Efficient Tests of Balances Series—No. 20: More Tips for Auditing Investments and Other Assets

 

Knowledge required for auditing investments may be more extensive than for other financial statement classifications. The diversity of the nature of possible investments and the varying accounting rules make such knowledge necessary to achieve the two basic audit objectives, high-quality and profitability. Following are basic procedures for auditing investments; tips for achieving higher-quality and profitability are included in text boxes following some of the procedures. Applicable financial statement assertions from the acronym COVEROD mentioned in a previous blog are referenced at the end of each procedure.
 
A.        Review the results of the applicable sections of the
            risk assessment procedures documentation and the
Small Audits Analytical Procedures Program and
assess the impact on tests of balances.
(E, C, R, and V)
 
The assessed level of risk of material misstatement for each financial statement classification is the primary factor in determining necessary auditing procedures. For larger entities with significant investments, the design and operation of internal controls will ordinarily result in lower risk of material misstatement. For smaller entities without such controls, risk will usually be higher. A smaller entity with knowledgeable members serving on its board of governance, however, may have established informal internal controls sufficient to evaluate risk at some level less than high.         
 
B.         Obtain schedules of investments and other assets,
             foot (if IT system not tested), and agree to the general ledger. (E and C)                                             
 
C.        Confirm----
 
            1.   Securities held by others. (E and C)                       
 
            2.   Cash surrender value of life insurance (V)   
           
These and other confirmations can be hardcopy or electronic. Capital Confirmation, Inc. (www.confirmation.com) can securely and economically handle most electronic confirmations.
 
D.        For life insurance, reconcile prepaid premiums at the
            beginning of period, premiums paid, and increase in
            cash surrender value with life insurance expense.(V)
 
Insurance policies should be read and excerpted for the permanent file. The persons covered and beneficiaries, the nature of the insurance and the accounting for cash value (particularly for split-dollar policies where the beneficiary receives the cash value over the cost of premiums paid) should be considered by the auditor.
 
E.        Review ____ calculations of investment earnings and
            related accruals for reasonableness. (V)                       
 
F.         Examine documentation supporting investment trans-
            actions during the year. (E, R, and V)   
 
Appropriate documentation should include brokers statements and, if necessary, documentation of individual transactions.  Approvals of transactions in minutes of meetings of the board of governance, or other evidence of internal control procedures, should also be inspected.   
 
G.        For investments, determine the current value at the
            engagement date and at the report date. Challenge
            carrying amounts (SFAS No. 157). (V)                       
 
H.        If investments are carried on the equity method---
 
            1.   Determine the company’s equity in net assets
                  at year end, earnings (losses), and distributions
                  for the year based on audited information.  
 
            2.   Obtain a reconciliation of intercompany
                  transactions and balances.   Determine  reasonableness.                                          
                                                       
             3.   Inspect evidence of tests for impairment to determine
                  if the carrying amount is greater than the fair value of the
                  ownership interest. (V)                                           
 
I.          Determine if any investments are pledged or
            restricted. (D)                                                              
 
J.         For consolidated statements, determine whether
            the presentation is appropriate. (SFAS No.160)(D)     
           
K.        Inquire about and discuss affiliated relationships
            to determine investments in variable interest entities.
            Perform sufficient procedures to determine if client
            is the primary beneficiary. (SFAS No. 167) (D)
 
All investments in variable interest entities must be considered to determine if the reporting entity is the primary beneficiary, in which case consolidation of the VIE is required. Disclosures are required in footnotes for VIEs that are consolidated and VIEs that are not consolidated.    
 
L.         When client is the primary beneficiary, review or
            assist in preparing consolidation of client’s interest
            and non-controlling interests. (SFAS No. 160) (D)       
 
M.        For more than 50%-owned entities, review or
                prepare consolidating schedules. Review audited
financial statements for subsidiaries and trace
information to the consolidating schedules. (D)
 
For more information on auditing investments and other financial statement classifications, you may wish to register for my live or on-demand webcasts by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com.            
 

 

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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.

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