A company makes a practice of investing excess short-term cash in marketable securities
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CHAPTER 9 Show AUDIT OF THE INVESTING CYCLE INTRODUCTION This chapter covers the explanation of the investing cycle, the types of the transactions in this cycle and the internal control environment and objective pertaining thereto. Consideration is then given to compliance tests of controls over transactions in the investing cycle. In the audit of the investing cycle, the following activities should be undertaken: 1. Identify the activities and types of transactions that occur in a company's investing cycle; 2.Relate the internal accounting control objectives to investing activities, 3.Determine the essential features of internal control over the above-mentioned transactions; 4.Perform compliance tests of controls over these transactions; and 5.After evaluating the effectiveness of internal control, perform substantive audit procedures to determine whether financial statement assertions are materially correct on accounts affected by the investing cycle. 6.Design tests of details of account balances and analytical procedures to satisfy balance-related audit objectives. Steps 1 1o 5 are discussed in this Chapter while Step no. 6 is covered in Chapters 14, 15 and 16. NATURE OF THE INVESTING CYCLE Basic Considerations Investing cycle includes the processes, procedures and policies for authorizing, executing and recording transactions involving acquisition and disposition of investments in securities (e.g., government securities, equity securities, corporate bonds) short-term and long-term, property and equipment, natural resources, intangible assets, non-trade loans, and investment property. Investing Cycle Transactions Generally, the classes of transaction in the investing involve: 1.Acquisitions and disposals of securities, for temporary or long-term investments, corporate bonds and government securities, plant assets, natural resources, intangible assets and other assets fall into this category of transactions. 2. Lending to others, excluding open trade accounts with customers. PROCESSING INVESTING CYCLE TRANSACTIONS Figure 9-1 shows the flow of the entries in the accounts affected by the transactions in the investing cycle. Are shortShort-term investments, also known as marketable securities or temporary investments, are financial investments that can easily be converted to cash, typically within 5 years. Short-term investments can also refer to the holdings a company owns but intends to sell within a year.
Why do companies often choose to invest excess cash in marketable securities?Businesses that invested their excess cash were able to offset some or all of their operating losses with investments in securities. Investing also allows companies to take advantage of attractive market opportunities to increase their balance sheet.
What is objective of investing cash in marketable securities?The primary purpose of investing in marketable securities is the opportunity to capture returns on existing cash, while still maintaining easy access to cash flow (due to the high liquidity ). Marketable securities include debt securities, equity securities, and derivatives.
What type of account is marketable securities?Marketable securities are typically reported right under the cash and cash equivalents account on a company's balance sheet in the current assets section.
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