UNIVERSITY OF MAKATI

SUBJECT: AUDITING AND ASSURANCE CONCEPTS AND APPLICATION – PART 1

ACTIVITY 8

CHAPTER 13: AGRICULTURE

1. Enumerate the scope of PAS 41, Agriculture
A. Biological assets, except bearer plants
B. Agricultural produce at the point of harvest; and
C. Unconditional government grants related to biological asset measured at its fair value
less costs to sell.
PAS 41 does not apply to the following:
A. Land related to agricultural activity (PAS 16 and PAS 40).
B. Bearer plants (PAS 16). However, PAS 41 applies to the produce on those bearer
plants.
C. Government grants related to bearer plants (PAS 20).
D. Intangible assets related to agricultural activity (PAS 38)
PAS 41 applies to agricultural activity at the point of harvest. After the harvest, PAS 2
Inventories or other applicable standard is applied.

2. Describe the features of agricultural activity.

Agricultural activity is the management by an entity of the biological transformation of
biological assets for sale into agricultural produce, or additional biological assets.
Common features which exist within this diversity include the ff.:
- Capability to change- Living animals and plants are capable of biological
transformation.
- Management of change- Management facilitates biological transformation by
enhancing or at least stabilizing conditions necessary for the process to take
place. Such management distinguishes agricultural activity from others.
- Measurement of change- The change in quality or quantity brought about by
biological transformation or harvest is measured and monitored as a routine
management function.

3. Describe the initial recognition, initial measurement, subsequent measurement,

derecognition and financial statement presentation of biological assets and agricultural
produce.
A. Initial Recognition

An entity shall recognize a biological asset or agriculture produce when, and only when

a. The entity controls the asset as a result of past events

b. It is probable that future economic benefits will flow to the enterprise

c. The fair value or cost of the asset can be measured reliably

In agricultural activity, control may be evidenced by, for example.

i. Legal ownership of cattle

ii. Branding or otherwise marking of the cattle on acquisition, birth, or

weaning.

The future benefits are normally assessed by measuring the significant physical
attributes.

B. Initial Measurement and Subsequent Measurement

1. Biological asset

Initial recognition and subsequent reporting date – shall be measured at its fair value
less costs to sell (FVLCTS), except when the fair value cannot be measured reliably.
Fair value less costs to sell is determined as follows:

2. Agricultural produce

· Initial recognition – shall be measured at its fair value less costs to sell at the point
of harvest

· Subsequent measurement – shall be measured in accordance with PAS 2

Inventories or another applicable Standard

C. Derecognition

The derecognition of biological assets and agricultural produce may arise due to the
following:

a. Losses
 Initial recognition – gains and losses are recognized in profit or loss in the period
in which they arise.

1. Biological assets - loss may arise on initial recognition of a biological

asset, because costs to sell are deducted in determining fair value less
costs to sell of a biological asset

2. Agricultural produce - loss may arise on initial recognition of agricultural

produce as a result of harvesting.

Subsequent reporting date – gains and losses from changes in fair value less
costs to sell of a biological asset shall be included in profit or loss for the period
in which it arises. The change in fair value of biological assets is part physical
change and part unit price change.

b. Sale of biological asset at its carrying amount

D. Financial statement presentation

Statement of Financial Position

Biological assets and agricultural produce should be presented as separate line

items under the following headings:

Non-current assets

Biological assets – mature and immature biological assets are usually treated as
non-currrent assets includings:

a. all agricultural produce to be harvested more than 12 months from

the reporting date

b. livestock to be held for more than 12 months and

c. trees cultivated for lunber and fruit

Current Assets

Biological Assets – that are to be included as current assets would include the following:

a. Agricultural produce to be harvested within 12 months of reporting date

b. Livestock to be slaughtered within 12 months and

c. Annual crops for example rice plant and maize

An entity is encouraged, but not required, to provide a quantified description of each

group of biological assets distinguishing between consumable and bearer biological
assets or between mature and immature biological assets, as appropriate. An entity
discloses for making any such distinctions

Statement of comprehensive Income

 Fair value of milk produced and gains arising from changes in fair value less
costs to sell of dairy livestock shall be included in profit or loss for the period in
which it arises

Statement of Cash Flows

Cash Receipts from sales of Milk, Sale of Livestock and cash paid for purchases
of consumable biological assets are to be presented in the operative activities
section of Statement of Cash Flows whereas purchase of Bearer biological
assets are to be presented in the investing activities.

4. Account properly government grants related to biological assets.

Biological assets are living plants and animals that are used for commercial purposes,
such as farming, fishing, and forestry. These assets are considered to be unique because of
their biological nature, which means that their value can fluctuate based on factors such as
weather conditions and disease outbreaks.
When it comes to accounting for government grants related to biological assets, there
are several considerations that need to be taken into account. Firstly, it is important to
understand the types of grants that are available and how they are classified. There are two
main types of grants related to biological assets:
1. Grants related to the acquisition or development of biological assets: These grants are
intended to help farmers, fishermen, and foresters acquire or develop biological assets.
Examples of these grants include grants for the purchase of new equipment or the
construction of new facilities.
2. Grants related to the maintenance of biological assets: These grants are intended to help
farmers, fishermen, and foresters maintain their existing biological assets. Examples of
these grants include grants for the cost of fertilizers and pesticides or grants for the cost of
animal feed.
The accounting treatment for these two types of grants is different. Grants related to the
acquisition or development of biological assets are typically recognized as income when the
grant is received, and they are credited to a separate account called "grants received." This
account is then used to offset the cost of the biological asset, which is recognized as an asset
on the balance sheet.
For example, let's say that a farmer receives a grant of $10,000 to purchase a new piece
of equipment. The farmer would recognize the grant as income and credit it to the grants
received account. The farmer would then recognize the equipment as an asset on the balance
sheet and debit the equipment account for $10,000. The cost of the equipment would be
reduced by the amount of the grant, so the net cost of the equipment would be $0.
Grants related to the maintenance of biological assets are recognized differently. These
grants are typically recognized as income when the related expenses are incurred. For
example, if a farmer receives a grant to cover the cost of fertilizer, the grant would be
recognized as income when the farmer incurs the expense for the fertilizer.
It is also important to note that government grants related to biological assets may be
subject to certain conditions. For example, a grant may require that the farmer maintain the
biological asset for a certain period of time or that the asset be used in a specific way. Failure to
comply with these conditions could result in the grant being revoked or the farmer being
required to repay the grant.
In conclusion, accounting for government grants related to biological assets requires
careful consideration of the type of grant and the conditions attached to it. By properly
accounting for these grants, farmers, fishermen, and foresters can accurately reflect the true
value of their biological assets and ensure compliance with regulatory requirements.

5. Describe the difference between the full PFRS and PFRS for SMEs for Agriculture

The main difference between full PFRS (Philippine Financial Reporting Standards) and PFRS
for SMEs (Small and Medium-sized Enterprises) for agriculture is the level of complexity and
reporting requirements. Full PFRS is a set of accounting standards that are more
comprehensive and designed for larger entities with more complex financial transactions. These
standards require a more detailed level of disclosures, including the presentation of the
statement of financial position, statement of comprehensive income, statement of changes in
equity, and statement of cash flows. Full PFRS also requires more extensive disclosures in the
notes to the financial statements. On the other hand, PFRS for SMEs is a simplified version of
full PFRS designed specifically for small and medium-sized enterprises. This set of standards
allows SMEs to comply with financial reporting requirements while reducing the complexity and
cost of compliance. PFRS for SMEs provides an alternative set of recognition, measurement,
and disclosure requirements that are less complex than full PFRS. For the agriculture sector
specifically, the PFRS for SMEs for Agriculture provides simplified reporting requirements for
small and medium-sized agricultural entities. These standards have less complex recognition,
measurement, and disclosure requirements compared to full PFRS and are designed to reduce
the cost and complexity of financial reporting for SMEs in the agriculture sector.

CHAPTER 14: SUBSTANTIVE TEST OF INVESTMENTS

1. Identify the audit objectives for investments and related accounts.

The audit objectives for investments and related accounts are as follows:
1. Existence and ownership: The first objective is to confirm the existence and ownership of the
investments. This involves verifying that the investments are actually held by the company, and
that they belong to the company and not to another entity or individual.
2. Valuation: The second objective is to determine the fair value of the investments. This
involves assessing the valuation methods used by the company, such as market value, cost, or
net realizable value, and ensuring that they are in accordance with generally accepted
accounting principles.
3. Completeness: The third objective is to ensure that all investments are included in the
financial statements. This involves reviewing the investment records to ensure that there are no
omissions or unrecorded investments.
4. Accuracy: The fourth objective is to ensure that the investment amounts recorded in the
financial statements are accurate. This involves verifying the mathematical accuracy of the
investment records and ensuring that any adjustments made are properly supported.
5. Disclosure: The fifth objective is to ensure that the disclosures related to investments are
complete and accurate. This involves reviewing the footnotes and other disclosures related to
the investments to ensure that they provide sufficient information to enable users of the financial
statements to understand the nature and risks associated with the investments.
6. Classification: The sixth objective is to ensure that investments are classified appropriately in
the financial statements. This involves reviewing the nature of the investments to determine
whether they should be classified as short-term or long-term assets, and ensuring that they are
presented in the appropriate section of the balance sheet.
7. Control: The final objective is to assess the adequacy of the company's internal controls
related to investments. This involves evaluating the effectiveness of the company's policies and
procedures for recording, valuing, and disclosing investments, and identifying any weaknesses
or deficiencies that may increase the risk of material misstatement.
Overall, these audit objectives help ensure that investments and related accounts are properly
recorded, valued, and disclosed in the financial statements, and that the company's internal
controls related to investments are adequate to prevent or detect material misstatements.

2. Describe the primary substantive audit procedures for investments and related accounts.

For investments and linked accounts, the main substantive audit techniques can rely on the type and
complexity of the investments the business has. Nevertheless, some of the standard detailed auditing
techniques for investments and the following are accounts that are related:
1. Verifying investment transactions and balances: The auditor can verify transactions and investment
balances made directly with third parties, such as To confirm the existence, ownership, and value of,
brokers or custodians, investments.
2. Reviewing investment activities: The auditor may examine investment activity, in order to confirm the
accuracy, such as purchases, sales, and dividends received and the completeness of investment
transactions that are reflected in the company's records and records.
3. Examining investment valuation: The auditor can evaluate the fair value of by carrying out steps
including comparing the quoted market employing market pricing or independent assessment methods,
including discounted cash flow evaluation.
4. Conducting impairment tests: The auditor is capable of conducting impairment tests.to ascertain
whether any investments have experienced a long-term loss in value, by contrasting the investments'
current fair value to their carrying value on the company's ledger.
5. Examining connected accounts and disclosures: The auditor can go over related accounts and
Accounts and disclosures, such as disclosures or the valuation of derivatives To ensure that substantial
investments are in line with the adequately disclosed investment strategy of the organization.
6. Internal controls evaluation: The auditor can evaluate the planning and adequacy of internal controls
over investments, such as those concerning investment deal approval, investment management, and
valuation of financial assets.

3. Identify assertions addressed by audit procedures for investments and related accounts.

Summary of audit procedures classified per assertion.

a. Existence

- Inspection of securities held by clients.

- Confirmation of securities held by third parties.

b. Occurrence

- Evaluate the accounting methods used and test the evaluation.

c. Completeness

- Detailed minutes of meeting review.

d. Valuation and Allocation

- Evaluate the accounting methods used and test the evaluation.

- Impairment test.

e. Accuracy

- Evaluate the accounting methods used and test the evaluation.

f. Classification

- Review financial statement presentation and disclosure of investments including

related accounts.

g. Rights and Obligations

- Inspection of securities held by clients.

- Confirmation of securities held by third parties.

h. Presentation and Disclosure

- Detailed minutes of meeting review.

- Review financial statement presentation and disclosure of investments including

related accounts.
CHAPTER 15: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT BY EQUITY

1. Identify and describe the type of financial instruments.

Financial instruments are contracts or agreements that represent a financial asset or
liability. They are traded on financial markets and used to facilitate investment, hedging,
and risk management activities. Here are some common types of financial instruments:
1. Stocks: Stocks, or shares, represent ownership in a company. When you buy a
stock, you become a part-owner of the company and have a claim on a portion of
its profits.
2. Bonds: Bonds are debt securities that represent a loan to a company,
government, or other entity. When you buy a bond, you are lending money to the
issuer, who promises to pay back the principal plus interest over a specified
period.
3. Options: Options are contracts that give the holder the right, but not the
obligation, to buy or sell an underlying asset at a predetermined price and time.
They are commonly used for speculation or hedging purposes.
4. Futures: Futures contracts are agreements to buy or sell an underlying asset at a
predetermined price and time in the future. They are commonly used for hedging
against price fluctuations or for speculation.
5. Mutual funds: Mutual funds are investment vehicles that pool money from
multiple investors to invest in a diversified portfolio of stocks, bonds, or other
assets. They offer investors a convenient way to achieve diversification and
professional management.
6. Exchange-traded funds (ETFs): ETFs are similar to mutual funds, but they trade
like stocks on an exchange. They offer investors a convenient and cost-effective
way to invest in a diversified portfolio of assets.
7. Derivatives: Derivatives are financial instruments whose value is derived from an
underlying asset, such as a stock, bond, or commodity. They can be used for
hedging or speculation purposes and include options, futures, and swaps.
These are just a few examples of the many types of financial instruments that exist. The
choice of financial instrument depends on an investor's goals, risk tolerance, and
investment strategy.

2. Identify and explain the different classifications of financial assets.

3. Describe the initial recognition, initial measurement, subsequent measurement,

reclassification, derecognition and financial statement presentation of financial asset.
4. Differentiate financial asset and investment in equity securities under full PFRS and
PFRS for SMEs.
Full PFRS
Under the Philippine Financial Reporting Standards (PFRS), a financial asset is
defined as any asset that is cash, a contractual right to receive cash, or another financial
instrument of another entity. Examples of financial assets include cash, accounts
receivable, bonds, and stocks.
On the other hand, investment in equity securities refers to the ownership of
shares in a company. Equity securities represent ownership in the issuing company and
can provide the investor with voting rights and a share of the company's profits.
While investment in equity securities is a type of financial asset, it is more
specific in that it refers specifically to the ownership of shares in a company. The
accounting treatment for investment in equity securities will depend on the specific
circumstances of the investment, such as whether the investment is held for trading,
held to maturity, or available for sale.
In summary, while investment in equity securities is a type of financial asset, it
refers specifically to the ownership of shares in a company and has its own specific
accounting treatment under PFRS.
PFRS FOR SMEs
Under PFRS for SMEs, financial assets and investments in equity securities are
two distinct categories.
Financial assets are defined as assets that are either cash, a contractual right to
receive cash or another financial asset from another entity, or an equity instrument of
another entity. Examples of financial assets include cash and cash equivalents, trade
receivables, and investments in debt securities.
Investments in equity securities, on the other hand, refer specifically to
investments in shares or other equity instruments of another entity that are held with the
intention of generating a return. Equity securities can include common shares, preferred
shares, and other similar instruments that represent an ownership interest in the issuing
entity.
The main difference between financial assets and investments in equity
securities is the intention behind holding the asset. Financial assets may or may not be
held with the intention of generating a return, whereas investments in equity securities
are specifically held for that purpose. Additionally, investments in equity securities are
subject to additional disclosure requirements under PFRS for SMEs, including
requirements to disclose significant influences over investees and changes in fair value
 5. Differentiate the accounting for FVTPL, FVTOCI and FAAC.

1. FAAC - a financial asset shall be measured at amortized cost if both of the following
conditions are met :
(a) the financial asset is held within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest (SPPI) on the principal amount outstanding.

2. FVTOCI - a financial asset shall be measured at fair value through other comprehensive
income if both of the following conditions are met :
(a) the financial asset is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.

3. FVTPL - a financial asset shall be measured at fair value through profit or loss under the
following conditions :

(a) it is held for trading. A financial asset is classified as held for trading if it is :
(i) acquired or incurred principally for the purpose of selling or repurchasing it in the near term;
(ii) part of a portfolio of identified financial instruments that are managed together and for which
there is evidence of a recent actual pattern of short-term profit-taking : or
(iii) a derivative (except for a derivative that is a financial guarantee contract or a designated
and effective hedging instrument).

(b) it is designated at FVTPL. An entity may, at initial recognition, designate a financial asset as
measured at fair value through profit or loss. An entity may use this designation only when doing
so results in more relevant information, because either
(i) it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes
referred to as 'an accounting mismatch) that would otherwise arise from measuring assets or
liabilities or recognizing the gains and losses on them on different bases; or
(ii) a group of financial assets is managed and its performance is evaluated on a fair value
basis, in accordance with a documented risk management or investment strategy, and
information about the group is provided internally on that basis to the entity's key management
personnel (as defined in PAS 24 Related Party Disclosures), for example the entity's board of
directors and chief executive officer.

(c) all other debt financial asset not classified under (1) and (2).