Auditing Investments
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Investments are one of the most heavily scrutinized areas in a financial audit — and a well-tested topic on the AUD section of the CPA exam. Whether it's stocks, bonds, or other financial instruments, three procedures do most of the work: securities confirmation, income verification, and reviewing ownership documents. Each targets a different financial statement assertion.
What is securities confirmation?
Securities confirmation substantiates the existence and valuation assertions for investment balances. It typically means contacting a third party — a broker or financial institution — to confirm exactly what securities the company holds as of the balance sheet date.
Example: You're auditing a tech company that claims to hold $5 million in a diversified stock portfolio. You send a confirmation request to its broker. The broker's response doesn't match the company's own records — a discrepancy that triggers a deeper investigation into the accuracy of the recorded balance.
What is income verification?
Income verification targets the accuracy and completeness of income generated from investments — dividends, interest, and gains or losses on sales. It typically involves reviewing bank statements, dividend receipts, and other supporting documents against what the company actually recognized during the period.
Example: You're auditing a real estate company that reported significant rental income from investment properties. Reviewing bank statements and lease agreements, you find it never recorded a breakage fee from a tenant who terminated their lease early — an omission that affects both completeness and accuracy.
What do ownership documents verify?
Ownership documents — share certificates, deeds, and legal agreements — verify the rights and obligations assertion: does the company actually own what it claims, and under what conditions?
Example: You're auditing a manufacturer that claims a 25% stake in a smaller supplier. Reviewing share certificates and shareholder agreements confirms the ownership stake — but also reveals a buy-sell agreement restricting the company's ability to sell it. That restriction affects the investment's valuation and needs to be disclosed.
Each procedure answers a different question about the same investment. Confirmation asks "does it exist?" Income verification asks "was the income captured completely and accurately?" Ownership documents ask "what rights and restrictions actually apply?" All three are usually needed together.
Want the full AUD framework?
My free CPA 101 course covers the study approach I used to score 90+ on every CPA exam section.
More on auditing
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.