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CMA Intermediate · Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

An auditor is verifying long-term investments of a company that are held by a custodian bank. Which evidence would be most reliable for verifying existence and ownership of these investments?

A direct confirmation from the custodian is the most reliable evidence. It comes from an independent external party, so it is more persuasive for existence and ownership than internal lists, prior-year ledger balances or management representations, which originate within the company.

  1. AA list of investments prepared by the company's accountant
  2. BA direct confirmation from the custodian of the securities held on behalf of the companyCorrect
  3. CThe investment ledger balance reported in the previous year's accounts
  4. DManagement's representation letter stating the investments are held

Explanation

Evidence obtained directly from an independent external third party is more reliable than internally generated evidence or management representations. The custodian's direct confirmation addresses existence and, along with records, supports ownership. The other options are internal or prior-period evidence.

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