The biggest difference between the SAS and the Audit Guide is in the section that deals with securities fair valued based on internally developed prices. The auditor should assess the reasonableness and appropriateness of any models used in valuation, including input variables, assumptions and expected future cash flows. The auditor may consider it necessary to involve a specialist in assessing an entity s fair value estimates or related models. The auditor should review valuation methodology, determine whether the methods are followed, review procedures applied by the Board and inspect underlying documentation to determine whether the procedures are reasonable and documentation is appropriate. SAS 81 is effective for audits of financial statements for periods ending on or after December 15, 1997.
Early adoption is permissible.
Compensating balance arrangements are when a fund receives a reduction in the fee charged by the service provider to the extent of any cash balances left on deposit with the service provider. It appears that the IRS believes that these earnings credits received by a fund in a compensating balance arrangement may be taxable income to a fund. The inclusion of these earnings credits as taxable income is a problem particularly in tax-exempt funds. Apparently, the IRS has added this issue to the checklist that agents utilize to perform their examination. This might be appropriate for both advisers to gain the status that they would like if they are LLCs, as well as unregistered funds to elect a certain status, particularly in an offshore setting.