Over the past several years, certain not-for-profit organizations, healthcare entities, pension plans and investment companies—including funds of funds; have dramatically increased their investment in financial instruments that do not have a readily determinable market value. These investments are commonly referred to as alternative investments. Generally, these entities are required by GAAP to carry these investments at fair value. The continued increase in the percentage of alternative investments to both net assets and total investment portfolio subjects these entities to complex fair value accounting and has exposed their investment portfolios to greater risk and volatility. 

Due to the increased risk of misstatement inherent with these investments, the Audit Issues Task Force of the Auditing Standards Board established the Alternative Investments Task Force. The Task Force was charged with providing additional guidance to auditors of investor entities as to how the auditor may obtain sufficient appropriate audit evidence in order to conclude that the financial statements are free of material misstatement.  As a result, the Alternative Investments Task Force has developed and issued a practice aid for auditors "Alternative Investments—Audit Considerations." The Task Force believes that this non authoritative practice aid will assist auditors in auditing alternative investments. The practice aid includes guidance on:

1. General considerations pertaining to auditing alternative investments
2. Addressing management’s financial statement existence assertion
3. Addressing management’s financial statement valuation assertion
4. Management representations
5. Disclosure of certain significant risks and uncertainties
6. Reporting

The practice aid also includes the following Appendixes:

Appendix 1: Example Confirmation for Alternative Investments
Appendix 2: Illustrative Examples of Due Diligence, Ongoing Monitoring and Financial Reporting Controls

• Alternative Investments Audit Considerations: A Practice Aid for Auditors
  
  
• Interpretation No. 1, "Auditing Interests in Trusts Held by a Third-Party Trustee and Reported at Fair Value," of AU Section 328
  
  
• Interpretation No. 1, "Auditing Investments in Securities Where a Readily Determinable Fair Value Does Not Exist," of AU Section 332