When a client engages in transactions involving derivatives, the auditor should:

Question

Quizplus · Accepted Answer

Choice "D" is correct. In auditing investments in securities and derivatives, the auditor must assess the reasonableness and appropriateness of assumptions, market variables, and valuation models. In order to do this, the auditor must consider whether the substance of transactions or events differs materially from their form. Remember that generally accepted accounting principles require transactions and events to be reported in accordance with their economic substance, even if this differs from their form. Choice "B" is incorrect. While the auditor might confirm settled and unsettled transactions with the broker, whether a security is held for trading purposes is based on management intent and would not be confirmed with the broker. Choice "C" is incorrect. There is no requirement that the auditor notify those charged with governance about the risks involved in derivative transactions. Choice "D" is incorrect. There is no requirement that the auditor add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

When a Client Engages in Transactions Involving Derivatives, the Auditor