Such a schedule should include all details about investments, e.g., name of the Securities, date of purchase, nominal value, cost price, market price at the date of Balance Sheet, etc.
The schedule so obtained should be examined by reference to the relevant ledger accounts and it should be seen that the asset has been shown distinctly and properly in the Balance Sheet according to the Schedule VI, Part I of the Companies Act.
The auditor should, in particular, examine the following:
(i) The authority of purchase of investments (if purchased during the year).
(ii) The prices of investments are checked by reference to Allotment Letters or Stock Brokers’ Bought Notes.
(iii) The Stock Exchange quotations are examined to verify the price paid along with the payees’ receipt.
(iv) It should be ensured that all investments are in the name of the client.
(v) The Memorandum and Articles of Association of the company be examined for the authority of the company to purchase.
(vi) It is to be seen that the purchase or sale of investments possess adequate approval of the Board of Directors.
(vii) Section 372 of the Companies Act provides for ceiling on purchase or sale of investments. This is to be verified.
The auditor should verify the existence of investments by his personal inspection at the same time if there is a very large number of investments, he should take special care as he would not be in a position to verify all of them in one sitting.
Those checked should be kept by him in a safe custody under lock and key which should be in his possession till the entire lot is checked. He should compare the Schedule and Securities with the Register of Investments maintained by the client.
If the Securities have been entrusted to the bank for safe custody, he should obtain a certificate from the bank giving details about all such Securities so kept. It is to be ensured that the Securities are free from any charge.
Thus, in all the situations, the auditor should personally inspect all the Securities wherever or by whomsoever they may be held. In the case of City Equitable Fire Insurance Company Ltd. (1924), it was held that the auditor should try to inspect all Securities himself.
If the Securities have been purchased during the year, he should examine the Transfer Deed when no certificate has been issued till the date of verification.
He may also inspect the Bought Note received from the broker. Similarly, if securities are held by any Trustee on behalf of the company, the Trust Deed should be inspected.
If some of the Securities have been sold during the course of the year after the date of the Balance Sheet but before the date of audit, the auditor should vouch the sale proceeds either in the Cash Book or in the Bank Pass Book.
Having verified the Securities through devices mentioned above, the auditor should proceed further to find out that the investments are properly valued.
Really speaking, investments are not subjected to the depreciation except investment in shares of mines and plantations, but it has to be seen as to the purpose for which investments are held.
In case of trust companies, the object of having investment is to earn interest and dividend so that the same may be distributed among the shareholders.
Hence, investments are to be treated as fixed assets. In such cases, investments are valued at cost and even permanent fall in their value is not taken into account. Much will depend, however, on the provisions of the Articles of Association and the Memorandum of Association of trust companies.
If investments are held by finance companies (i.e., ordinary financial institutions), where they are treated as current assets to be sold wherever it is thought necessary that they are vouched at “cost price or market price whichever is less.” In case of Securities purchased by underwriters, the cost price thereof will be the face value less the underwriting commission.
Interest Accrued on Investments:
The auditor should obtain a schedule showing the accrued interest on different types of investments and examine it. If there is a part of interest which is not likely to be realised, proper provision should be made therefore. Such an interest should be shown in the Balance Sheet separately. The auditor should check costs, calculations, etc.