FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

APPLIED AUDITING RROcampo
nd
AP.105 Audit of Investments 2 Semester AY 2017-2018

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.

SUBSTANTIVE AUDIT OF INVESTMENTS

Investments and Investment Income
Existence or occurrence: Recorded investments and investment exist
1. Inspect securities on hand and trace to list.
2. Confirm securities held by others.

Completeness: All investments and investment income are recorded

3. Apply analytical procedures.

Rights and obligations: Investments and investment income are owned by the entity
4. Examine supporting brokers’ advices and paid checks for investments acquired during the period.
5. Examine remittance advices for dividends, interest and disposals of investments.

Valuation and allocation: Investments are valued in accordance with GAAP and investments and investment
income are mathematically accurate
6. Reconcile the investment list to the subsidiary ledger and general ledger account.
7. Recalculate interest income and verify dividend income by reference to published reports of dividends.

Presentation and disclosure: Investments and investment income are presented and disclosed in accordance
with GAAP
8. Review financial statements and perform analytical procedures to whether accounts are classified and
disclosed in the financial statements in accordance with GAAP.

 DONE 

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AP.105 Audit of Investments 2nd Semester AY 2017-2018

PROBLEM NO.1
You were able to obtain the following ledger details of FA@FVTPL in connection with your audit of the
Universe 11 Corporation for the year ended December 31, 2019:
Date Particulars DR CR
Jan. 10 Purchase of Jiren Co. – 6,000 shares P1,440,000
Feb. 20 Purchase of Toppo Co. – 7,200 shares 1,800,000
Mar. 1 Sale of Toppo Co. – 2,400 shares 540,000
May 31 Receipt of Jiren share dividend– Offsetting
Credit to retained earnings 132,000
Aug. 15 Sale of Jiren – 4,800 shares 1,176,000
Sept. 1 Sale of Jiren – 1,200 shares 276,000
The following information was obtained during your examination:
 From independent sources, you determine the following dividend information for 2019:
Nature Declared Record Payment Rate
Cash 01/02 01/15 01/31 P20/share
Share 05/02 05/15 05/31 10%
Cash 08/01 08/30 09/15 P30/share
 Closing market quotation as at December 31, 2019:
Bid Asked
Jiren shares P210 P220
Toppo shares 240 250
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. In relation to March 1 transaction, the necessary adjusting journal entry includes
2. In relation to August 15 transaction, the necessary adjusting journal entry includes
3. In relation to September 1 transaction, the necessary adjusting journal entry includes
4. The carrying amount of FA@FVTPL as of December 31, 2019 is overstated by
5. How much is the net amount to be recognized in Universe 11 Corporation’s 2019 profit or loss related to
these investments?
6. 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 statement of financial position.
7. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is
unable to count the securities at the end of the reporting period, the auditor most likely will
a. Request the bank to confirm to the auditor the contents of the safe deposit box at the end of the reporting
period.
b. Examine supporting evidence for transactions occurring during the year.
c. Count the securities at a subsequent date and confirm with bank whether securities were added or
removed since the end of the reporting period.
d. Request the client to have a bank seal the safe-deposit box until the auditor can count the securities at a
subsequent date.
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AP.105 Audit of Investments 2nd Semester AY 2017-2018

8. In establishing the existence and ownership of an investment held by a corporation in the form of publicly
traded shares an auditor should inspect the securities or
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 the lower of cost or market.
9. 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.
10. In performing tests of the carrying amount of trading securities, the auditor would usually:
a. Ask management to estimate the market value of the securities.
b. Refer to the quoted market prices of the securities.
c. Value the securities at cost regardless of their market prices.
d. Count the securities.

PROBLEM NO.2
In connection with your audit of the financial statements of the Frieza Company for the year 2019, the
following FA@FVTOCI and Investment Income accounts were presented to you:
FA@FVTOCI
Date Description Ref. Debit Credit
01/15 10,000 ordinary shares, par value P50, Android17 Co. VR-18 390,000
04/30 5,000 shares Android17 Co. received as share dividend CJ-7 250,000
05/20 Sold 5,000 shares @ P25 CR-21 125,000
12/10 Sold 2,000 shares @ P60 CR-S2 120,000
Investment Income
Date Description Ref. Debit Credit
04/30 Share dividend SJ-7 250,000
11/30 Android17 Company ordinary CR-22 50,000
The following information was obtained during your examination:
1. From independent sources, you determine the following dividend information:
Type of Date Date of Date of
Dividend Declared Record Payment Rate
Share 03/15/19 04/01/19 04/30/19 50%
Cash 11/01/19 11/15/19 11/28/19 P5/share
Cash 12/01/19 12/15/19 01/02/20 20%
2. Closing market quotation as at December 31, 2019:
Bid Asked
Android17 Company ordinary 13-3/4 16-1/2
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the gain (loss) on the May 20 sale?
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AP.105 Audit of Investments 2nd Semester AY 2017-2018

2. How much is the gain on the December 10 sale?

3. How much is the total investment income for the year?
4. How much is the carrying amount of FA@FVTOCI as of December 31, 2019?
5. How much is the Fair Value Adjustment - loss on FA@FVTOCI as of December 31, 2019?

PROBLEM NO.3
The Whis COMPANY had acquired interest in a promising local company, the Goku Company. During your
audit of the company’s accounts for the year 2019, which was a first audit, you obtained the following:
Investment in Goku Company
2017–Jan. 2 30,000 sh @35 P1,050,000 2019–Jul. 15 50,000 sh @40 P2,000,000
2018–Jul. 2 90,000 sh @60 5,400,000
2019–Mar. 2 30,000 sh @70 2,100,000
Investment in Vegeta Company
2019 - Aug. 10 P10,000

Dividend Income
2019 January. 2 P120,000
April 1 150,000
August 10 10,000
December 20 100,000
The transactions pertaining to the foregoing for 2019 were 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 March 1 to shareholders of record as of March 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 Vegeta Company for every ten shares of
Goku Company. The share dividend had a market value of P3 per share and its book value on the
ledger of Goku Company was P1 per share.
Dec.20 Received cash dividend of P1 per share, declared December 1, out of Goku Company’s “Reserve
for Depletion”.
29 Sold 10,000 Goku Company shares at P90. Cash was received on January 5, 2020.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Loss on sale of 50,000 Goku Company shares on July 15
2. Gain on sale of 10,000 Goku Company shares on December 29
3. Adjusted balance of Investment in Goku Company as of December 31, 2019
4. Dividend income for the year ended Dec. 31, 2019
5. Which of the following is the most effective audit procedure for verification of dividends earned on
investments in equity securities?
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AP.105 Audit of Investments 2nd Semester AY 2017-2018

a. Tracing deposited dividend checks to the cash receipts book.

b. Reconciling amount 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.

PROBLEM NO.4
Your audit of the Norte Corp. disclosed that the company owned the following securities on December 31,
2018:
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 P1,440,000
Pagudpud, Inc. 240,000 6,240,000 5,840,000
Batac, Inc. 80,000 960,000 1,280,000
Total P8,576,000 P8,560,000
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 2017, the following transactions occurred:
Jan. 1 Receive interest on the Santiago bonds.
Mar. 1 Sold 8,000 shares of Laoag Inc. for P152,000.
May 15 Sold 3,200 shares of Batac, Inc. for P15 per share.
July 1 Received interest on the Santiago bonds.
Dec. 31 Received interest on the Ilocos bonds.
31 Transferred the Ilocos bonds to the FA@FVTOCI portfolio. 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, 2019, 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
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 8,000 Laoag, Inc. shares on March 1
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AP.105 Audit of Investments 2nd Semester AY 2017-2018

2. Gain or loss on sale of 3,200 Batac, Inc. shares on May 15,

3. Total interest income for the year 2019?
4. The amount to be recognized in other comprehensive income on the transfer of Ilocos bonds to
FA@FVTOCI?
5. Carrying amount of FA@FVTPL and FA@FVTOCI as of December 31, 2019 should be

PROBLEM NO.5
The following two subsidiary accounts reflect the trading securities of LODI Company for the year 2019:
PETMALU COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 16 Purchase 20,000 CD P1,900,000
31 Raised to market value, offset credit to GJ 100,000
retained earnings
Mar. 30 Sale at P150 10,000 CR 1,500,000
Jun. 10 Stock dividend at par 10,000 GJ 1,000,000
Jul. 29 Sale at P110 10,000 CR 1,100,000
TotalS P3,000,000 P2,600,000
WERPA CORP.
Date Transactions Shares Ref. Debit Credit
Sep. 05 Purchase 20,000 CD P1,000,000
Sep. 18 Cash dividends to stockholders of record
Sept. 15, declared Aug. 15 CR P 50,000
Oct. 01 Purchase 50,000 CD 2,500,000
Oct. 05 Sale at P65 20,000 CR 1,000,000
Nov.30 Cash collected for sale made on Nov. 10,
after a Nov. 1 declaration of P5 cash
dividend per share to stockholders on
record as of December 1 20,000 CR 3,300,000
Dec.15 Cash dividend received CR 150,000
Totals P3,500,000 P4,500,000
On January 2, 2019, LODI Company purchased 39,000 shares of ERAP Co.’s 200,000 shares of outstanding
common stock for P1,170,000. On that date, the carrying amount of the acquired shares on ERAP Co.’s books
was P810,000. LODI attributed the excess of cost over carrying amount to goodwill.
During 2019, LODI’s president gained a seat on ERAP’s board of directors. ERAP reported earnings of
P800,000 for the year ended December 31, 2019, and declared and paid cash dividends of P200,000 during
2019. On December 31, 2019, ERAP’s common stock was trading at P30 per share.
1. The gain on sale of 10,000 shares of PETMALU Company on March 30 is
2. The gain on sale of 10,000 shares of PETMALU Company on July 29 is
3. The correct acquisition cost of 20,000 shares of WERPA Corp. acquired on September 5 is
4. The gain on sale of 20,000 shares of WERPA Corp. October 5 is
5. The gain on sale of 20,000 shares of WERPA Corp. on November 10 is
6. The balance of the Company’s investment in PETMALU Company before fair value adjustment on
December 31, 2019 is
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AP.105 Audit of Investments 2nd Semester AY 2017-2018

7. The adjusted balance of the Company’s investment in WERPA Corp. before mark-to-market on December
31, 2019 is
8. The income from investment in common stock of ERAP Company to be reported on the income statement
for the year ended December 31, 2019 is
9. The adjusted balance of investment in ERAP Company at December 31, 2019 is

PROBLEM NO.6
On January 3, 2017, Julio Company purchased for P500,000 cash a 10% interest in Julia Corp. On that date the
net assets of Juia 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 Julio's
purchase. The investment in Julia Corp. is not intended for trading.
The fair value of Julio's investment in Julia securities is as follows: December 31, 2017, P570,00; December 31,
2018, P525,000; December 31, 2019, P2,200,000.
On January 2, 2019, Julio purchased an additional 30% of Julia's stock for P1,575,000 cash when the book
value of Julia's net assets was P4,150,000. The excess was attributable to depreciable assets having a remaining
life of 8 years.
During 2017, 2018, and 2019 the following occurred:
Julia Dividends Paid by
Net Income Julia to Julio
2015 P350,000 P15,000
2016 400,000 20,000
2017 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 2017 comprehensive income related to this investment?
2. The net amount to be recognized in 2018 comprehensive income related to this investment?
3. The adjustment to retained earnings as of January 1, 2019 as a result of the acquisition of the additional 30%
interest in Julia Corp. is.
4. The carrying amount of the investment in Julia Corp. as of December 31, 2017 is
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.

PROBLEM NO.7
On January 2, 2018, Bogart Company acquired 20% of the 400,000 shares of outstanding share capital of
Brando Corporation for P30 per share. The purchase price was equal to Brando’s underlying book value. Bogart
plans to hold this share to influence the activities of Brando.
The following data are applicable for 2018 and 2019:
2018 2019
Brando dividends (paid Oct. 31) P 40,000 P 48,000
Brando earnings 140,000 160,000

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AP.105 Audit of Investments 2nd Semester AY 2017-2018

Brando share market price at year-end 32 31

On January 2, 2020, Bogart Company sold 20,000 shares of Brando shares for P31 per share. During 2020,
Brando reported net income of P120,000, and on October 31, 2020, Brando paid dividends of P20,000. At
December 31, 2020, after a significant stock decline, which is expected to be temporary, Brando’s share was
selling for P22 per share. After selling the 20,000 shares, Bogart does not expect to exercise significant
influence over Imaw, and the shares are classified as FA@FVTOCI.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Carrying value of Investment in Brando as of December 31, 2018

2. Carrying value of Investment in Brando as of December 31, 2019

3. Gain or loss on sale of Investment in Brando on January 2, 2020
4. The income from investment in Brando in 2020 is
5. Net fair value adjustment-loss on FA@FVTOCI as of December 31, 2020

PROBLEM NO.8
On April 1, 2016, KLOOTZ Corporation purchased 5-year P10,000,000 10% bonds dated January 1, 2016.
The bonds were purchased to yield 8%. Interest is payable annually every December 31. KLOOTZ
Corporation has the positive intention and ability to hold these bonds to maturity.
The issuer paid the interest as scheduled in 2016 and 2017.
During 2018, the issuer of the bonds is in financial difficulties and it becomes probable that the issuer will be
put into administration by a receiver. On December 31, 2018, KLOOTZ estimated that none of the interest will
be collected and only P8,000,000 of the principal will be collected on maturity date.
At the end of 2019, the issuer is released from administration and KLOOTZ receives a letter from the receiver
stating that the issuer will pay P13,000,000 at maturity.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors to four
decimal places)
1. How much was the total amount paid to acquire the investment in bonds on April 1, 2016?
2. How much is the carrying amount of the investment in bonds on December 31, 2016?
3. How much should be recognized as impairment loss in 2018?
4. How much is the interest income to be recognized in 2019?
5. How much should be recognized as reversal of impairment loss in 2019?

 END of AP.105 

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