Determine if the securities are correctly classified

Assume you are an auditor and are concerned about how a client is reporting its marketable securities. You know that under certain circumstances marketable securities must be reported at market value. In addition, you realize that if the marketable securities are classified as trading securities, any unrealized gains are shown on the income statement while unrealized gains on available-for-sale securities are disclosed in the owners’ equity section of the balance sheet. Your client has recently reclassified a large amount of marketable securities from available-for-sale to trading securities. This reclassification increased its current ratio from 1.9 to 2.3. The company has a large loan outstanding that requires a current ratio of 2.0.

How will you determine if the securities are correctly classified?

How will the various stakeholders be affected by your decision?

Solution:

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