Audit Procedures for Investments and Cash

In testing the reasonableness of interest income, an auditor could most effectively use analytical tests involving

• Documentary support of specific entries in the account.

• The beginning balance in the investments account for fixed income securities.

• The average monthly balance in the investments account for fixed income securities.

• The ending balance in the investments accounts for fixed income securities.

The audit procedure that will give the least assurance of the validity of the general ledger balance of investment in stocks and bonds at the audit date is

• Inspection and count of stocks and bonds.

• Confirmation from the broker.

• Vouching all charges during the year to the broker’s advices and statements.

• Examination of paid checks issued in payment of securities purchased.

Of the following, which is the most efficient audit procedure for testing accrued interest earned on bond investments?

• Vouching the receipt and deposit of interest checks.

• Tracing interest declarations to an independent record book.

• Recomputing interest earned.

• Confirming interest rate with the issuer of the bonds.

The auditee has acquired another company by purchase. Which of the following would be the best audit procedure to test the appropriateness of the allocation of cost to tangible assets?

• Evaluate procedures used to estimate and record fair market values for purchased assets.

• Determine whether assets have been recorded at their book value at the date of purchase.

• Evaluate the reasonableness of recorded values by discussion with operating personnel.

• Evaluate the reasonableness of recorded values by use of replacement cost data.

Which of the following statements is the least accepted reason/purpose for acquiring long-term investments:

• To yield a relatively permanent other income.

• To generate cash for operating purposes.

• To establish business relationships.

• To create specific funds.

The auditor should insist that a representative of the client be present during the physical examination of securities in order to

• Lend authority to the auditor's directives.

• Acknowledge the receipt of securities returned.

• Detect forged securities.

• Coordinate the return of all securities to proper locations.

An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the

• Valuation of marketable equity securities.

• Completeness of recorded investment income.

• Existence and ownership of investments.

• Classification of gains and losses on the disposal of securities.

In auditing investments for proper valuation, the auditor should do all but the following:

• Vouch purchases and sales of securities by tracing to brokers' advices and canceled checks.

• Compare cost and market by reference to year end market values for selected securities.

• Confirm securities held in safekeeping off the client's premises.

• Recalculate gain or loss on disposals.

An auditor has set an audit objective of determining whether planned rate of return on investment in international operations has been achieved. Which of the following audit techniques will best meet this objective?

• Inquiry

• Observation

• Analytical review

• Inspection of documents

An audit procedure that provides evidence about proper valuation of trading securities arising from a short-term investment of excess cash is

• Recalculation of investment carrying value by applying the equity method.

• Comparison of carrying value with current market quotations.

• Confirmation of securities held by broker.

• Calculation of premium or discount amortization.