Audit of Investments


By Prof. Anita B. Catolico
 Forms of Investments

1. Debt – treasury bills, commercial paper, bonds
2. Equity – ordinary/preference shares
3. Securities – marketable or long-term
4. Others – pension funds, cash surrender value of life
insurance, real estate
 Audit Objectives

1. Investments physically exist.
2. Included in the SFP.
3. Company has ownership rights.
4. Valued properly in accordance with GAAP.
5. Properly classified in SFP and disclosures are
adequate.
 Audit Procedures

1. Obtain or prepare analysis of securities, other
investments and related revenue account and reconcile
to the general ledger.
2. Inspect securities on hand.
3. Confirm securities held by others.
4. Vouch selected purchases and sales of securities and
other investments during the year.
5. Verify the client’s cut-off of securities transactions.
6&7. Perform analytical procedure. Compute revenue
from investments independently.
 
8&9. Determine market value of securities and evaluate
accounting method.
10. Evaluate FS presentation and disclosure of
securities.
 
MAGNOLIA CORP. invested its excess cash in equity securities during 2020.
The business model for these investments is to profit from trading on price
changes.
 
As of December 31, 2020, The equity investment portfolio consisted of the
following:
 
Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P45,000 P63,000

Polland Co. 2,000 shares 120,000 126,000

Alabang Corp. 2,000 shares 216,000 180,000

 Totals P381,000 P369,000
 
1. In the December 31, 2020 statement of financial position,
what should be reported as carrying amount of the
investments?
 A. P369,000 C. P381,000
 B. P345,000 D. P405,000

2. In the 2020 income statement, what amount should be

reported as unrealized gain or loss?
A. Unrealized gain of P12,000 C. Unrealized loss of P36,000
B. Unrealized loss of P12,000 D. Unrealized gain of P24,000
 
During the year 2021, Magnolia Corp. sold 2,000 shares of
Polland Co. for P114,600 and purchased 2,000 more shares of LJ,
Inc. and 1,000 shares of Dwarfy Company. On December 31,2021,
Magnolia’s equity securities portfolio consisted of the following.
 
Investment Quantity Cost Fair Value 

LJ, Inc. 1,000 shares P45,000 P60,000

LJ,Inc. 2,000 shares 99,000 120,000
Dwarfy Company 1,000 shares 48,000 36,000
Alabang Corp. 2,000 shares 216,000 66,000
 Totals P408,000 P282,000
 
3. What is the gain or loss on the sale of Polland Co. Investments?
A. P5,400 gain C. P11,400 gain
B. P5,400 loss D. P11,400 loss
 
4. What is the carrying amount of the investments on December 31,
2021?
A. P408,000 C. P282,000
B. P444,000 D. P246,000

5. What amount of unrealized gain or loss should be reported in the

income statement for the year ended December 31, 2021?
A. P126,000 unrealized gain C. P108,000 unrealized gain
B. P126,000 unrealized loss D. P108,000 unrealized loss
Quiz Next
