Question

Suppose that a large investment firm had approximately 10 percent of its total asset invested in funds managed by Madoff Securities. What audit procedures should the investment firm's independent auditors have applied to those assets?

Answer 1

The independent auditors should make use of SAS No. 92 framework. This is for “Auditing Derivative Instruments, Hedging Activities, and Investments in Securities”.

The investment firm’s independent auditors should have determined the materiality of investments by the investment firm in the funds that is managed by Madoff securities. Secondly it should determine the nature and amount of assets, liabilities and transactions that have been executed with regards to the investment. The independent auditors should also determine specific risks related to the investment that presents a reasonable possibility of material misstatement.

The audit procedure should establish the accuracy of accounts that has been presented and should confirm the accounts with the actual existence of assets that have been recorded. A number of audit tools can be used for this purpose and risk assessments and materiality decisions will have to be assessed.

This will lead to identification of inherent and control risks that can lead to misstatements in financial statements. A proper, comprehensive and careful audit of key transactions should be done to determine the degree of accuracy. Issue of materiality will have to be addressed and this will help in ensuring that the investment firm is not being deceived. It will also lead to elimination of misstatements. Lastly the independent auditors should do bank reconciliation for all the operative accounts. This will lead to the determination of actual bank balances and find if any discrepancy exists or not.