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

Definition of Computer-Assisted Audit Techniques (CAATs):

CAATs use software tools to perform audit tasks such as data analysis, testing transactions, and evaluating internal controls.

Obtaining accurate and relevant data is a key first step, as it forms the basis of any analysis performed using CAATs.

Explanation of Answer Choices:

A. Writing the system audit program: This is part of audit planning but not a specific feature of CAATs.

B. Verifying internal controls: While CAATs can be used to test controls, obtaining data is fundamental to this process.

C. Obtaining appropriate data: Correct. CAATs rely on accurate, relevant, and complete data for meaningful analysis.

D. Purchasing data mining software: While software is a tool for CAATs, the focus is on using data, not on acquiring the software itself.

Response to Weaknesses in Shared Service Providers:

Shared service providers often issue reports on internal controls (e.g., SOC 1 or SOC 2 reports).

When a weakness is identified, the recipient agency must evaluate whether compensating or mitigating controls exist to address the risk, ensuring continued reliability.

Explanation of Answer Choices:

A. Consider the existence of compensating or mitigating controls: Correct. This is a standard response to internal control weaknesses, as outlined in auditing and risk management best practices.

B. Ask the service provider to correct the weakness: Incorrect. While this may be appropriate, the recipient agency is ultimately responsible for evaluating and addressing the risk.

C. Dismiss the weakness: Incorrect. Ignoring a weakness can expose the agency to risk.

D. Refer the weakness to the Contracting Officer: Incorrect. This may be part of the process, but the agency must first assess the impact and controls.

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‚· What Are We Solving For?

We are determining the present value (PV) of a $500,000 lump sum payment to be received in 10 years, using anopportunity rate of 12%. Inflation is not relevant here because the opportunity rate already reflects the expected return, including inflation adjustments.

ï‚· Formula for Present Value:

The present value (PV) is calculated using the formula:

PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV​

Where:

FVFVFV = Future Value = $500,000

rrr = Opportunity rate = 12% or 0.12

nnn = Number of years = 10

ï‚· Calculation:

PV=500,000(1+0.12)10PV = \frac{500,000}{(1 + 0.12)^{10}}PV=(1+0.12)10500,000​ PV=500,000(1.12)10PV = \frac{500,000}{(1.12)^{10}}PV=(1.12)10500,000​ PV=500,0003.10585PV = \frac{500,000}{3.10585}PV=3.10585500,000​ PV≈160,986PV ≈ 160,986PV≈160,986

ï‚· Why Inflation Is Not Included:

The opportunity rate already incorporates the expected inflation. Using it ensures the PV reflects the real purchasing power of the future lump sum payment.

ï‚· Why Other Options Are Incorrect:

B. $186,023, C. $440,000, D. $485,000:These values result from incorrect calculations or the misuse of inflation in the formula.

ï‚· References and Documents:

GAO Financial Analysis Guide:Recommends using present value calculations with opportunity rates for investment decision-making.

AICPA Financial Management Guide:Provides detailed examples of calculating present value for lump sum payments.

Selection Criteria for Contract Awards:

When awarding contracts, federal, state, and local governments typically evaluate contractors based on objective criteria like staff expertise, past performance, and financial position to ensure the contractor can successfully fulfill the contract requirements.

Union affiliationis irrelevant to the contractor’s ability to meet the contractual obligations and is not a valid selection criterion.

Explanation of Answer Choices:

A. Staff expertise: Correctly used to ensure the contractor has qualified personnel.

B. Past performance records: Correctly used to evaluate the contractor’s historical success in fulfilling similar contracts.

C. Union affiliations: Correct. This is not considered a valid selection criterion for contract awards.

D. Financial position: Correctly used to assess the contractor's financial stability.

ï‚· What Are the Four General Government Auditing Standards?

These standards, as defined in theGAO Yellow Book (Government Auditing Standards):

Qualifications:Auditors must have the necessary professional skills and competence to perform their work.

Independence:Auditors must remain free from personal, external, and organizational impairments to maintain objectivity.

Due Professional Care:Auditors must exercise care and diligence, adhering to professional standards and ethical requirements.

Quality Control:Auditors must establish and maintain a system of quality control to ensure audit work meets professional standards.

ï‚· Why Is Option D Correct?

These four elements are explicitly outlined in the GAO Yellow Book as the core principles of government auditing standards.

ï‚· Why Other Options Are Incorrect:

A. Compliance, timeliness, qualifications, and due professional care:Timeliness and compliance are not part of the four general standards; they are components of audit objectives.

B. Supervision, planning, management controls, and evidence:These are aspects of audit performance, not general standards.

C. Planning, internal controls, independence, and irregularities:Planning and internal controls are part of the audit process, not general standards.

ï‚· References and Documents:

GAO Yellow Book (Generally Accepted Government Auditing Standards - GAGAS):Lists qualifications, independence, due professional care, and quality control as the four general standards.

AICPA Audit Standards:Aligns with GAGAS in emphasizing these four principles.

ï‚· What Are Disbursement Techniques?

Disbursement techniques refer to the methods used by organizations to pay vendors or settle financial obligations. The timeliness of payments depends on the technique used.

ï‚· Why Are Drafts the Best Option for Timely Payments?

Adraftis a payment instrument issued by an organization’s bank, drawn against its account, and typically includes specific payment timing instructions.

Drafts allow the payer to specify the timing of payments, ensuring they are made on time.

ï‚· Why Other Options Are Incorrect:

A. Warrants:Warrants authorize payments but do not ensure timeliness as they require additional processing before funds are disbursed.

B. Checks:Checks rely on postal delivery and clearing times, which may delay payments.

D. Bank cards:While convenient, bank cards are typically used for immediate payments, not for ensuring future timely disbursements.

ï‚· References and Documents:

Treasury Financial Manual:Highlights drafts as a disbursement tool for controlling the timing of payments.

GAO Cash Management Guide:Discusses the benefits of drafts in ensuring timely payments.

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‚· What Is Strategic Sourcing?

Strategic sourcing is a systematic process aimed at optimizing an organization’s purchasing activities to maximize value and minimize costs. It involves analyzing spending, selecting suppliers, and negotiating contracts strategically rather than reactively.

ï‚· Why Start with Spend Data?

Analyzing Spend Data:The first step is to understand the organization’s current spending patterns by analyzing spend data by category and by business unit. This helps identify high-cost areas, redundancies, and opportunities for cost savings.

Importance of Data-Driven Decisions:Without knowing where and how money is being spent, it’s impossible to make informed strategic sourcing decisions.

ï‚· Why Other Options Are Incorrect:

A. Contacting Vendors:Vendors are contacted later in the process after the spend analysis is complete and sourcing strategies are determined.

C. Contacting Business Units:While checking for existing contracts is part of the process, it happens after analyzing spend data.

D. Developing Supplier Performance Measures:This step occurs much later, typically after supplier selection and contract execution.

ï‚· References and Documents:

GAO Guide to Strategic Sourcing (2013):Recommends starting with a detailed spend analysis as the foundation for effective sourcing decisions.