New guidance on auditing investments.When auditing an entity's investments, auditors should be aware of applicable accounting guidance. They must be familiar with the rules that apply both to the particular type of entity and to the investments it holds. To provide auditors with guidance on gathering evidence about investment, the American Institute of CPAs auditing standards board In the United States, the Auditing Standards Board (ASB) is the senior technical committee designated by the American Institute of Certified Public Accountants (AICPA) to issue auditing, attestation, and quality control statements, standards and guidance to certified public (ASB ASB Asbestos ASB Arbeiter Samariter Bund (German medical help organisation) ASB Anti-Social Behaviour ASB Accounting Standards Board (UK FRC) ASB Aarhus School of Business ) issued Statement on Auditing Standards no. 81, Auditing Investments. It supersedes AU section Long-Term Invesments," of SAS (1) (SAS Institute Inc., Cary, NC, www.sas.com) A software company that specializes in data warehousing and decision support software based on the SAS System. Founded in 1976, SAS is one of the world's largest privately held software companies. See SAS System. no. 1, Codification The collection and systematic arrangement, usually by subject, of the laws of a state or country, or the statutory provisions, rules, and regulations that govern a specific area or subject of law or practice. of Auditing Standards and Procedures (see also AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Professional Standards, AU section 332). SAS no.81 updates the auditing literature for recently issued accounting standards that address accounting for investments. It also deletes Interpretation no. 1 of AU section 332, "Evidential ev·i·den·tial adj. Law Of, providing, or constituting evidence: evidential material. ev Matter for the Carrying Amount of Marketable Securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has ." The purpose of this article is to explain some of the more significant aspects of SAS no. 81. SCOPE SAS no. 81 is a fieldwork field·work n. 1. A temporary military fortification erected in the field. 2. Work done or firsthand observations made in the field as opposed to that done or observed in a controlled environment. 3. standard. It provides guidance about the evidence needed to corroborate To support or enhance the believability of a fact or assertion by the presentation of additional information that confirms the truthfulness of the item. The testimony of a witness is corroborated if subsequent evidence, such as a coroner's report or the testimony of other assertions related to securities investments. Securities are issued in either debt or equity form. The SAS defines a security by referring to the definitions in Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities. SAS no. 81 also provides guidance on auditing investments accounted for under Accounting Principles Board The Accounting Principles Board (APB) is the former authoritative body of the American Institute of Certified Public Accountants (AICPA). It was created by the American Institute of Certified Public Accountants in 1959 and issued pronouncements on accounting principles until 1973, Opinion no. 18, The Equity Method of Accounting for Investments in Common Stock. While SAS no. 81 does not address derivatives (even though a derivative may be a security), some of the guidance may be helpful when auditing assertions about derivatives. EXISTENCE, OWNERSHIP AND COMPLETENESS SAS no. 81 recognizes that the procedures an auditor performs to gather evidence about the assertions of existence, ownership and completeness win vary depending on the type of investment and the auditor's assessment of audit risk. SAS no. 81 notes, however, that the auditor should include at least one of the six procedures listed in exhibit 1, page 66. The pronouncement also reminds auditors to consider the guidance in SAS no. 70, Reports on the Processing of Transactions by Service Organizations, when designing procedures to gather evidence about the existence, ownership and completeness of investments. THIRD-PARTY CUSTODIANS
The Custodians is terminology in the Bahá'í Faith, which refers to nine Hands of the Cause assigned specifically to work at the Bahá'í World Centre in attendance to the Guardian of the Faith. Certain evidentiary ev·i·den·tia·ry adj. Law 1. Of evidence; evidential. 2. For the presentation or determination of evidence: an evidentiary hearing. Adj. 1. issues arise when a third-party custodian bailee (custodian) n. a person with whom some article is left, usually pursuant to a contract (called a "contract of bailment"), who is responsible for the safe return of the article to the owner when the contract is fulfilled. , such as a bank trust department, provides services related to an entity's investments, including maintaining custody of or investing assets. SAS no. 81 does not specifically address the auditors responsibility for auditing financial statement assertions about the ownership, existence and valuation of financial instruments, commodity contracts and similar instruments when a custodian performs services related to an entity's investments. The ASB decided to address these issues in a separate project. This additional guidance is now being developed by the ASB's ownership, existence and valuation task force. INTENT AND ABILITY SAS no. 81 provides guidance to auditors evaluating both management's intent with regard to an investment and the entity's ability to hold a debt security to maturity. Management intent. An auditor should consider whether investment activities corroborate or conflict with management's stated intent for an investment. The SAS gives examples of pertinent evidence an auditor, when evaluating investment activities, should consider, such as written and approved records of investment strategies, records of investment activities, instructions to portfolio managers and minutes of meetings of the board of directors or the investment committee. Ability to hold a debt security to maturity. The guidance for auditing ability is similar to that for auditing intent. When management classifies a debt security as held to maturity, the auditor gathers evidence that will either corroborate or conflict with the entity's ability to hold that security until maturity. SAS no. 81 lists several factors auditors should consider when evaluating ability, such as whether existing operating and cash flow projections A Cash Flow Projection is an attempt to forecast the cash flows that will be generated by an asset, often a company, over a specified time frame. Methodology Projections can be made with varying levels of detail, but any cash flow projection for a business entails or forecasts provide relevant information about ability. Auditors are not required to create projections or forecasts if none exist. However, auditors exercising their professional judgment might ask management to prepare such prospective financial information. Management representations. SAS no. 81 says auditors ordinarily should obtain written representations from management confirming, with respect to held-to-maturity securities Held-to-Maturity Securities Debt securities that a firm has the ability and intent to hold until maturity. Notes: These are reported at amortized cost, therefore, they are not affected by swings in the financial markets. See also: Debt, Maturity , that management has the intent and the entity has the ability to hold such securities to maturity. VALUATION Procedures an auditor might perform to obtain evidence about investments carried at cost or fair value -- or when the fair value of investments carried at cost is disclosed in the financial statements -- are listed in SAS no. 81. Recognizing that the approaches for determining fair value described in generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting sometimes vary depending on investment type, the SAS says auditors should evaluate whether the determination of fair value is consistent with the approach specified in GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). . For example, the use of market value quotations as opposed to estimation techniques is required when measuring the fair value of equity securities accounted for under FASB Statement FASB Statement A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting no. 115. IMPAIRMENT As noted above, SAS no. 81 deletes Interpretation no. 1 of AU section 332. The ASB did this for two reasons. 1. The interpretation was written in the context of the short-term, long-term -- lower of cost or market lower of cost or market A method for determining an asset's value such that either the original cost or the current replacement cost, whichever is lowest, is used for financial reporting purposes. accounting model for investments superseded by Statement no. 115. 2. The interpretation contained accounting (preparer) guidance, thereby blurring the distinction between the auditor's responsibility for the audit and management's responsibility for the fair presentation of the financial statements. Management's responsibility to determine whether a decline in fair value is other than temporary is explicity recognized in SAS no. 81. The auditor evaluates whether management has considered relevant information in determining whether an other-than-temporary impairment exists. SAS no. 81 lists eight factors that may indicate an other-than-temporary impairment condition. (See exhibit 2, on page 67). The auditor considers existing conditions, obtains evidence about those conditions and evaluates whether the evidence corroborates or conflicts with managements conclusions about the existence of an other-than-temporary impairment for a particular investment it holds. Investments accounted for using the equity method. The guidance in SAS no. 81 on investments accounted for using the equity method generally is unchanged from the previous standard (AU section 332). Transition. SAS no. 81 is effective for audits of financial statements for periods ending on or after December 15 1997. Early application is permissible. EVOLUTIONARY STANDARD While the issuance of SAS no. 81 may cause auditors to reassess reassess Verb to reconsider the value or importance of reassessment n Verb 1. reassess - revise or renew one's assessment reevaluate their policies on management representations related to investments, the statement should not be difficult to implement. It is an evolutionary standard that sets the stage for a broader scope project that will address -- in greater detail -- issues such as the evidence needed to evaluate assertions related to the fair value of financial instruments and the auditor's responsibility for evaluating assertions about investments when a third-party custodian is involved. Exhibit 1: Obtaining Evidence About Existence, Ownership and Completeness SAS no. 81 lists six procedures for obtaining evidence about an entity's investments. The auditor should perform at least one of these six procedures: * Physical inspection. * Confirmation with the issuer. * Confirmation with the custodian. * Confirmation of unsettled transactions with the broker-dealer. * Confirmation with the counterparty. * Reading executed partnership or similar agreements. Exhibit 2: Factors Indicating an Other-Than-Temporary Impairment Here are some examples of factors outlined in SAS no. 81 that may indicate an other-than-temporary impairment condition. * Fair value is significantly below cont. * The decline in fair value is attributable to specific adverse conditions affecting a particular investment. * The decline in fair value is attributable to specific conditions, such as conditions in an industry or in a geographic area. * Management does not have both the intent and the ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. * The decline in fair value has existed for an extended period of time. * A debt security has been downgraded by a rating agency. * The financial condition of the issuer has deteriorated. * Dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made. |
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