Auditing Investment Portfolios

IFRS 9 prohibits recording Investment at Cost Under IFRS 9, equity investments are generally required to be measured at fair value. Using cost as the carrying amount is only permissible in very limited circumstances essentially as a proxy for fair value when more precise measurement is impracticable. IFRS 9 explicitly states that all investments in equity instruments must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. This implies management responsibility to justify that cost is still a valid approximation of fair value. Importantly, this is not a free choice it’s a temporary estimation method. IFRS 9 eliminated the old IAS 39 “no reliable measure” exception; thus, fair value should be determined whenever feasible. Critically, IFRS 9 requires ongoing assessment of whether cost remains appropriate. Management must consider all new information and conditions each reporting period. IFRS 9 guidance notes that if any facts indicate cost might no longer represent fair value, the investment must be re-measured at fair value. This means that when there are signs of a change in the investee’s value, the company cannot leave invesment at cost. They have an obligation to estimate fair value using an appropriate valuation technique as per IFRS 13 (even if valuation is difficult or requires significant judgment). In summary: Management’s responsibility under IFRS 9 is to use cost as a proxy only if it genuinely equals fair value and no better estimate is available. They must continually verify this. Once there are indicators that cost might not be representative of fair value. IFRS 9 mandates switching to a fair value measurement basis. Auditor should expect to see robust analysis from management supporting the use of cost (initially and at year-end) and evidence that management considered market data or valuation techniques in light of current conditions Auditor’s Obligations: The auditing standards require the auditor to obtain sufficient appropriate evidence for management’s estimates. Promptly communicate the issue to MGT and TCWG. Consider using an auditor’s expert as part of auditor’s risk response treating the valuation a high-risk area. Perform alternative audit procedures, include calculating basic valuation metrics or obtaining market quotes for similar companies. Assess materiality and impact on the financial statements Potential modification of the audit opinion If management still does not provide a reasonable fair value estimate, auditor will likely have to modify the audit report. Either Scope Limitation or Material Misstatement Lack of a fair value study is not an acceptable excuse in the auditor’s conclusion. The auditor must either get the evidence or reflect the shortfall in the audit report. This approach is especially important in a special purpose audit where a specific user is relying on the auditor to identify any departures from IFRS #IFRS_9 #audit #Investment

How to differentiate if you are getting genuine investment advice or being sold products that benefit the advisor more than you? Many of our clients come to us after dealing with traditional wealth management setups. At the time of taking over their portfolios under our advisory, we do a portfolio audit to understand their current portfolio structure and what changes need to be done to align the investments with their risk profile and market conditions. What we observed was not very surprising to us but clients weren't much aware of the mismanagement in their portfolios. Here are the common patterns we observed that are not in the interest of the clients: 𝟭. 𝗧𝗼𝗼 𝗺𝗮𝗻𝘆 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝘀: If your portfolio has more than 20 products in varied proportions, then there is a high likelihood that your advisor is selling you new and new products that pay higher commissions than the existing ones. Too many products create clutter in the portfolio and distract from efficient management of your portfolio. 𝟮. 𝗨𝗻𝗱𝗲𝗿𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗶𝗻𝗴 𝗣𝗿𝗼𝗱𝘂𝗰𝘁𝘀: Many underperforming products (in their respective categories) continue to stay in the portfolio even when the underperformance has been observed for multiple years. This usually happens because either the ongoing commission is high or there is no regular reviewing and monitoring of your investments. 𝟯. 𝗖𝗼𝗺𝗽𝗹𝗲𝘅 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲𝘀: Many PMSs and AIFs underperform MFs (in respective categories) after costs and taxes but many still exist in the portfolios. This happens because many such fancy products offer higher payouts to distributors. Of course, there are a few AIFs and PMSs that make sense but selecting those needs thorough due diligence and should have a track record of clear outperformance than mutual funds in the same category. Some specialized AIFs can be considered after deep research, due diligence, and investment suitability. 𝟰. 𝗘𝗾𝘂𝗶𝘁𝘆 𝗛𝗲𝗮𝘃𝘆 𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼: Higher allocation to equity (>80%) at all market levels and low to no allocation to Debt and Gold asset class indicates that your portfolio lacks diversification. A balanced portfolio must have representation from at least the three major asset classes for weathering volatility. Usually, equity products offer higher commissions than debt which offer higher commissions than Gold. That's why most of the portfolios we have audited are equity-heavy despite the conservative risk profile of the investor. If you find any of the above-mentioned observations in your portfolio, you must speak to your advisor and understand the rationale for such. If you do not get a convincing response, then it's clear, that you are being sold products to maximize commissions and not what is best for you. The best way to avoid such a situation is to deal with fee-only SEBI Registered Investment Advisors who cannot earn commissions by regulation. Truemind Capital #misselling #genuineadvice #truemindcapital

Auditing Market Risk in Financial Institutions: Turning Volatility into Assurance Market risk—the possibility of financial loss due to fluctuations in market prices—remains a core concern for banks, asset managers, and insurers. A robust audit of market risk not only confirms regulatory compliance but also strengthens risk controls and enhances investor confidence. 🔍 Key Steps in Market Risk Audits 1. Risk Identification: Map exposures across trading books, investment portfolios, and non-trading positions. 2. Model Validation: Test Value-at-Risk (VaR) and stress-testing models for accuracy. For example, confirm that a bank’s VaR model captures extreme currency swings during geopolitical events. 3. Data Integrity Checks: Ensure price feeds and market data are complete and timely—e.g., verifying that end-of-day equity prices align with independent sources. 4. Control Reviews: Evaluate limits, approvals, and exception processes. An insurer might test how swiftly limit breaches trigger escalation. 5. Reporting & Governance: Assess board reports and risk committee minutes to confirm transparent oversight. By embedding market risk audits into continuous monitoring—using automated alerts for threshold breaches—institutions convert compliance into a competitive edge. Align your audit framework with Basel III standards and local regulations to safeguard assets and reputation in unpredictable markets. #MarketRisk #Audit #FinancialInstitutions #RiskManagement #BaselIII #Compliance