Auditing a Company’s Investment Accounts
When performing an audit you have to account for all of your client’s assets. Not all assets are tangible objects or cash sitting in the bank. Many companies sell their own securities (stocks and bonds) to raise capital for operations and to expand. But businesses also frequently invest in securities issued by other companies, for both growth and income:
Growth securities are those a company anticipates being able to sell for more than it paid for them.
Income securities are investments that pay dividends.
This is important information for your audit because you need to make sure that asset accounts properly reflect on the balance sheet and that all investment income relating to these accounts is shown as well. Failure to do so may result in the financial statements being materially misstated, thus providing the users with inadequate or incorrect information. Following are the most common forms of these investments:
Common or preferred stock: Both types of stock show ownership in a corporation, but preferred stock represents a higher rung on the ownership ladder than common stock. Preferred stock owners have a higher priority claim on a company’s assets than common stock owners. However, only common stockholders have voting rights (to vote in members of the board of directors or change the corporate charter).
Notes receivable: These documents are agreements between lenders and borrowers specifying the amount borrowed, how much interest a company pays to borrow the money, and the length of the note. If your client loans money to another business, this type of note certifies how and when your client receives interest and gets its principal back.
Bonds: Bonds are long-term lending agreements between a borrower and lender. Corporations generally issue bonds to raise money for capital expenditures, operations, and acquisitions. Bondholders receive interest payments at the bond’s stated interest rate. When the bond matures (the term of the bond expires), the company pays the bondholder back the face value of the bond.