Account & Audit

Equity Investments

The most common type of investment is an equity investment which constitutes the purchase of shares in another entity. Types of equity investments include:

• Investments in subsidiaries – a subsidiary is an entity controlled by another entity, known as the parent.
• Investments in associates – an associate is an entity over which the investor has significant influence but is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the association but is not in control or joint control over those policies.
• Investments in joint ventures – a joint venture is a contract between two or more parties that undertake an economic activity subject to joint control.

Auditing financial assets

When auditing equity investments, an auditor must check that the investment is correctly accounted for and appropriately presented and disclosed in the financial statements. To do this, auditors must obtain the supporting documentation to address each assertion, with examples below:

• Existence – certificate of registration
• Rights & obligations – latest updated Memorandum & Articles of Association
• Completeness and existence – share registry at year-end
• Valuation – latest signed audited financial statements or latest management accounts (if audited financial statements are not available)

Other evidence might be obtained, depending on the type of equity investment held, such as joint venture agreement, transfer of shares, group structure, etc. Other investments: financial assets When the investment is neither an equity investment nor an equity investment in a subsidiary, associates, or joint venture, the investment would be accounted for as a financial asset.

Auditing financial assets

When auditing financial assets, auditors need to address the following assertions:

• Completeness –to ensure that all investments held by the Company have been recorded. This can be done by checking that the Company has a schedule listing all investments held at year-end and their market value, and reconciling this to the Company’s books and to confirmation obtained directly from an independent broker or custodian.
• Existence – to ascertain that all investments shown in the Company’s books existed as at year-end. An example to test this assertion is vouching a sample of sale and purchase transactions during the year to the supporting documentation and direct confirmation from the broker or custodian.
• Rights & obligations –to ensure that the client has the right and ownership of all investments shown within the financial statements that match the reporting date. Auditors can test this by looking out for potential restrictions on investments held.
• Valuation – to ensure that all investments have been appropriately valued within the Company’s balance sheet at year-end, mainly through testing of the unrealised movement, which is the gain or loss on value that exists only on paper (as this is yet to be realised when the investment is sold).

Additional procedures also need to be considered for testing interest and dividend income, as well as realised movement, in the case of a portfolio of investments.