CGFO Auditing Standards 3 — Questions and Answers
Question 1: Under the Single Audit Act, a 'major program' determination is based on:
- The number of grant recipients
- A risk-based approach considering expenditure thresholds and risk factors (Correct answer)
- Congressional designation of priority programs
- The auditor's professional judgment alone
Correct answer: A risk-based approach considering expenditure thresholds and risk factors
OMB's Uniform Guidance prescribes a risk-based approach combining expenditure thresholds and Type A/B program risk assessments to identify major programs.
Question 2: What is the threshold for a 'low-risk auditee' designation under the Uniform Guidance Single Audit?
- Clean audits for 2 of the past 3 years with no material weaknesses (Correct answer)
- No federal findings in the prior 5 years
- Less than $10 million in federal expenditures
- Unmodified opinions for 3 consecutive years with no significant deficiencies
Correct answer: Clean audits for 2 of the past 3 years with no material weaknesses
A low-risk auditee must have had unmodified opinions, no material weaknesses, and no Type A programs with high risk for at least 2 of the preceding 3 years.
Question 3: In a government audit, 'control risk' is best defined as:
- The risk that the auditor will fail to detect a material misstatement
- The risk that internal controls will fail to prevent or detect material misstatements (Correct answer)
- The risk inherent in the nature of the account or transaction
- The risk that audit procedures will not yield sufficient evidence
Correct answer: The risk that internal controls will fail to prevent or detect material misstatements
Control risk is the probability that an entity's internal controls will not prevent or detect a material misstatement on a timely basis.
Question 4: Which report is NOT typically required in a Single Audit?
- Report on internal control over financial reporting
- Report on compliance with major programs
- Report on the schedule of expenditures of federal awards (SEFA)
- Report on the entity's investment portfolio valuation (Correct answer)
Correct answer: Report on the entity's investment portfolio valuation
Single Audit requires reports on financial statements, internal controls, compliance with major programs, and a schedule of federal expenditures, but not investment portfolio valuation.
Question 5: The Government Accountability Office (GAO) issues Yellow Book standards applicable to:
- Only federal agency auditors
- Only state and local government auditors
- Federal, state, local, and non-profit entities receiving federal funds (Correct answer)
- Only independent CPA firms performing government audits
Correct answer: Federal, state, local, and non-profit entities receiving federal funds
GAGAS applies broadly to audits of government entities and entities that receive government awards at all levels, as well as non-profit recipients of federal funding.
Question 6: Under GAGAS, a 'significant deficiency' in internal controls is best described as:
- A deficiency severe enough to constitute a material weakness
- A deficiency less severe than a material weakness but important enough to merit attention (Correct answer)
- Any control gap identified during audit fieldwork
- A deficiency reported in a prior-year audit that remains uncorrected
Correct answer: A deficiency less severe than a material weakness but important enough to merit attention
A significant deficiency is a control deficiency, or combination of deficiencies, that is less severe than a material weakness yet important enough to merit attention by those charged with governance.
Question 7: When must an auditor communicate a material weakness in internal controls?
- Only if it resulted in a misstatement
- In writing to management and those charged with governance (Correct answer)
- Only to the funding federal agency
- Verbally to management before the audit report is issued
Correct answer: In writing to management and those charged with governance
GAGAS and GAAS require auditors to communicate material weaknesses in writing to management and those charged with governance.
CGFO Auditing Standards 3
Under the Single Audit Act, a 'major program' determination is based on: