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1. In connection with investments in marketable securities, what is an independent trustee?

: An independent trustee is an
outside party or entity, such as a bank or trust company, which maintains custody of stock certificates and other marketable securities.
2. What testing should be done by the auditor if marketable securities are being held by an independent trustee?: The auditor
should confirm that the marketable securities are being held by the independent trustee. If there is particular risk of fraud, the auditor should
also consider inspecting the securities.
3. What are several reporting problems that could exist in connection with the fair presentation of marketable securities?:
Marketable securities can be materially misstated because of reasons such as the following:
1. Trading securities and available-for-sale securities are not reported at appropriate fair values (FV)
2. Amortization of discount or premium on bonds being held-to-maturity may be incorrectly stated.
3. If appropriate, equity securities may not be properly reported via the consolidation and/or the equity reporting methods.
4. Securities may have been stolen and sold by employees.
5. Marketable securities may be classified incorrectly, especially between trading and available-for-sale securities.
Also, interest or dividend revenue from marketable securities may be being stolen by entity employees and/or may not be properly accrued for
or reported in the financial statements.
4. A company is reporting a marketable security as either a trading security or an available-for-sale security. Therefore, it
must be reported at fair value (FV) in the financial statements. However, this security does not have a price quoted on a
stock exchange.
How does the auditor verify the security's FV?: To determine a reasonable FV for this security, the auditor can communicate with a
broker who makes market in the investment. As an alternative, the auditor may have to utilize a security valuation pricing model.
5. For investments in held-to-maturity securities, the current net amortized cost of the investment must be reported.
When does fair value (FV) affect reporting of the value for these securities?: A held-to-maturity investment must be reported at
FV, rather than amortized cost if the market value of the security has undergone an other than temporary decline in value. This impairment
in value might be the case when an entire industry is in decline or when the financial condition of the debtor company significantly
6. Marketable securities are sometimes pledged as security for loans. If so, that information needs to be disclosed in the
financial statements.
How does the auditor discover this security interest?: To verify whether marketable securities have been pledged, the auditor can
do the following:
1. Read the loan agreements, which should mention the type of security, if any, that has been pledged.
2. Review the bank confirmations to the auditor for loan balances, terms, and securities that may have been pledged.
3. Read the minutes of the board of directors at the time approval was authorized for the borrowing, which should also mention the
collateral that has been provided.
7. What verification should the auditor make for any newly acquired marketable securities?: The auditor should make sure that
all of the costs of the marketable securities are properly capitalized.
In addition, the auditor should determine that the securities are properly classified as trading securities, available-for-sale securities, held-
to-maturity securities, whether they provide control (i.e., the investee should be consolidated with the entity in the consolidated financial
statements), or provide significant influence (i.e., the equity method should be applied).
8. For any dividend and interest revenues, what testing should the auditor perform?: The auditor should predetermine the
dividend and interest revenues that are likely to be reported to make certain that the reported amounts are appropriate.
In addition, the auditor should compare the dates of payment to the date of receipt to ensure that no unusual delays in recording these
revenues have occurred, which might indicate the presence of fraud.
The auditor should also examine the possibility of the need for accruing any dividends or interest receivables at year-end.
9. A company has a significant amount of marketable securities ans is holding the actual certificates within the company.
What testing should be done by the auditor?: The auditor (probably on a surprise basis) should inspect the physical marketable
securities. The auditor should verify the name of the issuing company, the name of the security's owner, the number of shares, the face
values of the debt instruments, and the serial numbers or other identification on the investment documents.
CPA Audit - Marketable Securities
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10. An auditor makes a surprise inspection of the client's marketable securities documents. Everything appears correct,
except that the actual serial numbers on the documents do not match company records.
What is the auditor's concern here?: If the marketable security certificate serial numbers do not match company records, the company
(or an employee) may have sold the original securities and then bought similar securities at a later date. If this suspicion is true, then the
gain or loss on the sale must be computed, and the capitalized cost of the newly purchased securities must be verified.
A likely explanation for this situation is that an employee sold the original securities, used the proceeds for some purpose, and then acquired
new similar securities to replace (and hide) the theft.
11. Company officials have said that their intention is to hold securities as trading securities or as available-for-sale
How does an auditor substantiate this intention?: To help determine the intention of management, the auditor can:
1. Look at the history of the company as to holding and selling similar securities.
2. Review information in the minutes of the board of directors' meetings as to the reason for making the individual security acquisitions.
3. Determine whether the company can operate for an extended period of time without selling the securities.
4. Review the subsequent period activities for securities to see if the securities have been sold.
Management's stated intention in holding individual securities is usually what determines their classification on the entity's balance sheet.
The auditor must cause management to reevaluate its intent to hold these securities at each balance sheet date so that the securities may be
properly classified. Typically, if there is no intent to sell the securities in the near future, debt securities would be classified as held-to-
maturity and equity securities would be classified as available-for-sale.