Question
1. The CEO discusses the investment strategy with the board of directors, but the board is not involved in the purchase and sale decisions and
1. The CEO discusses the investment strategy with the board of directors, but the board is not involved in the purchase and sale decisions and does not approve derivative contracts. The CEO enters into the speculative derivative financial instruments on behalf of McNeil Co.
2. Total investments in financial statements (trading and avail for sale) at year-end represent approx. 15% of total assets. The majority of investments are classified as trading securities, and many of the equity investments would considered high risk stocks.
3. The CEO makes the determination to classify securities as trading or avail for sale.
4. McNeil Co. has recorded significant gains on sales of financial instruments.
5. The new CEO has an incentive to continue to grow the company and report a profit because he has been given an incentive bonus based on return on assets.
Instructions:
a) ID the inherent and control risks related to the financial instruments accts for McNeil
b) ID at least 2 procedures the auditor would perform to test the existence balance-related audit obj. for the trading and avail for sale securities.
c) How would the auditor test the completeness balance-related audit obj. for the speculative derivative fin. instruments?
d) ID a least 2 audit procedures the auditor would perform to test the realizable value balance-related audit objective for the fin. instruments accts. Assume the investments in stock are all actively-traded in a liquid market, but the derivative fin. instruments require a level 3 fair value estimate.
e) In your opinion, would the audit of fin. instruments require the use of a valuation specialist? Why or why not?
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