FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

Accountancy Department

ACT1205 – Auditing and Assurance Principles: Concepts and Applications Part 2

Rian Ceasar P. Soliman, CPA, MBA

Audit of Investments

Discussion Questions

Problem 1-1. Nature and types of investments.

The following are some examples of investments that companies acquire for various reasons.

Investment in trading securities

Investment in long term securities

Investment in associates

Investment in subsidiary

Investment in derivative securities

Investment in real estate properties

Long term funds

Requirement:

For each of the investment above, explain the reasons why companies acquire those types of investments.

Problem 1-2. Nature of financial instruments.

Refer to the list below:
1. Cash in bank. 14. Accounts payable.
2. Accounts receivables. 15. Estimated warranty obligations.
3. Merchandise inventories. 16. Income tax payable.
4. Prepaid rent. 17. Unearned rent revenue.
5. Equity investment – held for trading. 18. Interest rate swap payable.
6. Equity investment – associate. 19. Bonds payable.
7. Debt investment – amortized cost. 20. Deferred tax liabilities.
8. Investment in subsidiary. 21. Issued ordinary shares.
9. Forward contract receivable. 22. Redeemable preference shares.
10. Gold bullion. 23. Share warrants outstanding.
11. Biological asset. 24. Treasury shares.
12. Property, plant, and equipment 25. Share appreciation rights payable.
13. Intangible asset.
Requirement:
For each of the items above, identify whether an item is a financial asset (FA), non-financial asset (NFA), financial liability
(FL), non-financial liability (NFL), or equity instrument (E).

Module No. 1 – Audit of Investments and Related Accounts Page 1

 FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Accountancy Department

ACT1205 – Auditing and Assurance Principles: Concepts and Applications Part 2

Rian Ceasar P. Soliman, CPA, MBA

Problem 1-3. Management assertions, audit objectives, and audit procedures.

Accuracy,
valuation and
Substantive audit Existence/ allocation/Cutoff
procedures Occurrence Rights Completeness /Classification Presentation
a. Inspect securities on
hand and confirm
securities held by
custodian.
b. Trace serial number
indicated in the security
to the list of investment
securities maintained by
the client.
c. The investment
securities listed on the
schedule of investment
transactions of the
client are
mathematically
accurate and agree with
the general ledger.
d. Read minutes of
meeting of board of
directors regarding
investments used as
collateral for
borrowings.
e. Recalculate gains and
losses on sale of
securities.
f. Recalculate interest and
dividend revenues.
g. Inspect securities
simultaneously with
count of other liquid
assets.
h. Verify fair values of
securities with
published price
quotations.
i. Obtain an
understanding on
management’s process
in classifying investment
securities.
j. Evaluate client’s
procedures on assessing
impairment of
investments.

Module No. 1 – Audit of Investments and Related Accounts Page 2

 FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Accountancy Department

ACT1205 – Auditing and Assurance Principles: Concepts and Applications Part 2

Rian Ceasar P. Soliman, CPA, MBA

k. Perform cut-off test on

acquisition and disposal
of investments and
accruals of interests and
dividends.

Requirement. Check the management assertions that are being validated by the above substantive audit procedures.

Problem 1-4. Classification, acquisition, measurement, and disposal of equity securities, illustrative working paper.

You were assigned to perform audit procedures on the investments account of Classic Corporation for 2023, your first-
time audit of the client. The current asset portion of Classic Corporation’s statement of financial position shows the
following information as of December 31, 2022:

Current Assets Note As of December 31, 2022

Cash and cash equivalents 5, 14 P 3,985,000
Receivables, net 6, 14 7,742,000
Inventories 7 15,859,000
Short-term investments 8, 14 3,280,000
Other current assets 10 352,000
Total current assets P 31,218,000

Note 8 on investments described the investments as equity securities held primarily for being traded to take advantage
of price fluctuations in the market. The following information shows the breakdown of the investment account per client’s
subsidiary records:

Held for Trading Securities:

Securities No. of Shares Market Price Amount

SMC Ordinary 5,000 176 P 880,000
AC Ordinary 3,000 800 2,400,000
Total P 3,280,000

You were able to verify that the quantity and valuation of the shares as of December 31, 2022 were appropriate.

Based on your substantive test of details of transactions and balances for the investment account you gathered the
following information for 2023:

1. SMC declared and distributed 10% bonus issue to its shareholders on February 1, 2023.
2. On March 31, 2023, AC declared and paid P5.00 cash dividend to its shareholders.
3. On May 30, 2023, Classic Corporation sold 550 shares of SMC ordinary shares for P200 per share.
4. On July 1, 2023, Classic Corporation acquired 1,000 ordinary shares of Excel Company for P26 per share. Classic
Corporation paid P2,000 in transfer taxes and commissions. The company designated the shares at fair value through
other comprehensive income.
5. On November 30, 2023, Classic Corporation sold 1,000 shares of AC ordinary for P780.00 per share.
6. On December 15, 2023, AC declared P2 cash dividend per share on its ordinary shares, payable on January 31, 2024
to shareholders of record as of December 30, 2023.
7. Refer to WB for HO.2 excel file for market prices of the equity investments as of December 31, 2023.

Requirements:

Download WB for M1 excel file from Module 1 in your Canvas and it use as working paper to summarize the audit
procedures performed on audit of investment account of Classic Corporation (Attached also is a printable version). Based
on your audit findings, answer the following questions:

Module No. 1 – Audit of Investments and Related Accounts Page 3

 FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
Accountancy Department

ACT1205 – Auditing and Assurance Principles: Concepts and Applications Part 2

Rian Ceasar P. Soliman, CPA, MBA

1. How much equity investments at fair value through profit or loss should be presented by Classic Corporation in the
current assets portion of its statement of financial position as of December 31, 2023?
2. How much equity investments at fair value through other comprehensive income should be presented by Classic
Corporation in the non-current assets portion of its statement of financial position as of December 31, 2023?
3. How much investment income (loss) should be presented in profit or loss in 2023?
4. How much investment income (loss) should be presented in other comprehensive income in 2023?
5. How much cumulative gains or losses should be presented as a separate component in shareholders’ equity related
to equity investments at fair value through other comprehensive income as of December 31, 2023?

Problem 1-5. Classification, acquisition, measurement, and disposal of debt securities.

Rose Corporation acquired P1 million of 8% bonds for P924,164 on January 1, 2022. The purchase price includes broker
commission of P50,000. The bonds were acquired to yield 10%. Interest is payable annually every
January 1. The bond matures in five (5) years.

Quoted price of the bonds as of the dates indicated follows:

December 31, 2022 98.0

December 31, 2023 99.0

Round of present value factors to four (4) decimal places.

Amortization schedule:

Date Effective interest Nominal interest Discount Amortized cost

(10%) (8%) amortization
1/1/2022 P 924,164
12/31/2022
12/31/2023
12/31/2024
12/31/2025
12/31/2026

Requirements:

Provide the journal entries for each investment classification: investment at amortized cost, financial asset at fair value
through profit or loss, and financial asset at fair value through other comprehensive income on the following
transactions:
a. Acquisition of the investment on January 1, 2022.
b. Accrual of interest on December 31, 2022.
c. Amortization of premium or discount on December 31, 2022.
d. Fair value adjustment on December 31, 2022.
e. Compute the carrying amount of the investment as of December 31, 2022.
f. Compute the gain or loss and journalize the disposal transaction if the investment is sold at
December 31, 2023.

End

Module No. 1 – Audit of Investments and Related Accounts Page 4

Classic Corporation Schedule: I.100
Analysis of Investment Transactions Prepared by:
December 2023 Audit Reviewed by:

Fair value
Dividend Gain/(Loss) on
Transaction Date SMC Ordinary AC Ordinary Excel Ordinary adjustment
revenue Disposal
gain (loss)
No. of sh. Sh. Price Amount No. of sh. Sh. Price Amount No. of sh. Sh. Price Amount
1/1/23
2/1/23
3/31/23
5/30/23
7/1/23
11/30/23
12/15/23

12/31/2023 before FV Adj.

FV Adjustment:
Profit or loss
Other comprehensive income

12/31/2023 as adjusted

Market Price of Shares as of December 31, 2023

Company Market Price
SMC
AC
Excel
Notes:

Conclusion:
Market Prices of Listed Companies as of December 31, 2023

No. Company Code Bid Ask

1 JFC 89 94
2 LTG 93 98
3 ATC 65 70
4 KLM 121 126
5 DD 48 53
6 LP 50 55
7 RHI 13 18
8 SMC 170 175
9 GAP 89 94
10 KII 720 725
11 HII 345 350
12 SPC 25 30
13 AC 790 795
14 TLC 411 416
15 UVI 73 78
16 EXI 24 29
17 DIC 123 128
18 Excel 31 36
19 GLI 123 128