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Exam 3 - Section 2 Flashcards

1
Q

What are the three main purposes, governments and agencies spend money?

A
  1. Current operations (benefits people who are currently receiving services)
  2. Capital outlays (benefits people receiving services now and in the future)
  3. Debt service (benefits people receiving services in the past, now, and in the future)
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2
Q

Why is it beneficial to know if the benefits in the future in the future will be worth the amounts they are to be spent today?

A
  1. Obtaining these benefits could require a large expenditure of funds
  2. Expenditures don’t occur regularly so they require deliberations.
  3. Expenditures commit agencies and government to a long-term course of action
    — retirement and debt require a large amount of payments in the future so they need to know if that money will be available
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3
Q

What is time value money? And when is it useful?

A
  • Comparing the value of money at various points in time
  • useful in knowing what future benefits will be worth and the availability of sufficient funds
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4
Q

What are two types of time value analysis?

A
  1. Present value analysis.
  2. Future value analysis.
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5
Q

What is present value analysis?

A

The dollar value of a future cost or income stream, calculated as of a certain date and time interval.

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6
Q

When is present value analysis used?

A
  • Do you what a dollar received or saved in the future is worth today.
  • Used when making expenditure, investment, and other financial decisions
  • To determine the amount that needs invested today in order to have sufficient funds to make a deferred payment in the future
  • example: if you owed someone $200,000 in the future, how much would you need to invest today?
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7
Q

What is future value analysis?

A

Reflects the future value of a current expenditure or investment based on an assumed rate of growth

(a dollar invested today will be worth more in the future)

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8
Q

What is the present value analysis formula?

A

P = F/(1 + r)n

P— principal that can be invested today
F— future value the investment will return
r— investment rate/discount rate/opportunity rate
n— number of years until the benefit is received

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9
Q

Who selects the present value analysis interest rate?

A
  • Agency based on what type of rate they want to make on the investment
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10
Q

What are the three components of a present value analysis interest-rate?

A
  1. Inflation (reflects the loss in value from one year to the next)
  2. Enterprise (reflects the inherent uncertainties for owning an enterprise)
  3. Unique (covers any unidentifiable uncertainties that may occur from civil unrest, market imperfections, solvency)
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11
Q

When can future value analysis be performed?

A

To compare investment type expenditures and determine which one is more favorable

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12
Q

What is the future value analysis formula

A

F = P(1 + r)n

F— future value the investment will return
P— principle that is to be invested today
r— interest rate/discount rate/opportunity rate
n— number of years until the benefit is received

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13
Q

Time value formulas are only a starting point when considering an investment. What are some other things to be considered?

A
  • availability of funding
  • impact of rules and regulations
  • likelihood of changing technology
  • capacity to the provide good/services
  • projected operating costs
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14
Q

What is payback analysis?

A
  • A more simpler technique than the time value analysis techniques
  • how long will it take to recover the amount invested in a new capital asset or project
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15
Q

How is payback analysis calculated?

A

Cash or savings received in the current year are considered the same amount of cash or savings received in later years

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16
Q

How is payback analysis assessed/evaluated?

A

Investment projects that have a quick pay back are less risky than those that have a slow payback

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17
Q

What is flowcharting?

A

A technique that can be used to obtain or convey an understanding of the process

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18
Q

When is flowcharting used?

A
  1. Business process reengineering (BPR) to obtain an understanding how the process functions
  2. To document the cycles used to process accounting data in order to determine the adequacy of the internal controls
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19
Q

What are the three different levels of flow charting that could be developed?

A
  1. High-level (to obtain or provide an overall understanding of the process)
  2. Mid-level (to obtain a provide an understanding of the steps involved in the process— identify and assess internal controls)
  3. Low level (guide the automation of a process)
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20
Q

What are the basic symbols in a process?

A
  1. Circle - represents the start of a process
  2. Rectangle - represents a step in the process
  3. Diamond - represent a decision in the process.
  4. Crooked square - represents a document in the process.
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21
Q

What is Earned Value Management (EVM)? When should it be used?

What does EVM consider?

A
  • A technique for managing large projects
  • A quantifies progress on the project by considering the funds expended, the time expended and the status of deliverables
  • Organizations may require that EVM is used where projected cost exceed a certain threshold (i.e. major weapon system procurement)
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22
Q

When can the value of EVM be seen?

A

When comparing EVM to traditional project management techniques

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23
Q

How was a project progress monitored by organizations in the past?

A

Funds spent would be compared to the amount budgeted, or by monitoring progress on the project to the amount of time that had elapsed.

This would tell them whether the budgeted funds were being spent at the anticipated rate, or the various tasks were being completed on time, but not a combination of both

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24
Q

What is regression analysis?

A

Technique that explores, develops a understanding of, and predicts the relationship among variables

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25
Q

How can regression analysis be used?

A

To predict the outcomes for new transaction’s dependent variables based on the values presented for independent variables

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26
Q

What is the confidence in the projection when there is low correlation between two data sets?

A

Not high reliance

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27
Q

Is the number for low correlation?

A

Correlation coefficient of 85 or -85

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28
Q

Why was the Fraud Reduction and Data Analytics Act of 2015 enacted?

A

To improve federal agency financial and administrative controls and procedures to mitigate fraud risk, and to improve federal agencies development and use data analytics for the purpose of identifying, preventing and responding to fraud, including improper payments

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29
Q

What does the Fraud Reduction and Data Analytics Act of 2015 require?

A
  • OMB to develop guidelines for GAO’s A Framework Managing Fraud Risks in Federal Programs to implement control activities related to fraud risk management
  • agencies to use a risk based approach design and implement controls to mitigate identified fraud risk
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30
Q

What is data analytics?

A

Process of inspecting, cleaning , transforming modeling data the goal of discovering useful information, suggesting conclusions, and supporting decision-making
- Data analytics goes by a variety of names

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31
Q

What is data mining?

A

Data analytic technique that focuses on modeling and knowledge discovery for predictive, rather than descriptive, purposes.

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32
Q

Does data mining entail?

A
  • Sorting through a very large, disparate amount of data
  • Combining them in a consistent format
  • Using filters and algorithms to pick out relationships amongst people, organizations, and events
  • using that knowledge for predictive rather than descriptive purposes
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33
Q

What is done with data mining results?

A
  • Data mining results are not conclusions; direct an analyst to dig deeper into specific area
  • The results of those more targeted examinations become the basis for conclusions
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34
Q

What is the key difference between data mining and other data analytic methods?

A
  • Application of the software analytic structure
  • It’s provides insight beyond attained by filtering data according to given criteria
  • an element of AI is applied in the term data mining
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35
Q

How can the information from data mining be applied?

A

It can be applied in a variety of uses, such as business analysis, forecasting, auditing, and risk management

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36
Q

Is data mined typically presented

A
  • Typically in summary form, most data systems allow for a drill down feature the summary to view the detailed information
  • example: a data system shows medical records; if the data system shows issues in a particular area, the user can drill down to that area to determine the causes of the issue
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37
Q

What are some examples of data mining?

A
  1. Examining medical services provided to females to determine if they were that could only be applied to males
  2. Examining student records to ensure they are receiving the proper credits and GPAs
  3. Examining nutrition eligibility programs determine that participants meet the right criteria
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38
Q

What does predictive analytics encompass?

A

Statistics, modeling, machine learning, and data mining to analyze current and historical facts to make predictions about the future or unknown events

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39
Q

How do predictive models work?

A

Exploit patterns found in historical and transactional data to identify risks and opportunities with associated with a particular set of conditions, and thereby, guide decision-making

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40
Q

What are the strengths of data analytic techniques?

A
  1. The analyst is able to review complete sets, and not just a sample.
  2. The ability to link together multiple data sources, such as demographic information and data delivery
    — for example, demographic data can be used to determine if the persons receiving the service met the criteria for the service
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41
Q

What is a caveat for using data analytics?

A

Caution must be exercised regarding the quality of the data as well as ensuring a full understanding of the program requirements and how does elements are represented in the data.
Once a full understanding is obtained, queries can be made of the combined data sources regarding common element (such as an identification number) to determine, in fact, persons were able to receive services

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42
Q

What are some questions organizations should ask when developing data analytic programs?

A
  1. Defining the decisions that the agency needs to make, and the information that will best inform those decisions
  2. Collaborate with other agencies to collect data and share analytic expertise.
  3. Develop data to determine return on investment for data analytic programs.
  4. Give agency leaders clear, concise analysis and results that they can use to support data driven programs (presentation is important, so include data visualization)
  5. Encourage data use and spark insights by enabling employees to easily see, combine, and analyze data
  6. Leaders/managers should demand using data and provide on the job training to targeted employees
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43
Q

What are some types of fraud?

A
  1. Fraudulent transactions. (online and off-line)
  2. Identity theft
  3. Inaccurate credit applications
  4. False insurance claims
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44
Q

What is the forensic auditing?

A

An examination of an organization or individuals financial information, or other economic affairs

45
Q

How is forensic auditing used?

A

Evidence is collected, but it’s likely to be used for the identification, and investigation and prosecution of financial crimes, such as theft, or fraud, and/or the determination of negligence

46
Q

In what instances is forensic auditing useful?

A
  1. Identify potential fraud.
  2. To determine the extent and losses of embezzlement, malfeasance, misfeasane, negligence, or misconduct
  3. In anticipation of litigation or part of the trial process.
  4. As internal audits to deter illegal activity by employees, or determine if a worker should be terminated.
  5. Determine amount to be paid in personal injury settlements.
  6. Determine economic damages suffered through tort or breach of contract
  7. Post acquisition dispute, such as breach of contract or warranties
  8. Insurance broad, or security fraud.
47
Q

Who performs forensic audits? What knowledge should they have?

A
  • CFEs, CPAs, economists, attorneys, paralegals
  • Understand of fraud schemes
  • Financial reporting systems
  • Accounting and auditing standards and procedures
  • Economic theories
  • Business information
  • Data management electronic discovery
  • Evidence gathering, and investigative techniques
  • Standards for legal discovery and professional ethics
  • Litigation processes and procedures
48
Q

How do you financial auditors gather information?

A
  • payment files
  • Bank statements
  • credit card receipts
  • Purchase orders
  • Email and electronic files
  • Other Documentation
49
Q

What are the four main steps in forensic analysis?

A
  1. Data collect.
  2. Data preparation.
  3. Data analysis
  4. Reporting.
    Example the forensic analyst may be used to review an employees purchase card activity to assess whether any of the purchases or diverted or divertavle for personal use
50
Q

What is the Benford Digital Analyis?

A

A forensic analysis technique that can point out potentially fraudulent transactions because created numbers are not likely to meet the expected distribution. Therefore, they stand out from the statistical distribution.

51
Q

When will Bedford testing not work?

A

Transactions that rule based limits, such as per diem rates for pet service charges

52
Q

What did agencies do to decide whether to retain the activity in-house or contract it out?

A

Conduct a competitive sourcing analysis

53
Q

What policy outlines the processes for determining whether to “competitively source” and for conducting the analysis?

A

OMB Circular A-76, Performance of Commercial Activities

54
Q

What are the analysis steps to take once an activity is identified for potential competitive sourcing?

A
  1. Conduct a management study.
  2. Prepare a performance work statement.
  3. Project the in-house and contract cost.
  4. Select the best alternative.
55
Q

What all entails a management study?

A
  • determining the most efficient and effective way the activity can be performed and it cost minimized
  • This can be done by using industrial engineering techniques to determine the products or services provided; identify the tasks performed; ascertain the workload in the required resources; establish indicators to monitor performance; and then use the data to analyze, determine, and recommend organizational, environmental, procedural, equipment, and personnel improvements
56
Q

What makes the government decide to contract out?

A

Cost— The activity can be the produced most efficient and effective way and achieved efficient savings

57
Q

What does a performance Work statement include?

A
  • Expected outputs/results
  • Required services in estimated workloads;
  • expected standard of a poor performance, acceptable quality levels, and manner in which the performance will be monitored
  • The equipment and properties to be furnished by the government and by the contractor
  • Required reports
58
Q

What is included in the government cost of an activity when determining whether to contract it out?

A
  • cost of personnel and their fringe benefits
  • material and supply cost
  • Travel
  • Other attributes, such as rent, depreciation, maintenance in repairs, and insurance
  • Both operations overhead (cost incurred to support the function) and general administrative overhead (support cost) should be considered, unless the contracting of those services to another organization is not expected to result in the elimination of the position or overtime. In that case overhead cost should be performed in house.
  • the cost of administering and monitoring the services received from an external party
59
Q

What are some ratios used by performance auditors?

A
  • workloads
  • response times
  • Accuracy rates
60
Q

What are some ways financial auditors use ratios?

A
  • review matters such as adequate of reserves
  • Appropriateness of expenditure levels
  • and liquidity of investments
61
Q

What are pure ratios?

A
  • Relating one number to another to produce a meaningful indicator of a particular characteristic
    Example 1: ratio of actual expenditures and obligations or encumbrances to the appropriated budget can be converted to a percentage to reveal half fast and entity is using its budgeted funds
    Example 2: ratio of the unassigned balance to the total revenues of a local government provides an indicator of the “ budgetary cushion” available to whether revenue shortfalls caused by an economic downturn, or to stay within legally imposed, obligation and expenditure limits, such as appropriation acts
62
Q

What is comparative analysis?

A

Numbers/ratios for an entity/operation compared to the numbers/ratios of similar entities/operations, or with benchmarks

Example: the budget expended/obligated can be compared to last year‘s percentage (or the percentage of budget expended/obligated at the same point in the prior year) to understand whether the budgeted funds are being expended too quickly or slowly, and why this is occurring

63
Q

Where can data for comparing an agencies or governments ratios with a benchmark be obtained?

A
  • headquarters of an agency
  • State agency
  • Best practices concordia
  • Industry groups that gather statistical information on the various locations, agencies, municipal governments in the state, etc.
  • Credit reading agencies
  • Financial managers can contact their counterpart (other locations, agencies, neighboring communities to exchange data)
64
Q

What is time series analysis?

A

Comparison of a government or agency against itself in prior years
For example: if a local government budgetary cushion is significantly lower than last year‘s ratio, the government, financial manager, and other members of leadership team should want to know why. But if the cushion has gone down two years in a row, the need to know why magnifies. It has been spiraling downward for five years, they may be caused for much greater concern.

65
Q

What is a good practice when using time series analysis?

A

Calculating the percentage of change from year to year

Example: the year Tiear percentage change in salary cost is more than a year to year percentage change in pension contributions deserving investigation

66
Q

How are common size statements developed?

A

By converting all data elements in a financial statement or another management report to percentages of a 100.

This is useful for tracing, overtime, whether any amounts have changed, disproportionately in relation to other amounts in the statement, thus warranty further inquiry

67
Q

How is per capita information obtained?

A

Dividing particular data that elements by the entire population

Example: TM amount of debt per capita reveals the debt burden each person in the community will need to pay off

68
Q

When is per capita information useful?

A

Useful when tracing information, overtime, or when comparing information with another entity.

However, the information can mean to entirely different things. For example, a large per capita expenditure could reflect considerable emphasis placed on a matter. Conversely, it could signify a highly inefficient operation.

69
Q

What are some sources of data?

A
  • accounting records
  • Operating records
    Information collected by higher level organizations and fulfilling their monitoring responsibility
  • Credit rating agencies
  • national and regional consortia of like organizations
  • State and federal agencies
  • Citizen and custom surveys
  • Complaints
70
Q

What is a cautionary note about ratios?

A

Ratios are not end in themselves. They should be viewed as a starting point from which questions should be asked to ascertain the actual situation.

In many situations, a single ratio is not sufficient using multiple ratios can help in arriving at the best conclusion

71
Q

What are liquidity ratios?

A

Ratios used to determine an entities ability to meet its creditors demands

72
Q

What are the two liquidity ratios?

A
  1. Current ratio.
  2. quick ratio/acid test ratio
73
Q

How is the current ratio calculated?

A
  • dividing current assets by its current liabilities
74
Q

What are current assets?

A

Cash and assets that will become cash within the year (e.g., cash, equivalence, short term, marketable, investments, receivables, inventory)

75
Q

What are current liabilities?

A

Amounts to be paid within the year (salaries, grants and account, payable, accrued, expenses, notes payable)

76
Q

What should the current ratio be?

What if it’s below this ratio? Above it?

A

At least two to one (Twice as many current assets as current liabilities)

Organizations with ratios below 2 have problems meeting short term obligations

Organizations with ratios above 2 may not be officially using its current assets or managing it’s working (inventory is slow moving, which increased its current assets)

77
Q

How is the quick ratio calculated?

A

Cash and cash equivalents (short term, marketable investments, and receivables) divided by current liabilities

78
Q

What does the quick ratio tell you? And what is the ideal ratio?

A

The ability to pay off current liabilities without using inventory

Ideal one-to-one ratio

79
Q

What do asset, efficiency and turnover ratios help with?

A

They indicate the efficiency of an entities use of assets and converting them into cash

Example: the longer it takes a state/local government to collect property taxes, the less cash it has on a hand to pay it’s obligations, and the greater probability that it might have to borrow the greater amount of inventory, a government business type activity needs to carry relatives to its sales, the greater is the cost to carry the inventory

80
Q

What is the easiest way to assess a government performance in collecting receivables?

A

Comparing the tax collections to the tax levy

Percentage of tax collected= tax collections (within a stated period of time)/tax levy

81
Q

What do credit reading agencies expect the percentage of taxes collected by local governments?

A

98 to 99%

82
Q

What is a way an organization to measure the efficiency in which it collects its receivables?

A

Calculating the number of days receivables are outstanding

Days receivables outstanding = (average receivables during the year/annual revenues) x 365

83
Q

How is average receivables calculated?

A

Beginning of year receivables plus end of year receivables divided by two

84
Q

What are factors within the governments or agencies control for collecting receivables?

A
  • Credit terms granted
  • Effectiveness of the collections and follow-up processes
  • To foreclose on collateral
85
Q

What formula is used to determine the speed and which inventory moves in and out of the entity? What is the ideal ratio?

A

Inventory turnover = revenues from sale of inventory/average inventory during the period

No ideal ratio because it depends on the type of inventory carried

86
Q

What ratio is used to measure the age of of the inventory?

A

Average age of inventory = 365/inventory turnover

87
Q

What do operating results and budgetary cushion ratios help indicate?

A
  1. The indicate the extent to which an entities revenues are sufficient to cover its costs
  2. An entities ability to generate sufficient cash to build up working capital or fund balance to offset future, unforeseen revenue, shortfalls, and/or emergency needs
  3. An entities ability to generate sufficient cash to service existing debt and/or acquire new facilities.

This is a very important for those entities that are expected to be self-supporting by charging user fees. If the revenues are not covering the costs, the entities might need to seek appropriations to cover the shortfalls.

88
Q

What is the ratio that reveals the percentage of expenditures covered by revenues?

A

Revenue/expenditures

89
Q

What is the ratio used to reveal the ability of the entity to generate a surplus or net income?

A

Excess of revenues over expenditures/revenues

90
Q

What ratio reveals the size of the budgetary cushion?

A

Unassigned fund balance/annual revenue

91
Q

What percent of revenues does Moody’s Determinants of Credit Quality sufficient to address normal contingencies, depending on the portion of governments, revenues, derived from the economy sensitive taxes (i.e. income or sales tax)?

A

5% to 10%

92
Q

What caution should be taken when calculating operating results and budgetary cushion ratios?

A

The quality of resource inflows

Governments frequently, balanced budgets with one time/non-reoccurring resource inflows (i.e. sales of capital assets, substantial litigation, settlements, withdrawing money from an allegedly over funded pension fund). One time inflows should be considered separately.

93
Q

What ratios can be used to obtain insight into, monitor, or manage an entity, financial structure, and flexibility?

A
  • debt burden ratios
  • Cost of debt service
  • Ability to finance debt
  • Soundness of pension funds
94
Q

What is the debt burden?

A

Commonly used to measure the ability of a state/local government to carry its outstanding long-term debt

95
Q

What is the debt burden calculation?

A

Outstanding, long-term debt/population (a.k.a. per capita debt)

OR

Outstanding, long-term debt/assessed value of taxable property

Government governments with lower tax burdens, have greater flexibility to issue debt when needed for financing purposes. However, this would also increase the tax burden which would be a negative result.

96
Q

How is the cost of debt service calculated?

A

Total debt service/total revenues (or total expenditures)

97
Q

What does the cost of debt service ratio show?

A

A portion of the governments revenues (or expenditures) it is devoted to paying tax debt service and is not available for paying the day-to-day operating expenditures

The higher the portion of revenues required to pay for debt service, the less flexibility the government has to finance, operating needs, or issue additional debt

98
Q

What do you credit rating agencies consider is a high percent debt service burden ratio? What should be considered when reviewing this ratio?

A

15% to 20%

An entities that service burden should be considered a relation to the speed in which it is scheduled to amortize it’s debt principal. Information about principal amortization, is reported in the notes to the financial statements.

99
Q

What is the ability to finance debt ratio?

A

The number of times the debt service (principal and interest on debt) is covered by earnings.

100
Q

How is the ability to finance debt calculated?

A

Excess revenues over operating expenses/(principal payment + interest expense)

The greater the ratio, the more secure the bond holder is

101
Q

Which party uses the ability to finance debt ratio the most?

A

Revenue bond holders, who have lent the money to build an enterprise facility (toll road, bridge, or tunnel)

In these instances, the denominator will be the gross revenues minus operating and maintenance expenses (money needed to operate the facility) but depreciation added back. Depreciation does not require cash and interest to be part of what is the debt service payments are intended to cover. The balance is what is available to cover the principal and interest on the revenue bond debt

102
Q

How is soundness of pension funds (a.k.a. funded ratio) calculated?

A

Pension fund assets available for benefits/pension benefit obligation (actuarial accrued liability)

103
Q

What is a good soundness of pension funds ratio?

A

Anything close to 100%

  • the closer to 100% less likely pension expenditures will become in undue burden on the government and future years
104
Q

What are some financial and government analysis techniques available? They help improve the quality of decisions?

A
  • time value money analysis
  • payback analysis
  • flowcharting
  • Earned value management
  • Regression analysis
  • data Analytics
  • forensic technique
  • Competitive outsourcing analysis
  • Ratio analysis
105
Q

How is correlation measured?

A

By the correlation coefficient

106
Q

What does correlation coefficient of 1.0 mean?

A

One factor can be predicted from the other factor 100% of the time

107
Q

What does correlation coefficient of zero mean?

A

There’s no relationship between the factors

108
Q

What are the limitations of regression analysis?

A
  1. A high correlation is needed between the data set to make useful predictions. For reasonable prediction, the correlation coefficient should be at least .85. An indirect relationship would be -.85.
  2. Data projections must be within a relevant range. (i.e. the Ranger which information is currently available)
  3. The date base must be accurate. Through of garbage and garbage out hold
  4. Correlation is not causation.

Exam (7 decks)

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