because all account balances, regardless of size, are fully tested.

b.Calculated in relation to the financial statements taken as a whole.

c.Determined separately for each major federal financial assistance program.

d.Decided in conjunction with the auditor's risk assessment.

ExplanationChoice "c" is correct. Under the Single Audit Act, materiality is determined separately for each major federal financial assistance program.Choice "b" is incorrect. Under a GAAS audit, materiality is determined in relation to the financial statements taken as a whole. Under a GAGAS audit, materiality levels may be lower due to the public accountability of the entity, the various legal requirements, and the visibility and sensitivity of governmental programs, activities, and functions.Choice "d" is incorrect. Materiality must be determined before risk is assessed.Choice "a" is incorrect. The Single Audit Act does not require that all balances be tested. The auditor's objectives in a compliance audit of a governmental entity include:a.Minimizing control risk of noncompliance.

b.Forming an opinion on whether the government complied in all material respects with applicable compliance requirements.

c.Limiting auditing procedures and audit exposure to the standards described by GAAS and GAGAS.

d.Providing negative assurance regarding a legal determination of compliance.

ExplanationChoice "b" is correct. An objective of a compliance audit of a governmental entity is to form an opinion on whether that government complied with applicable compliance requirements in all material respects, and then to report at the level specified by the governmental audit requirement. Choice "d" is incorrect. The auditor specifically reports that the audit does not provide a legal determination of compliance with requirements.Choice "c" is incorrect. The auditor is to identify audit and reporting requirements (e.g., Single Audit/OMB Circular A-133 requirements) supplementary to GAAS and GAGAS and perform procedures to address those requirements.Choice "a" is incorrect. The auditor cannot minimize or influence control risk. Detection risk of noncompliance is inversely related to:a.Audit risk of noncompliance.

b.Inherent risk of noncompliance.

c.Control risk of noncompliance.

d.Risk of material noncompliance.

ExplanationChoice "d" is correct. As risk of material noncompliance increases, detection risk of noncompliance should decrease to reach a desired level of overall audit risk of noncompliance. This concept is identical to the relationship between risk of material misstatement and detection risk.Choice "a" is incorrect. Audit risk of noncompliance, like audit risk in financial audits, is the product of risk of material noncompliance and detection risk.Choices "b" and "c" are incorrect. Both inherent and control risk are components of risk of material noncompliance. Government Auditing Standards published by the United States Government Accountability Office define standards associated with the following types of engagements:a.Financial audits, attest engagements, and program-specific audits.

b.Financial audits, single audits, and program specific audits.

c.Audits, reviews, and compilations.

d.Financial audits, attest engagements, and performance audits.

ExplanationChoice "d" is correct. Government Audit Standards define three types of engagements: financial audits, attest engagements, and performance audits.Choice "b" is incorrect. Single audits and program specific audits are defined by OMB Circular A-133 and the Single Audit Act. Government Auditing Standards define standards for financial audits, attest engagements, and performance audits. GAGAS are used in conjunction with single audits.Choice "a" is incorrect. Program-specific audits are defined by OMB Circular A-133 and the Single Audit Act. Government Auditing Standards define standards for financial audits, attest engagements, and performance audits.Choice "c" is incorrect. Audits, reviews, and compilations are defined by generally accepted auditing standards, not generally accepted government auditing standards. An auditor conducting a compliance audit will design and perform additional audit procedures in response to the assessed risk of material noncompliance. These procedures will include tests of controls if:a.The auditor's expectation of the operating effectiveness of controls over compliance is otherwise unknown.

b.Tests of controls are required by the governmental audit requirement.

c.The auditor has been engaged to perform an organization-wide audit.

d.The auditor has determined a deficiency in the design of internal control over compliance.

ExplanationChoice "b" is correct. Tests of the operating effectiveness of controls may be required if any one of the following exist: 1. The risk assessment includes an explanation of the operating effectiveness of controls over compliance,2. Substantive procedures do not provide enough evidence to support a conclusion, or3. Tests of controls are required by the applicable governmental audit requirements.Choice "d" is incorrect. The design of internal controls over compliance are not as significant as their operation for determination of the need for tests of controls.Choice "a" is incorrect. Tests of controls are appropriate when the auditor has developed an expectation regarding the operation of controls; not when the operating effectiveness is unknown.Choice "c" is incorrect. The engagement to perform an entity-wide audit does not have direct bearing on whether tests of controls are performedA government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization: a.Is removed from political pressures to conduct audits objectively, without fear of political reprisal.

b.Performs auditing procedures that are consistent with generally accepted accounting principles.

c.Is a line-manager of the unit under audit.

d.Is not accountable to those charged with governance.

ExplanationChoice "a" is correct. A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization is removed from political pressures to conduct audits objectively, without fear of political reprisal.Choice "d" is incorrect. Accountability to those charged with governance generally increases the objectivity of the internal auditors.Choice "b" is incorrect. The audit procedures used for the government audit should be consistent with generally accepted government auditing standards (GAGAS), not GAAP.Choice "c" is incorrect. If the head of the organization is also the line manager under the current audit, there is a potential conflict of interest with these two roles and potential pressure on behalf of the internal auditor to provide a more favorable audit opinion. The Generally Accepted Government Auditing Standards Framework for Independence identifies an inappropriate influence on auditor judgment or behavior caused by a financial or other interest as a:a.Management participation threat.

b.Bias threat.

c.Self-review threat.

d.Self-interest threat.

ExplanationChoice "d" is correct. The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditors judgment or behavior.Choice "c" is incorrect. The self-review threat is the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.Choice "b" is incorrect. Bias threat is the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.Choice "a" is incorrect. Management participation threat is the threat that results from an auditors taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.The standard that an auditor should be independent of mind and appearance in providing audits is included in the Generally Accepted Government Auditing Standard ethics principle of:a.Integrity.

b.Professional behavior.

c.Objectivity.

d.Serving the public interest.

ExplanationChoice "c" is correct. Objectivity includes independence of mind and appearance when providing audits, maintaining an attitude of impartiality, having intellectual honesty, and being free of conflicts of interest. Choice "d" is incorrect. The public interest is defined as the collective well-being of the community of people and entities served by the auditor. Auditor services should be designed to meet those needs.Choice "a" is incorrect. Integrity includes auditors conducting their work with an attitude that is objective, fact-based, nonpartisan, and non-ideological with regard to the audited entities and users of the auditors reports. Choice "b" is incorrect. Professional behavior includes an auditor's honest effort in the performance of professional services in accordance with the relevant technical and professional standards.Safeguards to threats to independence identified by Generally Accepted Governmental Auditing Standards are generally not effective to mitigate:a.Self-review threat.

b.Management participation threat.

c.Self-interest threat.

d.Undue influence threat.

ExplanationChoice "b" is correct. If an auditor were to assume management responsibilities for an audited entity, the management participation threat created would be so significant that no safeguards could reduce the threat to an acceptable level.Choice "c" is incorrect. The self-interest threat might be mitigated by removing the individual from an audit in which that individual's financial or other interest or relationships pose a threat to independence.Choice "a" is incorrect. The self-review threat might be mitigated by involving another audit organization to perform or reperform part of the audit.Choice "d" is incorrect. The undue influence threat might be mitigated by having a professional staff member who was not a member of the audit team review the work performed.The auditor should determine whether providinga nonaudit service would create a threat to independence, either by itself or in aggregate with other nonaudit services provided, with respect to any audit it performs in accordance with Generally Accepted Government Auditing Standards. A critical component of this determination is:a.Ability to remove the auditor involved in the nonaudit service from the audit team.

b.Consideration of managements ability to effectively oversee the nonaudit service to be performed.

c.Ability of a professional staff member who was not a member of the audit team to review the work performed.

d.Ability of outside auditors to independently review the nonaudit service.

ExplanationChoice "b" is correct. A critical component of the determination of whether providing a nonaudit service would create a threat to independence is consideration of managements ability to effectively oversee the nonaudit service to be performed.Choice "d" is incorrect. Use of outside auditors to independently review nonaudit services is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.Choice "a" is incorrect. Removal of an auditor involved in a nonaudit service is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.Choice "c" is incorrect. Use of a professional staff member who was not a member of the audit team to review the work performed is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.Able & Co. is evaluating its independence relative to its audit of the City of Baker's self insurance fund using the conceptual framework for independence included in Government Auditing Standards. During the course of the review of the work performed, the audit partner notes that virtually no audit procedures were performed on an actuarial valuation of the fund's unpaid claims liabilities conducted by consultants from Able & Co's actuarial group. The actuarial valuation was performed as part of a separate nonaudit engagement. The unpaid claims are material to the fund. The situation above represents:a.A familiarity threat.

b.A self-review threat.

c.No threat to independence.

d.A self-interest threat.

ExplanationChoice "b" is correct. The self-review threat is the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit. The failure to evaluate the fairness of the data used for the actuarial valuation and the reasonableness of the liability valuation itself represents a self-review threat.Choice "c" is incorrect. Independence was likely compromised by a self-review threat.Choice "d" is incorrect. The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditors judgment or behavior. Although the firm has a financial interest in the service that they performed outside of the audit, the threat is more accurately characterized as a self-review threat.Choice "a" is incorrect.Familiarity threat is the threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective. The issue is not the familiarity with management, it is the inappropriate reliance on unaudited work performed by the firm's consultants.Carlisle & Company is auditing the Town of Dunderhead in accordance with Generally Accepted Government Auditing Standards (GAGAS) and has determined that no one on the city's staff is competent enough to maintain and close the accounting records of the city. Believing that he is performing a service for his client, the audit manager takes possession of the books and records, posts transactions, develops trial balances and produces audited financial statements in time to fully comply with statutory filing requirements. The audit manager has created a threat to independence identified by GAGAS that is defined as:a.Self-review threat.

b.Management participation threat.

c.Familiarity threat.

d.Self-interest threat.

ExplanationChoice "b" is correct. The assumption of accounting duties and taking possession of the books and records represents a management participation threat. Management participation threat is the threat that results from an auditors taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.Choice "a" is incorrect. The self-review threat is the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.Choice "d" is incorrect. The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditors judgment or behavior.Choice "c" is incorrect. Familiarity threat is the threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective.The Generally Accepted Government Auditing Standards Framework for Independence identifies an inappropriate influence on auditor judgment or behavior caused by a financial or other interest as a:a.Bias threat.

b.Management participation threat.

c.Self-interest threat.

d.Self-review threat.

ExplanationChoice "c" is correct. The self-interest threat is the threat that a financial or other interest will inappropriately influence an auditors judgment or behavior.Choice "d" is incorrect. The self-review threat is the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.Choice "a" is incorrect. Bias threat is the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.Choice "b" is incorrect. Management participation threat is the threat that results from an auditors taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.th an honest effort in the performance of professional services in accordance with relevant technical and professional standards is included in the Generally Accepted Government Auditing Standard ethics principle of:a.Objectivity.

b.Professional behavior.

The standard that an auditor should be independent of mind and appearance in providing audits is included in the Generally Accepted Government Auditing Standard ethics principle of:a.Integrity.

b.Professional behavior.

c.Objectivity.

Generally accepted government auditing standards specifically include all of the following ethics principles except:a.Serving the public interest.

b.Proper use of government information.

c.Fraud detection.

The auditor should determine whether providinga nonaudit service would create a threat to independence, either by itself or in aggregate with other nonaudit services provided, with respect to any audit it performs in accordance with Generally Accepted Government Auditing Standards. A critical component of this determination is:a.Ability to remove the auditor involved in the nonaudit service from the audit team.

b.Consideration of managements ability to effectively oversee the nonaudit service to be performed.

c.Ability of a professional staff member who was not a member of the audit team to review the work performed.

d.Ability of outside auditors to independently review the nonaudit service.

ExplanationChoice "b" is correct. A critical component of the determination of whether providing a nonaudit service would create a threat to independence is consideration of managements ability to effectively oversee the nonaudit service to be performed.Choice "d" is incorrect. Use of outside auditors to independently review nonaudit services is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.Choice "a" is incorrect. Removal of an auditor involved in a nonaudit service is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.Choice "c" is incorrect. Use of a professional staff member who was not a member of the audit team to review the work performed is an important safeguard to address a threat to independence but does not represent a critical component of determining whether a nonaudit service would create a threat to independence.Safeguards to threats to independence identified by Generally Accepted Governmental Auditing Standards are generally not effective to mitigate:a.Self-interest threat.

b.Management participation threat.

c.Undue influence threat.

d.Self-review threat.

ExplanationChoice "b" is correct. If an auditor were to assume management responsibilities for an audited entity, the management participation threat created would be so significant that no safeguards could reduce the threat to an acceptable level.Choice "a" is incorrect. The self-interest threat might be mitigated by removing the individual from an audit in which that individual's financial or other interest or relationships pose a threat to independence.Choice "d" is incorrect. The self-review threat might be mitigated by involving another audit organization to perform or reperform part of the audit.Choice "c" is incorrect. The undue influence threat might be mitigated by having a professional staff member who was not a member of the audit team review the work performed.

The standard that an auditor should put forth an honest effort in the performance of professional services in accordance with relevant technical and professional standards is included in the Generally Accepted Government Auditing Standard ethics principle of:a.Integrity.

b.Professional behavior.

c.Serving the public interest.

d.Objectivity.

ExplanationChoice "b" is correct. Professional behavior includes an auditor's honest effort in the performance of professional services in accordance with the relevant technical and professional standards.Choice "c" is incorrect. The public interest is defined as the collective well-being of the community of people and entities served by the auditor. Auditor services should be designed to meet those needs.Choice "a" is incorrect. Integrity includes auditors conducting their work with an attitude that is objective, fact-based, nonpartisan, and non-ideological with regard to the audited entities and users of the auditors reports. Choice "d" is incorrect. Objectivity includes independence of mind and appearance when providing audits, maintaining an attitude of impartiality, having intellectual honesty, and being free of conflicts of interest. A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:a.Requiring personnel to adhere to the applicable independence rules.

b.Reviewing audit documentation and engagement reports.

c.Evaluating prospective and continuing client relationships.

d.Maintaining personnel files containing documentation related to the evaluation of personnel.

ExplanationChoice "b" is correct. Procedures for reviewing audit documentation and engagement reports are established to ensure that the work performed meets the firm's quality standards. This relates to the quality control element of performance.Choice "c" is incorrect. Evaluations of prospective and continuing client relationships are performed to minimize the likelihood of association with a client whose management lacks integrity. This relates to the quality control element of engagement/client acceptance and continuance. Such evaluations do not ensure that the work performed meets the firm's quality control standardsChoice "a" is incorrect. Requiring personnel to adhere to the applicable independence rules relates to the quality control element of ethical requirements. Such requirements are established to provide independence, but they do not ensure that the work performed meets the firm's quality control standards.Choice "d" is incorrect. Maintaining personnel files and periodic evaluations of personnel are part of the quality control element of human resources. Such policies are established to provide for appropriate hiring, assignment, development, and advancement of employees, but they would not ensure that the work performed meets the firm's quality control standards. Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?EngagementPerformanceRelevantEthicalRequirementsMonitoring

a.YesNoYes

b.YesYesYes

c.YesYesNo

d.NoYesYes

ExplanationChoice "b" is correct. Quality control elements are:1. Human resources2. Engagement/client acceptance and continuance3. Leadership responsibilities4. Performance of the engagement5. Monitoring6. Ethical requirementsChoices "c", "d", and "a" are incorrect based on the above explanationA CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:a.Adhering to generally accepted auditing standards.

b.Maintaining an attitude of independence in its engagements.

c.Having an appropriate system of quality control.

d.Joining professional societies that enforce ethical conduct.

ExplanationChoice "c" is correct. Quality control standards relate to the conduct of a firm's audit practice. They set forth standards for the establishment of policies and procedures to provide reasonable assurance of conforming with professional standards.Choice "a" is incorrect. GAAS relate to the conduct of individual audit engagements.Choice "d" is incorrect. Joining professional societies that enforce ethical conduct (e.g., the AICPA or state CPA society) will not assure the firm of meeting its responsibility to conform with GAAS. A system of policies and procedures (i.e., a system of quality control) must be established to provide this assurance.Choice "b" is incorrect. Independence is part of the quality control element of independence, integrity, and objectivity, but maintaining independence alone will not help the firm meet its responsibility to conform with professional standards.