Auditing and Internal Controls Flashcards

Which of the following sets of standards, often called the 'Green Book', is issued by the Government Accountability Office (GAO) and establishes the framework for an effective internal control system for federal agencies?

Answer: Standards for Internal Control in the Federal Government

The GAO issues the 'Standards for Internal Control in the Federal Government', commonly known as the 'Green Book'. This publication sets the standards for an effective internal control system for federal agencies and is the framework management uses to design, implement, and operate controls to achieve objectives related to operations, reporting, and compliance.

A DoD component head is preparing the annual Statement of Assurance as required by the Federal Managers' Financial Integrity Act (FMFIA). The evaluation identified a material weakness in inventory accountability. However, all other internal controls are designed and operating effectively. What type of assurance should the component head provide?

Answer: Modified Statement of Assurance

A Modified Statement of Assurance is appropriate when a material weakness is found in one or more areas, but management concludes that other internal controls are effective. An Unmodified (or unqualified) Statement of Assurance is given when there are no material weaknesses. A Statement of No Assurance is given when controls are pervasively ineffective.

An audit is being conducted to determine if a DoD program is achieving its objectives in an economical and efficient manner and is producing the intended results. According to Government Auditing Standards (the Yellow Book), what type of audit is this?

Answer: Performance Audit

A performance audit, as defined by the GAO's Yellow Book, is an engagement that provides findings or conclusions based on an evaluation of evidence against criteria. Performance audits can assess program effectiveness, economy, and efficiency; internal control; and compliance. A financial audit focuses on whether financial statements are presented fairly.

A financial management office has a process where one employee is responsible for authorizing payments, disbursing the funds, and recording the transactions in the general ledger. Which of the five components of internal control, as defined by the GAO Green Book, is most clearly violated by this practice?

Answer: Control Activities

This scenario violates the 'Control Activities' component, specifically the principle of segregation of duties. Control activities are the policies and procedures that help ensure management's directives are carried out. Segregating the responsibilities for authorizing transactions, maintaining custody of assets, and recording transactions is a fundamental control activity designed to prevent fraud and error.

What is the primary purpose of the Government Auditing Standards, also known as the 'Yellow Book'?

Answer: To provide a framework for conducting high-quality audits of government entities with competence, integrity, and independence.

The Government Accountability Office's (GAO) 'Yellow Book' provides a framework for conducting high-quality government audits. It contains standards related to auditor ethics, independence, professional judgment, competence, and the proper performance of audits to ensure that reliable and objective information is produced.

The Federal Managers' Financial Integrity Act (FMFIA) requires the head of each executive agency to annually evaluate and report on the effectiveness of which two major areas?

Answer: Internal Controls and Financial Management Systems

The FMFIA requires agency heads to provide an annual Statement of Assurance on the effectiveness of their internal controls (Section 2) and the conformance of their financial management systems with government-wide requirements (Section 4). This ensures accountability for safeguarding assets, complying with laws, and producing reliable financial reports.