Question

You are engaged in the audit of the financial statements of Onedirection Corp. for the year ended December 31 and you are about to begin an audit of the investment securities. Onedirection's records indicate that the company owns various bearer bonds as well as 25% of the outstanding common stock of Geico Inc., a nonpublic insurer. All securities in Onedirection'sportfolio are actively traded in a broad market, and approximately 10% of the total shares are in the process of being purchased or sold through the company’s investment dealer. You are satisfied with evidence that supports the presumption of significant influence over Geico Inc. Lastly, according to the balance sheet about 5% of all investment securities are considered held-to-maturity investments. The various securities are at two locations as follows:

1. Recently acquired securities are in the company's safe in the custody of the treasurer.

2. Other securities are in the company's bank safe deposit box.

Assume that the internal controls over securities are satisfactory, and consider the following audit objective related to the investment securities.

Audit Objective: Existence of the investment securities at the balance-sheet date.

Required: For the audit objective above, determine two audit procedures from the list below [a-o], that would provide the best evidence to address the audit objective above. Each procedure will be used either once or not at all.

	a.	For investments in the held-to-maturity securities evaluate whether the security has been downgraded by a rating agency or the financial condition of the issuer has deteriorated.
	b.	For held-to-maturity securities determine the market price as of the balance sheet date.
	c.	Inspect and examine the face of investment securities on hand to determine whether securities are recorded in the company’s name.
	d.	Send confirmation requests to the third-party custodian in possession of the securities.
	e.	Study minutes of the investment committee of the board of directors.
	f.	Look up Geico’s current market price per share via third-party sources, such as reported amounts on Yahoo Finance or the Wall Street Journal as of the balance sheet date.
	g.	On the balance sheet date, request that the company’s bank seal the company’s safe deposit box until the securities can be counted.
	h.	For all investments determine if the fair value is materially below the reported carrying value.
	i.	Examine broker’s statements to verify the initial cost of Onedirection’s investment in Geico.
	j.	Examine broker’s advices for a sample of securities purchased during the year.
	k.	For the investment in Geico, the auditor should examine significant contracts to evaluate the character of the transactions including risk exposure and determine Geico’s fair market value as of the balance sheet date.
	l.	For held-to-maturity securities calculate the appropriate amortization.
	m.	Study written records of investment strategies.
	n.	For the company’s investment in Geico, determine if there has been a significant and material increase in the fair market value to determine whether Onedirection should record an investment gain.
	o.	Send confirmation to the company’s broker-dealer with regard to any unsettled transactions at the balance sheet date

Answer 1

	Audit Objective: Existence of the investment securities at the balance-sheet date.
a	Inspect and examine the face of investment securities on hand to determine whether securities are
	recorded in the company’s name.
b	On the balance sheet date, request that the company’s bank seal the company’s safe deposit box
	until the securities can be counted.
	Explanation
	In order to satisfy the above audit objective We should check the ownership and physical existence of
	the investment securities. For that purpose following two audit procedures would serve the purpose :
a	In order to verify the existence of the investment securities at the balance sheet date, We should verify
	the ownership of such investment securities that whether the securities are recorded in the name of the
	company or not. Hence we should inspect and examine the face of investment securities on hand which
	will provide the best audit evidence to determine the ownership of the investment securities.
b	In order to verify the existence of the investment securities at the balance sheet date, We should carry out
	Physical verification of the investment securities which will provide the best audit evidence to determine the
	ownership of the investment securities.