Since 1977

AUDITING PROBLEMS OCAMPO/SOLIMAN/OCAMPO

AP.2906 - Audit of Investments OCTOBER 2020

SUBSTANTIVE AUDIT OF INVESTMENTS

Investments and Investment Income

Existence or occurrence: Recorded investments and Valuation and allocation: Investments are valued in
investment exist accordance with GAAP and investments and investment
income are mathematically accurate
1. Inspect securities on hand and trace to list.
6. Reconcile the investment list to the subsidiary ledger
2. Confirm securities held by others. and general ledger account.

7. Recalculate interest income and verify dividend income

Completeness: All investments and investment income are by reference to published reports of dividends.
recorded

3. Apply analytical procedures. Presentation and disclosure: Investments and investment

income are presented and disclosed in accordance with
GAAP
Rights and obligations: Investments and investment
income are owned by the entity 8. Review financial statements and perform analytical
procedures to whether accounts are classified and
4. Examine supporting brokers’ advices and paid checks disclosed in the financial statements in accordance
for investments acquired during the period. with GAAP.

5. Examine remittance advices for dividends, interest and

disposals of investments.

INTERNAL CONTROL MEASURES

1. Purchases and sales of investments should be properly authorized (normally by the board of directors or investment
committee of the board of directors).

2. Access to securities should not be vested in one person only.

3. Custodianship of investment securities and the accounting for them should be segregated.

4. Securities must be physically controlled in order to prevent unauthorized usage and they must be registered in the
name of the entity.

5. Income received from investments should be reconciled periodically with amounts that should be received.

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 1 5. How much is the net amount to be recognized in I Will

Corporation’s 2020 profit or loss related to these
You were able to obtain the following ledger details of
investments?
Equity investment-FVTPL in connection with your audit of
a. P 48,000 c. P204,000
the I Will Corporation for the year ended December 31,
b. P198,000 d. P246,000
2020:
Date Particulars DR CR 6. Which of the following is not one of the auditor’s
Jan. 10 Purchase of Emong primary objectives in an audit of trading securities?
Co. – 6,000 shares P1,440,000 a. To determine whether securities are authentic.
Feb. 20 Purchase of Bobads b. To determine whether securities are the property
Co. – 7,200 shares 1,800,000 of the client.
Mar. 1 Sale of Bobads Co. – c. To determine whether securities actually exist.
2,400 shares 540,000 d. To determine whether securities are properly
May 31 Receipt of Emong classified on the statement of financial position.
share dividend–
Offsetting Credit to 132,000 7. A client has a large and active investment portfolio
retained earnings that is kept in a bank safe-deposit box. If the auditor
Aug. 15 Sale of Emong – is unable to count the securities at the end of the
4,800 shares 1,176,000 reporting period, the auditor most likely will
Sept. 1 Sale of Emong – a. Request the bank to confirm to the auditor the
1,200 shares 276,000 contents of the safe deposit box at the end of the
reporting period.
The following information was obtained during your b. Examine supporting evidence for transactions
examination: occurring during the year.
c. Count the securities at a subsequent date and
 From independent sources, you determine the following confirm with bank whether securities were added
dividend information for 2020: or removed since the end of the reporting period.
Nature Declared Record Payment Rate d. Request the client to have a bank seal the safe-
Cash 01/02 01/15 01/31 P20/share deposit box until the auditor can count the
Share 05/02 05/15 05/31 10% securities at a subsequent date.
Cash 08/01 08/30 09/15 P30/share
8. In establishing the existence and ownership of an
 Closing market quotation as at December 31, 2020: investment held by a corporation in the form of
publicly traded shares an auditor should inspect the
Bid Ask
securities or
Emong shares P210 P220
a. Obtain written representations from management
Bobads shares 240 250
confirming that the securities are properly
classified as trading securities.
QUESTIONS:
b. Inspect the audited financial statements of the
Based on the above and the result of your audit, answer investee company.
the following: c. Confirm the number of shares held by an
independent custodian.
1. In relation to March 1 transaction, the necessary
d. Determine that the investment is carried at the
adjusting journal entry includes
lower of cost or market.
a. A debit to Loss of P60,000
b. A credit to Equity investment-FVTPL of P600,000 9. Which of the following is the least effective audit
c. Both a and b procedure regarding the existence assertion for the
d. Neither a nor b securities held by the auditee?
2. In relation to August 15 transaction, the necessary a. Examination of paid checks issued in payment of
adjusting journal entry includes securities purchased.
a. A debit to Equity investment-FVTPL of P216,000 b. Vouching all changes during the year to supporting
b. A debit to Loss of P15,300 documents.
c. A credit to Gain of P216,000 c. Simultaneous count of liquid assets.
d. A credit to Equity investment-FVTPL of P15,300 d. Confirmation from the custodian.

3. In relation to September 1 transaction, the necessary 10. In performing tests of the carrying amount of trading
adjusting journal entry includes securities, the auditor would usually:
a. A debit to Equity investment-FVTPL of P36,000 a. Ask management to estimate the market value of
b. A credit to Gain of P36,000 the securities.
c. Both a and b b. Refer to the quoted market prices of the securities.
d. Neither a nor b c. Value the securities at cost regardless of their
market prices.
4. The carrying amount of Equity investment-FVTPL as of
d. Count the securities.
December 31, 2020 is overstated by
a. P228,000 c. P60,000
b. P102,000 d. P 0

PROBLEM NO. 2
The LEE BUYS COMPANY had acquired interest in a promising local company, the Silver Tab Company. During your
audit of the company’s accounts for the year 2020, which was a first audit, you obtained the following:

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EXCEL PROFESSIONAL SERVICES, INC.

Investment in Silver Tab Company

2018–Jan. 2 30,000 sh @35 P1,050,000 2020–Jul. 15 50,000 sh @40 P2,000,000
2019–Jul. 2 90,000 sh @60 5,400,000
2020–Mar. 2 30,000 sh @70 2,100,000
Investment in Red Tab Company
2020 - Aug. 10 P10,000

Dividend Income
2020 January. 2 P120,000
April 1 150,000
August 10 10,000
December 20 100,000

The transactions pertaining to the foregoing for 2020 were SOLUTION GUIDE:
as follows:
Jan. 2 Received cash dividend (declared on December
1) of P1 per share.
Mar. 2 Bought 30,000 shares at P70 per share.
Apr. 1 Received cash dividend (declared on March 1 to
shareholders of record as of March 10) of P1
per share.
July 15 Sold 50,000 shares at P40 per share.
Aug. 10 Received an “extra” dividend in shares of one
share of Red Tab Company for every ten shares
of Silver Tab Company. The share dividend had
a market value of P3 per share and its book
value on the ledger of Silver Tab Company was
P1 per share.
Dec.20 Received cash dividend of P1 per share,
declared December 1, out of Silver Tab
Company’s “Reserve for Depletion”.
29 Sold 10,000 Silver Tab Company shares at P90.
Cash was received on January 5, 2021.
QUESTIONS:
Based on the above and the result of your audit, determine
the following:
PROBLEM NO. 3
1. Loss on sale of 50,000 Silver Tab Company shares on
July 15 Your audit of the Norte Corp. disclosed that the company
a. P250,000 c. P1,300,000 owned the following securities on December 31, 2019:
b. P850,000 d. P0 FA@FVTPL
2. Gain on sale of 10,000 Silver Tab Company shares on Security Shares Cost Fair value
December 29 Vigan, Inc. 9,600 P144,000 P184,000
a. P330,000 c. P300,000 Laoag, Inc. 16,000 432,000 288,000
b. P310,000 d. P0 10% , P200,000 face
value , Santiago
3. Adjusted balance of Investment in Silver Tab Company bonds (interest
as of December 31, 2020 payable every
a. P5,130,000 c. P5,580,000 Jan. 1 and Jul. 1) 158,400 163,440
b. P5,570,000 d. P5,640,000 Total P734,400 P635,440
4. Dividend income for the year ended Dec. 31, 2020
FA@FVTOCI
a. P150,000 c. P180,000
Security Shares Cost Fair value
b. P160,000 d. P280,000
Candon Products 32,000 P1,376,000 P1,540,000
5. Which of the following is the most effective audit Pagudpud, Inc. 240,000 6,240,000 5,840,000
procedure for verification of dividends earned on Batac, Inc. 80,000 960,000 1,280,000
investments in equity securities? Total P8,576,000 P8,660,000
a. Tracing deposited dividend checks to the cash
receipts book. FA@AC
b. Reconciling amount received with published Amortized
dividend records. Cost Fair value
c. Comparing the amounts received with preceding 12%, 2,000,000 face
year dividends received. value, Ilocos bonds
d. Recomputing selected extensions and footings of (interest payable
dividend schedules and comparing totals to the annually every Dec. 31) P1,926,000 P1,900,000
general ledger.

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EXCEL PROFESSIONAL SERVICES, INC.

During 2020, the following transactions occurred: PROBLEM NO. 4

Jan. 1 Receive interest on the Santiago bonds. Assassin Corporation’s accounting records included the
following investments:
Mar. 1 Sold 8,000 shares of Laoag Inc. for
P152,000, net of transaction cost of P7,600. Investment in Ordinary Shares
1/1/18 P1,000,000 7/1/20 P800,000
May 15 Sold 3,200 shares of Batac, Inc. at fair value 12/31/18 200,000
of P17 per share. The entity paid transaction 12/31/19 300,000
cost of P2,400.
July 1 Received interest on the Santiago bonds. Investment in Bonds
Dec. 31 Received interest on the Ilocos bonds. 1/1/20 P1,051,510

31 Because of the change in business model,

the entity transferred the Ilocos bonds to During the course of your audit, you noted the following.
FA@FVTOCI. The bonds were selling at 101
on this date. The bonds were originally Investment in Ordinary Shares
purchased at an effective rate of 14%.  The investment is not designated at FVTOCI.
 Acquired on January 1, 2018 at P950,000 plus
The fair values of the shares and bonds on December 31, transaction costs of P50,000.
2020, are as follows:  On July 1, 2020, the entity sold half of the investment
Vigan, Inc. P22 per share for its fair value of P800,000.
Laoag, Inc. P15 per share  Fair value of the investment: December 31, 2018,
10% Santiago bonds P151,200 P1,200,000; December 31, 2019, P1,500,000;
Candon Products P42 per share December 31, 2020, P900,000.
Pagudpud, Inc. P28 per share
Batac, Inc. P18 per share Investment in Bonds
 The entity uses the ‘held for collection’ business model
The company’s accounting policy is that when an equity for acquired and originated debt instruments.
investment classified as FVTOCI is sold, the accumulated  P1,000,000, 10% bonds, purchased for P1,051,510
OCI amount is transferred to retained earnings. including transaction costs of P20,000. Interest is
payable annually every December 31. The bonds
QUESTIONS: mature on December 31, 2022. The effective interest
rate is 8%.
Based on the above and the result of your audit, determine  The prevailing market rate for the bonds is 9% at
the following: December 31, 2020.
1. Total interest income for the year 2020
QUESTIONS:
a. P251,120 c. P286,000
b. P260,000 d. P289,640 Based on the above and the result of your audit, answer
the following:
2. On ‘reclassification date’, the amount to be recognized
in other comprehensive income on the reclassification
1. The carrying amount of Investment in Ordinary Shares
of Ilocos bonds
as of December 31, 2020 is misstated by
a. P123,640 c. P64,360
a. P200,000 over c. P50,000 over
b. P 94,000 d. Nil
b. P200,000 under d. P50,000 under
3. Gain or loss on sale of 8,000 Laoag, Inc. shares on
2. The carrying amount of Investment in Bonds as of
March 1
December 31, 2020 is overstated by
a. P8,000 gain c. P64,000 loss
a. P13,900 c. P18,020
b. P8,000 loss d. P64,000 gain
b. P15,880 d. P33,900
4. In relation to the sale of 3,200 Batac, Inc. shares on
3. The net amount to be recognized in 2020 profit or loss
May 15, the net amount to be recognized in profit or
related to these investments is
loss
a. P384,121 c. P134,121
a. P13,600 c. P800
b. P284,121 d. P114,121
b. P 2,400 d. Nil
4. If the investment in bonds is FVTOCI, the carrying
5. Adjusted carrying amount of investments as of
amount as of December 31, 2020 is overstated by
December 31, 2020
a. P15,880 c. P33,900
FA@FVTPL FA@FVTOCI
b. P18,020 d. P38,020
a. P602,400 P 9,446,400
b. P482,400 P 9,446,400 5. An audit procedure that provides evidence about
c. P602,400 P11,466,400 proper valuation of equity securities classified as
d. P482,400 P11,466,400 FA@FVTPL is
a. Confirmation of securities held by broker.
6. The accumulated OCI to be reported as separate
b. Calculation of premium or discount amortization.
component of equity at December 31, 2020
c. Recalculation of investment carrying amount by
a. P840,800 c. P908,800
applying the equity method.
b. P892,800 d. P924,800
d. Comparison of carrying amount with current
7. The amount to be recognized in 2020 OCI market quotations.
a. P840,800 c. P908,800
b. P892,800 d. P924,800

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 5 a. P15,000 c. P 85,000

b. P70,000 d. P120,000
On January 3, 2018, JR Company purchased for P500,000
cash a 10% interest in Judi Corp. On that date the net 2. The net amount to be recognized in 2019
assets of Judi had a book value of P3,750,000. The excess comprehensive income related to this investment?
of cost over the underlying equity in net assets is a. P20,000 c. (P25,000)
attributable to undervalued depreciable assets having a b. (P45,000) d. P15,000
remaining life of 10 years from the date of JR's purchase.
3. If the entity used the ‘fair value as deemed cost
The investment in Judi Corp. was designated as FVTOCI.
approach’ in accordance with PIC Q&A No. 2019-06,
the carrying amount of the investment in Judi Corp. as
The fair value of JR's investment in Judi securities is as
of December 31, 2020 is
follows: December 31, 2018, P570,000; December 31,
a. P2,200,000 c. P2,190,000
2019, P525,000; December 31, 2020, P2,200,000.
b. P2,195,000 d. P2,100,000
On January 2, 2020, JR purchased an additional 30% of 4. If the entity used the ‘accumulated cost approach’ in
Judi's stock for P1,575,000 cash when the book value of accordance with PIC Q&A No. 2019-06, the carrying
Judi's net assets was P4,150,000. The excess was amount of the investment in Judi Corp. as of December
attributable to depreciable assets having a remaining life of 31, 2020 is
8 years. a. P2,200,000 c. P2,195,000
b. P2,198,125 d. P2,173,125
During 2018, 2019, and 2020 the following occurred:
5. Which of the following provides the best form of
Judi Dividends Paid by evidence pertaining to the annual valuation of an
Net Income Judi to JR investment in which the independent auditor’s client
2018 P350,000 P15,000 owns a 30% voting interest?
2019 400,000 20,000 a. Market quotations of the investee company’s stock.
2020 550,000 70,000 b. Current fair value of the investee company’s
assets.
QUESTIONS: c. Historical cost of the investee company’s assets.
Based on the above and the result of your audit, answer d. Audited financial statements of the investee
the following: company.

1. The net amount to be recognized in 2018 - now do the DIY drill -

comprehensive income related to this investment?

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1 Type of Date Date of Date of
Dividend Declared Record Payment Rate
In connection with your audit of the financial statements of
Share 03/15/20 04/01/20 04/30/20 50%
the Pin Shop Company for the year 2020, the following
Cash 11/01/20 11/15/20 11/28/20 P5/share
Investment in Ordinary Shares and Dividend Income
Cash 12/01/20 12/15/20 01/02/21 20%
accounts were presented to you:
Investment in Ordinary Shares
2. Closing market quotation as at December 31, 2020:
Date Description Ref. Debit Credit
01/15 10,000 ordinary Bid Ask
shares, par SPIKES Company ordinary 13-3/4 16-1/2
value P50, VR-
SPIKES Co. 18 390,000 QUESTIONS:
04/30 5,000 shares Based on the above and the result of your audit, answer
SPIKES Co. the following:
received as
share dividend CJ-7 250,000 1. How much is the gain (loss) on the May 20 sale?
05/20 Sold 5,000 CR- a. (P5,000) c. (P70,000)
shares @ P25 21 125,000 b. P5,000 d. P0
12/10 Sold 2,000 CR-
2. How much is the gain on the December 10 sale?
shares @ P60 S2 120,000
a. P68,000 c. P42,000
Dividend Income b. P48,000 d. P0
Date Description Ref. Debit Credit
3. How much is the total dividend income for the year?
04/30 Share dividend SJ-7 250,000
a. P300,000 c. P 50,000
11/30 SPIKES Company CR-
b. P400,000 d. P150,000
ordinary 22 50,000
4. How much is the adjusted carrying amount of
The following information was obtained during your Investment in Ordinary Shares as of December 31,
examination: 2020?
a. P145,000 c. P110,000
1. From independent sources, you determine the
b. P132,000 d. P208,000
following dividend information:
5. How much is the fair value adjustment loss for the
year ended December 31, 2020?
a. P98,000 c. P76,000
b. P35,000 d. P0

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 2 10. Which statement is correct regarding audit of

investment securities?
The following subsidiary ledger reflects the trading
a. An auditor’s audit objective is to determine
securities of Gateway Company for the year 2020:
whether the securities are authentic.
TEMPLAR CORP. b. Examination of paid checks issued in payment of
Date Transactions Debit Credit securities purchased is the most effective
Sep. 05 Purchased P1,000,000 procedure to verify existence.
20,000 shares c. In performing tests of the carrying amount of
28 Cash dividends investments in equity securities, the auditor would
to stockholders usually refer to the quoted market prices of the
of record Sept. securities.
15, declared d. If a client has a large and active investment
Aug. 15 P 50,000 portfolio that is kept in a bank safe-deposit box
Oct. 01 Purchase 50,000 and the auditor is unable to count the securities at
shares 2,600,000 the end of the reporting period, the auditor most
05 Sold 20,000 likely will request the bank to confirm to the
shares at P65 1,000,000 auditor the contents of the safe deposit box at the
Nov.30 Cash collected end of the reporting period.
for sale of
20,000 shares
made on Nov. PROBLEM NO. 3
10, after a Nov.
On June 1, 2019, Panday Corporation purchased as a
1 declaration of
‘held for collection’ investment 6,000 of the P1,000 face
P5 cash
value, 8% bonds of Pira Corporation. Panday Corporation
dividend per
has the positive intention and ability to hold these bonds to
share to
maturity. The bonds were purchased to yield 10%
stockholders on
interest. Interest is payable semi-annually on December 1
record as of
and June 1. The bonds mature on June 1, 2025. On
December 1 3,300,000
November 1, 2020, Panday Corporation sold the bonds for
Dec.15 Cash dividend
a total consideration of P5,887,500.
received . 150,000
Totals P3,600,000 P4,500,000
QUESTIONS:
On January 2, 2020, Gateway Company purchased 39,000 Based on the above and the result of your audit, determine
ordinary shares of Dark Co.’s 200,000 ordinary shares the following: (Round off present value factors to four
outstanding for P1,170,000. On that date, the carrying decimal places)
amount of the acquired shares on Dark Co.’s books was
P810,000. Gateway attributed the excess of cost over 11. The purchase price of the bonds on June 1, 2019 is
carrying amount to goodwill. a. P5,467,992 c. P5,545,104
b. P5,536,698 d. P5,436,894
During 2020, Gateway’s president gained a seat on Dark’s
12. The carrying amount of the investment in bonds as of
board of directors. Dark reported profit of P800,000 for
December 31, 2019 is
the year ended December 31, 2020, and declared and paid
a. P5,588,878 c. P5,579,979
cash dividends of P200,000 during 2020.
b. P5,474,311 d. P5,507,237
Market values of the securities at December 31, 2020, are 13. The interest income for the year 2020 is
as follows: a. P459,911 c. P466,827
Templar Corp. P60 per share b. P466,073 d. P457,122
Dark Company P30 per share
14. The gain on sale of investment in bonds on November
QUESTIONS: 1, 2020 is
a. P 31,794 c. P 41,448
Based on the above and the result of your audit, answer b. P120,352 d. P156,068
the following:
15. When an auditor is unable to inspect and count a
6. The gain on sale of 20,000 shares of Templar Corp. client’s investment securities until after the end of the
October 5 is reporting period, the bank where the securities are
a. P350,000 c. P300,000 held in a safe deposit box should be asked to
b. P1,028,500 d. P314,300 a. Verify any differences between the contents of the
box and the balances in the client’s subsidiary
7. The gain on sale of 20,000 shares of Templar Corp. on
ledger.
November 10 is
b. Provide a list of securities added and removed
a. P2,260,000 c. P2,171,600
from the box between the end of the reporting
b. P2,185,800 d. P2,160,000
period and the security count date.
8. How much should be reported as unrealized gain on c. Count the securities in the box so that the auditor
trading securities? will have an independent direct verification.
a. P240,000 c. P257,400 d. Confirm that there has been no access to the box
b. P278,700 d. P 0 between the end of the reporting period and the
security-count date.
9. The adjusted balance of investment in Dark Company
at December 31, 2020 is
a. P1,326,000 c. P1,170,000
b. P1,287,000 d. P1,251,000
 - end of AP.2906 - 

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