A4 - Investment Cycle

Question 1

what procedures to test completeness of recorded investment income?

Answer 1

use analytical procedures to ascertain the reasonableness of the completeness of recorded investment income. ex: compare recorded investment income with expected amount (based on related interest rate, dividend declared..) and income balance audited in PY

Question 2

what procedures to test existence of unrealized gains or losses in the portfolio?

Answer 2

examine the trading prices in the WSJ or other sources for investment carried at cost. for those carried under equity method auditor would review the audited FS of the investee company

Question 3

what procedures to test valuation of marketable equity securities?

Answer 3

compare to market quotations (cost method) or examine the audited FS of investee (equity method)

Question 4

what are the 3 required segregations for internal control over investments?

Answer 4

1. Authorization of purchase or sale of investments: board of director should authorize the purchase or sale
2. Custody of investments: An independent third party is recommended. However, at minimum, a joint of 3 company officials with the investment kept in a safe-deposit box can be used but cannot prevent collusion
3. Recordkeeping: a separate party from those of have authorization and custody must keep detailed records of the investments