Among the five funds, three of the funds, Cloudy Retirement 500 Index, Cloudy High-Yield Hedge Strategies, and Cloudy Real Estate All starts, are alternative investments. Those three funds, as the case states, are not registered under the Investment Company Act of 1940 or under the Securities Act of 1933. Thus, they are not offered to the investing public or are not been required to offer significant information to public. Moreover, the investment product held by Cloudy High-Yield Hedge Strategies is hedge fund. It is not traditional investment, such as stock or bonds, and is difficult to determine the current market value.
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Existence of the investments
The confirmation did not provide sufficient competent audit evidences to support the existence of the investments; therefore, the engagement team must perform additional procedures. AU Session 332 states, “Confirmation of the holdings on a security-by-security basis typically would constitute adequate audit evidence with respect to the existence assertion.” The confirmation Union provided, which is on fund-by-fund basis, is not detail enough to typically be considered as adequate audit evidence. Moreover, the audited financial statement of the alternative investment, which could provide significant audit evidence, is not available before the issuance date of the auditors’ report on Ellie’s consolidated financial statements. This fact further proves that the engagement team needs to conduct substantive procedures. To assess the existence of the investments, following procedures can be performed. First, the engagement team can request transactions involved in each five of funds during the funds’ fiscal years. Actual transactions prove that Ellie’s investments have been held in those five different funds.
Second, as the case states, the Committee periodically review plan performance and assets allocation. Therefore, the Committee must kept reports and memos regarding their plan performance or discussions with Union. The engagement team can collect documents related to Ellie’s investments in those five funds from Ellie and Union. Documents from the investor entity and trustee entity can prove the existence of investment activities. Moreover, by comparing those documents, the engagement team can test whether Union’s investment behavior has aligned with the strategies or any adjustments made to the Ellie’s investments. An example can further illustrate. For example, the Committee decided to change the investment allocation. It is expected to see Union held documents which contain details showing the change of the strategy, specific investment that Union made, and the performance after adjustments. Such documents are sufficient evidence to prove that Ellie’s investments are in the funds and being appropriately management by Union. Lastly but no lease, obtaining related information directly from a third party may also be helpful in this case. The engagement team can directly contact five fund managers and inquire them whether Ellie’s investments were held in the funds.
Value of the investments
Simply confirming investments in the aggregate neither prove the existence of the investments, nor support the valuation of the investments. Furthermore, there is a time lag in reporting between the date of the financial statements of the funds and the date of the auditor’s report on Ellie’s consolidated financial statements; thus, the engagement team should perform additional procedures. Cloudy Retirement intermediate-Term U.S. Treasury
To check the accuracy of the amount of share held by Ellie, the engagement team could request the fund manager to provide documents stating the amount of shares held by Ellie. This fund is registered with the SEC under the Investment Company Act of 1940 and under the Securities Act of 1933. Normally quoted market prices for such funds are available from sources such as financial publications, the exchanges, or NASDAQ. The engagement team could obtain the quoted market prices of the fund and check the prices with those on the confirmation. Cloudy High-Yield Hedge Strategies
Since this fund is not registered with SEC under the Investment Company Act of 1940 or under the Securities Act of 1933, the engagement team is unable to get quoted market prices and compare with numbers on the confirmation. However, the engagement team could request a more detailed confirmation providing information of the underlying investments. Next step the engagement team can take is to evaluate the underlying investment and the reasonableness of the assumptions used in fair value calculation. Since evaluation may involve a lot of specialized knowledge and techniques, the engagement team could employ a specialist. Under the situation that the engagement team did not receive a detailed confirmation of the underlying investments, there are several procedures can help with the assessment.
First, the engagement team can collect previously audited financial statement for the funds to compare information the team obtains for this year. If Ellie didn’t make a lot of change on its investments and the performance of funds held by Ellie are stable in recent years, but investment balance of this year is very different from ones of previous years, the engagement team need to increase the risk and take a closer look at the evaluation of Ellie’s investment of this year. Other than previously audited financial statement for the funds, meeting minutes, memos, or summaries that document valuation or judgments made during managing the investment are evidence that auditor should collect and review to help assessment. Second, the engagement team can call or visit the auditors of Union to ask their opinion about the valuation of the investments that Union managed. Besides, the engagement team also could pick some sample transactions and then test the fair value measurement involved in those transactions to see whether the fair value measurement are reasonable or comply with industry standard. Last but not least, the auditing team can directly contact the five fund managers to check out Ellie’s balance.