The advent of sophisticated financial instruments has dramatically changed the nature of investing during the past

decade. Many financial instruments offer potentially greater returns for the investor but at higher levels of risk.

a. Review the FASB’s discussion on financial instruments, or a finance text, to identify various types of financial instruments.

Select five instruments that you consider interesting and prepare

a report addressing (1) the nature of the instrument, (2) its underlying business purpose, (3) risks associated with the instrument, and (4) special audit procedures that should be applied during the audit of a client with a significant investment in the instrument.

b. Now assume that one of your audit clients has a large

investment in a particularly risky financial instrument. This financial instrument exposes the client to significant eco-

nomic loss in the unlikely event that the marketability of the

instrument declines. You do not feel that the client’s foot-

note disclosures adequately reveal the true risk profile of the instrument. What is your ethical obligation to the share-

holders of the client with regard to your knowledge of the

riskiness of this investment? You should discuss this issue in your assigned group.

Use the framework for ethical decision making outlined in

Chapter 4 to formulate your answer. Recall that the steps in that framework are as follows: (1) identify the ethical issue(s); (2) determine who are the affected parties and identify their rights; (3) determine the most important rights; (4) develop

alternative courses of action; (5) determine the likely conse- quences of each proposed course of action; (6) assess the possi- ble consequences, including an estimation of the greatest good for the greatest number, and determine whether the rights framework would cause any course of action to be eliminated; (7) decide on the appropriate course of action.