Pass the AGA Government Financial Manager CGFM Questions and answers with CertsForce

What Is Vertical Analysis?

Vertical Analysisevaluates a single year's financial statements by expressing each line item as a percentage of a base amount. For example, in an income statement, each expense may be presented as a percentage of total revenue.

This approach helps users understand the relative size of each financial statement item within the context of the total.

Why Is Vertical Analysis Used for a Single Year?

Vertical analysis focuses solely on relationships within a single set of financial statements, making it the appropriate choice for single-year evaluations.

Why Other Options Are Incorrect:

A. Comparative:Involves comparing financial data across entities or periods, not within a single year.

B. Horizontal:Focuses on changes in financial data over time (year-to-year comparisons).

C. Trend:Examines patterns over multiple periods to identify long-term trends, not a single year.

References and Documents:

GAO Financial Audit Manual:Recommends vertical analysis for single-year financial statement evaluations.

AICPA Financial Statement Analysis Guide:Provides detailed examples of vertical analysis techniques.

Government Auditing Standards (GAS):

GAS, often referred to as theYellow Book, outlines the responsibilities of auditors conducting financial statement audits for government entities.

One core requirement is that auditors must consider compliance with applicable laws, regulations, contracts, and grant agreements that could materially affect financial statements.

Explanation of Answer Choices:

A. Design tests to assess compliance with laws, regulations, contracts, and grant agreements: Correct. This is a required component under GAS to ensure financial statements are materially accurate and comply with legal and regulatory frameworks.

B. Identify violations of laws which could be punishable by monetary penalties: Incorrect. Auditors are not required to investigate or pursue penalties but to focus on material misstatements or risks.

C. Identify expenditures that exceed the related obligations: Incorrect. While this could indicate an issue, auditors are not required to specifically test for this unless it relates to material misstatements or compliance issues.

D. Design tests to detect fraud, waste, and abuse: Incorrect. Auditors are not specifically required to detect fraud, waste, and abuse, though they should be alert to indicators.

References:

Government Accountability Office (GAO),Government Auditing Standards (Yellow Book).

Uniform Guidance (2 CFR Part 200),Audit Requirements for Federal Programs.

Definition of Internal Control (According to GAO):

Internal control is aprocess implemented by managementto provide reasonable assurance that the organization will achieve its objectives in:

Operations(effectiveness and efficiency).

Reporting(reliable and accurate financial and non-financial reporting).

Compliance(adherence to laws and regulations).

Explanation of Answer Choices:

A. Help an entity achieve its objectives: Correct. This is the primary purpose of internal controls.

B. Design an ERM system: Incorrect. Enterprise Risk Management (ERM) is broader than internal control and includes risk strategy and appetite.

C. Set the tone at the top: Incorrect. While the tone at the top is part of the control environment, it is not the full scope of internal control.

D. Develop a strategic plan: Incorrect. Internal control supports strategic plans but is not directly involved in developing them.

References:

GAO,Standards for Internal Control in the Federal Government (Green Book).

COSO,Internal Control - Integrated Framework.

What Is an Outcome Measure?

Anoutcome measureevaluates the results or impacts of a program or service, focusing on whether objectives were achieved (e.g., efficiency, effectiveness, or quality).

Percentage of disaster claims paid on timedirectly reflects the program’s ability to meet its goal of providing timely financial assistance to disaster victims, making it an outcome measure.

Why Other Options Are Incorrect:

A. Amount of disability inquiries received during a pandemic:This is aninput measure, as it reflects the demand or workload, not the results.

B. Total environmental impact statements reviewed:This is anoutput measure, showing the quantity of work done, not the effectiveness or result.

C. Number of federal capital territory students that graduated:While this measures results, it reflects an output rather than an outcome (it doesn’t assess the quality or long-term impact of education).

References and Documents:

Government Performance and Results Act (GPRA):Emphasizes the use of outcome measures to evaluate program performance.

GAO Performance Measurement Guide:Defines and provides examples of outcome, output, and input measures.

What Does OMB Circular A-50 Require?

OMB Circular A-50establishes policies for resolving and following up on audit findings and recommendations. It assignspersonal responsibilityto anaudit follow-up officialwithin the agency for ensuring that disagreements with audit findings are resolved and that corrective actions are implemented.

Why Is the Audit Follow-Up Official Responsible?

The follow-up official ensures the agency responds appropriately to audit findings, tracks corrective actions, and resolves disagreements in a timely manner. This ensures accountability and compliance with audit recommendations.

Why Other Options Are Incorrect:

A. Comptroller General:The Comptroller General leads the GAO and oversees audits but is not responsible for resolving disagreements within agencies.

B. OMB Deputy Director for Management:Provides guidance on audit policies but does not hold personal responsibility for resolving disagreements.

C. Inspector General:Performs audits and investigations but does not resolve disagreements over audit findings.

References and Documents:

OMB Circular A-50:Specifies that the audit follow-up official holds responsibility for resolving disagreements.

GAO Yellow Book:Discusses the roles and responsibilities of various officials in audit processes.

What Are Open-Ended Mutual Funds?

Open-ended mutual funds are investment vehicles that allow investors to buy and sell shares at the current net asset value (NAV), which is determined daily.

These funds are highly liquid and can be easily valued, making them a sound investment option for pension funds.

Why Are They Suitable for Pension Funds?

Pension funds require investments that are easily valued, transparent, and provide liquidity to meet benefit obligations. Open-ended mutual funds meet all these criteria.

Why Other Options Are Incorrect:

B. Reverse repurchase agreements:While they can be part of investment strategies, they are not easily valued compared to open-ended mutual funds.

C. Derivative instruments:Derivatives can be complex and difficult to value, making them less suitable for pension funds that prioritize transparency and simplicity.

D. Internal investment pools:These are investment vehicles used by governments, but their valuation may not be as straightforward or frequent as mutual funds.

References and Documents:

GAO Guide to Investment Management for Pension Funds:Recommends transparent, easily valued investments like mutual funds.

AICPA Pension Plan Audit Guidelines:Emphasizes liquidity and valuation in pension fund investments.

What Are We Solving For?

We are calculating thepresent value (PV)of $20,550 to be received at theend of year 2using a discount rate of10%.

The formula for present value is: PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV​ Where:

FVFVFV = Future Value = $20,550

rrr = Discount Rate = 10% or 0.10

nnn = Time Period = 2 years

Calculation:

PV=20,550(1+0.10)2PV = \frac{20,550}{(1 + 0.10)^2}PV=(1+0.10)220,550​ PV=20,550(1.10)2PV = \frac{20,550}{(1.10)^2}PV=(1.10)220,550​ PV=20,5501.21PV = \frac{20,550}{1.21}PV=1.2120,550​ PV≈16,983PV ≈ 16,983PV≈16,983

Why Other Options Are Incorrect:

A. $16,440:Results from incorrect discounting for one year instead of two.

C. $18,495:Results from applying a lower discount rate or an incorrect formula.

D. $20,550:This is the future value, not the present value.

References and Documents:

GAO Financial Analysis Guide:Explains present value calculations for investment decision-making.

AICPA Present Value Guidelines:Provides step-by-step guidance on time value of money calculations.

Definition of Computer-Assisted Audit Techniques (CAATs):

CAATs use software tools to perform audit tasks such as data analysis, testing transactions, and evaluating internal controls.

Obtaining accurate and relevant data is a key first step, as it forms the basis of any analysis performed using CAATs.

Explanation of Answer Choices:

A. Writing the system audit program: This is part of audit planning but not a specific feature of CAATs.

B. Verifying internal controls: While CAATs can be used to test controls, obtaining data is fundamental to this process.

C. Obtaining appropriate data: Correct. CAATs rely on accurate, relevant, and complete data for meaningful analysis.

D. Purchasing data mining software: While software is a tool for CAATs, the focus is on using data, not on acquiring the software itself.

References:

Information Systems Audit and Control Association (ISACA),Guide to Computer-Assisted Audit Techniques.

Association of Government Accountants (AGA),Data Analytics and Auditing Best Practices.

Annual Comprehensive Financial Report (ACFR):

TheACFR(formerly CAFR) is the primary source for a state’s annual financial information, including liability and cash flow data.

It provides comprehensive financial statements, including the balance sheet, statement of activities, and cash flow statements.

Explanation of Answer Choices:

A. PAR: ThePerformance and Accountability Report (PAR)focuses on federal agencies and includes performance goals and achievements but lacks detailed liability and cash flow data for states.

B. ACFR: Correct. The ACFR is the best source for detailed liability and cash flow data at the state level.

C. Appropriations bill: Provides legislative authority for spending but does not include detailed financial data.

D. Statement of activities: This is part of the ACFR but does not include all necessary cash flow or liability data.

References:

Government Finance Officers Association (GFOA),Best Practices for ACFR Reporting.

GASB,Annual Comprehensive Financial Report Guidance.

How to Prioritize Controls Based on Cost and Risk:

The priority of a control is based on its cost-effectiveness. Controls that protect assets with higher risk exposure relative to the cost of the control should be prioritized. The formula to calculate cost-effectiveness is: Cost-Effectiveness=Cost of ControlAsset Amount at Risk\text{Cost-Effectiveness} = \frac{\text{Cost of Control}}{\text{Asset Amount at Risk}}Cost-Effectiveness=Asset Amount at RiskCost of Control​

Lower ratios indicate more cost-effective controls.

Calculations:

Asset A:$15,000 / $150,000 = 0.10 (10%)

Asset B:$2,500 / $6,000 = 0.42 (42%)

Asset C:$50,000 / $2,000,000 = 0.025 (2.5%)

Asset D:$20,000 / $500,000 = 0.04 (4%)

Lowest Priority:

Asset Bhas the highest ratio (42%), meaning it is the least cost-effective and should be the lowest priority for controls.

References and Documents:

COSO Internal Control Framework:Discusses cost-benefit analysis for prioritizing controls.

GAO Risk Management Guide:Emphasizes evaluating control cost-effectiveness relative to asset risk.