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Cash and Investment Disclosures in Governmental Audits

City-hallAre you ready for your 2013 local government audits?  Cash and investments are a very important area of disclosure in the financial statements for state and local governments, especially for governments that report pension plans as fiduciary funds in their financial statements. Make sure you’re up to date on these cash and investment disclosure requirements. It’s a good idea that your clients are also well aware of these provisions as they prepare the disclosures, as they can help you to provide adequate audit evidence to support the material accuracies of the disclosures being made in the footnotes relative to cash and investments.

Here are a few important reminders about disclosures in this area: 

  • Investment disclosures should be organized by investment type, such as U.S. Treasurys, corporate bonds, or commercial paper. Dissimilar investments, such as U.S. Treasury bills and U.S. Treasury strips, should not be aggregated into a single investment type.
  • If a government has no deposit or investment policy that addresses a specific type of risk that it is exposed to, the disclosure should indicate that fact.
  • Credit quality ratings of investments in debt securities should be disclosed. 
  • The methods and significant assumptions used to estimate the fair value of investments should be included, if that fair value is based on anything other than quoted market prices.
  • For investment securities, including securities underlying repurchase agreements, at the end of the period that are exposed to custodial credit risk, the investment type, the reported amount, and how the investments are held. (This disclosure does not, however, apply to investments made in external investment pools and in open-end mutual funds or to securities underlying reverse purchase agreements.)
  • Disclose investments in any one issuer, by amount and issuer, that represent 5% or more of total investments.

For your client, getting this information for some of the disclosure elements, especially the risk disclosures, may not be terrifically easy to obtain. Your client is responsible for the preparation of these disclosures, so discussing these issues early on in the engagement will facilitate better, more complete reporting. A lot of the information being disclosed by these footnotes conveys the type of information that management should be monitoring throughout the reporting period. This is something to address in a pre-engagement, planning session to get a common understanding of what is going to be needed—especially if you are dealing with a larger entity with diverse investments as part of a pension plan or a new client.

Keep in mind that this is just a sampling of the required disclosures for cash and investments.  Many of these disclosures are discussed in the AICPA State and Local Governments Audit and Accounting Guide. For a complete checklist of required disclosures, please refer to the AICPA Practice Aid, Checklists and Illustrative Statements: State and Local Governments. New resources are also available with guidance to address auditing these disclosures and other issues of accounting and reporting in this industry.

Lucy Gallo, CPA, CGMA, Technical Manager - Accounting and Auditing Publications, American Institute of CPAs. Lucy was the audit partner and executive vice-president with a North Carolina based CPA firm for 15+ years prior to launching a consulting firm that served local, regional and national clients.

City hall image via Shutterstock

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