Investments program audit.docx
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Investments program audit.docx
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Investmentsprogramaudit
AP-8:
AuditProgramforInvestments
Company BalanceSheetDate
Thecompanyhasthefollowinggeneralledgeraccountsthatareclassifiedintheinvestmentscaptionsofthebalancesheet:
General
Ledger
Number
DescriptionorBriefPurpose
oftheAccount
Currentor
NoncurrentAsset?
AuditProgramforInvestments
Company BalanceSheetDate
AuditObjectives
AuditProceduresforConsideration
N/A
Performedby
WorkpaperIndex
FINANCIALSTATEMENTASSERTIONS
E/O Existenceoroccurrence. V/A Valuationorallocation.
C Completeness. P/D Presentationanddisclosure.
R/O Rightsandobligations.
AUDITOBJECTIVES
A. Thebalancesreflectacompletelistingofinvestments,andthecompany’sownershipofsuchassetsisevidencedbysecuritiesorotherappropriatelegaldocumentseitherphysicallyonhandorheldinsafekeepingbyothers(assertionsE/O,C,andR/O).
B. Assetvalues,investmentincomeorloss,valuationallowances,gainsorlossesonsalesofinvestments,andchangesinfairvaluearerecordedandpresentedinaccordancewithGAAP(assertionV/A).
C. Investmentsareproperlydescribedandclassifiedinthebalancesheet,anddisclosureshavebeenmadeforanyrestrictions,pledges,orliensagainsttheassets.ThedisclosuresrequiredbyGAAPhavebeenmade(assertionP/D).
D. Derivativesareproperlyidentifiedandmeasuredasassetsorliabilities,andchangesinfairvaluearerecordedandpresentedinaccordancewithGAAP.ThedisclosuresrequiredbyGAAPhavebeenmade(assertionsE/O,C,R/O,V/A,andP/D).
IDENTIFICATIONCODES
Thelettersprecedingeachoftheaboveauditobjectives,i.e.,A,B,etc.,serveasidentificationcodes.Thesecodesarepresentedintheleftcolumnlabeled“AuditObjectives”whenaprocedureaccomplishesanobjective.Ifthealphacodeappearsinabracket,e.g.,[A],[B],etc.,theauditprocedureonlysecondarilyaccomplishestheobjective.Ifanasteriskprecedesaprocedure,itisapreliminarysteporafollowupstepthatdoesnotaccomplishanobjective.
BASICPROCEDURES
A,B,C
1. Fordebtandequitysecurities:
a. Obtainorprepareananalysisofactivityduringtheyearinthesecuritiesportfolioseparatedbyclassificationtype(trading,held-to-maturity,oravailable-for-sale).Testtheclericalaccuracyoftheanalysis.Tracetheopeningbalancestotheadjustedprioryearworkingtrialbalanceandtheendingbalancestothecurrentyear’sworkingtrialbalance.
b. Inspectthesecuritiesonhandandconfirmsecuritiesheldbyothers.Retaincopiesofallconfirmationsintheworkpapers.
(1) Theinspectionshouldbeperformedinthepresenceofclientpersonnel.Obtainareceiptevidencingthereturnofthesecuritiestothecustodyoftheclient.(SeeCL-15,“ReceiptforSecuritiesCountedbyAuditor.”)
(2) Determinethatthesecuritiesaremadeouttotheclientandthatcoupons,ifappropriate,areattached.
(3) ComparethesecuritiesinspectedorconfirmedtotheportfolioactivityobtainedinStep1a.
c. Vouchthecostofsignificantpurchasesandtheproceedsfromsignificantsales.Documenttheitemstested.Recomputethegainorlossfromthesaleofsecurities,notingthatthemethodusedindeterminingthecostofsecuritiessold(specificidentification;first-in,first-out;oraveragecost)wasconsistentlyapplied.
d. Testthereasonablenessofcurrentyeardividendandinterestincomefrominvestmentsifsuchincomeismaterial.Inspectpublishedsourcesfordividendsdeclared.Determineifdividendsreceivableshouldbeaccrued.Recomputeamortizationofdiscountorpremiumonbonds.
e. Testthecarryingvalueofthesecurityportfolio.
(1) Testtheproprietyoftheclassificationofsecuritiesastrading,held-to-maturity,oravailable-for-sale.
(2) Tracemarketvaluestopublishedsources.
(3) Recomputetheunrealizedgainorlossforeachclassification.
(4) Determinethattheunrealizedgainorlossonthetradingportfoliohasbeenproperlyclassifiedintheincomestatementandthattheunrealizedgainorlossontheavailable-for-saleportfoliohasbeenproperlyclassifiedintheequitysectionofthebalancesheet.(Unrealizedholdinggainsandlossesontheavailable-for-saleportfolioshouldbereportedasothercomprehensiveincome.)
(5) Determinethatalltransfersbetweentheportfolioshavebeenproperlyrecordedinaccordancewithmanagement’sauthorizationandnotepertinentinformationforthemanagementrepresentationletter.
(6) Determinethatanyother-than-temporarydeclineinvalueofsecuritiesavailable-for-saleorheld-to-maturityhasbeenproperlyrecognizedandaccountedfor.
(7) Determinethatunrealizedgainsandlosseshavebeenappropriatelyidentifiedastemporarydifferencesforpurposesofcomputingdeferredincometaxes.
f. Fromareviewofbankconfirmations,debtconfirmations,debtagreements,directors’minutes,inquiryofmanagement,andphysicalinspectionorconfirmationofsecurities,determinewhetheranysecurityhasbeenpledgedorassignedtootherstosecuredebt.Summarizeanysuchsituationsfordisclosure.
g. Reviewclassificationofsecuritiesascurrentornoncurrent.
h. SummarizeintheworkpapersthefinancialstatementdisclosuresrequiredbySFASNo.115,SFASNo.107,andSFASNo. 133.
i. Obtainarepresentationintherepresentationletterrelatingtotheentity’sabilityandintenttoholdinvestmentsclassifiedasheld-to-maturity.AnexamplerepresentationletterisprovidedatCL-28.
PracticalConsiderations:
¯ Mostcommercialbusinessesnotinthefinancialservicesindustryhavelimitedinvestmentsinsecurities.Accordingly,thisfinancialstatementcaptionisusuallyimmaterial.Theseproceduresshouldonlybeperformedifthecompanyhasmaterialinvestmentsinsecurities.
¯ Oftenacompany’ssecurityactivitycanbeobtainedfrommonthlyactivityreportspreparedbythebrokerwhohandledthetrades.Photocopiesofthesedocumentscansometimesbeusedinlieuofpreparingaseparateworkpaperschedule.Ifthecompany’sinvestmentsareheldbyabroker/dealerorbanktrustdepartment,considerwhetheraSASNo.70reportontheserviceorganizationisneededtogainasufficientunderstandingofinternalcontrolinordertoplantheaudit.Seesection202.
¯ SASNo.96,AuditDocumentation,requiresdocumentationofsubstantivetestsofdetailsinvolvinginspectionofdocumentstoincludeidentificationoftheitemstested.Theauthorsbelieveitemstestedcanbeidentifiedbylistingtheitems;byincludingadetailscheduleintheworkpapers,suchasadetailedanalysisofsecuritiesactivity,onwhichtheitemsareidentified;orbydocumentingintheworkpapersthesourceandselectioncriteria.Forexample:
¯¯ Fortestsofsignificantitems,documentationmaydescribetheauditor’sscopeandthesourceoftheitems(forexample,allsecuritiespurchasesgreaterthan$5,000fromthe20X2portfolioactivityanalysis).
¯¯ Forhaphazardorrandomsamples,documentationshouldincludetheidentifyingcharacteristicsoftheitems(forexample,thespecificremittancenumbers,checknumbers,etc.).
¯¯ Forsystematicsamples,documentationmayindicatethesource,startingpoint,andsamplinginterval(forexample,aselectionofchecksfromthecashdisbursementsjournalfortheperiod1/1/X2to12/31/X2,startingwithchecknumber2150andselectingevery100thcheckthereafter).
SASNo.96iseffectiveforauditsoffinancialstatementsforperiodsbeginningonorafterMay15,2002,withearlyapplicationpermitted.
¯ SFASNo.115(asinterpretedbyFASBTechnicalBulletinNo.94-1)requiresthatalldebtsecuritiesandequitysecuritieswithreadilydeterminablefairvaluesbeclassifiedintooneofthreecategoriesbasedon
(1)thetypeofsecurityand
(2) management’sabilityandintenttoholdtheinvestment.AccordingtoParagraph83ofSFASNo.115,theclassificationofdebtandequitysecuritiesshouldbedocumentedbytheentity.
¯ Inevaluatingmanagement’sintentandabilityregardinginvestmentclassification,theauditorshould:
¯¯ Obtainanunderstandingofmanagement’sprocessforclassifyingsecuritiesastrading,available-for-sale,orheld-to-maturity.
¯¯ Considerwhetherthecompany’spastactivitiescorroborateorconflictwithitsstatedintent.Forexample,theauditorshouldquestionmanagement’sintentifthecompanyhassoldinvestmentsecuritiesclassifiedasheld-to-maturityforreasonsotherthanthoseidentifiedinSFASNo.115,Paragraphs8and11.
¯¯ Inspectdocumentationofmanagement’sintent.(Documentationoftheclassificationofdebtandequitysecuritiesmaybeinformal.)
¯¯ Determinewhethermanagement’sactivities,contractualagreements,orthecompany’sfinancialconditionprovideevidenceofmanagement’sabilitytoholdtheinvestment.
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