Free AGA CGFM Practice Exam with Questions & Answers | Set: 3

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​

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

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.

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.

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.

What Are Material Weaknesses?

Amaterial weaknessin internal control is a deficiency or combination of deficiencies that creates a reasonable possibility of a material misstatement in the financial statements that would not be prevented or detected in a timely manner.

In the context of state and local financial audits, material weaknesses must be reported to those charged with governance, as they are responsible for oversight and corrective actions.

Why Is the Governing Body the Correct Answer?

Thegoverning body(e.g., city council, county board, or state commission) is directly responsible for overseeing the entity’s financial operations and ensuring accountability. Reporting material weaknesses to them ensures that corrective actions can be implemented to strengthen internal controls.

Auditors communicate such findings through anaudit reportor amanagement letteraddressed to the governing body.

Why Other Options Are Incorrect:

A. Legislature:The legislature may have oversight of state budgets and appropriations but is not the direct governing body for financial audits.

C. Taxpayers:While transparency is important, material weaknesses are not directly reported to taxpayers. They may be disclosed in public audit reports, but taxpayers are not the primary audience.

D. Local media:Material weaknesses are not formally reported to the media; their disclosure depends on the entity’s public reporting processes.

References and Documents:

GAO Yellow Book (GAGAS):Requires auditors to report material weaknesses to those charged with governance.

GASB (Governmental Accounting Standards Board):Emphasizes the importance of communicating significant audit findings to governing bodies.

AICPA Audit Standards (AU-C 265):Requires auditors to communicate material weaknesses to management and those charged with governance.

Assumptions in Disaster Planning:

Financial continuity planning for natural disasters must account for scenarios where the event occurs suddenly and without warning.

This assumption ensures that governments are prepared to quickly resume critical financial operations even under challenging and unpredictable circumstances.

Explanation of Answer Choices:

A. Leadership and staff will reconvene at an alternate location: While this is part of disaster planning, it is not the primary assumption.

B. A fully redundant infrastructure will be available to staff at an alternate location: This may not always be realistic or feasible.

C. There may be no warning of the potential emergency: Correct. Disaster planning assumes that emergencies can occur without prior notice.

D. Government agencies will need to operate as standalone organizations: This is not a standard assumption in disaster planning.

References:

FEMA,Continuity Guidance Circular.

GAO,Disaster Resilience and Continuity Planning.

Why Shared Services Agreements Are Cost-Effective:

A shared services agreement allows multiple school districts to pool resources and share the costs of special education services, such as specialized staff, transportation, or facilities.

This reduces duplication of services, increases efficiency, and helps lower costs without reducing the quality of education provided.

Why Federal Maintenance of Effort (MOE) Requirements Matter:

Under federal law, schools must maintain a certain level of funding for special education services to receive federal grants. Cutting budgets or shifting costs directly to parents would likely violate MOE requirements.

Why Other Options Are Incorrect:

A. Shift a portion of the costs in the form of a fee to parents:This violates federal regulations, as public schools cannot charge parents for special education services.

B. Decrease budget allocation for special education services:This would also violate MOE requirements and reduce services for students with special needs.

D. Outsource special needs services to a private contractor:While outsourcing can be an option, it may not always reduce costs and could introduce additional risks (e.g., quality concerns or compliance issues).

References and Documents:

Individuals with Disabilities Education Act (IDEA):Mandates federal MOE requirements for special education funding.

GAO Report on Shared Services in Education:Highlights cost-saving benefits of shared services agreements.

Definition of the Condition in an Audit Finding:

The "condition" describes the actual state observed during the audit. It highlights what occurred in practice, serving as the factual basis for the finding.

In this case, the condition is theabsence of receiptsfor multiple credit card purchases.

Explanation of Answer Choices:

A. We identified multiple credit card purchases without receipts to support them: Correct. This is the observed issue (condition).

B. Government policy requires a cardholder to submit receipts for all purchases: This is the "criteria," which defines the standard or rule being audited against.

C. Finance Department personnel did not regularly review purchases to ensure compliance: This is the "cause," explaining why the condition occurred.

D. We recommend that the government implements a timely review of all credit card purchases: This is the "recommendation," not the condition.

References:

GAO,Government Auditing Standards (Yellow Book).

AICPA,Elements of an Audit Finding Guidance.

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.

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.

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.

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.

What Is Control Risk?

Control riskrefers to the risk that an organization’s internal controls will fail to prevent or detect material misstatements in a timely manner.

The effectiveness of internal controls directly influences control risk. If controls are weak or poorly designed, the risk increases.

Why Is Option B Correct?

The primary focus of control risk is the adequacy and effectiveness of an entity’s internal controls. Effective controls reduce the likelihood of material misstatements, while deficiencies increase control risk.

Why Other Options Are Incorrect:

A. Inherent Risk:This is the risk of material misstatements due to the nature of the business or transactions, independent of controls.

C. Detection Risk:This refers to the risk that auditors will fail to detect material misstatements. It is influenced by the nature and extent of audit procedures, not internal controls.

D. Audit Risk:This is the overall risk that an auditor will issue an incorrect opinion. It combines inherent, control, and detection risks.

References and Documents:

AICPA Standards on Audit Risk (AU-C 315):Explains control risk and its relationship to the effectiveness of internal controls.

GAO Yellow Book:Emphasizes assessing control risk when evaluating internal controls in audits.

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.

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.

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.

Why Is This the Best Measure for Performance?

Comparing thecost per acre maintainedto that of another jurisdiction provides a meaningful benchmark for performance evaluation. It allows the director to assess how efficiently the department is operating relative to similar organizations.

This comparison ensures that the department is managing resources effectively and identifies potential areas for improvement.

Why Other Options Are Incorrect:

A. Use a single measure of citizen satisfaction:While citizen satisfaction is important, it is subjective and does not provide insight into operational efficiency.

B. Evaluate funds spent on grounds maintenance:Total spending does not measure efficiency or productivity; it merely reflects the amount allocated.

C. Analyze staffing levels:Staffing levels do not directly measure performance; they are only one factor in determining efficiency.

References and Documents:

Governmental Performance Reporting (AGA):Recommends using comparative benchmarks for evaluating efficiency in service delivery.

Performance Management Framework by GAO:Highlights cost-effectiveness metrics such as cost per acre maintained.