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8/13/2019 Investments Programfdgfgf

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AP-8: Audit Program for Investments

Company Balance Sheet Date

The company has the following general ledger accounts that are classified in the investmentscaptions of the balance sheet:

GeneralLedgerNumber

Description or Brief Purposeof the ccount

Current orNoncurrent sset!

udit Program for "nvestments

Company Balance #heet Date

udit

$b%ectivesudit Procedures for Consideration

N&

Performedby

'or(pap

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*"NNC"L #TT+,+NT ##+-T"$N#

+&$ +)istence or occurrence. /& /aluation orallocation.C Completeness. P&D Presentation
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and disclosure.-&$ -ights and obligations.

0D"T $B1+CT"/+#

. The balances reflect a complete listing of investments2 andthe company3s ownership of such assets is evidenced by securitiesor other appropriate legal documents either physically on hand orheld in safe(eeping by others 4assertions +&$2 C2 and -&$5.

B. sset values2 investment income or loss2 valuationallowances2 gains or losses on sales of investments2 and changes infair value are recorded and presented in accordance with GP4assertion /&5.

C. "nvestments are properly described and classified in thebalance sheet2 and disclosures have been made for any restrictions2pledges2 or liens against the assets. The disclosures re6uired byGP have been made 4assertion P&D5.

D. Derivatives are properly identified and measured as assetsor liabilities2 and changes in fair value are recorded and presentedin accordance with GP. The disclosures re6uired by GPhave been made 4assertions +&$2 C2 -&$2 /&2 and P&D5.

IDENTIFIATI!N !DES

The letters preceding each of the above audit ob%ectives2 i.e.2 2 B2etc.2 serve as identification codes. These codes are presented in theleft column labeled 7udit $b%ectives8 when a procedureaccomplishes an ob%ective. "f the alpha code appears in a brac(et2e.g.2 92 9B2 etc.2 the audit procedure only secondarilyaccomplishes the ob%ective. "f an asteris( precedes a procedure2 it isa preliminary step or a follow up step that does not accomplish anob%ective.

B#"C P-$C+D0-+#

2 B2 C ;. *or debt and e6uity securities:

a. $btain or prepare an analysis of activity during the year inthe securities portfolio separated by classification type 4trading2held


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year3s wor(ing trial balance.

b. "nspect the securities on hand and confirm securities held

by others. -etain copies of all confirmations in the wor(papers.

4;5 The inspection should be performed in the presence ofclient personnel. $btain a receipt evidencing the return of thesecurities to the custody of the client. 4#eeCL5 Determine that the securities are made out to the clientand that coupons2 if appropriate2 are attached.

4?5 Compare the securities inspected or confirmed to theportfolio activity obtained in #tep ;a.

c. /ouch the cost of significant purchases and the proceedsfrom significant sales. Document the items tested. -ecompute thegain or loss from the sale of securities2 noting that the method usedin determining the cost of securities sold 4specific identification@first


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has been properly classified in the e6uity section of the balancesheet. 40nrealiAed holding gains and losses on the available


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$ften a company3s security activity can be obtained frommonthly activity reports prepared by the bro(er who handled thetrades. Photocopies of these documents can sometimes be used inlieu of preparing a separate wor(paper schedule. "f the company3s

investments are held by a bro(er&dealer or ban( trust department2consider whether a ## No. E report on the service organiAationis needed to gain a sufficient understanding of internal control inorder to plan the audit. #eesection >E>.

## No. 2 udit Documentation2 re6uires documentation ofsubstantive tests of details involving inspection of documents toinclude identification of the items tested. The authors believe itemstested can be identified by listing the items@ by including a detailschedule in the wor(papers2 such as a detailed analysis of securitiesactivity2 on which the items are identified@ or by documenting inthe wor(papers the source and selection criteria. *or e)ample:

*or tests of significant items2 documentation may describe theauditor3s scope and the source of the items 4for e)ample2 allsecurities purchases greater than H=2EEE from the >EI> portfolioactivity analysis5.

*or haphaAard or random samples2 documentation shouldinclude the identifying characteristics of the items 4for e)ample2 thespecific remittance numbers2 chec( numbers2 etc.5.

*or systematic samples2 documentation may indicate thesource2 starting point2 and sampling interval 4for e)ample2 aselection of chec(s from the cash disbursements %ournal for theperiod ;&;&I> to ;>&?;&I>2 starting with chec( number >;=E andselecting every ;EEth chec( thereafter5.

## No. is effective for audits of financial statements forperiods beginning on or after ,ay ;=2 >EE>2 with early applicationpermitted.

#*# No. ;;=4as interpreted by*#B Technical Bulletin No.5 management3sability and intent to hold the investment. ccording toParagraphF? of #*# No. ;;=2 the classification of debt and e6uity securities
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should be documented by the entity.

"n evaluating management3s intent and ability regardinginvestment classification2 the auditor should:

$btain an understanding of management3s process forclassifying securities as trading2 available


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estimates are obtained from bro(er


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instructions to the bro(er to ma(e trades that can be allocated toanother entity or individual.

The auditor should usually confirm the description of eachasset held by a third party as well as the par or principal amount2number of shares2 and total amount of the investment. "f theauditor2 based on his or her consideration of fraud ris( factors2decides to modify procedures related to investments2 considerconfirming all transactions during the period with the bro(er2including purchases2 sales2 dividend and interest collections2 andinterest and other e)penses paid. The confirmation may also see(verification of additional information such as who is authoriAed toma(e investment transactions2 where interest and dividend dollarsare sent2 etc.

,any small businesses do not have the internal ability toproperly record transactions for significant portfolios of securities.Thus2 the auditor normally is re6uired to propose entries necessaryto ad%ust the general ledger for accounting treatment necessaryunder GP. Consider using your paraprofessional staff prior tothe start of the audit to perform this wor( and to prepare necessaryschedules.

#*# No. ;;=states that debt securities should not beclassified as held


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precludes a security from being classified as held


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'hen testing the propriety of classifying debt securities asheld


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significant influence.

"f an investment is accounted for contrary to the presumptionestablished by GP for use of the e6uity method 4for e)ample2 ifan investment of >E to =E is accounted for using the costmethod52 auditors should obtain evidence supporting that thepresumption has been overcome and should determine that thereasons for not following the presumption are appropriatelydisclosed.

D ?. "n6uire of the most (nowledgeable client representative 4ina larger company2 this may be the treasurer5 about the e)tent of thecompany3s derivative use2 the types of derivatives used2 and thecompany3s purpose in using these instruments.

Practical Considerations:

The auditor3s in6uiries should address aspects of thecompany3s operations that might present ris(s hedged usingderivatives. -is(s hedged using derivatives may be present2 fore)ample2 if the company is in the financial services industry2conducts business with foreign entities2 or is in an industry wherecommodity contracts are common. uditors should also in6uireabout whether the company has converted interest


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guidance on auditing companies in specific industries2 such assecurities bro(er2 uditing Derivative "nstruments2 Jedgingctivities2 and "nvestments in #ecurities2 provides guidance forauditing derivatives. The "CP has issued a companion uditGuide that provides practical guidance and includes suggestedprocedures to clarify and illustrate the application of there6uirements of ## No. >.

M . Consider the need to apply one or more additionalprocedures. The decision to apply additional procedures should bebased on a consideration of whether information obtained ormisstatements detected by performing substantive tests or from

other sources during the audit alter your %udgment about the need toobtain a further understanding of control activities2 the assessedlevel of ris( of material misstatements 4whether caused by error orfraud52 and on an evaluation of whether the basic procedures havebeen sufficient to achieve the audit ob%ectives. ttach auditprogram sheets to document additional procedures.


Certain common additional procedures relating to thefollowing topics are illustrated following this program:

"nvestments in closely held corporations2 partnerships2 or%oint ventures.

*air value disclosures.

Derivatives.

dditional procedures in response to fraud ris( assessment.

Practitioners may refer to PPC3s Guide to *raud "nvestigations

for more e)tensive fraud detection procedures if it is suspected thatthe financial statements are materially misstated due to fraud.

M =. Consider whether procedures performed are ade6uate torespond to identified fraud ris( factors. "f fraud ris( factors or otherconditions are identified that re6uire an additional audit response2consider those ris( factors or conditions and the auditor3s response


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in connection with the performance of #tep ;; inP


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"nvestments in Closely Jeld Corporations2 Partnerships2 or 1oint/entures

2 B2 C *or material investments in closely held corporations2 partnerships2

or %oint ventures2 perform the following procedures:

a. /ouch the client3s ownership interest by inspectingappropriate securities or legal documents supporting ownership.

b. "n6uire as to whether the client has the ability to e)ercisesignificant influence over financial and operating policies of theinvestee and the basis for the conclusion. +valuate the results of thein6uiry in relation to facts obtained during the audit.

c. Based on the information obtained in #teps a and b2

determine the proper accounting method for recording theinvestment2 i.e.2 full consolidation2 e6uity method2 or cost. "f themethod has changed because of a change during the year inownership interest2 determine the effect on the auditor3s report andfinancial statements2 for e)ample2 e)planatory paragraph referringto the change and disclosure in the notes.

d. *or investments accounted for using the cost method2vouch the cost 4unless it was vouched previously5. -eview thelatest financial statements of the investee2 ma(e in6uiries ofmanagement2 etc.2 to determine if there has been any other5 Determine that the financial statements of the investee areon the same accounting basis as your client and that the fiscal year


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end of the investee coincides with your client3s 4or is within threemonths5.

4?5 Test the accuracy and completeness of the client3s

entry4ies5 to consolidate or to record the investment on the e6uitybasis.

4a5 "f the consolidation method is used2 test the propriety ofeliminating entries for intercompany profit. lso determine that theauditor3s report2 financial statements2 and related notes areappropriate for consolidated financial statements.

4b5 "f the e6uity method is used2 tie current year3s income orloss recognition 4after eliminating significant intercompany profit5to the appropriate revenue account.

45 +valuate the effect on the client3s financial statements ofreport 6ualifications2 contingencies2 etc.2 of the investee. 4This isappropriate for both the consolidation and e6uity methods.5

4=5 Determine that any other


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## No. >2 uditing Derivative "nstruments2 Jedgingctivities2 and "nvestments in #ecurities2 establishes the auditre6uirements for significant long


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nother often as(ed 6uestion is whether the date of the resultsof operations of the investor must coincide with the results ofoperations of the investee. "n other words2 if the financialstatements of the investor are dated December ?;2 >EI;2 must the

e6uity in earnings of the investee also be recorded throughDecember ?;2 >EI;! -B =;indicates that where the differenceis not more than about three months2 it usually is acceptable to usethe investee3s statements for its fiscal period@ when this is done2recognition should be given by disclosure or otherwise to the effectof intervening events that materially affect the financial position orresults of operations.

The investor3s share of losses of an investee may e6ual ore)ceed the carrying amount of an investment accounted for by thee6uity method. The investor normally should discontinue applying

the e6uity method when the investment is reduced to Aero.Jowever2 PB $pinion No. ;Falso states that if the investor hasguaranteed obligations of the investee or is otherwise committed toprovide further financial support2 losses should continue to berecorded by the investor to the e)tent of additional fundscommitted. 4#ee also "CP Technical Practice id T"# >>>E.;>.5n investment that has been reduced below Aero should bepresented as a liability in the balance sheet of the investor.

'hen accounting for investments in other entities2 the auditorshould also be aware that an 7e)cept for8 6ualification or

disclaimer in the audit report on the investee3s financial statements2if material2 could affect the report on the investor3s financialstatements.

*air /alue Disclosures

C $btain information about the fair values of financial instruments4e.g.2 securities and investments in closely held companies other

than those accounted for under the e6uity method5 for disclosure inthe financial statements.


#*# No. ;>2+)emption from Certain -e6uired Disclosuresabout *inancial "nstruments for Certain Nonpublic +ntities: nmendment of #*# No. ;E2 ma(es #*# No. ;E3s disclosures
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about the fair value of financial instruments optional for companiesthat meet the following criteria:

The company is a nonpublic company.

The company3s total assets are less than H;EE million on thedate of the financial statements.

The company has no instrument that2 in whole or in part2 isaccounted for as a derivative instrument under #*# No. ;??during the reporting period.

"n many small businesses2 securities are not material. Jowever2when they are material2 fair value will already have beendetermined to comply with the re6uirements of#*# No. ;;=.*orinvestments classified as trading securities or available


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"nterpretation No. ; of ## No. =2 uditing ccounting+stimates 40 ?>52 addresses auditing the client3s fair valueestimates for disclosures re6uired by #*# No. ;E.The"nterpretation re6uires that the auditor obtain sufficient competent

evidence to provide reasonable assurance that:

/aluation principles are in accordance with #*# No. ;E2consistently applied2 and supported by underlying documentation.

The method of estimation and significant assumptions usedare properly disclosed.

0 ?> provides additional guidance for situations in whichthe client chooses to provide voluntary fair value information inaddition to that re6uired by #*# No. ;E.

#*# No. ;Edoes not re6uire that fair values of financialinstruments be estimated if it is not practicable2 or cost effective2 todevelop the estimates. The decision of whether it is practicableshould consider such things as the importance of the financialinstrument to the client3s business activities and the materiality ofthe carrying amount of the financial instrument to the financialstatements.

'hen it is not practicable to estimate the fair value of a

financial instrument2 disclosure must be made of:

"nformation pertinent to estimating the fair value of thefinancial instrument.

The reasons why it is not practicable to estimate fair value.

"f a fair value estimate is based on the wor( of an outsidespecialist 4e.g.2 an appraiser52 the re6uirements of## No. ?20sing the 'or( of a #pecialist2 should be followed. The additionalprocedures to P


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D *or entities with significant derivative transactions2 perform thefollowing steps:

a. -ead board of directors3 minutes for approval of

derivatives transactions.

b. -ead loan agreements2 bond indentures2 lease agreements2insurance contracts and other relevant contracts to identifyembedded derivatives. Determine whether embedded derivativesshould be accounted for separately from the host contract inaccordance with #*# No. ;??. "nclude in the current orpermanent wor(paper files abstracts or copies of significantagreements e)amined to evaluate the appropriate accounting forembedded derivatives.

c. Confirm with counterparties or e)ecuting bro(ers theoutstanding transactions as of the balance sheet date. Consider alsoconfirming with counterparties or e)ecuting bro(ers thederivatives activity during the year. #can derivatives activity andcompare it with the description of the entity3s use of derivativesprovided by the client. -etain copies of all confirmations in thewor(papers.

d. Compare the terms of individual transactions with contractsor trade tic(ets.

e. *or derivatives designated as hedging instruments:

4;5 Determine that the hedged item meets the #*# No. ;??criteria for designation as a hedge.

4>5 -eview the company3s documentation of the hedgingrelationship to ensure it meets the documentation re6uirements of#*# No. ;??.

4?5 $btain an understanding of the methods used to determinewhether the hedge is highly effective and to determine theineffective portion of the hedge. Determine that management hasassessed the effectiveness of the hedging relationship at inceptionand whenever financial statements are prepared2 or at least everythree months2 noting that the method of assessing hedgeeffectiveness is the same as the criteria prescribed by thedocumentation prepared at the inception of the hedge.
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f. Test the valuation of the derivatives at year end.

4;5 Trace fair values to 6uoted prices2 if available 4fore)ample2 6uoted mar(et prices for derivatives listed on national

e)changes and 6uoted mar(et prices from bro(er


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derivative instrument may be a stand5 valuation assertions orunderlying assumptions2 4?5 the e)istence of side agreements thataffect the company3s rights and obligations2 45 the terms of anagreement that significantly impact whether an embeddedderivative is accounted for separately2 or 4=5 whether the contractwill settle net or result in physical delivery.
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"f the fair value is obtained from a thirdE of PPC3s Guide to Preparing*inancial #tatementsdiscusses common methods of determiningthe fair value of derivatives.

+valuating evidential matter for assertions about derivativesmay re6uire the use of considerable %udgment. "n situationsre6uiring considerable %udgment2 auditors should consider theguidance in ## No. =2 uditing ccounting +stimates2 and ##

No. ?.

*or cash flow hedges of forecasted transactions2 thedetermination about whether the forecasted transaction is probableof occurring should not be based solely on management3s intent.The probability should be supported by observable facts andcircumstances such as:

The fre6uency with which similar past transactions haveoccurred.

The ability of the company2 both financially andoperationally2 to carry out the transaction.

The e)tent of the loss that could result if the transaction doesnot occur.

The li(elihood of using transactions with substantially
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different characteristics to achieve the same business ob%ectives.

dditional Procedures in -esponse to *raud -is( ssessment

2 B "f the auditor2 based on his or her consideration of fraud ris(factors2 decides to modify procedures related to investments2 thefollowing procedures should also be considered:

a. $btain and review all contracts2 agreements2 and otherdocuments related to investments2 including actual stoc( or bondcertificates2 bro(er3s statements2 and other applicable documents.$btain an analysis of investment activity for the period.

Practical Consideration:

"f possible2 these documents should be obtained from a sourceother than the employee responsible for the custody and recordingof investments and related activity. The analysis of investmentactivity should be obtained directly from e)ecuting bro(ers.

b. Perform analytical procedures that are predictive tests ofinvestment


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d. -eview all investment


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4>5 -easonableness of investment income.

4?5 -easonableness of gains or losses on sales of securities.

45 ppropriateness of financial statement classification2disclosure2 and valuation2 and the ade6uacy of the predecessor3sprocedures to support these matters.

b. #can the predecessor3s wor(papers for investments inclosely held corporations2 partnerships2 or %oint ventures@ consider:

4;5 ppropriateness of the accounting method for theinvestment 4cost2 e6uity2 consolidation5 and the ade6uacy of theprocedures supporting that determination.

4>5 -easonableness of the carrying value and any relatedincome or loss and the ade6uacy of the procedures to support thoseamounts.

4?5 *or e6uity investments2 consider the ade6uacy of theprocedures to support the investor3s ability to e)ercise significantinfluence2 allocation2 if any2 of original purchase cost betweentangible assets and goodwill2 and appropriateness of increases4income5 and decreases 4losses and dividends received5 since

ac6uisition.

c. #can the predecessor3s wor(papers for derivatives@consider:

4;5 The ade6uacy of procedures performed to test forcompleteness.

4>5 The appropriateness of the accounting for derivativesdesignated as hedging instruments and the ade6uacy of procedures

supporting that determination.

4?5 The reasonableness of the valuation of derivatives and therealiAed and unrealiAed gains and losses for derivative contractsand the ade6uacy of procedures to support those amounts.

d. Consider whether any changes in classification or carrying


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value made in the current period should have been made in priorperiods.


The ade6uacy of the predecessor3s procedures should beconsidered in light of the materiality of the investment. Themateriality evaluation determines whether the basis of comparisonshould be the basic procedures or the additional procedures of theaudit program for investments.

M >. "f no reliance on a predecessor is planned or possible andthe investment in mar(etable debt or e6uity securities is material:

a. $btain or prepare a schedule of securities in the opening

balance2 reconcile to the general ledger accounts2 and compare tothe closing schedule of the current period.

b. "n vouching significant sales during the current period2trace to the opening schedule.

c. #can any significant sales of securities in the prior period2note the method of determining cost2 and compare to the methodused in the current period.

d. Consider whether any changes in classification or carryingvalue made in the current period should have been made in priorperiods.


These procedures supplement the additional proceduresapplied when the investment in securities is material in the currentperiod.

M ?. "f no reliance on a predecessor is planned or possible and

an investment in a closely held corporation2 partnership2 or %ointventure is material:

a. Consider whether any changes in the accounting method orrecognition of impairment of value in the current period shouldhave been made in prior periods.


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b. *or investments accounted for using the e6uity method:

4;5 "n6uire about whether the client3s ability to e)ercisesignificant influence has changed over the period the investmenthas been held.

4>5 Consider the appropriateness of the allocation2 if any2 oforiginal purchase cost between tangible assets and goodwill.

4?5 #can a summary of the activity in the investment accountfrom the original investment to the end of the current period.

45 Consider whether the inspection of the financialstatements of the investee for the current period supports thereasonableness of the opening investment balance.


These procedures supplement the additional proceduresapplied when an investment in a closely held corporation2partnership2 or %oint venture is material.

M . "f no reliance on a predecessor is planned or possible andderivatives are material:

a. $btain or prepare a schedule of derivatives in the openingbalance2 reconcile to the general ledger accounts2 and compare tothe closing schedule of the current period.

b. Consider whether tests of activity in the current periodprovide evidence about the e)istence and valuation of derivativesin the opening balance.

c. *or derivatives designated as hedging instruments2 evaluatewhether the method of assessing hedge effectiveness is the same as

the criteria prescribed by the documentation prepared at theinception of the hedge.

d. *or cash flow hedges of forecasted transactions2 inspectevidence of the occurrence of those forecasted transactions.

e. Consider whether any changes in classification or carrying


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value made in the current period should have been made in priorperiods.


These procedures supplement the additional proceduresapplied when derivatives are material.

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