GAC Auditing Principles & Procedures 3 — Questions and Answers
Question 1: Which risk model component represents the probability that a material misstatement will not be prevented or detected by internal control?
- Inherent risk
- Control risk (Correct answer)
- Detection risk
- Audit risk
Correct answer: Control risk
Control risk is the probability that a material misstatement will not be prevented, or detected and corrected, on a timely basis by internal controls.
Question 2: A governmental auditor notes that the same employee approves purchase orders and signs vendor checks. This violates which internal control principle?
- Competence and continuity
- Segregation of duties (Correct answer)
- Adequate documentation
- Physical safeguards
Correct answer: Segregation of duties
Having one employee both approve purchases and issue payments violates segregation of duties, which requires incompatible functions be performed by different individuals.
Question 3: Under the Uniform Guidance (2 CFR Part 200), what is the threshold for a non-federal entity to be classified as a 'large' auditee subject to Single Audit?
- $500,000 in federal expenditures
- $750,000 in federal expenditures (Correct answer)
- $1,000,000 in federal expenditures
- $2,000,000 in federal expenditures
Correct answer: $750,000 in federal expenditures
Under 2 CFR Part 200, non-federal entities that expend $750,000 or more in federal awards during a fiscal year must have a Single Audit.
Question 4: When auditing a government's pension obligations under GASB 68, which data source is most critical to verify?
- Actuarial reports from the pension plan (Correct answer)
- Employee payroll registers
- Budget allocation documents
- Grant award letters
Correct answer: Actuarial reports from the pension plan
Actuarial reports are the primary source for verifying pension obligations under GASB 68 because they contain the net pension liability calculations and key assumptions.
Question 5: An auditor finds that a city improperly recorded a capital lease as an operating expense. Which financial statement assertion is violated?
- Existence
- Completeness
- Classification (Correct answer)
- Valuation
Correct answer: Classification
Recording a capital lease as an operating expense violates the classification assertion, which requires transactions to be recorded in the proper accounts.
Question 6: What does the term 'material weakness' mean in the context of GAGAS internal control reporting?
- A deficiency in controls that is less severe than a significant deficiency
- A deficiency where there is a reasonable possibility of material misstatement not being prevented or detected (Correct answer)
- Any instance of noncompliance with federal regulations
- A finding that requires corrective action within 30 days
Correct answer: A deficiency where there is a reasonable possibility of material misstatement not being prevented or detected
A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected and corrected on a timely basis.
Question 7: Which element is NOT required to be included in a GAGAS performance audit report?
- Objectives, scope, and methodology
- Auditor's independence statement
- A detailed listing of all audit procedures performed (Correct answer)
- Findings, conclusions, and recommendations
Correct answer: A detailed listing of all audit procedures performed
GAGAS requires reporting on objectives, scope, methodology, findings, and conclusions, but does not require a detailed listing of every audit procedure performed.
GAC Auditing Principles & Procedures 3
Which risk model component represents the probability that a material misstatement will not be prevented or detected by internal control?