Investment Audit: Understanding, Purpose, and Procedure

An investment audit is an activity of reviewing concrete data on an investment report to ensure its accuracy. This evaluation process is necessary to prevent fraud or fraud.

Investment is an investment activity. Usually in the long run to procure complete assets or buy shares and other securities to make a profit.

Objectives of Investment Audit

Investment audits are not without purpose. The purpose of an investment audit or investment cycle audit is to test the fairness of investment reporting.

What kind of investment reporting fairness? This means in accordance with supporting evidence, namely evidence of investment transactions and proof of bookkeeping. This bookkeeping and reporting must be in accordance with accounting standards.

Aspects of investment testing or auditing are the accuracy of management assertions that include, existence or occurrence, completeness, rights and obligations, assessment or allocation, and presentation and disclosure.

Investment audit is important as a process of evaluating errors that may occur in investment activities. Examples such as:

Errors in determining investment costs
Miscalculation of investment sales profit-loss
Year-end misjudgment
Error of accounting treatment of the difference in cost with market price
Dividend income recording error
Error of recognition of interest income when there is a premium or discount on bonds
and others.

Investment Audit Planning

Common documents and records applicable to investment cycle audit planning and financing, among others:

1. Stock certificate

A printed form showing the number of shares held by shareholders in a cooperative. Evidence of assertion of existence and occurrence.

2. Bond certificate

A printed form showing the number of bonds held by bondholders.

3. Bond issuance contract

A contract that states the terms of a bond issued by a cooperative.

4. Broker advising documents

Documents issued by brokers that set the exchange price of an investment transaction.

5. Broker report

Monthly reports published by brokers detailing securities held by those brokers. Usually summarize every transaction that occurs during the month in question.

6. Journal book

General journals are used to record the posts.

7. Investment helper book

Separate additional books can be used for each different investment class if the company has a portfolio consisting of many different investments.

Examples of Questions about Investment Cycle Audits

In conducting an investment audit, the auditor may ask questions about the investment cycle audit as follows:

What type of investment do you have?

Is there an unusual investment?
What benchmarks are used to determine the value of an investment?
Who determines the classification of investments?
Does the person who calculates the investment activity have enough knowledge to do so?
Are all investment accounts reconciled (from investment reports to ledgers)?
Who is reconciling investment accounts and when?
What investment accounts were opened and closed during that period?
Who is authorized to open or close an investment account?
Who is authorized to buy and sell investments?

Is there a decrease in the value of the investment?
And other related questions.

Investment Audit Procedure

Substantive testing of investments can go through the following stages:

1. Preliminary investment audit procedure

The auditor will perform an initial investment audit procedure:

Match the initial balance of the investment account to last year's paperwork
Review all investment transactions and investment income, as well as identify unusual transactions and account balances. Both from the number and the source of the transaction
Match the data in the list with the data in the help book and ledger.

2. Analytical procedures

Analytical procedures are an important part of the investment audit process. It consists of an evaluation of financial information made by studying the relationship between financial data with other financial data, or between financial data and non-financial data.

Perform ratio calculations, such as short-term investments with current assets, long-term investments with total assets, and income ratios per investment classification
Compare the results of the ratio calculation with the comparison numbers. For example, the ratio per budget, last year's ratio, or the industry average ratio (if any).

3. Testing transaction details

Perform tracking, both for debit and credit transactions that include:

Debit or credit transaction acquisition or sale of investments to advising brokers and proof of cash out or cash in, as well as authorization of minutes of board of directors meeting
Debit or credit investment accounts and market adjustments to documents of increase or decrease in market prices
Recalculate for stock investments with equity methods.

4. Test account balance details

As for testing account balance details, the stages include:

Inspection of evidence of investment ownership
Confirmation for investments that serve as debt guarantees
Recalculate investment income, such as investment transaction profit-loss, dividends, income and interest acceptance of bond investments, premium or discounted amortization lists, or verification of investment income recorded by equity methods
Also determine the classification of investments. For example, short-term or long-term by:
Verify investment policy documents
Obtain a management affidavit on investment classification

Obtain supporting evidence of investment market value per balance sheet date, through investment market value information, investment fair value estimates, feasibility of investment valuation models.

5. Presentation and disclosure

In presentation and disclosure, steps to take:

Compare presentation with applicable accounting standards
Make sure that the investment balance has been identified and properly classified in the financial statements
Ensure the adequacy of disclosures about the basis of investment valuation, the realization component and unrealized profits or losses, as well as investments that are used as debt guarantees.

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