AUDITING PROBLEMS Review Class

AUDIT OF INVESTMENTS

PROBLEM NO. 1

Salt Corporation’s accounting records included the following investments:

Investment in Ordinary Shares

01/01/2019 P1,000,000 07/01/2021 P800,000
12/31/2019 200,000
12/31/2020 300,000

Investment in Bonds
01/01/2021 P1,051,510

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, 2019 at P950,000 plus transaction costs of P50,000.
 On July 1, 2021, the entity sold half of the investment for its fair value of P800,000.
 Fair value of the investment: December 31, 2019, P1,200,000; December 31, 2020,
P1,500,000; December 31, 2021, 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, 2023.
The effective interest rate is 8%.
 The prevailing market rate for the bonds is 9% at December 31, 2021.

Questions:

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, 2021 is misstated
by
A. P200,000 over B. P200,000 under C. P50,000 over D. P50,000 under

2. The carrying amount of Investment in Bonds as of December 31, 2021 is overstated by

A. P13,900 B. P15,880 C. P18,020 D. P33,900

3. The net amount to be recognized in 2021 profit or loss related to these investments is
A. P384,121 B. P284,121 C. P134,121 D. P114,121

4. If the investment in bonds is FVTOCI, the carrying amount as of December 31, 2021 is
overstated by
A. P15,880 B. P18,020 C. P33,900 D. P38,020

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AUDIT PROBLEMS 02 – AUDIT OF INVESTMENTS

PROBLEM NO. 2

Jade Co. holds debt securities within a business model whose objective is achieved both by
collecting contractual cash flows and selling the debt securities. The contractual cash flows are
solely payments of principal and interest on specified dates.

The following amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on
December 31, 2019, for P1,086,565. The bonds were purchased to yield 5% interest.

Interest Interest Premium Amortized

Date
Received Income Amortization Cost
12.31.2019 P1,086,565
12.31.2020 P 70,000 P 54,328 P 15,672 1,070,893
12.31.2021 70,000 53,545 16,455 1,054,438
12.31.2022 70,000 52,722 17,278 1,037,160
12.31.2023 70,000 51,858 18,142 1,019,018
12.31.2024 70,000 50,982* 19,018 1,000,000
*Adjustment due to rounding

The following schedule presents the amortized cost and fair value of the bonds at year-end.

Fair Value Amortized Cost

December 31, 2020 P1,065,000 P1,070,893
December 31, 2021 1,075,000 1,054,438
December 31, 2022 1,056,500 1,037,160
December 31, 2023 1,030,000 1,019,018
December 31, 2024 1,000,000 1,000,000

Questions:

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

1. What amount should be reported as investment in bonds in the statement of financial position
of Jade Co. on December 31, 2021?
A. P1,054,438 B. P1,065,000 C. P1,075,000 D. P1,086,565

2. What amount of unrealized gain should be shown as component of other comprehensive

income in the 2021 statement of comprehensive income?
A. P10,000 B. P16,455 C. P20,562 D. P26,455

3. What amount of unrealized loss should be shown as component of other comprehensive

income in the 2022 statement of comprehensive income?
A. P1,222 B. P14,393 C. P18,500 D. P19,340

4. What amount of unrealized loss should be shown as component of other comprehensive

income in the 2023 statement of comprehensive income?
A. P8,358 B. P9,792 C. P10,982 D. P26,500

5. What amount of unrealized gain should be shown in the 2023 statement of changes in equity?
A. P10,982 B. P16,883 C. P25,233 D. P26,455

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AUDIT PROBLEMS 02 – AUDIT OF INVESTMENTS

PROBLEM NO. 3

Your audit of the Taas Corp. disclosed that the company owned the following securities on
December 31, 2020:

FA@FVTPL
Security Shares Cost Fair value
Vigan, Inc. 9,600 P144,000 P184,000
Laoag, Inc. 16,000 432,000 288,000
10%, P200,000 face value,
Santiago bonds (interest payable
every Jan. 1 and Jul. 1) 158,400 163,440
Total P734,400 P635,440

FA@FVTOCI
Security Shares Cost Fair value
Candon Products 32,000 P1,376,000 P1,540,000
Pagudpud, Inc. 240,000 6,240,000 5,840,000
Batac, Inc. 80,000 960,000 1,280,000
Total P8,576,000 P8,660,000

FA@AC
Amortized Cost Fair value
12%, 2,000,000 face value,
Ilocos bonds (interest payable
annually every Dec. 31) P1,926,000 P1,900,000

During 2021, the following transactions occurred:

Jan. 1 Receive interest on the Santiago bonds.

Mar. 1 Sold 8,000 shares of Laoag Inc. for P152,000, net of transaction cost of P7,600.
May 15 Sold 3,200 shares of Batac, Inc. at fair value of P17 per share. The entity paid
transaction cost of P2,400.
July 1 Received interest on the Santiago bonds.
Dec. 31 Received interest on the Ilocos bonds.
31 Because of the change in business model, the entity transferred the Ilocos bonds to
FA@FVTOCI. The bonds were selling at 101 on this date. The bonds were originally
purchased at an effective rate of 14%.

The fair values of the shares and bonds on December 31, 2021, are as follows:
Vigan, Inc. P22 per share
Laoag, Inc. P15 per share
10% Santiago bonds P151,200
Candon Products P42 per share
Pagudpud, Inc. P28 per share
Batac, Inc. P18 per share

The company’s accounting policy is that when an equity investment classified as FVTOCI is sold,
the accumulated OCI amount is transferred to retained earnings.

Questions:

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

1. Total interest income for the year 2021

A. P251,120 B. P260,000 C. P286,000 D. P289,640

2. On ‘reclassification date’, the amount to be recognized in other comprehensive income on the

reclassification of Ilocos bonds
A. P123,640 B. P 94,000 C. P64,360 D. Nil

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AUDIT PROBLEMS 02 – AUDIT OF INVESTMENTS

3. Gain or loss on sale of 8,000 Laoag, Inc. shares on March 1

A. P8,000 gain B. P8,000 loss C. P64,000 loss D. P64,000 gain

4. In relation to the sale of 3,200 Batac, Inc. shares on May 15, the net amount to be recognized
in profit or loss
A. P13,600 B. P 2,400 C. P800 D. Nil

5. Adjusted carrying amount of investments as of December 31, 2021

FA@FVTPL FA@FVTOCI
A. P602,400 P 9,446,400
B. P482,400 P 9,446,400
C. P602,400 P11,466,400
D. P482,400 P11,466,400

6. The accumulated OCI to be reported as separate component of equity at December 31, 2021
A. P840,800 B. P892,800 C. P908,800 D. P924,800

7. The amount to be recognized in 2021 OCI

A. P840,800 B. P892,800 C. P908,800 D. P924,800

PROBLEM NO. 4

On January 3, 2019, RK Company purchased for P500,000 cash a 10% interest in Love Corp. On
that date the net assets of Love had a book value of P3,750,000. The excess of cost over the
underlying equity in net assets is attributable to undervalued depreciable assets having a
remaining life of 10 years from the date of RK's purchase. The investment in Love Corp. was
designated as FVTOCI.

The fair value of RK's investment in Love securities is as follows: December 31, 2019, P570,000;
December 31, 2020, P525,000; December 31, 2021, P2,200,000.

On January 2, 2021, RK purchased an additional 30% of Love's stock for P1,575,000 cash when
the book value of Love's net assets was P4,150,000. The excess was attributable to depreciable
assets having a remaining life of 8 years.

During 2019, 2020, and 2021 the following occurred:

Love Net Income Dividends Paid by Love to RK

2019 P350,000 P15,000
2020 400,000 20,000
2021 550,000 70,000

Questions:

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

1. The net amount to be recognized in 2019 comprehensive income related to this investment
A. P15,000 B. P70,000 C. P 85,000 D. P120,000

2. The net amount to be recognized in 2020 comprehensive income related to this investment
A. P20,000 B. (P45,000) C. (P25,000) D. P15,000

3. If the entity used the ‘fair value as deemed cost approach’ in accordance with PIC Q&A No.
2019-06, the carrying amount of the investment in Love Corp. as of December 31, 2021 is
A. P2,200,000 B. P2,195,000 C. P2,190,000 D. P2,100,000

4. If the entity used the ‘accumulated cost approach’ in accordance with PIC Q&A No. 2019-06,
the carrying amount of the investment in Love Corp. as of December 31, 2021 is
A. P2,200,000 B. P2,198,125 C. P2,195,000 D. P2,173,125

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PROBLEM NO. 5

Select the best answer for each of the following:

1. Which of the following is not one of the auditor’s primary objectives in an audit of trading
securities?
A. To determine whether securities are authentic.
B. To determine whether securities are the property of the client.
C. To determine whether securities actually exist.
D. To determine whether securities are properly classified on the balance sheet date.

2. 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.

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 the amounts 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
B. Rights and obligations
C. Completeness
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, an auditor should inspect the securities and
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 fair value.

6. An auditor is 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.

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AUDIT PROBLEMS 02 – AUDIT OF INVESTMENTS

8. 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.

9. An auditor who physically examines securities should insist that a client representative be
present in order to
A. Detect fraudulent activities.
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.

10. In testing long-term investments, an auditor ordinarily would use analytical procedures to
ascertain the reasonableness of the
A. Classification between current and noncurrent portfolios.
B. Valuation of marketable equity securities.
C. Existence of unrealized gains or losses in the portfolio.
D. Completeness of recorded investment income.

END

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