Free Practice Questions for AGA GFMC Exam

 Role of the Independent Auditor in Financial Reporting:

Independent auditors evaluate internal controls as part of their audit procedures to support an opinion on the fair presentation of the financial statements. This includes assessing whether internal controls over financial reporting are designed and operating effectively.

This evaluation helps ensure that financial statements are free of material misstatements, whether due to error or fraud.

 Why Management Does Not Do This:

Managementdesigns and implements internal controls but does not evaluate them to support the auditor’s opinion. Management’s responsibility is to certify the accuracy of the financial statements, while the auditor provides an independent opinion.

 Why Other Options Are Incorrect:

C. The program office:This entity oversees operations but does not perform evaluations to support an audit opinion.

D. The audit committee:The committee provides oversight of the audit process but does not perform the evaluation itself.

 References and Documents:

GAAS (Generally Accepted Auditing Standards):Outlines the responsibilities of independent auditors regarding internal control evaluation.

GAO Yellow Book:Specifies the role of external auditors in evaluating internal controls during financial audits.

 Capital Asset Transfers Within the Same Government:

When a capital asset is transferred between departments within the same government, the asset’sbook value(its original cost minus accumulated depreciation) should remain in the fixed asset tracking system.

The transfer does not change the overall value of the asset for the government as a whole, but it should reflect that the asset is now under the responsibility of the receiving department.

 Why This Is Important:

Accurate tracking ensures the fixed asset system reflects the current custodian of the asset and allows for proper asset management and accountability.

 Why Other Options Are Incorrect:

A. Recorded with the original department to maximize receipts:This is incorrect because it ignores the asset's transfer and would misrepresent which department is responsible for it.

B. Recorded with the second department to minimize costs:Cost minimization is irrelevant here; the transfer should reflect the book value.

C. Retained with no change in book value to either department:While the book value doesn’t change overall, the system must reflect the transfer to the receiving department.

 References and Documents:

GAAP (Governmental Accounting Standards Board - GASB):Requires accurate fixed asset tracking to reflect departmental transfers.

GASB Statement No. 34:Discusses fixed asset tracking and reporting requirements.

Antideficiency Act Overview:

TheAntideficiency Act (31 U.S.C. §§ 1341, 1342, 1517)prohibits federal agencies from:

Obligating or expending funds in excess of their appropriations.

Entering into contracts without sufficient appropriated funds.

Violating the Act is a serious matter, and agencies are required to report such violations to Congress and the President.

Explanation of Answer Choices:

A. Federal Managers’ Financial Integrity Act: Incorrect. This Act requires agencies to assess internal controls, not monitor appropriations.

B. Federal Financial Management Improvement Act: Incorrect. This Act focuses on improving financial systems, not budgetary compliance.

C. Antideficiency Act: Correct. This Act directly prohibits expenditures beyond appropriations.

D. Sarbanes-Oxley Act: Incorrect. This Act applies to corporate financial reporting, not federal appropriations.

 Why Should Management Consider the Cost of Internal Controls in Relation to Benefits?

Thecost-benefit principlestates that the cost of implementing and maintaining internal controls should not exceed the benefits derived from those controls. Effective internal controls help mitigate risks, improve efficiency, and ensure compliance, but their implementation comes with costs (e.g., time, resources, systems).

Management must evaluate whether the benefits of preventing or detecting potential issues (e.g., fraud, errors) justify the associated costs.

 Why Other Options Are Incorrect:

A. The available budget:While the budget is important, internal controls are not solely dictated by budget constraints; their effectiveness and benefit-to-cost ratio are key considerations.

B. Inherent risks:While inherent risks are a factor in determining control needs, the relationship between cost and benefit remains the primary consideration.

D. Risk of collusion:Controls address collusion risks, but management does not prioritize collusion specifically when assessing cost versus benefit.

 References and Documents:

COSO Internal Control Framework:Highlights the cost-benefit principle when implementing controls.

GAO Standards for Internal Control (Green Book):Emphasizes balancing costs with benefits when designing internal control systems.