Question

If a state or local government is a party to an agency relationship, it must automatically create an agency fund in order to be in conformity with generally accepted accounting principles.

True
False

Answer 1

False. An agency fund is not automatically created when a state or local government is a party to an agency relationship. The creation of an agency fund depends on the specific circumstances and the need for accountability and control.

Step-by-step explanation:

False

An agency fund is not automatically created when a state or local government is a party to an agency relationship. While generally accepted accounting principles (GAAP) require state and local governments to maintain separate funds for various activities and resources, including agency funds, the creation of an agency fund is not automatic and depends on the specific circumstances and the need for accountability and control.

For example, an agency fund may be created when the government is acting as a fiscal agent, holding and managing resources on behalf of another entity or individual, such as tax collections for school districts or grant funds for nonprofit organizations. However, if there is no need for a separate fund for the specific agency relationship, the government may not create an agency fund.