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AUDITING PROBLEMS
Audit of Investments

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

Corporation’s 2020 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 I Will Corporation for the year ended December 31,
b. P198,000 d. P246,000
2020:
Date Particulars DR CR 6. Which of the following is not one of the auditor’s
Jan. 10 Purchase of Emong primary objectives in an audit of trading securities?
Co. – 6,000 shares P1,440,000 a. To determine whether securities are authentic.
Feb. 20 Purchase of Bobads b. To determine whether securities are the property
Co. – 7,200 shares 1,800,000 of the client.
Mar. 1 Sale of Bobads Co. – c. To determine whether securities actually exist.
2,400 shares 540,000 d. To determine whether securities are properly
May 31 Receipt of Emong classified on the statement of financial position.
share dividend–
Offsetting Credit to 132,000 7. A client has a large and active investment portfolio
retained earnings that is kept in a bank safe-deposit box. If the auditor
Aug. 15 Sale of Emong – is unable to count the securities at the end of the
4,800 shares 1,176,000 reporting period, the auditor most likely will
Sept. 1 Sale of Emong – a. Request the bank to confirm to the auditor the
1,200 shares 276,000 contents of the safe deposit box at the end of the
reporting period.
The following information was obtained during your b. Examine supporting evidence for transactions
examination: occurring during the year.
c. Count the securities at a subsequent date and
• From independent sources, you determine the following confirm with bank whether securities were added
dividend information for 2020: or removed since the end of the reporting period.
Nature Declared Record Payment Rate d. Request the client to have a bank seal the safe-
Cash 01/02 01/15 01/31 P20/share deposit box until the auditor can count the
Share 05/02 05/15 05/31 10% securities at a subsequent date.
Cash 08/01 08/30 09/15 P30/share
8. In establishing the existence and ownership of an
• Closing market quotation as at December 31, 2020: investment held by a corporation in the form of
publicly traded shares an auditor should inspect the
Bid Ask
securities or
Emong shares P210 P220
a. Obtain written representations from management
Bobads shares 240 250
confirming that the securities are properly
classified as trading securities.
QUESTIONS:
b. Inspect the audited financial statements of the
Based on the above and the result of your audit, answer investee company.
the following: c. Confirm the number of shares held by an
independent custodian.
1. In relation to March 1 transaction, the necessary
d. Determine that the investment is carried at the
adjusting journal entry includes
lower of cost or market.
a. A debit to Loss of P60,000
b. A credit to Equity investment-FVTPL of P600,000 9. Which of the following is the least effective audit
c. Both a and b procedure regarding the existence assertion for the
d. Neither a nor b securities held by the auditee?
2. In relation to August 15 transaction, the necessary a. Examination of paid checks issued in payment of
adjusting journal entry includes securities purchased.
a. A debit to Equity investment-FVTPL of P216,000 b. Vouching all changes during the year to supporting
b. A debit to Loss of P15,300 documents.
c. A credit to Gain of P216,000 c. Simultaneous count of liquid assets.
d. A credit to Equity investment-FVTPL of P15,300 d. Confirmation from the custodian.

3. In relation to September 1 transaction, the necessary 10. In performing tests of the carrying amount of trading
adjusting journal entry includes securities, the auditor would usually:
a. A debit to Equity investment-FVTPL of P36,000 a. Ask management to estimate the market value of
b. A credit to Gain of P36,000 the securities.
c. Both a and b b. Refer to the quoted market prices of the securities.
d. Neither a nor b c. Value the securities at cost regardless of their
market prices.
4. The carrying amount of Equity investment-FVTPL as of
d. Count the securities.
December 31, 2020 is overstated by
a. P228,000 c. P60,000
b. P102,000 d. P 0

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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 2020, which was a first audit, you obtained the following:
Investment in Silver Tab Company
2018–Jan. 2 30,000 sh @35 P1,050,000 2020–Jul. 15 50,000 sh @40 P2,000,000
2019–Jul. 2 90,000 sh @60 5,400,000
2020–Mar. 2 30,000 sh @70 2,100,000
Investment in Red Tab Company
2020 - Aug. 10 P10,000

Dividend Income
2020 January. 2 P120,000
April 1 150,000
August 10 10,000
December 20 100,000

The transactions pertaining to the foregoing for 2020 were 5. Which of the following is the most effective audit
as follows: procedure for verification of dividends earned on
Jan. 2 Received cash dividend (declared on December investments in equity securities?
1) of P1 per share. a. Tracing deposited dividend checks to the cash
receipts book.
Mar. 2 Bought 30,000 shares at P70 per share. b. Reconciling amount received with published
Apr. 1 Received cash dividend (declared on March 1 to dividend records.
shareholders of record as of March 10) of P1 c. Comparing the amounts received with preceding
per share. year dividends received.
July 15 Sold 50,000 shares at P40 per share. d. Recomputing selected extensions and footings of
dividend schedules and comparing totals to the
Aug. 10 Received an “extra” dividend in shares of one general ledger.
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 SOLUTION GUIDE:
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 January 5, 2021.
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
July 15
a. P250,000 c. P1,300,000
b. P850,000 d. P0
2. Gain on sale of 10,000 Silver Tab Company shares on
December 29
a. P330,000 c. P300,000
b. P310,000 d. P0
3. Adjusted balance of Investment in Silver Tab Company
as of December 31, 2020
a. P5,130,000 c. P5,580,000
b. P5,570,000 d. P5,640,000
4. Dividend income for the year ended Dec. 31, 2020
a. P150,000 c. P180,000
b. P160,000 d. P280,000

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PROBLEM NO. 3 QUESTIONS:

Your audit of the Norte Corp. disclosed that the company Based on the above and the result of your audit, determine
owned the following securities on December 31, 2019: the following:
FA@FVTPL 1. Total interest income for the year 2020
Security Shares Cost Fair value a. P251,120 c. P286,000
Vigan, Inc. 9,600 P144,000 P184,000 b. P260,000 d. P289,640
Laoag, Inc. 16,000 432,000 288,000
2. On ‘reclassification date’, the amount to be recognized
10% , P200,000 face
in other comprehensive income on the reclassification
value , Santiago
of Ilocos bonds
bonds (interest
a. P123,640 c. P64,360
payable every
b. P 94,000 d. Nil
Jan. 1 and Jul. 1) 158,400 163,440
Total P734,400 P635,440 3. Gain or loss on sale of 8,000 Laoag, Inc. shares on
March 1
FA@FVTOCI a. P8,000 gain c. P64,000 loss
Security Shares Cost Fair value b. P8,000 loss d. P64,000 gain
Candon Products 32,000 P1,376,000 P1,540,000
Pagudpud, Inc. 240,000 6,240,000 5,840,000 4. In relation to the sale of 3,200 Batac, Inc. shares on
Batac, Inc. 80,000 960,000 1,280,000 May 15, the net amount to be recognized in profit or
Total P8,576,000 P8,660,000 loss
a. P13,600 c. P800
FA@AC b. P 2,400 d. Nil
Amortized 5. Adjusted carrying amount of investments as of
Cost Fair value December 31, 2020
12%, 2,000,000 face FA@FVTPL FA@FVTOCI
value, Ilocos bonds a. P602,400 P 9,446,400
(interest payable b. P482,400 P 9,446,400
annually every Dec. 31) P1,926,000 P1,900,000 c. P602,400 P11,466,400
d. P482,400 P11,466,400
During 2020, the following transactions occurred:
6. The accumulated OCI to be reported as separate
Jan. 1 Receive interest on the Santiago bonds. component of equity at December 31, 2020
Mar. 1 Sold 8,000 shares of Laoag Inc. for a. P840,800 c. P908,800
P152,000, net of transaction cost of P7,600. b. P892,800 d. P924,800

May 15 Sold 3,200 shares of Batac, Inc. at fair value 7. The amount to be recognized in 2020 OCI
of P17 per share. The entity paid transaction a. P840,800 c. P908,800
cost of P2,400. b. P892,800 d. P924,800

July 1 Received interest on the Santiago bonds.

Dec. 31 Received interest on the Ilocos bonds.
31 Because of the change in business model,
the entity transferred the Ilocos bonds to
FA@FVTOCI. 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,

2020, 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

The company’s accounting policy is that when an equity

investment classified as FVTOCI is sold, the accumulated
OCI amount is transferred to retained earnings.

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PROBLEM NO. 4 PROBLEM NO. 5

Assassin Corporation’s accounting records included the On January 3, 2018, JR Company purchased for P500,000
following investments: cash a 10% interest in Judi Corp. On that date the net
Investment in Ordinary Shares assets of Judi had a book value of P3,750,000. The excess
1/1/18 P1,000,000 7/1/20 P800,000 of cost over the underlying equity in net assets is
12/31/18 200,000 attributable to undervalued depreciable assets having a
12/31/19 300,000 remaining life of 10 years from the date of JR's purchase.
The investment in Judi Corp. was designated as FVTOCI.

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

1/1/20 P1,051,510 follows: December 31, 2018, P570,000; December 31,
2019, P525,000; December 31, 2020, P2,200,000.

During the course of your audit, you noted the following. On January 2, 2020, JR purchased an additional 30% of
Judi's stock for P1,575,000 cash when the book value of
Investment in Ordinary Shares Judi's net assets was P4,150,000. The excess was
• The investment is not designated at FVTOCI. attributable to depreciable assets having a remaining life of
• Acquired on January 1, 2018 at P950,000 plus 8 years.
transaction costs of P50,000.
• On July 1, 2020, the entity sold half of the investment During 2018, 2019, and 2020 the following occurred:
for its fair value of P800,000. Judi Dividends Paid by
• Fair value of the investment: December 31, 2018, Net Income Judi to JR
P1,200,000; December 31, 2019, P1,500,000; 2018 P350,000 P15,000
December 31, 2020, P900,000. 2019 400,000 20,000
2020 550,000 70,000
Investment in Bonds
• The entity uses the ‘held for collection’ business model QUESTIONS:
for acquired and originated debt instruments.
• P1,000,000, 10% bonds, purchased for P1,051,510 Based on the above and the result of your audit, answer
including transaction costs of P20,000. Interest is the following:
payable annually every December 31. The bonds
1. The net amount to be recognized in 2018
mature on December 31, 2022. The effective interest
comprehensive income related to this investment?
rate is 8%.
a. P15,000 c. P 85,000
• The prevailing market rate for the bonds is 9% at
b. P70,000 d. P120,000
December 31, 2020.
2. The net amount to be recognized in 2019
QUESTIONS: comprehensive income related to this investment?
a. P20,000 c. (P25,000)
Based on the above and the result of your audit, answer
b. (P45,000) d. P15,000
the following:
3. If the entity used the ‘fair value as deemed cost
1. The carrying amount of Investment in Ordinary Shares approach’ in accordance with PIC Q&A No. 2019-06,
as of December 31, 2020 is misstated by the carrying amount of the investment in Judi Corp. as
a. P200,000 over c. P50,000 over of December 31, 2020 is
b. P200,000 under d. P50,000 under a. P2,200,000 c. P2,190,000
b. P2,195,000 d. P2,100,000
2. The carrying amount of Investment in Bonds as of
December 31, 2020 is overstated by 4. If the entity used the ‘accumulated cost approach’ in
a. P13,900 c. P18,020 accordance with PIC Q&A No. 2019-06, the carrying
b. P15,880 d. P33,900 amount of the investment in Judi Corp. as of December
31, 2020 is
3. The net amount to be recognized in 2020 profit or loss
a. P2,200,000 c. P2,195,000
related to these investments is
b. P2,198,125 d. P2,173,125
a. P384,121 c. P134,121
b. P284,121 d. P114,121 5. Which of the following provides the best form of
evidence pertaining to the annual valuation of an
4. If the investment in bonds is FVTOCI, the carrying
investment in which the independent auditor’s client
amount as of December 31, 2020 is overstated by
owns a 30% voting interest?
a. P15,880 c. P33,900
a. Market quotations of the investee company’s stock.
b. P18,020 d. P38,020
b. Current fair value of the investee company’s
5. An audit procedure that provides evidence about assets.
proper valuation of equity securities classified as c. Historical cost of the investee company’s assets.
FA@FVTPL is d. Audited financial statements of the investee
a. Confirmation of securities held by broker. company.
b. Calculation of premium or discount amortization.
c. Recalculation of investment carrying amount by
applying the equity method.
d. Comparison of carrying amount with current
market quotations.
J - end - J

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