APPLIED AUDITING

INVESTMENTS (3)

Test I

1. 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

2. An auditee is holding equity securities as collateral for a debt. The auditor should:
a. Determine from data published in the financial press that the auditee has recorded dividend income
from the collateral
b. Ascertain the value of the securities
c. Ascertain that the amount recorded for the collateral in the investment account is equal to its fair
value at the balance sheet date
d. Verify that the client has taken title to the securities

3. Which of the following is the most effective audit procedure for verification of dividends earned on
investments in equity securities?
a. Tracing deposited dividend checks to the cash receipts book
b. Reconciling amount received with published dividend records
c. Comparing the amounts received with preceding year dividends received
d. Recomputing selected extensions and footings of dividend schedules and comparing totals to the
general ledger
4. In confirming with an outside agent, such as a financial institution, that the agent is holding investment
securities in the client’s name an auditor most likely gathers evidence in support of management’s
financial statement assertions of existence and:
a. Valuation c. Completeness
b. Rights and obligations d. Presentation and disclosure
5. In establishing the existence and ownership of an investment held by a corporation in the form of
publicly traded stock and 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
6. An auditor most likely to verify the interest earned on bond investment by:
a. Verifying the receipt and deposit of interest checks
b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on the basis of face amount, interest rate, and period held
d. Testing controls relevant to cash receipts
7. 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
8. In verifying the amount of goodwill by a client, the most convincing evidence an auditor can obtain is by
comparing the recorded value of assets acquired with the:
a. Assessed value as evidenced by tax bills
b. Sellers book value as evidenced by financial statements
c. Insured value as evidenced by insurance policies
d. Appraised value as evidenced by independent appraisals
9. The auditor can best verify a client’s bond sinking-fund transactions and year-end balance by:
a. Confirmation with individual holders of retired bonds
b. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization of bond discount or premium
d. Examination and count of the bonds retired during the year
10. An auditor who physically examines securities should insist that a client representative be present in
order to:
a. Detect fraudulent securities
b. Lend authority to the auditor’s directives
c. Coordinate the return of securities to the proper locations
d. Acknowledge the receipt of securities returned

11. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the
reasonableness of the:
a. Classification between current and non-current porfolios
b. Valuation of marketable equity securities
c. Existence of unrealized gains or losses in the porfolios
d. Completeness of recorded investment income

12. In performing tests of the carrying value of trading securities, the auditor would usually:
a. Ask management to estimate the market value of the securities
b. Refer to the quoted market prices of the securities
c. Value the securities at cost regardless of their market prices
d. Count the securities

13. Which of the following statements is the least accepted reason/purpose for acquiring long-term
investments:
a. To create specific funds c. To generate cash for operating purpose
b. To yield a relatively permanent other income d. To establish business relationship

14. In testing long-term investments, an auditor would use analytical procedures to ascertain the
rasonableness of the classification between current and noncurrent portfolios

In testing long-term investments, an auditor would use analytical procedures to ascertain the
reasonableness of the valuation of marketable equity securities.

In testing long-term investments, an auditor would use analytical procedures to ascertain the
reasonableness of the existence of unrealized gains or losses in the proforlio.

A B C D
First statement False True False False
Second statement True True False False
Third statement True True True False

Test II

You are engaged by SOSA COMPANY to audit its financial statements for the year 2005. During
the course of your audit, you noted that the following trading securities were properly reported as current
assets at December 31, 2004:
Cost Market
Aquata Corporation, 10,000 shares,
convertible preferred shares P 900,000 P 975,000
Andrina, Inc., 60,000 shares of common stock 1,350,000 1,485,000
Attina Co., 20,000 shares of common stock 1,237,500 900,000
P 3,487,500 P 3,330,000
========== =========
The following sale and conversion transactions transpired during 2005:
March 27 Sold 25,000 shares of Andrina for 33.75 per share.

April 15 Sod 5,000 shares of Attina for P45 per share

Sept. 21 Converted 5,000 shares of Aquata’s preferred stock into 15,000 shares of Aquata’s common
stock, when the market price was P78.75 per share for the preferred stock and P47.25 per
share for the common stock.

The following 2005 dividend information pertains to stock owned by SOSA:

Jan 12 Attina issued a 10% stock dividend when the market price of Attina’s common stock was
P49.50 per share.
March 31, Aquata paid dividends of P2.50 per share on its preferred stock, to stockholders of record
and Sept. 30 on March 15 ad September 15, respectively. Aquata did not pay dividends on its common
 stock during 2005.
July 1 Ardrina paid a P2.25 per share dividend on its common stock

June 30 Adella paid semi-annual dividends of P1.50 on each of these dates. Adella’s net income
And Dec, 31 for the year ended December 31, 2005 was P2,400,000.

On January 2, 2005, SOSA purchased 100,000 shares of Adella Corporation common stock for P3,600,000,
representing 20% of Adella’s outstanding common stock and an underlying equity of P3,150,000 in Adella’s
net assets on January 2, 2005.

SOSA intends to hold Adella’s stock as a long-term investment, with the remaining investments being
considered as held for trading. Market prices per share of the securities were as follows:

12/31/2005 12/31/2004
Aquata Corp., preferred 92.25 94.50
Aquata Corp., common 42.75 38.25
Andrina, Inc., common 22.50 24.75
Attina Co., common 40.50 45.00
Adella Corp., common 40.00 36.75

All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost
would not be considered permanent.

Required:
a. Gain on sale of Andrina shares
b. Gain or loss on sale of Attina shares
c. Gain or loss on conversion of 5,000 Aquata preferred stock into 15,000 common stock
d. Total dividend income for the year 2005
e. Net investment on investment in Adella Corp in 2005
f. Carrying amount of SOSA’s investment in Adella Corp as of 12/31/2005
g. Trading securities as of 12/31/05
h. Unrealized gain or loss on trading securities, 12/31/2005.

Test III

On December 31, 2004, BANTINAN Company’s balance sheet showed the following balances related t its
securities accounts:

Trading securities P 1,477,500

Available-for-sale securities 1,180,000
Interest receivables_Mayniladlad water bonds 12,500

BANTINAN’s securities portfolio on December 31, 2019, was made up of the following securities:

Security Classification Cost Market

10,000 shares Yeye Bonel Corp. stock Trading P 750,000 P 762,500
8,000 shares Totoy Bibo Inc., stock Trading 550,000 528,250
10% Mayniladlad water bonds (interest
payable semi-annually on Jan. 1 and July 1) Trading 250,000 186,750

Security Classification Cost Market

10,000 shares Bulaklak, Inc. stock Available for sale 590,000 630,000
20,000 shares Jumbo Hotdog
Unlimited Inc. Available for sale 490,000 650,000

During 2020, the following transactions took place:

Jan 3 Receive interest on the Mayniladlad water bonds

Mar 1 Purchased 3,000 additional shares of Yeye Bonel Corp., stock for P229,500, classified as a trading
Security

Apr 15 Sold 4,000 shares of the Totoy Bibo Inc., Stock for P69 per share

May 4 Sold 4,000 shares of Bulaklak Inc., stock for P62 per share
July 1 Received interest on the Mayniladlad water bonds

Oct. 30 Purchased 15,000 shares of Pasaway Co., stock for P832,500, classified as a trading security.

The market values of the stocks and bonds on December 31, 2020, are as follows:

Yeye Bonel Corp. stock P 76.60 per share

Totoy Bibo Inc., stock P 68.50 per share
Pasaway Co., stock P 55.25 per share
Mayniladlad water bonds P 205,550
Bulaklak Inc., stock P 61.00 per share
Jumbo Hotdog Unlimited Inc., Stock P 27.00 per share

Requirements:

a. Gain or loss on sale of 4,000 Totoy Bibo Inc., shares on April 15, 2020

b. Gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2020

c. Carrying value of trading securities as of 12/31/20

d. Carrying value of available for sale securities as of 12/31/20

e. In 2020, amount of unrealized gain or loss should be shown as component of income and
stockholders equity.

Test IV

FEDERIZO Company has a stock investment in Marciano Corporation. Described below are the
transactions pertaining to this investment:

a. On January 2, 2018, FEDERIZO purchased 10,000 shares of P100 par value common stock at
P110 per share. The company debited investment in stock account.

b. The Marciano Corporations was expanding and on March 2, 2019 it issued stock rights to its
stockholders. Each right entitles FEDERIZO to purchase one fourth ¼ share of common stock at
par. The market value of the stock on that date was P140 per share. There was no quoted price for
the rights. No journal entry was made to record the foregoing.

c. On April 2, 2019, FEDERIZO exercised all its stock rights. The investment in stock account was
charged for the amount paid.

d. FEDERIZO’s accountant felt that the cash paid for the new shares was merely an assessment since
FEDERIZO’s proportionate share in Marciano was not changed. Hence, he credited all dividends
(5% in December of each year) to the investment in stock account until the debit was fully offset.

e. FEDERIZO received a 50% stock dividend from Marciano in December 2003. Because the shares
received were expected to be sold, the company’s president instructed the accountant not to make
any entry for this dividend. The company did sell the dividend shares in January 2004 for P160 per
share. The proceeds from the sale were credited to income.

f. In December 2024, Marciano’s stock were split on a two-for-one basis and the new shares were
issued as no par shares. FEDERIZO found that each new share was worth P10 more than the P110
per share original acquisition cost. For this reason, FEDERIZO decided to debit the investment in
stock account with the additional shares received at P120 per share and credited revenue for it.

g. In August 2025, FEDERIZO sold one half ½ of its holdings in Marciano at P100 per share. The
proceeds were credited to the investment in stock account.

FEDERIZO uses the average method in recording disposals of its investment in stock.

Required:
a. Prepare the journal entry to record the receipt of stock on March 2, 2019.

b. What is the total cost of the share acquired on April 2, 2019?

c. What was the average cost per share of FEDERIZO’s Investment in Stock after the exercise of the
stock rights on April 2, 2019.

d. Compute the amount of cash dividends received by FEDERIZO for the period 2019 to 2022.

e. Determine the gain or loss on the sale of dividend shares received

f. How many shares were received by FEDERIZO as a result of the two-for-one stock split?

g. What journal entry should be made to record the stock split?

h. How much gain or loss should have been recognized by FEDERIZO from the sale of stock in August
2025?

i. How much is the unadjusted balance of the investment in stock account on December 31, 2025?

j. How much is the adjusted balance of the investment in stock account on December 31, 2025?