$16-2$ Drafting Tests of Controls from an Internal Control Questionnaire: Investment Transactions

The questions relate to the custody, recording, and valuation of investments, and to acquisitions, sales, and income. A Yes response to any question indicates a potential strength of the system, and a No response a potential weakness.

Required: Assume that inquiries indicate no apparent weaknesses in internal control.

Draft a test of controls you believe would provide persuasive evidence that no deficiencies exist.

$1.$ Is a detailed record of securities maintained by an official who is independent of officials responsible for custody?

$2.$ Is the listing of investments periodically reconciled with investment records?

$3.$ Are securities in the name of the entity $($or restrictively endorsed in the name of the entity$)?$

$4.$ Are acquisitions and sales of investment securities authorized by the board of directors or by an authorized investment committee?

$5,$ Are brokers$$ advices promptly compared with documented acquisition and sales authorizations?

$6.$ Is an independent check made to determine whether acquisition or sale prices are fair and objective?

$7.$ Is investment income periodically recalculated and verified?

$16-8$ Auditing Noncurrent Investments

Harold Brodkey is engaged in the audit of Longview Corporation$$s financial statements for the year ended December $31,2007,$ and is about to begin auditing noncurrent investment securities$.$ Longview$$s records indicate the company owns various bearer bonds, as well as

$25$ percent of the outstanding common stock of Industrial National Inc. Brodkey is satisfied with evidence supporting the presumption that Longview exercises significant influence over Industrial National. The various securities are at two locations:

Recently acquired securities are in the company$$s safe in the custody of the treasurer.

$$ All other securities are in the company$$s bank safe$-$deposit box.

$$ All the securities in Longview$$s portfolio are actively traded in a broad market.

Required:

$1.$ Assuming that control procedures for securities may be relied on in assessing control risk below the maximum, what are the objectives of the audit of these noncurrent invesiment securities$?$

$2.$ What audit procedures should Brodkey perform to audit Longview$$s noncurrent investment securities$?$