AUD 4.5 - Investment Cycle

Question 1

Internal control over investments requires strong segregation of the following duties:

Answer 1

Authorization of purchase or sale of investments
Custody of investments
Record keeping

Question 2

Who should authorize the purchase or sale of investments?

Answer 2

The board of directors

Question 3

Who should havre custody of the investments?

Answer 3

An independent, third-party custodian OR joint control by two company officials with investments kept in a safety deposit box

Question 4

Who is responsible for record keeping?

Answer 4

Neither the board of directors or those who have custody of the investments.

Question 5

Analytical procedures are used to test what in regards to investments?

Answer 5

Related gains and losses and investment income

Question 6

When testing the completeness assertion for the investment balance, the auditor should:

Answer 6

Confirm securities or count securities on hand
OR
If high volume of material transactions, search for unrecorded purchases by examining transactions following year end

Question 7

When testing the valuation and allocation assertion for the investment balance, the auditor should:

Answer 7

Agree listing of investments to general ledger
Review investment activity
Recalculate ending values
Determine if any permanent impairment
Reasonableness of assumptions made

Question 8

How should investments classified as held to maturity be valued at year end?

Answer 8

Amortized cost

Question 9

How should investments in another entity with significant influence exists and ownership is between 20 - 50% be accounted for at year end?

Answer 9

The equity method

Question 10

When testing the existence assertion for the investment balance, the auditor should:

Answer 10

Send confirmations and examine securities on hand and perform analytical procedures over interest earned

Question 11

When testing the rights and obligations assertion for the investment balance, the auditor should:

Answer 11

Confirm securities

Question 12

When testing the completeness assertion for investment transactions, the auditor should:

Answer 12

Perform analytical procedures over the dividend and interest inform to determine all investment income has been recorded

Question 13

When testing the cutoff assertion for investment transactions, the auditor should:

Answer 13

Perform cutoff review

Question 14

When testing the valuation, allocation and accuracy assertion for investment transactions, the auditor should:

Answer 14

Recalculate to validate the recorded gains or losses from security sales and of discount premium amortization. Also recalculate to determine the accuracy of recorded dividend and interest income

Question 15

When testing the existence and occurrence assertion for investment transactions, the auditor should:

Answer 15

Analytical procedures to test the reasonableness of dividend and interest income

Question 16

When testing the understandability and classification assertion for investment transactions, the auditor should:

Answer 16

Examine a sample of investment transactions to enter mine that they were recorded in proper accounts

Question 17

Unrealized gains and losses on available for sale securities should be recorded in what account?
Unrealized gains and losses on trading securities should be recorded in what account?

Answer 17

AFS - other comprehensive income
Trading securities and all equity - earnings

Question 18

Trading and available for sale securities for which the investor has no significant influence should be carried and classified how?

Answer 18

Carried at fair value and classification of level 1, 2, or 3 should be disclosed in the footnotes

Question 19

Held to maturity debt securities should be carried at:

Answer 19

Amortized cost

Question 20

Trading securities are always reported as:
AFS securitization and HTM securities are reported as:
Unrealized gains and losses on AFS securities are reported in:

Answer 20

1. Current assets with unrealized gains and losses to net income
2. Current or long-term based on mgmt’s intent to hold vs sell
3. Other comprehensive income

Question 21

The auditor should perform the following to obtain evidence in support of the investee’s financial results if valuations are based on the investee’s financial results:

Answer 21

Read the financials and audit report of the investee
If not audited, request that the entity arrange with the investee to have the financials audited

Question 22

The amount at which an asset could be sold or a liability settled in a current transaction between willing parties and the measurement date:

Answer 22

Fair value

Question 23

The three level hierarchy used to measure fair value:

Answer 23

Level 1, level 2, and level 3

Question 24

Observable quoted prices in active markets for identical assets or liabilities

Answer 24

Level 1

Question 25

Observable inputs other than quoted market prices for identical assets or liabilities

Answer 25

Level 2

Question 26

Unobservable inputs using estimates and valuation methods such as discounted cash flow, determined based on managements judgement

Answer 26

Level 3

Question 27

If an impairment loss has been recorded, an auditor should:

Answer 27

Evaluate managements basis for the decision

Question 28

If an impairment loss has not been recorded, the auditor should consider whether the following exist that could indicate the need for an impairment loss:

Answer 28

1. Is Fair value significantly below cost
2. Has the security been downgraded by a rating agency?
3. Has the financial condition of the issuer deteriorated
4. Have dividends been reduced or eliminated
5. Have payments not been made
6. Losses reported subsequent to year end