CPA Exam — AUDAssessing Risk and Developing a Planned ResponseEasy
A client, a non-profit organization, receives a significant portion of its funding through restricted government grants. When developing the audit plan, the auditor should consider the inherent risk associated with these grants to be high, primarily due to the increased risk of non-compliance with:
- AInternal control policies and procedures.
- BGenerally Accepted Auditing Standards (GAAS).
- CGenerally Accepted Accounting Principles (GAAP).
- DDonor-imposed restrictions and grant specific regulations.
Show answer & explanationAnswer & explanation
Correct answer: D. Donor-imposed restrictions and grant specific regulations.
Restricted government grants inherently carry a high risk of non-compliance with specific donor restrictions and grant regulations. Failure to comply can lead to repayment obligations or loss of future funding, directly impacting the financial statements.
Why the other options are wrong
- A. Internal control policies are designed to mitigate risk; the inherent risk exists prior to considering controls.
- B. GAAS are auditing standards that apply to the auditor, not compliance requirements for the client related to grants.
- C. While non-compliance with grant terms can lead to GAAP misstatements, the direct inherent risk is the non-compliance with the grant rules themselves.
Inherent Risk (Restricted Grants)
For restricted grants, inherent risk is high due to the complexity and specific compliance requirements associated with their terms.
- Grants often come with specific spending and reporting conditions.
- Non-compliance can result in repayment or loss of future funding.
- Requires careful tracking and segregation of funds.
Memory trick: Restricted grants mean 'RULES' are 'RISKY'.