GFMC Examination 3: Governmental Financial Management and Control (GFMC) Questions and Answers

 Investment Management Basics:

The first step in investment management is establishing theobjectivesof the investment program. This requires consensus among key stakeholders, such as managers, on what the investment goals are (e.g., risk tolerance, return expectations, liquidity needs).

Without clear objectives, subsequent steps like developing policies or selecting investments cannot be effectively carried out.

 Why Consensus Is Important:

Investment objectives must align with the organization’s mission, risk tolerance, and financial goals.

Consensus ensures that all managers are on the same page before developing specific strategies or policies.

 Why Other Options Are Incorrect:

A. Ensure employees understand their investment options:Employee understanding is not the first step; it comes later when the investment strategy is implemented.

C. Develop an investment policy manual:This happens after the objectives have been established.

D. Establish criteria for divesting:Divestment criteria are part of the investment policy and are determined later.

 References and Documents:

GAO Financial Management Guide:Highlights setting objectives as the first step in investment management.

COSO Framework for Investment Risk Management:Stresses the importance of aligning objectives before policy development.

 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 Does the Single Audit Act Require?

TheSingle Audit Actrequires non-federal entities (e.g., state and local governments, nonprofit organizations) that receive significant federal funds to undergo a single, organization-wide audit.

The audit focuses on both the entity’s financial statements and its compliance with federal program requirements.

 Why Is Option A Correct?

The Single Audit Act ensures accountability and transparency in the use of federal funds by requiring financial statement audits and compliance testing for grant recipients.

 Why Other Options Are Incorrect:

B. Using audits to manage acquisition risks:This relates to procurement and contract management, not the Single Audit Act.

C. Single audits of federal financial management systems:The act applies to non-federal entities, not federal agencies.

D. Establishing internal controls related to audits:While internal controls are assessed during a single audit, the act does not mandate their establishment.

 References and Documents:

Single Audit Act of 1984 (Amended 1996):Specifies the requirements for audits of non-federal entities receiving federal funds.

OMB Circular A-133 (Superseded by Uniform Guidance, 2 CFR Part 200):Provides detailed guidance on single audit requirements.

 Why Include Permissible and Non-Permissible Investment Securities?

Aninvestment policyoutlines the guidelines and restrictions for managing an entity’s investments, ensuring compliance with laws and protecting public funds.

Listingpermissible(e.g., government bonds, treasury securities) andnon-permissibleinvestments ensures clarity about what the entity can and cannot invest in, helping to mitigate risk and maintain fiduciary responsibility.

 Why Other Options Are Incorrect:

A. Prices and performance of investment securities:This information is important for monitoring investments but does not belong in the policy itself.

C. Historical allocations of investment securities:Historical data informs decision-making but is not relevant to the rules governing investments.

D. Key and non-key investment security controls:While controls are critical, they are part of the implementation process, not the investment policy.

 References and Documents:

GAO Investment Policy Guidelines:Recommends specifying permissible investments to ensure fiduciary responsibility.

GFOA Best Practices in Investment Management:Emphasizes clear investment guidelines in the policy.

 Why Select the Lowest Qualified Bidder?

Procurement rules in government require selecting thelowest qualified bidderto ensure fairness, cost-efficiency, and compliance with procurement regulations.

If the mayor’s high school classmate’s company meets the qualification criteria and provides the lowest bid, there is no conflict of interest unless favoritism or improper influence is proven.

 Why Other Options Are Incorrect:

B. Second lowest priced qualified bidder:Selecting the second lowest bidder without justification violates the principle of fairness and cost-efficiency.

C. Third lowest bidder pending state disbarment:This vendor is not a qualified bidder due to pending disbarment.

D. Highest priced qualified bidder with the highest quality products:If quality specifications are already met by lower bidders, selecting the highest-priced bidder is unjustifiable.

 References and Documents:

Federal Acquisition Regulation (FAR):Requires selecting the lowest qualified bidder.

GAO Guide on Procurement Standards:Emphasizes fairness and cost-effectiveness in vendor selection.

 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.

Management's Role in Resolving Audit Recommendations:

By appointing a senior official to oversee the resolution of audit recommendations, management demonstrates itscommitment and supportfor the audit process.

This action indicates a proactive approach to addressing findings and improving operations.

Explanation of Answer Choices:

A. Agreement with the audit findings: While this may indicate agreement, appointing a senior official is more about ensuring action is taken rather than expressing agreement.

B. Disagreement with the audit findings: Incorrect. Appointing a senior official is a constructive step, not an indication of disagreement.

C. Delegation of authority: Incorrect. Delegation is involved, but the key point is the demonstration of management’s support for addressing audit findings.

D. Support for the audit process: Correct. This action underscores management's commitment to resolving audit findings and improving accountability.

 What Is Inventory Control?

Inventory controlrefers to the processes and systems used to manage stock levels, including determining how much inventory to keep on hand, reordering stock, and maintaining optimal levels to meet operational needs while minimizing costs.

Determining stock levels is a central function of inventory control, ensuring the organization has the right amount of inventory to meet demand without overstocking or understocking.

 Why Other Options Are Incorrect:

B. Safeguard control:This refers to protecting inventory from theft, damage, or loss, not determining stock levels.

C. Management control:This is a broader term encompassing oversight and governance, not specific to inventory.

D. Supply control:This typically refers to managing supply chains and suppliers, not the internal control of inventory levels.

 References and Documents:

GAO Inventory Management Guide:Defines inventory control as the process of determining and maintaining appropriate stock levels.

Best Practices in Government Inventory Management (AGA):Emphasizes the role of inventory control in balancing supply and demand.

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.

Responsibilities in Resolving Single Audit Findings:

Single audits assess compliance with federal program requirements.

Findings often highlight deficiencies or noncompliance issues that must be resolved by the entity receiving the federal funds.

Explanation of Answer Choices:

A. Awarding agency: The agency provides oversight and guidance but does not directly resolve findings.

B. Recipient agency: Correct. The entity receiving the funds is responsible for addressing and resolving findings to comply with federal regulations.

C. Audit committee: May oversee the process but doesn’t take direct responsibility for resolving findings.

D. External auditors: Identify the findings but do not resolve them.

Understanding the Scenario:The table compares the costs of four printing jobs performed by an "Internal Print Shop" versus three external vendors (Ace Printing, ABC Printing, and Printing, Inc.). Each vendor's pricing varies by print job type. The task is to evaluate whether outsourcing (hiring external vendors) is a reasonable alternative to keeping the work in-house.

Key Considerations in Outsourcing:According to governmental accounting principles and budgeting practices outlined by theAssociation of Government Accountants (AGA), the decision to outsource should consider:

Cost-effectiveness: Does outsourcing reduce costs without compromising quality or service delivery?

Operational efficiency: Can outsourcing free up internal resources for other priorities?

Comparative pricing: How do external vendor rates compare to internal costs for identical services?

Analysis of the Print Jobs:Let’s break down the cost comparison for each print job:

Zone Map:Internal cost = $4.23.Cheapest vendor = Printing, Inc., at $4.00.Outsourcing is cheaper for this job.

Agenda Packet:Internal cost = $23.18.Cheapest vendor = Printing, Inc., at $22.00.Outsourcing is cheaper for this job.

Budget Cover:Internal cost = $840.00.Cheapest vendor = ABC Printing, at $624.30.Outsourcing is significantly cheaper for this job.

Employee Benefit Brochure:Internal cost = $6.14.Cheapest vendor = ABC Printing, at $4.90.Outsourcing is cheaper for this job.

Conclusion Based on Analysis:

Across all four print jobs, the lowest-cost external vendor always beats the Internal Print Shop's costs.

From abudgetary perspective, outsourcing is feasible as it offers cost savings across all jobs.

Why Not A, C, or D?:

Option A(Keep printing in-house): Incorrect, as in-house costs are consistently higher than the cheapest external vendor.

Option C(Outsourcing is necessary): Incorrect, as feasibility doesn’t mean necessity; internal printing is still an option if other factors (like quality or control) outweigh costs.

Option D(Award contract to ABC Printing): Incorrect, since the best vendor depends on the job (e.g., Printing, Inc. is cheaper for Zone Map and Agenda Packet).

Analyzing Participation and Enrollment Trends:

Dashboards are tools that provide real-time visualizations of data, making them ideal for quickly analyzing trends such as program participation versus enrollment.

They allow program managers to view up-to-date metrics and identify variances without manual data processing.

Explanation of Answer Choices:

A. Crosstab: While useful for comparing categorical data, crosstabs are static and less effective for real-time analysis.

B. Portable document format (PDF): A PDF is a static file format, unsuitable for dynamic data analysis.

C. Text file: Text files provide raw data but require additional processing, making them inefficient for quick analysis.

D. Dashboard: Correct. Dashboards provide dynamic, real-time analytics, perfect for monitoring daily changes in participation and enrollment.

 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.

 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.

 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.

 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.

Fraud Audit Objective:Fraud audits aim to detect and investigate fraudulent activities, strengthen internal controls, and report findings to stakeholders.

Basic Steps in Fraud Audits:

Consulting Legal Counsel: Ensures compliance with legal requirements and protects the organization.

Reporting the Results: Essential to inform stakeholders of findings and corrective actions.

Follow-up on Control Weaknesses: Addresses identified vulnerabilities to prevent future fraud.

Explanation of Incorrect Answer:

D. Considering political ramifications: Irrelevant to fraud audits, as these audits focus on financial and legal matters rather than political considerations.

 Why Verify Transit Use Before Taxi Use?

The program is intended for employees who commute by public transit. Verifying transit use on the day the taxi service was used ensures employees are adhering to program rules.

Random sampling is cost-effective and practical for identifying abuse without needing to review all records.

 Why Other Options Are Incorrect:

A. Looking for individuals using the service more than 10 times:This only identifies overuse but does not confirm whether program rules were followed.

B. Checking destination addresses for hospitals/clinics:This assumes all emergencies involve medical visits, which is not always the case.

C. Matching destination addresses to home addresses:This does not confirm transit use and may not identify abuse of the program.

 References and Documents:

GAO Fraud Prevention Guide:Recommends using random sampling to check compliance with program rules.

Best Practices for Internal Controls in Benefit Programs:Emphasizes verifying eligibility and usage to detect potential abuse.

 What Are Computer-Assisted Audit Techniques (CAATs)?

CAATsare specialized tools used in forensic accounting and auditing to analyze large volumes of data for patterns, anomalies, and irregularities that may indicate fraud.

These techniques help quantify the impact of fraud by identifying discrepancies, overpayments, or unaccounted transactions.

 Why Are CAATs Used for Quantifying Fraud?

CAATs can efficiently analyze transactional data, calculate losses, and determine the extent of financial damage caused by fraud.

Examples include using software to detect duplicate payments, inflated invoices, or unauthorized transactions.

 Why Other Options Are Incorrect:

A. Test of controls:Tests of controls evaluate the effectiveness of internal controls but do not quantify the impact of fraud.

C. Data integrity:Ensuring data integrity is important, but it does not specifically address quantifying fraud.

D. Benchmarking:Benchmarking compares performance metrics but does not analyze or quantify fraud.

 References and Documents:

GAO Fraud Prevention Framework:Highlights the use of CAATs in forensic accounting.

AICPA Forensic Accounting Guidelines:Recommends CAATs for fraud detection and quantification.

Creditworthiness and Loan Approval:

When creditworthiness is a criterion for government loans, the applicant must demonstrate asatisfactory history of repaying debt, as this reflects their ability to fulfill repayment obligations in the future.

 Why a Satisfactory History Is Required:

Past repayment behavior is considered the best indicator of future performance. Government agencies prioritize reducing the risk of defaults by ensuring applicants have a proven history of managing debt responsibly.

 Why Other Options Are Incorrect:

A. A credit rating from a major bank:While a credit rating is helpful, it is not typically required for government loans. Instead, creditworthiness is evaluated based on repayment history and other financial factors.

C. Sufficient capitalization:This is important for business loans, but it does not address creditworthiness.

D. A promise to pay interest at the government borrowing rate:A promise is not sufficient to establish creditworthiness.

 References and Documents:

OMB Circular A-129:Requires agencies to assess creditworthiness before granting loans.

GAO Loan Management Guide:Highlights repayment history as a key criterion for loan approval.

 What Is Net Present Value (NPV)?

NPV analysisevaluates the profitability of long-term investments by calculating the present value of expected cash inflows and outflows over time, discounted at a specified rate (e.g., the opportunity cost of capital).

It helps decision-makers compare investment options by quantifying their value in today’s dollars.

 Why NPV Is Appropriate for Long-Term Investments:

It considers thetime value of money(a dollar today is worth more than a dollar in the future).

NPV helps the treasurer evaluate and prioritize investments based on their overall profitability and financial impact over the long term.

 Why Other Options Are Incorrect:

B. Regression Analysis:This statistical method analyzes relationships between variables but is not commonly used for evaluating long-term investments.

C. Horizontal Analysis:Focuses on financial data changes over time (e.g., year-to-year comparisons), not investment decisions.

D. Ratio Analysis:Measures financial performance but does not evaluate the profitability of long-term investment alternatives.

 References and Documents:

GAO Guide on Investment Decision-Making:Recommends using NPV for evaluating long-term projects and investments.

OMB Circular A-94:Provides guidelines for using NPV in benefit-cost analysis of federal investments.

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.

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.

Type of Engagement for Reviewing Pilot Programs:

A performance audit evaluates theeffectiveness, efficiency, and economyof programs or operations.

In this case, the review of the pilot program assessed the number of families served and the efficiencies achieved through community involvement, which aligns with performance auditing objectives.

Explanation of Answer Choices:

A. Financial audit: Focuses on the accuracy of financial statements, not program effectiveness or efficiency.

B. Single audit: Focuses on compliance with federal grant requirements, not program evaluation.

C. Performance audit: Correct. This type of audit reviews program outcomes and operational efficiencies.

D. Attestation: Provides assurance on specific subject matter but does not evaluate program performance.

Performance Audit Overview:

A performance audit focuses on evaluating the economy, efficiency, and effectiveness of government programs or activities.

Due professional care is a requirement inGovernment Auditing Standards (Yellow Book), ensuring auditors perform their duties responsibly and with professional judgment.

Key Requirement: Sufficient and Competent Evidence:

Auditors must collect sufficient and reliable evidence to support their findings, conclusions, and recommendations. This is the cornerstone of "due professional care."

Explanation of Answer Choices:

A. Obtain sufficient and competent evidence: Correct. This ensures audit findings are supported by reliable, documented evidence.

B. Determine scope: While part of audit planning, it is not directly related to due professional care.

C. Set materiality of financial statements: This applies to financial audits, not performance audits.

D. Present the findings in accordance with GAAP: GAAP is not a requirement for performance audits.

Cash Control Fundamentals:

The primary goal of cash controls is to safeguard assets and prevent fraud, errors, or misappropriation.

Frequent bank reconciliations ensure that recorded cash balances match actual bank balances, detecting discrepancies quickly.

Explanation of Answer Choices:

A. Segregation of duties: While critical for cash management, it is not the most fundamental cash control.

B. Use of automated systems: Helpful for efficiency but not a fundamental control.

C. Analysis of cash reports: Important, but reconciling bank accounts is more critical for detecting errors or fraud.

D. Frequent reconciliation of bank accounts: Correct. This is the most fundamental and widely recognized control for safeguarding cash.

 What Did the Accountability for Tax Dollars Act Do?

This act expanded the audit requirements tovirtually all federal agencies, not just those covered under the CFO Act of 1990.

It mandated that agencies prepare audited financial statements to improve transparency, accountability, and the management of federal funds.

 Why Other Options Are Incorrect:

A. CFO Act of 1990:This act required audited financial statements but only applied to the 24 largest federal agencies (those covered under the Chief Financial Officers Act).

C. Federal Financial Management Improvement Act of 1996:Focused on financial system compliance with federal accounting standards, not expanding audit requirements.

D. Government Management Reform Act of 1994:Extended the CFO Act requirements to consolidated government-wide financial statements, not all federal agencies.

 References and Documents:

Accountability for Tax Dollars Act of 2002:Specifies the expanded audit requirements for federal agencies.

GAO Guide on Federal Financial Management Laws:Provides a comprehensive overview of key legislation.

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.

 What Are Open-Ended Mutual Funds?

Open-ended mutual funds are investment vehicles that allow investors to buy and sell shares at the current net asset value (NAV), which is determined daily.

These funds are highly liquid and can be easily valued, making them a sound investment option for pension funds.

 Why Are They Suitable for Pension Funds?

Pension funds require investments that are easily valued, transparent, and provide liquidity to meet benefit obligations. Open-ended mutual funds meet all these criteria.

 Why Other Options Are Incorrect:

B. Reverse repurchase agreements:While they can be part of investment strategies, they are not easily valued compared to open-ended mutual funds.

C. Derivative instruments:Derivatives can be complex and difficult to value, making them less suitable for pension funds that prioritize transparency and simplicity.

D. Internal investment pools:These are investment vehicles used by governments, but their valuation may not be as straightforward or frequent as mutual funds.

 References and Documents:

GAO Guide to Investment Management for Pension Funds:Recommends transparent, easily valued investments like mutual funds.

AICPA Pension Plan Audit Guidelines:Emphasizes liquidity and valuation in pension fund investments.

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 Auditing Standards (GAS):

GAS, often referred to as theYellow Book, outlines the responsibilities of auditors conducting financial statement audits for government entities.

One core requirement is that auditors must consider compliance with applicable laws, regulations, contracts, and grant agreements that could materially affect financial statements.

Explanation of Answer Choices:

A. Design tests to assess compliance with laws, regulations, contracts, and grant agreements: Correct. This is a required component under GAS to ensure financial statements are materially accurate and comply with legal and regulatory frameworks.

B. Identify violations of laws which could be punishable by monetary penalties: Incorrect. Auditors are not required to investigate or pursue penalties but to focus on material misstatements or risks.

C. Identify expenditures that exceed the related obligations: Incorrect. While this could indicate an issue, auditors are not required to specifically test for this unless it relates to material misstatements or compliance issues.

D. Design tests to detect fraud, waste, and abuse: Incorrect. Auditors are not specifically required to detect fraud, waste, and abuse, though they should be alert to indicators.

Federal Entities and Internal Controls:

Federal entities assess internal controls to ensure efficient, effective, and economical use of resources while achieving program objectives.

Internal control assessments often identify areas for improvement, such as reducing waste or increasing operational efficiency.

Explanation of Answer Choices:

A. Confirm that all management objectives will be met: Internal controls reduce risk but do not guarantee all objectives will be achieved.

B. Identify program areas where efficiencies may be gained: Correct. Internal controls are assessed to optimize operations and identify improvements.

C. Ensure there is no fraud, waste, or abuse within the entity: While controls mitigate risks of fraud, waste, or abuse, assessments aim to identify opportunities for efficiency.

D. Determine what legislation is not applicable to the entity: This is unrelated to internal control assessments.

 Role of the Independent Auditor in Financial Reporting:

Independent auditors evaluate internal controls as part of their audit procedures to support an opinion on the fair presentation of the financial statements. This includes assessing whether internal controls over financial reporting are designed and operating effectively.

This evaluation helps ensure that financial statements are free of material misstatements, whether due to error or fraud.

 Why Management Does Not Do This:

Managementdesigns and implements internal controls but does not evaluate them to support the auditor’s opinion. Management’s responsibility is to certify the accuracy of the financial statements, while the auditor provides an independent opinion.

 Why Other Options Are Incorrect:

C. The program office:This entity oversees operations but does not perform evaluations to support an audit opinion.

D. The audit committee:The committee provides oversight of the audit process but does not perform the evaluation itself.

 References and Documents:

GAAS (Generally Accepted Auditing Standards):Outlines the responsibilities of independent auditors regarding internal control evaluation.

GAO Yellow Book:Specifies the role of external auditors in evaluating internal controls during financial audits.