Chapter 42 Auditing Investment Companies.docx
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Chapter42AuditingInvestmentCompanies
窗体底部
42
AuditingInvestmentCompanies
42.1OVERVIEWOFTHEINDUSTRY
42.2ACCOUNTINGPRINCIPLESANDPRACTICES
(a)Valuation,
(b)IncomeRecognition,
(c)InvestmentTransactions,
(d)ForeignCurrency,
(e)ShareholderDistributions,
(f)Equalization,
(g)Brokerage/ServicesandExpenseOffsetArrangements,
(h)Reporting,
42.3RISKFACTORSANDAUDITREACTION
(a)ProcessingEnvironment,
(b)DerivativesTransactions,
42.4TYPICALTRANSACTIONSANDCONTROLS
42.5SUBSTANTIVETESTS
(a)Investments,
(b)InvestmentIncomeandRealizedGains,
(c)AccrualsandExpenses,
(d)Taxes,
(e)CapitalAccounts,
(f)FinancialHighlightsandInvestmentPortfolio,
42.1OVERVIEWOFTHEINDUSTRY
Aninvestmentcompanyservesasavehicleforinvestorswithsimilarinvestmentobjectivestobenefitfromprofessionalinvestmentselectionandmanagementanddiversificationofinvestmentswithoutincurringthesubstantialcoststhatwouldbeassociatedwithsmallerportfoliopositions.Thebusinessofaninvestmentcompanyconsistsofsellingitscapitalsharestothepublic;investingtheproceeds,principallyinsecurities,inamannerthatseekstoachieveitsestablishedinvestmentobjectives;anddistributingtoitsshareholdersthenetincomefrom,andnetgainsrealizedonsalesof,itsinvestments.
Therearemanydifferentcategoriesofinvestmentcompanies:
managementinvestmentcompanies,unitinvestmenttrusts,collectivetrusts,investmentpartnerships,certainseparateaccountsofinsurancecompanies,andoffshorefunds.Ownershipinaninvestmentcompanyisrepresentedbyunitsofownership,suchassharesorapartnershipinterest,towhichproportionatesharesofnetassetscanbeattributed.
Themanagementinvestmentcompanyisthemostdominantoftheseveraltypesofinvestmentcompanies.ThediscussioninthischapterispresentedprincipallyintermsofmanagementinvestmentcompaniesregisteredwiththeSecuritiesandExchangeCommission(SEC)undertheInvestmentCompanyActof1940(the1940Act),whichpredominateintheindustry.However,theaccountingprinciplesandauditingproceduresdiscussedhereingenerallyapplytoalltypesofinvestmentcompanies.Withinthemanagementinvestmentcompanyclassification,thetwomaintypesareopen-end(i.e.,mutual)fundsandclosed-endfunds.Investorsinmutualfundsinvestanddisinvestdirectlywiththefundonacontinuousbasis;thatis,mutualfundsgenerallyissueandredeemtheirsharesdaily.Closed-endfundsdonotredeemcapitalsharesonacontinuousbasis;instead,investorsdisinvestbysellingcapitalsharestoothers,aswithsecuritiesingeneral.Othertypesofinvestmentcompaniesgenerallyissueorredeemtheirequityinterestsinaccordancewiththeirorganizingdocument(i.e.,partnershipagreementortrustindenture).ManagementinvestmentcompaniesoperateinanenvironmentthatishighlyregulatedbytheSEC,extremelycompetitive,andsubjecttospecializedtaxtreatment.
Intheearly1980s,theinvestmentcompanyindustrychangedfromonethatwasprincipallyequity-orientedtoonethatalsoincludesmutualfundsthatinvestindebtandmoneymarketinstruments.Sincethattime,mutualfundproductshavecontinuedtodevelopinresponsetocustomerdemandandtheavailabilityofinnovativeinvestmentvehicles,suchasinternational/globalfunds,high-yield(or"junk")bondfunds,sectorfunds,tax-exemptfunds,multipleportfolioseriesfunds,andmortgage-backedsecurityfunds.Investmentstrategiesutilizingoptions,futures,andforwardcontractshavebeenusedtoenhanceyieldsandtohedgeinvestmentrisk.Inaddition,closed-endfundswithavarietyofobjectives,includingforeignanddomesticequitygrowthaswellasfixed-incomebondportfolios,havefoundincreasedfavorwiththeinvestingpublic.
Theconduit,or"pass-through,"conceptunderliestheoperationsoftheentireindustry.BycomplyingwithspecificSECregulationsandcertainsectionsoftheInternalRevenueCode(IRC)(describedlater),amanagementinvestmentcompanycandistributeasdividendstoitsshareholders,netinvestmentincomeearnedandcapitalgainsrealized,withnofederalincometaxesbeingassessedagainstthefund;theshareholderpaystheappropriatetaxandthusdoubletaxationisavoided.Netinvestmentincomeundergenerallyacceptedaccountingprinciples(GAAP)comprisesincomefromdividendsandinterestonaninvestmentcompany'sinvestments,plusallotherincomeexceptrealizedandunrealizedgainsorlossesfromsecurityandforeigncurrencytransactions,minusoperatingexpensesotherthanfederal,state,andforeignincometaxesonrealizedgainsfromsecuritytransactions.Inaddition,theeligibilityofdividendsforcertainfavorablecorporatefederalincometaxconsiderationscanberetainedbythefundandpassedthroughtoitscorporateshareholders.FailureofafundtocomplywithSECandInternalRevenueService(IRS)regulationscouldsubjectittothetaxrulesapplicabletoordinarycorporations.
Theauditorshouldbeawareofanumberofspecifictaxandregulatoryconstraintsonmanagementinvestmentcompanies.First,toqualifyasaregulatedinvestmentcompany(RIC),discussedlater,fortaxpurposes,aninvestmentcompanymust:
∙Beregisteredunderthe1940Actasamanagementinvestmentcompanyorunitinvestmenttrust,orhaveelectedtobetreatedasabusinessdevelopmentcompany.TheinvestmentcompanyalsomustelecttobetreatedasaRIC.
∙Meetseveraldiversification-of-assetstestsonaquarterlybasis.Thesetestsareparticularlyimportantforstart-upfunds,becausecertainrequirementsmustbemetattheendofthefirstquarterofafund'sinitialyear.
∙Deriveatleast90percentofits"grossincome"fromdividends,interest,andgainsfromthesaleorotherdispositionofsecurities,foreigncurrencies,orotherqualifyingincome,including,butnotlimitedto,gainsfromoptions,futurescontracts,orforwardcontracts.
∙Distributetoshareholdersatleast90percentofthefund's"netinvestmentcompanytaxableincome."
WhilethisisnotarequirementtomaintainRICstatus,theIRCrequiresthataRICmustdistributetoitsshareholdersbyDecember31atleast98percentofitscapitalgainsincome(forthe12-monthperiodendedOctober31)and98percentofitsordinaryincome(forthe12-monthperiodendedDecember31),orpayanondeductible4percentfederalexcisetaxontheundistributedamount.
Second,toqualifyforexemptionfromtaxesonnetinvestmentincomeandcapitalgainsrealized,aRICmustdistribute100percentofsuchincomeannuallytoitsshareholders.Othertaxmattersthatmustbeconsideredincludethefollowing:
∙Forfederalincometaxpurposes,netshort-termcapitalgainsareconsideredordinaryincometotheextentthattheyexceednetlong-termcapitallosses.
∙Certaincorporateactions,suchasareturnofcapital,affectcapitalgainorlossdetermination.
∙Afundmayelectnottodistributelong-termcapitalgains,butmayretainthemandrecordandpayafederalincometaxliabilitythereon(inthissituation,theshareholdersoftheRICwouldreceiveacreditforthetaxespaidbythefund).
∙Capitalgainsneednotbedistributedifthefundhasanequalorgreateramountofcapitallosscarryoversavailable.Fundsmaycarrycapitallossesforwardforeightyears.
∙TheSECusuallypermitsonlytwodistributionsoflong-termcapitalgainsinataxyear.
InadditiontoSubchapterMoftheInternalRevenueCode,asamended(Sections851to855andSection4982),theauditorofamanagementinvestmentcompanyshouldbefamiliarwiththefollowingfederalregulations,whichaddressallaspectsoffundoperations,includingthecontentsofafundprospectus,investmentportfoliodiversification,recordkeeping,advertising,andrelatedpartytransactions,aswellasfinancialstatementreportinganddisclosures:
∙TheInvestmentCompanyActof1940,asamended
∙TheInvestmentAdvisorsActof1940,asamended(theAdvisorsAct)
∙TheSecuritiesActof1933(the1933Act)
∙TheSecuritiesExchangeActof1934(the1934Act)
∙Article6ofRegulationS-X
∙SEC'sCodificationofFinancialReportingPolicies
TheauditoralsoshouldbefamiliarwiththeguidanceintheAICPAauditandaccountingguide,AuditsofInvestmentCompanies.
Theauditorshouldunderstandthedifferencesamongthefollowingdesignationsrelatingtomutualfunds,someofwhichhavebeenformulatedbytheregulatoryandtaxingauthorities:
∙RegulatedInvestmentCompany.AninvestmentcompanythatqualifiesforspecialtaxtreatmentprovidedbySubchapterMoftheIRCbymeetingtherequirementsofSubchapterMandfollowingtheconduitconceptofpassingitsincometoitsshareholders.
∙RegisteredInvestmentCompany.AninvestmentcompanythathasfiledaregistrationstatementwiththeSECinaccordancewiththerequirementsofthe1940Act,whichstatementhasbeendeclaredeffectivebytheSEC.
∙DiversifiedInvestmentCompany.Amanagementinvestmentcompanyhavingatleast75percentofitstotalassetsincashandcashitems(includingreceivables),governmentsecurities,securitiesofotherinvestmentcompanies,andothersecurities,withnomorethan5percentofitstotalassetsinanyoneissuer,andnotholdingmorethan10percentofthevotingsecuritiesofanyoneissuer(Section5ofthe1940Act).
∙LoadFund.Anopen-endinvestmentcompanythataddsasalescharge(ofupto8-1/2percent)tothenetassetvalueincomputingtheofferingpricetoprovideforunderwriters'anddealers'commissions.
∙No-LoadFund.Amutualfundsellingitsshares