Audit Procedures for Investments: Risks, Assertions, and Procedures

Auditing investment activities is an important part of a financial audit. The auditor must evaluate the accuracy and reliability of the information reported by the entity regarding its investments and ensure that the entity has followed applicable accounting standards and regulatory requirements.

This article will provide a comprehensive overview of audit procedures for investments, including accounting under IFRS, audit risks, and other important considerations.

Accounting under IFRS:

Investments are accounted for under International Financial Reporting Standards (IFRS) 9 Financial Instruments. This standard provides guidance on the recognition, measurement, and disclosure of financial instruments, including investments. Investments are classified into different categories, such as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets.

The recognition of investments requires that they meet certain criteria, such as being under the control of the entity and having contractual rights to receive cash flows.

The measurement of investments is based on their fair value, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

Finally, the disclosure of investments in financial statements requires that information be provided about the nature and risks of the investments, as well as their performance and changes in fair value.

Audit Risks:

In auditing investments, the auditor must consider several audit risks, including:

  1. Valuation risk: The risk that the investment is overvalued or undervalued.
  2. Completeness risk: The risk that the investment is not recorded or disclosed properly.
  3. Accuracy risk: The risk that the investment is recorded with incorrect amounts or incorrect accounting treatment.
  4. Cutoff risk: The risk that investments are recorded in the wrong period or with the wrong owner.
  5. Presentation and disclosure risk: The risk that the investment is presented or disclosed in a misleading manner.
  6. Fraud risk: The risk that the investment is subject to fraud or misappropriation.
  7. Fair value measurement risk: The risk that the fair value of the investment is not accurate or reliable.
  8. Compliance risk: The risk that the entity has not complied with regulatory requirements or accounting standards.
  9. Business risk: The risk that the investment will not perform as expected or that the entity will not receive the expected cash flows.
  10. Data risk: The risk that the data used for auditing investments is inaccurate or unreliable.
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Audit Assertions

Audit assertions refer to the auditor’s representations about the financial statements being audited. They provide a framework for the auditor to consider the risks of material misstatement and to plan the audit accordingly. There are three main audit assertions related to investments, which are:

  1. Existence or occurrence: This assertion focuses on the existence of an investment, its ownership and the transactions related to it. The auditor will assess the completeness of the investment in the financial statements, as well as its existence in physical form.
  2. Valuation or allocation: This assertion focuses on the proper measurement of an investment in the financial statements. The auditor will assess the accuracy of the recorded cost or fair value, the proper application of accounting standards for measuring investments, and the proper allocation of investment values to the appropriate accounts.
  3. Rights and obligations: This assertion focuses on the rights and obligations associated with an investment. The auditor will assess the proper recording of rights, such as dividends and voting rights, and the obligations, such as the obligation to purchase additional shares.

Walkthrough Testing

Walkthrough Testing is a procedure where the auditor reviews the transaction flow and processes to gain an understanding of the system and to assess the risk of material misstatement.

The auditor will walk through the transactions that led to the financial statement amounts, and will perform substantive tests to obtain evidence to support the assertions. The purpose of walkthrough testing is to:

  1. Obtain an understanding of the entity’s operations, processes and systems related to investments.
  2. Identify key controls and processes related to investments.
  3. Evaluate the accuracy and reliability of financial records and reports related to investments.
  4. Verify the compliance with accounting policies and standards related to investments.
  5. Evaluate the sufficiency and appropriateness of supporting documentation related to investments.
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The auditor must understand the nature of investments, the accounting standards related to investments, and the risks associated with investments. The auditor should perform audit procedures to assess the validity of the audit assertions and to obtain sufficient evidence to support the conclusion on the financial statements.

Test of Controls:

  1. Test the design of internal controls to assess the controls’ effectiveness in preventing or detecting material misstatements.
  2. Test the operating effectiveness of internal controls to assess if controls were operating effectively throughout the period.
  3. Document the results of the tests and provide a basis for the auditors’ conclusion on the effectiveness of the controls.

Substantive Audit Procedures:

  1. Inspect supporting documentation for investments, such as contracts, certificates of deposit, and bank statements.
  2. Compare investment activity recorded in the books to activity recorded by the bank.
  3. Review investment activity for unusual transactions or patterns.
  4. Test the existence and ownership of investments by examining documentation and confirming with the investment custodian.
  5. Test the valuation of investments by comparing to market prices or valuations obtained from an independent appraiser.
  6. Test the impairment of investments by evaluating any events or circumstances that may affect the investment’s value.
  7. Test the classification of investments in the financial statements, such as whether it is classified as held-to-maturity, available-for-sale, or trading.
  8. Evaluate the accuracy of the entity’s disclosures related to investments in the financial statements.
  9. Test the completeness of investment transactions by performing substantive analytical procedures.
  10. Perform other substantive procedures as necessary, such as testing the accuracy of amortization of premium/discount on debt securities.
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