Investment is the deployment of capital in order to earn interest, dividend, or capital appreciation. Investments are basically either held to maturity or available for sale securities. Held to maturity securities are those that are held with intent until maturity.
These are reported at cost, provided for amortization and accretion of discounts. Available for sale investments are reported at fair value where any unrealized profits or losses form part of stockholders’ equity.
While auditing the investment of any entity, the auditor needs to be aware of applicable accounting guidance. They should be familiar with the knowledge of client business and the nature of investment it holds.
Investments are audited by testing various audit assertions as existence, completeness, valuation, and rights and obligations. These are explained in detail below:
The inherent risk and control risk in the obligations form the risk of material misstatement in investment reporting and compliance. The risk of being susceptible to misstatement due to the nature of the investment is the inherent risk of the investment.
Related article Audit Procedures for Accounts Payable - Risks and Assertions IncludedControl risk occurs when the internal control system of the auditee fails to prevent or detect material misstatement in the investment. The inherent risk further involves issues related to existence and valuation of investment on books.
When the value of investment is overstated, there is higher risk it could be due to fraud with intention. The investment of the client may come with certain restriction which have not been disclosed and circumstances would lead to non-detection of such restriction.
These are where internal control fails due to complexity of terms and conditions in arrangements of investments being done.
Auditing investment requires a deep working knowledge of accounting and auditing standards along with knowledge of client business and the type of investments they hold.
The substantive audit procedures related to investments should respond to risks identified by the management and auditors which involves confirmation of investments, an inspection of cut off of investment with respect to date and amount, and vetting the investment documents for the requirements related to disclosure and checklists.
It would better to show the audit assertions and relevant substantive audit procedures carried out for such assertions as: