AICPA Issues Practice Aid for Alternative Investments
July 20, 2006
The AICPA has issued Alternative Investments-Audit Considerations, a Practice Aid for auditors. The aid focuses on the existence and valuation assertions associated with alternative investments and provides that the approach to auditing such assertions should be based on an assessment of the risk of material misstatement of the financial statements.
The risk assessment depends on:
- significance of alternative investments to the financial statements;
- nature, complexity, and liquidity of underlying investments;
- management's process and related internal controls over the process; and
- information available to support valuation.
Auditors must determine the nature, extent, and timing of the audit evidence with respect to existence and valuation assertions.
There may be circumstances where the auditor cannot obtain sufficient appropriate audit evidence over the existence or valuation assertions. Depending on the significance of the alternative investments to the investor entity’s financial statements taken as a whole, it may be necessary for the auditor to perform additional audit procedures. Considerable auditor judgment is required to determine whether the additional procedures provide sufficient and appropriate evidence.
Sufficiency is the measure of quantity of audit evidence, and appropriateness is the measure of quality of audit evidence. The extent of audit evidence necessary for the auditor to conclude on the sufficiency and appropriateness of the audit evidence increases as: the percentage of alternative investments to both total assets and the total portfolio increases and as the nature, complexity, and volatility of the underlying investment increase. If the auditor is unable to obtain sufficient and appropriate audit evidence to support the financial statement assertions, it will be necessary to qualify or disclaim an opinion on the financial statements due to a scope limitation.
The Practice Aid provides guidance to auditors for the following:
- additional procedures required for existence assertion;
- extent of confirmations needed;
- management's responsibility for the valuation process;
- obtaining an understanding of internal controls sufficient to plan the audit;
- fair value, cost, and equity methods of accounting; and
- testing of management's valuation assertion.
Note that if management estimates the fair value of a significant portion of its alternative investments as of an interim date, management will need a robust process and strong internal control over the roll-forward period to the balance sheet date.
NACUBO contact: Sue Menditto, director of accounting policy, 202.861.2542.
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