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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