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Chapter 21 - Internal, Operational, and Compliance Auditing

Chapter 21
Internal, Operational, and Compliance Auditing
True / False Questions

1. The work of internal auditors is primarily for the benefit of management and the board of
directors.
True False

2. The first internal auditors were primarily concerned with operational auditing.
True False

3. The passage of the Foreign Corrupt Practices Act increased the demand for internal
auditing.
True False

4. Evaluation of internal control is one of the general sections of the IIA's Standards of the
Professional Practice of Internal Auditing.
True False

5. In operational auditing, the preliminary survey serves as a guide for the development of the
audit program.
True False

6. When no weaknesses in internal control are discovered during an operational audit, the
appropriate report will be either standard unqualified or unqualified with explanatory
language.
True False

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Chapter 21 - Internal, Operational, and Compliance Auditing

7. Operational audits are primarily concerned with whether an organization follows


appropriate laws and regulations.
True False

8. Compliance procedures are tests of an organization's controls.


True False

9. In an audit in accordance with Government Auditing Standards, the auditors are required to
perform additional compliance procedures beyond those required by generally accepted
auditing standards.
True False

10. In an audit in accordance with the Single Audit Act of 1984, the auditors must test
compliance with the significant requirements of all major programs.
True False

Multiple Choice Questions

11. When auditing an entity's financial statements in accordance with Government Auditing
Standards (the "Yellow Book"), an auditor is required to report on:
I. Noteworthy accomplishments of the program.
II. The scope of the auditor's testing of internal controls.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

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Chapter 21 - Internal, Operational, and Compliance Auditing

12. When auditing an entity's financial statements in accordance with Government Auditing
Standards (the "Yellow Book"), an auditor is required to report on:
I. Recommendations for actions to improve operations.
II. The scope of the auditor's tests of compliance with laws and regulations.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

13. A comprehensive examination of an operating unit or a complete organization to evaluate


its systems, controls, and performance, as measured by management's objectives is called
a(an):
A. Compilation.
B. Consultation.
C. Operational Audit.
D. "Yellow Book" audit.

14. An audit in accordance with the Single Audit Act does not involve reporting upon:
A. Compliance with provisions of laws that may have a direct and material affect on each
major federal financial assistance program.
B. Financial statements.
C. Internal control over operations.
D. Schedule of expenditures of federal awards.

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Chapter 21 - Internal, Operational, and Compliance Auditing

15. Under the Single Audit Act, the auditor must apply procedures to test for compliance and
test the effectiveness of controls for:

A. Option A
B. Option B
C. Option C
D. Option D

16. Internal auditing is considered to be part of an organization's:


A. Accounting system.
B. Control activities.
C. Monitoring.
D. External controls.

17. Which of the following is not one of the attribute standards of the IIA's Standards for the
Professional Practice of Internal Auditing?
A. Independence and objectivity.
B. Outsourcing.
C. Proficiency and professional care.
D. Purpose, authority, and responsibility.

18. Which of the following is not required of an individual seeking to become a certified
internal auditor?
A. Two years work experience in internal auditing or its equivalent.
B. Successful completion of a two-day examination.
C. A baccalaureate degree from an accredited college.
D. One year of supervisory experience.

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Chapter 21 - Internal, Operational, and Compliance Auditing

19. For the highest degree of independence the director of internal auditing should report
directly to:
A. The controller.
B. The audit committee of the board of directors.
C. The executive vice-president.
D. The chief accountant.

20. The operational auditors' preliminary conclusions about potential problem areas are
summarized as:
A. The definition of purpose.
B. The audit program.
C. The preliminary survey.
D. The audit report.

21. A legal aid society provides free legal aid to low-income individuals with funds passedthrough the state welfare department from the U.S. Department of Health and Human
Services. In this situation, which organization is the primary recipient of the funds?
A. The state welfare department.
B. The Department of Health and Human Services.
C. The legal aid society.
D. The individual receiving the aid.

22. In an audit in accordance with Government Auditing Standards, the auditors are required
to provide a report on:
A. Compliance with general requirements.
B. The schedule of financial assistance received.
C. The organization's internal control.
D. Findings and questioned costs.

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Chapter 21 - Internal, Operational, and Compliance Auditing

23. Which of the following types of audits is designed to determine that an organization has
complied with the specific requirements of major financial assistance programs?
A. An audit in accordance with Government Auditing Standards.
B. A single audit.
C. An audit in accordance with generally accepted auditing standards.
D. An operational audit.

24. Compliance auditing procedures are:


A. Tests of controls.
B. Observation procedures.
C. Substantive procedures.
D. Confirmation procedures.

25. In an audit in accordance with Government Auditing Standards, the auditors are required
to provide a report on:
A. Compliance applicable to major federal programs.
B. The Schedule of financial assistance received.
C. Compliance with laws and regulations which are required to be tested by generally
accepted auditing standards.
D. Internal control systems used in administering federal assistance programs.

26. In an audit in accordance with generally accepted auditing standards, the auditors must
test compliance with those laws and regulations that:
A. Have a direct and material effect on the financial statements.
B. Have a direct and material effect on major federal programs.
C. Have a material direct or indirect effect on the financial statements.
D. Have a material effect on major or nonmajor programs.

27. Requirements of federal financial assistance programs that involve significant national
policy are known as:
A. Specific requirements.
B. Major program requirements.
C. General requirements.
D. Primary requirements.

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Chapter 21 - Internal, Operational, and Compliance Auditing

28. Costs paid with federal assistance that appear to be in violation of a law or regulation are
known as:
A. Questioned costs.
B. Noncompliance costs.
C. Improper costs.
D. Illegal costs.

29. When performing an audit of a city in accordance with the Single Audit Act, an auditor
should adhere to:
A. Standards for the Professional Practice of Internal Auditing.
B. Government Auditing Standards.
C. Operational Auditing Standards.
D. Financial Accounting Standards.

30. A primary purpose of operational auditing standards is to provide:


A. A means of assurance that internal control is operating effectively.
B. Aid to the independent auditor in conducting the audit of financial statements.
C. The results of internal examinations of financial and accounting matters to the company's
top-level management.
D. A measure of management performance in meeting organizational goals.

31. The primary purpose of the internal auditors' evaluation of internal control is to:
A. Determine if management has planned and implemented activities needed to attain goals
and objectives.
B. Determine the extent of tests of controls needed during field work.
C. Identify areas for fraud investigation.
D. Determine if employees have incompatible duties that have compromised the control
environment.

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Chapter 21 - Internal, Operational, and Compliance Auditing

32. According to the IIA's Standards, an internal auditor's working papers should be reviewed
by the:
A. Management of the department being audited.
B. Management of the internal auditing department.
C. Audit committee of the board of directors.
D. Management of the organization's security division.

33. Management is beginning to take corrective action on personnel department deficiencies


reported during the last internal audit. According to the IIA's Standards, the internal auditor
should:
A. Oversee the corrective action.
B. Postpone the next audit of the personnel department until the corrective action is
completed.
C. Refrain from judging whether the corrective action will remedy the deficiencies.
D. Follow up to see that the corrective action satisfies the audit recommendations.

34. The internal auditing department provides information about control and quality of
performance to:
A. Management and the board of directors.
B. A level in the organization sufficient to ensure acceptance of all recommendations.
C. Outside agencies for regulatory and financial compliance.
D. Any member of the organization upon request.

35. The GAO standards of reporting for governmental financial audits incorporate the AICPA
standards of reporting and prescribe supplemental standards to satisfy the unique needs of
governmental audits. Which of the following is a supplemental reporting standard for audits
in accordance with Government Auditing Standards?
A. A report on the entity's internal control.
B. Material indications of illegal acts should be reported in a document with distribution
restricted to senior officials of the entity audited.
C. Instances of abuse, fraud, mismanagement, and waste should be reported to the
organization with legal oversight authority over the entity audited.
D. All privileged and confidential information discovered should be reported to the senior
officials of the organization that arranged for the audit.

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Chapter 21 - Internal, Operational, and Compliance Auditing

36. Kent is auditing an entity's compliance with requirements governing a major federal
financial assistance program in accordance with the Single Audit Act. Kent detected
noncompliance with requirements that have a material effect on that program. Kent's report on
compliance should express a(an):
A. Unqualified opinion with a separate explanatory paragraph.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Limited assurance on the items tested.

37. The scope of an internal audit is initially defined by the:


A. Audit objectives.
B. Scheduling and time estimates.
C. Preliminary survey.
D. Audit program.

38. An operational audit report which deals with the scrap disposal function in a
manufacturing company is most likely to address:
A. The efficiency and effectiveness of the scrap disposal function and include any findings
requiring corrective action.
B. Whether the scrap material inventory is reported as a current asset.
C. Whether the physical inventory count of the scrap material agrees with the recorded
amount.
D. Whether the scrap materials inventory is valued at the lower of cost or market.

39. Interviewing operating personnel, identifying the objectives of the auditee, identifying
standards used to evaluate performance, and assessing the risk inherent in the auditee's
operations are activities typically performed in which phase of an internal audit?
A. The fieldwork phase.
B. The preliminary survey phase.
C. The audit programming phase.
D. The reporting phase.

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Chapter 21 - Internal, Operational, and Compliance Auditing

40. In governmental accounting, emphasis is placed on:


A. Total assets owned by the governmental entity.
B. Generating income form funds employed.
C. Expenditures of funds.
D. The flow of funds through the income statement.

41. Which of the following best describes the scope of internal auditing as it has developed to
date?
A. Internal auditing involves appraising the economy and efficiency with which resources are
employed.
B. Internal auditing involves evaluating compliance with policies, plans, procedures, laws,
and regulations.
C. Internal auditing has evolved to verifying the existence of assets and reviewing the means
of safeguarding assets.
D. Internal auditing has evolved to more of an operational orientation from a financial
orientation.

42. In planning an operational audit, an on-site survey could assist with all of the following,
except:
A. Obtaining auditee comments and suggestions on control problems.
B. Obtaining preliminary information on internal control.
C. Identifying areas for audit emphasis.
D. Evaluating the effectiveness of the internal control.

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Chapter 21 - Internal, Operational, and Compliance Auditing


Essay Questions

43. Governmental entities and other recipients of governmental financial assistance,


depending upon the circumstances, may be subject to an audit in accordance with Generally
Accepted Auditing Standards (GAAS audit), Government Auditing Standards (GAS audit)
and the Federal Single Audit Act (Single Audit Act audit). Place an X by proper reports issued
by auditors for each of these audits on the following:

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Chapter 21 - Internal, Operational, and Compliance Auditing

44. Internal auditors are an important part of the internal control structures of all types of
organizations.
a. Describe the objectives of an internal auditing function.
b. Explain two ways that internal auditors may maintain independence with respect to the
activities that they audit.

45. Operational auditing has grown in importance over the last few decades.
a. Define operational auditing.
b. Who are the major users of operational audit reports?
c. List the phases of an operational audit.

46. Many government and nonprofit organizations are required to have an audit in accordance
with Government Auditing Standards.
a. Who develops Government Auditing Standards?
b. Describe the requirements of an audit in accordance with Government Auditing Standards.
c. Describe the auditors' responsibilities for testing for compliance with laws and regulations
in an audit in accordance with Government Auditing Standards.

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Chapter 21 - Internal, Operational, and Compliance Auditing

Chapter 21 Internal, Operational, and Compliance Auditing Answer Key

True / False Questions

1. The work of internal auditors is primarily for the benefit of management and the board of
directors.
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 21-01 Describe the functions performed by internal auditors.
Topic: Internal Auditing

2. The first internal auditors were primarily concerned with operational auditing.
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-01 Describe the functions performed by internal auditors.
Topic: Internal Auditing

3. The passage of the Foreign Corrupt Practices Act increased the demand for internal
auditing.
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Remember
Difficulty: Easy
Learning Objective: 21-01 Describe the functions performed by internal auditors.
Topic: Internal Auditing

21-13

Chapter 21 - Internal, Operational, and Compliance Auditing

4. Evaluation of internal control is one of the general sections of the IIA's Standards of the
Professional Practice of Internal Auditing.
FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-02 Describe the internal auditors' role with respect to the Sarbanes-Oxley Act.
Topic: Internal Auditing

5. In operational auditing, the preliminary survey serves as a guide for the development of the
audit program.
TRUE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Topic: Operational Auditing

6. When no weaknesses in internal control are discovered during an operational audit, the
appropriate report will be either standard unqualified or unqualified with explanatory
language.
FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Topic: Operational Auditing

21-14

Chapter 21 - Internal, Operational, and Compliance Auditing

7. Operational audits are primarily concerned with whether an organization follows


appropriate laws and regulations.
FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Topic: Operational Auditing

8. Compliance procedures are tests of an organization's controls.


FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-05 Distinguish among the various types of compliance audits.
Topic: Compliance Auditing

9. In an audit in accordance with Government Auditing Standards, the auditors are required to
perform additional compliance procedures beyond those required by generally accepted
auditing standards.
FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-15

Chapter 21 - Internal, Operational, and Compliance Auditing

10. In an audit in accordance with the Single Audit Act of 1984, the auditors must test
compliance with the significant requirements of all major programs.
TRUE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

Multiple Choice Questions

11. When auditing an entity's financial statements in accordance with Government Auditing
Standards (the "Yellow Book"), an auditor is required to report on:
I. Noteworthy accomplishments of the program.
II. The scope of the auditor's testing of internal controls.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Source: AICPA
Topic: Compliance Auditing

21-16

Chapter 21 - Internal, Operational, and Compliance Auditing

12. When auditing an entity's financial statements in accordance with Government Auditing
Standards (the "Yellow Book"), an auditor is required to report on:
I. Recommendations for actions to improve operations.
II. The scope of the auditor's tests of compliance with laws and regulations.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Source: AICPA
Topic: Compliance Auditing

13. A comprehensive examination of an operating unit or a complete organization to evaluate


its systems, controls, and performance, as measured by management's objectives is called
a(an):
A. Compilation.
B. Consultation.
C. Operational Audit.
D. "Yellow Book" audit.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-05 Distinguish among the various types of compliance audits.
Topic: Compliance Auditing

21-17

Chapter 21 - Internal, Operational, and Compliance Auditing

14. An audit in accordance with the Single Audit Act does not involve reporting upon:
A. Compliance with provisions of laws that may have a direct and material affect on each
major federal financial assistance program.
B. Financial statements.
C. Internal control over operations.
D. Schedule of expenditures of federal awards.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

15. Under the Single Audit Act, the auditor must apply procedures to test for compliance and
test the effectiveness of controls for:

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-18

Chapter 21 - Internal, Operational, and Compliance Auditing

16. Internal auditing is considered to be part of an organization's:


A. Accounting system.
B. Control activities.
C. Monitoring.
D. External controls.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-01 Describe the functions performed by internal auditors.
Topic: Internal Auditing

17. Which of the following is not one of the attribute standards of the IIA's Standards for the
Professional Practice of Internal Auditing?
A. Independence and objectivity.
B. Outsourcing.
C. Proficiency and professional care.
D. Purpose, authority, and responsibility.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-02 Describe the internal auditors' role with respect to the Sarbanes-Oxley Act.
Topic: Internal Auditing

21-19

Chapter 21 - Internal, Operational, and Compliance Auditing

18. Which of the following is not required of an individual seeking to become a certified
internal auditor?
A. Two years work experience in internal auditing or its equivalent.
B. Successful completion of a two-day examination.
C. A baccalaureate degree from an accredited college.
D. One year of supervisory experience.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-03 Identify the standards for the professional practice of internal auditing.
Topic: Internal Auditing

19. For the highest degree of independence the director of internal auditing should report
directly to:
A. The controller.
B. The audit committee of the board of directors.
C. The executive vice-president.
D. The chief accountant.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 21-03 Identify the standards for the professional practice of internal auditing.
Topic: Internal Auditing

21-20

Chapter 21 - Internal, Operational, and Compliance Auditing

20. The operational auditors' preliminary conclusions about potential problem areas are
summarized as:
A. The definition of purpose.
B. The audit program.
C. The preliminary survey.
D. The audit report.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Topic: Operational Auditing

21. A legal aid society provides free legal aid to low-income individuals with funds passedthrough the state welfare department from the U.S. Department of Health and Human
Services. In this situation, which organization is the primary recipient of the funds?
A. The state welfare department.
B. The Department of Health and Human Services.
C. The legal aid society.
D. The individual receiving the aid.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-21

Chapter 21 - Internal, Operational, and Compliance Auditing

22. In an audit in accordance with Government Auditing Standards, the auditors are required
to provide a report on:
A. Compliance with general requirements.
B. The schedule of financial assistance received.
C. The organization's internal control.
D. Findings and questioned costs.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

23. Which of the following types of audits is designed to determine that an organization has
complied with the specific requirements of major financial assistance programs?
A. An audit in accordance with Government Auditing Standards.
B. A single audit.
C. An audit in accordance with generally accepted auditing standards.
D. An operational audit.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-22

Chapter 21 - Internal, Operational, and Compliance Auditing

24. Compliance auditing procedures are:


A. Tests of controls.
B. Observation procedures.
C. Substantive procedures.
D. Confirmation procedures.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-05 Distinguish among the various types of compliance audits.
Topic: Compliance Auditing

25. In an audit in accordance with Government Auditing Standards, the auditors are required
to provide a report on:
A. Compliance applicable to major federal programs.
B. The Schedule of financial assistance received.
C. Compliance with laws and regulations which are required to be tested by generally
accepted auditing standards.
D. Internal control systems used in administering federal assistance programs.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-23

Chapter 21 - Internal, Operational, and Compliance Auditing

26. In an audit in accordance with generally accepted auditing standards, the auditors must
test compliance with those laws and regulations that:
A. Have a direct and material effect on the financial statements.
B. Have a direct and material effect on major federal programs.
C. Have a material direct or indirect effect on the financial statements.
D. Have a material effect on major or nonmajor programs.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

27. Requirements of federal financial assistance programs that involve significant national
policy are known as:
A. Specific requirements.
B. Major program requirements.
C. General requirements.
D. Primary requirements.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-24

Chapter 21 - Internal, Operational, and Compliance Auditing

28. Costs paid with federal assistance that appear to be in violation of a law or regulation are
known as:
A. Questioned costs.
B. Noncompliance costs.
C. Improper costs.
D. Illegal costs.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

29. When performing an audit of a city in accordance with the Single Audit Act, an auditor
should adhere to:
A. Standards for the Professional Practice of Internal Auditing.
B. Government Auditing Standards.
C. Operational Auditing Standards.
D. Financial Accounting Standards.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-25

Chapter 21 - Internal, Operational, and Compliance Auditing

30. A primary purpose of operational auditing standards is to provide:


A. A means of assurance that internal control is operating effectively.
B. Aid to the independent auditor in conducting the audit of financial statements.
C. The results of internal examinations of financial and accounting matters to the company's
top-level management.
D. A measure of management performance in meeting organizational goals.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Topic: Operational Auditing

31. The primary purpose of the internal auditors' evaluation of internal control is to:
A. Determine if management has planned and implemented activities needed to attain goals
and objectives.
B. Determine the extent of tests of controls needed during field work.
C. Identify areas for fraud investigation.
D. Determine if employees have incompatible duties that have compromised the control
environment.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-01 Describe the functions performed by internal auditors.
Source: IIA
Topic: Internal Auditing

21-26

Chapter 21 - Internal, Operational, and Compliance Auditing

32. According to the IIA's Standards, an internal auditor's working papers should be reviewed
by the:
A. Management of the department being audited.
B. Management of the internal auditing department.
C. Audit committee of the board of directors.
D. Management of the organization's security division.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-02 Describe the internal auditors' role with respect to the Sarbanes-Oxley Act.
Source: IIA
Topic: Internal Auditing

33. Management is beginning to take corrective action on personnel department deficiencies


reported during the last internal audit. According to the IIA's Standards, the internal auditor
should:
A. Oversee the corrective action.
B. Postpone the next audit of the personnel department until the corrective action is
completed.
C. Refrain from judging whether the corrective action will remedy the deficiencies.
D. Follow up to see that the corrective action satisfies the audit recommendations.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-03 Identify the standards for the professional practice of internal auditing.
Source: IIA
Topic: Internal Auditing

21-27

Chapter 21 - Internal, Operational, and Compliance Auditing

34. The internal auditing department provides information about control and quality of
performance to:
A. Management and the board of directors.
B. A level in the organization sufficient to ensure acceptance of all recommendations.
C. Outside agencies for regulatory and financial compliance.
D. Any member of the organization upon request.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Difficulty: Medium
Learning Objective: 21-03 Identify the standards for the professional practice of internal auditing.
Source: IIA
Topic: Internal Auditing

35. The GAO standards of reporting for governmental financial audits incorporate the AICPA
standards of reporting and prescribe supplemental standards to satisfy the unique needs of
governmental audits. Which of the following is a supplemental reporting standard for audits
in accordance with Government Auditing Standards?
A. A report on the entity's internal control.
B. Material indications of illegal acts should be reported in a document with distribution
restricted to senior officials of the entity audited.
C. Instances of abuse, fraud, mismanagement, and waste should be reported to the
organization with legal oversight authority over the entity audited.
D. All privileged and confidential information discovered should be reported to the senior
officials of the organization that arranged for the audit.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Source: AICPA
Topic: Compliance Auditing

21-28

Chapter 21 - Internal, Operational, and Compliance Auditing

36. Kent is auditing an entity's compliance with requirements governing a major federal
financial assistance program in accordance with the Single Audit Act. Kent detected
noncompliance with requirements that have a material effect on that program. Kent's report on
compliance should express a(an):
A. Unqualified opinion with a separate explanatory paragraph.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Limited assurance on the items tested.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Source: AICPA
Topic: Compliance Auditing

37. The scope of an internal audit is initially defined by the:


A. Audit objectives.
B. Scheduling and time estimates.
C. Preliminary survey.
D. Audit program.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Source: IIA
Topic: Operational Auditing

21-29

Chapter 21 - Internal, Operational, and Compliance Auditing

38. An operational audit report which deals with the scrap disposal function in a
manufacturing company is most likely to address:
A. The efficiency and effectiveness of the scrap disposal function and include any findings
requiring corrective action.
B. Whether the scrap material inventory is reported as a current asset.
C. Whether the physical inventory count of the scrap material agrees with the recorded
amount.
D. Whether the scrap materials inventory is valued at the lower of cost or market.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Source: IIA
Topic: Operational Auditing

39. Interviewing operating personnel, identifying the objectives of the auditee, identifying
standards used to evaluate performance, and assessing the risk inherent in the auditee's
operations are activities typically performed in which phase of an internal audit?
A. The fieldwork phase.
B. The preliminary survey phase.
C. The audit programming phase.
D. The reporting phase.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Source: IIA
Topic: Operational Auditing

21-30

Chapter 21 - Internal, Operational, and Compliance Auditing

40. In governmental accounting, emphasis is placed on:


A. Total assets owned by the governmental entity.
B. Generating income form funds employed.
C. Expenditures of funds.
D. The flow of funds through the income statement.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Source: IIA
Topic: Compliance Auditing

41. Which of the following best describes the scope of internal auditing as it has developed to
date?
A. Internal auditing involves appraising the economy and efficiency with which resources are
employed.
B. Internal auditing involves evaluating compliance with policies, plans, procedures, laws,
and regulations.
C. Internal auditing has evolved to verifying the existence of assets and reviewing the means
of safeguarding assets.
D. Internal auditing has evolved to more of an operational orientation from a financial
orientation.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Source: IIA
Topic: Operational Auditing

21-31

Chapter 21 - Internal, Operational, and Compliance Auditing

42. In planning an operational audit, an on-site survey could assist with all of the following,
except:
A. Obtaining auditee comments and suggestions on control problems.
B. Obtaining preliminary information on internal control.
C. Identifying areas for audit emphasis.
D. Evaluating the effectiveness of the internal control.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Source: IIA
Topic: Operational Auditing

21-32

Chapter 21 - Internal, Operational, and Compliance Auditing


Essay Questions

43. Governmental entities and other recipients of governmental financial assistance,


depending upon the circumstances, may be subject to an audit in accordance with Generally
Accepted Auditing Standards (GAAS audit), Government Auditing Standards (GAS audit)
and the Federal Single Audit Act (Single Audit Act audit). Place an X by proper reports issued
by auditors for each of these audits on the following:

*No such reports exist.

21-33

Chapter 21 - Internal, Operational, and Compliance Auditing


AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

44. Internal auditors are an important part of the internal control structures of all types of
organizations.
a. Describe the objectives of an internal auditing function.
b. Explain two ways that internal auditors may maintain independence with respect to the
activities that they audit.
a. Internal auditing is an independent, objective assurance and consulting activity designed to
add value and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.
b. The internal auditors maintain independence by:
Ensuring that the organizational status of the internal auditing department is sufficient to
permit the accomplishment of its objectives, and
Policies and procedures regarding the assignment of internal auditors to assignments.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 21-01 Describe the functions performed by internal auditors.
Learning Objective: 21-03 Identify the standards for the professional practice of internal auditing.
Topic: Internal Auditing

21-34

Chapter 21 - Internal, Operational, and Compliance Auditing

45. Operational auditing has grown in importance over the last few decades.
a. Define operational auditing.
b. Who are the major users of operational audit reports?
c. List the phases of an operational audit.
a. An operational audit is a comprehensive examination of an operating unit or a complete
organization to evaluate its performance, as measured by management's objectives. It focuses
on effectiveness, efficiency, and economy.
b. The major users of operational reports are top management, including the board of directors
and, especially in the case of governmental organizations, Congress.
c. The phases in an operational audit include:
Definition of purpose.
Familiarization.
Preliminary survey.
Program development.
Reporting the findings.
Follow-up.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-04 Explain the nature and the purpose of an operational audit.
Topic: Operational Auditing

21-35

Chapter 21 - Internal, Operational, and Compliance Auditing

46. Many government and nonprofit organizations are required to have an audit in accordance
with Government Auditing Standards.
a. Who develops Government Auditing Standards?
b. Describe the requirements of an audit in accordance with Government Auditing Standards.
c. Describe the auditors' responsibilities for testing for compliance with laws and regulations
in an audit in accordance with Government Auditing Standards.
a. The United States General Accounting Office (GAO) establishes Government Auditing
Standards.
b. The requirements of an audit in accordance with Government Auditing Standards include:
Perform audit procedures required by generally accepted auditing standards.
Increase emphasis on ethical principles related to public interest; integrity; objectivity;
proper use of government information, resources, and position; and professional behavior.
Communicate information about the nature of the audit and the level of assurance provided
to management, those charged with governance, appropriate oversight bodies requiring the
audits, those responsible for acting on audit findings, and others authorized to receive such
reports.
Consider the results of previous audits and follow-up on significant findings and
recommendations in prior-year audit reports.
Provide additional audit documentation.
Perform audit procedures to provide reasonable assurance of detecting material violations of
provisions of contracts and grants.
Issue written reports on compliance with laws and regulations and on internal control.
In some cases, report fraudulent or illegal acts directly to a government agency or another
third party.
c. Under Government Auditing Standards the auditors must perform test of compliance with
laws and regulations that have a direct and material effect on the financial statements--the
same as under generally accepted auditing standards.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 21-06 Describe the auditing and reporting requirements of Government Auditing Standards and the Single Audit Act.
Topic: Compliance Auditing

21-36