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.
Financial Statement
Assertions
Existence or occurrence
Completeness
Rights and obligations
Investment transactions and related income or loss are
recorded correctly as to account, amount, and period.
Existence or occurrence
Valuation or allocation
Investments are properly valued, and loss in value is
promptly identified and provided for.
Valuation or allocation
Investments are properly segregated between current
and noncurrent assets and are disclosed in accordance
with IAS.
Presentation and disclosure
Performed
By
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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.
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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.
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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)
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.
(ii)
Management’s cash flow projections may suggest
that it does not have the ability to hold debt
securities to their maturity.
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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.
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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.
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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.
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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.
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(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.
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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 BlackScholes 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?)
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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.
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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)
The decline is attributable to adverse
conditions specifically related to the
security or to specific conditions in an
industry or in a geographic area.
(ii)
The decline has existed for an extended
period of time.
(iii)
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.
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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:
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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.
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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.
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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
Date
Reviewed and approved by
Date
Conclusions:
Comments: