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investment cycle

Terms in this set (24)

investment balance completeness
- test that all purchases of securities have been recorded by examining transactions after year end
- confirm securities held by third parties and count securities on hand
- request information from counter parties to derivatives or holders of securities to determine whether any side agreements or agreements to repurchase exist
- differences between expected interest earned from underlying agreement and actual interest earned may indicate that an interest rate swap agreement exists
investment balance valuation, allocation, accuracy
- foot security listing by category and agree to the GL
- obtain a schedule of investment activity and obtain evidence of additions or subtractions
- obtain corroborating evidence for YE FV by comparing assigned values with prices published by various sources or obtained from broker-dealer
- recalculate ending values of investments not reported at FV (HTM securities reported at amortized cost and equity method investments)
- permanent impairment
- reasonableness and appropriateness of assumptions, valuation models and declines in FV
investment balance existence
1. confirmations of securities held by third parties (broker-dealer)
2. examination of securities on hand
3. analytical procedures over expected interest earned
investment balance rights and obligations
- confirmation of securities and count of securities on hand provide evidence of entity's ownership of investments
- examine broker's advices for sample of securities purchased during year
investment transactions completeness
analytical procedures to test reasonableness of interest and dividend income to make sure all investment income recorded (IS item without subjectivity is predictable)
investment transactions cutoff
looking at purchases/sales of investments before and after year end to make sure they were recorded in the proper period
investment transactions valuation, allocation, accuracy
- recalculation to determine validity of recorded gains/losses from security sales and discount/premium amortization
- recalculation to determine accuracy of recorded interest and dividend income
- compare recorded dividend income with dividend records provided by investment services
investment transactions existence
analytical procedures to test reasonableness of dividend and interest income to provide evidence of existence of investment income
investment transactions understandability and classification
examine sample of investment transactions to determine that they were recorded in the proper accounts

AFS unrealized G/L goes to OCI
trading unrealized G/L goes to NI
investment presentation and disclosure completeness
auditor should determine that all required disclosures related to marketable securities and derivatives have been included in the notes to the FS
investment presentation and disclosure valuation, allocation, accuracy
auditor should read the footnotes and other information related to investments to determine whether the information is accurate and presented at appropriate amounts
investment presentation and disclosure rights and obligations
auditor should inquire of management and review loan agreements and minutes to determine whether investments have been pledged as collateral

compare disclosures to other audit evidence to ensure all disclosed information has occurred
investments presentation and disclosure understandability and classification
auditor should read disclosures for understandability and review and evaluate methods used to account for, value and classify securities
if management accounts for a derivative as a hedge the auditor must ensure that the following has occurred:
1. derivative was designated as a hedge at inception by management
2. management has documented the hedging relationship, risk management objective and strategy for undertaking the hedge
3. management has established expectation that the hedge will be effective in achieving the hedging strategy and is periodically evaluating its effectiveness
when investments in securities are valued based on the investee's FS (equity method), the auditor should perform the following procedures to obtain sufficient appropriate audit evidence in support of investee's financial results
1. obtain and read the FS and audit report of the investee
2. if FS are not audited or audit report is unsatisfactory- request that entity arrange with investee to have their FS audited
3. if carrying amount of investment reflects factors that are not recognized in investee's FS or FVs materially differ from investee's carrying amounts obtain sufficient appropriate evidence
4. if difference between FS period of entity and investee could have a material effect on the entity's FS determine whether management has considered the lack of comparability and determine the effect on the auditor's report
5. inquire of management about entity's ability to exercise significant influence over investments to determine whether investments have been properly classified
fair value
exit price
amount at which an asset could be sold/amount liability could be settled at in a current transaction between willing parties at measurement date
3 level hierarchy used to measure FV
level 1: observable quoted prices in active markets for identical assets/liabilities (BEST WAY, LEAST OBJECTIVE, LEAST AMOUNT OF DISCLOSURE)

level 2: observable quoted prices in active for similar assets/liabilities or observable quoted prices in inactive markets for identical or similar assets/liabilities

level 3: unobservable inputs using estimates and valuation methods such as discounted CF based on management's judgement (WORST WAY, MOST SUBJECTIVE, MOST AMOUNT OF DISCLOSURE)
level 3 FV measurement
- when a level 3 FV measurement is used an appropriate valuation method should be used
- the method should incorporate assumptions that a market participant would use
- these assumptions must be identified and supported in FV disclosures
management's responsibility for FV measurements
management is responsible for making FV measurements and disclosures in accordance with GAAP
auditor's responsibility for FV measurements
auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance that FV measurements and disclosures are in conformity with GAAP
what auditor should do regarding FV measurements
1. understand the entity's process for determining FV measurements and disclosures
2. understand relevant controls
3. assess RMM of FV measurements
4. evaluate whether the method used is in conformity with GAAP
5. consider need for specialist
6. test FV measurements and disclosures
7. evaluate whether FV disclosures are in conformity with GAAP
8. evaluate sufficiency, competency and consistency of evidence obtained with FV measurements and disclosures
9. obtain relevant management representations
10. communicate relevant matters to those charged with governance
reliability of information obtained from pricing service
the reliability of info obtained from pricing service depends on the experience and expertise of pricing service, methodologies used and whether they have a relationship with the entity
relevance and reliability of quote received from broker-dealer
based on whether the broker-dealer is a market maker for similar instruments, whether they have a relationship with the entity and whether the quote is binding on broker-dealer
impairment losses
if client recorded an impairment loss, auditor should evaluate management's basis for that decision

if client did not record an impairment loss, auditor should consider whether the following situations exist that indicate need for impairment loss:
- FV is significantly below cost and
1. decline attributable to adverse conditions specifically related to the security or industry/geographic area
2. decline has existed for extended period of time
3. management does not posses intent and ability to hold the security for period of time sufficient to allow for anticipated recovery in FV
4. security has been downgraded by rating agency
5. financial condition of issuer has deteriorated
6. dividends have been reduced or eliminated or scheduled interest payments have not been made
7. entity recorded losses from security subsequent to end of reporting period
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