AGA Examination 3: Governmental Financial Management and Control (GFMC) GFMC Exam Practice Test

Answer : D

Why Pay on the Discount Date?

Discount terms are offered by vendors to encourage early payment, such as '2/10, net 30' (2% discount if paid within 10 days). Paying on the discount date ensures the organization takes advantage of cost savings while still making timely payments.

This approach optimizes cash management by reducing payment obligations while maintaining good vendor relationships.

Why Other Options Are Incorrect:

A . After the due date: Late payments can damage vendor relationships and incur penalties.

B . Prior to the due date: Paying too early does not provide additional benefits and can unnecessarily deplete cash reserves.

C . On the due date: If a discount is offered, waiting until the due date means missing the opportunity to save money.

Reference and Documents:

GAO Financial Management Guide: Recommends paying invoices with discounts on the discount date to maximize cost savings.

Best Practices in Governmental Cash Management (AGA): Highlights the importance of managing vendor payments to take advantage of discounts.

Answer : A

Definition of Internal Control (According to GAO):

Internal control is a process implemented by management to 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.

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

COSO, Internal Control - Integrated Framework.

Answer : B

What Are Material Weaknesses?

A material weakness in 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?

The governing 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 an audit report or a management letter addressed 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.

Reference 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.

Answer : C

What Is GPRA? The Government Performance and Results Act (GPRA) of 1993 was designed to improve the performance of federal programs by requiring federal agencies to establish goals, measure performance, and report on their progress.

Stated Purposes of GPRA:

Improve Service Delivery (Option A): GPRA helps agencies align performance goals with customer needs, improving service delivery.

Improve Internal Management Practices (Option B): By requiring performance metrics and evaluations, GPRA enhances internal management and decision-making processes.

Improve Program Effectiveness (Option D): GPRA aims to make federal programs more effective by fostering accountability and linking resources to results.

Why Option C Is Incorrect:

GPRA does not provide detailed instructions on program reporting. While it requires agencies to report on their performance, it does not dictate the specific steps or instructions for reporting. Instead, agencies design their own reporting processes within the GPRA framework.

Reference and Documents:

Government Performance and Results Act of 1993: Stipulates the law's objectives but does not mention program reporting instructions.

GAO Report on GPRA Implementation: Highlights GPRA's purpose to improve performance management and accountability without prescribing reporting instructions.

Answer : B

Federal Credit Reform Act of 1990: This Act established a new accounting framework for federal credit programs, such as direct loans and loan guarantees. It requires using the net present value (NPV) method to measure the costs of loans and guarantees by discounting future cash flows (e.g., loan repayments, defaults) to their present value.

Explanation of Financial Analytical Technique:

Net Present Value (NPV): Accounts for the time value of money by discounting future cash flows to the present. It provides an accurate measure of the economic cost to the government.

Other options:

A . Future value: Focuses on future cash flows, not their present cost.

C . Current value: Not a recognized technique for analyzing long-term cash flows.

D . Regression analysis: A statistical method, unrelated to calculating loan program costs.

Federal Credit Reform Act of 1990, Section 502.

Congressional Budget Office (CBO), Federal Credit Program Cost Analysis.

Office of Management and Budget (OMB), Circular A-11: Credit Reform Accounting.

Answer : D

Definition of a Material Weakness: According to auditing standards, a material weakness in internal control over financial reporting is a deficiency or combination of deficiencies that creates a reasonable possibility of a material misstatement in the financial statements that will not be prevented or detected on a timely basis.

Key Characteristics of a Material Weakness:

Reasonable Possibility: The likelihood of a misstatement is more than remote but less than certain.

Material Misstatement: The error or omission could impact the decisions of users relying on the financial statements.

Timely Detection: The deficiency allows errors to go undetected for an extended period, potentially affecting financial statement reliability.

Why Other Options Are Incorrect:

A . A misstatement in the basic financial statements may result from a material weakness, but the definition focuses on the reasonable possibility, not the actual result.

B . A material weakness impacts the financial statements, not 'other accompanying financial information.'

C . While timely detection is part of the issue, the definition focuses on the reasonable possibility of a misstatement, not management's inability to perform specific duties.

Reference and Documents:

GAAS (AICPA SAS No. 115): Provides the formal definition of material weaknesses and guidance for auditors in evaluating control deficiencies.

COSO Framework: Emphasizes the need for effective internal controls to mitigate material misstatement risks.

Answer : B

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:

Management designs 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.

Reference 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.