CBS Compliance & Risk Assessment 3 — Questions and Answers
Question 1: A budget specialist notices that actual expenditures are 15% below budget at mid-year. From a compliance perspective, what should be investigated FIRST?
- Whether vendors are being paid on time
- Whether obligated but unspent funds comply with period-of-availability rules (Correct answer)
- Whether the budget was overstated at adoption
- Whether personnel costs can be reduced further
Correct answer: Whether obligated but unspent funds comply with period-of-availability rules
Unspent obligated funds must be used within their authorized period of availability; lapsing or misusing them violates appropriation law.
Question 2: Which type of audit focuses specifically on whether public funds were used economically, efficiently, and effectively?
- Financial statement audit
- Performance audit (Correct answer)
- Compliance audit
- Forensic audit
Correct answer: Performance audit
Performance audits (also called value-for-money audits) evaluate the economy, efficiency, and effectiveness of government programs.
Question 3: In budget risk assessment, 'sensitivity analysis' is best described as:
- Evaluating employee responses to budget cuts
- Testing how budget outcomes change when key assumptions are varied (Correct answer)
- Measuring the sensitivity of tax revenues to economic cycles
- Reviewing confidential budget documents for security risks
Correct answer: Testing how budget outcomes change when key assumptions are varied
Sensitivity analysis varies individual assumptions (e.g., revenue growth rate) to measure their impact on budget outcomes and identify the most critical drivers.
Question 4: Which internal control principle requires that no single employee can both authorize a transaction and record it in the accounting system?
- Dual control
- Segregation of duties (Correct answer)
- Management override
- Compensating controls
Correct answer: Segregation of duties
Segregation of duties splits authorization, custody, and recording functions among different employees to reduce fraud and error risk.
Question 5: A government entity uses multi-year appropriations. Which compliance risk is UNIQUE to this structure compared to annual appropriations?
- Overspending in the first year
- Tracking period-of-availability across fiscal years without lapsing funds inappropriately (Correct answer)
- Failure to adopt a balanced budget
- Incorrect object-code classification
Correct answer: Tracking period-of-availability across fiscal years without lapsing funds inappropriately
Multi-year appropriations require careful tracking to ensure funds are obligated and expended only within their authorized multi-year window.
Question 6: Under COSO's Internal Control – Integrated Framework, which component addresses the organization's processes for identifying and responding to risk?
- Control Environment
- Risk Assessment (Correct answer)
- Monitoring Activities
- Information & Communication
Correct answer: Risk Assessment
The Risk Assessment component of COSO covers how organizations identify, analyze, and respond to internal and external risks.
Question 7: Which term describes the practice of setting aside budget reserves to cover unforeseen expenditures while maintaining overall budget compliance?
- Encumbrance
- Contingency appropriation (Correct answer)
- Supplemental appropriation
- Lapse reserve
Correct answer: Contingency appropriation
A contingency appropriation creates a legally authorized reserve that can be drawn upon for unexpected needs without violating the overall budget.
CBS Compliance & Risk Assessment 3
A budget specialist notices that actual expenditures are 15% below budget at mid-year.
From a compliance perspective, what should be investigated FIRST?