An auditor is testing the valuation of a client's investment in a non-traded equity security. The client uses the cost method. The auditor observes that the investee company has reported significant recurring losses and has lost a major customer. What is the auditor's primary concern?

Answer options:

The classification of the investment as trading or available-for-sale.

Impairment of the investment.

The mathematical accuracy of the dividend income.

The existence of the stock certificate.

How to approach this question

Scenario clues: 'Losses', 'Lost Customer' -> Bad news -> Asset value goes down -> Impairment.

Full Answer

B.Impairment of the investment.✓ Correct

Impairment of the investment.

For investments carried at cost (or equity method), the auditor must evaluate whether there are indicators of impairment. Significant adverse changes in the investee's environment (losses, lost customers) suggest the asset may be impaired and require a write-down.

Common mistakes

Focusing on classification instead of valuation.

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