Free Practice Questions for AGA GFMC Exam

Limiting Public Reporting in Attestation Engagements:

Government auditing standards allow auditors to limit public reporting in rare cases, such as when disclosing certain information could compromise sensitive or ongoing legal proceedings.

The goal is to protect the integrity of investigations or legal actions while maintaining transparency where possible.

Explanation of Answer Choices:

A. Auditors detect material fraud: Auditors are required to report material fraud to appropriate authorities, not limit reporting unless legal proceedings are affected.

B. Audit report would compromise ongoing legal proceedings: Correct. This is a valid reason to limit public reporting under auditing standards.

C. Auditor detects non-compliance with provisions of law: Non-compliance must be disclosed unless legal considerations warrant confidentiality.

D. Entity management fails to satisfy legal requirements: This would typically be reported, not withheld.

 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.

 What Are Liquidity Ratios?

Liquidity ratios are financial metrics used to measure an organization’s ability to meet its short-term financial obligations as they come due. These ratios assess whether the organization has sufficient liquid assets (like cash, receivables, or short-term investments) to cover its current liabilities (debts or obligations due within a year).

 Why Are They Relevant to Creditors?

Creditors care deeply about an entity's ability to repay its debts in a timely manner. Liquidity ratios provide a snapshot of the organization's financial health and give insight into its capacity to meet short-term demands. They are essential tools in evaluating whether a government entity (federal, state, or local) or any other organization can pay its creditors without needing to secure additional financing or liquidate long-term assets.

 Common Liquidity Ratios:

The most commonly used liquidity ratios are:

Current Ratio:This measures the organization’s ability to pay off its current liabilities with current assets.Formula:Current Assets ÷ Current Liabilities

Quick Ratio (Acid-Test Ratio):A stricter version of the current ratio, it excludes less liquid assets (like inventory) to assess the organization’s immediate ability to pay short-term debts.Formula:(Current Assets - Inventory) ÷ Current Liabilities

Cash Ratio:Focuses only on the most liquid assets, such as cash and cash equivalents.Formula:Cash + Cash Equivalents ÷ Current Liabilities

 How Do Liquidity Ratios Apply to Governmental Accounting?

In governmental accounting, liquidity ratios are crucial for determining whether a governmental entity has the financial flexibility to manage short-term obligations like accounts payable, payroll, and other operating costs. For example:

State and local governments use liquidity ratios to show stakeholders their ability to sustain operations without financial strain.

Government-wide financial statements (under GASB standards) often emphasize liquidity to demonstrate fiscal health to bondholders and credit rating agencies.

 Why Not Other Ratios?

A. Budgetary Cushion Ratios:These focus on the organization’s ability to withstand revenue shortfalls and maintain budgetary reserves, not specifically on meeting creditor demands.

C. Debt Burden Ratios:These measure the overall burden of debt on the organization but don’t directly address short-term liquidity or solvency.

D. Turnover Ratios:These evaluate operational efficiency (e.g., how quickly assets like inventory are converted into revenue), which doesn’t directly relate to creditor demands.

 References and Documents:

Government Financial Manager (GFM) Competency Framework by the Association of Government Accountants (AGA):Section on “Financial Analysis” emphasizes the importance of liquidity ratios in assessing short-term solvency for government entities.

GASB Concepts Statement No. 1:Discusses the need for governmental financial reporting to provide information on financial condition, including short-term liquidity.

AGA Performance Management Framework Guide (2023):Highlights liquidity ratios as critical tools for demonstrating fiscal responsibility and transparency in public sector financial management.

 What Are Material Weaknesses?

Amaterial weaknessin internal control is a deficiency or combination of deficiencies that creates a reasonable possibility of a material misstatement in the financial statements that would not be prevented or detected in a timely manner.

In the context of state and local financial audits, material weaknesses must be reported to those charged with governance, as they are responsible for oversight and corrective actions.

 Why Is the Governing Body the Correct Answer?

Thegoverning body(e.g., city council, county board, or state commission) is directly responsible for overseeing the entity’s financial operations and ensuring accountability. Reporting material weaknesses to them ensures that corrective actions can be implemented to strengthen internal controls.

Auditors communicate such findings through anaudit reportor amanagement letteraddressed to the governing body.

 Why Other Options Are Incorrect:

A. Legislature:The legislature may have oversight of state budgets and appropriations but is not the direct governing body for financial audits.

C. Taxpayers:While transparency is important, material weaknesses are not directly reported to taxpayers. They may be disclosed in public audit reports, but taxpayers are not the primary audience.

D. Local media:Material weaknesses are not formally reported to the media; their disclosure depends on the entity’s public reporting processes.

 References and Documents:

GAO Yellow Book (GAGAS):Requires auditors to report material weaknesses to those charged with governance.

GASB (Governmental Accounting Standards Board):Emphasizes the importance of communicating significant audit findings to governing bodies.

AICPA Audit Standards (AU-C 265):Requires auditors to communicate material weaknesses to management and those charged with governance.

 What Is COSO ERM?

TheCOSO Enterprise Risk Management (ERM) Frameworkis a widely accepted framework that helps organizations identify, assess, and manage risks while creating value. The five components of COSO ERM are:

Governance and Culture

Strategy and Objective-Setting

Performance

Review and Revision

Information, Communication, and Reporting

 Why Is Performance a Key Component?

ThePerformancecomponent focuses on identifying, assessing, and prioritizing risks to achieving an organization’s objectives. It includes implementing risk responses (e.g., avoiding, reducing, sharing, or accepting risks) and monitoring their effectiveness.

 Why Other Options Are Incorrect:

B. Changing Environment:This is not a COSO ERM component but a general factor influencing risk management.

C. Complex Calculations:This is not relevant to COSO ERM.

D. Accepting Risk:While accepting risk is part of risk responses, it is not one of the five COSO ERM components.

 References and Documents:

COSO ERM Framework (2017):Details the five components of ERM and their application in managing risks.

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.

Creditworthiness and Loan Approval:

When creditworthiness is a criterion for government loans, the applicant must demonstrate asatisfactory history of repaying debt, as this reflects their ability to fulfill repayment obligations in the future.

 Why a Satisfactory History Is Required:

Past repayment behavior is considered the best indicator of future performance. Government agencies prioritize reducing the risk of defaults by ensuring applicants have a proven history of managing debt responsibly.

 Why Other Options Are Incorrect:

A. A credit rating from a major bank:While a credit rating is helpful, it is not typically required for government loans. Instead, creditworthiness is evaluated based on repayment history and other financial factors.

C. Sufficient capitalization:This is important for business loans, but it does not address creditworthiness.

D. A promise to pay interest at the government borrowing rate:A promise is not sufficient to establish creditworthiness.

 References and Documents:

OMB Circular A-129:Requires agencies to assess creditworthiness before granting loans.

GAO Loan Management Guide:Highlights repayment history as a key criterion for loan approval.

 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.

Regression Analysis:

Regression analysis is a statistical method used to examine relationships between variables and make predictions.

To estimatesales tax revenue, a CGFM can use regression to analyze how population growth, housing, and employment trends correlate with tax revenue over time.

Explanation of Answer Choices:

A. Regression analysis: Correct. This method uses historical and predictive data to model the relationship between variables (e.g., population growth and sales tax revenue).

B. Cash flow analysis: Focuses on analyzing cash inflows and outflows, not predicting revenue based on external factors.

C. Payback analysis: Used to calculate the time needed to recover an investment, unrelated to tax revenue estimation.

D. Flow charting: Used to visualize processes, not for predictive analytics.