Audit Program for Investments

Transcription

1 Form AP 25 Index Reference Audit Program for Investments Legal Company Name Client: Balance Sheet Date: Instructions: The auditor should refer to the audit planning documentation to gain an understanding of the financial reporting system and the planned extent of testing for investments. Modification to the auditing procedures listed below may be necessary in order to achieve the audit objectives. All audit work should be documented in attached working papers, with appropriate references noted in the right column below. Audit Objectives Investments reflected in the balance sheet include securities on hand and in custody of third parties, and physical evidence of ownership exists. Investment transactions and related income or loss are recorded correctly as to account, amount, and period. Investments are properly valued, and loss in value is promptly identified and provided for. Investments are properly segregated between current and noncurrent assets and are disclosed in accordance with IAS. Financial Statement Assertions Existence or occurrence Completeness Rights and obligations Existence or occurrence Valuation or allocation Valuation or allocation Presentation and disclosure Performed By Workpaper Reference

2 1. For investments in securities, such as bonds, stocks, and mutual funds: a. Prepare or obtain from the client a detailed analysis of such investments, showing the following: (1) The classification of the securities (i.e., trading, heldto-maturity, or available-for-sale). (2) A detailed description of the securities and the terms (interest rate, maturity date, dividend rate, etc.). (3) The nominal quantity (shares, face value) and the balance at cost, market, or other basis, as applicable, and the balance of unamortized premium or discount as of the end of the prior period. (4) Detail of additions, sales, or disposals for the current period. (5) The nominal quantity (shares, face value) and the balance at cost, market, or other basis, as applicable, and the balance of unamortized premium or discount as of the end of the current period. (6) Valuation allowances as of the beginning and end of the period, and changes in valuation allowances. (7) Detail of investment income. b. Test the arithmetical accuracy of the analysis. c. Trace opening balances to the prior-period workpapers and year-end balances to the general ledger. d. In the presence of the custodian, inspect the securities on hand and determine if they are owned by the client, note serial or certificate numbers, and obtain a signed receipt from the custodian. e. For investments held by independent third parties, obtain positive confirmation of such securities.

3 f. If a service organization provides services that are part of a client s information system, determine if it is necessary to inspect supporting documentation, such as securities purchases and sales advices, located at the service organization s facilities. g. Summarize the terms of preferred stock and debt securities. h. Determine whether security transactions were properly authorized by examining minutes of the Representative Governing Board meetings or other committee minutes. i. Examine bank, broker, or custodian reports of transactions and vouch the cost of significant purchases and the proceeds from significant sales. j. Trace payments to payment orders and cash receipts to cash receipts journal. k. Recompute amortization of premium and/or discount. l. Compute realized and unrealized gains and/or losses for current and noncurrent portfolios, and ascertain that the method used in determining the cost of securities sold (e.g., first-in, first-out; specific identification; or average cost) was consistently applied. m. Determine whether unrealized gains or losses have been properly presented and disclosed in the financial statements. n. Test the reasonableness of investment income (dividends, interest income), if the amount is material. o. Test the propriety of the classification of securities as trading, held-to-maturity, or available-for-sale. p. Determine whether any security has been pledged or assigned.

4 q. Determine that any transfers between categories of investments have been properly made and recorded in accordance with IAS. r. Consider management s intent and ability in valuing securities, as follows: (1) Obtain an understanding of the process used by management to classify securities as trading, available-for-sale, or held-to-maturity, and determine that the securities are classified in accordance with IAS. (2) For investments classified as held-to-maturity, obtain a representation from management in the representation letter about the entity s ability and intent to hold such investments until maturity. (3) Consider whether management s activities corroborate or conflict with its stated intent. For example, the auditor should evaluate management s assertion and intent to hold debt securities to maturity by examining evidence such as documentation of management s strategies and sales and other historical activities with respect to those securities and similar securities. (4) Determine whether management s activities, contractual agreements, or the entity s financial condition provide evidence of its ability, for example as follows: (i) (ii) The entity s financial position, working capital needs, operating results, debt agreements, guarantees, alternate sources of liquidity, and other relevant contractual obligations, as well as laws and regulations, may provide evidence about the entity s ability to hold debt securities to their maturity. Management s cash flow projections may suggest that it does not have the ability to hold debt securities to their maturity.

5 s. See steps 4 through 7 below for audit procedures regarding the valuation of securities, impairment losses, and adequacy of presentation and disclosure in the financial statements. 2. For investments in closely held corporations, partnerships, joint ventures, and investments carried on the equity method: a. Prepare or obtain from the client a detailed analysis of such investments, showing the following: (1) The name of each investee. (2) Percentage of ownership. (3) The accounting policies of the client/investor. (4) The difference, if any, between the amount at which the investment is carried and the amount of underlying equity in net assets. b. Read executed partnership or similar underlying agreements and other forms of supporting documentation. c. Determine the proper method of accounting for the investment (cost, equity, consolidation). d. Obtain and review copies of the investee s most recent financial statements and the accompanying audit report, if any, and/or tax returns. If necessary, determine if an adjustment to record the current-year equity investment should be made. e. Review information in the investor s files that relates to the investee (e.g., investee minutes; budgets and cash flow information about the investee). f. Make inquiries of the investor s management about, and obtain sufficient evidence in support of, the investee s financial results.

6 g. Apply, or request that the investor arrange with the investee to have another auditor apply, appropriate auditing procedures to the investee s financial statements, if the investee s financial statements are not audited or if the investee auditor s report is not satisfactory. h. If the carrying amount of the security reflects factors that are not recognized in the investee s financial statements or fair values of assets that are materially different from the investee s carrying amounts, obtain sufficient evidence in support of these amounts. i. If a time lag between the date of the entity s financial statements and those of the investee has a material effect on the entity s financial statements, determine whether the entity s management has properly considered the lack of comparability. j. Add an explanatory paragraph to the auditor s report, if a change in time lag occurs that has a material effect on the investor s financial statements. k. Evaluate sufficiency of evidential matter because of significant differences in fiscal year-ends, significant differences in accounting principles, changes in ownership, changes in conditions affecting the use of the equity method, or the materiality of the investment to the investor s financial position or results of operations. l. Obtain evidence about material transactions between the entity and the investee and evaluate (a) the propriety of the elimination of unrealized profits and losses on such transactions when the equity method of accounting is used to account for an investment under IAS and (b) the adequacy of disclosures about material related party transactions.

7 m. For subsequent events and transactions of the investee occurring after the date of the investee s financial statements but before the date of the investor auditor s report, read available interim financial statements of the investee and make appropriate inquiries of the investor to identify subsequent events and transactions that are material to the investor s financial statements. n. Determine whether the investment is properly classified in the financial statements and whether disclosure, if necessary, is made with respect to summarized information of assets, liabilities, and results of operations of the investee. o. For an investment accounted for using the equity method, inquire of management as to whether the entity has the ability to exercise significant influence over the operating and financial policies of the investee and evaluate the attendant circumstances that serve as a basis for management s conclusions. p. If the entity accounts for the investment contrary to the presumption established by IAS for the use of the equity method, obtain sufficient evidence about whether that presumption has been overcome and whether appropriate disclosure is made regarding the reasons for not accounting for the investment in keeping with that presumption. q. Evaluate management s conclusion about the need to recognize an impairment loss for a decline in the fair value of the investment below its carrying amount that is other than temporary. 3. For derivative instruments and hedging activities: a. Confirm with counterparties the outstanding transactions as of the balance sheet date, including significant terms and the absence of any side agreements. b. Confirm with counterparties settled and unsettled transactions.

8 c. Request counterparties who are frequently used, but with whom the accounting records indicate there are presently no derivatives, to state whether they are counterparties to derivatives with the client. d. Physically inspect derivative contracts, underlying agreements, and any other forms of supporting documentation. e. Inspect financial instruments and other agreements to identify embedded derivatives. f. Inspect documentation, in paper or electronic form, for activity subsequent to the end of the reporting period. g. If a service organization provides services that are part of a client s information system, determine if it is necessary to inspect supporting documentation, such as derivative contracts, located at the service organization s facilities. h. Read other information, such as minutes of meetings of the Representative Governing Board or finance, investment, or other committees to identify the nature and extent of derivative instruments and hedging activities. i. Trace payments for purchases of derivatives to payment orders or wire transfers. j. Gather evidential matter to support the amount of unrealized appreciation or depreciation in the fair value of a derivative that is recognized in earnings or other comprehensive income or that is disclosed because of the ineffectiveness of a hedge. k. For hedging activities: (1) Determine whether management complied with the hedge accounting requirements under IAS, including designation and documentation requirements.

9 (2) Support management s expectation at the inception of the hedge that the hedging relationship will be highly effective and its ongoing effectiveness will be periodically assessed. (3) Support the recorded change in the hedged item s fair value that is attributable to the hedged risk. (4) Determine whether management has properly applied IAS to the hedged item. (5) Evaluate management s determination of whether a forecasted transaction that is hedged is probable of occurring. (Note: IAS requires that the likelihood that the transaction will take place not be based solely on management s intent; rather, the transaction s probability should be supported by observable facts and the attendant circumstances.) l. Obtain written representations from management confirming aspects of management s intent and ability that affect assertions about derivatives, such as to enter into a forecasted transaction for which hedge accounting is applied. m. See steps 4 through 7 below for audit procedures regarding the valuation of derivatives, impairment losses, and adequacy of presentation and disclosure in the financial statements. 4. For investments in securities and derivative instruments that are valued based on fair value, test such valuations as follows: a. Determine whether IAS specifies the method to be used to determine the fair value of the client s securities and derivatives and evaluate whether the determination of fair value is consistent with the specified valuation method.

10 b. Obtain quoted market prices from sources such as the following: financial publications, the exchanges, the National Association of Securities Dealers Automated Quotations System (NASDAQ), or pricing services based on sources such as those. c. If quoted market prices for securities or derivatives are obtained from broker-dealers who are market makers in them or through the National Quotation Bureau, determine whether special knowledge is required to understand the circumstances in which the quote was developed. (For example, quotations published by the National Quotation Bureau may not be based on recent trades and may only be an indication of interest and not an actual price for which a counterparty will purchase or sell the security or the derivative.) d. If quoted market prices are not available for the security or derivative, obtain estimates of fair value from brokerdealers or other third-party sources based on proprietary valuation models or from the entity based on internally or externally developed valuation models (e.g., the Black- Scholes option-pricing model). Under these circumstances, also perform the following: (1) Obtain an understanding of the method used by the broker-dealer or other third-party source in developing the estimate (e.g., whether a pricing model or a cash flow projection was used). (2) Determine whether it is necessary to obtain estimates from more than one pricing source, which may be appropriate if the pricing source has a relationship with the client that might impair its objectivity, or the valuation is based on assumptions that are highly subjective or particularly sensitive to changes in the underlying circumstances. e. For fair-value estimates obtained from broker-dealers and other third-party sources, consider the applicability of the guidance in ISA 620 Using the Work of an Expert. (Is the expert competent and objective? Is the work of the expert appropriate as audit evidence?)

11 f. If a security or derivative is valued by the entity using a valuation model (e.g., present value of expected future cash flows, option-pricing models), obtain evidence supporting management s assertions about fair value by performing the following procedures, as deemed necessary: (1) Assess the reasonableness and appropriateness of the model. Determine whether the valuation model is appropriate for the derivative or security to which it is applied and whether the assumptions used are reasonable and appropriately supported. Consider involving a specialist in assessing the model. (2) Calculate the value, for example, using a model developed by the auditor or by a specialist engaged by the auditor, to develop an independent expectation to corroborate the reasonableness of the value calculated by the entity. (3) Compare the fair value with subsequent or recent transactions. g. If collateral (e.g., negotiable securities, real estate, property, etc.) is an important factor in evaluating the fair value and collectibility of the security, obtain evidence regarding the existence, fair value, and transferability of such collateral as well as the investor s rights to the collateral. h. Determine if there have been material declines in market values subsequent to the balance-sheet date. 5. For investments in securities that are valued based on cost, test such valuations as follows: a. Inspect documentation of the purchase price. b. Confirm the purchase price with the issuer or holder. c. Test discount or premium amortization, either by recomputation or analytical procedures.

12 d. Evaluate management s conclusion about the need to recognize an impairment loss for a decline in the security s fair value below its cost that is other than temporary (see step 6 below). 6. Regardless of the valuation method used, evaluate the need to recognize in earnings an impairment loss for a decline in fair value that is other than temporary, as follows: a. Evaluate whether management has considered relevant information and factors such as the ones below in reaching its conclusions about the need to recognize an impairment loss: (1) Fair value is significantly below cost and: (i) (ii) (iii) The decline is attributable to adverse conditions specifically related to the security or to specific conditions in an industry or in a geographic area. The decline has existed for an extended period of time. Management does not possess both the intent and the ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. (2) The security has been downgraded by a rating agency. (3) The financial condition of the issuer has deteriorated. (4) Dividends have been reduced or eliminated, or scheduled interest payments have not been made. (5) The entity recorded losses from the security subsequent to the end of the reporting period.

13 b. When the entity has recognized an impairment loss, gather evidence supporting the amount of the impairment adjustment recorded and determine whether the entity has appropriately followed IAS. 7. Evaluate whether the presentation and disclosure of derivatives and securities are in conformity with IAS as follows: a. Determine whether the accounting principles selected and applied have general acceptance. b. Determine whether the accounting principles are appropriate in the circumstances. c. Determine whether the financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation. d. Determine whether the information presented in the financial statements is classified and summarized in a reasonable manner (i.e., neither too detailed nor too condensed). e. Determine whether the financial statements reflect the underlying transactions and events in a manner that presents the financial position, results of operations, and cash flows stated within a range of acceptable limits that are reasonable and practicable. f. Consider the form, arrangement, and content of the financial statements and their notes, including, for example, the terminology used, the amount of detail given, the classification of items in the statements, and the bases of amounts reported. g. Compare the presentation and disclosure with the requirements of IAS. (See Form AP 125) 8. If the auditor is concerned about the risk of fraud, audit procedures such as the following should be considered in addition to the ones listed above:

14 a. Consider using the work of a specialist in determining the fair value of the securities or derivatives, and scrutinize the specialist s qualifications, integrity, and results. b. Verify the fair value of securities using multiple brokers or third parties. c. Perform predictive tests of investment income and scrutinize amounts that look out of line with expectations. d. Evaluate the underlying assumptions used in valuing the securities or derivatives and scrutinize valuations that look out of line with expectations. e. Evaluate the legitimacy and financial viability of the custodian when confirming investments, including verifying the proper address of the custodian. f. Insist on inspecting original supporting documents rather than copies, e.g., original security certificates, brokers statements. g. Expand tests of details and trace all transactions to the appropriate accounts. h. Trace sales proceeds and investment income to bank statements. i. Trace cost of investment purchases to payment orders and bank statements. j. Review all journal entries related to investments and examine supporting documents. k. Scrutinize and investigate investments acquired in exchange for non-cash assets or company stock. 9. For transfers of financial assets, determine that the transaction has been accounted for in accordance with IAS.

15 a. If a transfer of financial assets has been accounted for as a sale by the client, determine that all of the following conditions have been met: (1) The transferred assets have been isolated from the client put presumptively beyond the reach of the client and its creditors, even in bankruptcy or other receivership. (2) Each transferee has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the client. (3) The client does not maintain effective control over the transferred assets. b. Upon completion of a transfer of assets by a client that satisfies the conditions to be accounted for as a sale as described in step a. above, determine that the client: (1) Has derecognized all assets sold. (2) Has recognized all assets obtained and liabilities incurred in consideration as proceeds of the sale, including: cash; put or call options held or written (for example, guarantee or recourse obligations); forward commitments (for example, commitments to deliver additional receivables during the revolving periods of some securitizations); swaps (for example, provisions that convert interest rates from fixed to variable); and servicing liabilities, if applicable. (3) Has initially measured at fair value assets obtained and liabilities incurred in a sale or, if it is not practicable to estimate the fair value of an asset or a liability, has applied alternative measures. (4) Has recognized in earnings any gain or loss on the sale.

16 c. Upon completion of any transfer of financial assets in which the client is the transferor, determine that the client: (1) Has continued to carry in its balance sheet any retained interest in the transferred assets, including, if applicable: servicing assets, beneficial interests in assets transferred to a qualifying special-purpose entity in a securitization, and retained undivided interests. (2) Has allocated the previous carrying amount between the assets sold, if any, and the retained interests, if any, based on their relative fair values at the date of transfer. d. If the client is the transferee, determine that the client has recognized all assets obtained and any liabilities incurred and initially measured them at fair value (in aggregate, presumptively the price paid). e. If a transfer of financial assets in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the criteria for a sale in step a. above, determine that the transfer has been accounted for as a secured borrowing with pledge of collateral. Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit program have been achieved. Performed by Reviewed and approved by Date Date Conclusions: Comments: