1.
📌 Audit Assertions & Directional Risk
Key assertions for investments include:
● Existence: Investments recorded really exist at period‑end.
● Valuation & Allocation: Recorded at proper cost or fair value with correct amortization
or impairment.
● Completeness: All holdings and transactions are recorded.
● Rights & Obligations: Client legitimately owns the investments — no undisclosed
restrictions or liens.
● Cut‑off: Purchases, sales, and earnings are recognized in the proper period.
● Presentation & Disclosure: Correct classification (held‑to‑maturity, AFS, trading),
restrictions, fair‑value hierarchy, and income disclosed
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Directional risk primarily lies in overstatement—clients may inflate positions or miss
impairments investopedia.com+2cpahalltalk.com+2accountinguide.com+2.
2. ⚠️ Inherent & Control Risks
● Inherent Risk: High due to complexity, volatility, and valuation subjectivity—especially
with complex or illiquid instruments .
● Control Risk: Arises when controls around authorization, reconciliation, and valuation
lack robustness—e.g., one person oversees trading, recording, and reconciliation
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Under SOX 404 and PCAOB standards, controls must be documented and tested if they affect
financial reporting—otherwise, reliance on substantive procedures is required
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3. 🛡️ Controls to Evaluate
Audit controls central to reducing risk include:
● Authorization & policy: Board-approved investment policy, delegated authority limits.
● Segregation of Duties: Separating trading, recording, and reconciliation duties
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● Reconciliations: Timely comparison of custodian statements/broker reports to the
general ledger.
● Valuation oversight: Independent review of pricing models, use of specialists for Level
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● Disclosure controls: Checklists ensuring proper classification, fair-value hierarchy,
restrictions, and income disclosures
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4. 🧩 Substantive Audit Procedures
A. Confirm Existence & Ownership
● Send confirmations to custodians/brokers/investment managers to confirm positions,
valuation, and ownership rights
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● Physically inspect held securities or certificates where applicable
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B. Reconcile Activity & Cut‑off
● Agree opening balances, purchases, sales, and adjustments to sub‑ledgers and the
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● Test pre- and post‑year‑end trades to ensure correct cut‑off
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C. Valuation & Fair‑Value Testing
● For Level 1: obtain quoted prices from reliable sources (Bloomberg, Reuters) as of
year‑end investopedia.com+9cpaexamsmastery.com+9pdfcoffee.com+9.
● For Level 2/3 or complex instruments: employ valuation specialists; evaluate model
inputs, reasonableness, and impairment indicators
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D. Test Revenue Recognition
● Recompute interest, dividends, and amortization of premiums or discounts
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● Vouch realized gains and losses to broker statements and contract terms
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E. Evaluate Completeness
● Review investment account listings, reconcile to GL, and verify inclusion of all types
(e.g., held-to-maturity, equity-method, derivatives) cpahalltalk.com.
F. Rights, Restrictions & Collateral
● Examine contracts, board minutes, or loan documents for pledge, collateral, or contract
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G. Fair‑Value Disclosures & Presentation
● Review disclosures for compliance with GAAP/IFRS classification, fair-value hierarchy,
restrictions, and methods used .
H. Analytical Procedures
● Perform ratio analyses: returns, fair-value changes, long-term vs. short-term asset mix
trends.
5. 🔍 Fraud & Special Risks
Watch for:
● Phantom or overstated holdings—handled via confirmation and ownership
documentation wikiaccounting.com.
● Misclassification (e.g., reclassifying losses unrealistically) or inaccurate impairment
application.
● Unauthorized trades or undisclosed off‑book positions.
6. 🔄 Audit Strategy & Risk Response
● Assume high inherent risk for complex or high-value investments.
● If control risk is high (e.g., untested controls), place heavy reliance on substantive
procedures over controls
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● Tailor detection risk to be low—i.e., use rigorous testing for valuation, existence, and
disclosure assertions.
7. ✅ Typical Audit Deliverables
● Confirmations and reconciliations with broker/custodian statements.
● Valuation specialist reports and pricing documentation.
● Fair-value rollforward schedules and impairment analysis.
● Cutoff transaction testing files.
● Revenue recalculation worksheets.
● Disclosure checklists and audit evidence review
●
