ACCTG508 Test 3 exam with correct 100% answers 2024.

If a component unit is, in substance, a part of the primary government, its financial data should be reported: A) In a separate column from that of the primary government. B) By discrete presentation. C) By blending. D) All of the above are acceptable methods of - answer-C) By blending. (Feedback: If a component unit is, in substance, a part of the primary government, either because its governing board is substantially the same as the primary government or it provides services entirely or almost entirely to the primary government, its financial information should be reported in the same columns as that of the primary government. Such blended reporting applies to both the government-wide and fund financial statements.) The primary criterion considered in determining whether a potential component unit should be reported as part of the governmental reporting entity is: A) Financial interdependence. B) Financial accountability. C) Political responsibility. D) Taxing authority. - answer-B) Financial accountability. (Feedback: The primary criterion is financial accountability. In short, if the elected officials of the primary government are financially accountable for another organization (i.e., a component unit) that organization must be reported as part of the reporting entity.) Six of the nine members of the board of trustees of the Clinton Sewer District are appointed by the village council of Clinton and the council has the power to remove board members at its discretion. In addition, the village must approve any bond issues of the sewer district and is secondarily obligated to pay debt service on bonds recently issued by the district to construct a new sewage treatment plant, should sewage revenues be insufficient to make principal and interest payments. Based on the GAAP criteria for defining the reporting entity it would appear that: A) Financial data for the sewer district should be reported as part of the Village of Clinton reporting entity. B) The sewer district is financially dependent on the primary government. C) The village has the ability to impose its will on the sewer district. D) All of the above. - answer-D) All of the above. (Feedback: The fact situation described in this question indicates that the village council can impose its will on the sewer district board and that there is significant financial interdependency between the district and the village. Thus, there can be little doubt that the sewer district should be included in the reporting entity.) A majority of the members of the Jamestown library board are appointed by the city council of Jamestown, but the city council has no power to remove members for cause (removal requires a recall petition vote by voters of the Library District). The Library District is a separate legal entity. The library board has the power to levy its own property taxes and, with the approval of a majority of registered voters in the district, can issue tax-exempt bonds. Although the Library District must submit an informational copy of its annual budget to the city council, the council's approval is not required. The city has no obligation to subsidize the Library District's operations and has no obligation for its debt. The city has no claim on any financial resources of the Library District. Based on the GAAP criteria for defining the reporting entity it would appear that: A) The city council is able to impose its will on the Libr - answer-C) The Library District is not a component unit of the city reporting entity. (Feedback: Based on the facts presented, it would appear that the city is not financially accountable for the Library District. Thus, the Library District should not be included as part of the city's reporting entity.) Which of the following is correct regarding interim financial reports? A) Interim reporting is highly recommended for sound financial administration. B) GASB standards require quarterly reports. C) The Securities and Exchange Commission requires state or local governments with outstanding public debt to provide quarterly financial reports to bondholders. D) Both B and C are correct. - answer-A) Interim reporting is highly recommended for sound financial administration. (Feedback: Unless it is required by state law or local ordinances, interim reporting is left to the discretion of the government. However, without the use of periodic interim reports, it is hard to conceive how effective budgetary and financial control could be maintained.) The three sections of a comprehensive annual financial report (CAFR) prepared in conformity with GASB standards are the: A) MD&A, basic financial statements, and notes to the financial statements. B) Introductory, financial, and statistical sections. C) MD&A, financial, and statistical sections. D) Audit, MD&A, and the financial section. - answer-B) Introductory, financial, and statistical sections. (Feedback: Although governments are not required to prepare a CAFR, they are highly encouraged to do so. When they do prepare a CAFR, the prescribed sections are introductory, financial, and statistical.) Under GASB standards, the financial section of a comprehensive annual financial report (CAFR) includes: A) Basic financial statements that include both government-wide and fund financial statements. B) Combining statements and individual fund statements. C) Required supplementary information. D) All of the above. - answer-D) All of the above. (Feedback: All of the items listed above are required parts of the financial section of a CAFR.) Which of the following items is recommended for inclusion in the introductory section of a CAFR? A) Management's discussion and analysis (MD&A). B) Audit report. C) Letter of Transmittal. D) All of these items are recommended for inclusion in the introductory section. - answer-C) Letter of Transmittal. (Feedback: The MD&A and audit report are parts of the financial section of the CAFR. In fact, the MD&A is a part of the minimum requirements for external financial reporting. A letter of transmittal, table of contents, and other information at the discretion of management should be included in the introductory section. Information included in the introductory section should not duplicate what is reported in the MD&A.) Under the GASB reporting model, which of the following is not a basic financial statement? A) Schedule of revenues, expenditures, and changes in fund balance—budget and actual. B) Statement of activities. C) Statement of revenues, expenses, and changes in fund net position—proprietary funds. D) Statement of changes in fiduciary net position. - answer-A) Schedule of revenues, expenditures, and changes in fund balance—budget and actual. B) Statement of activities. C) Statement of revenues, expenses, and changes in fund net position—proprietary funds. D) Statement of changes in fiduciary net position. (Feedback: Budget to actual information is considered required supplementary material under the GASB reporting model. The fact that A is a schedule of revenues, expenditures and changes in fund balance is also an indication that this choice is not a financial statement.) Under the GASB reporting model, net position in the government-wide statement of net position should be divided into the categories of: A) Reserved, unrestricted—designated, unrestricted—undesignated. B) Net investment in capital assets, restricted, and unrestricted. C) Unrestricted, temporarily restricted, and permanently restricted. D) None of the above is correct. - answer-B) Net investment in capital assets, restricted, and unrestricted. (Feedback: The GASB reporting model segregates net position into the three categories: net investment in capital assets, amounts that have been restricted by contract or law, and amounts that are unrestricted and thus may be used at the discretion of management.) Which of the following is not a true statement regarding a management's discussion and analysis (MD&A) prepared by a state or local government? A) The MD&A should provide an overview of the government's financial activities and financial highlights. B) The MD&A should provide a narrative explanation of the contents of the CAFR. C) The MD&A should provide management's long-term forecast of the government's financial condition. D) The MD&A should describe the government's financial condition, financial trends of the government as a whole and of its major funds, budgetary highlights, and activities affecting capital assets and related debt. - answer-C) The MD&A should provide management's long-term forecast of the government's financial condition. (Feedback: Based on currently known facts, management should discuss economic factors and budget and tax rates for the next year. Long-term forecasts in the MD&A are not permitted by GASB standards.) Which of the following statements is true regarding the basic financial statements prepared for governmental funds in the GASBS reporting model? A) The governmental funds financial statements display totals for each fund type in separate columns. B) The governmental funds financial statements display financial information for each major governmental fund in separate columns and display the totals for all nonmajor governmental funds in a single column. C) The governmental fund financial statements are prepared using the accrual basis of accounting and the economic resources measurement focus. D) The governmental funds balance sheet reports general capital assets, net of depreciation, and general long-term liabilities. - answer-B) The governmental funds financial statements display financial information for each major governmental fund in separate columns and display the totals for all nonmajor governmental funds in a single column. (Feedback: The reporting model requires separate columns only for major funds. Choices C and D are incorrect since governmental funds report only current financial resources, using the modified accrual basis of accounting.) Which of the following best represents the format for the government-wide statement of activities? A) Function/program expenses - program revenues = net (expenses) revenues -/+ general revenues = change in net position. B) Operating expenses - operating revenues +/- nonoperating revenues (expenses) = change in net position. C) Operating revenues - operating expenses +/- nonoperating revenues (expenses) = change in net position. D) Program revenues - function expenses + general revenues = net change in position. - answer-A) Function/program expenses - program revenues = net (expenses) revenues -/+ general revenues = change in net position. (Feedback: The government-wide statement of activities format is a bit unusual in that it starts with function or program expenses and then adjusts expenses for the revenues specific to the function (program revenues) to arrive at a net expense or revenue. The net expense or revenue is than adjusted for general revenues (primarily tax revenues) to arrive at the change in net position. This format is shown in Illustration 9-4.) Among other categories, the statistical section of a CAFR prepared in conformity with GASB standards should provide 10-year trend information relating to: A) Financial information. B) Revenue capacity. C) Debt capacity. D) All of the above. - answer-D) All of the above. (Feedback: In addition to the three categories shown, 10-year trend information should be provided about demographic and economic information and operating information.) In preparing financial information to be reported in the Governmental Activities column of the government-wide statement of activities, depreciation expense is usually reported as: A) Part of the various program expenses. B) A separate line-item below the program expenses. C) A separate line-item below general revenues in the lower part of the statement. D) All of the above are permissible under GASB standards. - answer-A) Part of the various program expenses. (Feedback: Depreciation expense is usually allocated to the various program expense categories on some rational basis, such as floor space of a building occupied by particular functions or programs. This is illustrated in the adjusting entry shown on p. 364 of the text. Depreciation of assets that cannot rationally be allocated to some function or program may be reported on a separate line as indicated in Choice B. This option appears to be rare. Choice A is correct since this question asks how depreciation is usually reported.) The City of Bethel reported Net Investment in Capital Assets of $1,500,000 in the Governmental Activities column of its statement of net position dated December 31, 2013. Its post-closing trial balance prepared as of December 31, 2014, revealed the following amounts related to governmental activities: Capital assets (at cost): $9,600,000 Accumulated depreciation: $3,500,000 Bonds payable: $4,800,000 Revenue anticipation notes: $500,000 Assuming the bonds were issued in a prior year to acquire capital assets, what amount should the City of Bethel report as Net Investment in Capital Assets as of December 31, 2014? A) $6,100,000. B) $1,300,000. C) $800,000. D) $(200,000). - answer-B) $1,300,000. (Feedback: The amount net investment in capital assets as of December 31, 2014 is $1,300,000 ($9,600,000 - $3,500,000 - $4,800,000). This balance represents a $200,000 decrease from the prior period balance of $1,500,000.) Which of the following would be added to total fund balances in the governmental funds balance sheet to reconcile the amount to reported total net position, governmental activities, on the government-wide statement of net position? A) Capital assets used in governmental activities. B) Long-term liabilities reported in governmental activities. C) Accumulated depreciation on capital assets used in governmental activities. D) Both A and C would be added. - answer-A) Capital assets used in governmental activities. (Feedback: Under modified accrual, capital assets are not reported on the balance sheet; therefore, to adjust from modified accrual to accrual (statement of net position) the value of the capital asset accounts must be added. Since accumulated depreciation has the effect of decreasing the value of the capital assets it would be a deduction. Similarly, long-term liabilities are not reported on a modified accrual balance sheet; to adjust to an accrual statement of net position the value of the liabilities is deducted.) When reconciling the net change in fund balances on the statement of revenues, expenditures and changes in fund balances—governmental funds to the governmental activities change in net position on the government-wide statement of activities which of the following would be added? A) Depreciation expense for the year. B) The proceeds of new bond issuances. C) Repayment of long-term debt. D) Both A and B are correct statements. - answer-C) Repayment of long-term debt. (Feedback: Repayment of long-term debt reduces the fund balances of governmental funds but does not reduce net position at the government-wide level. To reconcile the two changes requires that debt service expenditures for repayment of long-term debt be added back to the changes in fund balances. Both A and B have the opposite effect; that is, those amounts would be subtracted from fund balances in reconciling to the change in net position. You can satisfy yourself that this is the case, using Illustration 9-8 as a guide.) A city has an ordinance passed by its city council indicating that resources received from a user charge can be used only for a specified purpose. Which of the following fund balance classifications would be used to report the resources related to the user charge? A) Restricted fund balance. B) Committed fund balance. C) Assigned fund balance. D) Unassigned fund balance. - answer-B) Committed fund balance. (Feedback: GASB states that when a formal action (ordinance) taken by the highest level decision makers (city council) of a government indicates resources can be used only for a specified purpose the funds are to be classified as committed. A is incorrect since restrictions can only be placed by external resource providers (e.g. donors or other governments). C is incorrect since the formal action taken in passing an ordinance is stronger than intent, the criterion imposed for assigning fund balances.) Which of the following fund balance classifications would be used by the city's permanent fund to report its endowment resources on its balance sheet? A) Restricted fund balance. B) Committed fund balance. C) Assigned fund balance. D) Nonspendable fund balance. - answer-D) Nonspendable fund balance. (Feedback: GASB states that amounts that are legally or contractually required to remain intact are to be reported as nonspendable. A permanent fund is required to maintain the principal of its endowments intact; therefore, the fund balance related to endowment assets should be reported as nonspendable.) Early warning systems to identify trends or practices that may adversely impact the long- and short-term solvency of a government are: A) Effective if they help decision makers assess solvency; i.e., cash solvency, budgetary solvency, long-run solvency, and service-level solvency. B) Used by government managers as well as credit analysts, oversight bodies, and other decision makers. C) As important today as it they were when the International City/County Management Association (ICMA) developed such a monitoring system in 1980. D) All of the above are true. - answer-D) All of the above are true. (Feedback: Government financial crises over the years led government managers, such as those in the ICMA, to develop tools to use to alert managers, credit analysts, city councils, and other decision makers to worrisome trends or practices that could negatively impact the long and short-term solvency of the government. There continue to be governments in financial crises today; consequently, the need for monitoring systems is as important as ever.) GASB defines the probability that a government will meet its financial and service obligations to various constituents, both currently and in the future, as: A) Economic condition. B) Fiscal capacity. C) Financial condition. D) Financial position. - answer-C) Financial condition. (Feedback: As discussed on p. 417, financial condition is defined more broadly than financial position by the GASB. While financial condition is considered only one of three components of economic condition according to GASB (p. 418).) The term used by the GASB to describe the short-term financial concept readily determined from the financial statements of governmental funds is: A) Economic condition. B) Financial position. C) Fiscal capacity. D) Financial condition. - answer-B) Financial position. (Feedback: A 1992 GASB Research Report describes financial position in this way as discussed on p. 417.) The GASB has tentatively decided to use of the term economic condition as a broad concept that includes all of the following components except: A) Financial condition. B) Fiscal capacity. C) Financial position. D) Service capacity. - answer-A) Financial condition. (Feedback: Economic condition is a term that would replace the term financial condition as it more broadly includes a government's willingness and ability to meet its financial obligations and its commitments to provide services (see p. 418 of the text).) Which type of solvency indicates a government's ability to generate enough revenue over a normal period to meet its expenditures and not incur deficits? A) Cash solvency. B) Budgetary solvency. C) Long-run solvency. D) Service-level solvency. - answer-B) Budgetary solvency. (Feedback: Choice B is the term that describes the government's ability over its budgetary period to ensure it does not run at a deficit. Choice A describes a government's ability over the short-run to pay its bills, in contrast to Choice C that looks over a longer horizon. Choice D is a term used to describe the government's ability to provide services at the level and quality that citizens desire.) The Financial Trend Monitoring System lists political culture, such as attitudes towards taxes, and the political process as examples of: A) Financial factors. B) Environmental factors. C) Organizational factors. D) Business factors. - answer-B) Environmental factors. (Feedback: Illustration 10-1 shows environmental factors, including political culture, on the far left of the diagram.) Condition of the capital plant, as measured by maintenance effort and capital outlay, is an example in the Financial Trend Monitoring System of: A) Financial factors. B) Environmental factors. C) Organizational factors. D) Management practices and legislative policies. - answer-A) Financial factors. (Feedback: Illustration 10-1 shows financial factors, such as condition of the capital plant, on the far right of the diagram.) Management practices and legislative policies of a government are: A) Critical determinants of its financial condition. B) Difficult to measure. C) Examples of organizational factors affecting financial condition. D) All of the above. - answer-D) All of the above. (Feedback: Illustration 10-1 presents management practices and legislative policies as organizational factors in the center of the diagram. The practices and policies of management and the governing body of an organization are critical in determining its financial condition, although difficult to measure.) An argument for presenting a comprehensive annual financial report (CAFR) in addition to the basic financial statements is: A) Generally accepted accounting principles require a CAFR to be prepared by governments. B) The complex nature of financial condition and lack of a "bottom-line" performance measure for governments makes all three sections of the CAFR useful for decision makers. C) Narrative information is always better than mere financial statements. D) The management's discussion and analysis included in a CAFR provides useful information not available in the basic financial statements or required supplementary information. - answer-B) The complex nature of financial condition and lack of a "bottom-line" performance measure for governments makes all three sections of the CAFR useful for decision makers. (Feedback: Answer B is the only correct statement. Answer A is incorrect because GAAP does not require a CAFR. Answer C is false for several reasons, one of which is financial statements do include narrative information in the form of note disclosures. Answer D is not correct because although the term "basic financial statements" used in the GASB standards does not include the MD&A, an MD&A is required supplementary information.) The use of benchmarks to aid interpretation of state and local government ratios for performance analysis can best be described as: A) More widespread for government-wide statements than for fund statements. B) Comparable across states as all local government structures are the same across the country. C) Most easily done by comparing one government to itself over time. D) Easy since data sources useful for comparing one government to its peers are readily available. - answer-C) Most easily done by comparing one government to itself over time. (Feedback: Choice C is best because presently there is a lack of comparable data across governmental entities, yet each government has its own historical data to serve as the basis for comparisons. Choice A is incorrect because accrual-based government-wide information available is relatively recent compared to fund financial information. The reason Choice B is not true should be obvious—there is quite a variety in types of governmental entities (e.g., counties, cities, townships, villages, school districts). Choice D is not correct because, as discussed on p. 433 in the text, there are no comprehensive benchmark values based on up-to-date financial data available for easy to use comparisons.) An advantage of government-wide financial statements required under the GASB reporting model is: A) Basic financial statements, such as the government-wide statements, use modified accrual accounting and focus on fiscal accountability. B) They show the revenues and expenditures for all governmental, business-type, and fiduciary activities. C) Fund financial statements do not use the accrual basis of accounting and as such are not useful. D) Questions not easily addressed with disaggregated fund financial statements can be answered. - answer-D) Questions not easily addressed with disaggregated fund financial statements can be answered. (Feedback: Choice D is the only right answer. Decision makers have two accrual-based government-wide financial statements that focus on the flow of total economic resources and provide information useful in analyzing the real cost of government services, the means of financing them, and the financial condition of the government as a whole. Choice A is not correct because the government-wide statements use the accrual basis of accounting and focus on economic resources. Choice B is incorrect because the government-wide statements do not report on fiduciary activities. Choice C is false because the proprietary funds do use the accrual basis of accounting.) For which of the following indicators is a low or decreasing value of the ratio associated with a stronger economic condition? A) The ratio of capital outlays to total operating expenditures. B) The ratio of net revenues to total expenses. C) The ratio of General Fund spendable fund balances to operating revenues. D) The ratio of debt to assessed property values. - answer-D) The ratio of debt to assessed property values. (Feedback: Answer D is the only one that is associated with a stronger economic condition as its value decreases. Decreasing values of the other choices signal a weaker economic condition of a government (see Illustrations 10-3 and 10-4).) For which of the following indicators is a trend of decreasing values for the ratio associated with a weaker economic condition? A) The ratio of one-time revenues to operating revenues. B) The ratio of pension obligations to salaries and wages. C) The ratio of revenues to debt principal and interest payments. D) The ratio of current liabilities to operating revenue. - answer-C) The ratio of revenues to debt principal and interest payments. Feedback: Answer C is the only one that is associated with a weaker economic condition as its value decreases. Decreasing values of the other choices signal a stronger economic condition of a government (see Illustrations 10-3 and 10-4). Which of the following items describes a measure of the change from the prior period in total net position of the government as a whole for governmental and business-type activities (BTA)? A) Total ending net position (governmental activities and BTA) less total beginning net position (governmental activities and BTA). B) Total revenue divided by total expenses. C) Unrestricted net position divided by total revenue. D) BTA service charge revenues divided by BTA total expenses. - answer-A) Total ending net position (governmental activities and BTA) less total beginning net position (governmental activities and BTA). (Feedback: The question relates to information reflected on the statement of net position of the government-wide statements for two years. Choices B, C, and D include components of the statement of activities and are not relevant to addressing the question asked (see Illustration 10-4).) Which ratio measures the degree to which the government's total assets have been funded with debt, indicating the extent of true ownership of government assets? A) Total revenues divided by total expenses. B) Total debt divided by total assets. C) Current assets divided by current liabilities. D) Total ending net position less total beginning net position. - answer-B) Total debt divided by total assets. (Feedback: Choice B is the only right answer as it relates total debt to total assets. Choice A refers to information from the statement of activities. Choices C and D are from the statement of net position but do not accurately measure the issue in the question. Choice D is not a ratio (see Illustration 10-4).) Which ratio measures the government's ability to meet its current financial obligations from available cash and equivalents? A) Total revenue divided by total expenses. B) Current assets divided by current liabilities. C) Business-type activities revenue divided by business-type activity expenses. D) Each revenue source divided by total revenue. - answer-B) Current assets divided by current liabilities. (Feedback: Choice B is a traditional ratio of working capital accounts from the statement of net position and is as relevant for government as it is for business entities. Choices A, C, and D relate to elements from the statement of activities, and, as such, do not reflect the obligations of a government.) A citizen watch group is concerned that the bond investors and lenders might try to take over and run the city. Which performance measure best addresses whether the government can pay its bond investors and lenders on time so the group's concerns are groundless? A) Debt service coverage. B) Liquidity. C) Financing margin. D) Self-sufficiency. - answer-A) Debt service coverage. (Feedback: Choice A is the best at addressing this specific question, although the ratios in Choices B, C, and D and those in Illustration 10-4 may also prove useful to a citizen watch group.) Which of the following is a true statement about information used by decision makers in evaluating governments' financial performance? A) Internal managers do not have access to as much information as do credit analysts. B) Internal managers have an informational advantage over credit analysts with respect to their own governments. C) Internal managers have an informational advantage over bond rating agency analysts with respect to benchmark information. D) None of the above statements are true. - answer-B) Internal managers have an informational advantage over credit analysts with respect to their own governments. (Feedback: As discussed on p. 434, internal managers have access to all information generated by the government for as far back as data have been retained; therefore, they have an advantage over credit analysts. However, credit analysts with bond rating agencies have access to data from thousands of entities whose bonds are rated or insured which puts them at an advantage with respect to benchmarking data about governments.) A composite reading of the financial health of a government can be useful for: A) Assisting decision makers to compare the government's financial health over time. B) Assisting government managers to compare its financial health to other governments. C) Credit analysts who are comparing a government's financial health to one another. D) All of the above are ways that a composite reading can be useful. - answer-D) All of the above are ways that a composite reading can be useful. (Feedback: As shown in Illustration 10-7, a tool that incorporates results of several ratios into a composite, which is then compared to a benchmark, can be very useful in tracking the change in government financial health over time and across entities.) A General Fund operating deficit as a percentage of operating revenues and transfers: A) Will be negative indicating that the budget will be out of balance. B) May be positive. C) May not indicate a problem if the total of spendable fund balances is adequate to cover the difference. D) None of the above. - answer-C) May not indicate a problem if the total of spendable fund balances is adequate to cover the difference. (Feedback: Illustration 10-5 shows that a negative percentage results when a General Fund operating deficit is divided by operating revenues and transfers for the year. However, the discussion in the description of this illustration suggests that this may not necessarily mean the budget will be out of balance if fund balances are used to cover the difference.) Financial statements of governmental and not-for-profit entities are: A) The representations of the officials responsible for the financial management of the entity. B) The representation of the financial position of the entity as prepared by the auditor. C) Always accompanied by the report of an independent auditor. D) The product of the audit. - answer-A) The representations of the officials responsible for the financial management of the entity. (Feedback: Financial statements are not the product of an audit (Choice D) or the representation of the auditor (Choice B), rather they are the responsibility of the entity's management, as indicated in the first paragraph of an audit report. Answer C is not correct because financial statements may not be required to be audited.) The Sarbanes-Oxley Act of 2002 A) Has no effect on governmental or not-for-profit organizations. B) Includes best practices relating to audit committees and internal controls that can be adapted by governments and not-for-profit organizations. C) Applies equally to governments, not-for-profit organizations and businesses. D) None of the above statements are true. - answer-B) Includes best practices relating to audit committees and internal controls that can be adapted by governments and not-for-profit organizations. (Feedback: As discussed on p. 480, there are many provisions of the Sarbanes-Oxley Act of 2002 that provide best practice ideas for governments and not-for-profit organizations.) The authoritative literature that is second only to GASB statements and interpretations in the hierarchy of generally accepted accounting principles (GAAP) for state and local governments is: A) AICPA Practice Bulletins. B) GASB Implementation Guides with Questions and Answers. C) Statements of GASB's Emerging Issues Task Force. D) AICPA Industry Audit and Accounting Guides. - answer-D) AICPA Industry Audit and Accounting Guides. (Feedback: The AICPA Audit and Accounting Guide State and Local Governments is category (b) GAAP as shown in Illustration 11-4. AICPA Practice Bulletins are category (c). Implementation Guides with "Q&As" prepared by GASB staff are category (d), and at the present time, the GASB does not have an Emerging Issues Task Force. Even so, an Emerging Issues Task Force would not issue a "statement.") The primary objective of a financial audit of a governmental or not-for-profit entity by an independent auditor is to provide assurance that: A) The entity is effectively accomplishing its mission and efficiently using its resources. B) The financial statements present fairly the financial position, results of operations, and cash flows of an organization in conformity with generally accepted accounting principles. C) The financial statements are free of errors and misstatements and all fraud was detected. D) All of the above. - answer-B) The financial statements present fairly the financial position, results of operations, and cash flows of an organization in conformity with generally accepted accounting principles. (Feedback: Choice B is the only correct answer. Performance audits, not financial audits, are designed to show whether an organization is effectively accomplishing its mission and efficiently using the resources with which it is entrusted, so Choice A is not correct. No audit can guarantee that financial statements are error-free and fraud was detected, so Choice C is not correct.) Financial audits of state and local governments are always performed: A) By external certified public accountants. B) Following generally accepted government auditing standards. C) By state or federal audit agencies. D) None of the above statements is true. - answer-D) None of the above statements is true. (Feedback: States vary in their requirements as to which type of auditor performs the audits and which auditing standards are employed. Any auditor performing a single audit or performance audit would follow generally accepted government auditing standards (GAGAS); however, some state and local governments are able to have an audit performed under generally accepted auditing standards issued by the AICPA.) Auditing financial statements prepared under the GASB reporting model requires separate materiality determinations for each: A) Opinion unit. B) Fund. C) Activity. D) Component unit. - answer-A) Opinion unit. (Feedback: According to the AICPA's Audit and Accounting Guide State and Local Governments, opinion units are the basis on which the auditor provides an opinion. Opinion units, which consist of governmental activities, business-type activities, the aggregate discretely presented component units, each major governmental and enterprise fund and the aggregate remaining fund information, are the basis on which the auditor provides an opinion.) Which of the following statements is true regarding required supplementary information (RSI)? A) RSI includes the Management's Discussion and Analysis (MD&A) and budgetary comparison schedules. B) Auditors apply certain limited procedures to RSI to provide assurance that it is fairly presented in relation to the basic financial statements. C) Auditors do not render an opinion on RSI. D) All of the above are true. - answer-D) All of the above are true. (Feedback: Choice D is the correct answer as each of the statements is true. RSI is subject to a different but important level of review by auditors.) Generally accepted government auditing standards (GAGAS) are issued by the: A) American Institute of CPAs (AICPA). B) Office of Management and Budget (OMB). C) Government Accountability Office (GAO). D) Governmental Accounting Standards Board (GASB). - answer-C) Government Accountability Office (GAO). (Feedback: Choice C is the only correct answer. The GAO is the auditing arm of Congress and, as such, promulgates GAGAS. The AICPA promulgates generally accepted auditing standards (GAAS) and the OMB produces circulars that are important resources for auditors. The GASB's mission is to produce authoritative literature including statements that form the basis for generally accepted accounting principles (GAAP) for state and local governments.) Which of the following is a true statement about the comparison of generally accepted auditing standards (GAAS) to generally accepted government auditing standards (GAGAS)? A) GAGAS are used when auditing governmental organizations while GAAS are used in auditing not-for-profit organizations. B) GAGAS are broader in scope than GAAS. C) There are more GAAS in the areas of general standards, field work standards, and reporting standards than there are GAGAS. D) GAGAS refer to financial audits only. - answer-B) GAGAS are broader in scope than GAAS. (Feedback: Illustration 11-6 shows that GAGAS is broader in scope than GAAS and alsoincludes more field work and reporting standards than GAGAS. As a result, Choices C and D are incorrect. Additionally, GAGAS can apply to not-for-profit organizations that are receiving federal funding, making Choice A incorrect.) Engagements in which auditors provide an examination, a review, or an agreed-upon procedure report on a subject matter or on an assertion about a subject matter are called: A) Financial audits. B) Financial related audits. C) Attestation engagements. D) Performance audits. - answer-C) Attestation engagements. (Feedback: Choice C is the right answer as described in Illustration 11-5 of the text.) Engagements in which auditors provide an independent assessment of the management of government programs against objective criteria or best practices are called: A) Attestation engagements. B) Financial related audits. C) Financial audits. D) Performance audits. - answer-A) Attestation engagements. (Feedback: Choice D is the definition of performance audits provided in Illustration 11-5.) Which of the following statements concerning the GAGAS general standards for a financial audit is correct? A) The audit firm has the responsibility for ensuring that its audit staff is competent B) Twenty of the 80 continuing professional education (CPE) credits that are taken every two years should relate to government auditing or the government/not-for-profit environment. C) An external peer review is to be conducted every three years, with an internal review conducted annually. D) All of the above statements are correct. - answer-A) The audit firm has the responsibility for ensuring that its audit staff is competent (Feedback: GAGAS charge the audit firm with the responsibility for ensuring audit staff competency. Twenty-four of the 80 CPE credits taken every two years should relate to government auditing or the government/not-for-profit environment, making Choice B incorrect. Audit firms auditing under GAGAS are to undergo an external peer review every three years and maintain a system of quality control; however, there is no standard related to an annual internal review (Choice C).) The GAGAS conceptual framework for independence should be used to assess threats to independence: A) Annually. B) At the start of a new audit engagement. C) Any time a threat to independence comes to the attention of the audit organization. D) Both B and C are correct. - answer-D) Both B and C are correct. (Feedback: As described on pp. 466-468, the GAGAS conceptual framework for independence should be used to assess threats to independence: at the start of a new audit engagement, when assigning new staff to an ongoing audit engagement, when taking on a nonaudit service engagement at an audited entity, and any time a threat to independence comes to the attention of the audit organization.) Which of the following statements concerning GAGAS requirements for performing financial audits is incorrect? A) During audit planning, the auditors should evaluate whether the audited entity has taken appropriate corrective action to address findings and recommendations from previous engagements that could have a material effect on the financial statements. B) Pertinent information should be communicated to individuals contracting for or requesting the audit. C) Auditors must follow a total of five field work standards. D) Documentation should be provided concerning evidence of supervisory review of work performed. - answer-C) Auditors must follow a total of five field work standards. (Feedback: GAGAS add five standards to the GAAS field work standards; therefore, there are more than five field work standards. Choices A, B, and D are fieldwork standards identified in Illustration 12-6 and discussed on p. 465.) Which of the following statements concerning the GAGAS reporting standards for a financial audit is incorrect? A) Sensitive information may be omitted from the audit report. B) A report on internal control over financial reporting and compliance must be provided as part of the audit report prepared for financial statements. C) The fact that the audit was conducted in accordance with GAGAS is to be indicated in the audit report. D) If internal control deficiencies are reported, any plans for corrective action should be included. - answer-B) A report on internal control over financial reporting and compliance must be provided as part of the audit report prepared for financial statements. (Feedback: The report on internal control can be included as part of the audit report or it can be issued as a separate report. Choices A, C and D are GAGAS reporting standards identified in Illustration 11-6 and discussed on pp. 465-466.) Which of the following statements about the single audit is correct? A) It does not apply to nongovernmental not-for-profit organizations. B) It is intended to ensure maximum effectiveness, by conducting audits on a grant-by-grant basis. C) Its purpose is to improve the financial management of state and local government with respect to federal financial assistance programs. D) All of the above are correct. - answer-C) Its purpose is to improve the financial management of state and local government with respect to federal financial assistance programs. (Feedback: A single audit applies to all nonfederal entities expending $500,000 or more in federal assistance, making Choice A incorrect. The audit is conducted on an entity-wide basis, not a grant-by-grant basis, making Choice B incorrect. As identified on page 469, one of the primary objectives of the single audit is to improve the financial management of entities receiving federal assistance (Choice C).) A cognizant agency for audit responsibilities in a single audit is: A) The federal awarding agency that provides the predominant amount of direct funding to a nonfederal recipient. B) Always required no matter how much an entity expends in federal awards. C) Normally designated by the Office of Management and Budget. D) Designated when a nonfederal entity does not receive a large enough amount of federal awards to be assigned an oversight agency. - answer-A) The federal awarding agency that provides the predominant amount of direct funding to a nonfederal recipient. (Feedback: Choice A is the best answer. Choice C is not normally true but it is sometimes true; that is, for nonfederal entities expending more than $25 million a year.) Which of the following statements is not true about selecting federal award programs to be audited in a single audit? A) At least 50 percent of total federal awards expended must be audited. B) A risk-based approach is used for selecting major programs for audit. C) Low risk programs include those that have previously been audited with no audit findings, and are relatively stable, among other considerations. D) A major program is one that is large and relatively risky and always includes new programs. - answer-D) A major program is one that is large and relatively risky and always includes new programs. (Feedback: Choice D is the only correct answer. Major programs are typically large and considered somewhat risky; however, they do not have to include all new programs. At a minimum 50 percent of federal funds must be audited (Choice A). Programs are selected based on risk (Choice B). Low risk does include previously audited programs with no findings and those programs that are relatively stable (Choice C). The selection criteria used to determine which federal award programs are included in a single audit are discussed on pp. 474-476.) A single audit is required of: A) A federal or nonfederal entity that receives more than $500,000 in a year. B) A nonfederal entity that received more than $100,000 in a year. C) Nonfederal entities that expend $500,000 or more in federal awards in a year. D) Any entity that receives more that $500,000 in federal financial assistance in a year. (Feedback: Choice C is the only correct answer. The 1996 revisions to the Single Audit Act changed the focus to funds "expended" rather than received. See pp. 473-474 for a discussion of which entities must have a single audit.) - answer-C) Nonfederal entities that expend $500,000 or more in federal awards in a year. (Feedback: Choice C is the only correct answer. The 1996 revisions to the Single Audit Act changed the focus to funds "expended" rather than received. See pp. 473-474 for a discussion of which entities must have a single audit.) Which of the following is not typically one of the functions of the audit committee of a governing board? A) Select the auditor. B) Monitor the audit process. C) Participate with management and the independent auditor in resolving internal control deficiencies. D) Propose adjusting journal entries. - answer-D) Propose adjusting journal entries. (Feedback: An audit committee will perform the duties identified in Choice A, B, and C, but they will not propose adjusting journal entries. That task is a function of the auditors who propose, but do not record, adjustments for the client's financial system.) Which of the following statements best describes the order of the planning, budgeting, and performance measurement process in governments? A) Setting strategic direction, measuring results and monitoring performance, evaluating results, planning programs and activities. B) Planning programs and activities, measuring and monitoring performance, evaluating results, setting strategic direction. C) Setting strategic direction, planning programs and activities, measuring results and monitoring performance, evaluating results. D) Assessing performance, setting strategic direction, planning programs and activities, measuring and monitoring performance, evaluating results. - answer-C) Setting strategic direction, planning programs and activities, measuring results and monitoring performance, evaluating results. (Feedback: The process, as shown in Illustration 12-5, is a cyclical interrelationship among planning, budgeting, and performance management, but there is a logical order to the steps that must begin with strategic planning. Choice C, then, is the only correct statement.) The budgeting principle in generally accepted accounting principles (GAAP) for state and local governments requires that: A) The accounting system should provide the basis for appropriate budgetary control. B) Budgetary comparison schedules should be presented as required supplementary information for the General Fund and each major special revenue fund that has a legally adopted budget. C) Annual budgets should be adopted by each government. D) All of the above. - answer-D) All of the above. (Feedback: GASB's budgeting, budgetary control, and budgeting reporting principle (see p. 492) includes the three statements in Choices A, B, and C.) Budgeting for performance in a governmental entity is: A) Always separate from the traditional process of budgeting revenues and expenditures to demonstrate compliance with laws and regulations. B) Not evaluated in the GFOA's Distinguished Budget Presentation Award program. C) Not required of governmental entities by their state oversight bodies. D) Focused on improving efficiency and delivering higher quality services to taxpayers. - answer-D) Focused on improving efficiency and delivering higher quality services to taxpayers. (Feedback: Choice D is correct. Choice A is incorrect because many organizations integrate budgeting and performance measurement in order to demonstrate both compliance with laws and effective performance. Choice B is incorrect because the GFOA's Distinguished Budget Presentation Program does look at the budget's effectiveness as a policy document, financial plan, operations, guide, and communications device. Some states have passed legislation that requires both financial and nonfinancial performance measures, so Choice C is incorrect.) An often used approach to budgeting that simply derives the next year's budget from the current year's budget is called: A) Planning-program-budgeting. B) Incremental budgeting. C) Zero-based budgeting. D) Performance budgeting. - answer-B) Incremental budgeting. (Feedback: Choice B is correct. A government may apply an increment, such as 3 percent or the rate of inflation, to each line item. The other budgeting methods in Choices A, C, and D require more analysis of underlying reasons for the next year's budget to differ from that of the current year.) A budgeting approach in which input of resources is related to output of services is called: A) Planning-program-budgeting. B) Incremental budgeting. C) Zero-based budgeting. D) Performance budgeting. - answer-D) Performance budgeting. (Feedback: Performance budgeting is a simple attempt to match inputs to outputs. Choice D, then, is correct. Choice A has similar characteristics to performance budgeting but differs in its complexity of integrating various parts of an organization. Choices B and C focus on line-items or objects-of-expenditures from the past year in building the new year's budget.) A budgeting approach that requires the very existence of each activity and the amount of resources requested to be allocated to that activity to be justified each year is called: A) Incremental budgeting. B) Zero-based budgeting. C) Performance budgeting. D) Planning-program-budgeting. - answer-B) Zero-based budgeting. (Feedback: See p. 495-497 for a description of zero-based budgeting and the other budgeting methods listed here.) The budgetary comparison schedule prepared by state and local governments: A) Can be presented as required supplementary information (RSI) or as a statement in the basic financial statements. B) Must be a schedule included as art of RSI. C) Is a statement included in the basic financial statements. D) Is not required. - answer-A) Can be presented as required supplementary information (RSI) or as a statement in the basic financial statements. (Feedback: Choice A is the only correct statement. GASB standards require a government to compare actual performance to budgeted performance for the General Fund and major special revenue funds that have a legal requirement to have a budget. The government can present this information as a basic financial statement or as required supplementary information.) Tax anticipation notes and sweep accounts are important factors to consider when budgeting: A) Revenues. B) Capital expenditures. C) Cash receipts. D) Appropriations. - answer-C) Cash receipts. (Feedback: Choice C is correct. Borrowing cash in anticipation of collecting taxes results in a short-term liability. Sweep accounts are used to move available cash into an interest bearing account for the short-term. Both of these balance sheet elements factor into a cash budget) A government that is considering privatizing or outsourcing its payroll function should consider which of the following: A) The long-term strategic plan of the government. B) The short- and long-term budgets for general and administrative expenses such as payroll. C) The costs and benefits of performing the activity within the government compared to hiring a company to perform similar activities. D) All of the above. - answer-D) All of the above. (Feedback: Choice D is an obvious answer. Governments that have integrated their strategic planning, budgeting, and cost/benefit analysis activities with the management of resources are in a better position to make major structural decisions such as privatizing or outsourcing a major activity.) In a state or local government, the budget for which of the following most likely occurs first? A) Governmental appropriations. B) Capital expenditures. C) Governmental revenues. D) Cash receipts. - answer-A) Governmental appropriations. (Feedback: Appropriations represent the authorized amount of expenditures. In state and local governments, this amount is generally determined first based on demand for government services, and then the revenue needed to cover the cost of government services follows. Budgeting for capital expenditures and cash receipts is important; however, it follows after the determination of the projected cost of government services for the year.) Which of the following is a true statement about budgeting cash disbursements in a governmental entity? A) Budgeting for cash receipts and cash disbursements should be no more frequent than once a month. B) Disbursements in most governments are clustered in two months of the year, while revenues are more evenly distributed throughout the year. C) Disbursements of each fund should be considered separately and in separate bank accounts. D) None of the above statements are true. - answer-D) None of the above statements are true. (Feedback: Choice A is incorrect as the largest governments should budget for their daily cash needs. Choice B is really backwards for most governments—revenues in the form of property taxes are mainly received in only a few months during the year while expenditures are more evenly distributed throughout the year. Choice C is incorrect because it is not only unnecessary, but inefficient, to have multiple bank accounts for various funds.) A benefit of using activity-based costing in a government is: A) Understanding and controlling the allocation of indirect costs to programs. B) Finding lower cost alternatives. C) Better measures of the cost of service outcomes. D) All of the above. - answer-D) All of the above. (Feedback: Choices A, B, and C are all benefits to using activity-based costing (ABC) in governments. See page 511 for discussion of the benefits of ABC applied to government.) A budgeting approach that develops balanced scorecards to link financial and nonfinancial indicators of financing, customer satisfaction, internal operations, and the learning and growth of employees is called: A) Program budgeting. B) Planning-programming-budgeting system. C) Entrepreneurial budgeting. D) Zero-based budgeting. - answer-C) Entrepreneurial budgeting. (Feedback: The term "entrepreneurial budgeting" has been used to describe budgeting done at the highest levels of the organization to ensure that strategic plans and the means to achieving organization-wide goals are clearly communicated to all stakeholders. Balanced scorecards were developed for the business sector (hence the term entrepreneurial), but have been adapted by many state and local governments. Choices A, B, and D are considered traditional tools often employed at the department or program level.) When used in governments, total quality management (TQM): A) Is consistent with program budgeting approaches. B) Seeks to continuously improve the government's ability to meet or exceed demands from taxpayers and service recipients. C) Links taxpayer and other resource provider satisfaction to improvements in the operating systems and processes used to provide goods and services. D) All of the above. - answer-D) All of the above. (Feedback: Choice A, B, and C are important elements of a TQM structure along with others listed on p. 510.) In the budget process, some states have legislated ceilings on which of the following? A) Appropriations. B) Capital expenditures. C) Revenues. D) Cash receipts. - answer-C) Revenues. (Feedback: Choice C is the best answer. States, such as California in the 1970s, have imposed ceilings on the level of tax revenues that can be raised, or the percentage increase in revenues in a given year, as a way to curtail spending. Choices A and B are possible, of course, but not as common.) Budgeting for long-lived assets, or capital expenditures, is best done at the: A) Business-type activities level. B) Government-wide level. C) Governmental fund level. D) Governmental-type activities level. - answer-B) Government-wide level. (Feedback: Under GASB standards, capital assets that are used in governmental and business-type activities are capitalized on the statement of net assets at the government-wide level.) Which of the following is a critical component of service efforts and accomplishments (SEA) measures in governments? A) Service efforts, such as resources used. B) Efficiency and outcome measures that relate service efforts to accomplishments. C) Service accomplishments, such as outputs and outcomes. D) All of the above. - answer-D) All of the above. (Feedback: Choice D is correct. A fairly easy question, as the term "SEA" is descriptive of its components. See Illustration 12-6 for an example of how a fire department uses SEA indicators to report on the performance of its fire suppression activity.) GASB Concepts Statement No. 2, as amended by Concepts Statement No. 5: A) Makes SEA reporting a requirement for all state and local governments. B) Clarifies the role of SEA reporting as complementary to CAFR reporting yet integral to broader general purpose external financial reporting. C) Provides a set of templates from which governments can choose from when implementing SEA reporting. D) All of the above. - answer-B) Clarifies the role of SEA reporting as complementary to CAFR reporting yet integral to broader general purpose external financial reporting. (Feedback: Choice A is incorrect, as SEA reporting is voluntary for state and local governments. Choice B is consistent with the discussion on p. 507 of the text. Choice C sounds reasonable; however, no such templates are included in the concepts statement.) As defined by OMB Circular A-87, indirect costs: A) Are incurred for a common or joint purpose benefiting more than one cost objective. B) Can be identified specifically with a particular cost objective. C) Are assigned to the cost objectives specifically benefited. D) Both A and C are correct. - answer-A) Are incurred for a common or joint purpose benefiting more than one cost objective. (Feedback: Choice A is consistent with the definition of an indirect cost, as described on p. 516. Choices B and C are more associated with direct costs.) Which of the following provides guidance to government managers and auditors in determining appropriate and allowable costs chargeable to federal grants and contracts for state and local governments? A) OMB Circular A-87 Cost Principles for State, Local and Indian Tribal Governments. B) OMB Circular A-102 Grants and Cooperative Agreements with State and Local Governments. C) OMB Circular A-122 Cost Principles for Non-Profit Organizations. D) OMB Circular A-133 Audits of States, Local Governments, and Non-Profit Organizations. - answer-A) OMB Circular A-87 Cost Principles for State, Local and Indian Tribal Governments. (Feedback: Choice A is correct. See Illustration A12-1 and the related discussion in the appendix to Chapter 12. Choice B is considered an administrative requirement that describes how federal expenditures are made as opposed to what expenditures are appropriate and allowable on federal grants and contracts. Choice C describes a circular that is very similar to Circular A-87; however, it relates to nongovernmental not-for-profit organizations, not state and local governments. Choice D relates to conducting a single audit.) Which of the following is a true statement about the comparison of generally accepted auditing standards (GAAS) to generally accepted government auditing standards (GAGAS)? A) GAGAS are used when auditing governmental organizations while GAAS are used in auditing not-for-profit organizations. B) GAGAS are broader in scope than GAAS. C) There are more GAAS in the areas of general standards, field work standards, and reporting standards than there are GAGAS. D) GAGAS refer to financial audits only. - answer-A is the correct answer.(Feedback: Illustration 11-6 shows that GAGAS is broader in scope than GAAS and alsoincludes more field work and reporting standards than GAGAS. As a result, Choices C and D are incorrect. Additionally, GAGAS can apply to not-for-profit organizations that are receiving federal funding, making Choice A incorrect.)