Substantive Procedures to Audit Investment Securities

Summary

This video lecture explores the substantive procedures auditors follow when auditing investment securities. It covers techniques like physical inspection, confirmation from custodians, and reviewing disclosures and classifications. Auditors also vouch purchases and sales, test for cutoff accuracy, and perform analytical procedures to verify completeness. Additional steps include checking dividend records, amortization of premiums and discounts, and reviewing the market value of securities. The goal is to ensure that investment securities are accurately valued and appropriately disclosed in financial statements.

Takeaways

• 😀 The auditor inspects and counts securities on hand to verify their existence and detect any potential fraud, such as unauthorized sales or purchases.
• 😀 A client employee should be present during the inspection of securities to prevent confusion or disputes over missing items.
• 😀 The auditor verifies that the security certificates match the records by checking certificate numbers, shares, and other details to ensure proper recording.
• 😀 Confirmation from independent custodians, like banks or trust companies, is used to verify the existence of securities held outside the entity.
• 😀 Simultaneous verification involves inspecting securities while confirming their existence with an outside party, often in cases where securities are held by third-party custodians.
• 😀 The auditor may perform procedures on related accounts, such as cash, during the audit of investment securities, ensuring a holistic review of financial items.
• 😀 Typical substantive audit procedures include reviewing the required disclosures, inquiring about pledging of securities, and ensuring they are classified correctly per accounting standards.
• 😀 The auditor checks if any securities have been pledged for loans and verifies that disclosures related to pledging are correctly presented in the financial statements.
• 😀 Vouching procedures involve tracing security transactions to source documents, ensuring that purchases and sales of securities are properly recorded.
• 😀 The auditor uses analytical procedures to corroborate the assertions related to the existence, completeness, and accuracy of investment securities.
• 😀 Testing the amortization of premiums and discounts ensures that securities are properly valued, with adjustments made for premiums and discounts separately from the principal value.

Q & A

What is the purpose of inspecting and counting investment securities during an audit?

The purpose is to verify the existence of the securities and to prevent fraud or mishandling. This also helps ensure that the securities match the entity's records and can detect any unauthorized sales or substitutions.

Why is it important for an employee or management member to be present during the inspection of securities?

It is important to prevent any confusion over missing securities. If any discrepancies are found, the person responsible can immediately investigate and explain the deviation from the recorded amounts.

How does the auditor confirm that the securities held by the client match those recorded in the books?

The auditor examines the security certificates by comparing details such as certificate numbers, the number of shares, face value, and other identifying characteristics to ensure they are correctly recorded.

What is the role of external custodians in the audit of investment securities?

External custodians, such as banks or trust companies, hold the securities on behalf of the entity. The auditor can obtain confirmation from these custodians to verify the existence of the securities.

What is simultaneous verification, and when is it used in auditing investment securities?

Simultaneous verification involves the auditor performing both the physical inspection and external confirmation of the securities at the same time. It is used when securities are entirely held by a third-party custodian.

How does the auditor verify if any securities have been pledged as collateral for loans?

The auditor can inquire from management about any pledging of securities and review loan agreements to confirm if the securities have been pledged and whether the necessary disclosures have been made.

Why is it important for the auditor to review the classification of investment securities?

The classification of securities determines how they are measured and accounted for, which affects their valuation. Proper classification is crucial to ensure compliance with accounting standards and accurate financial reporting.

What is the significance of vouching purchases and sales of investment securities during an audit?

Vouching is done to verify that all purchases and sales of securities are accurately recorded in the books. This is done by tracing the transactions back to their supporting documents.

How does the auditor perform cut-off testing for investment securities?

Cut-off testing ensures that transactions are recorded in the correct accounting period. The auditor checks whether investment securities transactions, like purchases and sales, are recorded accurately according to the proper dates.

What is the purpose of performing analytical procedures in the audit of investment securities?

Analytical procedures are used to gather corroborative evidence regarding assertions such as existence, completeness, and valuation of the investment securities. These procedures help the auditor confirm the accuracy and consistency of the recorded information.

Why does the auditor need to test the amortization of premiums and discounts on investment securities?

The auditor needs to test amortization to ensure that premiums and discounts on securities are properly accounted for and that the investments are accurately valued, as these adjustments affect the carrying amount of the securities.

How does the auditor determine the market value of securities classified as financial assets at fair value?

The auditor reviews the market value of these securities by checking their current market prices or other reliable valuation methods to ensure they are reported accurately at fair value, as required by accounting standards.

What is the role of reviewing audited financial statements of major investments in the audit process?

Reviewing audited financial statements helps the auditor confirm that major investments are properly valued and disclosed in the financial statements. The auditor will ensure that any misstatements related to the investment accounts are corrected.