AUDITING PROBLEMS

AUDIT OF INVESTMENTS (2)

PROBLEM 1

On June 30, 2019, GIGANTE Company purchased 25% of the outstanding ordinary shares of IB
Co. at total cost of P4,200,000. The book value of IB Co.’s net assets on acquisition date was
P14,400,000. for the following reasons, GIGANTE was willing to pay more than book value of the
IB Co., shares:
- IB Co. has depreciable assets with a current fair value of P360,000 more than their book
value. These assets have a remaining useful life of 10 years.

- IB Co. owns a tract of land with a current fair value of P1,800,000 more than its carrying
amount.

- All other identifiable tangible and intangible assets of IB Co. have current fair values that
are equal to their carrying amounts.
IB Co. reported net income of P3,240,000, earned evenly during the current year ended December
31, 2019. Also in the current year, it declared and paid cash dividend of P630,000 of its ordinary
shareholders. Market value of IB Co.’s ordinary shares at December 31, 2019, is P18 million.
GIGANTE Company’s financial year-end is December 31.
1. What is the total amount of goodwill of IB Co. based on the price paid by GIGANTE Company?
a. P600,000 b. P2,160,000 c. P240,000 d. P60,000
2. What amount of investment income should GIGANTE report in its income statement for the
year ended December 31, 2019, under the equity method?
a. P405,000 b. P400,000 c. P 157,500 d. P247,500

3. Under the equity method, the carrying value of the GIGANTE Company’s investment in
ordinary shares of IB Co. on December 31, 2019, should be:
a. P4,443,000 b. P4,200,000 c. P 4,140,000 d. P4,500,000

PROBLEM 2
JUAN Corp. purchased 40% of Associate Company’s outstanding ordinary shares on January 2,
2019, for p540 million.

The book value of Associate Company’s net assets (shareholders’ equity) at the purchase date
totaled P900 million.

Book values and fair values were the same for all financial statement items except for inventory
and buildings, for which fair values exceeded book values by P25 million and P225 million,
respectively.

All inventory on hand at the purchased date was sold during 2019.

The buildings have average remaining useful lives of 15 years.

Associate Company reported net income of P220 million for the year ended December 31, 2019,
and paid cash dividends of P80 million.

The fair value of Durian’s investment in associate was P600 million at December 31, 2019.
1. Of the amount paid for the acquisition of Associate Company’s ordinary shares, how much is
attributable to goodwill?
a. P100 million b. P90 million c. P80 million d. P180 million
2. What is the investment balance at December 31, 2019?
a. P540 million b. P600 million c. P580 million d. P596 million
3. At what amount will JUAN Corp. report its investment revenue in its 2019 income statement?
a. P88 million b. P72 million c. P40 million d. P32 million
PROBLEM 3
1. 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 balance sheet date, the auditor most likely
will:
a. Request the bank to confirm to the auditor the contents of the safe-deposit box at the
balance sheet date.
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 balance sheet date
d. Request the client to have the bank seal the safe-deposit box until the auditor can count the
securities at a subsequent date.

2. When an auditor is unable to inspect and count a client’s investment securities until after the
balance sheet date, the bank where the securities are held in a safe-deposit box should be
asked to:
a. Verify any differences between the contents of the box and the balances in the client’s
subsidiary ledger
b. Provide a list of securities added and removed from the box between the balance sheet
date and the security count date
c. Count the securities in the box so that the auditor will have an independent direct
verification
d. Confirm that there has been no access to the box between the balance sheet date and the
security count date.

3. 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 balance sheet date

4. PUN, CPA, observes the count of securities on December 31. She records the serial numbers
of the securities and reconciles them and the number of shares with company records. Which
frauds should be detected by this procedure?
a. An investee company declared and paid a stock dividend on December 15. The stock
certificate for the additional shares was received directly by the treasurer who mad no
record of the receipt and embezzled the shares
b. The treasurer embezzled and sold securities on April 4. She speculated successfully with
the proceeds and replaced the securities on December 29
c. The treasurer borrowed securities on July 15 to use as collateral for a personal loan. He
repaid the loan and returned the securities on December 2
d. The treasurer embezzled interest receipts from bonds by having the payments mailed
directly to him

5. 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

6. An auditee is holding equity securities as collateral for a debt. The auditor should:
a. Determine from data published in the financial press that the auditee has recorded dividend
income from the collateral
b. Ascertain the value of the securities
c. Ascertain that the amount recorded for the collateral in the investment account is equal to
its fair value at the balance sheet date
d. Verify that the client has taken title to the securities
7. Which of the following is the most effective audit procedure for verification of dividends earned
on investments in equity securities?
a. Tracing deposited dividend checks to the cash receipts book
b. Reconciling the amounts 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.
8. In confirming with an outside agent, such as a financial institution, that the agent is holding
investment securities in the client’s name, an auditor most gathers evidence in support of
management’s financial statement assertions of existence and:
a. Valuation
b. Rights and obligations
c. Completeness
d. Presentation and disclosure
9. In establishing the existence and ownership of an investment held by a corporation in the form
of publicly traded stock, an auditor should inspect the securities and:
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 fair value

10. An auditor is most likely the interest earned on bond investment by:
a. Verifying the receipt and deposit of interest checks
b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on the basis of face amount, interest rate, and period held
d. Testing controls relevant to cash receipts

11. 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

12. In verifying the amount of goodwill recorded by a client, the most convincing evidence an
auditor can obtain is be comparing the recorded value of assets acquired with the:
a. Assessed value as evidenced by tax bills
b. Seller’s book value as evidenced by financial statements
c. Insured value as evidenced by insurance policies
d. Appraised value as evidenced by independent appraisals

13. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by:
a. Confirmation with individual holders of retired bonds
b. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium
d. Examination and count of the bonds retired during the year

14. An auditor who physically examines securities should insist that a client representative be
present in order to:
a. Detect fraudulent activities
b. Lend authority to the auditor’s directives
c. Coordinate the return of securities to the proper locations
d. Acknowledge the receipt of securities returned

15. In testing long-term investments, an auditor ordinarily would use analytical procedures to
ascertain the reasonableness of the:
a. Classification between current and non current portfolios
b. Valuation of marketable equity securities
c. Existence of unrealized gains or losses in the portfolio
d. Completeness of recorded investment income