Audit and Assurance Practice Exam

What is generally true about the audit procedures related to financial instruments in a ready market?

1. They are simpler than those for illiquid instruments

2. They require more in-depth valuation work

3. They are more subject to management estimates

4. They have less regulatory scrutiny

The correct answer is: They are simpler than those for illiquid instruments

In a ready market, financial instruments are typically easier to value due to their liquidity and the abundance of available market data. This means that the audit procedures can often be more straightforward. When financial instruments are readily traded, auditors can refer to observable prices and market quotations, allowing for a more efficient assessment of fairness. The simplicity in auditing procedures arises from the clarity of transaction history and the ongoing availability of market information, which reduces ambiguity and enhances reliability in the valuation of those instruments. Consequently, auditors can apply a more streamlined approach compared to the extensive, more complex procedures necessary for valuing illiquid instruments, which often require significant estimation and judgment to assess fair value accurately. In contrast, other options suggest requirements for more in-depth work or higher estimates, which are generally not as prevalent in a ready market situation due to the straightforward nature of the valuations involved.