$16-4$ Planning the Audit of Marketable Securities

In an audit of the financial statements of Belasco Chemicals, Inc., Karen Mack is deciding whether to inspect marketable securities on the balance sheet date, May $31,2007,$ or at some other date. The marketable securities held by Belasco include negotiable bearer bonds, which are kept in a safe in the treasurer$$s office, and miscellaneous stocks and bonds, which are kept in a safe$-$deposit box at The Merchants Bank. Both the negotiable bearer bonds and the miscellaneous stocks and bonds are material to Belasco$$s financial statements.

Required:.

$1.$ What are the factors that Mack should consider when deciding whether to inspect securities on May $31,2007,$ as opposed to other dates?

$2.$ Assume that Mack plans to have a member of her staff inspect securities at Belasco$$s offices and at The Merchants Bank on May $31,2007.$ What instructions should she give to the staff member about inspecting and including evidence in the working papers?

$3.$ Assume Mack believes that sending a staff member to Belasco$$s offices and to The Merchants Bank on May $31,2007,$ is impractical. What alternative procedures might she use to assure herself that the company physically possesses marketable securities on May $31,2007,$ if the securities are inspected $($a$)$ May $28,2007?($b$)$ June $5,2007?$

$16-5$ Auditing an Investment Portfolio

As a result of highly profitable operations over a number of years, Eastern Manufacturing Corporation accumulated a substantial investment portfolio. In auditing the financial statements for the year ended December $31,2007,$ the following information came to the auditor$$s attention:

a$.$ Continuing manufacturing operations resulted in an operating loss for the year.

b$.$ In $2007,$ the corporation placed the securities in their investment portfolio with a financial institution that serves as custodian of the securities$.$ Formerly the securities were kept in a safe$-$deposit box at a local bank.

c$.$ On December $22,2007,$ the corporation sold and then repurchased on the same day a number of securities that had appreciated greatly in value. Management stated that the purpose of the sale and repurchase was to establish a higher cost and book value for the securities and to avoid reporting a loss for the year.

Required:

$1.$ List the objectives of the auditor$$s tests of the investment account.

$2.$ Under what conditions would the auditor accept a confirmation of the securities from the custodian rather than personally inspecting and counting the securities$?$