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:

Inspect the securities certificates.

Obtain quoted prices for similar assets in active markets.

Request a management representation letter.

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

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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