Defining and Understanding Alternative Investments

Alternative investments are investments for which a readily determinable fair market value does not exist. In other words, investments that are not listed on traditional exchanges or whose market price isn’t available from traditional sources like the NASDAQ. The difficulty in determining their fair market value presents a challenge to auditors, who must utilize a number of nonstandard procedures to become comfortable with the fair market value provided.

In order to facilitate the auditor’s ability to become comfortable with the fair market value of alternative investments, it is important that management understand their responsibility. It is management’s responsibility to:
• Understand the fund manager’s method for valuing the alternative investments
• Understand the nature of the underlying investments and the portfolio strategy used by the fund manager
• Obtain sufficient information to evaluate and challenge the fund’s valuation
• Determine the fair value measurements and disclosures to be included in the financial statements

For more information on alternative investments and how they may affect your audit contact us.

Authored by Ashley Parsons.