3. Astor City, a small city that is not required to have independent audit, voluntarily decided to have an audit of its financial records. Currently, the city generates $900,000 in revenues. Of the revenue generated, 10% is from state sources and 2% is from federal sources. Janice Murphy, a CPA who serves on the city council has orally agreed to conduct the audit for a small gratuitous fee. Murphy decided not to accept a full fee since in the last three years she has gotten away from doing audit work and has concentrated her time on tax preparation and small business consulting. Murphy conducts the audit and presents the city with the following audit report:

I have audited the accompanying balance sheet of Astor City as of June 30, 2008, and the related statements of revenue, expenditures and changes in fund balance and cash flows for the year then ended. These financial statements are the responsibility of the city's management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Astor City as of June 30, 2008, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

Janice Murphy

November 3, 2008

(a) At a minimum what audit standards apply to Astor City (GAAS, GAS or Single Audit Act)? Why?

(b) Discuss any potential violations of the applicable audit standards. (Points : 12)