An organization invests excess snort-term cash in trading securities. When of the following actions should an internal auditor take to test the…

Trading securities are financial instruments held for the principal purpose of selling them in the near term. According to accounting standards (e.g., IFRS 9 and ASC 320), these securities must be reported on the balance sheet at their fair value. The most direct and appropriate audit procedure to test the valuation assertion for trading securities is to compare the carrying value recorded by the organization with their current market quotations as of the reporting date. This procedure verifies that the securities are stated at their correct market value, with any unrealized gains or losses properly reflected in income.

A. The equity method is an accounting method used for investments where an entity has significant influence over the investee, not for short-term trading securities.

B. Confirming securities held by a broker is a procedure to test the existence and rights assertions, not the valuation of the securities.

C. Calculation of premium or discount amortization is relevant for debt securities classified as held-to-maturity, which are carried at amortized cost, not fair value.

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1. International Auditing and Assurance Standards Board (IAASB). (2018). ISA 540 (Revised)

Auditing Accounting Estimates and Related Disclosures. Paragraph A84(a) outlines audit procedures for fair value measurements. For estimates based on an active market

a primary procedure is "obtaining quoted market prices." This directly supports comparing the carrying value to market quotations to test valuation.

2. Financial Accounting Standards Board (FASB). Accounting Standards Codification (ASC) Topic 320

Investments—Debt and Equity Securities. Section 320-10-35-1 requires that investments in debt securities classified as "trading" be measured at fair value in the statement of financial position. This accounting requirement dictates the necessary audit procedure for valuation.

3. Arens

A. A.

Elder

R. J.

& Beasley

M. S. (2017). Auditing and Assurance Services: An Integrated Approach (16th ed.). Pearson. Chapter 17

in its discussion of auditing marketable securities

specifies that for the valuation (realizable value) objective

auditors test fair value by "footing the marketable securities schedule and comparing the total with the general ledger" and verifying the quoted market prices. This aligns directly with comparing carrying value to market quotations.