GAC Internal Controls & Auditing in Governmental Entities 2 — Questions and Answers
Question 1: Under the Yellow Book (GAGAS), which standard requires auditors to document their understanding of the entity's internal controls?
- Financial audit standards
- Generally Accepted Government Auditing Standards fieldwork requirements (Correct answer)
- Single Audit Act provisions only
- OMB Circular A-133 alone
Correct answer: Generally Accepted Government Auditing Standards fieldwork requirements
GAGAS fieldwork standards require auditors to obtain and document sufficient understanding of internal controls relevant to the audit objectives.
Question 2: A governmental entity's internal audit function reports directly to the city council rather than management. This arrangement is BEST described as:
- A segregation of duties weakness
- Organizational independence (Correct answer)
- A control deficiency
- Functional redundancy
Correct answer: Organizational independence
Reporting to the governing body rather than management enhances organizational independence for the internal audit function.
Question 3: Which component of COSO's internal control framework addresses the policies and procedures that ensure management directives are carried out?
- Risk Assessment
- Control Environment
- Control Activities (Correct answer)
- Monitoring Activities
Correct answer: Control Activities
Control Activities are the actions established through policies and procedures that help ensure management directives to mitigate risks are carried out.
Question 4: During a Single Audit, the threshold for a program to be classified as a Type A program is federal expenditures exceeding:
- $500,000
- $750,000
- $1,000,000 or 3% of total federal expenditures (Correct answer)
- $2,000,000 or 3% of total federal expenditures
Correct answer: $1,000,000 or 3% of total federal expenditures
Under the Uniform Guidance, Type A programs are those with federal expenditures exceeding the larger of $750,000 or 3% of total federal expenditures for larger entities, but the standard threshold is $750,000.
Question 5: A government auditor discovers that purchase orders are approved by the same employee who receives goods and processes payment. This represents a failure in:
- Management override
- Segregation of duties (Correct answer)
- Tone at the top
- Entity-level controls
Correct answer: Segregation of duties
Segregation of duties requires that authorization, custody, and recording functions be performed by different individuals to prevent errors and fraud.
Question 6: In governmental auditing, a 'material weakness' in internal control is defined as a deficiency where:
- Any control procedure is missing
- A significant deficiency has not been corrected within 90 days
- There is a reasonable possibility that a material misstatement will not be prevented or detected (Correct answer)
- Management disagrees with the auditor's findings
Correct answer: There is a reasonable possibility that a material misstatement will not be prevented or detected
A material weakness exists when there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or timely detected and corrected.
Question 7: Which of the following is NOT a required element of an audit finding under GAGAS?
- Criteria
- Condition
- Cause
- Corrective action implemented by management (Correct answer)
Correct answer: Corrective action implemented by management
GAGAS requires findings to include criteria, condition, cause, and effect (or potential effect); corrective action is management's responsibility, not a required finding element.
GAC Internal Controls & Auditing in Governmental Entities 2
Under the Yellow Book (GAGAS), which standard requires auditors to document their understanding of the entity's internal controls?