CGAP Finance 3 — Questions and Answers
Question 1: A city's general fund reports a negative unassigned fund balance. What does this most likely indicate?
- The city has overspent its total assets
- The city has consumed more resources than it has generated over time in the general fund (Correct answer)
- The city's total liabilities exceed total assets on a government-wide basis
- The city must immediately reduce expenditures by law
Correct answer: The city has consumed more resources than it has generated over time in the general fund
A negative unassigned fund balance in the general fund indicates cumulative expenditures have exceeded cumulative revenues, suggesting fiscal stress in the operating fund.
Question 2: Under GASB 34, which statement is required as part of the government-wide financial statements?
- Statement of revenues, expenditures, and changes in fund balances
- Statement of net position (Correct answer)
- Statement of fiduciary net position only for pension funds
- Budgetary comparison schedule for all funds
Correct answer: Statement of net position
GASB 34 requires a statement of net position (and statement of activities) as government-wide financial statements, providing an economic resources view of all governmental activities.
Question 3: A government auditor is reviewing a lease entered into by a public agency. Under GASB 87, what is the lessee required to recognize at lease commencement?
- Rent expense equal to the first year's payments
- A right-to-use lease asset and a corresponding lease liability (Correct answer)
- An operating expenditure for the full lease term
- A contingent liability for future lease payments
Correct answer: A right-to-use lease asset and a corresponding lease liability
GASB 87 requires lessees to recognize a right-to-use intangible asset and a corresponding lease liability at the present value of future lease payments at commencement.
Question 4: Which fund type is used to account for resources that are legally restricted to expenditure for specified purposes other than debt service or capital projects?
- Special revenue fund (Correct answer)
- Permanent fund
- Agency fund
- Enterprise fund
Correct answer: Special revenue fund
Special revenue funds account for specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.
Question 5: A government's debt service fund shows a fund balance of $800,000 and upcoming principal and interest payments of $750,000 due in 45 days. How should the auditor assess this?
- The fund balance is excessive and should be transferred to the general fund
- The fund appears adequately funded to meet the upcoming debt obligation (Correct answer)
- The fund must have a zero balance after each debt payment by law
- The balance indicates improper accumulation prohibited by GASB standards
Correct answer: The fund appears adequately funded to meet the upcoming debt obligation
A debt service fund balance exceeding the near-term payment obligation is normal and prudent, ensuring the government can meet its debt obligations on time.
Question 6: Which of the following best describes an internal service fund?
- A fund that accounts for services provided to the public for a fee
- A fund that accounts for goods or services provided by one department to other departments on a cost-reimbursement basis (Correct answer)
- A fund that pools investment resources from multiple funds
- A fund used for temporarily holding resources collected on behalf of others
Correct answer: A fund that accounts for goods or services provided by one department to other departments on a cost-reimbursement basis
Internal service funds account for goods or services provided by one government department to other departments, typically on a cost-reimbursement or cost-allocation basis.
Question 7: In reviewing intergovernmental revenues, a CGAP auditor should be most concerned with which risk?
- Revenues being recorded in the wrong fiscal year under full accrual
- Grant funds being spent on unallowable costs or for ineligible purposes (Correct answer)
- Interest earned on grant proceeds being understated
- Federal grants being recorded as taxes rather than intergovernmental revenue
Correct answer: Grant funds being spent on unallowable costs or for ineligible purposes
The primary risk with intergovernmental revenues is compliance—grant funds must be spent on allowable costs and for the eligible purposes specified in the grant agreement.
CGAP Finance 3
A city's general fund reports a negative unassigned fund balance.
What does this most likely indicate?