IIII

S.K SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE

VIDYAVIHAR (EAST), MUMBAI - 400077

PROJECT ON:
INVESTMENT AUDITING

MASTERS OF COMMERCE
(ACCOUNTANCY)

PART 2 (SEM-3)
(2016-2017)

Submitted:
In Partial Fulfillment of the requirements
For the Award of the Degree of
MASTERS OF COMMERCE
(ACCOUNTANCY)
BY
POOJA .B. PANDA
ROLL NO : 40

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 DECLARATION

I POOJA PANDA student of class in Mcom (ACCOUNTANCY) PART 2

(SEM-3), ROLL NO-40, academic year 2016-2017 Studying at S.K.
SOMAIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE, hereby
declare that the work done on the project Entitled INVESTMENT
AUDITING is true and original and any Reference used in this project is duly
acknowledged.

DATE:
PLACE: MUMBAI --------------------
SIGNATURE OF STUDENT
(POOJA PANDA)

CERTIFICATE
2
This is to certify that MISS POOJA PANDA , studying in Mcom
(ACCOUNTANCY) PART 2 (SEM-3), ROLL NO. 40 , academic year 2016
-2017 at S.K.SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE
has completed the project on INVESTMENT AUDITING under the
guidance of Proff. VINAYAK JOSHI
The information submitted herein is true and original to the best of my
knowledge.

____________________ ___________________
Proff. VINAYAK JOSHI DR. SANGEETA
[PROJECT GUIDE] [PRINCIPAL]

____________________ ___________________
EXTERNAL EXAMINER MR.
[CO-ORDINATOR]

DECLARATION BY GUIDE

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 I, the undersigned Proff. VINAYAK JOSHI has guided MISS POOJA
PANDA , ROLL NO. 40 for her project. He has completed the project on
INVESTMENT AUDITING successfully.

I, hereby declare that information provided in this project is true as per

the best of my knowledge.

Thank You,
Yours Faithfully,

(Proff. VINAYAK JOSHI)

Project Guide

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 ACKNOWLEDGEMENT

It gives me immense pleasure to present a project on INVESTMENT

AUDITING As a M.com student it is a great honour to undergo a project work
at an graduate level and I would like to thank the University of Mumbai for
giving me such a golden opportunity.

I am eternally grateful to almighty god for giving me the spirit to put in my best
effort towards my project. I owe my sincere gratitude to DR. SANGEETA
KOHLI, the principal of our college. I am also thankful to my project guide
MR VINAYAK JOSHI for his valuable guidance and for providing an insight
to the subject.

I am also obliged to the library staff of S.K..Somaiya College for the numerous
books made me available for the handy reference.

Although, I have taken every care to check mistake and misprint yet it is
difficult to claim perfection. Any error, omission and suggestion brought to my
notice, will be thankfully acknowledged by me.

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 INDEX
SR.NO TOPIC PAGE.NO
1 INTRODUCTION TO 7
AUDITING

2 INVESTMENT 16

3 PORTFOLIO INVESTMENT 25

4 DIFFERENT TYPES OF 27
INVESTMENT

5 GOVERNMENT BONDS 31

6 AUDIT INVESTMENT 32

7 GUIDANCE NOTE ON 37
AUDIT INVESTMENT

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 INTRODUCTION
What is an 'Audit'
An audit is an objective examination and evaluation of the financial
statements of an organization to make sure that the records are a fair and
accurate representation of the transactions they claim to represent. It can be
done internally by employees of the organization, or externally by an outside
firm.

The IRS can perform audits to verify the accuracy of a taxpayers returns or
other transactions. When an audit is being preformed by the IRS, it usually
carries a negative connotation and is seen as evidence of some type of
wrongdoing by the taxpayer.

BREAKING DOWN 'Audit'

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Audits preformed by outside parties on private companies can be extremely
helpful in removing any bias when it comes to the state of a company's
financials. Audits look for what can be called a "material error" in statements
on any specific object. They help provide stakeholders with a sense of
accuracy when regarding the state of the subject being audited and can help
enable them to make better, more informed decisions regarding the subject
being audited. When audits are performed by third parties, the opinion on
whatever is being audited (a business books, an organization as a whole or a
system) can be candid and honest without it effecting daily work relationships.

Most all companies receive an audit once a year, while even larger companies
can receive audits monthly. For some companies, audits are a legal
requirement due to the compelling incentives to intentionally misstate financial
information in an attempt to commit fraud. For some publicly traded
companies, auditors are used as a resource to evaluate the effectiveness of
internal controls on financial reports.

Types of Auditors
When it comes to external auditing, there are two different categories of
auditors. First, there is an external or statutory auditor who works
independently to evaluate financial reporting, and then there are external cost
auditors who evaluate cost statements and sheets to see if theyre free of
misstatements or fraud. Both of these types of auditors follow a set of
standards different from that of the company or organization hiring them to do
the work.

Internal auditors, as the name implies, are employed by the company or

organization for whom they are performing the audit. To the best of their ability,
internal auditors provide information to the board, managers, and other
stakeholders on the accuracy of their books and the efficacy of their internal
systems.

Consultant auditors, while not working internally, use the standards of the
company they are auditing as opposed to a separate set of standards. These
types of auditors are used when an organization doesnt have the resources to
audit certain parts of their own operations.

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Oversight, Rules and Regulation
In the United States as in many other countries, an audit has to meet a
general set of accepted standards as established by their respective governing
bodies.

Standards for external audits, called the Generally Accepted Auditing

Standards (GAAS) are set out by the American Institute of Certified Public
Accountants. A separate set of International standards, called the International
Standards on Auditing were set up by the International Auditing and
Assurance Board.

Rules for audits of public companies are made by the PCAOB, the Public
Company Accounting Oversight Board established in 2002.

Trading Center

Internal Audit
An internal audit is the examination, monitoring and analysis of activities
related to a company's operations, including its business structure, employee
behavior and information systems. Internal audit regulations, such as the
Sarbanes-Oxley Act of 2002, have increased corporate requirements for
performing internal audits. Audits are important components of a company's
risk management as they help to identify issues before they become
substantial problems, such as attempts to steal intellectual property.

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BREAKING DOWN 'Internal Audit'
A daily, weekly, monthly or annual internal audit assesses the effectiveness of
a companys internal control system and helps uncover evidence of fraud,
waste or abuse. Some departments may be audited more frequently than
others. For example, a manufacturing process may need daily audits for
quality control purposes, while the human resources department may need an
annual audit of records and processes.
Scheduling audits on a calendar helps ensure they are performed consistently.
Departments should be given notice so they can have the required
documentation and materials available for the auditor. A surprise audit may be
conducted if suspicion of unethical or illegal activity exists.

Internal Audit Procedure

An internal audit begins by an auditor assessing current processes and
procedures. The auditor then analyzes and compares the results to internal
control objectives. He determines whether the results comply with internal
policies and procedures as well as state and federal laws. Finally, the auditor
compiles and presents an audit report to the business owner.

Assessment Techniques
Assessment techniques ensure an internal auditor completely understands
internal control procedures and determines whether employees comply with
internal control directives. An auditor avoids disrupting the daily workflow by
beginning with indirect assessment techniques. For example, he may review
flowcharts, manuals, departmental control policies or other existing
documentation, or he may trace specific audit trails from start to finish. He may
conduct one-on-one interviews and process observations with staff if
document reviews or audit trails do not fully answer all of his questions.

Analysis Techniques
Substantive procedures such as transaction matching, physical inventory
count, audit trail calculations and calculating already-reconciled financial
statements help determine whether work products contain data entry errors or
whether financial statements contain misstatements. Analysis techniques may
test random data or target specific data if an auditor believes an internal
control process needs work.

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Reporting Procedures
Internal audit reporting always includes a formal report and may include a
preliminary or memo-style interim report. An interim report typically includes
sensitive or significant results the auditor feels are pertinent for immediate
sharing with the business owner. The final report is more formal than the
interim report. The final report includes a summary of the procedures and
techniques used for completing the audit, a description of audit findings and
suggestions for improvements of internal controls and control procedures.

Audit Risk
What is 'Audit Risk'
Audit risk is the risk that the financial statements are materially incorrect, even
though the audit opinion states that the financial reports are free of any
material misstatements. The two components of audit risk are the risk of
material misstatement and detection risk. Because creditors, investors and
other stakeholders rely on the financial statements, audit risk may carry legal
liability for a CPA firm performing audit work.

!--break--An auditor provides a written opinion as to whether the financial

statements are free of material misstatement. An audit requires a CPA firm to
make inquiries and perform testwork on the financial statements. Auditing
firms carry malpractice insurance to manage audit risk and the potential legal
liability.

Factoring in CPA Firms

Large public companies typically engage one of the Big Four accounting firms
PricewaterhouseCoopers, KPMG, Ernst & Young or Deloitte Touche
Tohmatsu to perform an audit. Many companies hire staff to perform internal
audits, and external audit firms may rely on some of the internal work
performed. The Big Four was previously the Big Five, but Arthur Andersen lost
the ability to perform audit work after being indicted on counts of obstruction of
justice for its role in the Enron scandal. According to a 2008 Government
Accountability Office (GAO) report, the Big Four firms audit 98% of U.S.

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companies with annual revenues over $1 billion. Smaller companies are more
likely to engage a mid-range firm, such as Grant Thornton.

The Differences Between Risks

Assume, for example, that a large sporting goods store needs an audit
performed, and that a CPA firm is assessing the risk of auditing the store's
inventory. The risk of material misstatement is the risk that the financial reports
are materially incorrect before the audit is performed. In this case, the word
"material" refers to a dollar amount that is large enough to change the opinion
of a financial statement reader, and the percentage or dollar amount is
subjective. If the sporting goods store's inventory balance of $1 million is
incorrect by $100,000, a stakeholder reading the financial statements may
consider that a material amount.

Detection risk is the risk that the auditors procedures do not detect a material
misstatement. For example, an auditor needs to perform a physical count of
inventory and compare the results to the accounting records, and this work is
performed to prove the existence of inventory. If the auditor's inventory count
procedures are weak, the detection risk is higher.

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 What an Auditor Does and Doesnt Do
In the past, companies often relied on accountants from their audit firms to
assist in reconciling accounts, preparing the adjusting journal entries and
writing financial statements.

Small companies, in particular, often lacked the level of accounting

sophistication necessary to carry out these tasks. Relying on the audit firm often
made sense from the perspective of efficiency and cost containment.

But an increased focus on auditor independence has come about during the last
decade in new requirements by the American Institute of CPAs and a host of
related regulatory guidance issued by the Securities and Exchange Commission,
the General Accounting Office and the U.S. Department of Labor.

The standards generally restrict the nonattest services such as tax or

consulting services that auditors may perform and the circumstances under
which those services may be allowed. The increased regulations serve to muddy
an already often-misunderstood set of expectations.

WHAT AN AUDITOR DO
The outside, independent auditor is engaged to render an opinion on whether a
companys financial statements are presented fairly, in all material respects, in
accordance with financial reporting framework. The audit provides users such
as lenders and investors with an enhanced degree of confidence in the financial
statements. An audit conducted in accordance with GAAS and relevant ethical
requirements enables the auditor to form that opinion.

To form the opinion, the auditor gathers appropriate and sufficient evidence and
observes, tests, compares and confirms until gaining reasonable assurance. The
auditor then forms an opinion of whether the financial statements are free of
material misstatement, whether due to fraud or error.

Some of the more important auditing procedures include:

Inquiring of management and others to gain an understanding of the

organization itself, its operations, financial reporting, and known fraud or error

Evaluating and understanding the internal control system

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 Performing analytical procedures on expected or unexpected variances in
account balances or classes of transactions

Testing documentation supporting account balances or classes of transactions

Observing the physical inventory count

Confirming accounts receivable and other accounts with a third party

At the completion of the audit, the auditor may also offer objective advice for
improving financial reporting and internal controls to maximize a companys
performance and efficiency.

WHAT AN AUDITOR DONT DO

For a clear picture of the role of external auditors, it helps to understand what
you should not expect auditors to do. The emphasis is on independent.

First and foremost, auditors do not take responsibility for the financial
statements on which they form an opinion. The responsibility for financial
statement presentation lies squarely in the hands of the company being audited.

Auditors are not a part of management, which means the auditor will not:

Authorize, execute or consummate transactions on behalf of a client

Prepare or make changes to source documents

Assume custody of client assets, including maintenance of bank accounts

Establish or maintain internal controls, including the performance of ongoing

monitoring activities for a client

Supervise client employees performing normal recurring activities

Report to the board of directors on behalf of management

Serve as a clients stock or escrow agent or general counsel

Sign payroll tax returns on behalf of a client

Approve vendor invoices for payment

Design a clients financial management system or make modifications to

source code underlying that system

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 Hire or terminate employees

This list is not all-inclusive. But, in short, the auditor may not assume the role
and duties of management.

In practical terms, there are a number of tasks you should not expect your
auditor to perform.

Analyze or reconcile accounts

Close the books

Locate invoices, etc., for testing

Prepare confirmations for mailing

Select accounting policies or procedures

Prepare financial statements or footnote disclosures

Determine estimates included in financial statements

Determine restrictions of assets

Establish value of assets and liabilities

Maintain client permanent records, including loan documents, leases,

contracts and other legal documents

Prepare or maintain minutes of board of directors meetings

Establish account coding or classifications

Determine retirement plan contributions

Implement corrective action plans

Prepare an entity for audit

Your external auditor may perform some of these duties under guidelines of the
American Institute of CPAs, Department of Labor, Government Accountability
Office, Securities and Exchange Commission or Public Company Accounting
Oversight Board. However, these same guidelines may preclude the auditor
from performing some of these functions.

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Managements responsibilities in an audit

The words, The financial statements are the responsibility of management,

appear prominently in an auditors communications, including the audit report.

Managements responsibility is the underlying foundation on which audits are

conducted. Simply put, without management having responsibility for the
financial statements, the demarcation line that determines the auditors
independence and objectivity regarding the client and the audit engagement
would not be as clear.

It is important for a companys management to understand exactly what an audit

is and what an audit does and does not do. The auditors responsibility is to
express an independent, objective opinion on the financial statements of a
company. This opinion is given in accordance with auditing standards that
require the auditors to plan certain procedures and report on the results of the
audit, while considering the representations, assertions and responsibility of
management for the financial statements.

As one of their required procedures, auditors ask management to communicate

managements responsibility for the financial statements to the auditor in a
representation letter. The auditor concludes the engagement by using those same
words regarding managements responsibility in the first paragraph of the
auditors report.

Auditors cannot require management to do anything or to make any

representation. However, to conclude the audit with the hope of a clean
unqualified opinion issued by the auditor, management has to assume the
responsibility for the financial statements.

Auditing standards are very clear that management has the following
responsibilities fundamental to the conduct of an audit:

1. To prepare and present the financial statements in accordance with an

applicable financial reporting framework, including the design, implementation
and maintenance of internal controls relevant to the preparation and presentation
of financial statements that are free from material misstatements, whether from
error or fraud

2. To provide the auditor with the following information:

All records, documentation and other matters relevant to the preparation and
presentation of the financial statements

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 Any additional information the auditor may request from management

Unrestricted access to those within the organization if the auditor determines

it necessary to obtain audit evidence objectivity.

It is not uncommon for the auditor to make suggestions about the form and
content of the financial statements, or even assist management by drafting them,
in whole or in part, based on information provided by management. In those
situations, managements responsibility for the financial statements does not
diminish or change.

INVESTMENTS
In the financial industry, there are two concepts that form the basis of most
transactional activities. One is savings and the other is investments. There is a
huge overlap between the two concepts though, it terms of execution.

Investment in terms of financial context, means any money that is spent today in
the hope of financial benefits that may be reaped in a future time frame. Any
investment is the act of buying or creating assets with an expectation that the
same would yield interest earnings or dividend or capital appreciation or any
other return that is profitable as compared to the money put in initially. Almost
all investments are differentiated from other kinds of transactions based on the
aim of the money spent. Money spent on making investments is primarily with
the aim of obtaining some sort of return in a specific period of time.

A lot of times people confuse savings with investments. Savings and investment
are different from each other in their approach of utilizing the money involved.
While saving may be understood as a passive way of accumulating wealth,
investment can be seen as a more aggressive way of securing returns. Mostly,
under savings, customers avail a savings account and stash away cash in that
account. This cash can be used as and when required by the account holder.

Investments made in the finance industry can be divided into two distinct types
namely, Traditional and Alternative. Let us look into each of these types one by
one and see what investment categories fall into which type.

Traditional Investments

Investing in well-known financial products falls into the category of traditional

investments. These include bonds, shares, real estate etc. These are categories
which are quite popular among investors as active investment strategies to make
your money grow. Following are the investment products that fall under the
category of traditional investment.
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 Bonds

A Bond can be understood as an IOU which is issued by an issuer (borrower)

and to a lender. Generally, bonds are instruments used by public and private
sector enterprises to raise huge sums of money which any bank is incapable of
lending. These bonds are then issued in the public market by the borrowing
entity and are bought by lenders for specific amounts of money. Thousands of
lenders then come together to lend the required amount and the borrowing
organization is able to raise capital for its operational or growth purposes.

However, since money is being lent to the issuer of bonds, there is also an
interest component involved that is paid back to the investor in turn for his/her
money. This interest is paid at a predetermined rate and for a specific period
of time. Bonds fall under the category of fixed income securities since the
interest on these can be exactly calculated for the time for which the bond is
held. Bonds fall under the debt category and are therefore, comparatively
safer financial instruments to invest in. However, with all financial tools risk
is inversely proportional to returns and as such the low-risk attribute of this
tool makes it a low return instrument as well.

Stocks

Stocks or equity are shares that are issued by companies and are bought by the
general public. This offers an avenue to companies to raise funds. Stocks
entitle a customer ownership of a company. Shares, stocks and equity all
imply the same thing. Shares are one of the most popular investment avenues
in the world. This is because the returns offered by stocks is generally higher
than any other financial instrument. However, to balance out the high return
associated with stocks, the risk associated with these products is also quite
high.

Any business may issues different types of shares based on the financial
urgency and need. In exchange for the money, shareholders are issued Stock
certificates.

Stocks are mostly divided into two basic types, common stocks and preferred
stocks.

Small saving schemes

Small savings is another popular savings tool in the Indian financial market.
The name itself suggests that these tools are meant for saving money in small
amounts. The idea behind this financial tool is to enable the habit of saving in

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 people from almost all economic sections. Some of the most common small
savings tools are Sukanya Samriddhi Scheme, EPF (Employees Provident
Fund), NPS (National Pension Scheme, Kisan Vikas Patra, Personal Provident
Fund (PPF) etc. Almost all small savings schemes are initiated and facilitated
by the government so as to enhance the spread and penetration of savings
schemes in the country. Let us look into some of the most prominent schemes
out of these.

Employees Provident Fund

Employees Provident Fund is another small savings scheme that is primarily

offered by your employer. This includes salaried individuals of both private
and public organizations. Any company with a workforce of more than 20
employees is mandated to register for the EPF scheme. Around 12% each
month is deducted from the salary and contributed towards the EPF account
of an employee. This EPF account is maintained by the Employees Provident
Fund Organization, commonly known as the EPFO. The amount deposited
towards EPF is eligible for tax exemption under section 80C of the Income
Tax Act.

Sukanya Samriddhi Scheme

Sukanya Samriddhi Yojana is a special scheme which has been launched by

the central government to facilitate the financial wellbeing of girl child in the
country. This scheme can be availed by parents or legal guardian of a girl
child and an amount as low as Rs.1000 per annum can be deposited under the
scheme. The account matures only after the girl child reaches the age of 21.
Premature withdrawal is allowed only after the girl reaches the age of 18
years and has financial need pertaining to wedding or education.

National Pension Scheme

National pension Scheme is one of the most popular schemes for ensuring a
regular pension amount to individuals working in both the private and the
public sector. NPS is offered to individuals either as part of their corporate
perks or is availed by individuals on their own. The amount set aside
towards NPS is eligible for tax rebate under section 80C of the Income Tax
Act. The scheme offers withdrawal of deposited amount only once the
account holder reaches the age of 60 years. The corpus withdrawn on maturity
is absolutely tax-free.

Mutual Funds

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 Mutual funds are financial instruments that are professionally managed and
that invest money on behalf of any investor, in different securities. These
mutual funds are classified into various types based on the type of securities
that they invest in. Some of the most popular mutual fund types are balanced
funds, stock funds, open-ended funds etc. These funds are classified based on
their percentage allocation in different securities. So, an equity fund invests
purely is equity and is a high risk high return product while a debt fund
invests purely in debt and money market instruments and is hence a low risk
low return financial product.

Fixed Deposits

As the name itself indicates, fixed deposits are financial instruments that are
one of the oldest and safest ways to save money. These are not necessarily
active investment tools, but are rather a passive way to save and earn returns.
A fixed amount of money is kept aside with a financial institution for a fixed
number of days or months or years. In turn, interest is earned on this money.
The rate of interest differs with the deposit tenure and also with the banking
entity.

Similar to fixed deposit is the concept of recurring deposit. However, the

only point of difference in the two investment tools is that while a lump-sum
amount needs to be fixed in case of fixed deposit, a smaller amount needs to
be deposited at regular intervals in case of a recurring deposit. Hence,
customers who do not have a large chunk of money to fix in a single go can
opt for a recurring deposit wherein money is usually deposited monthly for a
specific deposit tenure. The rate of interest earned on recurring deposit is
similar and comparable to that earned on fixed deposit.

Real Estate

Property rates are soaring with every passing day which has made real estate a
hot investment avenue for investors. Buying, selling and leasing of property
offers substantial returns to investors. Appreciation of property makes real
estate a good investment tool. With urbanization gaining ground rapidly, real
estate prices in certain major cities like Mumbai, Bangalore, New Delhi, are
skyrocketing. This has made these places hot hubs for real estate investors.
Most investors take loans from banks to purchase real estate and then lease
out or sell the same property to enjoy returns offered due to appreciation in
price of the property.

Alternative Investments

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 Alternative Investments are those that are not regular investments like stocks,
bonds etc. These are investments made in order to acquire jewelry, precious
metals etc. which are expected to yield returns in future. Hedge funds, some real
estate types, venture capital and derivatives also form a part of alternative
investment. Alternative investments are so called due to their non-traditional as
well as complex nature. Also, another distinguishing feature of alternative
investments is relatively low liquidity and well as very high minimum
investment limits.

While a common investor may not access alternative investments like hedge
funds or derivatives due to their complex nature, others like gold and real estate
are available to even the common man. Let us look into some of the most
prominent alternative investment tools known to investors.

Hedge Funds

These can be understood as a professionally managed private investment

company or partnership structure. Techniques to manage the fund can be those
that are not commonly allowed for SEC regulated companies. Hedge funds
invest in both financial derivatives and/or publicly traded securities. These are
popular as an alternative investment tool owing to their high leverage and
high returns. However, they are characterized by high fees as well as low
liquidity. It is seen that managers of hedge funds generally have a personal
stake in the fund.

Private Equity

Private equity is trading in shares of an operating company that is not publicly

listed and whose shares are not available on the stock market. Institutional
investors employ various strategies to indulge in private equity trading.
Private equity is popular since it offers diversification of financial portfolio by
allowing investment in avenues that are not tightly coupled to normal
investments.

Venture Capital

Venture Capital is one of the most popular investment strategies currently

being deployed by investors in the Indian start-up scene. The idea behind this
investment strategy is to invest substantial capital in a budding company in
return for stocks of the same. This is done with companies who are either in
their initiation phase or in their growth phase. Venture capitalism is generally

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 based on ideas that find substance with the investors or any new technology
that the investors feel might take the market by storm in future.

Managed Futures

This type alternative investment involves managers using futures also as part
of their investment portfolio. Managed futures are a great tool to offer
portfolio diversification and therefore are a great alternative to minimize risk
and maximize returns. In general, a managed futures account will have
sufficient exposure to different markets like energy, agriculture, commodities,
currency etc.

Structured Products

Structured products are alternative investment tools that generally combine

two or more financial instruments to make a packaged investment strategy in
a single product. Most often, derivatives are combined with securities or with
other derivatives. Structured products have a fixed maturity date like bonds.
These offer a convenient strategy to implement a complex investment strategy
across various financial products.

Collectible items

Collecting artifacts that have substantial value and those that have historical
and artistic significance is one of the most difficult types of alternative
investments. This requires knowledge of the article that you are purchasing.
Mostly, collectibles like stamps, jewelry, boats, planes, art works etc. tend to
appreciate in value and are considered good and profitable assets to own. The
value of artifacts is generally expected to appreciate and keep pace with
inflation and hence collectibles make a good form of alternative investment.

There are a few more alternative investment instruments available in the

financial world. However, their use is limited since these are more complex
products and are hence not considered by the common investor. Seasoned
investors and professional investors tend to consider these alternative
investment strategies to increase wealth.

Why is investment important

Investment is one of the most important aspects of financial planning. The aim
is to make sure that the money earned by you does not lie around being
unproductive. It is a good and profitable idea to make money from any extra

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 cash that a person might have. Investing in various financial products lends
growth to any financial portfolio. One thing that is absolutely clear is that any
amount of money is sure to appear less with each passing day. This is because
the value of say Rs.1000 will not be the same 5 years down the line as it is
today. Same holds true for the value of Rs.100 10 years ago as compared to its
value today. Hence, it is important to understand that saving alone is not enough
for future financial goals. Any investor or common man needs to ensure that his
or her money grows as well. Investment can be defined as any activity that
involves using money in a way which offers returns in future. Mentioned below
are some of the most important reasons for investing money.

Investing money in various financial avenues ensures that your money

grows instead of just lying there in your bank account
Investments yield returns which take care of emergency expenses such as
medical expenditure etc.
Investments are a good way to earn income from your accumulated
wealth. For example, earning rent from a real estate investment or earning
dividends from stock market investment
Tax minimization is a secondary objective that can be achieved by
investing your money in various investment tools
Fighting inflation can be one of the key reasons to ensure that your
money grows. The value attached to a quantum of money depreciates with
rising inflation. The effect of inflation in lowering the value of your assets can
be tamed by investing and generating returns on your corpus
Investments lead to a certain amount of corpus that plays a vital role in
providing financial security to your loved ones
Distant financial goals, both log-term as well as short-term can be
planned and fulfilled by making intelligent and relevant investments
Various examples of investment

As discussed in the sections above, there are two forms of investments that
exist. One is traditional investment while the other is alternative investment.
Based on this particular categorization, following are some of the most popular
financial tools that fall under each category of investment.

Traditional Investment

Stocks

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 Bonds
Deposits

Alternative Investment

Real Estate
Private Equity
Collectibles (Valuables)
o Gold jewelry, bullions, coins etc.(Check for Gold Rates Place
Wise)
o Silver jewelry, coins etc.(Check for Silver Rates Place Wise)
o Other precious metals and gems
o Antique Collectibles
o Paintings
Hedge Funds
Structured Products

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HOW TO TEST INVESTMENTS

As an auditor you have to test security investments such as your clients stocks
and bonds. Testing investments during an audit is no different from testing any
other financial account, such as cash. You must make sure that the amounts
shown as investment assets arent materially misstated and that all income and
changes in an investments value are properly recorded.

First you have to confirm your audit clients security investments:

If your client uses a custodian an outside agent who safeguards the

securities you request a confirmation. The confirmation should address
what types of securities the company owns. If the securities include stock,
you must find out how many shares the company owns and the stocks
fair market value (a best estimate of the price the stock would fetch if it
were sold that day). Receiving confirmation from the clients investment
custodian is typically adequate to verify the existence of the investment.

If your client maintains custody of its investments itself, you confirm

their existence by physically examining the securities. Its always a good
idea to check the minutes of the corporate meetings to confirm the
authorization to purchase each investment.

You should also confirm that all investment-related interest and dividend
income has hit the income statement as revenue. On the flip side, if you see any
investment income hitting the income statement that cant be matched to an
investment, that situation indicates that you have a completeness issue all
investments arent reflecting on the balance sheet.

To test a clients investments, you mostly look at how a security is categorized

and whether its presented on the clients income statement or balance sheet.

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The three categories of debt and equity securities are held-to-maturity, trading,
and available-for-sale. While checking out the classification, you also audit the
value of an investment and how that value is determined.

Heres how your client should be treating and valuing each category of
investments:

Held-to-maturity: These are debt securities such as bonds that your

client intends to hold until they come due. Held-to-maturity securities are
held at their amortized cost, which means any difference paid for the
bond versus its face value is recorded as a premium or discount. This is
an advanced accounting topic, so dust off your generally accepted
accounting principles (GAAP) guide if your audit client has these types
of securities to make sure its recording the transactions properly.

Trading: Debt and equity securities that your client purchases to sell in
the short term to make a profit are recorded on the balance sheet initially
at cost. Then, as their value fluctuates, theyre recorded at fair market
value with any gain or loss going to the income statement.

Available-for-sale: A catch-all category, these debt and equity

investments are defined by what theyre not: They dont fall into either
the held-to-maturity or trading category. Theyre initially recorded at their
cost, and then your client should be recording them at fair market value
with any gains or losses reported in shareholders equity.

Part of your testing should be to confirm the beginning investments balances to

the prior year financial statements. So if the client is on a calendar year-end, you
look at the value of the investments as of December 31 and check to make sure
the same values are reflected as of January 1. If the company is a continuing

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client, this information will be in your workpapers. Otherwise, check out the
companys prior year financial statements.

Portfolio Investment
What is a 'Portfolio Investment'

A portfolio investment is a hands-off or passive investment of securities in a

portfolio, and it is made with the expectation of earning a return. This expected
return is directly correlated with the investment's expected risk. Portfolio
investment is distinct from direct investment, which involves taking a sizable
stake in a target company and possibly being involved with its day-to-day
management.

BREAKING DOWN 'Portfolio Investment'

Portfolio investments can span a wide range of asset classes such as
stocks, government bonds, corporate bonds, Treasury bills, real estate
investment trusts (REITs), exchange-traded funds (ETFs), mutual funds
and certificates of deposit. Portfolio investments can also include options,
derivatives such as warrants and futures, and physical investments such as
commodities, real estate, land and timber.

The composition of investments in a portfolio depends on a number of factors.

Some of the most important include the investors risk tolerance, investment
horizon and amount invested. For a young investor with limited funds, mutual
funds or exchange-traded funds may be appropriate portfolio investments. For a
high net worth individual, portfolio investments may include stocks, bonds,
commodities and rental properties.

Portfolio investments for the largest institutional investors such as pension

funds and sovereign funds include a significant proportion of infrastructure
assets like bridges and toll roads. Portfolio investments for institutional
investors generally need to have very long lives so that the duration of their
assets and liabilities match.

Impact of Risk Tolerance, Age and Time Horizon

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The investments that are made in a portfolio are dependent on the investor's
individual circumstances. Those with a greater risk tolerance may favor
investments in stocks, real estate, international securities and options, while
more conservative investors may opt for government bonds and the stocks of
large well-known companies.

These risk preferences should also be weighed against the investor's goals and
time horizon. A young person saving for retirement may have 30 years or more
to save but isn't comfortable with the risks of the stock market. This individual
may want to favor a more conservative mix of portfolio investments despite the
long time horizon. Conversely, individuals with high risk tolerances may want
to avoid large allocations to riskier growth stocks if they are nearing retirement
age. A progression to a portfolio of more conservative investments is generally
recommended as an investment goal nears.

Portfolio Investments for Retirement

Investors saving for retirement should focus on a diversified mix of low-cost

investments for their portfolios. Index funds have become popular in individual
retirement accounts (IRAs) and 401(k) accounts due to their broad exposure to a
number of asset classes at a minimum expense level. These types of funds make
ideal core holdings in retirement portfolios. Those wishing to take a more
hands-on approach may tweak portfolio allocations by adding additional asset
classes such as real estate, private equity and individual stocks and bonds to
their portfolio mix.

Trading Center
Portfolio Manager

A portfolio manager is a person or group of people responsible for investing a

mutual, exchange-traded or closed-end fund's assets, implementing
its investment strategy and managing day-to-day portfolio trading. A portfolio
manager is one of the most important factors to consider when looking
at fund investing. Portfolio management can be active or passive, and historical
performance records indicate that only a minority of active fund
managers consistently beat the market.

BREAKING DOWN 'Portfolio Manager'

28
 A portfolio manager has great influence on a fund, no matter if that fund is a
closed or open mutual fund, hedge fund, venture capital fund or exchange-
traded fund. The manager of the fund's portfolio will directly affect the overall
returns of the fund. Portfolio managers, therefore, are usually experienced
investors, brokers or traders with strong backgrounds in financial management
and track records of sustained success.

A portfolio manager, regardless of background, is either an active manager or

passive manager. If a manager takes a passive approach, his investment strategy
mirrors a specific market index. With these funds, the market index used as a
benchmark is extremely important since an investor should expect to see similar
returns over the long term.

DIFFERENT TYPES OF INVESTMENTS

A diverse portfolio can help protect your wealth from market ups and downs.
There are four main types of investments, also called asset classes, each with
their own benefits and risks. These are:

Cash

Fixed interest

Shares

Property

You can invest directly in these assets or you may prefer a managed fund that
offers a range of different investments and is looked after by a professional fund
manager. Learn more about the different ways to invest.

Defensive investments

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 Defensive investments focus on generating regular income, as
opposed to growing in value over time. The two most common
types of defensive investments are cash and fixed interest.

Cash investments include:

High interest savings accounts

The main benefit of a cash investment is that it provides stable, regular income
through interest payments. Although it is the least risky type of investment, it is
possible the value of your cash could decrease over time, even though its dollar
figure remains the same. This may happen if the cost of goods and services rises
too quickly, also known as inflation, meaning your money buys less than it used
to.

Fixed interest investments include:

Term deposits

Government bonds

Corporate bonds

A term deposit lets you earn interest on your savings at a similar, or slightly
higher, rate than a cash account (depending on the amount and term you invest
for), but it also locks up your money for the duration of the term so you cant
be tempted to spend it.

Bonds, on the other hand, basically function as loans to governments or

companies, who sell them to investors for a fixed period of time and pay them a

30
regular rate of interest. At the end of that period, the price of the bond is repaid
to the investor.

Although bonds are considered a low risk investment, certain types can decrease
in value over time, so you could potentially get back less money than you
initially paid.

Growth investments:- Growth investments aim to increase in

value over time, as well as potentially paying out income.

Because their prices can rise and fall significantly, growth

investments may deliver higher returns than defensive

investments. However, you also have a stronger chance of

losing money.

The two most common types of growth investments are shares and property.

SHARES:- At its simplest, a single share represents a single unit of ownership

in a company. Shares are generally bought and sold on a stock exchange, via
a broking platform such as Comm Sec.

Shares are considered growth investments because their value can rise. You may
be able to make money by selling shares for a higher price than you initially pay
for them.

If you own shares, you may also receive income from dividends, which are
effectively a portion of a companys profit paid out to its shareholders.

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 Of course, the value of shares may also fall below the price you pay for them.
Prices can be volatile from day to day and shares are generally best suited to
long term investors, who are comfortable withstanding these ups and downs.

Although they have historically delivered better returns than other assets, shares
are considered one of the riskiest types of investment.

Property investments include:

Residential property such as houses and units

Commercial property such as individual offices or office blocks

Retail premises such as shops

Hotel rooms or hotels

Industrial property such as warehouses

Similarly to shares, the value of a property may rise and you may be able to
make money over the medium to long term by selling a house or apartment for
more than you paid for it.

Prices are not guaranteed to rise though, and property can also be more difficult
than other investment types to sell quickly, so it may not suit you if you need to
be able to access your money easily.

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 WHAT ARE GOVERNMENT BONDS?

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814

(CommSec) is a wholly owned but non-guaranteed subsidiary of the
Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the
Bank) and a Participant of the ASX Group and Chi-X Australia. This article is
intended to provide general information only and does not take into account
your individual objectives, financial situation or needs. Past performance is not
necessarily indicative of future performance. You should seek independent
financial and tax advice before making any decision based on this information.

33
 AUDIT INVESTMENT
Auditors may need to reasses their policies on ivestment-related
management representations.
EXECUTIVE SUMMARY

STATEMENT ON AUDITING STANDARDS no. 81, Auditing

Investments, updates the auditing literature for recently issued
accounting standards related to investments in securities. The
SAS offers guidance for auditing the existence, ownership,
completeness and valuation assertions for investments.

WHEN A THIRD-PARTY CUSTODIAN provides services

related to an entitys investments, certain evidentiary issues arise.
SAS no. 81 does not specifically address the auditors
responsibility for auditing financial statement assertions under
such circumstances, but additional guidance is being developed
by the AICPA auditing standards board.

SAS NO.81 ALSO PROVIDES GUIDANCE for auditing

managements intent regarding an investment and an entitys
ability to hold a debt security to maturity.

SAS NO. 81 DELETES INTERPRETATION NO. 1 of AU

section 332 and contains guidance for evaluating other-than-
temporary impairment conditions. The SAS makes clear that it is
managements responsibility to evaluate whether such a condition
exists.

THE GUIDANCE IN SAS NO. 81 FOR auditing investments

accounted for under the equity method of accounting is largely
unchanged from that contained in AU section 332.

GEORGE F. PATTERSON, Jr., CPA, is a partner of Ernst & Young

LLP in Los Angeles. A former member of the American Institute of
CPAs auditing standards board, he chaired the auditing investments task
force.
When auditing an entitys investments, auditors should be aware of applicable
accounting guidance. They must be familiar with the rules that apply both to the
particular type of entity and to the investments it holds. To provide auditors with
guidance on gathering evidence about investments, the American Institute of

34
CPAs auditing standards board (ASB) issued Statement on Auditing Standards
no. 81, Auditing Investments. It supersedes AU section 332, "Long-Term
Investments," of SAS no. 1, Codification of Auditing Standards and
Procedures (see also AICPA Professional Standards, AU section 332). SAS no.
81 updates the auditing literature for recently issued accounting standards that
address accounting for investments. It also deletes Interpretation no. 1 of AU
section 332, "Evidential Matter for the Carrying Amount of Marketable
Securities." The purpose of this article is to explain some of the more significant
aspects of SAS no. 81.

SCOPE
SAS no. 81 is a fieldwork standard. It provides guidance about the evidence
needed to corroborate assertions related to securities investments. Securities are
issued in either debt or equity form. The SAS defines a security by referring to
the definitions in Financial Accounting Standards Board Statement no.
115, Accounting for Certain Investments in Debt and Equity Securities. SAS no.
81 also provides guidance on auditing investments accounted for under
Accounting Principles Board Opinion no. 18, The Equity Method of Accounting
for Investments in Common Stock. While SAS no. 81 does not address
derivatives (even though a derivative may be a security), some of the guidance
may be helpful when auditing assertions about derivatives.

Exhibit 1: Obtaining Evidence About

Existence
Ownership and Completeness, SAS no.
81 lists six procedures for obtaining
evidence about an entitys investments.
The auditor should perform at least one
of these six procedures:

Physical inspection.

Confirmation with the issuer.

Confirmation with the custodian.

Confirmation of unsettled
transactions with the broker
dealer.

35
 Confirmation with the
counterparty.

Reading executed partnership or

similar agreements.

EXISTENCE, OWNERSHIP AND COMPLETENESS

SAS no. 81 recognizes that the procedures an auditor performs to gather
evidence about the assertions of existence, ownership and completeness will
vary depending on the type of investment and the auditors assessment of audit
risk. SAS no. 81 notes, however, that the auditor should include at least one of
the six procedures listed in exhibit 1. The pronouncement also reminds auditors
to consider the guidance in SAS no. 70, Reports on the Processing of
Transactions by Service Organizations, when designing procedures to gather
evidence about the existence, ownership and completeness of investments.

THIRD-PARTY CUSTODIANS
Certain evidentiary issues arise when a third-party custodian, such as a bank
trust department, provides services related to an entitys investments, including
maintaining custody of or investing assets. SAS no. 81 does not specifically
address the auditors responsibility for auditing financial statement assertions
about the ownership, existence and valuation of financial instruments,
commodity contracts and similar instruments when a custodian performs
services related to an entitys investments. The ASB decided to address these
issues in a separate project. This additional guidance is now being developed by
the ASBs ownership, existence and valuation task force.

INTENT AND ABILITY

SAS no. 81 provides guidance to auditors evaluating both managements intent
with regard to an investment and the entitys ability to hold a debt security to
maturity.

Management intent. An auditor should consider whether investment activities

corroborate or conflict with managements stated intent for an investment. The
SAS gives examples of pertinent evidence an auditor, when evaluating
investment activities, should consider, such as written and approved records of
investment strategies, records of investment activities, instructions to portfolio

36
managers and minutes of meetings of the board of directors or the investment
committee.

Ability to hold a debt security to maturity. The guidance for auditing ability
is similar to that for auditing intent. When management classifies a debt security
as held to maturity, the auditor gathers evidence that will either corroborate or
conflict with the entitys ability to hold that security until maturity. SAS no. 81
lists several factors auditors should consider when evaluating ability, such as
whether existing operating and cash flow projections or forecasts provide
relevant information about ability. Auditors are not required to create
projections or forecasts if none exist. However, auditors exercising their
professional judgment might ask management to prepare such prospective
financial information.

Management representations. SAS no. 81 says auditors ordinarily should

obtain written representations from management confirming, with respect to
held-to-maturity securities, that management has the intent and the entity has
the ability to hold such securities to maturity.

VALUATION
Procedures an auditor might perform to obtain evidence about investments
carried at cost or fair valueor when the fair value of investments carried at
cost is disclosed in the financial statementsare listed in SAS no. 81.
Recognizing that the approaches for determining fair value described in
generally accepted accounting principles sometimes vary depending on
investment type, the SAS says auditors should evaluate whether the
determination of fair value is consistent with the approach specified in GAAP.
For example, the use of market value quotations as opposed to estimation
techniques is required when measuring the fair value of equity securities
accounted for under FASB Statement no. 115.
IMPAIRMENT
As noted above, SAS no. 81 deletes Interpretation no. 1 of AU section 332. The
ASB did this for two reasons.

1. The interpretation was written in the context of the short-term, long-term

lower of cost or market accounting model for investments superseded
by Statement no. 115.

2. The interpretation contained accounting (preparer) guidance, thereby

blurring the distinction between the auditors responsibility for the audit
37
 and managements responsibility for the fair presentation of the financial
statements.

Managements responsibility to determine whether a decline in fair value is other

than temporary is explicitly recognized in SAS no. 81. The auditor evaluates
whether management has considered relevant information in determining
whether an other-than-temporary impairment exists. SAS no. 81 lists eight
factors that may indicate an other-than-temporary impairment condition. (See
exhibit 2.) The auditor considers existing conditions, obtains evidence about
those conditions and evaluates whether the evidence corroborates or conflicts
with managements conclusions about the existence of an other-than-temporary
impairment for a particular investment it holds.

Investments accounted for using the equity method. The guidance in SAS no.
81 on investments accounted for using the equity method generally is
unchanged from the previous standard (AU section 332).

Transition. SAS no. 81 is effective for audits of financial statements for periods
ending on or after December 15, 1997. Early application is permissible.

EVOLUTIONARY STANDARD
While the issuance of SAS no. 81 may cause auditors to reassess their policies
on management representations related to investments, the statement should not
be difficult to implement. It is an evolutionary standard that sets the stage for a
broader scope project that will addressin greater detailissues such as the
evidence needed to evaluate assertions related to the fair value of financial
instruments and the auditors responsibility for evaluating assertions about
investments when a third-party custodian is involved.

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Guidance Note On Audit of Investments
The following is the text of the Guidance Note on Audit of Investments issued by
the Auditing Practices Committee of the Council of the Institute of Chartered
Accountants of India. This Guidance Note should be read in conjunction with the
Statements on Standard Auditing Practices (SAPs) issued by the Institute.1

1. The "Preface to the Statements on Standard Auditing Practices" issued by the

Institute of Chartered Accountants of India states that the, "main function of the
APC is to review the existing auditing practices in and to develop Statements on
Standard Auditing Practices (SAPs) so that may be issued by the Council of the
Institute. " of the Preface states the "APC will issue Guidance Notes on the issues
arising from the SAPS wherever necessary."

2. The Auditing Practices Committee has also taken up the task viewing the
Statements on auditing matters issued prior to the formation of the Committee. It
is intended to issue, in due course of time, SAPs or Guidance Notes, as
appropriate, on the matters covered by such Statements which then stand
withdrawn. With the issuance of this Guidance Note on Audit of Investments,
Chapter 4 of the Statement on Auditing Practices, titled "Investments", shall stand
withdrawn. In due course of time, the entire Statement on Auditing Practices shall
be withdrawn.

INTRODUCTION

3. Investments are assets held by an entity for earning income by way of

dividends, interest and rentals, for capital appreciation, or for other benefits to the
investing entity. Investments are classified as 'current investments' and 'long term
investments'. A current investment is an investment that is by its nature readily
realisable and is intended to be held for not more than one year the date on which
such investment is made. A long term investment is an investment other than a
current investment.

4. The following features of investments have an impact on the related auditing

procedures:

(a) Investments constitute a significant portion of the total assets of certain entities
like banks, insurance companies, investment companies, trusts, etc. In other cases,
the nature, quantum and type of investments may vary from case to case.

(b) Documentary evidence is generally available for audit verification. A

detailed record of acquisition, disposal, etc., of the investments is usually

39
maintained.

(c) The market values of investments may keep on fluctuating. While in the case
of some investments, such fluctuations may not be wide, in the case of others,
they may be significant.

(d) Physical location of documents of title to investments may be different from

the one where the acquisition disposal and recording thereof take place.

(e) Many investments are readily marketable or can be converted into cash.

INTERNAL CONTROL EVALUATION

5. The auditor should study and evaluate the system of internal control relating to
investments to determine the nature, timing and extent of his other audit
procedures. He should particularly review the following aspects of internal control
relating to investments.5

(a) Control over acquisition, accretion and disposal of investments: There should
be proper authority for sanction, acquisition and disposal of investments
(including renunciation of rights). It should also be ensured that investments are
made in accordance with the legal requirements governing the entity as also with
its internal regulations, e.g., the provisions of the articles of association, rules and
regulations, trust deed, etc.

(b) Safeguarding

40