Chapter 19COMPLIANCE AND INTERNAL AUDITING MULTIPLE CHOICE 1.

Under generally accepted auditing standards, an auditor's responsibility to detect and report violations of laws and regulations is to a. Assess the risk that violations of laws and regulations may cause materially misstated financial statements and to design the audit accordingly. b. Report all violations of laws and regulations to the U.S. A!. c. "etect all violations of laws and regulations, including those that are neither direct nor material. d. #oordinate the search for violations of laws and regulations with all agencies from which the entity has received financial assistance. A$S% &. A

'n assessing whether management has overlooked relevant laws and regulations, the auditor performs all of the following e(cept a. !btains written representations from management. b. Reviews relevant portions of grant and loan agreements. c. #onfirms grant arrangements with granting agencies. d. "iscusses laws and regulations with the entity's chief financial officer and legal counsel. A$S% #

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*rogram audits performed for governmental entities include determining a. +he e(tent to which the desired results or benefits established by the legislature are being achieved. b. ,hether the entity is ac-uiring resources economically and efficiently. c. +he e(tent to which the financial statements are presented fairly. d. ,hether the entity has adhered with specific financial compliance re-uirements. A$S% A

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Under government auditing standards issued by the U.S. A!, a report on internal control should address all of the following e(cept a. +he entity's internal control categories. b. +he scope of the work performed in obtaining an understanding of the entity's internal controls. c. +he auditor's opinion on the appropriateness of the internal control in complying with future grants. d. "eficiencies in internal control not significant enough to be considered reportable conditions under SAS $o. /0, 1#ommunication of 'nternal #ontrol Structure Related 2atters $oted in an Audit.1 A$S% #

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+o provide for the greatest degree of independence in performing internal auditing functions, an internal auditor should report to the a. 4inancial vice5president. b. #orporate controller. c. 6oard of directors. d. #orporate stockholders. A$S% #

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,hich of the following activities is typically associated with operational auditing7 a. "etermining whether the financial statements are an accurate representation of the entity's operations. b. 8valuating the feasibility of attaining the entity's operational ob9ectives. c. 2aking recommendations for improving performance. d. Reporting on the entity's relative success in meeting profitability goals. A$S% #

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+he overall ob9ective of internal auditing is to a. "esign and implement an effective system of internal control. b. Assist the independent auditors in gathering evidence needed to form an opinion on the fairness of the financial statements. c. 8nsure that assets are properly accounted for and protected from loss or misuse. d. *rovide information to the board of directors and management. A$S% "

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Usually, an operational audit is performed a. 6y independent e(ternal auditors. b. 6y a team consisting of an e-ual number of e(ternal and internal auditors. c. !nly when an operating division is e(periencing declines in productivity or profitability.

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d. 6y internal auditors at the re-uest of top management or the board of directors. "

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'n a financial statement audit, the independent auditor would not utili=e the work of an internal auditor in a. !btaining an understanding of the system of internal control. b. +esting the effectiveness of specific controls. c. "etermining materiality. d. *erforming substantive tests. A$S% #

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'nternal audit reports a. Should only be issued by those auditors licensed as #*As. b. 2ay only be prepared by #'As. c. Are re-uired to be utili=ed by the e(ternal auditors in the performance of their work. d. Should conform to the Standards for the *rofessional *ractice of 'nternal Auditing. A$S% "

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!ne of the sources of guidance for e(ternal auditors performing compliance audits for federal government grants is a. +he *#A!6 standards. b. +he S8# regulations. c. +he A'#*A standards. d. >arious state regulations. A$S% #

1&. +he auditor?s responsibility for detecting violations of laws and regulations under SAS :., @#ompliance Auditing #onsiderations in Audits of overnmental 8ntities and Recipients of overnmental 4inancial Assistance,A is a. 'dentical to the responsibility to detect errors, fraud, and illegal acts. b. 2ore than the responsibility to detect errors, fraud, and illegal acts. c. Bess than the responsibility to detect errors, fraud, and illegal acts. d. "etermined for each individual engagement. A$S% 1). A

,hen performing a compliance audit, a. +he auditor assesses whether management has identified laws and regulations that have a direct and material impact on the financial statements. b. +he auditor re-uests a confirmation from the agency?s outside attorney regarding possible violations of applicable laws and regulations. c. A management representation letter covering possible violations of applicable laws and regulations is presented to management of the agency. d. +he audit firm consults with its own legal counsel regarding the agency?s possible violations of applicable laws and regulations. A$S% A

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+he auditor is considering internal control for an agency undergoing a compliance audit. 2anagement?s awareness or lack of awareness of laws and regulations applicable to the agency is part of a. #ontrol activities. b. +he control environment. c. 2onitoring. d. Accuracy. A$S% 6

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+he client?s internal auditor reports directly to the #4!. 'nternal audit reports indicate that the system of internal control is functioning as it was designed to and that control risk is low. +he independent auditor will most likely a. 8liminate compliance testing. b. 'ncrease tests of controls. c. Retest all of the work tested in the samples chosen by the internal auditor. d. *lace some reliance on the internal auditor?s work. A$S% " !6C% DA'#*A A"A*+8"E

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1/. +he Fellow 6ook a. Supersedes AAS for compliance audits of federal governmental units. b. ,as adopted by the *#A!6 to serve as interim auditing standards. c. 2andates that the S8# set governmental audit standards for federal agencies. d. 's issued by the A!. A$S% "

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1:.'n relation to a financial statement audit for a business, a governmental financial audit a. 's less rigorous. b. *laces less emphasis on possible illegal acts. c. *laces more responsibility on the auditor. d. 's conducted in the same manner. A$S% 1;. #

'n a governmental financial audit, a report on internal control a. 's issued if reportable conditions are found. b. 2ust contain suggestions for improvements in the system. c. $otes that the auditor is responsible for the system of internal control. d. 's issued on all engagements. A$S% "

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+he Single Audit Act has reporting re-uirements that apply generally to a. 'ndividuals receiving benefits under Social Security. b. Agencies, which receive ten or more grants in a year. c. overnments receiving over G)00,000 in grant funds per year. d. State governments receiving over G)00,000 per year from the federal government. A$S% #

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!26 #ircular A51)), @Audits of States, Bocal overnments, and $on5profit !rgani=ations,A a. ,as issued by the U.S. !ffice of 2anagement and 6udget. b. 2andates that all states, local governments, and non5profit organi=ations have an audit. c. Bimits the authority of the federal government to impose additional audit re-uirements beyond that in the Single Audit Act. d. 's a regulation of the S8# applicable to states, local governments, and non5profit organi=ations. A$S% A

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+he 'nstitute of 'nternal Auditors has established all of the following e(cept a. A code of ethics for internal auditors. b. A professional certification program for internal auditors. c. A statute governing use of the certified internal auditor license. d. Auditing standards for the performance of internal audits. A$S% #

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'n considering the ob9ectivity of the internal auditors, the independent auditor a. #onsiders the organi=ation level to which internal auditors report. b. Reviews the -uality control program, which the internal audit activity has in place. c. 8(amines the information in the internal audit reports. d. #onsiders the -ualifications of the internal auditors. A$S% A !6C% DA'#*A A"A*+8"E

&).'n comparison to financial auditing, internal auditing is a. 2uch more restricted in the scope activities sub9ect to audit. b. An activity, which is more independent with respect to the entity under audit. c. 4ar broader in the scope of activities sub9ect to audit. d. 6etter able to provide an opinion on the fair presentation of the financial statements. A$S% &.. #

'n relation to e(ternal auditors, internal auditors a. +ypically provide a more overall opinion of the entire entity under audit. b. Are more likely to make recommendations for improvements in controls.

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c. d. Are more likely to be employed by entities outside of the client. Are less professional. 6

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,hich of the following is not an operational audit, which internal auditors might perform7 a. Huality control audit. b. 4inancial statement audit. c. 8nvironmental audit. d. Social responsibility audit. A$S% 6

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8(ternal auditors might consider the internal auditor?s work for which of these7 a. Setting the appropriate audit risk for the financial statements. b. "etermining financial statement materiality. c. Understanding internal control. d. "etermining planning detection risk for accounts payable. A$S% #

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,hich of the following statements relating to the independent auditor considering the procedures performed by the internal auditors is true7 a. 'nternal auditors are more independent than the e(ternal auditors. b. 'nternal auditors are employees whose work must be reviewed during substantive testing. c. +he work of internal auditors cannot be considered during the e(ternal audit. d. 'nternal auditors are employees of the client, but their work might be relied on. A$S% "

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,hich of the following tasks is most appropriate for the e(ternal auditors to delegate to the internal auditor7 a. "etermining the ade-uacy of the allowance for doubtful accounts. b. Selecting accounts receivable for confirmation based on risk factors. c. Assessment of the system of internal control for cash and long5term debt. d. Summari=ation of negative accounts receivable confirmation responses. A$S% "

&<.+he Fellow 6ook identifies three types of generally accepted governmental engagements. ,hich of the following is not one of the three7 a. *erformance audit. b. 4inancial audit. c. 'nternal audit. d. Attestation engagement. A$S% #

TRUE/FALSE 1. +he professional standards used by internal auditors are the Standards for the *rofessional *ractice of 'nternal Auditing. A$S% + +he professional standards used by internal auditors are the Standards for the *rofessional *ractice of 'nternal Auditing. &. +he internal auditor should report to the chief financial officer of the entity. A$S% 4 +he internal auditor should report to an organi=ational level above the levels auditedI this generally means the internal audit activity should report to the 6oard of "irectors. ). 'nternal auditing is a control functioning over all other controls. A$S% + 'nternal auditing is a control functioning over all other controls. .. +he S8# issues overnment Auditing Standards Dthe Fellow 6ookE. A$S% 4 +he A! publishes overnment Auditing Standards Dthe Fellow 6ookE.

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3. ,hen performing an audit of a governmental entity, the auditor follows the Fellow 6ook, but does not need to comply with AAS. A$S% 4 ,hen performing an audit of a governmental entity, the auditor follows the Fellow 6ook, as well as AAS. /.

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8conomy and efficiency audits assess the management of a governmental program against ob9ective criteria specified in the grant program. A$S% 4 *erformance audits assess the management of a governmental program against ob9ective criteria specified in the grant program.

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+he auditor in a governmental financial audit assumes more responsibility than the auditor of a financial audit for a business. A$S% + +he auditor in a governmental financial audit assumes more responsibility than the auditor of a financial audit for a business.

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'n a governmental financial audit, the auditor tests the client?s compliance with applicable laws and regulations. A$S% + 'n a governmental financial audit, the auditor tests the client?s compliance with applicable laws and regulations.

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'f the auditor does not detect reportable conditions in a governmental audit, a report on internal control is not issued. A$S% 4 +he auditor performing a governmental financial audit is re-uired to issue a report on internal control, regardless of whether reportable conditions were located.

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+he professional designation for internal auditors is the #hartered 'nternal Auditor. A$S% 4 +he professional certification for internal auditors is the #ertified 'nternal Auditor.

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