AUDIT OF INVESTMENTS HANDOUT NO.

Audit Procedures

1. In the audit of long-term investments, the auditor ordinarily would use analytical procedures to ascertain the
reasonableness of the
A. Completeness of recorded investment income
B. Existence of unrealized gains or losses in the portfolio
C. Valuation of marketable equity securities
D. Classification between current and noncurrent portfolios

2. The auditor who physically examines securities should insist that a client representative be present in order to
A. Acknowledge the receipt of securities returned
B. Coordinate the return of securities to the proper locations
C. Lend authority to the auditor’s directives
D. Detect fraudulent activities

3. The auditor can best verity a client’s bond sinking fund transactions and year-end balance by
A. Examination and count of the bonds retired during the year
B. Re-computation of interest expense, interest payable, and amortization of bond discount or premium
C. Confirmation with the bond trustee
D. Confirmation with individual holders of retired bonds

4. Which of the following provides the best form of evidence pertaining to the annual valuation of an investment in
which the independent auditor’s client during a 30% voting interest?
A. Audited financial statements of the investee company
B. Historical cost of the investee company’s assets
C. Current fair value of the investee company’s assets
D. Market quotations of the investee company’s stock

5. An auditor is most likely to verify the interest earned on bond investment by

A. Testing controls relevant to cash receipts
B. Re-computing the interest earned on the basis of face amount, interest rate, and period held
C. Confirming the bond interest rate with the issuer of the bonds
D. Verifying the receipt and deposit of interest checks

6. In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded
stock, an auditor should inspect the securities and
A. Determine that the investment is carried at fair value
B. Confirm the number of shares held by an independent custodian
C. Inspect the audited financial statements of the investee company
D. Obtain written representations from management confirming that the securities are properly classified as
trading securities

7. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in
the client’s name, an auditor most likely gathers evidence in support of management’s financial statement assertions
of existence and
A. Presentation and disclosure C. Rights and obligations
B. Completeness D. Valuation

8. Which of the following is the most effective audit procedure for verification of dividends earned on investments in
equity securities?
A. Re-computing selected extensions and footings of dividend schedules and comparing totals to the general
ledger
B. Comparing the amounts received with preceding year dividends received
C. Reconciling the amounts received with published dividend records
D. Tracing deposited dividend checks to the cash receipts book
9. Which of the following is the least effective audit procedure regarding the existence assertion for the securities held
by the auditee?
A. Confirmation from the custodian
B. Simultaneous count of liquid assets
C. Vouching all changes during the year to supporting documents
D. Examination of paid checks issued in payment of securities purchased

10. Which of the following is not one of the auditor’s primary objectives in an audit of trading securities?
A. To determine whether securities are properly classified on the balancer sheet date
B. To determine whether securities actually exist
C. To determine whether securities are the property of the client
D. To determine whether securities are authentic