GAC Internal Controls & Auditing in Governmental Entities 3 — Questions and Answers
Question 1: The Government Accountability Office (GAO) issues auditing standards known as GAGAS. For financial audits of governmental entities, GAGAS incorporates and adds to which other standards?
- International Standards on Auditing (ISA)
- AICPA's Generally Accepted Auditing Standards (GAAS) (Correct answer)
- Institute of Internal Auditors Standards
- FASAB accounting standards
Correct answer: AICPA's Generally Accepted Auditing Standards (GAAS)
GAGAS incorporates AICPA GAAS by reference for financial audits and adds government-specific requirements on top of those standards.
Question 2: A governmental auditor identifies a significant deficiency related to grant revenue recognition. Under GAGAS, the auditor is required to:
- Issue a separate audit report solely on this deficiency
- Communicate the deficiency in writing to management and those charged with governance (Correct answer)
- Withhold the audit opinion until the deficiency is corrected
- Report the deficiency only if it rises to the level of a material weakness
Correct answer: Communicate the deficiency in writing to management and those charged with governance
GAGAS requires auditors to communicate significant deficiencies and material weaknesses in writing to management and those charged with governance.
Question 3: Under the Single Audit Act, entities that expend $750,000 or more in federal awards must have a Single Audit performed. The primary purpose of this audit is to:
- Replace the entity's annual financial audit
- Assess compliance with federal program requirements and related internal controls (Correct answer)
- Evaluate the efficiency of government programs
- Determine whether federal funds were spent cost-effectively
Correct answer: Assess compliance with federal program requirements and related internal controls
The Single Audit focuses on compliance with requirements applicable to each major federal program and the internal controls over compliance.
Question 4: Which risk is MOST associated with the control environment component of COSO in a governmental entity?
- Failure to reconcile subsidiary ledgers monthly
- Lack of ethical tone from elected officials and senior management (Correct answer)
- Inadequate IT access controls
- Insufficient physical safeguards over assets
Correct answer: Lack of ethical tone from elected officials and senior management
The control environment is shaped by the integrity, ethical values, and tone set by leadership, making ethical tone the primary risk factor.
Question 5: A performance audit of a state highway department finds that construction projects are consistently completed over budget. According to GAGAS, this finding should include an assessment of:
- Financial statement accuracy only
- Compliance with procurement laws only
- Economy, efficiency, and effectiveness of program operations (Correct answer)
- Internal control deficiencies only
Correct answer: Economy, efficiency, and effectiveness of program operations
Performance audits under GAGAS evaluate economy, efficiency, and effectiveness, making program outcomes and resource utilization central to findings.
Question 6: An auditor performing a compliance audit of a federal grant program identifies a questioned cost. This means the cost is:
- Definitely ineligible for federal reimbursement
- Questioned by the auditor due to an exception or lack of documentation, pending resolution (Correct answer)
- Subject to immediate refund to the federal agency
- A fraud indicator requiring referral to law enforcement
Correct answer: Questioned by the auditor due to an exception or lack of documentation, pending resolution
A questioned cost is one the auditor questions because of an audit finding, but it may ultimately be allowed after resolution with the federal agency.
Question 7: Which internal control procedure is MOST effective at detecting unauthorized journal entries in a governmental accounting system?
- Pre-numbered purchase orders
- Supervisory review and approval of journal entries (Correct answer)
- Physical inventory counts
- Dual signatures on checks
Correct answer: Supervisory review and approval of journal entries
Supervisory review and approval of journal entries is a detective control specifically designed to identify unauthorized or erroneous adjustments.
GAC Internal Controls & Auditing in Governmental Entities 3
The Government Accountability Office (GAO) issues auditing standards known as GAGAS.
For financial audits of governmental entities, GAGAS incorporates and adds to which other standards?