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Homework answers / question archive /     Case 10-8       AB&C Company The engagement team is in the process of planning the audit of AB&C Company’s (“AB&C”) financial statements as of, and for the year ended, December 31, 2006

    Case 10-8       AB&C Company The engagement team is in the process of planning the audit of AB&C Company’s (“AB&C”) financial statements as of, and for the year ended, December 31, 2006

Accounting

 

 

Case 10-8

 
   

AB&C Company

The engagement team is in the process of planning the audit of AB&C Company’s (“AB&C”) financial statements as of, and for the year ended, December 31, 2006.  

 

AB&C sponsors a defined benefit pension plan that it accounts for under ASC 715-30,

Defined Benefit Plans – Pension (FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.) 

 

Along with planning the audit, the engagement team is in the process of understanding the entity’s pension plan investment management process sufficient to assess risk and design further audit procedures.

 

The following information has been obtained:

 

  1. AB&C’s plan assets are held in a trust with Union National Bank (“Union”), which acts as trustee and custodian for the underlying assets. z   AB&C’s Retirement Plan Committee (“the Committee”) maintains a formal investment policy, which has been approved by the Board of Directors.
  2.  

     

    On the basis of the guidance provided by the Committee, Union structures the plan’s asset allocation strategy. The Committee periodically reviews plan performance and asset allocation, and makes adjustments on a quarterly basis. The current target asset allocation is 75 percent equity and 25 percent fixed income.
  3. Given targeted allocation percentages, investments are held in five separate funds. The funds are managed by Bright Horizons (“Bright”), which is not associated with Union.
  4. Three of the funds (Bright Retirement 500 Index, Bright Retirement Equity Income, and Bright Retirement Long-Term Investment-Grade) are private-investment vehicles that are not registered under the Investment Company Act of 1940 or under the Securities Act of 1933.
  5. Two of the funds (Bright Retirement Emerging Markets Stock Index and Bright Retirement Intermediate-Term U.S. Treasury) are registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 and under the Securities Act of 1933.
  6. A snapshot of each fund, including its holdings and investment strategy, is provided below.
    • Bright Retirement 500 Index: Managed to track the S&P 500 Index. Portfolio includes approximately 500 publicly-traded domestic equity holdings.

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Case 10-8: AB&C Company                            Page 2

 

    • Bright Retirement Equity Income: Holdings consist of stocks that are temporarily undervalued and offer high dividend yields relative to the market. Portfolio includes 150 publicly-traded equity holdings of which approximately 95 percent are domestic stocks.
    • Bright Retirement Long-Term Investment-Grade: Invested primarily in highquality corporate bonds, but may invest up to 20 percent in treasuries and other government securities. Fund’s duration (i.e., price sensitivity because of changes in interest rates) is managed within 20 percent of the Lehman Brothers Long Credit A Index. Portfolio includes approximately 250 bond holdings (A–AAA grade).
    • Bright Retirement Emerging Markets Stock Index: Managed to track the Morgan Stanley Capital International (MSCI) Emerging Markets Index. Portfolio includes approximately 700 publicly-traded domestic and foreign-equity holdings.
    • Bright Retirement Intermediate-Term U.S. Treasury: Invested in treasury (85 percent) and government agency bonds. Portfolio includes approximately 50 U.S. government bond holdings.
  1. For financial reporting purposes, management uses each respective fund’s net asset value per share (“NAV”) and shares held (both figures provided by Union) to calculate the fair value of the investment.

Audit Procedures

 

The engagement team has tested control activities addressing all relevant control objectives and determined that such activities have been effectively designed and are operating effectively.

 

A specific risk has not been identified related to investments.

 

Year-end audited financial statements for the funds are not available before the issuance date of the auditors’ report on AB&C’s consolidated financial statements.

 

At year end, a confirmation was sent to Union. In response, on a fund-by-fund basis, Union provided the shares held, NAV, and total outstanding shares. All investment fund balances are considered material to the financial statements. An excerpt of the information is included within the following table:

 

 

 

 

 

 

 

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Case 10-8: AB&C Company                 Page 3

Relevant excerpts from the confirmation replies received directly from Union:

 

Fund

Shares

Held by

AB&C

Net Asset

Value Per

Share

(NAV)

Balance

AB&C

Total    

Outstanding Shares

Bright

Retirement 500

Index

45,388 shares

$132.41

$6,010,000

907,718 shares

Bright

Retirement

Equity Income

169,877 shares

$25.79

$4,381,155

2,426,830 shares

Bright

Retirement

Long-Term

InvestmentGrade

262,897 shares

$9.15

$2,405,510

3,755,671 shares

Bright

Retirement

Emerging

Markets Stock

Index

134,388 shares

 

$25.51

This study resource was

 

$3,428,310

1,919,829 shares

Bright

Retirement Long-Term U.S.

Treasury

241,546 shares

$10.80

 

$2,608,700

shared via CourseHero.com

 

4,391,745 shares

 

 

Required:

 

  • Would any of these funds be considered alternative investments (such investments are generally defined as investment vehicles (1) that are not listed on national exchanges or over-the-counter markets or (2) for which quoted market prices are not available)? If so, why?
  • Do the confirmations provide sufficient competent audit evidence to support the existence of the investments? Discuss what additional procedures, if any, may be necessary, and why.
  • Do the confirmations provide sufficient competent audit evidence to support the valuation of the investments? Discuss what additional audit procedures, if any, may be necessary?

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