Case Study: Audit Procedures for Investments and Securities

Company XYZ is a publicly traded company that holds a significant portfolio of investments and securities$.$ As part of the annual audit process, the external auditors need to perform thorough procedures to ensure the accuracy and reliability of the financial statements related to these investments and securities$.$ Let's explore the audit procedures involved in this process.

Understanding the Company's Investment Policies: The auditors begin by gaining an understanding of the company's investment policies and procedures. They review the investment policy statement, which outlines the company's objectives, risk tolerance, and investment strategies. This helps the auditors assess whether the company's investments align with its stated goals.

Assessing Internal Controls: The auditors evaluate the company's internal controls related to investments and securities$.$ They review policies and procedures for the authorization, recording, and reporting of investment transactions. This includes assessing segregation of duties, approval processes, and controls over access to investment accounts.

Confirming Investments and Securities: The auditors send confirmation requests to financial institutions and brokers to independently verify the existence and ownership of the company's investments and securities$.$ This ensures that the investments reported in the financial statements are accurate and valid.

Valuing Investments and Securities: The auditors assess the valuation of investments and securities$.$ They review the company's valuation methodologies and compare them to industry standards. They also evaluate the fair value measurements, such as market prices, quoted prices for similar securities$,$ or net asset values provided by investment managers.

Testing Investment Income and Gains$/$Losses: The auditors review investment income and gains$/$losses recorded in the financial statements. They perform analytical procedures to assess the reasonableness of the amounts reported. They also test the accuracy of income recognition, including interest, dividends, and realized and unrealized gains$/$losses$.$

Assessing Impairment: The auditors evaluate whether any investments or securities are impaired. They review management's assessment of impairment indicators and perform independent tests to ensure that any necessary impairments have been appropriately recognized in the financial statements.

Disclosures and Presentation: The auditors review the disclosures related to investments and securities in the financial statements. They ensure that the required information, such as significant accounting policies, fair value disclosures, and related party transactions, is adequately disclosed. They also assess the presentation of investment information in the financial statements.

Objective Question: Which audit procedure involves independently verifying the existence and ownership of the company's investments and securities$?$ A$)$ Assessing internal controls B$)$ Confirming investments and securities C$)$ Valuing investments and securities D$)$ Testing investment income and gains$/$losses

Please select the correct answer $($A$,$ B$,$ C$,$ or D$).$