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    Presentation5 - Audit of Investments

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    Roseanne Dela Cruz
    The document discusses the audit of investments. It covers: 1) Types of investments and accounting methods used 2) Primary audit procedures including verifying existence and ownership, evaluating valuation methods, testing for impairment, reviewing meeting minutes, and assessing financial statement presentation 3) Specific procedures for different investment types such as examining financial statements of associates, evaluating quoted market prices, and assessing impairment indicators The auditor must understand different accounting treatments and ensure investments are properly valued, impaired if necessary, and correctly disclosed in financial statements.

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    Presentation5 - Audit of Investments

    Uploaded by

    Roseanne Dela Cruz
    28 views20 pages
    The document discusses the audit of investments. It covers: 1) Types of investments and accounting methods used 2) Primary audit procedures including verifying existence and ownership, evaluating valuation methods, testing for impairment, reviewing meeting minutes, and assessing financial statement presentation 3) Specific procedures for different investment types such as examining financial statements of associates, evaluating quoted market prices, and assessing impairment indicators The auditor must understand different accounting treatments and ensure investments are properly valued, impaired if necessary, and correctly disclosed in financial statements.

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    The document discusses the audit of investments. It covers: 1) Types of investments and accounting methods used 2) Primary audit procedures including verifying existence and ownership, evaluating valuation methods, testing for impairment, reviewing meeting minutes, and assessing financial statement presentation 3) Specific procedures for different investment types such as examining financial statements of associates, evaluating quoted market prices, and assessing impairment indicators The auditor must understand different accounting treatments and ensure investments are properly valued, impaired if necessary, and correctly disclosed in financial statements.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    28 views20 pages

    Presentation5 - Audit of Investments

    Uploaded by

    Roseanne Dela Cruz
    The document discusses the audit of investments. It covers: 1) Types of investments and accounting methods used 2) Primary audit procedures including verifying existence and ownership, evaluating valuation methods, testing for impairment, reviewing meeting minutes, and assessing financial statement presentation 3) Specific procedures for different investment types such as examining financial statements of associates, evaluating quoted market prices, and assessing impairment indicators The auditor must understand different accounting treatments and ensure investments are properly valued, impaired if necessary, and correctly disclosed in financial statements.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 20

    Audit of

    Investments
    (Part 1)
    INVESTMENTS
    - assets held by an entity for the accretion of wealth through distribution
    such as interest, royalties, dividends and rentals, for capital appreciation or for
    other benefits to the investing entity such as those obtained through trading
    relationships.
    INVESTMENTS

    Accounting for investments can vary depending on whether cost, fair value, equity, or
    consolidation methods are used.

    Much depends on the entity’s business model and management’s intention, which are
    assessed through inquiry and knowledge of the client’s business industry.

    Only auditors knowledgeable about the business can determine the economic substance
    of an acquisition and whether it makes sense from an industry’s perspective and the
    business’ strategic plan.

    In the audit of investments, the auditor should consider the related income statement
    accounts such as investment income, holding gains (losses), impairment loss, derecognition
    loss and other items.
    Assertions addressed in the audit of investments:

    Existence– all recorded investments on the statement of financial position exist.


    Occurrence – all recorded income from investments has accrued to the entity at the
    reporting date.
    Completeness – all investments owned by the entity at the reporting date are included/all
    income accruing from investments at the reporting date has been recorded
    Valuation and allocation – investments are included on the statement of financial position
    at the appropriate amounts
    Accuracy – investment income is included on the statement of comprehensive income at
    the appropriate amount
    Classification – income statement related items are appropriately recorded in the proper
    accounts in the statement of comprehensive income
    Rights and obligations - entity owns/has legal right to all investments reported
    Presentation and disclosure and classification – investments and related investment income
    accounts are properly classified, described and disclosed, in accordance with PFRS; all
    investment pledged or other security interests are adequately and properly disclosed
    PRIMARY AUDIT PROCEDURES FOR INVESTMENTS

    1. Verifying the existence and ownership of securities


    2. Performing valuation procedures in accordance with accounting policies
    3. Investigating current and potential impairments of investments
    4. Reviewing board of director’s (BOD) minutes of meetings, shareholders
    meeting, committee (i.e. investment committee) meetings and agreements;
    5. Reviewing appropriateness of presentation and adequacy of disclosure
    1. Verification of existence and ownership
    - This procedure depends whether the securities or evidence of ownership are held by
    the client or held by a third party

    If held by client:

    The auditor counts the securities (stock certificates) on hand and examine these
    evidence of ownership.

    The count is ideally performed at the reporting date and simultaneously with the
    count of cash and other negotiable instrument to prevent substitution.
    1. Verification of existence and ownership

    When inspecting the securities, the auditor should note the following:

    a. The name/s of the indicated owner/s of the securities


    b. The names of the issuers of the securities
    c. Whether the security is debt or equity
    d. The certificate numbers on the documents
    e. Any evidence of pledging or restrictions on disposal shown on the certificates
    f. The number of shares of stock or the face value of debt securities
    1. Verification of existence and ownership

    If held by third party:

    The auditor sends confirmation letter to the custodian.

    Note that the dispatch and receipt of the confirmation request should always be under
    the control of the auditor after it was signed by the client.

    The auditor normally includes the same information to be noted if the securities were
    held by the entity.
    2. Evaluate the accounting methods used and test the valuation

    The valuation method of investments depends on the type of investments.

    Types of Investments

    a. Investment in associate and joint venture


    b. Investment in subsidiary
    c. Financial asset at amortized cost (FA-AC)
    d. Financial asset at fair value (FA-FV)
    2. Evaluate the accounting methods used and test the valuation

    a. Investment in associate and joint venture (PAS 28/PFRS 11)


    - 20%-50% ownership, or below but with indicator of significant influence
    - Investor (audit client) has significant influence and share in income

    b. Investment in Subsidiary (PAS 27)


    - Parent and Subsidiary relationship
    - >50% ownership, or below but with indicator of control
    - intercompany/intersubsidiary transactions are reversed to reflect the true
    performance/position of the business

    c. Financial asset at amortized cost (PFRS 9, PAS 32)

    d. Financial asset at fair value (PFRS 9, PAS 32)


    - FA-FV through P/L (FVPL)
    - FA-FV through OCI (FVOCI)
    2. Evaluate the accounting methods used and test the valuation

    a. Investment in associate and joint venture (PAS 28/PFRS 11)


    - accounted under equity method
    - measured initially, at cost
    - measured subsequently, at cost plus/minus:
    share in net income/loss
    change in OCI
    dividend received (return of investment)

    The auditor:
    1. To verify the share in net income or loss, examines the audited FS
    of the investee and make independent calculation.
    2. For dividends received, can examine the published dividend record
    of the investee (thru confirmation letter)
    2. Evaluate the accounting methods used and test the valuation

    b. Investment in subsidiary (PAS 27)


    - measured initially, at cost
    - measured subsequently, at cost adjusted for impairment, if any

    The auditor:
    1. To verify the beginning balance of the investment for the current year,
    normally refer to the working papers.
    2. To examine any addition or disposal of investment, examine the supporting
    documentations.
    2. Evaluate the accounting methods used and test the valuation

    c. Financial asset at amortized cost (PFRS 9, PAS 32)


    - measured initially, at cost
    - measured subsequently, at amortized cost using the effective interest
    method

    The auditor:
    To verify the carrying amount of the financial asset, obtain evidence regarding the
    original issuance price of the asset and prepare the amortization table using the
    appropriate rate, and compare with the amount reported by the client.
    2. Evaluate the accounting methods used and test the valuation

    c. Financial asset at fair value (PFRS 9, PAS 32)


    - measured initially, at fair value
    - measured subsequently, at fair value (change in FV, P/L or OCI)

    The auditor:
    1. To evaluate the appropriate valuation of the asset, examine quoted market
    price if there is an active market. (ex. Shares of stock quoted in the PSE)
    2. Determine the quoted price and multiply to the number of shares
    3. Test impairment of investments

    Accounting for impairment depends on the type of investment. The auditor therefore
    should consider the applicable PFRS in evaluating the impairment made by the management.

    Impairment in affiliates (e.g. associate, subsidiary, joint venture)


    - accounted on accordance with PAS 36 Impairment of Assets

    Impairment of financial asset (e.g. at amortized cost)


    - - accounted on accordance with PFRS 9
    3. Test impairment of investments

    The auditor:
    In assessing the proprietary of impairment, inquire with management their approach
    in identifying the indicators of impairment and their actions taken as a result of any potential
    impairment noted.

    If an impairment provision was made or the auditor consider it necessary, the auditor
    ordinarily should perform the following:
    1. Evaluate the appropriateness of the valuation model and assumptions used
    2. Asses the reasonableness of management’s estimates
    3. Evaluate the accuracy, completeness and the relevance of the important data on
    which the estimates or measurements are based.
    3. Test impairment of investments
    Indicators of Impairment (PAS 36)
    External sources Internal sources
    - market value declines - Obsolescence or physical damage
    - Asset is idle, part of restructuring or
    - negative changes in technology, held for disposal
    markets, economy or laws - Worse economic performance than
    expected
    - increases in market interest rates - For investments in subsidiaries, joint
    ventures or associates, the carrying
    - net assets of the company higher than amount is higher than the carrying
    market capitalization amount of the investee’s assets, or a
    dividend exceeds the total
    comprehensive income of the
    investee
    4. Review of minutes of meeting

    The auditor:
    Should obtain and review minutes agreements and confirmation replies for evidence
    of existence, liens, pledges or other security interest in investments, and of commitments to
    acquire or dispose of investments.

    This may disclose unrecorded purchase or sale of securities or other financial


    instruments.
    5. Review financial statement presentation and disclosure of investments
    including related account

    The auditor must determine that investments are properly classified and presented in the
    statement of financial position.

    Short-term investments – current asset section


    Long-term investments – noncurrent asset section

    The auditor must determine that the related income statement accounts are appropriately
    reported in P/L or OCI
    5. Review financial statement presentation and disclosure of investments
    including related account
    Statement of Comprehensive Income
    Profit or Loss Other comprehensive income
    - Dividend income - Unrealized gain or loss on Available
    - Interest income for Sale (AFS) or Financial Asset at
    - Share in net income or net loss of an Fair value through Other
    associate or joint venture Comprehensive Income (FVOCI)
    - Unrealized holding gain or loss on investments
    FVPL - Share in change of other
    - Disposal gain or loss on all types of comprehensive income component
    investments of an associate or joint veture
    - Impairment loss on investments

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