Question

During the audit of derivatives, investments, and hedges, a number of misstatements were detected by the auditor. For each misstatement, select from List I the assertion affected by the misstatement. Select from List II the audit procedure that most likely detected the misstatement. Each choice may be used once, more than once, or not at all.
List 1       

1. Classification & understandability                                                        
2. Completeness
3. Cutoff   
4. Existence
5. Occurrence
6. Rights and Obligations
7. Valuation and allocation   

List 2                                                    

1. Confirm securities and other assets held by third parties.

2. Obtain and review minutes of meetings of those charged with governance.

3. Obtain prices at year end from an independent source and compare with recorded amounts.

4. Inspect securities on hand.

5. Read and evaluate available contracts for effects on the financial statements.

6. Review the financial statements and inquire of management about investments and derivatives.

Misstatement	List I - assertion affected	List II - audit procedure used to detect misstatement
1. A derivative used as a fair value hedge was reported at less than fair value.​
2. A contract for a future delivery of a commodity used as a hedge was not clearly described in the notes to the financial statements.
3. A contract approved by the board of directors creating and defining a derivative was not recorded in the financial statements.
4. A cash flow hedge created to protect against an interest rate increase was ineffective and resulted in a loss that was unrecognized in the current year.
5. A derivative security being reported at year end had been sold by the client’s broker earlier in the year.

Answer 1

Misstatement	List I - assertion affected	List II - audit procedure used to detect misstatement
1. A derivative used as a fair value hedge was reported at less than fair value.​	Valuation & Allocation	a.Obtain prices at year end from an independent source and compare with recorded amounts. b.Review of financial statements &Inquire of management about investments & derivatives.
2. A contract for a future delivery of a commodity used as a hedge was not clearly described in the notes to the financial statements.	Completeness	a.Read and evaluate available contracts for effects on the financial statements. b.Review the financial statements and inquire of management about investments and derivatives.
3. A contract approved by the board of directors creating and defining a derivative was not recorded in the financial statements.	Completeness	a.Obtain and review minutes of meetings of those charged with governance. b.Read and evaluate available contracts for effects on the financial statements. c.Review the financial statements and inquire of management about investments and derivatives.
4. A cash flow hedge created to protect against an interest rate increase was ineffective and resulted in a loss that was unrecognized in the current year.	Completeness,Cut-off	Read and evaluate available contracts for effects on the financial statements. Obtain prices at year end from an independent source and compare with recorded amounts.
5. A derivative security being reported at year end had been sold by the client’s broker earlier in the year.	Existence	Inspect securities on hand. Confirm securities and other assets held by third parties.