AGA GFMC Exam Dumps

What Are Material Weaknesses?

A material weakness in 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?

The governing 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 an audit report or a management letter addressed 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.

Reference 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.

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.

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.

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.

Reference 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.

Compliance Reporting Under Government Auditing Standards (GAS):

GAS requires auditors to assess compliance with applicable laws, regulations, contracts, and grant agreements during audits.

Compliance reporting typically includes:

Identifying areas of noncompliance.

Describing the auditor's responsibility for compliance testing.

Outlining the scope of compliance testing.

Explanation of Answer Choices:

A . Areas of noncompliance: Included in compliance reporting to highlight where the entity failed to meet requirements.

B . The auditor's responsibility for tests of compliance: GAS requires auditors to clarify their role in compliance testing.

C . Review of major internal control cycles: Correct. While internal controls may be assessed, reviewing 'major internal control cycles' is not a direct component of compliance reporting.

D . The scope of the compliance testing: GAS mandates that the scope of testing be disclosed in the compliance report.

GAO, Government Auditing Standards (Yellow Book).

AICPA, Compliance Reporting Guidance for Government Audits.

Understanding Resource Allocation in Street Maintenance: When additional resources are provided for street maintenance, their allocation should address the most pressing infrastructure needs to maximize impact and public benefit.

Key Indicator (Pavement Rating Scores): Pavement rating scores are used to evaluate the condition of roads. Areas with the lowest scores (representing unmet needs) require prioritized funding to bring the infrastructure to acceptable levels.

Explanation of Answer Choices:

A . Number of intersections: The number of intersections is not directly related to road conditions or pavement scores.

B . Historical budgeted amounts: Allocating based on past budgets does not address current infrastructure conditions or unmet needs.

C . Lane miles rated as acceptable by citizens: Roads already rated as 'acceptable' do not require immediate attention.

D . Lane miles with unmet needs: Correct, as this aligns with addressing the most critical deficiencies based on the pavement scores.

Government Finance Officers Association (GFOA), Best Practices in Capital Asset Management.

Federal Highway Administration (FHWA), Performance-Based Planning and Programming Guidebook.

GAO and External Audit Standards:

The Government Accountability Office (GAO) uses the Yellow Book as its primary standard. However, it may also reference external standards from recognized international and professional auditing organizations. INTOSAI is specifically mentioned in the Yellow Book as a source of additional standards for governmental audits.

Explanation of Answer Choices:

A . Public Company Accounting Oversight Board (PCAOB): This regulates audits of publicly traded companies, not government entities.

B . International Auditing and Assurance Standards Board (IAASB): This focuses on global private-sector audits, not specifically government-related.

C . International Organization of Supreme Audit Institutions (INTOSAI): Correct. INTOSAI sets audit standards for public-sector auditors worldwide and is relevant for the GAO.

D . AICPA: While the AICPA sets standards for U.S. auditors, INTOSAI is more relevant for international public-sector audits.

GAO, Government Auditing Standards (Yellow Book).

INTOSAI, Framework of Professional Standards for Supreme Audit Institutions.