Page 323 - Auditing Standards

As of December 15, 2017
The extent of loss that could result if the transaction does not occur

The likelihood that transactions with substantially different characteristics might be used to achieve
the same business purpose

The auditor should evaluate management's determination of whether a forecasted transaction is probable.

Assertions About Securities Based on Management's Intent and Ability

.56 Generally accepted accounting principles require that management's intent and ability be considered

in valuing certain securities; for example, whether—

Debt securities are classified as held-to-maturity and reported at their cost depends on
management's intent and ability to hold them to their maturity.

Equity securities are reported using the equity method depends on management's ability to

significantly influence the investee.

Equity securities are classified as trading or available-for-sale depends on management's intent and
objectives in investing in the securities.

.57 In evaluating management's intent and ability, the auditor should—

a. Obtain an understanding of the process used by management to classify securities as trading,

available-for-sale, or held-to-maturity.

b. For an investment accounted for using the equity method, inquire of management as to whether the

entity has the ability to exercise significant influence over the operating and financial policies of the
investee and evaluate the attendant circumstances that serve as a basis for management's
conclusions.

c. If the entity accounts for the investment contrary to the presumption established by generally

accepted accounting principles for use of the equity method, obtain sufficient appropriate evidential
matter about whether that presumption has been overcome and whether appropriate disclosure is
made regarding the reasons for not accounting for the investment in keeping with that presumption.

d. Consider whether management's activities corroborate or conflict with its stated intent. For example,
the auditor should evaluate an assertion that management intends to hold debt securities to their
maturity by examining evidence such as documentation of management's strategies and sales and

other historical activities with respect to those securities and similar securities.

e. Determine whether generally accepted accounting principles require management to document its
intentions and specify the content and timeliness of that documentation. 19 The auditor should

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