Question

Investment Securities. You are engaged in the audit of the financial statements of Bass Corporation for the year ended December 31 and you are about to begin an audit of the investment securities. Bass’s records indicate that the company owns various bearer bonds as well as 25 percent of the outstanding common stock of Commercial Industrial Inc. All securities in Bass’s portfolio are actively traded in a broad market. You are satisfied with evidence that supports the presumption of significant influence over Commercial Industrial Inc. The various securities are at two locations as follows:

1. Recently acquired securities are in the company’s safe in the custody of the treasurer.
2. All other securities are in the company’s bank safe deposit box.
Required:
a. Assuming that the internal controls over securities are satisfactory, what are the objectives (specific assertions) for the audit of the held-to-maturity securities?
b. What audit procedures should you undertake with respect to obtaining audit evidence for the existence and cost valuation of Bass’s securities in the held-to-maturity classification?
c. What audit procedures should you undertake with respect to obtaining audit evidence against Bass’s investment in Commercial Industrial Inc.?
d. What audit procedures should you undertake with respect to obtaining audit evidence about the classification of held-to-maturity securities in the Bass portfolio?
e. Suppose that the held-to-maturity portfolio (excluding the investment in Commercial Industrial Inc.) is carried at cost in the amount of $3,450,000. What audit procedures should you undertake with respect to obtaining audit evidence about the fair market value of this portfolio?
f. Suppose that the auditors determine that the held-to-maturity portfolio (exclufing the investment in Commercial Industrial Inc.) has an aggregate fair market value of $2,970,000. What audit procedures should they undertake with respect to obtaining audit evidence regarding a value impairment that might be "other than temporary"?

Answer 1

Auditors focus on key assertions linked to existence, valuation, and classification of held-to-maturity securities, verifying the cost, market value, and impairment through documented evidence and current market data. The specific procedures include physical verification, document examination, equity method analysis, market comparisons, and impairment testing.

Step-by-step explanation:

When assessing the audit objectives for hedge-to-maturity securities in an organization's portfolio, an auditor typically focuses on several key assertions, such as existence, rights and obligations, completeness, valuation, and accuracy. An auditor aims to solve completely any discrepancies that might affect the financial statements' reliability.

For the existence and cost valuation of Bass's securities, audit procedures would involve physical verification, examining supporting documents like purchase receipts, and cross-checking with bank statements and custody records. To audit the investment in Commercial Industrial Inc., the auditor would review shareholding documents, evaluate the evidence supporting the influence over the investee, and analyze equity method accounting records. For classification, the auditor would examine investment policies and the nature of securities to confirm correct categorization.

To verify the fair market value of the held-to-maturity securities portfolio, the auditor would compare the cost to current market prices sourced from active markets. If a potential impairment is suspected, the audit procedures would involve conducting an impairment test to determine whether the decline in value is temporary or other than temporary, by analyzing market conditions, issuer's financial health, and the duration and extent of the value shortfall.