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AUDITING PRACTICE OCAMPO/OCAMPO

AP.3406 - Audit of Investments MAY 2023

SUBSTANTIVE AUDIT OF INVESTMENTS

Investments and Investment Income

Existence or occurrence: Recorded investments and Valuation and allocation: Investments are valued in
investment exist accordance with GAAP and investments and investment
income are mathematically accurate
1. Inspect securities on hand and trace to list.
6. Reconcile the investment list to the subsidiary ledger
2. Confirm securities held by others. and general ledger account.

7. Recalculate interest income and verify dividend income

Completeness: All investments and investment income are by reference to published reports of dividends.
recorded

3. Apply analytical procedures. Presentation and disclosure: Investments and investment

income are presented and disclosed in accordance with
GAAP
Rights and obligations: Investments and investment
income are owned by the entity 8. Review financial statements and perform analytical
procedures to whether accounts are classified and
4. Examine supporting brokers’ advices and paid checks disclosed in the financial statements in accordance
for investments acquired during the period. with GAAP.

5. Examine remittance advices for dividends, interest and

disposals of investments.

INTERNAL CONTROL MEASURES

1. Purchases and sales of investments should be properly authorized (normally by the board of directors or investment
committee of the board of directors).

2. Access to securities should not be vested in one person only.

3. Custodianship of investment securities and the accounting for them should be segregated.

4. Securities must be physically controlled in order to prevent unauthorized usage and they must be registered in the
name of the entity.

5. Income received from investments should be reconciled periodically with amounts that should be received.

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PROBLEM NO. 1 5. How much is the net amount to be recognized in BFF

Corp.’s 2022 profit or loss related to these
You were able to obtain the following ledger details of
investments?
Equity investment-FVTPL in connection with your audit of
a. P 48,000 c. P204,000
the BFF Corp. for the year ended Dec. 31, 2022:
b. P198,000 d. P246,000
Date Particulars DR CR
Jan. 10 Purchase of Rian Co. 6. Which of the following is not one of the auditor’s
– 6,000 shares P1,440,000 primary objectives in an audit of trading securities?
Feb. 20 Purchase of Bryan a. To determine whether securities are authentic.
Co. – 7,200 shares 1,800,000 b. To determine whether securities are the property
Mar. 1 Sale of Bryan Co. – of the client.
2,400 shares 540,000 c. To determine whether securities actually exist.
May 31 Receipt of Rian share d. To determine whether securities are properly
dividend– classified on the statement of financial position.
Offsetting Credit to 132,000
retained earnings 7. A client has a large and active investment portfolio
Aug. 15 Sale of Rian – that is kept in a bank safe-deposit box. If the auditor
4,800 shares 1,176,000 is unable to count the securities at the end of the
Sept. 1 Sale of Rian – reporting period, the auditor most likely will
1,200 shares 276,000 a. Request the bank to confirm to the auditor the
contents of the safe deposit box at the end of the
The following information was obtained during your reporting period.
examination: b. Examine supporting evidence for transactions
occurring during the year.
• From independent sources, you determine the following c. Count the securities at a subsequent date and
dividend information for 2022: confirm with bank whether securities were added
Nature Declared Record Payment Rate or removed since the end of the reporting period.
Cash 01/02 01/15 01/31 P20/share d. Request the client to have a bank seal the safe-
Share 05/02 05/15 05/31 10% deposit box until the auditor can count the
Cash 08/01 08/30 09/15 P30/share securities at a subsequent date.

• Closing market quotation as at December 31, 2020: 8. In establishing the existence and ownership of an
investment held by a corporation in the form of
Bid Ask
publicly traded shares an auditor should inspect the
Rian shares P210 P220
securities or
Bryan shares 240 250
a. Obtain written representations from management
confirming that the securities are properly
QUESTIONS:
classified as trading securities.
Based on the above and the result of your audit, answer b. Inspect the audited financial statements of the
the following: investee company.
c. Confirm the number of shares held by an
1. In relation to Mar. 1 transaction, the necessary
independent custodian.
adjusting journal entry includes
d. Determine that the investment is carried at the
a. A debit to Loss of P60,000
lower of cost or market.
b. A credit to Equity investment-FVTPL of P600,000
c. Both a and b 9. Which of the following is the least effective audit
d. Neither a nor b procedure regarding the existence assertion for the
2. In relation to Aug. 15 transaction, the necessary securities held by the auditee?
adjusting journal entry includes a. Examination of paid checks issued in payment of
a. A debit to Equity investment-FVTPL of P216,000 securities purchased.
b. A debit to Loss of P15,300 b. Vouching all changes during the year to supporting
c. A credit to Gain of P216,000 documents.
d. A credit to Equity investment-FVTPL of P15,300 c. Simultaneous count of liquid assets.
d. Confirmation from the custodian.
3. In relation to Sept. 1 transaction, the necessary
adjusting journal entry includes 10. In performing tests of the carrying amount of trading
a. A debit to Equity investment-FVTPL of P36,000 securities, the auditor would usually:
b. A credit to Gain of P36,000 a. Ask management to estimate the market value of
c. Both a and b the securities.
d. Neither a nor b b. Refer to the quoted market prices of the securities.
c. Value the securities at cost regardless of their
4. The carrying amount of Equity investment-FVTPL as of
market prices.
Dec. 31, 2022 is overstated by
d. Count the securities.
a. P228,000 c. P60,000
b. P102,000 d. P 0

PROBLEM NO. 2
The LEE BUYS COMPANY had acquired interest in a promising local company, the Silver Tab Company. During your
audit of the company’s accounts for the year 2022, which was a first audit, you obtained the following:

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Investment in Silver Tab Company

2020–Jan. 2 30,000 sh @35 P1,050,000 2022–Jul. 15 50,000 sh @40 P2,000,000
2021–Jul. 2 90,000 sh @60 5,400,000
2022–Mar. 2 30,000 sh @70 2,100,000
Investment in Red Tab Company
2022 - Aug. 10 P10,000

Dividend Income
2022 Jan. 2 P120,000
Apr. 1 150,000
Aug. 10 10,000
Dec. 20 100,000

The transactions pertaining to the foregoing for 2022 were SOLUTION GUIDE:
as follows:
Jan. 2 Received cash dividend (declared on December
1) of P1 per share.
Mar. 2 Bought 30,000 shares at P70 per share.
Apr. 1 Received cash dividend (declared on Mar. 1 to
shareholders of record as of Mar. 10) of P1 per
share.
July 15 Sold 50,000 shares at P40 per share.
Aug. 10 Received an “extra” dividend in shares of one
share of Red Tab Company for every ten shares
of Silver Tab Company. The share dividend had
a market value of P3 per share and its book
value on the ledger of Silver Tab Company was
P1 per share.
Dec.20 Received cash dividend of P1 per share,
declared December 1, out of Silver Tab
Company’s “Reserve for Depletion”.
29 Sold 10,000 Silver Tab Company shares at P90.
Cash was received on Jan. 5, 2023.
QUESTIONS:
Based on the above and the result of your audit, determine
the following:
1. Loss on sale of 50,000 Silver Tab Company shares on PROBLEM NO. 3
July 15
Your audit of the Norte Corp. disclosed that the company
a. P250,000 c. P1,300,000
owned the following securities on Dec. 31, 2021:
b. P850,000 d. P0
FA at FVTPL
2. Gain on sale of 10,000 Silver Tab Company shares on
Security Shares Cost Fair value
December 29
Vigan, Inc. 9,600 P144,000 P184,000
a. P330,000 c. P300,000
Laoag, Inc. 16,000 432,000 288,000
b. P310,000 d. P0
10% , P200,000 face
3. Adjusted balance of Investment in Silver Tab Company value , Santiago
as of Dec. 31, 2022 bonds (interest
a. P5,130,000 c. P5,580,000 payable every
b. P5,570,000 d. P5,640,000 Jan. 1 and Jul. 1) 158,400 163,440
Total P734,400 P635,440
4. Dividend income for the year ended Dec. 31, 2022
a. P150,000 c. P180,000 FA at FVTOCI
b. P160,000 d. P280,000 Security Shares Cost Fair value
5. Which of the following is the most effective audit Candon Products 32,000 P1,376,000 P1,540,000
procedure for verification of dividends earned on Pagudpud, Inc. 240,000 6,240,000 5,840,000
investments in equity securities? Batac, Inc. 80,000 960,000 1,280,000
a. Tracing deposited dividend checks to the cash Total P8,576,000 P8,660,000
receipts book.
b. Reconciling amount received with published FA at AC
dividend records. Amortized
c. Comparing the amounts received with preceding Cost Fair value
year dividends received. 12%, 2,000,000 face
d. Recomputing selected extensions and footings of value, Ilocos bonds
dividend schedules and comparing totals to the (interest payable
general ledger. annually every Dec. 31) P1,926,000 P1,900,000

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During 2022, the following transactions occurred: PROBLEM NO. 4

Jan. 1 Receive interest on the Santiago bonds. Assassin Corp.’s accounting records included the
following investments:
Mar. 1 Sold 8,000 shares of Laoag Inc. for
P152,000, net of transaction cost of P7,600. Investment in Ordinary Shares
1/1/20 P1,000,000 7/1/22 P800,000
May 15 Sold 3,200 shares of Batac, Inc. at fair value 12/31/20 200,000
of P17 per share. The entity paid transaction 12/31/21 300,000
cost of P2,400.
July 1 Received interest on the Santiago bonds. Investment in Bonds
Dec. 31 Received interest on the Ilocos bonds. 1/1/22 P1,051,510

31 Because of the change in business model,

the entity transferred the Ilocos bonds to FA During the course of your audit, you noted the following.
at FVTOCI. The bonds were selling at 101 on
this date. The bonds were originally Investment in Ordinary Shares
purchased at an effective rate of 14%. • The investment is not designated at FVTOCI.
• Acquired on Jan. 1, 2020 at P950,000 plus transaction
The fair values of the shares and bonds on Dec. 31, 2022, costs of P50,000.
are as follows: • On July 1, 2022, the entity sold half of the investment
Vigan, Inc. P22 per share for its fair value of P800,000.
Laoag, Inc. P15 per share • Fair value of the investment: Dec. 31, 2020,
10% Santiago bonds P151,200 P1,200,000; Dec. 31, 2021, P1,500,000; Dec. 31,
Candon Products P42 per share 2022, P900,000.
Pagudpud, Inc. P28 per share
Batac, Inc. P18 per share Investment in Bonds
• The entity uses the ‘held for collection’ business model
The company’s accounting policy is that when an equity for acquired and originated debt instruments.
investment classified as FVTOCI is sold, the accumulated • P1,000,000, 10% bonds, purchased for P1,051,510
OCI amount is transferred to retained earnings. including transaction costs of P20,000. Interest is
payable annually every Dec. 31. The bonds mature on
QUESTIONS: Dec. 31, 2024. The effective interest rate is 8%.
• The prevailing market rate for the bonds is 9% at
Based on the above and the result of your audit, determine Dec. 31, 2022.
the following:
QUESTIONS:
1. Total interest income for the year 2022
a. P251,120 c. P286,000 Based on the above and the result of your audit, answer
b. P260,000 d. P289,640 the following:
2. On ‘reclassification date’, the amount to be recognized
1. The carrying amount of Investment in Ordinary Shares
in other comprehensive income on the reclassification
as of Dec. 31, 2022 is misstated by
of Ilocos bonds
a. P200,000 over c. P50,000 over
a. P123,640 c. P64,360
b. P200,000 under d. P50,000 under
b. P 94,000 d. Nil
2. The carrying amount of Investment in Bonds as of Dec.
3. Gain or loss on sale of 8,000 Laoag, Inc. shares on
31, 2022 is overstated by
Mar. 1
a. P13,900 c. P18,020
a. P8,000 gain c. P64,000 loss
b. P15,880 d. P33,900
b. P8,000 loss d. P64,000 gain
3. The net amount to be recognized in 2022 profit or loss
4. In relation to the sale of 3,200 Batac, Inc. shares on
related to these investments is
May 15, the net amount to be recognized in profit or
a. P384,121 c. P134,121
loss
b. P284,121 d. P114,121
a. P13,600 c. P800
b. P 2,400 d. Nil 4. If the investment in bonds is FVTOCI, the carrying
amount as of Dec. 31, 2022 is overstated by
5. Adjusted carrying amount of investments as of Dec.
a. P15,880 c. P33,900
31, 2022
b. P18,020 d. P38,020
FA at FVTPL FA at FVTOCI
a. P602,400 P 9,446,400 5. An auditor who physically examines securities should
b. P482,400 P 9,446,400 insist that a client representative be present in order to
c. P602,400 P11,466,400 a. Detect fraudulent securities.
d. P482,400 P11,466,400 b. Lend authority to the auditor’s directives.
c. Acknowledge the receipt of securities returned.
6. The accumulated OCI to be reported as separate
d. Coordinate the return of securities to the proper
component of equity at Dec. 31, 2022
locations.
a. P840,800 c. P908,800
b. P892,800 d. P924,800
7. The amount to be recognized in 2022 OCI
a. P840,800 c. P908,800
b. P892,800 d. P924,800

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PROBLEM NO. 5
On Jan. 3, 2020, JR Company purchased for P500,000
cash a 10% interest in Judi Corp. On that date the net
assets of Judi 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 JR's purchase.
The investment in Judi Corp. was designated as FVTOCI.

The fair value of JR's investment in Judi securities is as

follows: Dec. 31, 2020, P570,000; Dec. 31, 2021,
P525,000; Dec. 31, 2022, P2,200,000.

On Jan. 2, 2022, JR purchased an additional 30% of Judi's

stock for P1,575,000 cash when the book value of Judi's
net assets was P4,150,000. The excess was attributable to
depreciable assets having a remaining life of 8 years.

During 2020, 2021, and 2022 the following occurred:

Judi Dividends Paid by
Net Income Judi to JR
2020 P350,000 P15,000
2021 400,000 20,000
2022 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 2020
comprehensive income related to this investment?
a. P15,000 c. P 85,000
b. P70,000 d. P120,000
2. The net amount to be recognized in 2021
comprehensive income related to this investment?
a. P20,000 c. (P25,000)
b. (P45,000) 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 Judi Corp. as
of Dec. 31, 2022 is
a. P2,200,000 c. P2,190,000
b. P2,195,000 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 Judi Corp. as of Dec. 31,
2022 is
a. P2,200,000 c. P2,195,000
b. P2,198,125 d. P2,173,125
5. 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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