Question

1) If you do an investment audit, specify the accounts/accounting records, and what documents are examined in relation to the audit.

2) Mention the activities/transactions that are most at risk in the investment audit.

Answer 1

INVESTMENT AUDIT :

An investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. Investments include Government securities, shares, debentures, etc. When the number of investments is very large, the auditor should ask for a schedule of investments held by the client containing various particulars like name of the securities, date of purchase, nominal value, cost price, market price, etc., and examine the same. He should ensure that the investment asset has been shown separately in the Balance Sheet.

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.

If the securities are with the trustees on behalf of the concern the auditor should examine the trust deed. In case they are under the safe custody of the banker then he should obtain the certificate from the banker and examine the same. If they are with the broker, he should examine the certificate received from the broker.

Having verified the securities, the auditor has to find out that the investments are properly valued. Generally, investments are valued at cost price or market price whichever is lower.

In case there is a temporary fall in the price of the shares, it should be ignored. But where such a fall is permanent, depreciation must be provided. Actually, the basis of valuations of investment will depend upon the purpose for which they are held. For instance, in case of trust company, the sole purpose of which is to earn interest and dividend, then such investment must be treated as fixed asset. In such cases, even the permanent fall in their value should be ignored.

The investments are classified as – (1) Quoted Investments, and (2) Unquoted Investment

Quoted Investments:

A company’s share is said to be “lists”, or “Quoted” if its share can be traded on a stock exchange, i.e., Public Limited Companies.

Auditor's Duty in Verification

1. Verify the authorization for purchase of investment. Auditor should review board minute book (book which record the conclusion of meeting) for authorization.

2. Vouch the entries in brokers contract note, share certificate and cash book.

3. Examine the share certificate to ensure that the type of security and number of share agrees with investment account and that the share held in the company with its name.

4. Verify that the investments are properly classified and disclosed as stated in Companies Act.

Auditor's Duty in Valuation

1. The auditor should satisfy himself that the investment has been valued in the financial statement in accordance with recognized accounting policies and practices and relevant statutory requirements.

2. The auditor should examine whether in computing the cost of investment, expenditure incurred on account of transfer fees, stamp duty, brokerage etc., is included in the cost of investment.

Unquoted Investments:

A company share is said to be “unlisted” or “unquoted” if its stocks that are not listed on a stock exchange and so have no publicly stated price. Here, Investments are difficult to value, for example, shares that have no stock exchange listing i.e. Private Company etc.

Auditor's Duty in Verification

1.        Audition hould verify the Memorandum of Association to ensure authority for purchase such investment.

2.        Where investments are in large numbers, the auditor should obtain the schedule of securities certified by a senior officer of the company.

3.        Obtain the schedule of investment comprises for information about the name of the securities / investment, date of their acquisition, nominal/ face value, cost price, book value, paid up value market value, rate of interest applicable, dates of interest due, tax deduction, etc., at the date of Balance Sheet.

Auditor’s Duty in Valuation

1.        The Auditor should examine the method adopted by the organization for determining the market value of such securities.

2.        The Auditor should examine whether the method of valuation of securities by entity is one of the recognized methods of valuation viz., breakup value method, capitalization of yield method, yield to maturity method etc.

An investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. Investments include Government securities, shares, debentures, etc. When the number of investments is very large, the auditor should ask for a schedule of investments held by the client containing various particulars like name of the securities, date of purchase, nominal value, cost price, market price, etc., and examine the same. He should ensure that the investment asset has been shown separately in the Balance Sheet.

Investment Audit Checklist and Program

Investment Audit Checklist

1. Whether the Rules and Regulations governing the Company Permit for investments by the company?
2. Are there any restrictions or limitations for any of such investments?
3. Do flowcharts exist that document investment processing and identify control procedures?
4. There written policies and procedures that document the flow of investment processing and identify control procedures?
5. Are there policies and procedures established to ensure investment certificates are received or appropriately reflected in the custodial accounts?
6. Investment purchases recorded in the general ledger on the date traded?
7. Does the documentation easily accessible to all persons needing it to perform their job?
8. Our policies and procedures established to ensure the acquisition and disposal of investments are properly recorded?
9. Are the policies and procedures established to ensure the investment income received is recorded properly
10. Does investment income earn to get the record on a timely basis?
11. Are investment earnings credit to the proper fund?
12. Is the acquisition and disposal of investments authorized by a person with approval authority?
13. Our investment guidelines formally established and periodically reviewed?
14. Have authority and responsibility been establish for investment opportunity evaluation and purchase?
15. Has the level and nature of approval require to purchase or sell an investment been establish?
    Are the following duties generally performed by different people: Cash flow management, investment transactions, safeguarding the investments, responsibility for them and recording them?

Checklist

Record-keeping functions for securities and income separate from those having access to physical securities, those authorizing security transactions, and those having duties in the cash area?

1. Initiating, evaluating, and approving transactions segregated from those for detail accounting, general ledgerMonitoring investment market values, and performance from those for investment acquisition?
   Maintaining detail accounting records segregated from those for general ledger entries?
   Custodial responsibilities for securities or for other documents evidencing ownership or other rights assigned to an official who has no accounting duties?
2. Does a governing body or statute restrict investments by type and/or amount? Can officials override these restrictions with proper authorization?
3. Are investment certificates and interest coupons sufficiently safeguarded?
4. Are securities release from the vault only upon authorization of a person responsible for cash flow and for investment transactions?
5. Is it necessary for more than one person to authorize the release of security from safekeeping, or to have access to the safe deposit box or vault?
6. Individuals with access to securities bonded?
7. Securities transported by armored truck?
8. Are all security held or register in the name of the company or the Treasurer if applicable?
   detail records maintained that includes the following information, if applicable, on each evidence of ownership:
9. Date of acquisition, identification and purchase amount or cost?
   The physical location of the item, i.e., safe deposit box, etc.?
   Interest dividend, or income rates and accrual or receipt dates?
   Ownership by the fund?
10. Do procedures exist for reconciling the detail accounting records with the General Ledger control .   ACTIVITIES / TRANSACTIONS THAT ARE RISK IN INVESTMENT AUDIT

1. Investments are stolen.
2. Investments are intentionally overstated to cover up theft.
3. Investments accounts are intentionally omitted from the general ledger.
4. Investments are misstated due to errors in the investment reconciliations.
5. Investments are improperly valued due to their complexity and management’s lack of accounting knowledge.
6. Investments are misstated due to improper cutoff.
7. Investment disclosures are not accurate or complete.