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Introduction The auditor should use the assessed levels of inherent risk and control risk for assertions about investments
Investment is an asset held by an entity for purposes of accretion of wealth through distributions of dividends, to determine the nature, timing, and extent of the substantive procedures to be performed to detect material
interest and rentals or for capital appreciation or other benefits to be obtained. misstatements of the financial statement assertions. Some substantive procedures address more than one assertion
Investments are presented either as ‘current investments’ and ‘long-term investments.’ A current investment about various investment transactions.
is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the
date on which such investment is made. A Long-term investment is an investment other than a current investment. Management Assertion: Existence and Rights
Quick review: Purpose of Investments Audit Objectives:
All recorded investments in the statement of financial position exist.
Investment Purpose The entity owns, or has legal right to the investments included on the statement of financial position.
Investment in Equity Instruments – Financial To earn from changes in fair value and dividends Audit Procedures:
Asset at fair value The auditor’s procedure depends whether the securities or evidence of ownership are held by the client or
Investment in Equity Instruments – To benefit from exercising significant influence over third party.
Associate another entity If the securities or evidence of ownership is held by the client, the auditor counts the securities or
Investment in Equity Instruments – To benefit from exercising control over another entity instruments on hand with simultaneous count of cash and other negotiable instrument to prevent
Subsidiary substitution.
Investment in Equity Instruments – Joint To benefit from exercising joint control over another entity If held by third party, the auditor will confirm to the custodian or arrange for a visit to the custodian
Venture and conduct a count.
Investment in Debt Investments To earn from changes in fair value and interest For investment properties, arrange for an ocular inspection of investment properties and trace back
Investment in special purpose funds To accumulate funds for basically any purpose such as acquisition of investment properties to acquisition documents.
plant expansion and long-term debt retirement
Documents/Files needed:
Investment in Derivatives To earn from changes in fair value Stock certificates
Investment in life Insurance policies – Cash To compensate the entity from the untimely death of key Confirmation letter1
surrender value officers Deed of sale and other title transfer papers
Audit of Investments in a nutshell:
1. Understand the Client’s investing activities
The complexity of auditing entity’s investments always going to be different because for entities with simple
investment instruments, auditing does not require much tedious work. One of the primary audit procedures might
be to confirm its existence.
Under other conditions, complex investments or entities with large investment portfolio, however, require
additional work such as auditing values. As investment complexity increases, so will the need for more highly
competent audit team members (those that can thoroughly understand unusual investments).
Inherent Risk Assessment
The inherent risk for an assertion about an investment is its susceptibility to a material misstatement,
assuming there are no related controls. Factors that might affect the auditor's assessment of inherent
risk for assertions about an investment include the following:
The complexity of the features of the investment.
Whether external factors affect the assertion.
2. Internal Control Evaluation
The auditor should carefully evaluate and study the system of internal control for audit clients that have large
investment portfolio to determine the nature, timing and extent of audit procedures. Since it has several
investments related transactions, the auditor should decide whether it would be more efficient to conduct test of
control before substantive test. Before he opts to decide to rely on test of control, the auditor should ascertain the
following internal control regarding investments:
Control over acquisition, accretion and disposal of investments
Safeguarding of investments
Controls relating to title to investments
Information controls
Control Risk Assessment
After obtaining the understanding of internal control over investment transactions, the auditor should
assess control risk for the related assertions. If the auditor plans to assess control risk at less than Management Assertion: Completeness
maximum for one or more assertions regarding investments, the auditor should identify specific controls Audit Objectives:
relevant to the assertions that are likely to prevent or detect material misstatements and gather audit To determine that investments to which the company has title to are all included in the statement of
evidence about their operating effectiveness. financial position.
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Fair value of preferred stock (2,500 shares x P78.75) P196,875.00 Effective interest (P3,667,594 x 10% x 6/12) P183,380.00
Less: CV of shares converted (P487,500 x 2.5/5) (243,750.00) Nominal interest (P4,000,000 x 8% x 6/12) (160,000.00) 23,380.00
1.) Loss on conversion of 2,500 France preferred shares P 46,875.00 Carrying value, 6/1/20 P3,690,974.00
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c. On May 1, 2019, the company purchased 4,200 ordinary shares of JKL Corp. At P75 per share. The
company incurred brokers’ fees amounting to P10,400.
d. The following additional information in 2019 were deemed relevant:
Questions:
1. What is the realized gain on sale of ABC ordinary shares in 2019?
2. What is the unrealized holding gain/loss to be reported in the stockholder’s equity portion of the 2019 statement
of financial position?
Suggested Solutions:
BARBIE Corporation acquired a building on January 1, 2017.The acquisition cost is P5,000,000 payable at the rate of
P1M at the beginning of each year starting on January 1, 2017. The company paid option money totaling P400,000,
P85,221 of which is attributed to real properties not acquired. The company also paid property taxes in arrears.
The company also paid property taxes in arrears as of January 1, 2017 at P147,872. The prevailing market rate of
interest for transaction is 12%. The building is estimated to have useful life of 25 years.
The property was appraised at the end of each year as follows:
Questions:
1. What is the carrying value of the property as of December 31, 2019, assuming that the building is an investment
property under the cost method?
2. How much recovery gain should be recognized from the asset in the 2019 profit or loss?
Suggested Solutions: