Substantive Testing

Objective

Substantive Procedures

Financial Statement Assertions

Investments reflected in the statement of financial position include securities on hand and in the custody of third parties, and physical evidence of ownership exists

Inspect securities and investments.

Obtain direct confirmation from independent custodians.

Existence or Occurrence

Rights or obligations

Completeness

Investment transactions and related income or loss are recorded correctly as to account, amount, and period

Obtain a schedule of investments showing reconciliation from beginning to end of period, including income or loss from investments, test the schedule, and reconcile to the general ledger.

Existence of Occurrence

Completeness

Accuracy, Valuation, or Allocation

Cutoff

Understandability, Classification, Presentation, and Disclosure

Investments are properly classified and presented in the financial statements in accordance with the applicable financial reporting framework. Disclosures are clearly expressed and are at appropriate amounts.

Determine and test basis for classification of investments.

Existence or Occurrence

Completeness

Accuracy, Valuation, or Allocation
Understandability, Classification, Presentation, and Disclosure

Investments in debt and equity are carried at cost or market value, as appropriate.

Obtain management’s representation as to whether investments should be classified as “trading,” “available for-sale,” or “held-to-maturity.”

Corroborate management’s representations as to whether investments are trading or available-for-sale through review of historical practice. Review the minutes of board of directors (or committee) meetings to determine management’s investment objectives and intent.

If debt securities are classified as “held-to maturity,” evaluate whether past history supports that assertion, and consider whether the entity has the ability to carry investments until they mature.

Review and inquire about whether any investments are pledged as collateral.

Evaluate whether an “other-than-temporary” impairment in value has occurred.

Accuracy, Valuation, or Allocation

Understandability, Classification, Presentation, and Disclosure

Recorded and disclosed fair values for investments or derivatives are appropriate.

Evaluate whether the fair value measurements and disclosures are in accordance with the applicable financial reporting framework (e.g., U.S. GAAP).

Understand the entity’s process for determining fair value measurements and disclosures and the pertinent controls.

Evaluate whether the valuation model used by the entity is appropriate under the circumstances.

Evaluate whether management’s assumptions are reasonable and based on, and not inconsistent with, current market data.

Consider the extent to which reliance on historical information by management in the development of an assumption is justified.

Evaluate whether the method used by the entity for determining fair value measurements is applied consistently, and when the entity does so, consider whether it is appropriate for the method to be applied consistently.

Consider whether there is a need to engage a specialist and, if so:
Determine whether the specialist is qualified;
Obtain an understanding of the methods and assumptions used by the specialist;
Make appropriate tests of data provided to the specialist, taking into account the auditor’s assessment of control risk; and
Evaluate whether the specialist’s findings support the related assertions in the financial statements.
Test the entity’s fair value measurements and disclosures, including the evaluation of the significant assumptions used by management, the valuation model, and the underlying data.

Determine if an “other-than-temporary” impairment in value has occurred.

Obtain written representations from management regarding (a) the reasonableness of significant assumptions and (b) whether investments are properly classified based on management’s ability and intent.

Accuracy, Valuation, or Allocation

Understandability, Classification, Presentation, and Disclosure

Carrying amount for investments classified as “available-for-sale,” “trading,” or “held-to-maturity” are accurate and properly classified.

Obtain and test the entity's amortization schedule.

Evaluate whether an “other-than-temporary” impairment in value has occurred.

Accuracy, Valuation, or Allocation

Understandability, Classification, Presentation, and Disclosure

Derivatives are identified, measured, recorded, and presented in accordance with the applicable financial reporting framework.

Confirm significant terms with the counterparty to the derivative.

Inspect underlying supporting documentation (e.g., contracts, agreements, and financial instruments).

Review minutes of board of directors (or committee) meetings. Test recorded fair values.

Existence or Occurrence

Rights or Obligations

Completeness

Rights and obligations

Accuracy, Valuation, or Allocation

Cutoff

Understandability, Classification, Presentation, and Disclosure