Chapter 12 - answer.doc - CHAPTER 12 SUBSTANTIVE TESTS OF...

12-1. The CPAs would accept a confirmation of the securities on hand from the
custodian in lieu of their personal inspection of the securities after they had
investigated and satisfied themselves as to the standing of the custodian. The
CPAs would probably be satisfied if they found the custodian to be a well-known,
reliable financial institution, completely independent of the client and with
resources substantially larger in amount than the securities of the CPAs’ client that
are on deposit.
12-2. The auditors can make an independent computations of dividends earned during
the year by reference to dividend record books published by investment advisory
services.
12-3. Securities owned by the client may not be on hand at the statement of financial
position because they are held by others for safekeeping, pledged as collateral for
loans, deposited as assurance of performance under contracts, or in the hands of
brokers or others for transfer.
12-4. When the inspection of securities cannot be made for two weeks after the
statement of financial position, the client at the auditors’ suggestion may instruct
the bank that the safe deposit box is not to be opened until the time of the auditors’
inspection. A letter may be obtained from the bank stating that the box has not
been opened between the statement of financial position and the auditors’ arrival.
If the securities are in the client’s office, it will be necessary to verify any security
transactions between the date of inspection and the statement of financial position
and to reconcile the results of the inspection with the securities owned at the
statement of financial position. The count of cash and other negotiable assets
should be coordinated with the inspection of securities.
12-5. Pink Corporation
(a) Instructions to be given to the assistant regarding the examination of the
securities kept in the safe deposit box include the following:
(1) A copy of the client’s record of the contents of the box should be
obtained and used in connection with the inspection of the securities.
Comparing the contents of the box and the record will provide assurance that
all securities listed in the record are on hand. (The validity of the record will
be determined by examination of the transactions pertaining to investments.)
CHAPTER
12
SUBSTANTIVE TESTS OF
INVESTMENTS

12-2
Solutions Manual to Accompany Applied Auditing, 2014 Edition
The copy of the record, after being verified, should be added to the auditors’
working papers as evidence of work performed.
(2) The bank’s record of persons entering the deposit box should be
examined to determine that only authorized persons have had access to
the box and that there was no entry to the box between December 31 and
January 11. Entry to the box between those dates may be an indication
that a security was returned to safekeeping after being “borrowed” at
year-end. The security may have been “borrowed” and used as collateral
to obtain cash to cover a shortage at December 31.