Chapter

ExpectedLearning Outcomes
After studying this chapter, you should be able to:
1 Describe the auditors' objectives for the substantive tests of
details of balances of investments in debt and equity securities as
well as non-trade loans receivable.
2. Describe the nature of the audit procedures to accomplish the
auditors' objectives for the audit of investments in debt and
equity securities and non-trade loans receivable
3. Understand and prepare audit working papers to document
audit procedures for investments in debt and equity
securities and non-trade loans receivable

CHAPTER 14
AUDIT OF INVESTMENTS
INTRODUCTION

As previously mentioned in Chapter 9. because of the relatively few

transactions involving investments, most auditors would focus on directly
testing the transactions affecting the Investments account. The decision to
forego testing of prescribed controls for compliance may be based on cost-
benefit considerations rather than on the absence of effective controls.

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The forlTl of investments can vary considerably. The investments may in debt (T-
bills, commercial paper, bonds) or equity (ordinary shares, preference shares)
securities. The securities may be marketable or long term, as investment in shares of
subsidiary or affiliated companies. Also, the investment may be in pension funds,
cash surrender value of the life insurance, real estate, or loan or advance rather than
a security. However, the primary distinction between long-term investment and
investment classified as current assets is management's intention and ability to hold
the investment for longer than one year. Thus, the following
discussion of the substantive audit objectives and procedures will apply in general to
most investments.

AUDIT OBJECTIVES AND PROCEDURES

Figure 14-1 summarizes the financial statement assertions, specific audit

objectives and the common audit procedures traditionally used to audit
Investments.

Figure 14-1: Assertions, Objectives and Procedures for Investments in

Securities
Assertions Audit Ob'ectives Audit Procedures
l. Existence or A. To determine that 1. Obtain or prepare a listing
Occurrence investments in securities of securities and
(shares, bonds, notes) investments owned by the
physically exist and in company and related
loans and advances exist. revenue accounts and
reconcile to the general
2. Inspect securities on hand.
3. Obtain confirmation of
securities held b others.
A udit of Investments 433

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 Completeness B. To determine that 4, In-addition to audit
investments are all procedures 2 and 3, vouch
included in the selected purchases and sales
statement of financial transactions of securities
position. durin the ear.
Ill. Rights and To determine that the 5, In addition to audit
Obligations company owns or has procedures 2 and 3, verify the
ownership rights to all clients' cutoff of securities
investments included in transactions.
the statement of 6. Perform analytical
financial position. 7. procedures. Compute
independently revenue from
securities.
IV. Valuation D To determine that 8. Determine market value of
investments are valued securities at statement of
properly in accordance financial position date.
Evaluate the method of
with generally accepted
accountin for securities.
accountin rinci les.

V Presentation E. Investments are properly 10. Evaluate financial statement

and Disclosure described and classified presentation and related
in the statement of revenue or loss accounts.
financial position and
related disclosures are
ade uate.

Discussion of Audit Procedures

l. Obtain or prepare analysis of the securities, other investments and related
revenue account and reconcile to the general ledger.
The auditor: should obtain or prepare in advance if possible, an analysis of
the investment account showing the beginning and ending balances,
purchases and sales of investments during the year and interest and dividend
earned. The auditors should see to it that the totals on the schedules agree
with the totals shown in the general ledger. Illustrative Audit Case 14-2
shows the analysis of securities. Also, the auditor should prepare a separate
list of securities as of the end of the year that includes the following
information: name of issuer and description of security; serial numbers;
name of owner and any endorsement, number of shares or principal amount;
cost and

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carrying amount if other than cost; market price per unit; total market price,
location of securities; if they are pledged, with whom and for what purpose.

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2. Inspect securities on hand.
The auditor should account for the securities 0B ned by the company by
inspecting the securities on hand in the presence of the company's and
obtain a signed receipt in ink for their return to the custodian. The information
mentioned in audit procedures number I will be shown in the securities count
sheet If securities are held in more than one location. an arrangement should be
made to hag,e a simultaneous count at all locations This 'SGII a'.oid the
possibilit> of client personnel attempting to cover up theft of authorized used
bv transferring the securities from one location to another
The information obtained during the physical examination of Securities should
be compared to the information on the listing of securities provided by the
client.
Figure papers for securities

14-2 shov.s the pro-forma

3. Confirm securities held by others

Client-owned securities may be in the hands of shareholders for safekeeping or
banks if they were used as collateral for bank loans. The auditorsh0Uld send a
confirmation request signed by the client to the holders Of the securities. "I he

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 Chapter 14
request should include instruct;ons to mail the reply directly to the auditor.

A /mertpm.'nl" 4-55

4. Vouc•/l selected purchases and sales of securltles and other

Investmen/¶ during the year,
The auditors should verify a sample of transactions by reference to
the brokers' advices and cash records. Entries to record the purchases
and transactions should be checked as to authorization, propriety and
accuracy,

5. Verify the client's cutoffofsecurities transactions.

The auditors should review transactions pertaining to securities few
wcckf' before and after the statement of financial position date to
(IcterJJ)11je whether they arc recorded in the correct accounting
pergod. Somctijneq o,alct; occurring at the statement of financial
position date are not recorded because the delivery of the cerlificates
by the broker are made after the statement of financial position date.
Hence, an error in cutoff of transactions will occur.

6&7. Perform analytical procedure. Compute revenue from investments

independently.
To test the reasonableness of the amounts of dividend and interest
income recorded, they may bc related to their sources namely, the
sccuritics. Dividends that should have been received and recorded can
also be verified by referring to the investment advisory services by the
Philippine Stock Exchange and other international publications. Interest
income carncd on notes, bonds can also be verified independently by
the auditors and compared with recorded amounts in the books of the
client.

889. Determine market value ofsecurities and evaluate accounting method

Generally, the audit procedures in the verification of "valuation" arc
largely determined by the method of valuation that is appropriate undcr
PFRS.
Cost is substantiated by vouching the acquisition pricc in the
accounting records and market price is substantiated by comparison to
publication of market quotation of security prices. When securities are
not listed at the Stock Exchange or not actively traded, it may be
necessary to obtain market quotations from brokers,

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 If the investment is closely held with no active market, the auditors may
obtain an appraisal value from a securities appraiser.
In those instances where investment in ordinary shares allows
significant influence by the investor, the equity method should be used
to account for the investment. When the equity method is used, no
valuation to market is necessary.

El he investment OCCOt111t is increased to reflect a proportionate share of.

investee income and decreased to reflect investce losses and dividend received
from the investee.
When auditing an investment accounted for by the equity method, the auditors
must verify that the investment was properly recorded initially. auditors must
also obtain evidence regarding additions to or deductions from the account by
referring to the "audited financial statements of the investee If these statements
are not available, the auditors should perform a sufficient investigation of the
investee's financial statements to determine the fairness of the amounts recorded
by the investor. In certain cases, this might involve performing audit procedures
at the investee's place.

10. Evaluatefinancial statement presentation and disclosure ofsecurities.

PAS 32 and PFRS 9 require the proper categorization of the investment portfolio
in the financial statements. They also, require the disclosure of the method of
accounting for the securities, aggregate market values of the various portfolio.
amount of realized and unrealized gains and losses proceeds from sales of
securities, lien on the securities and other related matters.

Illustrative Audit Case 14-1: Audit of Investment in Marketable Equity

Securities (MES) Measured at FVOCI
The following are data on Investment in MES (@FVOCI) for the auditor's scrutiny:
January 1, - Purchased marketable equity securities for P2,000,000 wth transaction
costs of P200,000. The company made an irrevocable election to present unrealized
qain and loss in other comprehensive income
December 31 - Market value of the securities, P2,600,000 December 31 -
Market value of the securities, P3,200,000
July 1, - Securities are sold for P4,000,000
Required:
l . What entries relative to the Investment in MES (@FVOCI) should have been
made by the company

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 Chapter 14

a) On January l , 20>47?
b) On December 31,
c) On December 3 1, 20X8?
d) On July l , 20X9?
At v,hat balance should the follovving accounts be shown on the
Statement of Financial Position

Solution: Case 14-1

Requirement I
Journal entries to record the aforementioned transactions and data
January 1, 20X7
Investment in MES @ FVOCI
Cash + P200,OOO)

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 December 31, 20X7
Investment in MES @ FVOCI 400,000
Unrealized Gain - OCI
400,000

600,000

600,000

800,000

438

Summary:
Selling price of Investment in MES-@FVOCI

Original cost 2,200 000

Realized gain on 7.31.)(9 credited
to retained earnings

Illustrative Audit Case 14-2: Analysis of Investment in Equity Securities

@ FVOCI)
As auditor for the Laurel Company, you are to prepare the following:

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 Chapter 14
Working papers for the securities and for security transactions for the year
ended December 3 1, 20X7, including columns for the following:
(l ) Securities inventory at December 31, 20X6, divided into security name,
number of shares, cost, and average cost per share.
(2) Security purchases in 20X7, divided into date, shares, and amount.
(3) Security sales in 20X7, divided into date, shares, amount, and average
cost of shares sold, and profit or loss on sales.
(4) Securities inventory at December 3 1, 20X7, divided into name of
security, shares, cost, and market value.
(5) Dividends received in 20X7.
(6) Adjusting journal entiY required (if any) as of December 31, 20X7.
Purchases Shares Cost
A ril 15 500 A P 50,000
A alSecurity
25 200 15,000
A 1 500 shares, at a cost of PI 20 000
Jul 15
Security B 1 200 shares. at a cost o! Security F 40,000
84sooo
C 1,000 shares, at a cost of 300 G
Jul Security
25 D, 800 shares, at a cost of 200130,000
D
85,000 20,000
Au ust 15 E 1 000 sharess at a cost of
Secunty 200 70,000
D
25,000
Se tember 15 90,000
Sales Shares Selli Price
n
March 10 200 c P 30,000
A ril 10 1,200 B 110,00
0
June 15 300 c 50,00
0
Au ust 20 1,000 E 30100
0
Se tember 15 1,000 A Invt'5/mcn/t 30,00
0
Marketable securities (fit: VCR'l) purchased by the Laurel Company at December
31,

Security transactions for 20X7 are as shown tn the two tables following;

Other data are as follows:

dividendsreceived, A, PI 2,000; C, l), P5,OOO•, and
000.
dividendreceived
price ofsecurities

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 on June 15, 20X7; E, 100 percent.
at December 31, 20X7:
PIOO,OOO 70,000
135,000
40,000
12,000
133 000

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 Audit Case 14-3: Valuation of
Current and
Son-Current 1m estments

The asset side of the statement of financial position provided the NIB Corporation on
December -3 1, 20X7.
'13 Corporattcn
December 31, 20X7
A.SSEtS P20,OOO
22,000
Temporary marketable equity secunt:es (@FVPL) (market PI 6,000) 30 000
Inventory 72,000
Current assets
Noncurent investment in to-year bonds (at face value, 100,00
cost: 0
Noncurrent marketeb!e equity secunties @FVOCI
(at market; cost: PE2,0C0) 75,000
Plant assets 100,000
Less: Accumulated depreciation (25,000
Total assets )
P022000
The long-term investment in bonds (held-to-maturity) was purchased on January l, 20X7.
The difference between cost and face value was recognized on the 20X7 income statement
as an unrealized gain on the acquisition date, The interest on the bonds is payable annually
on January l . The noncurrent marketable equity securities (âFVOCl) include a 30% interest
in the Alomar Company. This investment (with a P45,000 market value on December 3 1,
20X7) was purchased on January 2, 20X7, for P40,000 and represents a significant
influence. Alomar had net income of P50,000 and dividends of P20,000 in 20X5. MB
reported 20X7 net income of P57,000. The books for MB Corporation have not been closed
for 20X7. Assume that all items are material.

Required:

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 442 Chapter 14
a.

Financial
Reporting

Provide correcting and adjusting entries for MB Corporation in light of the information
given. Any discount or premium on the bond investment is to
value.

Solution: Illustrative Audit Case 14-3

Requirement (a)

Adjusting journal entries for MB Corporation are as follows:

AJE (l)
Loss on Valuation of Current Marketable
Equity Securities (@FVPL) 6,000
Allowance to reduce Current Marketable
Equity Securities to Fair Value or
Market Adjustment — Trading Securities (@FVPL) 6,000 To adjust FVPL to fair value
valuation.

AJE (2)
Unrealized Gain cn Bond Investment 12,289
(PIOO,OOO - P87,711)
Discount on Bond Investment 12,289 To properly record discount on bond investment.

AJE (3)
Interest Receivable x PIOO,OOO) 8,000
Discount on Bond Investment 771
Interest Revenue (P87,771 x 10%) 8,771

The effective rate of the bond investment must be determined. The effective rate must be greater than
8% because the bonds were acquired at a discount; try 10%

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 PIOO,OOO =
P38,554
( 38554) = P49
(PIOO,OOO 157
(.614457) P87,711
This calculation indicates that 10% is the effective rate on the investment. Therefore, the above journal
entry has to be made.

AJE (4)
Gain on Valuation Noncurrent Marketable Equity 13,000
Securities (NCMES)
Investment in Equity Securities - Alomar 40,000
Noncurrent Marketable Equity Securities (@FVOCI) 451000
Unrealized Gain on Noncurrent Marketable Equity Securities
@ FVOCI) (Equity) 8,000 To reclassify investment in Alomar and correct entry to record
gain on valuation of non-current marketable equity securities.

(@FVOCI)

' Because the securities are included in the statement of financial pcsition at P75,000, the
assumption is made that an unrealized gain of P13, 000 to the asset account was recorded.

Total Unrealized Gain on NCMES per client PI 3,000

Less: Increase in value of Investment in Alomar 5 000
Balance of remaining NCMES P 8.000
The equity method should be applied to the Alomar investment as follows.

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 444 Chapter 14
Investment in Equity Securities (P50,000 x 30%) 15,000
Equity in Investee Income 15,000
To take up share In investee income,

AJE (6)
Dividend Revenue (P20,OOO x 30%) 6,000
Investment in Equity Securities 6,000
To correct entry recording receipts of dividends.

Requirement (b)
P57,OOO
Net income as reported
Unrealized loss on current marketable equity securities (@FVPL) (6,000)
Elimination of unrealized gain on bond investment (12,289
)
Interest revenue 81771
Elimination of unrealized gain (13,000)
Income from Alomar investment 15,000
Dividend revenue (6,000)
Correct net income p43,482

Requirement (c)

The Unrealized Gain on NCMES (FVOCI) balance of the Equity section of the Statement
of Financial Position,
will be reflected in

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 Insurance Policy
Casefacts

On January l, 20X5 Gordon Manufacturing Corporation took a life insurance

policy on the life of its president for with the entity designated as the
lone beneficiary. The annual premium was P300,000.

Data relative to the insurance policy follow.

Premium Paid at Cash Surrender Value
End ofPolic Year Be innin of Polic Year End
20X5 P300,OOO
300,000
20X7 300,000 P300,OOO
20X8 300,000 420,000
300,000 580,000
The president died on June 30, 20X9 and the face value of the policy collected on
July 31, 20X9.

Premiums paid were correctly recorded as expense from January l , 20X5 to January
l, 20X9. The accountant, however, failed to recognize the cash surrender value ofthe
policy in .20X7 to 20X9.

Required:

What adjusting entry should be made on July l, 20X9 to correct the accounts of the
entity?

Solution: Illustrative Audit Case 14-4

July l , 20X9
are as follows:
Value
500,000
expense 420,000
cæh surrender
P120,OOO

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 446 Chapter 14
80,000 value of
the insurance policy as of 6.30.X9
+ P80,OOO)
ta e not

2. Gain on life insurance settlement 500,000

Cash insurance value 5001000 To correct overstatement of gain on insurance
settlement and close the cash surrender value account.

OR

Compound adjusting entity will be:

Gain on life insurance settlement 500,000

Retained earnings
Life insurance expense

(a) Cash surrender value as of 12.3118

(b) Increase in CSV as of 6.30.X9 420,000 (a)
80,000 (b)

P 420,000
80 000
0
1 500 000

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 control over marketable securities.

A xsell- financed audit client of CPA firm imests larae amounts

marketable securities. As part of its internal control. the compan>' uses a
monthlv report of securities transactions. The report is prepared by the
controller and presented to the illX estment committee or the board of
directors. hat information should this report contain'

3. Durin í' ',our audit of a small manufacturing firm. you find numerous
checks for a larze amounts draxs n pay able to the treasurer and char2ed to
the Miscellaneous Expense account. Does this require any action by the
auditor? Explain.
4. hat information should be noted by the auditors during their inspection of
securities on hand?

5. Salvador Corporation made an estment in Letter.com Inc., in exchange for

100,000 options to purchase Letter.com's stock at P20 per share. Since the
stock options are not marketable, Salvador's management has this derixati\
e a security appraiser. The appraiser uses an option-pricing model to
determine the fair value of the stock options. Describe hov, sou audit the
valuation of the stock options.

6. In ways can the audit of financtal investments present special

risks requiring specialized skill and knowledge?

7. How can the auditors determine that all dividends applicable to

investment in securities owned bv the client have been received
and recorded?

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8. If a securitv or derÁ atise is not marketable, how do the auditors t)pically
obtain evidence about the fair x aloe of the instrument?

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 Chapter

-uS
Exercises

Exercise r

During the current year, the manazement of Circle Inc., entered into a futures contract
to hedge the price of silver that will be needed for next year,s production. The contract,
which is held by Circle's commodity broker, is marketable and exchanged on the
Philippine Stock Exchange.
Required:
l , Describe the types of controls that should be established by a company that engages
in derivative trading.
2. List the substantise procedures that the auditors would use to audit this derivative.

Exercise 2

Following are t)pical questions that might appear on an internal control questionnaire
for investments in marketable securities. l . Is custody of investment securities
maintained by an employee who does not maintain the detailed records of the
securities?
2. Are securities registered in the company name?
3. Are investment activities reviewed by an investment committee of the board of
directors?

Required:
a. Describe the purpose of each of the above controls.
b. Describe the manner in which each of the above procedures might be tested.

c. Assuming that the operating effectiveness of each of the above procedures is found
to be inadequate, describe how the auditors might their substantive procedures to
compensate for the increased level of control risk.

Exercise 3

In the audit of a client with a fiscal year ending December 31, the CPAs obtain a
January 10 bank statement directly from the bank. Explain how this cutoff bank
statement will be used
a. In the review of the December 31 bank reconciliation.
b. To obtain other audit information.

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 Exercise 4: Journal Entriesfor Fair j alue and Equin
Presented below arv• tsso indeFndent situation".

Situation /
Charming Cosmetics acquired 10% of the 200,000 ordinary shntvs of
Monday -Fashion at a total cost of PI 3 per share on Mare!' 18, 20 X 7. On June
30, 'Monday declared and paid a P' cash dividend. On Dccembcr '3 1, Nlonday
repotted net income of PI 22 000 for the scar. At December 31. the market price
of Fashion PIS pec share. tIte securities arc classified as FA aj OCI but the
accountant used the equity method, The balance Of the 1m estittent in Securities
account is P264,700

Sltuation 2
Monsters, Inc. obtained stú'llltlcant influence over Nemo Corporation by buy ing
30% of Nemo•s 30.000 outstanding ordinary shares ate a total cost of P) per share
on Januan l, On June 15, Nemo declared and paid a cash of P-36,000. On
dividend
December 31, Nemo reported net income of for the year. The accountant used the
fair value method of accounting and considered the shares as FA @ F VOCI. The
market value per share on December 3 1, 20X7 is PI 0.
Required: Prepare all necessary adjusting journal entries in 2()X7 for both

situations.

Problem I : Entriesfor FA FVOCI and Trading Securities

The information on the following page is available for BY DG Company at
December 3 1 , 20X7, regarding its investments.
Securities Cost Fair value
3,000 shares of Austn Corpration
Ordinary Shares P40,OOO P48,OOO
1 ,000 shares of Tyrone Cotpœatbn
Preference Shares 25.000

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 Chapter

(a) Prepare the adjusting enti)' (if any) for 20X7, assuming the Securities are classified
as trading ( a FVPL).
(b) Prepare the adjusting entry (if anv) for 20X7, assuming the Securities are classified
as FA @ F VOCI.
(c) Discuss how the amounts reported in the financial statements are affected by the
entries in (a) and (b).

Problem 2

During the first quarter of 20,X6 the Canada Corporation entered into the following
transactions:
Jan. 1 Acquired 150 ordinary shares of Tan Corporation for P20 per share,
200 ordinary shares of Argante Corporation for P30 per share, and 100
ordinary shares of Francisco Corporation for P25 per share. These are
the only shares the company owns and all are classified as securities
@FvocI
Feb. I Purchased 12% Josefina company bonds with a face value of P20,000
at par, plus accrued interest. Interest on the bonds is payable February
28 and August 31 each year, and the bonds are due August 31, 20X8.
Also purchased 10% Jayce Company bonds with a face value of P
12,000 at par, plus accrued interest. Interest on the bonds is payable
Feb. I March 31 and September 30, and the bonds are due September 30,
Feb 28 These are the only bonds the company owns and all are classified as
Feb. 28 securities @FVOCI
Established a petty cash fund for incidental expenditures at P500
Received the semiannual interest on the Josefina Company bonds.
A count of cash on hand indicated that P 12550 remained in the petty
cash fund. A sorting of petty cash vouchers disclosed that PI 10.00 was
Mar. 31 spent for postage, P 170.65 was spent for office supplies, P45.00 was
spent for transportation, and P43.50 was spent for miscellaneous item s.
The fund was replenished
Mar. 31 Received first quarter dividends of PI j500 and the semiannual interest
on the Jayce Company bonds. On this date, the aggregate fair value Of
Canada's securities @FVOCI is P42,600.
A count of cash on hand indicated that P230.50 remained in the petty

cash fund A sotting of petty cash vouchers disclosed that P140.00 was spent for postage, P75,30
was spent for office supplies, and P54.20 was spent for miscellaneous items. The fund was

replenished

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 of/nvestmenls "51

Canada from the dividends

Corporation that the cash collected
Company bond interest was deposited on March 3 but did the March
bank statement. There werc no other deposits bank statement showed a
balance on March 3 1 of PI 3,459.75, included collection or a P 1,500 note and P
in transit. The
100 of' interest
which

by the bank for the Canada Corporation. Also listed was a P20 bank qervice
charge and a P 75.60 NSF check returned by the bank. The cash balance per the
accounting records on March 31 was PI 1,689.95, which included checks totalin
o
that had not yet cleared the bank.

Required:
l . Prepare journal entries to record the preceding transaction of the Canada
Corporation for the first quarter of 20X6.
2. Prepare a bank reconciliation for Canada for March 3 1, 20X6.
3. Prepare any journal entries necessary to adjust Canada's books on March 31,
20X6.

Problem 3

On January l , 20X6 Patrick Company paid for 10,000 shares of

Lede Company's voting ordinary shares, which was a 10% interest in Ledc,
Patrick does not have the ability to exercise significant influence over the
operating and financial policies of Lede. The company made an irrevocable
election to present the investment @FV OCI

Patrick received dividends of PI .00 per share from Lede on October 2, 20X6.
Lede reported net income of for the year ended December 3 1, 20X6. Lede
reported net income of P400,000 for the year ended December 3 1 20X6 and the
ending market price of its shares was P63.

On July 2, 20X7 Patrick paid PI .950,000 for 30,000 additional shares of Lede
Company's voting ordinary shares, which represents a 30% investment in Lede.
The fair values of all of Lede's assets, net of liabilities, were equal to their book
values of As a result of this transaction, Patrick has the ability to
exercise significant influence over the operating and financial policies of Lede.
Patrick received dividends of PI .00 per share from Lede on April 2, 20X7 and
PI .35 per share on October 3 1, 20X7, and for the 6 months ended December 3 1,
20X7.

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 Chapter

452
Chaptcr

Reqttircd
I For the Patiick
Company the 20 XO
Decembcr
and carnitig
2. Assuming that
Patrtck for 20X6
and 20 X 7.
as thc Deccmbcr account

Problem

May Flores, of Castro llorano, Cl) Of the Manufacturtng Companv audit

tlsr the sear cndcd I)ccentbcr J I , 20X8 firm also audited Belle last y car I
Iclle eartll•moving equtpment and ossns 25% of 01 1
'bce Industries, a Ictisitig cornpatè At Dccember 31. 20 X 7. Ihc cnd 01 the
ptcec(linp ycttr, llellc lleld 10% of the shares and rcportcd the cost. which eqtJltlC(I t
liC
Belle aeqtnrcd addttional
15% of the votiltg Khatcs, tind 20X8 transactions
related to this investmcnt arc tolJows:

Balance in •Investment in Lanbeo,n 1,000 shares at a cost of P50 por share

01/02/20X8 Puchased 1,500 shares of Laribce at a cost of P50 pcr share.
04/01'20X8 Lanbee declared a first-quarter dividcnd of P50,000
07/01/20X8 Laúe declared a dividend of P50,000 10,01/20X8.
Lanbeedeclared a thirdAuarter dividend ot PG0,000.

At 31, the investment accotll)t appe:ucd follow< in Ucllc's general ledger.

Investment in Lanbce Ordinaty

12/31/20X7 Balance 50,000
01/02/20X8 Purchase 75,000

Belle recorded its share of Lari bce (llvwlcngl< as "1)lvidend Revcnoe,

Audil of Investments 453

Leasing revenues P20 million

Cost of equipment for sales-type leases P 12 million
Operating expenses P 5 million
Loss from casualty (net of tax) p 1 million
Income taxes P 1 million

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 Laribee's income statement for 20X7 reflected the following revenue and expen<e
components:

Required:
a. What specific audit obJectives should Flores have in examining the Laribee
account? What audit procedures should she apply?
b. SVhat level of satisfaction does Flores require with respect to Laribee ts
income statement components?
c. Prepare an audit workpaper, in good form, for the Laribee investments.
Be sure to include any necessary audit adjustments.
d. Does the Laribee investment raise any "warning signs" that the auditors
should pursue?

Problcrn 5: Analytical Procedures Applied to Investments

In its 20,X7 annual report, Del Corporation, a manufacturer of photocopying

equipment, has several items in the financial statements that refer to investments
in equity-basis companies (which are labeled affiliated companies by Del):
(Amounts in millions) 20X7 20X6
From the income statement:
Equity in income of unconsolidated
Affiliated companies and other income p 74 p 127
From the statement of financial position:
Investment in affiliates, at equity 1,33
From the statement of cash flows: 2
Adjustments to reconcile income to cash
Undistributed equity in Income of affiliates (27) (84)
* These

amounts added back (subtractedfrom) net income to obtain cashflowfrom

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 Chapter

'Mth

Required
l . On the income statement. equitx income IS combined with "other income".
From the information presented. hat is the maximum that Del could
receÁed in idends from its equity-basis companies in 20 X 70 suppose Del
received no dividend from equits-basis companies in In this case, how much of
the f)74 million is other income
2. Did Del increase or decrease Its imestments in equity-basis COmpanies
durinz 20X7 be's ond the amount of Del's equity earnings retained by the
If so, how much?
3. L8A hat rate of return on avera2e assets did Del earn on its investment in equitx -
basis companies in 20,X7? Assume that other income in 20X7 is zero.
4. Suppose there is onlv one equity-basis companv in Del's investment, and it is a 50
percent joint What you estimate the total shareholder-s equity of that company to be
at December 3 1 . 20X7?

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