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

ï‚· What Is a Risk Profile?

Arisk profilerepresents the aggregate level and types of risks that an organization is willing to accept in pursuit of its strategic objectives. It aligns with the organization’s risk appetite and tolerance and helps prioritize and manage risks effectively.

This profile typically includes key risks, their likelihood, and potential impact, as well as how those risks align with the organization's mission and strategy.

ï‚· Why Is Risk Profile the Correct Answer?

The risk profile provides an enterprise-wide view of risks and their potential influence on achieving strategic goals. It aggregates risks across all levels of the organization and ensures that management considers them when making decisions.

ï‚· Why Other Options Are Incorrect:

A. Risk Register:While a risk register includes detailed descriptions of individual risks, it does not aggregate risk levels or types across the organization.

B. Risk and Control Evaluation Matrix:This tool evaluates specific risks and controls but does not capture the organization’s overall risk appetite or profile.

D. Risk and Control Assessment Tool:This is a generic tool for assessing risks and controls, not for aggregating the overall risk picture.

ï‚· References and Documents:

OMB Circular A-123:Specifies the need for agencies to maintain a risk profile as part of enterprise risk management.

COSO ERM Framework (2017):Defines a risk profile as central to managing risks in alignment with strategic objectives.

ï‚· 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.

ï‚· 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.

ï‚· 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.

ï‚· 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.

Definition of Cost-Effectiveness Measures:

Cost-effectiveness measures assess therelationship between inputs (resources used)andoutcomes (results achieved)to determine whether a program delivers value for the resources invested.

Explanation of Answer Choices:

A. Efficiency measures: Incorrect. These relate inputs to outputs, focusing on how efficiently resources are used to produce services, but not directly tied to outcomes.

B. Process measures: Incorrect. These measure activities or steps within a program but do not assess outcomes.

C. Cost-effectiveness measures: Correct. These directly link inputs to outcomes, measuring the program’s effectiveness in achieving its objectives relative to costs.

D. Activity measures: Incorrect. These track the level of activity or effort but not outcomes or effectiveness.

ï‚· 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).

ï‚· 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.

ï‚· 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

ï‚· 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.

ï‚· 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.

ï‚· 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.