Basic Financial Instruments

​

Basic Financial Instruments Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company holds various basic financial instruments crucial for its operations and financial reporting. Proper accounting and disclosure of these instruments are essential for accurately portraying the company’s financial health and compliance with financial reporting standards.

Audit Objective

To obtain reasonable assurance that basic financial instruments recorded in ABC Manufacturing Company’s financial statements are properly recognized, measured, and disclosed in accordance with applicable financial reporting frameworks such as IFRS or US GAAP.

Types of Audit Evidence and Documentation for Basic Financial Instruments Assertions

1. Existence

• Case: Confirm the existence of recorded financial assets and liabilities through physical verification, third-party confirmations, or inspection of relevant documentation.

• Documentation: Document the confirmation processes, including bank confirmations for cash and bank balances, and agreements or statements for receivables and payables, highlighting the methods used and conclusions reached.

2. Rights and Obligations

• Case: Verify that the company has the rights to the financial assets and is obligated for the financial liabilities it has recognized.

• Documentation: Summarize the examination of legal documents and agreements underpinning financial assets and liabilities to substantiate the company’s rights and obligations, including loan agreements and terms of receivables.

3. Completeness

• Case: Ensure all financial instruments that should be recognized are included in the financial statements.

• Documentation: Outline the reconciliation of ledger accounts to external confirmations and documentation, and the review of unrecorded liabilities and assets, detailing procedures and findings.

4. Valuation and Allocation

• Case: Assess the valuation of financial assets and liabilities, ensuring they are recorded at appropriate amounts, considering amortized cost or fair value as applicable.

• Documentation: Document the valuation methods and assumptions used for measuring financial instruments, including any fair value measurements or impairment tests conducted, and the rationale behind them.

5. Presentation and Disclosure

• Case: Review financial statements to ensure financial instruments are correctly classified, described, and disclosed in line with reporting standards.

• Documentation: Note the assessment of financial statement disclosures related to financial instruments, including classification as current or non-current, interest rates, maturity dates, and fair value information, ensuring disclosures are complete and accurate.

Additional Considerations

• Impact of New Standards: If there have been recent changes to accounting standards affecting financial instruments (like the adoption of IFRS 9), document how these changes impact the recognition, measurement, and disclosure of financial instruments.

• Internal Controls: Evaluate and document the company’s internal controls over the recording and reporting of financial instruments, including controls over the authorization of transactions, the recording of new financial instruments, and periodic reconciliations.

• Inquiries and Analytical Procedures: Perform inquiries with management about significant financial instrument transactions during the period and apply analytical procedures to identify unusual transactions or trends that might indicate misstatements.

• Communication with Those Charged with Governance: Discuss any significant findings or issues identified during the audit of financial instruments with management and those charged with governance, especially concerning the valuation of instruments, adequacy of disclosures, or identification of new types of financial instruments.

Conclusion

The audit of basic financial instruments is vital for ensuring the reliability and accuracy of ABC Manufacturing Company’s financial statements. By thoroughly documenting the audit procedures and findings related to each relevant assertion for financial instruments, auditors provide a basis for their opinion on the financial statements, enhancing stakeholder confidence in the reported financial information.