AGA CGFM - CGFM Certified Government Financial Manager

ï‚·Role of Management in Internal Control Evaluation:

Responsibility for Risk Identification:Management has the primary responsibility for designing, implementing, and maintaining an effective system of internal controls. As part of this process, management identifies the risks related to fraud, waste, and abuse that could impact financial reporting or operational efficiency.

Mitigating Risks:Once risks are identified, management is responsible for mitigating them by developing appropriate policies, procedures, and controls.

ï‚·Role of the Auditor in Internal Control Evaluation:

Assessing Control Effectiveness:Auditors are not responsible for designing or implementing controls; rather, their role is to evaluate whether the controls put in place by management are effective. They do this through testing, observation, and other audit procedures.

Fraud Risk Assessment:As part of their duties under Generally Accepted Government Auditing Standards (GAGAS), auditors must assess the risk of material misstatement due to fraud and evaluate how management’s controls address those risks.

ï‚·Why Other Options Are Incorrect:

B.Auditors do not identify risks—this is management's job. Auditors evaluate and assess the controls already in place.

C.Determining risk tolerance is a governance and management responsibility, not the joint responsibility of auditors and management.

D.Management mitigates risks, but auditors don’t monitor compliance with controls—they test and evaluate the controls as part of their audit procedures.

ï‚·References and Documents:

GAGAS (Yellow Book) by GAO:Emphasizes management’s responsibility for risk identification and the auditor’s responsibility for assessing control effectiveness.

COSO Internal Control Framework (2013):Highlights management’s responsibility for risk assessment and control design, while auditors provide independent assurance.

ï‚·Why Measure Performance Based on Cost per Ton of Trash Collected?

Costper ton of trash collectedis a direct, objective, and quantifiable measure of the contractor’s performance. It reflects how efficiently the contractor is operating relative to the amount of trash being managed.

This measure aligns with the principle of output-based performance evaluation, which focuses on results (e.g., tons of trash collected) rather than inputs or unrelated factors.

ï‚·Why Other Options Are Incorrect:

A. Per mile traveled:Mileage is not directly tied to performance; it depends on the route structure and geography, not the quantity of trash collected.

C. Comparison with closest comparable jurisdiction:While this may provide context, it is not a specific performance measure.

D. Per employee:Employee count does not directly measure performance or efficiency in trash collection operations.

ï‚·References and Documents:

GAO Guide on Contract Performance Evaluation:Recommends using measurable and outcome-based metrics like cost per ton collected for performance reviews.

Best Practices in Local Government Contracting (AGA):Highlights output-based measures for evaluating contractor performance.

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.

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.

References:

Association of Government Accountants (AGA),Predictive Analytics in Public Sector Finance.

U.S. Census Bureau,Data Analytics for Revenue Forecasting.

ï‚·Why Does Management Need Real-Time Data Access?

Real-time access to data enables managers to make timely and informed decisions.

Complex data setspresented clearly and concisely (with minimal distractions) allow decision-makers to focus on the critical insights necessary for strategic and operational planning.

ï‚·Why Is Option D Correct?

On-demand access ensures managers can retrieve updated data whenever needed. Presenting the data in a focused and distraction-free format facilitates quick comprehension and decision-making.

ï‚·Why Other Options Are Incorrect:

A. Visual representation with indirect information:Including unrelated data can overwhelm users and detract from effective decision-making.

B. Dashboards updated quarterly:Quarterly updates do not meet the need for real-time access.

C. Prior year’s financial data:Decisions based solely on historical data are not responsive to real-time needs.

ï‚·References and Documents:

GAO Data Analytics and Visualization Framework:Stresses the importance of real-time, actionable, and distraction-free data for decision-making.

AICPA Dashboard Guidelines:Recommends presenting complex data sets in a clear and accessible format for management use.

Cash Control Fundamentals:

The primary goal of cash controls is to safeguard assets and prevent fraud, errors, or misappropriation.

Frequent bank reconciliations ensure that recorded cash balances match actual bank balances, detecting discrepancies quickly.

Explanation of Answer Choices:

A. Segregation of duties: While critical for cash management, it is not the most fundamental cash control.

B. Use of automated systems: Helpful for efficiency but not a fundamental control.

C. Analysis of cash reports: Important, but reconciling bank accounts is more critical for detecting errors or fraud.

D. Frequent reconciliation of bank accounts: Correct. This is the most fundamental and widely recognized control for safeguarding cash.

References:

Association of Government Accountants (AGA),Cash Management Best Practices.

Government Finance Officers Association (GFOA),Bank Reconciliation Best Practices.

Risk Assessment Under COSO Framework:

The first step in a COSO-based risk assessment is defining internal control objectives. This establishes what the organization aims to achieve, providing a framework for identifying risks and ensuring controls align with objectives.

Risk assessment focuses on evaluating the likelihood and impact of risks that could hinder these objectives.

Explanation of Answer Choices:

A. Identification of risks: Identifying risks follows the definition of internal control objectives.

B. Defining internal control objectives: Correct. Objectives must be defined first to provide a basis for identifying and assessing risks.

C. Review of prior audit findings: Important, but it’s not the starting point for a risk assessment under COSO.

D. Setting risk tolerance levels: This occurs later, after risks have been identified and evaluated.

References:

COSO,Internal Control - Integrated Framework.

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

ï‚·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.

ï‚·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.

ï‚·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.

ï‚·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.

ï‚·What Is the Current Ratio?

Thecurrent ratiomeasures an entity’s ability to cover its short-term liabilities with its short-term assets. The formula is: Current Ratio=Total Current AssetsTotal Current Liabilities\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}}Current Ratio=Total Current LiabilitiesTotal Current Assets​

ï‚·Calculation:

Total Current Assets = $1,320

Total Current Liabilities = $810

Current Ratio=1,320810\text{Current Ratio} = \frac{1,320}{810}Current Ratio=8101,320​ Current Ratio≈1.63\text{Current Ratio} ≈ 1.63Current Ratio≈1.63

ï‚·Why the Current Ratio Matters:

A current ratio above 1 indicates that the entity has more current assets than current liabilities, suggesting good short-term liquidity.

ï‚·Why Other Options Are Incorrect:

A. 0.61, B. 0.98, C. 1.14:These values result from incorrect calculations or misinterpretations of the formula.

ï‚·References and Documents:

GAO Financial Analysis Guide:Provides guidance on using the current ratio to assess liquidity.

GASB Financial Reporting Requirements:Highlights the importance of liquidity measures in government financial statements.