Question

For each test of transactions and each test of account balances for investments listed below, identify the assertion for which the test provides evidence.

a. Determine whether there has been any permanent impairment in the value of the cost basis of an individual security.
b. Inspect securities if they are maintained by the client or obtain a confirmation from an independent custodian.
c. Search for purchases of securities by examining transactions for a few days after year-end.
d. Examine brokers' advices for a sample of securities purchased during the year.

Answer 1

The tests for investments provide evidence for different financial assertions: a) Permanent Impairment - Valuation, b) Inspect Securities/Confirmation - Existence, c) Year-End Purchases Search - Cut-Off, and d) Brokers' Advices - Existence and Valuation.

Step-by-step explanation:

The student is asking about different tests for transactions and account balances related to investments, and which financial assertion each test supports. Here are the assertions for each test:

• Permanent Impairment (a): This test is directly related to the valuation assertion, as it involves assessing whether the investment is appropriately valued at the cost basis or if an impairment write-down is necessary.
• Inspect Securities or Obtain Confirmation (b): This procedure provides evidence for the existence assertion, ensuring that the investments recorded in the financial statements actually exist.
• Year-End Purchases Search (c): The search for purchases of securities after year-end checks the cut-off assertion, which ensures transactions are recorded in the correct accounting period.
• Examine Brokers' Advices (d): By examining brokers' advices for a sample of securities purchased, the audit provides evidence for the existence and valuation assertions, confirming the securities were purchased at the stated amounts and valuations are accurate.