AUDIT OF INVESTMENTS

Problem No. 1

1. Which of the following is not a control that is designed to protect investment securities?
a. Access to securities should be vested in more than one individual.
b. Securities should be properly controlled physically in order to prevent unauthorized usage.
c. Securities should be registered in the name of the owner.
d. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities.

2. When negotiable securities are of considerable volume, planning by the auditor is necessary to guard against
a. Substitution of securities already counted for other securities which should be on hand but are not.
b. Substitution of authentic securities with counterfeit securities.
c. Unauthorized negotiation of the securities before they are counted.
d. Unrecorded sales of securities after they are counted.

3. In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded shares an auditor
should inspect the securities or
a. Obtain written representations from management confirming that the securities are properly classified as trading securities.
b. Inspect the audited financial statements of the investee company.
c. Confirm the number of shares held by an independent custodian.
d. Determine that the investment is carried at the lower of cost or market.

4. Which of the following is the least effective audit procedure regarding the existence assertion for the securities held by the
auditee?
a. Examination of paid checks issued in payment of securities purchased.
b. Vouching all changes during the year to supporting documents.
c. Simultaneous count of liquid assets.
d. Confirmation from the custodian.

5. In auditing investments for proper valuation, the auditor should do all but the following:
a. Vouch purchases and sales of securities by tracing to brokers' advices and canceled checks.
b. Compare cost and market by reference to year end market values for selected securities.
c. Confirm securities held in safekeeping off the client's premises.
d. Recalculate gain or loss on disposals.

6. An audit procedure that provides evidence about proper valuation of trading securities arising from a short-term investment of
excess cash is
a. Recalculation of investment carrying value by applying the equity method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of securities held by broker.
d. Calculation of premium or discount amortization.

7. Of the following, which is the most efficient audit procedure for testing accrued interest earned on bond investments?
a. Vouching the receipt and deposit of interest checks.
b. Tracing interest declarations to an independent record book.
c. Recomputing interest earned.
d. Confirming interest rate with the issuer of the bonds.

Problem No. 2

On January 1, 2020, CLOY Corporation purchased P1,000,000 10% bonds for P1,051,510 (including broker’s commission of P20,000).
Interest is payable annually every December 31. The bonds mature on December 31, 2022. The prevailing market rate for the bonds
is 9% at December 31, 2020.

1. If the bonds are classified as FA@FVTPL, the amount to be recognized as fair value adjustment loss in its 2020 profit or loss is
a. P33,900 c. P13,900
b. P26,180 d. P 6,180

2. If the bonds are classified as FA@AC, the amount to be reported on the entity’s December 31, 2020 statement of financial position
is
a. P1,034,340 c. P1,025,330
b. P1,035,630 d. P1,017,610

3. Investment in debt instruments classified as FA@FVTOCI recognizes which of the following in OCI?
a. Changes in fair value

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 b. Impairment gains and losses
c. Interest calculated using the effective interest method.
d. All of the above.

4. Which statement is correct if the bonds are classified as FA@FVTOCI?

a. The amount to be recognized in 2020 profit or loss is P100,000. P84,121
b. The amount to be recognized in 2020 other comprehensive income is P33,900. P18,020
c. The amount to be reported on the entity’s December 31, 2020 statement of financial position is P1,035,630. P1,017,610
d. None of the above.

5. The amounts that are recognized in profit or loss are the same for which of the following?
a. FA@FVTPL and FA@FVOCI
b. FA@FVTPL and FA@AC
c. FA@AC and FA@FVTOCI
d. None of the above.

6. If the entity sold the investment on 31 December 2020 at fair value, the entity will report a ‘reclassification adjustment’ if the
investment is classified as
a. FA@FVTPL
b. FA@FVTOCI
c. FA@AC
d. None of the above.

Problem No. 3

Capt. Ri Corporation purchased P200,000 8% bonds for P184,557 on January 1, 2018. Capt. Ri classified the bonds as financial asset
at fair value through other comprehensive income (FA@FVTOCI). The bonds were purchased to yield 10% interest. Interest is payable
semiannually on July 1 and January 1. The bonds mature on January 1, 2023. Capt. Ri uses the effective interest method to amortize
premium or discount. On January 2, 2020, Capt. Ri sold the bonds for P185,000 after receiving interest to meet its liquidity needs.

The market values of the bonds are as follows:

December 31, 2018 P190,449

December 31, 2019 186,363

Based on the above and the result of your audit, determine the following:

1. Interest income for the year 2018

a. P14,869 c. P18,517
b. P16,000 d. P18,456

2. Unrealized gain on FA@FVTOCI as of December 31, 2018

a. P3,436 c. P5,892
b. P3,375 d. P 0

3. Unrealized gain or loss on FA@FVTOCI in 2019

a. P8,053 gain c. P3,351 gain
b. P3,486 loss d. P6,861 loss

4. Unrealized gain or loss on FA@FVTOCI as of December 31, 2019

a. P8,053 gain c. P3,351 gain
b. P3,486 loss d. P6,861 loss

5. Realized gain or loss on sale of FA@FVTOCI on January 2, 2020

a. P6,861 loss c. P4,849 loss
b. P4,714 loss d. P9,416 gain

Problem No. 4

You were engaged by Yoon Se-Ri Company to audit its financial statements for the year 2020. During the course of your audit, you
noted that the following trading securities were properly reported as current assets at December 31, 2019:

Cost Market
South Corporation, 5,000 shares, convertible preference shares P 450,000 P 487,500
North, Inc., 30,000 shares of ordinary share 675,000 742,500
Army Co., 10,000 shares of ordinary share 618,750 450,000
P1,743,750 P1,680,000

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The following sale and conversion transactions transpired during 2020:

Mar. 1 Sold 12,500 shares of North, Inc. for P33.75 per share.
April 1 Sold 2,500 shares of Army Co. for P45 per share.
Sept. 21 Converted 2,500 shares of South Corporation’s preference share into 7,500 shares of South Corporation’s
ordinary share, when the market price was P78.75 per share for the preference share and P47.25 per share
for the ordinary share.

The following 2020 dividend information pertains to shares owned by Yoon Se-Ri:

Jan. 2 Army Co. issued a 10% share dividend when the market price of Army Co.’s ordinary share was P49.50 per
share.
March 31 and South Corporation paid dividends of P2.50 per share on its preference share, to shareholders of record on
Sept. 30 March 15 and September 15, respectively. South Corporation did not pay dividends on its ordinary share
during 2020.
July 1 North, Inc. paid a P2.25 per share dividend on its ordinary share.

Market prices per share of the securities were as follows:

12/31/2020 12/31/2019
South Corp., preference 92.25 97.50
South Corp., ordinary 42.75 38.25
North, Inc., ordinary 22.50 24.75
Army Co., ordinary 40.50 45.00

All of the foregoing shares are listed in the Philippine Stock Exchange.

Based on the above and the result of your audit, you are to provide the answers to the following:

1. How much is the gain on sale of 12,500 North, Inc. shares?

a. P112,500 c. P140,625
b. P281,250 d. P 0

2. How much is the gain or loss on sale of 2,500 Army Co. shares?
a. P28,125 gain c. P28,125 loss
b. P10,227 gain d. P 0

3. How much is the gain or loss on conversion of 2,500 South preference share into 15,000 ordinary share?
a. P 28,125 loss c. P46,875 loss
b. P129,375 gain d. P 0

4. How much is the total dividend income for the year 2020?
a. P 64,375 c. P 51,875
b. P101,375 d. P364,375

5. How much should be reported as unrealized gain on trading securities in the company’s income statement for the year 2020?
a. P 4,500 c. P59,250
b. P67,773 d. P 0

Problem No. 5

Hallasan Corporation’s accounting records included the following investments:

Investment in Ordinary Shares

1/1/18 P1,000,000 7/1/20 P800,000
12/31/18 200,000
12/31/19 300,000

Investment in Bonds
1/1/20 P1,051,510

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During the course of your audit, you noted the following.

Investment in Ordinary Shares

• The investment is not designated at FVTOCI.
• Acquired on January 1, 2018 at P950,000 plus transaction costs of P50,000.
• On July 1, 2020, the entity sold half of the investment for its fair value of P800,000.
• Fair value of the investment: December 31, 2018, P1,200,000; December 31, 2019, P1,500,000; December 31, 2020, P900,000.

Investment in Bonds
• The entity uses the ‘held for collection’ business model for acquired and originated debt instruments.
• P1,000,000, 10% bonds, purchased for P1,051,510 including transaction costs of P20,000. Interest is payable annually every
December 31. The bonds mature on December 31, 2022. The effective interest rate is 8%.
• The prevailing market rate for the bonds is 9% at December 31, 2020.

Based on the above and the result of your audit, answer the following:

1. The carrying amount of Investment in Ordinary Shares as of December 31, 2020 is misstated by
a. P200,000 over c. P50,000 over
b. P200,000 under d. P50,000 under

2. The carrying amount of Investment in Bonds as of December 31, 2020 is overstated by

a. P13,900 c. P18,020
b. P15,880 d. P33,900

3. The net amount to be recognized in 2020 profit or loss related to these investments is
a. P384,121 c. P134,121
b. P284,121 d. P114,121

4. If the investment in bonds is FVTOCI, the carrying amount as of December 31, 2020 is overstated by
a. P15,880 c. P33,900
b. P18,020 d. P38,020

5. An audit procedure that provides evidence about proper valuation of equity securities classified as FA@FVTPL is
a. Confirmation of securities held by broker.
b. Calculation of premium or discount amortization.
c. Recalculation of investment carrying amount by applying the equity method.
d. Comparison of carrying amount with current market quotations.

Problem No. 6

In connection with your audit of the financial statements of the Taean Company for the year 2020, the following FA@FVTOCI and
Dividend Income accounts were presented to you:

FA@FVTOCI
Date Description Ref. Debit Credit
01/08 Purchased 20,000 shares ordinary, par value P50, Kwang-Beom Co. VR-69 780,000
03/30 10,000 shares Kwang-Beom Co. received as share dividend CJ-30 500,000
04/03 Sold 10,000 shares @ P25 CR-44 250,000
12/02 Sold 4,000 shares @ P60 CR-65 240,000

Dividend Income
Date Description Ref. Debit Credit
03/30 Share dividend SJ-8 500,000
08/30 Kwang-Beom Company ordinary CR-52 100,000

The following information was obtained during your examination:

1. From independent sources, you determine the following dividend information:

Type of Dividend Date Date of Date of

Declared Record Payment Rate
Share 02/14/2020 02/28/2020 03/30/2020 50%
Cash 08/01/2020 08/15/2020 08/30/2020 P5/share
Cash 12/01/2020 12/15/2020 01/02/2021 20%

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2. Closing market quotation as at December 31, 2020:

Bid Asked
Kwang-Beom Company ordinary 13-3/4 16-1/2

Requirements:

Based on the above and the result of your audit, answer the following:

1. How much is the gain or loss on the April 3, 2020 sale to be recognized in profit or loss?
a. P10,000 loss c. P140,000 loss
b. P10,000 gain d. P 0

3. How much is the total dividend income for the year 2020?
a. P600,000 c. P100,000
b. P800,000 d. P300,000

4. How much is the adjusted balance of FVTOCI Securities as of December 31, 2020?
a. P290,000 c. P220,000
b. P264,000 d. P416,000

5. How much is the Unrealized Loss on FVTOCI as of December 31, 2020?

a. P196,000 c. P152,000
b. P 70,000 d. P 0

Problem No. 7

Korea Inc. acquired 50,000 shares of North Inc. share for P5 per share and 125,000 shares of South Corp. share for P10 per share on
January 2, 2019. Both North Inc. and South Corp. have 500,000 shares of no-par ordinary share outstanding. Both securities are being
held as long term investments. Changes in retained earnings for North and South for 2019 and 2020 are as follows:

North, Inc. South Corp.

Retained earnings (deficit), 1/1/19 P1,000,000 (P175,000)
Cash dividends, 2019 (125,000) -
Net income, 2019 200,000 325,000
Retained earnings, December 31, 2019 1,075,000 150,000
Cash dividends, 2020 (150,000) (50,000)
Net income, 2020 300,000 125,000
Retained earnings, December 31, 2020 P1,225,000 P 225,000

Market value of share: 12/31/19 P7.00 P12.00

12/31/20 6.50 15.00

Based on the above and the result of your audit, answer the following:

1. The income from investment in North, Inc. in 2020 is

a. P15,000 c. P12,500
b. P 1,000 d. P 0

2. The income from investment in South, Inc. in 2019 is

a. P31,250 c. P2,500
b. P81,250 d. P 0

3. The carrying value of Investment in North, Inc. as December 31, 2020 is

a. P250,000 c. P325,000
b. P350,000 d. P252,500

4. The carrying value of Investment in South, Inc. as December 31, 2020 is

a. P1,250,000 c. P1,875,000
b. P1,268,750 d. P1,350,000

5. How much is the unrealized gain or loss that will be included as component of equity as of December 31, 2020?
a. P75,000 gain c. P25,000 gain
b. P25,000 loss d. P 0

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Problem No. 8

On January 2, 2019, Jeong-Hyeok, Inc. acquired a 15% interest in Se-Ri Corp. by paying P2,000,000 for 10,000 ordinary shares. On this
date, the net assets of Se-Ri Corp. totaled P12,000,000. The fair values of Se-Ri Corp.’s identifiable assets and liabilities were equal to
their book values. The investment in Se-Ri Corp. is classified as FVTOCI.

On January 1, 2020, Jeong-Hyeok paid P4,500,000 for 30,000 additional ordinary shares of Se-Ri, which represents a 25% interest in
Se-Ri. The fair value of Se-Ri’s identifiable net assets was equal to their book values of P13,000,000.

During 2019 and 2020 the following occurred:

Se-Ri’s Profit Dividends Paid by Se-Ri

2019 P2,000,000 P1,000,000
2020 5,000,000 1,500,000

The fair value of Jeong-Hyeok's investment in Se-Ri securities is as follows: December 31, 2019, P2,700,000; December 31, 2020,
P8,700,000.

1. The amount to be recognized in Jeong-Hyeok’s 2019 profit or loss related to this investment is
a. P850,000 c. P300,000
b. P700,000 d. P150,000

2. In accordance with PIC Q&A 2018-07 as amended, the amount recognized in OCI on the previously held equity interest
a. May be transferred to profit or loss.
b. Should be transferred to retained earnings.
c. Either a or b.
d. Neither a nor b.

3. The balance of the investment in Se-Ri account at December 31, 2020 is

a. P8,600,000 c. P7,900,000
b. P8,050,000 d. P6,500,000

4. Which of the following provides the best form of evidence pertaining to the annual valuation of an investment in which the
independent auditor’s client owns a 30% voting interest?
a. Market quotations of the investee company’s stock.
b. Current fair value of the investee company’s assets.
c. Historical cost of the investee company’s assets.
d. Audited financial statements of the investee company.

End of Material

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