42
Auditing Investment Companies
42.1 OVERVIEW OF THE INDUSTRY
42.2 ACCOUNTING PRINCIPLES AND PRACTICES
(a) Valuation,
(b) Income Recognition,
(c) Investment Transactions,
(d) Foreign Currency,
(e) Shareholder Distributions,
(f) Equalization,
(g) Brokerage/Services and Expense Offset
Arrangements,
(h) Reporting,
42.3 RISK FACTORS AND AUDIT REACTION
(a) Processing Environment,
(b) Derivatives Transactions,
42.4 TYPICAL TRANSACTIONS AND CONTROLS
42.5 SUBSTANTIVE TESTS
(a) Investments,
(b) Investment Income and Realized Gains,
(c) Accruals and Expenses,
(d) Taxes,
(e) Capital Accounts,
(f) Financial Highlights and Investment Portfolio,
42.1 OVERVIEW OF THE INDUSTRY
An investment company serves as a vehicle for investors with similar investment objectives to
benefit from professional investment selection and management and diversification of
investments without incurring the substantial costs that would be associated with smaller
portfolio positions. The business of an investment company consists of selling its capital
shares to the public; investing the proceeds, principally in securities, in a manner that seeks to
achieve its established investment objectives; and distributing to its shareholders the net
income from, and net gains realized on sales of, its investments.
There are many different categories of investment companies: management investment
companies, unit investment trusts, collective trusts, investment partnerships, certain separate
accounts of insurance companies, and offshore funds. Ownership in an investment company
is represented by units of ownership, such as shares or a partnership interest, to which
proportionate shares of net assets can be attributed.