10-1.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.10-2.The auditors can make an independent computations of dividends earned during the year by reference to dividend record books published by investment advisory services.10-3.Securities owned by the client may not be on hand at the balance sheet date 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.10-4.When the inspection of securities cannot be made for two weeks after the balance sheet date, 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 balance sheet date 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 balance sheet date and to reconcile the results of the inspection with the securities owned at the balance sheet date. The count of cash and other negotiable assets should be coordinated with the inspection of securities.10-5.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 CHAPTER10SUBSTANTIVE TESTS OF INVESTMENTS
10-2 Solutions Manual to Accompany Applied Auditing, 2006 Editionto investments.) 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.