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Clarified Auditing Standards: Audit Evidence – Specific Considerations for Selected Items – Part 1

Nov 12th 2015
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AU-C Section 501, Audit Evidence – Specific Considerations for Selected Items, includes the following two sections that will be discussed in the first part of this article:

  • Investments in securities and derivative instruments
  • Inventory

These next two sections will be discussed in the second part of this article:

  • Litigation, claims, and assessments involving the entity
  • Segment information in an audit of financial statements


This standard includes requirements for collecting sufficient evidence in these areas:

  • Valuation of investments in securities and derivative instruments
  • Existence and condition of inventory
  • Completeness of litigation, claims, and assessments involving the entity
  • Presentation and disclosure of segment information in accordance with the applicable financial reporting framework

Investments in Securities and Derivative Instruments

Investments in securities when valuations are based on the investee's financial results (excluding investments accounted for using the equity method of accounting).  In these circumstances, auditors are required to obtain sufficient appropriate audit evidence in support of the investee's financial results. This should include:

  • Obtain and read available financial statements and the audit report of the investee.
  • In the cases of unaudited statements or audit reports that are unsatisfactory, apply appropriate auditing procedures to the financial statements.
  • Obtain sufficient audit evidence to determine if the investee's carrying amounts for the securities are appropriate and reasonable. If the carrying amounts are not appropriate, or sufficient valuation evidence cannot be obtained, determine if management has reflected any material differences in the financial statements and if there are any effects on the auditor's reports.

Investments in derivative instruments and securities measured or disclosed at fair value. Auditing procedures include:

  • Determining the valuation methods in the applicable financial reporting framework for the entity's derivative instruments and investments in securities have been properly applied.
  • Understanding the method used by a broker-dealer or other third-party source in developing the estimate.
  • Obtaining sufficient audit evidence supporting management's assertions about fair value they have determined using an appropriate model.

Impairment losses. Auditors' responsibilities include:

  • Evaluating management's conclusions about recognizing an impairment loss.
  • Obtaining sufficient audit evidence for the amount of any impairment adjustment recorded.

Unrealized appreciation or depreciation. Auditors should obtain sufficient audit evidence about the amount of unrealized appreciation or depreciation in the fair value of a derivative in accordance with the requirements of the applicable financial reporting framework.


For material amounts of inventory, auditors should obtain sufficient evidence about both the existence and condition of the inventory. The following procedures ordinarily should be performed:

  • Attending a physical count of the inventory or performing appropriate alternative procedures when the count cannot be observed.
  • Evaluating management's count instructions and procedures for recording the quantities counted.
  • Observing the performance of the count procedures, making test counts, and inspecting the condition of the inventory.
  • Performing appropriate inventory pricing and compilation procedures over the entity's final inventory records.
  • Reconciling physical inventories at dates other than the date of the financial statements to the reporting date and, depending on assessed levels of risk, applying appropriate audit procedures to reconciling transactions.

Other Information

Live webcasts and self-study courses on these subjects can be accessed on my home page.


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