ExpertHard1 markMultiple Choice
CPA · Question 56 · Area III: Procedures
An auditor is testing the 'Valuation' assertion for a client's long-term investments in equity securities. The securities are not traded on an active market (Level 2 inputs). Which procedure is most appropriate?
An auditor is testing the 'Valuation' assertion for a client's long-term investments in equity securities. The securities are not traded on an active market (Level 2 inputs). Which procedure is most appropriate?
Answer options:
A.
Inspect the securities certificates.
B.
Obtain quoted prices for similar assets in active markets.
C.
Request a management representation letter.
D.
Trace the purchase price to the cash disbursements journal.
How to approach this question
Know the Fair Value Hierarchy (Level 1, 2, 3). Level 2 = Similar assets or observable inputs.
Full Answer
B.Obtain quoted prices for similar assets in active markets.✓ Correct
Obtain quoted prices for similar assets in active markets.
For Level 2 fair value measurements, the valuation is based on observable inputs other than quoted prices for identical assets. This often involves looking at quoted prices for *similar* assets in active markets. Option B aligns with this definition.
Common mistakes
Confusing Level 1 (Quoted price, identical asset) with Level 2.
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