GFMC Exam Dumps - Examination 3: Governmental Financial Management and Control (GFMC)

ï‚· 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.

ï‚· 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.

ï‚· 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.

ï‚· 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.

ï‚· Why Hire Contractors for Management Control Evaluations?

Management may decide to bring in external contractors when there are gaps in the organization’s capacity to perform evaluations internally. One key factor is thelack of management expertise—if management lacks the necessary knowledge or experience to evaluate controls effectively, it may outsource this task to qualified contractors.

ï‚· Why Other Options Are Incorrect:

B. Availability of Qualified Contractors:While availability is a factor, it’s not a variable that influences the decision to outsource. Instead, it’s a logistical consideration once the decision has been made.

C. Suspicion of Internal Fraud:Suspicion of fraud may lead to investigations, but hiring contractors to evaluate controls is driven by expertise gaps rather than fraud concerns.

D. Knowledge of Systemic Deficiencies:If management already has knowledge of systemic deficiencies, they may focus on remediation rather than outsourcing evaluations.

ï‚· References and Documents:

GAO Standards for Internal Control in the Federal Government (Green Book):Emphasizes the need for knowledgeable personnel to evaluate controls.

GAGAS (Yellow Book):Highlights the role of external expertise in cases where internal expertise is insufficient.

ï‚· What Does the Cash Management Improvement Act (CMIA) Do?

CMIA governs the transfer of federal funds to state governments and ensures timely and efficient use of these funds.

If federal agencies fail to provide funds for entitlements (e.g., Medicaid) in a timely manner, CMIA requires them to payinterestto state governments for the delays.

This ensures states are compensated for any financial burden caused by delayed federal transfers.

ï‚· Why Other Options Are Incorrect:

A. Debt Collection Improvement Act:Focuses on improving debt collection practices for the federal government, not entitlements or interest payments to states.

B. CFO Act:Improves federal financial management but does not address payment timeliness or interest.

C. Accountability for Tax Dollars Act:Expands audit requirements but does not involve compensation for delays.

ï‚· References and Documents:

CMIA (1990):Requires federal agencies to pay interest on late entitlement payments to states.

Treasury Financial Manual:Details CMIA interest payment provisions.

Performance Audit Objectives:

Performance audits evaluate theeffectiveness,efficiency, andeconomyof government programs, operations, or activities.

These audits focus on improving operations, achieving program goals, and ensuring responsible use of public resources.

Explanation of Answer Choices:

A. Providing an opinion on the entity's financial statement: This is the objective of a financial statement audit, not a performance audit.

B. Assessing program effectiveness, economy, and efficiency: Correct. This is the primary objective of performance audits.

C. Providing an opinion on a subject matter that is the responsibility of another party: This aligns with attestation engagements, not performance audits.

D. Issuing a report of findings based upon an agreed-upon procedure: This describes agreed-upon procedures engagements, not performance audits.

ï‚· What Is Internal Control Evaluation?

Internal control evaluation is the process of assessing an organization’s internal controls to ensure they are adequate and effective in mitigating risks, ensuring compliance, and achieving objectives.

ï‚· Why Is Identifying Potential Risks the First Step?

The entire purpose of internal controls is to mitigate risks. Therefore, before evaluating the controls, you need to identify the risks they are meant to address.

Once risks are identified, the organization can evaluate whether the existing controls are adequate and effective in mitigating those risks.

This approach aligns with risk-based frameworks like theCOSO Internal Control Framework, which emphasizes risk identification as the foundation for effective controls.

ï‚· Why Other Options Are Incorrect:

A. Identifying the effectiveness of management activities:This is part of control evaluation but occurs after risks and controls are identified.

B. Assessing the adequacy of controls:Controls cannot be assessed until the risks they address are identified.

C. Documenting how transactions or events are processed:While this step is important, it comes later in the process, after risks and controls are identified.

ï‚· References and Documents:

COSO Internal Control Framework:Identifies risk assessment as the foundation for designing and evaluating controls.

GAO Standards for Internal Control (Green Book):Highlights risk identification as the first step in the control process.

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.

ï‚· What Does GPRA Require?

TheGovernment Performance and Results Act (GPRA)mandates that federal agencies prepare:

Astrategic planoutlining long-term goals.

Anannual performance plandetailing the objectives and performance measures for the upcoming year.

Anannual performance reportevaluating the agency’s success in meeting the goals outlined in the annual performance plan.

ï‚· Why Is the Annual Performance Report Important?

The annual performance report provides accountability and transparency by comparing actual results to planned goals. It allows Congress and the public to assess how effectively the agency is achieving its mission.

ï‚· Why Other Options Are Incorrect:

A. A five-year performance plan:GPRA requires a strategic plan (updated every four years), not a separate five-year performance plan.

C. SEA Report:This refers to Service Efforts and Accomplishments reporting, which is not mandated by GPRA.

D. The prior year’s audited financial report:While financial reports are important, they are separate from the performance reporting requirements of GPRA.

ï‚· References and Documents:

Government Performance and Results Act (1993):Requires agencies to submit strategic plans, annual performance plans, and annual performance reports.

GAO Reports on GPRA Compliance:Emphasizes the role of annual performance reports in promoting accountability.

ï‚· 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.

ï‚· 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.

ï‚· 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.

ï‚· 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.