As a result of highly profitable operations over a number of years. Eastern Manufacturing Corporation has accumulated a substantial investment portfolio. In auditing the financial statements for the year ended December 31, 1999, the following information came to the auditor's attention:

a. Continuing manufacturing operations resulted in an operating loss for the year.

b. In 1999, the corporation placed the securities in their investment portfolio with a financial institution that will serve as custodian of the securities. Formerly the securities were kept in a safe-deposit box at a local bank.

c. On December 22, 1999, the corporation sold and then repurchased on the same day a number of securities that had appreciated greatly in value. Management stated that the purpose of the sale and repurchase was to establish a higher cost and book value for the securities and to avoid reporting a loss for the year.

Required:

1. List the objectives of the auditor's tests of the investment account.

2. Under what conditions would the auditor accept a confirmation of the securities from the custodian rather than personally inspecting and counting the securities?

3. What disclosure, if any, of the sale and repurchase of securities would the auditor recommend for the financial statements? What impact, if any, would the sale and repurchase have on the auditor's opinion on the financial statements if the client accepts the auditor's disclosure recommendations? Discuss.