Audit Investments
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.
