Dealagdon, Kyle L.

SBAC3D

Exercise No. 1

1. Types of controls that should be established by a company that engage in derivative trading:
The following are the types of controls that should be established by a company that engages in
the derivatives trading:

(a) Formal investment policies are a prerequisite as they limit the nature of derivative
transactions.
(b) The investment committee of the board of directors authorizes and reviews derivative
transactions and sees whether they comply with investment policies
(c) The separation of duties among executives authorizes purchase and sale of securities and
derivative instruments, the custodian of securities and the person maintaining records
investments.
(d) Detailed records relate to securities and derivatives and the related terms and provisions;
(e) Determination of appropriate accounting treatment for complex financial instruments
(f) Periodic review of risk and compliance with investment policies.

2. The following are the list of substantive procedures that the auditor s should use to audit the
derivatives:
(a) Obtaining an analysis of accounts such as investment, revenue, gain and losses, and
reconciling it with the general ledger.
(b) Inspecting securities on face value and reviewing the agreements underlying the derivatives.
(c) Obtaining confirmation of securities and derivatives with holders and counterparties.
(d) Reviewing selected purchase and sales transactions of derivatives during the accounting year
and verifying them with the cut-off investment transactions.
(e) Reviewing the investment committee s minutes and reports
(f) Performing analytical procedures
(g) Preparing independent computations of revenue obtained from securities.
(h) Inspecting the documents related to: (Classified Derivative Transactions as: Hedging,
Activities per management’s intention.
(i) Checking and evaluation the method of accounting for investments
(j) Testing the valuation of investment and evaluating the presentation and disclosure of
financial investments.

Exercise No. 2

a. 1. Segregation of the recordkeeping and custody functions for marketable securities is made to
avoid personnel from being in a position to abstract the securities of the client and change the
records to hide the abstraction.
2. Registration in the name of the company is designed to stop employees with custody of
securities from using securities for their own ends. For instance, securities registered in the
 custodian s name could easily be used as collateral for a loan to that particular individual.
3. A proper analysis of minutes of the investment committee and reports may reveal unrecorded
sales and purchase of securities or other securities as well as transactions that are not consistent
with company s policies. This procedure is particularly significant if the client involves in
derivative since these transactions give rise to derivatives because transactions transaction give
rise to derivatives might not include the receipt transactions give rise to because transactions
derivatives might not include the receipt or payment of cash.
b. 1. Segregation of duties assigned is tested by creating investigations as to which employees did
specific tasks throughout the year, and noticing personnel carrying out those tasks. The auditors
should also create inquiries as to who does the allocated tasks under usual conditions such as
extended illness of an employee
2. Registration of marketable securities in the name of the company can be tested by creating
inquiries concerning policy and perceiving securities on hand, if possible, on a surprise basis.
3. Minutes of Investment committee could be attained from the client.
c. Both (1) and (2) of these weakness may be compensated for by carrying out a surprise count for
securities. A contrast can be made of the securities serial numbers on hand with those
documented from earlier examinations. Misuse of the securities of the client throughout the
year might also be specified by analytical procedures such as comparison of the rate of earning
on investments to prevailing rates of the client.

The third weakness is probably very substantial in the sense that unauthorized sales and
purchases of derivative transactions might be involved. The auditors will enlarge the
examination of derivative transactions to decide precisely the nature of transactions that have
happened. Subject to the nature of the transaction, this might comprise a study of all
investments and perhaps a search of receipts and payments. In addition to that since many such
transactions might not contain the receipts or disbursements of cash, it is important that the
auditors recognize the nature of the transactions involved.

Exercise No. 3

a. 1. The beginning balance on the cut-off bank statement agrees with the "balance per bank" on
the December 31 reconciliation.
2. The December 31 bank reconciliation includes those paid checks that were returned with the
cut-off bank statement and are dated or bear bank endorsements prior to January 1.
3. Deposits in transit are cleared within a reasonable time.
4. Interbank transfers have been considered properly in determining the December 31 adjusted
bank balance.
5. Other reconciling items that had not cleared the bank at December 31 (such as bank errors)
clear during the cut-off period
b. 1. Investigating unusual entries on the cut-off bank statement
2. Examining paid checks, particularly noting unusual payees or endorsements
3. Reviewing other documentation supporting the cut-off bank statement
Exercise No. 4

Situation 1

2,600,000.0
Mar-18 Available for Sales Securities (200,000 x 13) 0  
2,600,000.0
  Cash   0
Jun-30 Cash 7,500.00  
  Dividend Income   75,000.00
Jun-30 Securities Fair Adjustment 400,000.00  
  Unrealized Holding Gain - Loss Equity   400,000.00

Situation 2

Jan-01 Investment in Nemo Corp (9,000 x 9/share) 81,000.00  

  Cash   81,000.00
Jun-15 Cash 10,800.00  
  Investment in Nemo Corp (36,000 x 30%)   10,800.00
Dec-31 Investment in Nemo Corp Stock (85,000 x 30%) 25,500.00  
  Income from Investment   25,500.00