Case 10-8
Ellie Enterprises

An investment that is not one of the three traditional asset types such as stocks, bond and cash are considered as an alternative investment. “These types of investments include hedge funds, managed futures, real estate, commodities and derivative contracts.” (www.investopedia.com). These are subject to less regulation and use leverage and derivative instruments to optimize their returns. “In spite of many pensions and private endowments beginning to invest in these funds, the portion apportioned to them is still small usually less than 10%.” (www.investopedia.com). An alternative investment differs from publicly traded investments in three main ways:
The alternative assets can be purchased in a privately …show more content…

For instance, in order to confirm the balances exist, the auditors may send a negative confirmation request to Cloudy Investments and ask them to fill in required information concerning account balances and return it directly to the auditors. In addition, the auditors have failed to take the control reliance and specific risks related to investment have not been identified; therefore, a high level of inspection is necessary to confirm that the information is not a fraud. According to AU 332-21, this may require auditors to perform additional substantive procedures for existence or occurrence assertions such as:
Confirmation with the issuer of the security.
Confirmation with the holder of the security, including securities in electronic form, or with the counterparty to the derivative.
Confirmation of settled transactions with the broker-dealer or counterparty.
Confirmation of unsettled transactions with the broker-dealer or counterparty.
Physical inspection of the security or derivative contract.
Reading executed partnership or similar agreements.
Vouching relevant cash receipts and disbursements.
Inspecting supporting documentation for subsequent realization or settlement after the end of the reporting period. In this case, the confirmations do not represent sufficient competent audit evidence to support the valuation of the investment. As discussed earlier, the information is not received from the third party (Cloud