Audit of Investments: Investment Purpose
Audit of Investments: Investment Purpose
Introduction
Investment is an asset held by an entity for purposes of accretion of wealth through distributions of dividends,
interest and rentals or for capital appreciation or other benefits to be obtained.
Investments are presented either as ‘current investments’ and ‘long-term investments.’ A current investment
is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the
date on which such investment is made. A Long-term investment is an investment other than a current investment.
Quick review: Purpose of Investments
Investment Purpose
Investment in Equity Instruments – Financial To earn from changes in fair value and dividends
Asset at fair value
Investment in Equity Instruments – To benefit from exercising significant influence over
Associate another entity
Investment in Equity Instruments – To benefit from exercising control over another entity
Subsidiary
Investment in Equity Instruments – Joint To benefit from exercising joint control over another entity
Venture
Investment in Debt Investments To earn from changes in fair value and interest
Investment in special purpose funds To accumulate funds for basically any purpose such as
plant expansion and long-term debt retirement
The auditor should use the assessed levels of inherent risk and control risk for assertions about investments
to determine the nature, timing, and extent of the substantive procedures to be performed to detect material
misstatements of the financial statement assertions. Some substantive procedures address more than one assertion
about various investment transactions.
Audit Objectives:
All recorded income from investments has accrued to the entity at the reporting date.
To determine that investments are valued properly in accordance with applicable PFRS.
Audit Procedures:
The Accounting method and impairment test on investments of the client depends on the applicable
PFRS. Therefore, the procedure applied by the auditor depends on the type of investment.
Accounting Classification of
Level of Influence % of ownership Applicable PFRS
Method Investment
PFRS 9
Financial asset at
Little or none <20% Fair Value PFRS 7
fair value
PAS 32
Investment in
Significant 20-50% Equity PAS 28
Associate
Investment in
Control >50% Consolidation PFRS 10
Subsidiary
No quantitative Investment in Joint
Joint Control Equity PAS 28
presumption Venture
Sandy is auditing the financial statements of YG Inc. for the year ended 20x8. As a result of her audit, she
found out that there are some investments and investment-related income accounts that were omitted from the
general ledger by the investment custodian.
She has confirmed that not all investment-related interest and dividend income has hit the income statement
as revenue and that some investment income hitting the income statement can’t be matched to an investment,
which means that not all investments are reflecting on the balance sheet.
Discussions on the case:
The issue lies in the completeness and accuracy assertions the company had over its recorded investments.
Completeness assertion addresses whether all of the entity's derivatives and securities are reported in the financial
statements through recognition or disclosure. They also address whether all investment-related transactions are
reported in the financial statements as a part of earnings, other comprehensive income, or cash flows or through
disclosure.
To test a client’s investments, auditors mostly look at how a security is categorized and whether it’s presented
on the client’s income statement or balance sheet. The accuracy assertion states that all information disclosed are
in the correct amounts, and reflect their proper values. Since there are some values that cannot be matched to any
investment account, there is an issue on the company’s assertion on the accuracy of its recorded investments.
The auditor may opt to calculate expected income with reference to supporting documents and compare them
with the recorded income. She may also obtain or prepare a lead schedule of investments, and trace last year’s
balances with last year’s working papers, check arithmetical accuracy of the schedule and trace totals of the
schedule to general ledger control account and balance sheet. Comparing previous and current account detail may
also help to identify the assets that have been removed from the accounts and testing those items further to
determine that the criteria for sales treatment have been met. She may also do a confirmation with the issuers of
the investment items, to know if there really an investment that exists and if there is, how much is it.
She also may opt to do an inspection of the entries in investments and related income accounts. She may
check additions and sales, inspect board of directors minutes for authorization of sales and purchases of
investments, or re-compute gain or loss on sale of investments, if any.
You were engaged by Bato Company to audit its financial statements for the year 2019. During the course of your
audit, you noted that the following trading securities were properly reported as current assets at December 31, 2018:
Cost Market
France Corporation, 5,000 shares,
convertible preferred shares P 450,000.00 P 487,500.00
Ces, Inc., 30,000 shares of common stock 675,000.00 742,500.00
Coo Co., 10,000 shares of common stock 618,750.00 450,000.00
P1,743,750.00 P1,680,000.00
Jan. 2 Coo issued a 10% stock dividend when the market price of Coo’s
common stock was P49.50 per share.
March 31 and France paid dividends of P2.50 per share on its preferred stock, to
Sept. 30 stockholders of record on March 15 and September 15, respectively.
France did not pay dividends on its common stock during 2006.
July 1 Ces paid a P2.25 per share dividend on its common stock.
12/31/2019 12/31/2018
France Corp., preferred 92.25 97.50
France Corp., common 42.75 38.25
Ces, Inc., common 22.50 24.75
Coo Co., common 40.50 45.00
All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost would not be
considered permanent.
Questions:
1. How much is the gain or loss on conversion of 2,500 France preferred stock into 15,000 common stock?
2. How much should be reported as unrealized gain on trading securities in the company’s income statement for the
year 2019?
Suggested Solutions:
On June 1, 2019, Leo Corporation purchased as a long term investment 4,000 of the P1,000 face value, 8% bonds of
Angela Corporation. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on December
1 and June 1. The bonds mature on June 1, 2025.Leo uses the effective interest method of amortization. On November
1, 2020, Leo sold the bonds for a total consideration of P3,925,000. Leo intended to hold these bonds until they matured,
so year-to-year market fluctuations were ignored in accounting for bonds.
Questions:
1. The carrying value of the investment in bonds as of December 31, 2019
2. The interest income for the year 2020
3. The gain on sale of investment in bonds on November 1, 2020
4. The carrying value of the investment in bonds as of November 1, 2020
Suggested Solutions:
Your audit of the MILLAN Inc., revealed the following transactions on its “Financial Asset at Fair Market Value through
profit or loss” account:
06/30/19 Purchased 1,000 of GMA Inc.’s 12%, 4-year, P1,000 face 1, 044, 258.00
value bonds dated January 1, 2017 and pays annual
interest every December 31. Prevailing interest on the
same date at 14%. Amount includes accrued interest and
transaction costs amounting to P10 per bond.
08/05/19 Sold 15, 000 of ABS shares at P15 per share and 5,000 of P290, 000.00
CBN at 13 per share
12/01/19 Sold half of the GMA bonds at 98 plus accrued interest. 515,000.00
12/30/19 Received P80,000 in lieu of 5, 000 stock dividends from its 80,000.00
ABS shares
12/31/19 BALANCE P1, 315, 258.00
Additional information:
On December 31, 2019, the market values of the ABS and CBN shares were at P18 and P15 per share, respectively.
Moreover, the GMA bonds had a prevailing interest on the same date at 11%.
Questions:
1. How much is the total realized gain/loss on disposal of bonds on December 1?
2. How much should be the unrealized holding gain to be recorded in the income statement for the year 2019?
3. How much investment in trading securities should be reported in the statement of financial position?
Suggested Solutions:
FMV 12/31/19
ABS (25,000sh*P18) P450,000.00
CBN (18,000sh*P15) 270,000.00
GMA at 11% yield rate
Principal (P500,000*0.9009009)
450,450.00
Interest (P60,000*0.9009009)
54,054.00 504,505.00
3.) Total P1,224,505.00
Corgi Corp. Has the following non-trading securities on December 31, 2019:
Audit notes:
a. The above securities were all bought in 2018. on the initial recognition, Corgi made an irrevocable election
to present gain/loss on the said securities to other comprehensive income.
b. On April 1, 2019, the company sold all of the ABC ordinary shares for P65 per share.
c. On May 1, 2019, the company purchased 4,200 ordinary shares of JKL Corp. At P75 per share. The
company incurred brokers’ fees amounting to P10,400.
d. The following additional information in 2019 were deemed relevant:
Questions:
1. What is the realized gain on sale of ABC ordinary shares in 2019?
2. What is the unrealized holding gain/loss to be reported in the stockholder’s equity portion of the 2019 statement
of financial position?
Suggested Solutions:
BARBIE Corporation acquired a building on January 1, 2017.The acquisition cost is P5,000,000 payable at the rate of
P1M at the beginning of each year starting on January 1, 2017. The company paid option money totaling P400,000,
P85,221 of which is attributed to real properties not acquired. The company also paid property taxes in arrears.
The company also paid property taxes in arrears as of January 1, 2017 at P147,872. The prevailing market rate of
interest for transaction is 12%. The building is estimated to have useful life of 25 years.
The property was appraised at the end of each year as follows:
Questions:
1. What is the carrying value of the property as of December 31, 2019, assuming that the building is an investment
property under the cost method?
2. How much recovery gain should be recognized from the asset in the 2019 profit or loss?
Suggested Solutions: