Download CGFM TEST 3 Questions with Complete Verified Solutions 2024/2025 and more Study Guides, Projects, Research Business Administration in PDF only on Docsity! CGFM TEST 3 Questions with Complete Verified Solutions 2024/2025 Three Broad Government Spending Purposes 1) Current Operations 2) Capital Outlays 3) Debt Service Present Value Analysis - Three Components Determines what $$ Rec'd in Future is Worth Today 1) inflation component - year over year loss in value 2) enterprise component - inherent risk 3) unique component - Budget Accounting and Procedures Act of 1950 Requires the head of each federal agency to establish and maintain I/C's. Federal Managers Financial Integrity Act of 1982 (FMFIA) requires the head of each agency to evaluate controls on an annual basis, reporting any weakness along with a corrective action plan * (resulted in the "green book") * Single Audit Act of 1984 (amended in 1996) requires the audit of state and local governments and npo's receiving federal funding Sarbanes Oxley Act of 2002 Placed restrictions on publicly traded companies following Enron scandal. Requires mgmt to report on I/C's for financial reporting in its annual report. (ICOFR) Internal Controls Over Financial Reporting Chief Financial Officers Act of 1990 (CFO Act): required 10 federal agencies to produce audited annual financial reports that included a report on internal control. expanded in 1994 by GMRA INTERNAL CONTROLS systems and techniques managers use to provide reasonable assurance that agency objectives met in an effective/efficient manner, in compliance with laws/regulations, and to safeguard assets. Implemented to accomplish certain results, prevent problems, or detect problems that have occurred. Some controls can both detect and prevent problems (but only if their existence is known). TIME VALUE OF MONEY Used in consideration of capital budgeting 1) Present Value Analysis 2) Future Value Analysis 3) Payback Analysis Flowcharting Iterative process requiring changes throughout development, each step represents a decision, also used to evaluate processes for effective internal controls Earned Value Management (EVM) project mgmt system that weighs both schedule and cost performance to determine if a project is delivering expected results on time and within budget Regression Analysis Predicts the relationship between variables: 1) Direct Linear Regression 2) Indirect Linerar Regression 3) Non-linear Regression 4) No Relationship ** See Limits of Regression Analysis Correlation Coefficient Determines the degree of accuracy the analysis (variables) can be used to predict results (1=perfect correlation .85 considered reliable for forecasting) Multiple Regressions analyzes multiple IV's and look for items with the highest correlation coefficient as being the most like predictors Limits of Regression Analysis Cautionary Note on Ratio Analysis Not an ends unto themselves but serve as a starting point for further investigation. Liquidity Ratios Determines entities ability to meet creditors demands: 1) Current Ratio 2) Quick Ration Current Ratio = current assets/current liabilities current assets = cash and those assets that will become cash within one year (including inventories) Current liabilities = those that are due and payable within one year Should be a ratio of 2:1 Quick Ratio = Cash and equivalents, and receivables/current liabilities Removes the uncertainty over inventories Ideal ration should be 1:1 Asset efficiency and Turn-Over ratios Efficiency in using assets and converting them to cash. 1) Receivables Ratios 2) Inventory Ratios Receivables Ratios ex., percentage of tax collections/taxes levied. Rating agencies expect 98-99% range. Days outstanding = Avg receivables/Annual revenues x 365 Avg receivables = (Beg of year receivables + end of year receivables)/2 Inventory Ratios helps determine risk of loss from spoilage, pilfering, obsolescence, etc. Inventory turnover = Revenues from sales of inventory/Avg inventory during the period Avg inventory = 365/Inventory Turnover Operating Costs and Budgetary Cushions Extent to which entities revenues are sufficient to cover costs, or build balances for working capital, rainy day funds, emergency needs, or debt service coverage. Budgetary cushion is considered to be one of the most important financial ratios for state and local governments Need to watch out for balancing the budget with one time inflows Debt Burden Burden of 15-20% and above considered "high" by rating agencies. Measured by: * outstanding LTD/population * outstanding LTD/assessed property values Ability to repay Debt Excess revenues over operating expenditures/ Principal payment + interest expense Government Mgmt Reform Act of 1994 (GMRA) Expanded CFO Act to require 24 agencies to prepare an audited annual consolidated financial statement for the executive branch of the federal government Federal Financial Mgmt Improvement Act of 1996 (FFMIA) requirement to follow federal accounting standards, a standardized financial mgmt system, and standard general ledger (sgl) at the transaction level Accountability of Tax Dollars Act of 2002 Annual audit requirement expanded to include ALL federal agencies * OMB Circular A-123 - Mgmts Responsibility for Internal Control Mgmt responsible for: 1) develop/implement cost effective I/C's 2) assess the adequacy of I/C's in programs/ operations 3) assess/correct ICOFR 4) identify needed improvements 5) take corresponding corrective action 6) report annually on I/C through mgm Statement of Assurance (SOA) Appendix A - strengthened process for ICOFR Appendix B - mgmt of gov't charge card programs Appendix C - measurement and remediation of improper payments Appendix D (2013) - FFMIA guidance for agencies subject to CFO Act OMB Circular A-130 Mgmt of Federal Information Resources establishes minimum set of controls in federal automated information security programs GAO Standards for I/C in Fed Gov't See Appendix 2 Government Accountability w/Reasonable Assurance of ... 1) achieving program objectives/mission 2) using resources efficiently 3) complying with legal requirements 4) accurate and reliable financial reporting 5) safeguarding resources/assets Five Internal Control Components/Standards - Development Developed by the Committee of Sponsoring Organizations (COSO) in 1992, updated in 2013 Per COSO, Internal controls are intended to meet three major objectives: 1) Operations, 2) Reporting, 3) Compliance Five Internal Control Components/Standards - TRIANGLE 1) Control Environment - Base -> most important 2) Risk Assessment 3) Control Activities 4) Info and Communication 5) Monitoring IC Standard 1: Control Environment - 5 Principles Five principles of Control Environment: 1) Commitment to integrity and ethical values 2) Independence of oversight body and mgmt 3) Establish structures, reporting lines, and responsibilities 4) retain competent individuals in alignment with objectives 5) individuals held accountable for their I/C responsibilities * Most important component of Internal Control Control Environment - Commitment to Integrity Demonstrated by: * code of conduct that reflects organizational core values * employees understand what is ethical by mgmt communications and actions * employees know how to act if they see unethical behavior * management does not routinely override controls * management emphasizes long-term goals instead of short term gains * management actively discourages unethical behavior Control Environment - Commitment to Competence Demonstrated by: * clearly defined KSA's assigned to job functions * ambiguous and unrealistic job descriptions revised when necessary Enterprise Risk Management (ERM) Issued by COSO in Sept 2004 broader in scope with a focus on risk addition of 4th category - strategic objectives introduces risk appetite and risk tolerance growing in emphasis for government financial managers Risk Appetite used as a guidepoint for setting objectives - defines how much the entity is willing to risk in pursuit of its mission Risk Tolerance 8 Components to ERM (3 additional from IC triangle model) 1) Internal Environment (same as Control Environment) 2) OBJECTIVE SETTING - New 3) EVENT IDENTIFICATION - New 4) RISK ASSESSMENT - New 5) Risk Response 6) Control Activities 7) Information and Communication 8) Monitoring ERM - OBJECTIVE SETTING process to clearly set forth the entities mission ERM - EVENT IDENTIFICATION determining which events may impact the entities ability to achieve objectives both positively (opportunities) and negatively (risks) ERM -RISK RESPONSE, 4 ways to address risk: 1) avoidance 2) reduction 3) sharing 4) acceptance * decision based on the entity's "risk appetite" INTERNAL CONTROL EVALUATION - 8 STEPS 1) Organize the process 2) Segment the Agency 3) Conduct Risk Assessment 4) Develop Control Plans 5) Conduct Control Reviews 6) Identify Corrective Action Plans 7) Track Corrections 8) Report Results IC Eval Step 1 - Organize the Process * Senior official assign responsibility to team members based on: * individual KSA's * understanding of IC * ensures that each team member understands their responsibility in the process IC Eval Step 2 - Segment the Agency most gov'e agencies are too large to assess at one time, so must be broken down in to assessable units Can be broken down by bureau, a process within a unit, or a process that cuts across all units. * every segment of the organization should be included in one of the assessable units. IC Eval Step 3 - Conduct Risk Assessments Basics of Conducting Risk Assessment: 1) identify functions to be assessed 2) define each functions control objectives 3) obtain info on prior risk assessments 4) identify inherent risks 5) identify other risks 6) identify each functions control activities 7) Self assessment using existing knowledge (mgmt reviews, audit reports, annual performance plans) 8) form conclusion regarding extent of risk * weigh likelihood and impact * if extreme risk detected, mgmt may decide to jump straight to corrective action with other planning IC Eval Step 4 - Develop the Internal Control Plan Brief written plan summarizing the agencies risk assessments, planned actions, and internal control evaluations that are intended to provide reasonable assurances that controls are in place and working. Areas of high risk should be first area of focus. IC Eval Step 5 - Conduct Internal Control Reviews detailed evaluation documenting event cycles (major functions) and recording: * objective of the cycle * risks that would prevent achievement of objective * control techniques used to mitigate risks * how techniques were tested * results of the testing: adequate, weak, excessive, redundant * cost benefit analysis * any additional findings IC Eval Step 6 - Identify Corrective Actions IC Eval Step 7 - Track Corrective Actions * establish timetables and responsible individuals * track progress * establish follow-up procedures IC Eval Step 8 - Report on Results of Review agencies must have a formal reporting process to share and benefit from data obtained. external reporting requirement varies - federal government is required to issue an annual Statement of Assurance under FMFIA Auditor's Responsibility for Internal Controls * generally limited to the scope of work and the reporting requirements of the auditors * confined to audit objectives * audit work conforms to general audit standards Chief Internal Auditor Role 1) planning 2) policies and procedures 3) personnel management 4) coordinating with the external audit function 5) quality control understanding of IC's must be gained and documented during the planning phase. Effective IC's should limit the amount of additional testing required by the auditor Audit standards published by Institute of Internal Auditors additional level of internal control. * concentration bank systems - for widely disbursed payees * over-the-counter collections - bank receieves pmts directly on gov'ts behalf * credit and debt cards * electronic collections - pmts made via EFT, requires agreement with payee and gov't, and their financial institutions * prepaid draw-down account - ex., prepaid toll accounts Zero balance accounts mostly used for payroll clearing Disbursements * warrants and checks * electronic payments * automatic debit/credit card payments * recurring payments * Electronic Data Interchange (EDI) * credit cards * electronic benefit cards Warrant instrument drawn on the treasury of the government Check instrument drawn on a bank and paid with fund on deposit Improper Payments Elimination and Recovery Act (2010) Improper Payments Elimination and Recovery Improvement Act (2012) Reducing Improper Payments 1) Prevention Activities ex. pre-payment review 2) Detection Activities ex. data matching - PosPay 3) Recapture Activities ex. recovery efforts Three Elements to Investing 1) Safety/Risk 2) Liquidity - ease of conversion to cash without suffering significant loss in value 3) Yield - Return, interest, or dividend Investing - Types of Risk 1) Credit Risk = default risk, risk that investment will not be paid back 2) Custodial Credit Risk - securities registered in owners name or through agent of owner most safe 3) Market Risk - loss due to daily market fluctuations 4) Interest Rate Risk - fixed income securities will lose value as interest rates rise 5) Currency Risk 6) Political Risk Short-Term Fixed Income Securities *Treasury bills, backed by the full faith and credit of the US Gov't *CD's *Commercial Paper (Short term promissory notes) - typically mature in less than 270 days * Bankers Acceptances *Repurchase Agreements Short term Mutual Funds *Short term investing Funds (STIF) Long-Term Fixed Income Securities * Bonds * Debenture - backed by general credit, not assets * Zero-Coupon Bonds - no interest payment Equity Securities * Stocks, mutual funds, index funds International Securities American Depositary Receipts (Yankee Bonds) * registered with the SEC Alternative Investments high risk, low liquidity - best for large pension or endowment funds *Hedge funds *Real Estate Investment Trusts (REIT) *Private equities sold in secondary markets *Derivatives Investment Diversification - 4 Areas * Key determinant of portfolio success * 1) type of investment 2) sectors 3) companies 4) countries (global exposure) Prudent Expert Standard aka Prudent Investor Rule ** fiduciary investor must act as someone with familiarity with matters relating to the management of money, not just prudence. ** done solely in the interest of the participants and with no conflict of interest. Depository Trust Company settles trades in corporate, mortgage-backed, and municipal securities and electronically transfer security certificates. Written Investment Policy * best way to maintain fiduciary responsibility, most important control * should address prudent person rule investment objectives by investment type guidelines for selection required collateral required valuation/reporting instruments benchmarks for standards of comparison permissible/non-permissible investments positions and authorizations guidelines for use of investment managers required controls Government Credit Programs Government = "lender of last resort", for those that would not otherwise qualify 1) Direct Loans: Gov --> Private Party 2) Loan Guarantees: Bank --> Private Party w/ Gov Guarantee 3) Extension of Credit 4) Delinquent Taxes --> deferral programs and payment plans Subject to legislative authorization Government Loan - Program Management Responsible for (using legislative guidance): * choosing who is eligible * determining amount of credit to extend * establishing terms and conditions * negotiating work-out arrangements with delinquent accounts Government Loan - Financial Management Provide Program Mgmt support, including: * budget oversight * Cost sharing contracts * Time and material - contractor receives a flat hourly/daily rate plus the cost of materials Monitoring Contract Performance 1) timeliness of delivery 2) quantity delivered 3) quality of product/service 4) costs - prevent overruns by setting clear requirements in ITB/RFP Federal Real Property Profile (FRPP) maintained by GSA; comprehensive data base of all real property controlled by all executive branch agencies. Property Management - 4 activities 1) Recordkeeping, asset management system 2) Maximize utility 3) Safeguarding, esp. high value, small items 4) Maintenance - to maximize assets life, gov't tendency to defer Heritage Property a.k.a. Works of Art and Historical Treasure Assets that do not support the gov't in providing goods/services, but have historic, cultural, artistic, or other significance. Eg. monuments, public lands. No $$ amount used for reporting, however their existence is disclosed in a footnote to the financial statements OMB - 4 criteria for property disposal consideration: 1)is it needed to carry out a critical mission 2) the extent to which it is utilized 3) condition 4) cost to operate property * also, can it be used for an alternate purpose? Disposal methods * scrap - easiest * trade * give to another gov't agency * sell Gov't must always be good stewards of public resources. Inventory Risks 1) not having enough 2) having too much - timing up funds and eating space 3) loss due to pilferage, spoilage, deterioration, or obsolescence Inventory Management System - Supply Control 1) When to order - "reorder point" * consider usage, days for order processing and delivery, and reasonable level of stock for contingency * 2) How much to order - dependent on admin cost of procurement and the cost of carrying the materials in inventory. Economic Order Quantity (EOQ) EOQ = square root of 2DS/CI D= annual demand S = order cost C = unit cost I = carrying cost Inventory Control - Major Activities * receiving and inspecting * placing in inventory * tracking movement and disposition: * sold, placed in production, used in operations, placed into repair, loaned * *valuing inventory: FIFO, LIFO, Avg Cost Inventory - Major Internal Controls * policies and procedures * separation of duties * ensuring inspections accuracy * storage (to avoid damage) * safeguarding - asset tagging * physical verification - annual counts Inventory write-offs approved by management before processed Inventory Management/Performance Reporting Supply, Manufacturing, Retail, Budgeting Activities periodic user survey to gauge effectiveness **Supply Activities: 1) out of stock instances 2) dollar amount of unfilled orders 3) inactive, excess, or absolute stock 4) inventory difference ratio 5) inventory turn over ratio **Manufacturing Activities: 1) days of supply on hand 2) breakage and spoilage ** Retail Activities: 1) pilferage ** Budget Activities: 1) Budget Vs. Actual Financial Management System - Definition people, processes and technology to capture, classify, summarize, and report data in a meaningful manner to support business decisions. Core Components of a Financial Management System 1) maintain chart of accounts 2) account for basic financial transactions 3) monitoring budget execution 4) managing financial assets, esp. cash 5) A/P 6) maintaining financial controls 7) reporting financial position and results. Data Visualization - Definition creation and study of visual representation of data with goal of communicating complex insights in a meaningful way. Data Acquisition - Definition sampling of real world facts/figures to generate data that can be manipulated by a computer Data Analysis - Definition process of studying and summarizing data with the intent of extracting useful information to develop conclusions Data Dashboards - 4 key elements 4) Intermediate Outcomes 5) Final Outcomes Performance Measures - Service Accomplishments 1) Efficiency measure = cost per output, time per output 2) Cost-Effectiveness measure = cost per outcome Other type of performance measures 1) Context or environmental - identify the magnitude of the population or service area 2) Workload 3) Process measures - examines the way resources are applied in service delivery 4) Activity measures - only reflect work being done, not any accomplishments that have occurred. Explanatory Information Narrative explanation of internal, external factors impacting measurement/results, description of measurements, any relevant trends in performance, reasons for variances or declining performance Characteristics of Performance Information Measures need to be: 1) Relevant - logical relationship to entity mission 2) Understandable - 3) Reliable - verifiable and free from bias 4) Comparable - with baselines and benchmarks 5) Consistent - measuring/reporting same thing across periods 6) Timely - soon enough to make decisions, also adequate frequency of measurement 7) Actionable - able to point to whether corrective actions are needed Sources of Performance Data 1) Routine record-keeping systems 2) Physical testing and trained observer surveys 3) Citizen surveys 4) Third party data sources 5) Accounting systems Limitations of Performance Measurement ** need for more than one indicator, but not too many ** cause and effect not always evident - results not always related to inputs/gov't resources (e.g., crime and weather) ** process is still in formative stages Service Efforts and Accomplishments (SEA) Reports established by FASB in 1979 GASB Concept Statement 1 - Objectives in Financial Reporting (1987) for state and locals "financial reporting should assist in fulfilling government's duty to be publicly accountable and should enable users to assess that accountability by ... providing information to assist users in assessing the service efforts, costs, and accomplishments of the government entity" GASB Concept Statement 2 - Service Efforts and Accomplishments (SEA) Reporting (1994) Sets guidelines for performance measure reporting for state/local, however never made a mandatory reporting requirement. Set four essential components: 1) purpose and scope 2) major goals and objectives 3) key measures of SEA performance 4) discussion and analysis of results/challenges CFO Act (1990) Requires 24 largest fed agencies to have annual audits in accordance with Yellow Book CFO to establish policies relating to performance measures and maintain systems and controls for systematic measurement of performance Government Performance and Results Act (GPRA) 1993, Government Performance and Results Act Modernization Act (GPRAMA) 2011 ** major force behind fed gov't performance reporting ** requires federal agencies to prepare: 1) STRATEGIC PLAN (for at least 5 years, then updated to at lease every 4 years with GPRAMA) 2) ANNUAL PERFORMANCE PLAN (upcoming performance goals and indicators, basis for measurement and reliability factors, -- could incorporate in to budget document) 3) ANNUAL PERFORMANCE REPORT - yearly results for each performance goal , results from the previous 5 years, and an explanation of any goals that were not met. 2011 amendment requires appointment of a COO and PIO (Performance Improvement Officer) for each agency OMB Circular A-11 - Strategic Plan requirements include: * high level summary of the agency * mission statement * stakeholder outreach strategy * cross-agency priority goals * long-term goals * programs, organizations, regulations, and policies that relate to goals Performance and Accountability Report (PAR) What is an Audit an independent, systematic, objective, unbiased assessment that provides answers to a set of questions (audit objectives). auditors assess whether financial statements are presented fairly in all material respects, providing reasonable assurance of their correctness Materiality whether reasonable people would consider the commission or misstatement would have changed their opinions of the auditors conclusions based on auditors professional government, or guidelines form the GAO/IG in the case of the Federal government Audit Engagement - 3 Types 1) financial audits 2) attestation engagements 3) performance audits Financial Audits Standards set by the AICPA in the Statements on Auditing Standards (SASs), incorporated by reference in the Government Auditing Standards. Generally express an opinion on the accuracy of the financial statements, and whether they were prepared in accordance with GAAP. Generally Accepted Accounting Principles (GAAP) Set by: FASB - private companies and non-profits GASB - state and local governments FASAB - federal government Attestation Engagements Standards set by the AICPA in the Statements on Standards for Attestation Engagements (SSAEs) examination based on agreed upon procedures on a subject matter, e.g., policy or internal control compliance. More common to private entities. Three Types: 1) Examination in a financial audit 5) Audit Documentation - that stands alone (an experienced auditor with no involvement in the audit can review the documentation and understand the basis for conclusions and judgements) GAAS Reporting Standards for Financial Audits 1) unmodified opinion - f/s presented fairly in all material aspects in accordance with GAAP (unqualified or "clean opinion") 2) modified opinion - f/s NOT fairly presented or auditor is unable to obtain sufficient appropriate audit evidence (qualified, adverse, or disclaimer of opinion) GAGAS Reporting Standards for Financial Audits 1) report on compliance with GAGAS 2) report in internal controls and compliance * scope of testing and opinion 3) report deficiencies in internal controls and fraud, noncompliance, or abuse * anything having material effect * nonmaterial items presented in management letter * may have to report material items to IG, AG 4) report views of responsible officials * allow officials to review and comment on draft report 5) reporting confidential or sensitive information * omit this information from general publication is required by law 6) distributions of reports F/S Audits of State/Local Governments Primary Government - Government Wide 1) Government Activities** 2) Business Activites** Primary Government - Fund Level 1) Each Major Gov't Fund** 2) Combined Non-Major Funds 3) Each Major Enterprise Fund** 4) Combined Other Enterprise Funds 5) Agregate Internal Service Funds 6) Agregate Pension Funds 7) Aggregate Investment Trust Funds Component Units ** require a separate audit opinion, and all others expressed together in aggregate opinion Attestation Engagements - Fieldwork Standards The practitioner must have reason to believe that the subject matte is capable of evaluation against criteria that are suitable and available to users. AICPA standards require auditor to: * property plan the engagement * supervise assistants * obtain sufficient evidence 1) Examination - requires same 5 GAGAS requirements for F/S audits 2) Review - additional requirement to report findings 3) Agreed Upon Procedures - additional requirement to report findings Attestation Engagements - Reporting Standards 1) identify subject matter and character of the engagement 2) state conclusions about the subject matter based on audit criteria 3) state auditor's significant reservations about the engagement 4) state whom the report is intended for use by Performance Audits - Framework 1) Reasonable Assurance - that evidence obtained sufficiently supports the findings. 2) Significance - 3) Audit Risk - possibility that findings are improper or incomplete Performance Audit - Fieldwork Standards (Yellow Book) 1) Planning - more extensive that F/S Audits: * define scope, methodology, objectives * additional criteria for fieldwork (e.g., benchmarks, expert opinions, technical standards) 2) Supervision - No difference from F/S Audits 3) Obtaining sufficient, appropriate evidence * sufficiency = quantity of evidence * appropriateness = relevance, reliability, and validity of evidence 4) Audit Documentation - no difference from F/S Audits Performance Audit - Reporting Standards 1) Reporting - no specific format, in written or other retrievable form 2) Report Contents * objective, scope, methodology * results, findings, recommendations * internal control deficiencies * instances of fraud, noncompliance, abuse * a statement of compliance with GAGAS * views of responsible officials * nature of sensitive/confidential information 3) Distribution - same requirements as F/S Audits Yellow Book = GAGAS Provides standards for: financial audits attestations engagements performance audits * incorporates AICPA standards by reference Audit Planning (part of Fieldwork) * define objectives * identify scope or period of review * entrance conference * prepare written audit program, listing procedures - accumulate pertinent knowledge of auditee - conduct analytical tests - gain understanding of internal controls - assess audit risk - combination of: * inherent, control, and detection risk * greater the risk, more testing required Additional Audit Fieldwork