Scenario: An auditor is testing the fair value of a Level 2 financial asset. The client uses a matrix pricing model based on similar securities. <br/><br/>Which of the following is the MOST important audit consideration?

Answer options:

Verifying the mathematical accuracy of the matrix multiplication.

Determining whether the 'similar' securities used in the model are truly comparable to the client's asset.

Confirming the existence of the asset with the custodian.

Ensuring the asset is classified as Available-for-Sale.

How to approach this question

Level 2 = 'Comps'. The trick is picking the right comps. Audit the 'Similarity'.

Full Answer

B.Determining whether the 'similar' securities used in the model are truly comparable to the client's asset.✓ Correct

Determining whether the 'similar' securities used in the model are truly comparable to the client's asset.

For Level 2 fair value measurements (based on observable inputs for similar assets), the auditor's primary focus should be on the comparability of the benchmark assets used. If the 'similar' assets have different risks or characteristics, the valuation will be wrong.

Common mistakes

Focusing on math instead of the validity of the inputs.

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