Cloudy High-Yield Hedge Strategies and Cloudy Real Estate All Stars would be considered as alternative investments, according to the standards issued by AICPA. Typically, great examples of types of alternative investments are common/collective trusts, pooled separate accounts, stable value investments, private equity funds, hedge funds, real estate funds and etc. Because these funds have higher risk-return structure than normal index bonds, they are in the most of the time illiquid investments which will also have restrictions on the ownership transfer. Hedge funds are regularly engaged in aggressive strategies which can involve highly leveraged trading of derivatives; hence in ...view middle of the document...
The discussion of internal control in this document is included in the section on the valuation assertion; however, certain of the controls in that section also are relevant to the existence assertion.”
In addition, in order to ensure the existence of the investment, simply an aggregate support (here is NAV and shares held) is not enough. The engagement team should request more information on the security-by-security basis from the fund manager. In other words, auditors need to somehow determine the existence of the recent transactions of the fund to make sure the investment is active in trading and the confirmations do make sense. When the confirmation isn’t enough to support the existence evidence, AICPA requires auditors to follow the following paths:
“Auditor must obtain sufficient appropriate audit evidence – either through confirmation or otherwise. If confirmation does not contain sufficient detail the auditor should perform other procedures directed toward assessing existence. These may include:
• Observing management site visits, telephone calls to investee fund or reviewing documentation of such
• Review executed partnership or other legal agreements
• Review other documentation that supports existence, e.g., correspondence, trustee transaction acknowledgements
• Review periodic statements from the fund and amounts recorded by investor
• Vouching relevant cash receipts and disbursements”
For all investments, not limited to alternative investments, the standard auditing procedures start with inspection of records and documents followed by inspection of tangible assets and observation. Then external document (usually from a third-party) is needed and finally, auditors will conduct recalculation and re-performance. In this case, external documents are those that are provided by the Union. However, auditors lack in steps of recalculation and re-performance to complete a thorough auditing procedures. Recalculation is to determine the mathematical accuracy of the records and documents. Re-performance refers to auditors’ independent execution of procedures and controls.
The audit evidence to support the valuation of the investments is not sufficient either. The main reason behind is that the engagement team does not clearly identify the definition of the fair value of the investment, the date of the fair value that is provided by the Union, the risk associated with each investment and lastly, the procedures that can be used to reduce the risks to the acceptable level. In the case, the engagement team just received a really generic document from the Union indicating the simplest numbers (shares and NAV) that Ellie Enterprise invested. This document is far away from the standards that auditors should have followed to complete the valuation of investments. The big picture of the audit procedures for determining the fair value of investments is as followed: “
• Establishes a consistent definition of fair value...