401 Exam 3

Front 1

T/F The AICPA's suite of risk assessment audit standards requires that auditors conduct a more rigorous assessment of the risk of material misstatement of the client's financial statements.

Back 1

TRUE
This is one of the requirements of the risk assessment standards, among others, discussed in Chapter 12. The risk assessment standards provide guidance to auditors in using a risk-based model for planning and executing audits.

Front 2

T/F The introductory paragraph of an audit report introduces the auditor and his/her background and qualifications to perform the auditor.

Back 2

FALSE
This item might seem to make sense. However, as explained in Chapter 12 the introductory paragraph identifies the financial statements being audited and indicates that the financial statements are the responsibility of management, not the auditor.

Front 3

T/F The scope paragraph of an audit report identifies the audit standards used in performing the audit and describes any limitations imposed on the audit.

Back 3

TRUE

Front 4

T/F The opinion paragraph of the independent auditor's standard report states the auditor's opinion that the financial statements are free of errors

Back 4

FALSE
The opinion paragraph, as explained in Chapter 12, only states the auditor's opinion that each opinion unit (i.e., columns of the financial statements) described in the report is fairly presented in conformity with GAAP.

Front 5

T/F Governments often engage one auditor to audit the primary government and other auditors to audit certain component units. In such cases the auditor of the primary government is permitted under generally accepted auditing standards (GAAS) to rely on the work of the other auditors.

Back 5

TRUE
Generally accepted auditing standards leave it to the principal auditor's judgment whether to rely on the other auditors' work and thus make no reference to the other auditor in the audit report or, alternatively, to refer to the other auditors in the report thus effectively disclaiming responsibility for any work of the other auditors.

Front 6

T/F Audits of governments' financial statements are performed to determine if the financial statements are fair and in accordance with generally accepted accounting principles, but not to determine if there is compliance with laws and regulations.

Back 6

FALSE
In audits of governments conducted in accordance with Government Auditing Standards (GAS) (the yellow book) must also include tests of compliance with laws and regulations. This question is also false for governments audited only under AICPA GAAS.

Front 7

T/F Generally accepted government auditing standards (GAGAS) apply to audits of state and local governments only if they expend $500,000 or more in federal financial assistance.

Back 7

FALSE
Although it is true that state and local governments that expend $500,000 or more in federal financial assistance are required to receive a single audit, all audits of federal grant and contract expenditures (even those less than $500,000 in amount) require the auditor to follow GAGAS.

Front 8

T/F The yellow book (i.e., GAGAS) independence standard prescribes two overarching principles—Auditors should not perform management functions or make management decisions and auditors should not audit their own work or provide nonaudit services in situations where the nonaudit services are significant to audit subject matter.

Back 8

TRUE
These are the two overarching principles stated in Chapter 12 of the text.

Front 9

T/F Performance audits provide an auditor's independent assessment of the performance and the management of an entity, program, service, or activity against objective criteria.

Back 9

TRUE
This is the definition given in Chapter 12 of the text

Front 10

T/F Only state and local governments and their component units must have single audits; colleges and universities and other not-for-profit organizations that expend federal financial awards are not required to have single audits.

Back 10

FALSE
The Single Audit Act Amendments of 1996 and OMB Circular A-133 require single audits of all colleges and universities and other not-for-profit organizations that expend $500,000 or more in federal financial awards, in addition to state and local governments. OMB Circular A-133 extended the single audit requirement to colleges and universities and not-for-profit organizations beyond the Single Audit Act of 1984 which covered only state and local governments.

Front 11

T/F In evaluating an entity's system of internal controls a significant deficiency is a deficiency in the design or operation of internal controls of such magnitude that the internal control components do not reduce the risk of detection or prevention of material misstatement to an acceptably low level.

Back 11

FALSE
The definition given in the statement above is for a material weakness, which is a significant deficiency of such high magnitude that it creates an unacceptably high level of risk.

Front 12

T/F In auditing compliance with laws and regulations as part of a single audit, the auditor must render an opinion on the specific requirements applicable to each program for which the entity receives federal financial assistance.

Back 12

FALSE
The auditor is required to render an opinion on specific compliance requirements for major programs (as defined in Illustration 12-9 of the text) that are selected using a risk-based approach. Not all programs are audited.

Front 13

T/F Though used historically by corporate boards of directors, audit committees have great potential in a government setting to improve the quality of financial reporting through the audit process.

Back 13

TRUE
When properly organized and utilized an audit committee of a government can strengthen the stewardship function of the governing board, improve communication between the auditor and responsible officials, and enhance the auditor's independence by serving as an objective buffer between the auditor and management.

Front 14

T/F Under current accounting and reporting standards nongovernmental, not-for-profit organizations (NPOs) must utilize the fund accounting structure set forth in the AICPA Audit and Accounting Guide Not-for-Profit Organizations.

Back 14

FALSE
Most NPOs are nongovernmental in nature and are therefore subject to SFAS No. 116 on contributions and SFAS No. 117 on financial statement display. SFAS No. 117 neither requires nor precludes the use of fund accounting; however, many NPOs continue to voluntarily use fund accounting for internal management and accountability for restricted purposes, such as grants. The AICPA Audit and Accounting Guide on NPOs provides guidance for optional fund accounting.

Front 15

T/F A voluntary health and welfare organization (VHWO) is a type of NPO that depends primarily on charges for services as a source of revenue, rather than on contributions from the public at large and provides health and welfare services to the public for a nominal or no fee.

Back 15

FALSE
The definition of voluntary health and welfare organizations is one that depends primarily on contributions from the public at large and provides health and welfare services to the public for a nominal or no fee. These organizations are sometimes called human service organizations.

Front 16

T/F Not-for-profit organizations should be conservative and record pledges as support (contributions) only when received in cash.

Back 16

FALSE
NPOs that follow generally accepted accounting principles will use accrual accounting. Pledges should be recorded as receivables and support in the year received. An allowance should be established for estimated uncollectible pledges, if deemed necessary. Contribution revenue (i.e., support) should be reported in the statement of activities in the appropriate section, as a change in either unrestricted, temporarily restricted, or permanently restricted net assets.

Front 17

T/F Cash received by a nongovernmental NPO in year 1 that the donor stipulates is to cover operating expenses of the following year should be recognized as an "increase in temporarily restricted net assets" in year 1 and as "net assets released from restrictions" in year 2.

Back 17

TRUE
This approach results in matching the operating resources (net assets released from restrictions) and the related expenses that both affect unrestricted net assets in the same fiscal year, year 2. The contribution is reported in the statement of activities for year 1, under the caption "changes in temporarily restricted net assets." Year 2 will show a decrease in temporarily restricted net assets and an increase in unrestricted net assets in equal amounts.

Front 18

T/F Donated services should be recorded as contributions by a nongovernmental, not-for-profit organization if material, and if they meet the criteria set out in SFAS No. 116.

Back 18

TRUE
Donated services are recorded as contributions and as expenses only when the service is one that meets the SFAS No. 116 criteria discussed in Chapter 14 under the caption "Donated Materials and Services." Services must create or enhance nonfinancial assets (such as a carpenter constructing a building), or be provided by individuals possessing specialized skills that typically would need to be purchased if not provided by donations (e.g., accountants or lawyers).

Front 19

T/F SFAS No. 117 requires that support from special events, if related to the central ongoing and major activities of the organization, and related direct costs, be reported at their gross amounts in the statement of activities rather than reporting the special events support net of direct costs.

Back 19

TRUE
However, netting direct costs against special events support is permitted if the special events are of a peripheral or incidental nature.

Front 20

T/F Depreciation expense is reported in the statement of activities prepared by nongovernmental, not-for-profit organizations.

Back 20

TRUE
Depreciation expense is reported in the statement of activities and allocated among the program services and supporting services expense categories to which it applies, rather than reported as a separate item on its own line.

Front 21

T/F Supporting services expenses include fund-raising and management and general expenses that are not directly attributable to specific programs.

Back 21

TRUE

Front 22

T/F Contributions received in a prior period and restricted by the donor for construction of a building were reported as increases to "temporarily restricted net assets" in the period received. When the building is constructed in a subsequent period an NPO would report "contributions" for the amount released from restrictions.

Back 22

FALSE
The cost of the constructed building would be reported in the statement of activities as "net assets released from temporary restrictions," rather than again as "contributions." If it is the NPO's policy to consider all building and equipment acquisitions as temporarily restricted, then the restriction will be released over time as depreciation is recorded.

Front 23

T/F The statement of activities for an NPO must be prepared exactly as prescribed by the Financial Accounting Standards Board in SFAS No. 117.

Back 23

FALSE
SFAS No. 117 allows considerable discretion in presenting the statement of activities as long as changes in all three net asset classes are displayed: unrestricted, temporarily restricted, and permanently restricted.

Front 24

T/F The statement of financial position prepared by a nongovernmental NPO presents net assets in these categories: unrestricted; temporarily restricted; invested in capital assets, net of related debt; and permanently restricted.

Back 24

FALSE
Nongovernmental NPOs must report only the three net asset categories required by SFAS No. 117: unrestricted, temporarily restricted, and permanently restricted. The category of capital assets, net of related debt is found in governmental entities that follow GASB standards.

Front 25

T/F Expense amounts by natural classification can be determined from the statement of functional expenses, as can the expense amounts for program services and supporting services categories.

Back 25

TRUE
The statement of functional expenses provides totals both for natural expense classifications (object-of-expenses) and program services and supporting services classifications, although the statement is only required for VHWOs

Front 26

T/F NPOs are required to prepare a statement of cash flows.

Back 26

TRUE
A statement of cash flows is one of the basic financial statements required by SFAS No. 117 for all nongovernmental not-for-profit organizations and by GASBS 9 for governmental not-for-profit organizations that use proprietary fund accounting.

Front 27

T/F All not-for-profit organizations covered by the AICPA Audit and Accounting Guide Not-for-Profit Organizations are under the standards-setting jurisdiction of the FASB.

Back 27

FALSE

Front 28

T/F A statement of functional expenses is not required of all voluntary health and welfare organizations.

Back 28

FALSE
Other nongovernmental NPOs should show expenses by function, but do not need to prepare a statement of functional expenses.

Front 29

T/F Hospitals, colleges and universities, voluntary health and welfare organizations, and other not-for-profit organizations all follow the same standards for recognition of revenues and expenses.

Back 29

FALSE
Each of these organizations may have different standards for revenue and expense recognition, particularly if they are governmentally owned or affiliated. In fact, some public colleges and universities recognize expenditures, not expenses. It is true, however, that all nongovernmental entities of these types, those subject to FASB jurisdiction, report support, revenues, and expenses on a similar basis for external financial reporting purposes.

Front 30

T/F Donated materials are seldom recognized as a contribution and as an expense by a not-for-profit organization.

Back 30

FALSE
Although SFAS No. 116 criteria for recognizing revenue for donated materials are somewhat restrictive and limit the recognition of donated materials by not-for-profit organizations, many NPOs do report donated materials. Guidance in the AICPA Audit and Accounting Guide Not-for-Profit Organizations suggests that donated materials (gifts-in-kind) should be recorded as contributions and as expenses (supplies expense or cost of goods sold) at fair value on the date of the gift if an objective, clearly measurable basis for fair value can be established

Front 31

Donor-imposed restrictions must be clearly reflected in financial statements of not-for-profit organizations.

Back 31

TRUE
Not-for-profit organizations that prepare financial statements in conformity with FASB standards are required to report net assets in three categories: unrestricted, temporarily restricted, and permanently restricted

Front 32

T/F Investments should be recorded at cost, or in the case of donated investments, at fair value as of the date of the gift. On subsequent balance sheets investments should be marked to and reported at market value with the valuation method disclosed and consistently followed

Back 32

TRUE
SFAS No. 124 requires that investments be marked to fair value whenever financial statements are presented. Unrealized gains and losses are reported on the statement of activities. In general, the accounting treatment of investments is similar to that of for-profit organizations (under SFAS No. 115) and governmental entities (under GASBS 31) although differences do exist.

Front 33

T/F Museums and religious organizations must capitalize and report in their balance sheets assets such as works of art, historical treasures, historical archives, and similar collectible items if they are held for public inspection.

Back 33

FALSE
Current standards do not require balance sheet reporting of such collectible items that are held for public inspection since the conventional wisdom is that reporting a dollar value would not provide useful information to the readers of financial statements. NPOs can choose nonrecognition but only if the items are added to collections and meet SFAS No. 116 conditions explained in Chapter 14 under the heading "Collection Items", for example, when collections are being held in the public interest rather than to achieve a financial gain from trading the collectible items.

Front 34

T/F Nongovernmental (private) colleges and universities follow FASB standards; governmental (public) colleges and universities should follow GASB standards.

Back 34

TRUE
Since its formation in 1984 GASB has been responsible for setting financial reporting standards for government colleges and universities. FASB has responsibility for all others

Front 35

T/F Public colleges and universities are considered general purpose governments and are expected to be engaged in governmental activities only for purposes of their stand-alone reports

Back 35

FALSE
Public colleges and universities are considered special purpose governments, and most are expected to be engaged in business-type activities only. These public colleges and universities rely on tuition and fees, state appropriations, gifts and grants, income from auxiliary activities, and investment income to fund operations. Community colleges, and other colleges with the power to tax, may be engaged in both business-type and governmental activities.

Front 36

T/F Revenues and expenses of both public and private colleges and universities are accounted for on the accrual basis.

Back 36

TRUE
Under GASB standards public colleges and universities engaged only in business-type activities use accrual accounting, including capitalization and depreciation of capital assets. Private colleges and universities following SFAS No. 116 and SFAS No. 117 also use accrual accounting.

Front 37

T/F unrestricted gift that is subsequently designated by the board of regents of a public university for agricultural research would be recorded as an unrestricted contribution.

Back 37

TRUE
Resources designated for a particular operating purpose by the governing board should be reported as changes in unrestricted net assets; only donors external to the entity can restrict the use of resources such that the gift increases restricted net assets

Front 38

T/F Contributions or grants restricted by an external donor for a particular operating purpose would be reported as increases to restricted fund balances by a public college or university engaged only in business-type activities and as an addition to temporarily restricted net assets by a private college or university.

Back 38

FALSE
Public colleges and university would report a gift restricted by a donor as revenue—gifts, which would be closed to net assets—restricted at fiscal year-end. Restrictions are placed on net assets, not fund balances.

Front 39

T/F College summer school revenues of a public university engaged only in business-type activities should be recognized in the fiscal year in which the term is predominantly conducted.

Back 39

FALSE
Public colleges and universities should apply accrual accounting in recognizing tuition revenue for the percent of time appropriate to each fiscal year

Front 40

T/F Depreciation of a residence hall should be reported as an expense in a private college's operating statement but might not be reported in the operating statement of a public college engaged only in business-type activities.

Back 40

FALSE
GASB standards require public colleges to depreciate capital assets, other than land and certain other nondepreciable assets (i.e., infrastructure assets accounted for using the modified approach and noncapitalized collections).

Front 41

T/F An unrestricted endowment established by the governing board of a public college engaged only in business-type activities is considered a permanent fund and would be reported as unrestricted net assets.

Back 41

FALSE
A public college or university engaged only in business-type activities would not report a permanent fund. A public college or university reports resources designated as an endowment by the governing board as an increase in unrestricted net assets. These net assets are captioned as funds functioning as endowments. Restricted net assets only arise when donors external to the institution place restrictions on gifts.

Front 42

T/F Earnings on endowment investments may increase unrestricted or restricted net assets, or both.

Back 42

TRUE
The stipulations of the donor of endowment assets control the disposition of endowment revenue.

Front 43

T/F A receipt of a $500,000 gift by a private college which is stipulated by the donor to be used to endow a "chaired" professorship in accounting would be recorded as an increase in temporarily restricted net assets.

Back 43

FALSE
The term endowment indicates that the corpus of the gift is to remain intact in perpetuity, so this gift would increase permanently restricted net assets in a private college.

Front 44

T/F . The sale of bonds for construction of a college residence hall would always result in a credit to proceeds of bonds in the accounts.

Back 44

FALSE
The credit would be to bonds payable, not proceeds of bonds, in either private colleges and universities or public colleges and universities engaged only in business-type activities. However, if a public college or university is also engaged in governmental activities because it receives tax revenue, then it may credit proceeds of bonds in the same manner as governmental fund-types.

Front 45

T/F A statement of cash flows is required by GAAP for both private colleges and universities and public colleges and universities engaged in business-type activities.

Back 45

TRUE
Private colleges and universities are subject to FASB jurisdiction and required to provide a statement of cash flows using the direct or indirect method. Under GASB standards public colleges and universities engaged in business-type activities are required to present a statement of cash flows using the direct method only.

Front 46

T/F Private colleges and universities must provide aggregated entity-wide financial statements prepared in conformity with FASB Statement No. 117. Consequently, private colleges and universities no longer utilize fund accounting.

Back 46

FALSE
The first part of the statement is true; however, FASB standards neither require nor preclude the use of fund accounting. Many public and private colleges continue to use fund accounting for internal management and stewardship purposes.

Front 47

T/F . Public colleges and universities that use business-type reporting must present segment information in the notes to the financial statements.

Back 47

TRUE
GASB standards require reporting on segments for colleges and universities engaged in business-type transactions.