Free Practice Questions for AGA CGFM Exam

Definition of a Repurchase Agreement (Repo):A repurchase agreement is a short-term financial transaction where one party sells securities to another with an agreement to repurchase them at a later date for a specified price, which includes interest. It functions as a secured loan.

Transaction Description:

The state transfers cash to a broker.

The broker provides securities as collateral and agrees to repay the cash plus interest in exchange for the return of the same securities.This arrangement matches the definition of arepurchase agreement.

Explanation of Answer Choices:

A. Arbitrage agreement: Arbitrage involves exploiting price differences in markets, unrelated to this transaction.

B. Repurchase agreement: Correct, as it fits the definition.

C. Mutual buy-sell agreement: This involves agreements to buy and sell assets, unrelated to this financial transaction.

D. Reverse repurchase agreement: Incorrect, as the state would be the borrower, not the lender, in a reverse repo.

References:

U.S. Department of the Treasury,Guide to Federal Investments.

Financial Accounting Standards Board (FASB),Accounting for Repurchase Agreements.

Response to Weaknesses in Shared Service Providers:

Shared service providers often issue reports on internal controls (e.g., SOC 1 or SOC 2 reports).

When a weakness is identified, the recipient agency must evaluate whether compensating or mitigating controls exist to address the risk, ensuring continued reliability.

Explanation of Answer Choices:

A. Consider the existence of compensating or mitigating controls: Correct. This is a standard response to internal control weaknesses, as outlined in auditing and risk management best practices.

B. Ask the service provider to correct the weakness: Incorrect. While this may be appropriate, the recipient agency is ultimately responsible for evaluating and addressing the risk.

C. Dismiss the weakness: Incorrect. Ignoring a weakness can expose the agency to risk.

D. Refer the weakness to the Contracting Officer: Incorrect. This may be part of the process, but the agency must first assess the impact and controls.

References:

American Institute of Certified Public Accountants (AICPA),SOC Reports Guidance.

Government Accountability Office (GAO),Internal Control Standards for Federal Agencies.

Segregation of Duties and the Fraud Triangle:

TheFraud Triangleidentifies three conditions that contribute to fraud:pressure,opportunity, andrationalization.

Segregating duties (e.g., separating authorization, recordkeeping, and asset custody) is specifically designed to reduceopportunity, which is the chance for an employee to commit fraud without detection.

Why Opportunity Is Key:

If one person has too much control over a process, they may exploit it for personal gain. Segregating duties creates checks and balances, making it harder for fraudulent activities to go unnoticed.

Why Other Options Are Incorrect:

A. Pressure:Pressure refers to personal or financial stresses that drive someone to commit fraud, but segregation of duties does not address this directly.

C. Rationalization:Rationalization involves justifying fraudulent behavior, which segregation does not prevent.

D. Detection:While segregation can aid in fraud detection, its primary role is to reduce opportunities for fraud.

References and Documents:

GAO Standards for Internal Control (Green Book):Emphasizes segregation of duties as a control to mitigate opportunities for fraud.

COSO Internal Control Framework:Identifies segregation of duties as a key tool to reduce fraud risk.

Why Include Permissible and Non-Permissible Investment Securities?

Aninvestment policyoutlines the guidelines and restrictions for managing an entity’s investments, ensuring compliance with laws and protecting public funds.

Listingpermissible(e.g., government bonds, treasury securities) andnon-permissibleinvestments ensures clarity about what the entity can and cannot invest in, helping to mitigate risk and maintain fiduciary responsibility.

Why Other Options Are Incorrect:

A. Prices and performance of investment securities:This information is important for monitoring investments but does not belong in the policy itself.

C. Historical allocations of investment securities:Historical data informs decision-making but is not relevant to the rules governing investments.

D. Key and non-key investment security controls:While controls are critical, they are part of the implementation process, not the investment policy.

References and Documents:

GAO Investment Policy Guidelines:Recommends specifying permissible investments to ensure fiduciary responsibility.

GFOA Best Practices in Investment Management:Emphasizes clear investment guidelines in the policy.