Audit of financial instruments

Generally up to 1½ marks for each point explained:

Why is audit of financial instruments challenging?

– Financial reporting requirements complex
– Transactions themselves difficult to understand
– Lack of evidence and need to rely on management judgement
– Auditor may need to rely on expert
– May be hard to maintain attitude of skepticism
– Internal controls may be deficient

Planning implications

– Obtain understanding of accounting and disclosure requirements
– Obtain understanding of client’s financial instruments
– Determine resources, i.e. skills needed and need for an auditor’s expert
– Consider internal controls including internal audit
– Determine materiality of financial instruments
– Understand management’s method for valuing financial instruments

Maximum marks 8