Procedure of verifying Investments in a big organization


To avoid carrying excess amounts of cash over stock, over slack buying seasons of the year, to accumulate a secondary reserve in case of need, or to establish satisfactory relations with another company for supply or other purposes, many concerns invest excess cash temporarily in bonds or shares of stock of other companies. These investments in other companies and transactions affecting them entered into throughout the period under examination should be verified by the auditor in order to determine the reliability of the accounting statement and records.

He must satisfy himself that the securities or investments, a concern claims to own are actually possessed by the company; that transactions during the period have been properly accounted for; that the securities are valued fairly in the financial statements, and that income from them has been properly accounted for. To do this, the following steps are necessary:

1)         Examine and count all securities on hand (simultaneously with cash and other negotiable instruments):
(a) If securities are not available for count because in the hands of other for safe-keeping or for any other reasons, their existence and ownership by the company should be verified confirmation;
(b) In examining or confirming the existence of company’s investments, the possibility of any being pledged as security for loans should be kept in mind. Such pledging requires disclosure in the financial statements and may lead to discovery or unrecorded or unauthorised transactions;
(c) The reasons why security certificates are not on hand should be given attention. Unless a valid business reason justifies their absence, further investigation may be required, particularly if the certificates are held by an officer or other individual.

2)         The total of securities counted or confirmed should be agreed with the balance of the amount shown in the Balance Sheet or in the general ledger account.

3)         Transactions in securities entered into during the period should be verified by reference to documentary evidence, the propriety of the accounting should be reviewed, and the entries tied in with the beginning ending balance of the general ledger balances.

4)         The appropriateness of the company’s valuation of investments should be listed by comparison with current market quotations where available or by such other evidence as can be obtained.

5)         The classification and description of the securities for Balance Sheet purposes should be reviewed critically.

6)         Income for the period from the investments held during the period should be determined independently of the company’s records and traced into cash receipts and bank deposits.

7)         Any related accrued interest should be verified by computation and tied in with the interest income accounts.

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