Phung, CPA, has been engaged to audit the financial statements of Vernon Distrib
ID: 2583261 • Letter: P
Question
Phung, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30. After obtaining an understanding of Vernon’s internal control system, Phung set control risk at the maximum level for all financial statement assertions concerning investments. Phung determined that Vernon is unable to exercise significant influence over any investee and none are related parties. Phung obtained from Vernon detailed analyses of its investments in domestic securities showing
• The classification among held-to-maturity, trading, and available-for sale securities.
• A description of each security, including the interest rate and maturity date of bonds and the par value and dividend rate of stocks.
• A notation of the location of each security, either in the treasurer’s safe or held by an independent custodian.
• The number of shares of stock or face value of bonds held at the beginning and end of the year.
• The beginning and ending balances at cost and at market, and the unamortized premium or discount on bonds.
• Additions to and sales from the portfolios for the year, including date, number of shares, face value of bonds, cost, proceeds, and realized gain or loss.
• Valuation allowances at the beginning and end of the year and changes therein.
• Accrued investment income for each investment at the beginning and end of the year, and income earned and collected during the year.
Phung then prepared the following partial audit program of substantive audit procedures:
1. Foot and crossfoot the analyses.
2. Trace the September 30 balances to the general ledger and financial statements.
3. Trace the beginning balances to the prior year’s working papers.
4. Obtain positive confi rmation of the investments held by any independent custodian as of the balance sheet date.
5. Determine that income from investments has been properly recorded as accrued or collected by reference to published sources, by computation, and by tracing to recorded amounts.
6. For investments in nonpublic entities, compare carrying value to information in the most recently available audited fi nancial statements.
7. Determine that all transfers among held-to-maturity, trading, and available-for-sale securities have been properly authorized and recorded.
8. Determine that any other-than-temporary decline in the price of an investment has been properly recorded.
Required:
For procedures 4-8, identify the primary financial statement assertion relative to investments that would be addressed by each of the following objectives.
Explanation / Answer
4. Obtain positive confirmation of the investments held by any independent custodian as of the balance sheet date.
- By performing the above procedure, the primary management assertion that investment belonging to the client is with the custodian and that the existence of the investment, is confirmed.
5. Determine that income from investments has been properly recorded as accrued or collected by reference to published sources, by computation, and by tracing to recorded amounts.
- By performing the above procedure, the primary management assertion in the financial statement, as to proper valuation and reporting of the investments.
6. For investments in nonpublic entities, compare carrying value to information in the most recently available audited financial statements.
- While carrying value of investments in public entities can be verified by reference to the current market price listed in the stock exchange, value of investment in public entities will have to be cross checked by reference to the information contained in latest audited financial statements. By performing this procedure, management’s assertion that valuation of the investments in public entities is appropriate and appropriate mark-to market losses have been provided.
7. Determine that all transfers among held-to-maturity, trading, and available-for-sale securities have been properly authorized and recorded.
- By verifying whether all transfers among HTM, trading and AFS securities are properly authorized and recorded, the auditor can ensure, management assertion that all investment transactions have been done with the due approval of the management and classification of the investments is in accordance with the accepted accounting standards, as follows;
Held to Maturity Securities – the entity has the positive intent and ability to hold the investment to maturity as it has to be reported at cost.
Held for Trading Securities – Securities are bought and held for the purpose of selling them in the near term – It need to be reported at fair value with unrealized gains and losses reported in profit and loss account.
Available for Sale Securities – Securities which are not classified as either of the above, reported at fair value. Unrealized gains and losses excluded from P&L and reported under “other comprehensive income”
8. Determine that any other-than-temporary decline in the price of an investment has been properly recorded.
- the above procedure confirms the management assertion that all its Long term investments have been valued at cost only and temporary fluctuation in value has not been considered. However, the permanent decline in value of investments have been duly considered and made provision in the accounts, by suitable charge to profit and loss account. It confirms the management assertion of appropriate valuation of its long term investments.