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What is the basis for determining materiality for financial audits?
A. The auditor sets a standard percentage for all entities by transaction class.
B. The auditor establishes materiality based on whether a misstatement would influence the judgement made by a reasonable user of the financial statements.
C. The auditee determines what is material based on their understanding of how the financial statements may be used by third parties.
D. The entity's main provider of resources typically sets materiality levels for financial reporting.
Answer: B
Explanation:
* Definition of Materiality:
* In financial audits, materiality is the threshold above which a misstatement or omission could influence the economic decisions of users of financial statements.
* Auditors consider theneeds of reasonable userswhen determining materiality, focusing on what would influence their decision-making.
* Explanation of Answer Choices:
* A. The auditee determines what is material: Incorrect. The auditor, not the auditee, is responsible for determining materiality.
* B. The auditor establishes materiality based on whether a misstatement would influence the judgment made by a reasonable user of the financial statements: Correct. This aligns with auditing standards, such as those in the Yellow Book and AICPA guidance.
* C. The entity's main provider of resources typically sets materiality levels: Incorrect.
Materiality is not determined by resource providers but by the auditor based on the needs of users.
* D. The auditor sets a standard percentage for all entities by transaction class: Incorrect.
Materiality varies depending on the entity and its financial circumstances.
:
GAO,Government Auditing Standards (Yellow Book).
AICPA,Auditing Standards - Materiality in Planning and Performing an Audit.
NEW QUESTION # 108
The Federal Credit Reform Act requires complex calculations, which are likely to include errors. This is an example of
A. audit risk.
B. detection risk.
C. inherent risk.
D. control risk.
Answer: C
Explanation:
Definition of Inherent Risk:
Inherent risk refers to the risk of material misstatement in financial statements or other reports due to the nature of the subject matter, without considering any controls in place. It arises from the complexity, judgment, or uncertainty involved in the underlying transactions or calculations.
Why This Is Inherent Risk:
* TheFederal Credit Reform Actrequires complex calculations to estimate loan subsidies, interest rates, and cash flows. These calculations inherently involve significant judgment and estimation, making them prone to errors. This is a classic example of inherent risk because the complexity exists regardless of controls.
Why Other Options Are Incorrect:
* A. Audit Risk:This refers to the overall risk that the auditor may issue an incorrect opinion. In this case, the issue is about the inherent complexity of the calculations, not the auditor's procedures.
* B. Control Risk:This is the risk that errors will not be prevented or detected due to weak internal controls. While control risk could contribute to misstatements, it is not the primary issue in this example.
* C. Detection Risk:This is the risk that auditors will not detect a misstatement. This risk relates to audit procedures, not the inherent complexity of the calculations.
References and Documents:
* GAO Yellow Book on Risk Assessment:Explains inherent risk in the context of government financial reporting.
* AICPA Standards on Audit Risk (AU-C 315):Highlights inherent risk as arising from the nature of transactions or subject matter.
NEW QUESTION # 109
The Parking Fund for a government entity has the following information in its Statement of Net Position.
Calculate the current ratio.
Total current assets$1,320
Total non-current assets$8,100
Total assets$9,420
Total current liabilities$ 810
Total non-current liabilities$ 360
Total liabilities$1,170
Total net position$8,250
A. 0.61
B. 1.14
C. 0.98
D. 1.63
Answer: D
Explanation:
What Is the Current Ratio?
* Thecurrent ratiomeasures an entity's ability to cover its short-term liabilities with its short-term assets.
The formula is: Current Ratio=Total Current AssetsTotal Current Liabilities ext{Current Ratio} = rac
{ ext{Total Current Assets}}{ ext{Total Current Liabilities}}
Current Ratio=Total Current LiabilitiesTotal Current Assets
Calculation:
* Total Current Assets = $1,320
* Total Current Liabilities = $810
Current Ratio=1,320810 ext{Current Ratio} = rac{1,320}{810}Current Ratio=8101,320 Current Ratio#1.
63 ext{Current Ratio} # 1.63Current Ratio#1.63
Why the Current Ratio Matters:
* A current ratio above 1 indicates that the entity has more current assets than current liabilities, suggesting good short-term liquidity.
Why Other Options Are Incorrect:
* A. 0.61, B. 0.98, C. 1.14:These values result from incorrect calculations or misinterpretations of the formula.
References and Documents:
* GAO Financial Analysis Guiderovides guidance on using the current ratio to assess liquidity.
* GASB Financial Reporting Requirements:Highlights the importance of liquidity measures in government financial statements.
NEW QUESTION # 110
In a performance aygit, due professional care is used to
A. determine scope.
B. obtain sufficient and competent evidence.
C. present the findings in accordance with GAAP.
D. set materiality of financial statements.
Answer: B
Explanation:
* Performance Audit Overview:
* A performance audit focuses on evaluating the economy, efficiency, and effectiveness of government programs or activities.
* Due professional care is a requirement inGovernment Auditing Standards (Yellow Book), ensuring auditors perform their duties responsibly and with professional judgment.
* Key Requirement: Sufficient and Competent Evidence:
* Auditors must collect sufficient and reliable evidence to support their findings, conclusions, and recommendations. This is the cornerstone of "due professional care."
* Explanation of Answer Choices:
* A. Obtain sufficient and competent evidence: Correct. This ensures audit findings are supported by reliable, documented evidence.
* B. Determine scope: While part of audit planning, it is not directly related to due professional care.
* C. Set materiality of financial statements: This applies to financial audits, not performance audits.
* D. Present the findings in accordance with GAAP: GAAP is not a requirement for performance audits.
:
GAO,Government Auditing Standards (Yellow Book).
Association of Government Accountants (AGA),Performance Auditing Practices.
NEW QUESTION # 111
Who is responsible for resolving single audit findings?
A. the external auditors
B. the audit committee
C. the recipient agency
D. the awarding agency
Answer: C
Explanation:
* Responsibilities in Resolving Single Audit Findings:
* Single audits assess compliance with federal program requirements.
* Findings often highlight deficiencies or noncompliance issues that must be resolved by the entity receiving the federal funds.
* Explanation of Answer Choices:
* A. Awarding agency: The agency provides oversight and guidance but does not directly resolve findings.
* B. Recipient agency: Correct. The entity receiving the funds is responsible for addressing and resolving findings to comply with federal regulations.
* C. Audit committee: May oversee the process but doesn't take direct responsibility for resolving findings.
* D. External auditors: Identify the findings but do not resolve them.
:
Uniform Guidance (2 CFR Part 200),Single Audit Requirements.
Association of Government Accountants (AGA),Government Auditing Standards.
NEW QUESTION # 112
......
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rovides guidance on using the current ratio to assess liquidity.