A beginner’s guide to understanding your audit – Part 3: Auditing your investments

A Fund’s investments held as of the balance sheet date are tested by your auditor for both existence and valuation.

For existence, your auditor is trying to corroborate that the investments exist and that the Fund does own these investments as of the year-end. In order to test existence, your auditor will usually send broker and private equity confirmations directly to the broker, custodian, or underlying private investee company.

For valuation, your auditor will seek to corroborate the fair value of the investment as of the year-end date. For publicly traded investments, this can be done by corroborating the price to online stock exchanges like Bloomberg or Yahoo finance. For private equity, your auditor will look to see if there have been any recent sales or purchases of the underlying company’s shares between two independent knowledgeable parties at arm's length. Alternatively, an expert valuation obtained by an independent expert would provide good support for the investee company’s value. Your auditor will also request the underlying investee’s audited or unaudited financial statements to determine if this provides any support for the valuation of the investee company.

Should your auditor not be able to obtain sufficient and appropriate audit evidence on the existence and valuation of the underlying investment, your auditor may include a qualification in their audit report.?