CHAPTER TWO

AUDITING OF CASH AND MARKETABLE SECURITIES

In this chapter, you will have a brief discussion on internal control that a client is expected to
design for cash, the test of control and test of balance for cash (substantive). Cash and
marketable securities are generally used to meet the transaction needs of the firm. It is also used
for contingency purposes. Firms or individuals hold Cash for different purposes. I) for
transaction Motive, ii) Precautionary Motive, iii) Speculative Motive and iv) Compensating
Motive. Cash is medium exchange that banks accept at its face value. In a broad sense cash
includes “near-cash assets” such as marketable securities & time assets” such as time deposits
with banks. The primary concern should be with safety and liquidity rather than the maximum
profits.

2.1. Meaning and Nature of Cash

Cash is a medium of exchange that a bank will accept for deposit at its face value. It includes
coins, currency notes, cheques, bank drafts & demand deposits. In a broad sense, cash includes
“near-cash assets” such as petty cash, marketable securities & time assets” such as time deposits
with banks and certain negotiable instruments accepted by financial institution for immediate
deposit and withdrawal. Marketable securities are securities or debts that are to be sold or
redeemed within a year or below a year. These are financial instruments that can be easily
converted to cash such as; short term government Treasury note, common shares, or certificates
of deposits, commercial paper, Federal funds, bank acceptance & letter of credit and others.
Because of their liquidity, these assets represent the most vulnerable of all the company’s assets.
On the other hand, they are the most easily verified, because they can be confirmed directly by
third parties or by physical counts.

2.2. Internal Control Over cash transactions

Internal control consists of the policies and procedures adopted within a business in order to
optimize resources, prevent irregularities or frauds or safeguard firm’s assets and maintain the
accuracy & reliability of its accounting records. Internal control over cash is imperative in order
to safeguard cash and assure the accuracy of the accounting records for cash.

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Thus, the evaluation of internal control over cash is among the foremost detail task of auditors
due to the fact that almost all transactions affect cash account and by its very nature cash is the
most liquid and tempted to miss appropriation and embezzlement. Therefore auditors devotes a
reasonably good depth of test on internal control over cash as it can highlight the possible audit
risk on cash account as well as in other accounts in balance sheet as well as income statement.

Most of the processes relating to cash handling are the responsibility of the finance department
under the controller of the treasurer. This process includes handling and depositing cash receipts,
signing checks, investing idle cash and maintaining custody of cash, marketable securities and
negotiable instruments. In addition the finance department must forecast cash requirements and
make both short term and long term financing arrangements.

Ideally, assessment of internal control over cash is expected to assure auditor that the function of
the finance and accounts department should be integrated to provides assurance that, the
following general objectives of cash control are achieved:

 All cash that should have been received was in fact received, recorded accurately, and
deposited promptly.
 Cash disbursements have been made for authorized purposes only and have been properly
recorded.
 Cash balances are maintained at adequate, level by forecasting expected cash receipts and
payments relating to normal operations. The need for obtaining loans or for investing
excess cash is thus made known on a timely basis.

To address the above stated general objectives of control over cash, an entity under audit must
have a well-designed and full implemented internal control mechanisms over cash receipt as well
as cash payment from the general cash in bank accounts as well as other impress cash funds.
The following are the different aspects of cash control:
2.2.1. Internal Control Techniques of Cash

A. Authorization of transactions and activities: Aauthorization by the proper individual is

important. Control is most effective when only one person is responsible for a given task.
For example, when there is no such control, the administration department supervisor can

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 endorse a payment of an invoice and also sign a cheque to make the payment. This
supervisor may open a dummy business that sends out a fake invoice to his or her
employer company. He or she endorses payment of the fake invoice, signs a payment
cheque, and eventually pockets the money as the owner of the fake business.
Authorization of transactions should be separated from custody of related assets to
prevent embezzlement.
B. Segregation of duties: The work of one employee should provide a reliable basis for
evaluating the work of another employee. Basically, custody of assets, authorization of
transactions and recording-keeping responsibility should be implemented and executed
by different personnel. Custody of assets should be separated from accounting to prevent
embezzlement. For example, when there is no such control, a cashier receives cash from
customers and also performs the data entry. The cashier can pocket the cash received and
adjust a customer’s account by recording a false credit to the account.
C. Documentation procedures: Documents should provide evidence that transactions and
events have occurred. Proper documentation of processing is needed for the necessary
audit trail. Documented reviews of transactions gives validity to the audit trail. The
document must proof that the accuracy of the transactions when it is needed. Effective
and user-friendly documents, whether within IT or manual systems, should be designed
and introduced to all users to ensure that all assets and transactions are correctly
accounted for.
 All documents such as time cards, invoices, purchases orders and cheques should
be pre-numbered to ensure fast location of any of them.
 Necessary documents should be prepared at the time of transaction to ensure
completeness of information.
 All documents should be designed for multiple uses to ensure that all parties
involved will obtain the same information.
 All documents should be constructed to encourage correct preparation. Clear
instructions are provided in the document to guide the users to complete the
document step by step.
D. Safeguards to control access to, and use of, assets and records:

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 a. Using mechanical or electronic controls relate primarily to the safeguarding of
assets and enhancing accuracy and reliability of the accounting records.

E. Independent verification:
i. External verification indicates whether the company’s financial
statements fairly present its financial position and results of operations in
accordance with GAAP.

ii. Internal verification involves review, comparison, and reconciliation of

information from two sources. The need for independent checks arises
because internal controls tend to change over time unless there is a
mechanism for frequent review. Employees sometimes may forget or
intentionally fail to follow procedures, or they may simply be careless.
Thus, the work of an employee should be independently verified by
another member of personnel.

For example, the senior salesperson prepares the daily sales report at the end of
each day. Then, the sales department supervisor checks the accuracy and
completeness of the daily sales report by comparing the report to copies of sales
invoices for the same day.

2.2.1.1. Internal Control over Cash Receipt

Cash can be received from different sources, but the major source of cash for most business
enterprises is sales. Cash from sales can be received either over the counter or via mails in the
case of credit sales.

1. Internal Control over Cash Receipts over the Counter

 Cash register should be used to record cash receipt and the amount written on the cash
register should be visible to customers.
 There should be pre numbered receipt used in the sales process.
 The cash receipt should be deposited immediately in a bank.
 A person independent of the cashier should count cash, and compare it to the amount
recoded on the receipts.

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2. Internal Control over Cash Receipt by Mail

 The mail should be locked and the key should be placed on the hand of a responsible
person.
 At least two people have to be present when mail is opened and list of money received
should be kept.
 A prelisting of cash received should be made in three copies, one copy for cashier, the
second copy for accounting department and the third copy kept by the preparer.
In general, the above stated internal control mechanisms for cash are designed to ensure that all
cash that should have been received was in fact received, recorded accurately, and deposited
promptly.

2.2.1.2. Internal Control of Cash Payment

To attain the aforesaid general internal control objective over cash, the auditor must obtain
sufficient understanding on the functionality following control mechanisms over cash payments:

 Use voucher system in approving and making payment

 Only specified individuals should be authorized to sign cheques but the duties of approving
payment must be done by different individuals (departments).
 Expenditure should be made using pre- numbered checks and following payment, the
approved invoice should be stamped PAID.
 The Persons who prepare checks and signing them should be separated
 The signed check should be mailed under the supervision of the person signing them
 A person who prepare checks or have access to unissued checks should not handle cash
receipt and under no circumstance should they be returned to the person who prepared them.
 Unsigned checks should be placed in secured place
 To guard against alteration of the amount, the amount of the check should be imprinted or
embossed on the check by means of a check protecting machine
 The person who prepares checks should not bear responsibility over purchases or sales
transactions.

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The overall objective of designing and implementing internal control mechanisms over cash
payment is to ensure that cash payments are made only on valid and authorized reasons, and all
payments are properly recorded and reflected in the account balance.

2.2.1.3. Control over Petty Cash

Though effecting cash payments using a pre-numbered check is considered as a sign of strong
internal control over cash, it is not always possible and economical to issue check to all
payments; therefore, entities under audit may have different imprest cash fund accounts such as
petty cash fund. Payments from such a petty fund is usually small in amount but most frequent
and large in number, as a result the auditor need to assess the adequacy of internal control over
petty cash fund to reduce the expected risk of understating the cash balance as well as possible
errors and frauds. The internal control over petty cash includes that:
 The level of petty cash should be laid down formally by management
 A maximum amount should be placed on a petty cash payment
 Voucher should be produced before the check is signed
 Periodically the petty cash should be reconciled by an in dependent person.
2.3. Audit program for cash

Cash typically has a small account balance, but auditors devote a large proportion of total audit
hours because liabilities, revenues, expenses and most other assets flow through cash. Cash is the
most liquid asset so greater temptation for misappropriation and it is also a high risk account In
order to audit cash, follow the following steps;
1. Obtain an understanding of internal control over cash.
2. Use the understanding of the client and its environment to consider inherent risk,
including fraud risks, related to cash
3. Assess the risks of material misstatement of cash and design tests of controls and
substantive procedures
2.3.1. Test of control
I. Cash Receipts
i) Attend mail opening and ensure procedures are adhered to.
ii) Test independent check of cash receipts to bank deposit slip.

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 iii) Test for evidence of a sequence check on any pre-numbered receipts for cash.
iv) Test authorization of cash receipts.
v) Test for evidence of arithmetical check on cash received records.
II. Cash Payments
i) Inspect current check books for:
a) Sequential use of checks
b) Controlled custody of unused checks
c) Any signatures or blank checks.
ii) Test (to avoid double payment) to ensure that paid invoices are marked 'paid'.
iii) Test for evidence of arithmetical check on cash payments records, including cashbook.
iv) Examine evidence of authority for current standing orders and direct debits.
III. Bank Reconciliations
i) Examine evidence of regular bank reconciliations (usually one per month).
ii) Examine evidence of independent check of bank reconciliations (e.g. a signature).
iii) Examine evidence of follow-up of outstanding items on bank reconciliations. Pay
particular attention to old outstanding reconciling items that should be written back
such as old, un-presented checks.
IV. Petty Cash
i) Test petty cash vouchers for approval.
ii) Test cancellation of paid petty cash vouchers.
iii) Test for evidence of arithmetical check on petty cash records.
iv) Examine evidence of independent check of petty cash balance.

2.3.2. Substantive Audit Test of Cash

A. Auditing Cash Receipts

The audit procedures involved in the attainment of audit objectives pertaining to cash receipts are
discussed below.

 Existence/ occurrence: The specific audit objective is to determine whether all recorded
cash receipts transactions has occurred. As noted above, the audit concern with existence
is the inclusion of false cash receipts in the cash receipt journal, leading to an inflated

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 current ratio. This is especially important if the client is using the financial statements to
apply for a bank loan. Audit testing for existence involves vouching from cash receipt
journal entries (or accounts receivable ledger) to the prelisting and/or remittance advices.
The prelisting and remittance advices support the occurrence of the cash receipt. The
auditor should also vouch from daily deposit recorded to the cash account in the general
ledger to bank records- deposit tickets and/or bank statement.
 Completeness: This assertion can be used to establish credibility of the accounting
records by tracing the handling of representative transactions from origin of final account
balance, i.e., to trace whether all cash received has been recorded or not. The extent of
tracing to be done is a direct function of the amount of internal control that is evident.
The first step would be to prove the footing of the cash receipts records for one or more
months and trace the totals to entries in the ledger accounts that are affected. For clients
with a large volume of transactions and good internal control, the proof of footings can
usually be safely eliminated, but not, if the records are handled by employees who have
contact with cash or checks. Supporting documents should be examined. Cash receipt
source records would include remittance advices accompanying orders or payments of
account balances, receipts issued for over-the-counter payments, sales checks, or cash
register tapes.
 Rights and obligations: This is not an issue with cash receipts.
 Valuation: This is not an issue (except foreign currency transactions).
 Cutoff: This assertion is checking that cash receipts are recorded in the correct period.
That is, scrutinizing whether they have been cutoff properly. The audit concern for cutoff
is “window dressing”, that is trying to make the current ratio or the quick ratio appears
“good” with cash receipts. This can be accomplished by holding the books open for a few
days after year end, then dating the receipts from early in the next year as December 31.
One audit test for window dressing involves the bank reconciliation. The other audit test
involves preparing a schedule of interbank transfers, and examining it for possible kiting.
Kiting is a fraudulent scheme that seeks to take advantage of “float”. Float in the banking
system, refers to the timing differences between the day a check is credited to an account
in one bank, and debited to an account in another bank.

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  Presentation and disclosure: The auditor is expected to ascertain that receipts are
credited to the proper account, e.g. sales, accounts receivable. For this assertion, the main
audit concern is that cash received is credited to correct account. For example, sales,
miscellaneous income, gain on disposal of fixed assets, accounts receivable, notes
receivable, etc. The related audit test is to vouch from a sample of credits in cash receipts
journal to the documentation which supports the account credited.
 Accuracy: The audit concern here is that cash receipts journal amounts are correctly
posted to the Accounts Receivable Subsidiary Ledger and the General Ledger Cash
account. The related audits tests are to foot (add) the cash receipts journal, and then
compare the totals with the general ledger and accounts receivable entries. Moreover,
compare sales, accounts receivable, or miscellaneous receipts by month and analyze the
current ratio. Increase of the current ratio from the previous year may indicate that cash
receipts are overstated.
B. Auditing Cash Payment

 Existence/occurrence: The auditor need to assert whether all recorded cash payments
transactions occurred or not. An inquiry should be made to ensure that invoices have
been internally checked and initiated by the authorized officials and payments are
authorized, payee’s acknowledgement should be checked and statements of account of
the creditors should be scrutinized.) The other audit procedure is to vouch from cash
payments Journal to bank statement, vouchers, purchase invoices, receiving reports, and
purchase orders.
 Completeness: This assertions can be used to establish credibility of the accounting
records by tracing the handling of representative transitions from origin to final account
balance, i.e. to trace whether all cash disbursements has been recorded or not. The extent
of tracing to be done is a direct function of the amount of internal control that is evident.
The first step would be to prove the footings of the cash disbursements records for one or
more months and trace the totals to entries in the ledger accounts that are affected. Then,
for selected entries, supporting documents should be examined. In the case of cash
disbursements, source records would include vouchers, invoices, receiving reports, and
paid checks. A key issue related to fraud is overstating current ratio. That is unrecorded
cash payments increase current ratio. The audit procedure for this is to trace from

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 vouchers, purchase invoices, etc to cash payment Journal. In addition, to examine bank
statement (cut-off bank statement) in a new year, and compare it to outstanding checks on
bank reconciliation.
 Rights and obligations: This is concerned with Checking whether cash payments were
for valid obligations of the client or not. For instance, payments for personal (non-
business) items or payments for goods not received (including double payments) may be
made. This is probably the key issue in testing cash payments. For example, examined
payments for the purchases should be vouched with cash memos of the suppliers. To
insure that goods have actually been received, the available documentary evidence, such
as goods receiving notes, goods inward book, should be examined. As well, the auditor
should
 Examine cancelled checks for endorsement/ payee
 Vouch from cash payments Journal to purchase invoices, goods receiving reports,
purchase invoices, purchase orders and requisitions
 Use knowledge of business to identify bogus venders
 Examine supporting documents for cancellation
 Be aware of possible “kickbacks”
 Valuation: The assertion is to check that correct price was paid, including discounts. Be
aware of possible bribes for overpayments. To ascertain the valuation compare prices on
sales invoice to purchase order and vendor price list/Performa invoices/bid documents
and recalculate purchases discounts.
 Cutoff: This assertion is about checking that cash disbursements are recorded in the
correct period. As stated earlier the audit concern for allocation is “window-dressing,”
that is trying to make the current ratio or the quick ratio appears “good.” This can be
accomplished for cash disbursements by writing and recording checks to settle accounts
payable, but not actually mailing the checks until the next fiscal year. Checks may be
posted in 2000 (to inflate current ratio), but not mailed until 2001(to preserve cash flow).
To ascertain the allocation objective, examine paid dates on cancelled checks or paid
dates in bank statement and note number of last check of fiscal year.

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  Presentation and Disclosure: The specific audit objective is to determine whether
payments are debited to the proper account. For example, expenses may be recorded as
assets. The auditor should:
 Read asset or expense policy manual
 Refer to chart of accounts
 Examine account coding for purchase invoices for adherence to policy
 Be alert for payment of previously undisclosed contingent liabilities
 Scan cash payments Journal for large/unusual payments, esp. to directors and
other related parties
 Accuracy: It is about checking that arithmetic is correct on invoices and in cash
payments Journal. To ascertain the accuracy recalculate extensions and footing on
purchase invoices and recalculate cash payments Journal and compare to General Ledger.
C. Auditing Cash on Hand and Cash in Bank
Cash on hand consists of petty cash funds, changes fund, and un-deposited receipt. The auditor’s
first consideration in verifying cash in bank is to ascertain the actual balance on deposit. Some of
the relevant assertions and testing for assertions in the audit procedures of cash on hand and in
bank are covered in the parts that follow:

Existence/occurrence: The specific audit objective is to determine that all cash balances exist
and that cash is not overstated

a) Count cash on hand: All balances should be counted at once. This is to prevent the client
from moving cash from one branch to another and having it include in the count two or more
times. If it is impossible to count all locations at one time, each cash box should be sealed after
counting and the auditor should check that the seals are still intact after completing the count. If
the client has highly liquid investment, such as certificate of deposit, the auditor should verify
those at the same time as cash. It is very important that the cash custodian be present at all times
during the count. After the count, the auditor should ask the custodian to sign the paper.

Petty cash funds should be counted on surprise basis, some times before year end. The reason for
this is to detect if the petty cash custodian is borrowing from the cash box. If the cashier knows
the date on which the auditor will count cash, she /he can borrow many from friends to make up

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the balance for the auditors count, and then take the money out of the box after the auditor
leaves.

b) Confirm bank account balances: Even though the balance in bank can be determined by
referring to the bank statement, standard practices requires that independent confirmation of the
bank balance be obtained directly from the bank.

c) Obtain cutoff bank statement: cut off bank statement is a partial statement which covers the
first week or two in the next fiscal year. It is sent directly to the auditor so that the client has no
opportunity to alter it. The auditor will use it especially in testing the bank reconciliation

d) Test bank reconciliation: The auditor should thoroughly test the bank reconciliation prepared
by the clients by doing the following.

 Compare the balance per bank on the reconciliation to the bank confirmation and to the
beginning balance on the cutoff statement.
 Foot the column of numbers
 Traces outstanding checks and deposit in transit to the cut off statement
 Compare checks and deposits on the cut off statement with the bank reconciliation.
Completeness: The specific objective in this case is to determine whether all cash balances have
been recorded or cash was not understated. The audit tests employed for completeness are to
scan the ledger, looking for days during which there have been no debit to cash. The auditor may
also prepare a proof of cash. The other audit test would involve tracing deposit receipts to the
cutoff bank statement.

Rights and obligations: The use of cash is not restricted for cash on hand, of course, there is no
audit testing for rights. The possessor of cash is assumed to be its owner and proving otherwise is
almost impossible. However, in the cash bank account, the use of the money may be restricted in
some way. Examples of restriction include bond sinking funds and compensating balance
requirement. Audit testing of restriction on cash balance involves requesting a special
confirmation from the bank and it has to be disclosed in a financial statement.

Valuation: is not an issue, except for foreign currency balances

Cutoff: is not an issue except as discussed in the receipt

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Presentation and disclosure: The specific audit objective is to determine whether all cash
balances are really cash rather than investment in bonds etc and whether sufficient disclosure is
provided. Some of the Items to be disclosed are:

 Certificate of deposit
 Sinking fund
 Compensating balance
 Overdraft
2.4. Fraud Audit Test for Cash
The beginning of this chapter, under the nature of cash, cash is the most liquid asset which is
prone to misuse and misappropriation, the auditor usually performs audit procedure that enables
to detect intentional misstatement of cash account. Weak internal control procedures would
create opportunity for fraud of cash.
2.4.1. Common Frauds on Cash Account
Weak internal control over cash would create opportunity for fraud or defalcation/theft/ of cash.
The most defalcations that call auditors to conduct a test of fraud are:
3. Lapping: refers to cash collection on account from credit customer may be postponed
(delayed). This is usually practiced as a temporary borrowing, but in long run they lead to
cover up by more elaborate means. This is possible if a single person is responsible to
receive cash from charge customers and keep records for accounts receivable at the same
time. For example: Galilo (borrower)stole cash used by Customer A to pay the loan, the
funds received from Customer B was used to pay the balance of receivables owned by the
Customer A and so on, this can be liken to digging a hole and cover the hole.

4. Check-kitting: kitting is a fraudulent cash scheme to overstate cash assets at year end by
showing the same cash in two different bank accounts. It also refers to transferring of
check from one bank to another when business has two bank accounts say for example in
Commercial Bank of Ethiopia Jimma branch and Dashen Bank Jimma branch check is
written to withdraw an account from CBE bank account balance and deposited in Dashen
Bank account. Due to lag (delay) of time in clearance, the amount deposited in Dashen
Bank may be reflected immediately in balance of cash account at Dashen Bank, but not
reflected as deduction from the account at Commercial Bank of Ethiopia account soon. As

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 a result of such technique a casher may cover up cash shortage which an auditor might
uncover under normal audit procedure.
5. Window dressing: Trace deposits in transit to cutoff bank statements to determine
deposit date. Cash shortage or cash position could be improved by holding the cash book
open/unclosed/ beyond the closing date to include subsequent cash receipt.
6. Writing off bad debts: accounts receivable could be written off as bad debts when
actually customers’ remittance is pocketed.
7. Sales discount: cash can be abstracted from sales discount not taken by customers. This
when customers pay the full amount, only amount net of discount are recorded to
customers and the difference would be pocketed by recording it to discount account.
2.5. Auditing programs for Marketable securities

Marketable securities are liquid assets in that they can easily and quickly be converted into cash.
They are held as a temporary investment and classified as current assets. Marketable securities
provide investors with the liquidity of cash and the ability to earn a return when the assets are not
being used. Such securities are typically traded on a public exchange, where price quotes are
readily available. The tradeoff for the high level of liquidity is that the return on marketable
securities is usually low.

Marketable securities are recorded as a current asset, since they have a maturity of less than one
year. This is of some importance when calculating the current ratio, since marketable securities
are included in the numerator of that calculation, and make a business look more liquid. A
conservatively-run business may place a large proportion of its excess cash in marketable
securities, so that it can easily liquidate them if there is a sudden need for cash. A tightly-
managed treasury department that has a clear understanding of expected cash flows may pursue
higher-return investments which typically require longer maturities, and so will invest a smaller
proportion of excess cash in marketable securities.

The securities are marketable securities if the firm can readily convert them into cash, and the
firm intends to do so when it needs cash. For examples of marketable securities are banker's
acceptances, certificates of deposit, commercial paper, treasury bills. If either of the two above
tests for marketable securities does not apply, then the securities are properly classified as

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investment in securities or long-term investment securities. For example; stocks, bonds and
preferred stock are the best example based on their maturity date (for bond and preferred stock).

2.5.1. Inherent (Control) Risks related to marketable securities

The existence of fraud risk reasons related to marketable securities are risk of sudden market
declines, manipulation of classification of securities and manipulation of valuation of fair market
value. The risk of theft of securities may raise when they are not physically controlled and
authorization and monitoring over their trade is not effective.
 Lack of policies over purchase or sale of securities,
 lack of monitoring of changes in securities balances,
 lack of policies over valuation or classification of securities,
 lack of involvement or oversight by internal audit in relation to securities,
 lack of segregation of duties between those responsible for making investment decisions
and custody of securities.
2.5.2. Auditing procedures of Marketable securities

1. Review the results of the applicable sections of the risk assessment documentation and the
Small Audits Analytical Procedures Program and assess impact on tests of balances. For
smaller organizations, investments are usually managed by the person with top management
authority. Without appropriate governance responsibilities carried out by a board of directors,
risk of material misstatement is usually high resulting in more extensive tests of balances
procedures. When persons charged with governance perform entity-level controls, the level
of risk may be moderate.

2. Obtain a list of securities at engagement date, including descriptions, number of shares,

costs, carrying amount, and market value, foot (if client’s IT system has not been tested) and

tie to the general ledger. The auditor must obtain and document an understanding of the

client’s IT system. If the software is an out-of-the-box system, the auditor should have a

thorough knowledge of its operation and separate testing of the system is not normally

required. For more sophisticated accounting software that allows user modification, tests of

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 the software are normally necessary to obtain a complete understanding of its

operation. Absence such testing, all reports and documents generated by the software must be

tested for mathematical and content accuracy.

3. Review subsequent transactions to determine the completeness of the list.

4. Examine securities on hand at the engagement date and obtain a receipt for their return.

5. Obtain confirmation of securities held by others at the engagement date.

6. Determine that all debt and equity securities are properly classified as held-to-maturity,

available-for-sale, or trading by reference to the nature of the security and management’s

ability and intention to hold

7. Obtain a schedule of all sales of investment securities, by category, and transfers between

categories during the year and determine whether they have been classified and accounted

for properly

8. Examine brokers’ advices and/or directors’ approval for major transactions during the period

9. Determine if any securities are pledged or restricted and Obtain a list of all derivative

transaction

10. Ensure that all information needed for financial statement disclosures has been accumulated

and documented in the working paper

2.5.3. SUBSTANTIVE TESTS FOR MARKETABLE SECURITIES.

Existence/ occurrence  Securities exist at balance sheet date.

 It is requesting for a schedule of securities and verifying their
existence.
Completeness  Securities balances include all securities transactions taken place
during the period.
 Footing schedule of marketable securities and examining them.

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Rights and obligations  Company has title to such securities accounts as of balance sheet
date.
 Examining selected documents to determine any restrictions

Valuation or allocation •Recorded balances reflect true underlying economic value of

those assets.
• Re-computing interest and proper recording of accrued interest
Presentation and Properly classifying the securities on balance sheet and disclosing in
notes to financial statements.
disclosure

2.5.4. AUDITOR’S JUDGMENTAL CHALLENGE

• Corroborating management’s intent in classifying assets

– Gathering information about management’s trades in investments
– Importance of market value to management compensation
• Determining fair market value
– Easily determinable for regularly traded securities
– Financial institutions reluctant to mark fair values for thinly traded securities

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