Audit of Investments. In connection with an examination of the financial statements of Moravia of Prague (Praha),

Question:

Audit of Investments. In connection with an examination of the financial statements of Moravia of Prague (Praha), the Czech Republic, Libusa Stadic, Auditor, is considering the necessity of inspecting marketable securities on the balance sheet date, May 31, or at some other date. The marketable securities held by Moravia include negotiable bearer bonds, which are kept in a safe in the treasurer’s office and miscellaneous stocks and bonds kept in a safe-deposit box at Bohemia Bank. Both the negotiable bearer bonds and the miscellaneous stocks and bonds are material to proper presentation of Moravia’s financial position.

Required:

A. What are the factors that Stadic should consider in determining the necessity for inspecting these securities on May 31, as opposed to other dates?

B. Assume that Stadic plans to send a member of her staff to Moravia’s offices and Bohemia Bank on May 31 to make the security inspection. What instructions should she give to this staff member as to the conduct of the inspection and the evidence to be included in the audit working papers? (Note: Do not discuss the valuation of securities, the revenue from securities or the examination of information contained in the accounting records of the company.)

C. Assume that Stadic finds it impracticable to send a member of her staff to Moravia’s offices and Bohemia Bank on May 31. What alternative procedures may she employ to assure herself that the company had physical possession of its marketable securities on May 31, if the securities are inspected on

(1) May 28?

(2) June 5?

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