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Confirming deposit and investment information of state and local governments.

CONFIRMING DEPOSIT AND INVESTMENT INFORMATION OF STATE AND LOCAL GOVERNMENTS

Recent changes in the process of coninfirmation with financial institution (see JofA, Mar.91, page 82) have highlighted the importance of carefully designed confirmation requests. The new American Institute of CPAs standard form to confirm account balance information with financial institutions addresses only basic information about deposits and loans at a financial institution; it does not provide evidence about other matters that may require disclosure. As a result, auditors are faced with the difficult problem of designing separate confirmation letters to obtain information about such matters.

This month, O. Ray Whittington, CPA, Phd, director of audit research, and Douglas P. Sauter, CPA, technical manager, AICPA auditing standards division, illustrate how auditors may design confirmation requests to help obtain evidence about the adequacy of disclosures confirming deposit and investment information of state and local governments.

Government Accounting Standards Board Statement no. 3, Deposits with Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements, provides guidance for state and local government disclosure of certain information about deposits with financial institutions and for investments. GASB Statement no. 3 says a government's authority to make deposits and investments may be restricted by certain laws and regulations specifying

* The types of deposits and investments that may be made.

* The financial institutions where the deposits may be made.

* The collateral and liquidity requirements for these deposits. Deposit and investment act may be affected by local ordinance, written policy, bond covenant or management practice.

GASB GUIDANCE

Deposits. Statement no. 3 says if deposits at financial institutions are entirely federally insured or collateralized with securities held by an entity or its agent in the entity's name, that fact should be stated. If not, the entity's financial statements should disclose the total amount of financial institution deposits and the amount of these deposits:

* Insured or collateralized with securities held by the entity or by its agent in the entity's name.

* Collateralized with securities held by the pledging financial institution's trust department or agent in the entity's name.

* Uncollateralized, including those collateralized with securities held by the pledging financial institution's trust department or agent, but not registered in the entity's name.

* Investments. Statement no. 3 says the carrying amount and market value of total investments should be disclosed as of the balance sheet date. It also requires the carrying amount and market value be disclosed for investment categories

* Insured or registered in the name of the entity or securities held by the entity or its agent in the entity's name.

* Uninsured and unregistered, with securities held by the counterparty's trust department or agent in the entity's name (the term "counterparty" includes financial institutions that purchase securities for an entity, whether the securities come from the institution's trading inventory or the open market).

* Uninsured and unregistered, with securities held by the counterparty, or its trust department or agent, but not registered in the entity's name.

The above categories don't include any investments in pools managed by other governments, mutual funds or securities underlying reverse repurchase agreements.

Statement no. 3 provides guidance for other disclosures required in certain situations. These include disclosures related to the types of investments made during the year but not owned as of the balance sheet date; losses (and their subsequent recovery) recognized during the year from default by counterparties to deposit and investment activity; amounts of certain categories of the entity's deposits or securities that during the period significantly exceeded the amounts in those categories as of the balance sheet date; and any commitments to resell securities under yield maintenance repurchase agreements.

CONFIRMATION WITH FINANCIAL INSTITUTIONS

Auditors should consider the restrictions imposed on an entity's authority to make deposits, the disclosure requirements of Statement no. 3 and the availability of other reliable information in determining whether it is necessary to send confirmation requests about deposits to the entity's financial institutions.

If the auditor decides to request a confirmation, he or she may wish to first discuss the deposit and investment information with an appropriate financial institution representative. This discussion provides an opportunity for the auditor to obtain the necessary details to be included on the confirmation request. For example, the auditor might telephone the government's financial institution representative to learn how collateral related to certain deposits is held. The confirmation request can then be tailored to confirm the information obtained from the discussion. In most cases, the auditor can most effectively address the confirmation request to the individual with whom he spoke on the telephone.

Exhibits 1 and 2, pages 125 and 127, suggest the basic forms of confirmation letters to request information about deposits and investments, respectively. The letters should be addressed to a financial institution official responsible for the institution's relationship with the client or to someone knowledgeable about the transactions or arrangements. Some financial institutions centralize the confirmation function by assigning responsibility for responding to confirmation requests to a separate area of the institution. Auditors are responsible for ascertaining the appropriate recipient of the request.

Exhibit 3, page 128, illustrates various provisions that could be included in the confirmation letters and indicates the circumstances in which the provisions would be included.

The illustrative confirmation requests will not only improve the efficiency with which the auditor obtains information required by Statement no. 3 but also should strengthen the quality of the evidence supporting the required disclosures.

EXECUTIVE SUMMARY

AUDITORS ARE FACED with the difficult problem of designing confirmation requests to obtain evidence about the adequacy of disclosures confirming deposit and investment information of state and local goverments.

* GASB STATEMENT no. 3 provides guidance for state and local governments about deposits with financial institutions, including the types of deposits that may be made and required disclosures.

* AUDITORS NEED to decide if it's necessary to send a confirmation request to a government entity's financial institution.

* THE AICPA has developed sample confirmation letters to help CPAs request information about a government entity's deposits and investments.
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Author:Sauter, Douglas P.
Publication:Journal of Accountancy
Date:Sep 1, 1991
Words:988
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