Overview
As auditors, we usually audit investments that the client has on their financial statements by testing various audit assertions including existence, completeness, valuation, and rights and obligations.
In the audit of investments, the inherent risk of investments involves more on the existence and valuation of their balances. This is due to the risk of overstatement of investments is higher than the risk of an understatement and an overstatement, in this case, could be due to fraud.
The inherent risk of investments is that client’s investments may be stolen and their balances may be overstated to cover up the fraud. Additionally, as there are many types of investments, investments may be wrongly classified, either intentional or unintentional, resulting in improper valuation. Another issue concerning the valuation assertion of investment account is the lack of the client’s staff knowledge and the complexity of valuation itself.
Audit Assertions for Investments
In the audit of investments, we usually test the audit assertions that are included in the table below:
| Audit assertions for investments |
|---|
| Existence | Investments reported on the financial statements really exists at the reporting date. |
| Valuation | Investment balances truly reflect their actual economic value as at reporting date. |
| Completeness | All investments that should have been recorded have actually been recorded. |
| Rights and obligations | The client has ownership rights for all investments as of the reporting date. |
| Presentation and disclosure | Investments have been properly classified and appropriately disclosed (e.g. any restrictions) in the notes to financial statements. |
Existence and valuation assertions are usually the most relevant assertions in the audit of investments. This is because the client may intentionally overstate the balances of investments. Hence, we need to pay more attention to the areas related to these two audit assertions.
Audit Procedures for Investments
It is very important for us to design and perform proper audit procedures in order to obtain sufficient appropriate audit evidence about the client’s investments. This is so that we can make a proper conclusion regarding significant assertions of the client’s investment accounts.
In the audit procedures for investments, we need to test various audit assertions, including existence, valuation, completeness, and rights and obligations.
Completeness
In the audit of investments, we test completeness assertion to verify whether all investment transactions that occurred during the year have actually been recorded.
Example: tests of completeness of the investments include:
- Request the schedule of all investments from the client (if the client doesn’t have the schedule, request them to prepare one)
- Verify the arithmetic accuracy of the schedule by footing and cross-footing
- Reconcile the beginning balance in the schedule to the previous year audited balance
- Examine the transactions around year-end to ensure all investments have been recorded in the correct accounting period
Existence
We test the existence assertion to ensure that the investments balances shown on the financial statements really exist at the reporting date.
Example: tests of existence in investments audit include:
- Perform direct confirmation with the brokerage (for investments held by broker)
- Physically inspect all investments (for investments held by the client)
- Vouch new purchases and disposals of investments to supporting documents, e.g. broker’s advice
Valuation
In the audit of investments, we test the valuation assertion to ensure that the investment balances are mathematically correct and their values reflect the true economic value as at the reporting date.
Example: tests of valuation assertion in the audit of investments:
- Vouch the investment balances to the actual market value at year-end
- Determine whether gains or losses, as a result of changes in market value, have been properly recorded
- Recalculate interest income or dividend income from investments
Rights and obligations
We test the rights and obligations assertion to ensure that the client has the right and ownership of all investments shown on the financial statements as at reporting date. Our concern here is that there may be some restrictions that are placed on investments.
Example: tests of rights and obligations in the investment audit include:
- Inquire management about any restrictions placed on investments.
- Examine related documents to determine whether there are any restrictions on investments.
FAQs
The auditor can verify investments through various procedures, including transaction verification, physical inspection, examination of valuation and disclosure, and analytical review procedures. However, the nature, timing, and extent of audit procedures to be performed depend on the auditor's professional judgment.
How do you audit investment funds? ›
A few items to consider include:
- Reconcile bank, broker and other investment statements to the general ledger.
- Review each account balance and determine whether the balance is appropriate.
- Verify marks for each investment.
- Recalculate allocated income and expenses for one partner.
It takes a special set of skills and knowledge because auditors have to be able to spot mistakes or weak points in important processes. On the other hand, accounting is the process of recording, analyzing, and reporting financial data for businesses or organizations.
What is the hardest part of being an auditor? ›
7 Challenges Faced By Auditors In Accounting
- Revenue Recognition. “One of the biggest audit challenges that comes up is revenue recognition,” says Marcin Stryjecki, SEO project manager at Booksy. ...
- Fraud. ...
- Inventory Inaccuracy. ...
- Information Delays. ...
- Talent Retention & Development. ...
- Job Stress. ...
- Outdated Skills.
The auditor should verify the existence of investments by personal inspection. At the same time, he should also ensure that the investments are registered in the name of the client and they are free from any charge. He should rely on the relevant vouchers and certificates to do so.
What audit evidence do you use to verify fixed assets? ›
Verification of fixed assets consists of examination of related records and physical verification. The auditor should normally verify the records with reference to the documentary evidence and by evaluation of internal controls. Physical verification of fixed assets is primarily the responsibility of the management.
What is an accounting method for recording investments? ›
Equity accounting is an accounting method for recording investments in associated companies or entities. The equity method is applied when a company's ownership interest in another company is valued at 20–50% of the stock in the investee.
What is the accounting treatment for investment? ›
How do you account for an investment? When a company purchases an investment, it is recorded as a debit to the appropriate investment account (an asset), offset with a credit to the account representing the consideration (e.g., cash) given in exchange for the asset.
How is investment accounting done? ›
Indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. The type and extent of the investor's stake in the investee are also taken into account.
Are auditors high paid? ›
The majority of Audit Consultant salaries across the United States currently range between $64,500 (25th percentile) and $110,000 (75th percentile) annually.
Dead-end jobs such as an internal auditing position within a firm, according to CFO.com, should only be considered and accepted if an individual has a pre-calculated exit strategy so that one is not stuck permanently within a position of no opportunities.
Is auditor a stressful job? ›
Yes, auditing can be a stressful job due to its critical responsibility of reviewing financials to make sure it corresponds to regulations and legal standards.
Which Big 4 pays auditors the most? ›
Which big 4 accounting firm pays the most? Well it depends on which practice you want to go into. If you want to make the most money in consulting, Deloitte pays the best. However if you want to make the most money in auditing or tax PwC is likely your best bet.
What personality type is best for auditor? ›
So, the typical internal auditor personality is...
Extroverted, detailed people who like to make decisions based on facts and logic, plan, and come to conclusions.
What is a weakness of an auditor? ›
Failure to recognise related party transactions has been cited as an audit weakness by regulators. If related parties are not identified and documented at the planning stage, this increases the risk that unidentified related parties can be used to conceal fraudulent activities or financial reporting.
How do you identify audited financial statements? ›
An audited financial statement is any financial statement that a certified public accountant (CPA) has audited. When a CPA audits a financial statement, they will ensure that the statement adheres to general accounting principles and auditing standards.
What is verification of stock by auditor? ›
Stock Audit Verification
The objective of a Stock Audit is to ensure the existence, accuracy, ownership rights and also verify the realizable value of the items in the company's inventory. Accurate accounting of inventory is also essential to a robust bookkeeping system and MIS reporting.
How can an auditor verify intangible assets? ›
Intangible Assets
As such, companies should have substantial documentation related to their ownership. Auditors will request supporting documentation and cross-validate the information with other audited accounting information.
