How to Calculate Amortization and Income on the Investments or Financial Instruments Classified as Held to Maturity (HTM)

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How to Calculate Amortization and Income on the Investments or Financial Instruments Classified
as Held to Maturity (HTM)

Only the Investments Classified as Held to Maturity are recorded in books at amortized Cost.

Q.1 When Amortization/Discount is required?

Ans. Amortization is required when securities (Investments) are purchased at the price higher than its Face Value.

And Discount calculation is required when the Securities (Investments) are purchased at the price lower than its Face Value.

Q#2 What is the Effect of Amortization/Discount.

Ans#2 Amortization is treated as an Expense and Discount is treated as Income.

Q#3 How to Amortize the premium/(discount) on the Investments (securities).

Ans. Premium/(discount) on Investment are to be amortized over the Maturity period of the Investment.

Key Terms:

Premium:   The Excess amount paid on the purchase of any Securities (Investments).

Discount: The Securities purchased at less than the Face value (at Discount)

Amortization = Coupon interest amount – Interest calculated at effective rate (at IRR).

Coupon interest: is interest calculated at the coupon rate, which is actually received.

Effective interest: is calculated using the (IRR=Internal Rate of Return)

IRR (Internal Rate of Return):  is the rate where the return is Zero. (the rate of return where no loss and no profit arise.)

Face Value it is the security’s actual value/Price.

Purchase Cost:  is the cost at which securities are purchased (Ex. A security having face value of 100,000 is purchased at the cost of 125,000 the difference between the face value and cost is the premium paid = 25,000)

Formulas:

Amortized cost: the value of Security after amortization (Purchase cost/Opening Amortized Cost – amortization for the period = amortized cost as at the period ended)

Coupon interest = Face Value * Coupon Interest Rate.

Effective Interest = Purchased Cost/Amortized Cost * Effective Interest Rate (IRR)

Amortization/(Discount):

Amortization/(Discount) = Coupon interest - Interest at Effective rate/IRR = Amortization/(Discount) for the period.

Amortized Cost: = Purchased Cost/Opening Amortized Cost– Amortization for the period – Principal Redemption (if any)

Complete Amortization Schedule for Pakistan Investment Bonds.

ABC Ltd                                              PIBs - 10 Years

For the year ended 31 December 2009   Issue Date          18-Apr-01

PIB HELD TO MATURITY                Maturity Date   18-Apr-11

                                                            Purchase cost   5,005,570

                                                            Face value        5,000,000

                                                            IRR (Half yearly)  6.976%

                                                            Coupon Rate        14%        

S#	Coupon Date	Interest / Redemption	Principal Redemption		Interest Income on IRR Basis	Discount/ Amortization	Closing Balance/ Amortized Cost
	Formula	F.V*Coup. Rate/2	As per Agreement		Purch. Cost * IRR	Int as per Coup. Rate - Int as per IRR	Opining. Amort. Cost  – Prncple Redemption -Amort.
1	18-Apr-08					-	5,005,570
2	18-Oct-08	350,000	-		349,221	779	5,004,791
3	18-Apr-09	350,000	-		349,167	833	5,003,957
4	18-Oct-09	350,000	-		349,108	892	5,003,066
5	18-Apr-10	350,000	-		349,046	954	5,002,112
6	18-Oct-10	350,000	-		348,980	1,020	5,001,092
7	18-Apr-11	350,000	5,000,000		348,908	1,092	-
						5,570
Amortization period			Days for the period		Total Days	Total Amortization for the year	Apportioned Premium
From 1 Jan to 18 April 09			108		182	495
From 18 April to 18 Oct 09			183		181	892
From 18 Oct to 31 Dec 09			74		182	388
						1,774
Amortized cost as at 18 Oct, 2009							5,003,066
	Amortization from 18 Oct to Dec 31,09						388
Amortized cost as at 31 Dec 2009							5,002,678

Ledger Entries:

At the time of purchase:

                                                            Debit               Credit

Investments                                          5,005,570

                 

Cash/Bank                                                       5,005,570

At the year ended 31 Dec, 2008:

Income Receivable/Cash/Bank  492,308

                       

                        Coupon interest                                    492,308          

Amortization Expense                           1,118

           

                        Investments                                          1,118

At the year ended 31 Dec, 2009:

Income Receivable/Cash/Bank  700,000

                       

                        Coupon interest                                    700,000          

Amortization Expense                           1,774

           

                        Investments                                          1,774

At the year ended 31 Dec, 2010:

Income Receivable/Cash/Bank  700,000

                       

                        Coupon interest                                    700,000          

Amortization Expense                           2,030

           

                        Investments                                          2,030

At the year ended 31 Dec, 2011:

Income Receivable/Cash/Bank  207,692

                       

                        Coupon interest                                    207,692          

Amortization Expense                           566

           

                        Investments                                          566

Click the Links Below to Download the Amortization Schedule in MS-Excel
 

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Access to Programs and Data Audit Work Program

Access to Programs and Data Audit Work Program

Audit Objectives
The purpose of this work program – focused on access to programs and data – is to outline the IT general controls to be tested, review the results of management’s testing, and document the procedures to test each control.

Document the procedures to be performed to conclude on the operating effectiveness of the controls identified, including a specific description of the nature, timing and extent of procedures to be performed. For all controls that are tested at an interim date, list the procedures performed to roll-forward the interim testing to period end.

Project Work Step
I. Audit Procedures
A. Determine that information security is managed to guide consistent implementation of security practices and that users are aware of the organization's position with regard to information security, as it pertains to financial reporting data.
B. Determine that logical and physical access to IT computing resources is appropriately restricted by the implementation of identification, authentication and authorization mechanisms to reduce the risk of unauthorized/inappropriate access to the organization’s relevant financial reporting applications or data.
C. Determine that procedures have been established so that user accounts are added, modified and deleted in a timely manner to reduce the risk of unauthorized/inappropriate access to the organization's relevant financial reporting applications or data.
D. Determine that an effective control process is in place to periodically review the appropriateness of access rights in order to reduce the risk of unauthorized/inappropriate access to the organization’s relevant financial reporting applications or data.
E. Determine that controls used to provide appropriate segregation of duties within key processes exist and are followed.
F. Document the procedures to be performed to conclude on the operating effectiveness of the controls identified, including a specific description of the nature, timing and extent of procedures to be performed. Consider the application of relevant PCAOB Auditing Standards and AICPA Audit and Accounting Guides.
II. Conclusion on Operating Effectiveness of Internal Controls
A. To support the overall assessment of management’s evaluation process, document internal audit’s evaluation of management’s tests of operating effectiveness for the related audit objective. Specifically, address the following key considerations:
1. Were procedures sufficient to assess design and operating effectiveness?
- Consider the nature, timing and extent of management’s procedures.
2. Were findings supported based on the testing performed?
3. Were exceptions/deficiencies adequately documented and followed up?
B. Conclude on the operating effectiveness of the controls over this audit objective and document any deficiencies noted. Weaknesses in pervasive controls should cause the internal auditor to alter the nature, timing, or extent of tests of operating effectiveness that otherwise would have been performed.
C. Document the impact of any deficiencies on the planned testing of operating effectiveness of other controls.

Audit Program Cash and bank balances

Audit Program (i)         Cash and bank balances		WP Ref.:
		Prepared by:
		Date:
		Reviewed by
		Date
Client:
Period:
Subject:	Cash and bank balances

			Amount in Rs.
Account balances:
Cash in hand
Cash at bank- Current
	- PLS
Classes of transactions:

S. No.	Audit Objectives	Assertions	Risk Assessment
			IR	CR	ROSM
1.	All cash and bank balances are completely and accurately recorded	CA
2.	All recorded cash and bank balances actually exist.	E
3.	All cash and bank balances are recorded at appropriate values.	V
4.	All cash and bank balances recorded are owned by the client and title is also in the name of client.	R
5.	All cash and bank balances are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.	OCAL RVU

S. No.	Audit Procedures	Objective	Done by	W. P. Ref.
Test of Controls
1.	Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions.	ALL
2.	Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions.	ALL
3.	Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same.	ALL
4.	Check that proper bank reconciliations are prepared, checked and approved. Long outstanding items are followed up and proper disposition of such items is made.	ALL
5.	Proper segregation of duties between custodian and accounting and approving personnel exist.	CE
6.	Payments vouchers are appropriately prepared and properly approved by designated authority.	ECA

S. No.	Audit Procedures		Objective	Done by	W. P. Ref.
7.	Ensure that management does not override the designed controls by n              Enquiring from the designated staff person n              Remain skeptical during performing test of design and test of effective operation
8.	Document the conclusion after performing test of controls and required level of assurance from substantive procedures.		N/A
Analytical Procedures
1.		Document logical commercial reasons for new bank accounts opened and closed during the year.	AU
2.		Compare current year balances with last year balances and ensure that any significant variation should be properly and logically reasoned.	CEA
Test of Details
1.		Attend year-end cash count and deposit verification.	E
2.		Circularize direct confirmations to all banks.	ER
3.		Trace opening balance in general ledger from last year working papers.	CE
4.		Obtain and examine bank reconciliations ensure the following: - n              No long outstanding item should remain unfollowed, n              No revenue nature item should be appearing n              All deposit made should be cleared within two days n              No long outstanding cheques of significant amount are unpresented; if so then check their payment voucher and ensure that no discrepancy is involved.	CEA
5.		Ensure that all balances etc. reported by bank in replies to bank confirmation request are included in records of the client.	CA
6.		Ensure that no balances are subject any encumbrance, if so then disclosure is made.	U
7.		Convert FCY accounts into PKR at year-end rate.	V
8.		Ensure that all bank accounts are in company's name.	R
9.		Ensure that closing balances as per our working paper file are in match with general ledger.	N/A
10.		Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.	OCAL RVU

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