Week 11 Investing Cycle Part 3 audio

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Part 3 0f 3 of the Investing and Financing cycle

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Chapter 10 :

Chapter 10 Finance and Investment Cycle “ Credit has done a thousand times more to enrich mankind than all the goldmines in the world. It has exalted labor, stimulated manufacture and pushed commerce over every sea. ” --Daniel Webster 10- 1

Auditing Investments: Substantive Procedures:

Auditing Investments: Substantive Procedures Agree beginning balances to Prior Year Documentation Review client ’ s policies and procedures Identify those individuals authorized to execute trades with brokers Identify individuals who reconcile brokerage accounts with company records and ensure they are independent. Purchases of investments VOUCH to BROKER'S ADVICE (Statement) Examine BOARD MINUTES for authorization 10- 2

Auditing Investments: Substantive Procedures (Cont.):

Auditing Investments: Substantive Procedures (Cont.) Sales of investments VOUCH to BROKER'S ADVICE, CASH RECEIPTS RECORDS, and BOARD MINUTES Recalculate gain or loss on sale Read minutes for sales of Investments and trace to recording Trace cash receipts to cash receipts journal and bank statement 10- 3

Auditing Investments: Substantive Procedures (cont.):

Auditing Investments: Substantive Procedures (cont.) Determine MARKET VALUE Obtain 12/31 market price from Wall Street Journal or other sources Evaluate for possible PERMANENT DECLINES PHYSICALLY INSPECT or CONFIRM securities Verify CUSIP Numbers to ensure that there were no unrecorded sales and subsequent repurchases Recorded in company name Can inspect at interim, if safe-deposit box 10- 4

Auditing Investments: Substantive Procedures (cont.):

Auditing Investments: Substantive Procedures (cont.) Verify DIVIDEND REVENUE Review stocks held by client for dividend payments (e.g. Moody's, Standard & Poor's, CNBC.com ). If securities held by broker review monthly statements for dividends. Trace dividend received to CASH RECEIPTS records Evaluate presentation in BALANCE SHEET (short-term vs. long-term asset) 10- 5

Trouble Spots in Audits of Investments :

Trouble Spots in Audits of Investments Valuation of investments at cost or market value is not always evident value impairment that is other than temporary. Propriety, effectiveness, and risk disclosure of derivative securities used as a hedges Determination of the fair value of derivatives and securities, including valuation models and the reasonableness of key assumptions. Determination of significant influence relationship for equity method investments. 10- 6

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