Special Considerations in Auditing Financial Instruments - Audit Guide
Entities of all sizes may be subject to risks of material misstatement when using financial instruments. This Audit Guide provides an in-depth understanding of financial instruments, as well as practical assistance for auditors to develop an effective audit approach to address such risks.
Detailed implementation guidance is provided for assessing an entity’s internal control and responding to associated risks, as well as guidance on reporting considerations. A series of case studies is provided to help you understand and apply the concepts specific to financial instruments, including the use of service organizations and accounting for hedging activities.
This AICPA Audit Guide was developed by leading auditing and financial instrument experts in public practice to provide CPAs with foundational information on financial instruments and related audit considerations.
- Coverage of voluntary disclosures regarding fair value information
- Guidance on the complexities surrounding the valuation of financial instruments, as well as key presentation and disclosure considerations
- Detailed case studies to show practical applications on classification of financial instruments, use of work of others, embedded derivatives, interest rate swaps and put options
- Understanding how to effectively use work performed by a service organization
The following audit and accounting updates affecting financial instruments have been considered and discussed as appropriate.
- SSAE No. 18, Attestation Standards: Clarification and Recodification
- SAS No. 131, Statement on Auditing Standards No. 131, Amendment to Statement on Auditing Standards No. 122 Section 700, Forming an Opinion and Reporting on Financial Statements
- ASU No. 2015-10, Technical Corrections and Improvements
- ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
- ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
In addition to covering auditing standards to address all areas of the audit, the following standards are discussed in greater detail throughout this guide to address audit considerations unique to financial instruments:
- AU-C section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
- AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
- AU-C section 500, Audit Evidence
- AU-C section 501, Audit Evidence – Specific Considerations for Selected Items
Who Will Benefit:
Entities of various sizes and across industries use financial instruments for hedging, investment, and trading purposes. Because of the inherent risks and complexities around this topic, it is critical to consider specific audit considerations and be able to address the risk of material misstatement to perform an effective audit of these financial instruments. This comprehensive guide has been designed to be beneficial for those practicing in small, regional, and large auditing firms.
Understanding the Financial Instruments
- 2.06The characteristics of financial instruments may obscure certain elements of risk and exposure. Obtaining an understanding of the instruments in which the entity has invested or to which it is exposed, including the characteristics of the instruments, helps the auditor identify whether
- important aspects of a transaction are missing or inaccurately recorded.
- the risks inherent in them are fully understood and managed by the entity.
- the instruments are valued using an appropriate valuation technique.
- the financial instruments are appropriately classified into current and noncurrent assets and liabilities.
- the types of financial instruments to which the entity is exposed.
- the purpose for which they are used.
- management’s and, when appropriate, those charged with governance’s understanding of the financial instruments, their use, and the accounting requirements.
- their exact terms and characteristics so that their implications can be fully understood and, in particular, when transactions are linked, the overall effect of the financial instrument transactions.
- how they fit into the entity’s overall risk management strategy.
Developing an Audit Approach
- 5.09In testing how management values the financial instrument and in responding to the assessed risks of material misstatement in accordance with paragraphs .12–.14 of AU-C section 540, the auditor undertakes one or more of the following procedures, taking account of the nature of the accounting estimates:
- Test how management made the accounting estimate and the data on which it is based (including valuation techniques used by the entity in its valuations).
- Test the operating effectiveness of the controls over how management made the accounting estimate, together with appropriate substantive procedures.
- Develop a point estimate or range to evaluate management’s point estimate.
- Determine whether events occurring up to the date of the auditor’s report provide audit evidence regarding the accounting estimate.
- 5.10As described in chapter 1, "Gaining an Understanding About Financial Instruments," of this guide, to estimate the fair value of financial instruments, management may
- utilize information from third-party pricing sources.
- gather data to develop its own estimate using various techniques, including models.
- engage a specialist to develop an estimate.
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