1. Auditing Investments and Cash Balances
Auditing Investments
Investing in marketable securities interfaces with 2 other cycles:
1. Dividends and interest received on investments involve cash receipts transactions as part of
the revenue cycle.
2. Purchases of securities with cash involves cash disbursements transactions as part of the
expenditure cycle.
The following accounts are used in recording short-term and long-term investing
transactions and the resulting income statement effects of those investments:
Selected Specific Audit Objectives for Short-term and Long-term Investments
Transaction Objectives
Occurrence. Recorded purchases (EOI) and sales (EO2) of investments, and investment
revenues, realized gain and losses, and unrealized gains and losses (EO3) resulted from
transactions that occurred during the period
Completeness. The effects of all investment purchases (C1), sales (C2), and income
transactions and events (C3) that occurred during the period were recorded.
Accuracy. Recorded purchases (VAI) and sales (VA2) of investment, and investment
revenues, realized gains and losses, and unrealized gains and losses (VA3) accurately
valued using GAAP and correctly journalized, summarized, and posted.
Cutoff. Recorded purchases (EO1 and C1) and sales (E02 and C2) of investments, and
investment revenues realized gains and losses, and unrealized gains and losses (EO3 and
C3) have been recorded in the correct accounting period.
Classification. All purchase (PD1) and sales (PD2) of investments, and investment
revenues, realized gains and losses, and unrealized gains and losses (PD3) have been
recorded in the proper accounts
Investments
• Understanding the Entity and Environment
• Analytical Procedures
• Inherent Risk

2. Consideration of Internal Controls – Common Documents and Records
The documents and records applicable to this cycle are:
1. Stock certificate. An engraved form showing the number of shares of stock owned by a
shareholder in a corporation. This document provides evidence for the existence or
occurrence assertion.
2. Bond certificate. An engraved form showing the number of bonds owned by a bondholder.
3. Bond indenture. A contract stating the terms of bonds issued by a corporation.
4. Broker’s advice. A document issued by a broker specifying the exchange price of investing
transactions; it is the primary source document for recording investing transactions. The
advice provides evidence for the valuation or allocation assertion.
5. Broker’s statement. A monthly statement issued by a broker specifying securities held in
safekeeping by the broker, their cost, and their fair market value at the end of the month. In
addition, the monthly statement usually summarizes any transactions that took place during
the month.
6. Books of original entry. The general journal is used to record such items as the accrual of
bond interest revenue, market adjustments under the fair value method, and income earned
under the equity method of accounting. The cash receipts journal is used to record the
proceeds from sales transactions and the receipt of interest and dividends. The voucher and
check registers are used in purchasing and paying for the cost of securities.
Functions and Related Controls
• Authorize Investment Transactions
– Purchasing securities
– Selling securities
Receive or Deliver Securities
– Receiving securities
– Safeguarding securities
– Delivering securities
– Receiving periodic income
• Record Transactions
– Recording purchases, sales, and income
– Recording market adjustments and reclassifications
– Reviewing purchases, sales, and income transactions
Settle Transactions
– Receiving cash
– Disbursing cash
– Assessing investment performance and reporting

3. Preliminary Audit Strategies for Investments
Substantive Tests of Investments
• Initial Procedures
That is, first, the auditor obtains an understanding of the entity’s business and
industry. It is important for the auditor to understand the economic drivers that allow
an entity to engage in investing activities, such as an entity’s policy for investing excess
cash, its financing activities, and its ability to generate free cash flow. Second,
agreement of the beginning investment balances with audited amounts in the prior
year’s working papers is verified. Next, the activity in investment-related accounts is
reviewed to determine the presence of any entries that are unusual in nature or
amount that should be investigated. Then, client-prepared schedules of all
investments, or additions and disposals in the current period, are checked for
mathematical accuracy and agreement with the underlying accounting records.
• Analytical Procedures
An important part of the investing cycle is determining that the financial information
subjected to audit is consistent with the auditor’s expectations. When performing
analytical procedures, the auditor should maintain an appropriate level of professional
skepticism and investigate abnormal results. If the results of analytical procedures are
consistent with the auditor’s expectations, audit strategy might be modified to reduce
the extent of details tests of transactions and balances.
• Tests of Details of Transactions

4. Tests of details of transactions may be particularly effective as an audit approach
when the entity has a low volume of transactions. These substantive tests consist of
vouching the individual debits and credits in the various investment accounts.
Auditing Cash Balances
Relationship of Cash Balances to Transaction Cycles
5 transaction cycles relate directly to general cash balances. The cycles are revenue,
expenditure, financing, investing, and personnel services. The production cycle does not have
transactions that relate directly to cash, while the investing and financing cycles both increase
and decrease cash. The revenue cycle increases, and the expenditure and personnel services
cycles, decrease cash.
Well-managed companies regularly develop cash budgets, projecting:
1. cash receipts based on anticipated collection of receivables,
2. cash disbursements for operating needs, and
3. investing and financing activities.
Substantive Tests for Cash Balances
• Initial Procedures
• Analytical Procedures
• Tests of Details of Transactions
• Perform Cash Cutoff Tests
• Cash Receipts
• Cash Disbursements
• Trace Bank Transfers
• Kiting
• Bank Transfer Schedule
• Count Cash on Hand
• Cash Counts
• Tests to Detect Lapping
• Confirm Accounts Receivable
• Make a Surprise Cash Count
• Compare Details of Cash Receipts Journal Entries with the Details of
Corresponding Daily Deposit Slips
• Tests of Details of Balances
• Confirm Bank Deposit and Loan Balances
• Confirm Other Arrangements with Banks
• Scan, Review, or Prepare Bank Reconciliations
• Obtain and Use Bank Cutoff Statements
• Tests of Details of Presentation and Disclosure