A5 Investment Cycle Flashcards
Testing Long Term Investments
Auditors normally use analytical procedures to ascertain reasonableness of the completeness regarding recorded investment income. These would include a comparison of recorded investment income with the expected amount (based on interest rate, dividends, etc.)
Valuation Testing
To test valuation of marketable equity securities, an auditor would most likely compare to market quotations (cost method) or examine the audited FS of the investee company (equity method).
Unrealized Gains & Losses Test
We test existence of unrealized gains and losses in a portfolio by examining the trading prices in the Wall street journal or other sources for those long term investments carried under the cost method.
For equity method, the auditor would have to review the audited FS of the investee company.
Subsequent Events
The auditor should consider subsequent events & transactions occurring before the completion of the audit (not after).
Verifying Marketable Securities
These can be verified at the balance sheet date by comparing prices of the securities with published closing prices at the balance sheet date.
If they are unable to count at that date, they should request the client to seal the safe deposit box until the securities can be counted.
Transfers Between Categories of Investments
The audit scan’s the client’s investment records for the period just before & after the year end to determine if transfers between categories of investments have been properly recorded. This is to obtain evidence about understandability of presentation & classification.
Investments may be classified into these categories to determine how they will be shown on the balance sheet & whether it will be at valued at market or amortized cost.
Completeness Test
Auditors obtain evidence of investment balance of high volume material investment transactions by performing a search for unrecorded purchases of securities by examining transactions for a few days after year end. AP test are done here too to test reasonableness of dividends & interest income recorded.
Marketable Securities
These include equity securities (Stocks) & debt securities (bonds) classified as trading or available for sale over which the investor has no significant influence.
Equity Method
Used to account for investments if significant influence can be exercised by investor over investee. A company that owns 20% to 50% voting stocks of another investee company is presumed to exercise significant influence.
Impairment
A loss resulting from a decline in FV that is other than temporary. These must be recorded. Can include indicators such as FV significantly below cost & this decline has existed for an extended period of time, security has been downgraded by a rating agency, or financial condition of issuer has deteriorated.