Part 2: AIS application Build an audit trail

Maintaining an audit trail is often a regulatory requirement in many financial domains, as well as an accounting best practice and one of the critical control measures as we have learned from the course.

Assuming that your audit team is auditing your clients balance sheet at the year-end, and your supervisor asks you to establish an audit trail and to verify and confirm the value of the debit security presented on your clients balance sheet as of 12/31/2022. You supervise specifies the tasks, which you are going to perform. These tasks include:

1) obtain critical source documents from your client; 2) prepare your own amortization schedule of the bonds using the effective interest method and be ready to present to your audit team, and 3) verify and confirm the value of the debt security that is reported on the balance sheet as of 12/31/2022. Note that the debit security is classified as Held to Maturity.

Requirements (your tasks):

1. What source documents should you request/obtain from your client in order to confirm the basic information about the debt security, such as 1) the face value, the coupon rate, the term of the bonds.

2. How do you verify and confirm the market rate at the issuance of the bonds?

3. Given: your client purchased $100,000 of 8 % bonds on January 1, 2019, at a discount of $92,278. The bonds mature January 1, 2024 and yield 10%. Interest is payable each July 1 and January 1.

1. Prepare your own amortization schedule using the effective interest method so that you can check against your clients amortization schedule to verify/confirm the valuation of the debt security.
2. You are required to prepare the amortization schedule for the duration of the bonds.
3. Then, highlight the value of the bonds (the debt security) at 12/31/2022 on your amortization schedule.