Efficient Tests of Balances Series—No. 19: Tips for Auditing Investment Securities | AccountingWEB

Efficient Tests of Balances Series—No. 19: Tips for Auditing Investment Securities


This blog contains an illustrative audit program for investment securities with some “boxed” comments containing tips that can enable auditors to be more effective and efficient in performing auditing procedures. Financial statement assertions are synthesized into an acronym below (COVEROD) and cross-referenced to individual audit procedures. Since auditors are responsible for evaluating the appropriateness and reasonableness of financial statement assertions (management’s representations in financial statements), this cross-referencing will facilitate 1) the determination that sufficient evidence has been collected and 2) that such evidence is not excessive.
AUDIT OBJECTIVES (Evaluating Financial Statement Assertions)
            C   ompleteness
                        To determine that all transactions and accounts that should be presented
                        have been included in the financial statements.
O   ccurrence and cutoff
            To determine that all transactions occurring during the period have been
            recorded in the financial statements in the proper period.
V   aluation and accuracy
            To determine that all asset, liability, revenue and expense components
            have been included in the financial statements at accurate amounts,
            classified properly.
E   xistence
            To determine that all recorded assets and liabilities exist at a given date.
R   ights
            To determine that the entity has rights to all assets recorded at a given    date.
O   bligations
            To determine that all liabilities are obligations of the entity at a given date.
 D   isclosure and Presentation
            To determine that all components of the financial statements and other
            transactions and events are accurately classified, clearly described and
A.        Review the results of the applicable sections of the
            risk assessment documentation and the Small Audits
Analytical Procedures Program and assess impact
on tests of balances. (E, C, R, and V)             
For smaller organizations, investments are usually managed by the person with top management authority. Without appropriate governance responsibilities carried out by a board of directors, risk of material misstatement is usually high resulting in more extensive tests of balances procedures. When persons charged with governance perform entity-level controls, the level of risk may be moderate.
B.         Obtain a list of securities at engagement date,
            including descriptions, number of shares, cost,
            carrying amount, and market value. Foot (if client’s
IT system has not been tested) and tie to the general
ledger. Review subsequent transactions to determine
the completeness of the list. (E and C)             
The auditor must obtain and document an understanding of the client’s IT system. If the software is an out-of-the-box system, the auditor should have a thorough knowledge of its operation and separate testing of the system is not normally required. For more sophisticated accounting software that allows user modification, tests of the software are normally necessary to obtain a complete understanding of its operation. Absence such testing, all reports and documents generated by the software must be tested for mathematical and content accuracy.
C.        Examine securities on hand at the engagement
            date and obtain a receipt for their return. (E and R)       
D.        Obtain confirmation of securities held by others at
            the engagement date. (E, C, and R)                              
These and other confirmations can be hardcopy or electronic. Capital Confirmation, Inc. (www.confirmation.com) can securely and economically handle most electronic confirmations.
E.         1.   Determine that all debt and equity securities are
                  properly classified as held-to-maturity,
                  available-for-sale, or trading by reference to
                  the nature of the security and management’s
                  ability and intention to hold. (D)                              
In high-risk situations, the auditor should be alert for any transactions that are contrary to the expressed intent of management. Sales of securities discovered during the subsequent events review should be compared to financial statement classifications at the engagement date and referred to management for explanations of the reasons for the sale.
            2.   For debt securities classified as held-to-maturity:
                  a.   Determine that they are valued at amortized
                        cost. (V)                                                          
                  b.   Recalculate amortized cost. (E, C, V, and D)   
In accordance with SFAS No. 144, such long-lived assets must still be tested for impairment.
            3.   For debt and equity securities classified as
                  a.   Determine that they are valued at fair value
(SFAS No. 157) and, on a test basis, agree
to third party or fund manger market value
quotations and assess reasonableness.
(E, C, V, and D)                                             
                  b.   Recalculate unrealized gains and losses and
                        determine that they are included in
comprehensive income as a separate
component of stockholder’s equity.
                        (V and D)                                                       
            4.   For debt and equity securities classified as
                  trading securities:
                  a.   Determine that they are valued at fair value
(SFAS No. 157) and, on a test basis, agree
to third party market value quotations.
(E, C, V, and D)                                              
                  b.   Recalculate unrealized gains and losses and
                        determine that they are included in earnings.
                        (V and D)                                                        
Unrealized appreciation and depreciations on trading securities is presented in the statement of operating income. For available for sale securities, such amounts are presented as comprehensive income. For non-profit entities, as described in SFAS No. 124, unrealized appreciation and depreciation on all trading and available for sale debt and equity securities is recorded in the statement of activities.
            5.   Obtain a schedule of all sales of investment
                  securities, by category, and transfers between
                  categories during the year and determine whether
                  they have been classified and accounted for
      properly. (SFAS No. 157-4) (C, V, and D)           
F.         Examine brokers’ advices and/or directors’ approval
            for major transactions during the period. (E and V)      
G.        Obtain a list of all derivative transactions. (E and C)
            1.   Examine evidence of the transactions and
                  proper approval.. (E, C, and R)                             
2.   Obtain confirmations of outstanding transactions
                  as of year end. (E)                                                 
            3.   Review subsequent transactions to determine
                  completeness of the list. (C)                                   
            4.   For disclosure purposes obtain and evaluate
                  information concerning significant individual
                  or group concentrations of credit risk. (D)  
            5.   Determine that any gains of losses have been
                  properly recorded. (V and D)                                 ­­
H.        Determine if any securities are pledged or restricted.
I.          Ensure that all information needed for financial
            statement disclosures has been accumulated and
documented in the working papers. (D)
With the increasing complexity of accounting standards, auditors should always utilize a current disclosure checklist that has been updated for new ASUs. Because many new ASUs are being issued by the Financial Accounting Standards Board, most published disclosure checklists require frequent updating.

In the next blog, I’ll focus on tips for auditing other investments. The live webcasts and self-study courses in my Basic Staff Training Series contain more information on the approaches to auditing many different types of investments. You can download syllabuses and register for these presentations by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com


This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.