FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

APPLIED AUDITING RROcampo
nd
QUIZ4 – Audit of Investments SET A 2 Semester AY 2017-2018

Believe on what you can do, always bear on your mind that you can answer everything to the best that you
can. Choose the best answer, use the answer sheet provided. Strictly no erasures. Always observe
HONESTY. GODBLESS!

PART I – THEORIES

1. Inspecting marketable securities provides primary evidence about the assertion of

a. existence. c. valuation.
b. rights and obligations. d. all of the choices.

2. If market prices are not readily available for fair value measurements, management should use
a. auditors' best estimates.
b. historical cost.
c. their own assumptions as long as there are no contrary data.
d. the previous year's value

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

4. An auditor would most likely verify the interest earned on bond investments by
a. Vouching 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 the internal controls over cash receipts.

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

6. Which of the following is not a control that is designed to protect investment securities?
a. Access to securities should be vested in more than one individual.
b. Securities should be properly controlled physically in order to prevent unauthorized usage.
c. Securities should be registered in the name of the owner.
d. Custody over securities should be limited to individuals who have recordkeeping responsibility over the
securities.

7. Which of the following controls would a company most likely use to safeguard investment securities when
an independent trust agent is not employed?
a. The chairman of the board verifies the investment securities, which are kept in a bank safe deposit box,
each year on the balance sheet date.
b. The investment committee of the board of directors periodically reviews the investment decisions
delegated to the treasurer.
c. Two company officials have joint control of investment securities, which are kept in a bank safe deposit
box.
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QUIZ4 – Audit of Investments SET A 2nd Semester AY 2017-2018

d. The internal auditor and the controller independently trace all purchases and sales of investment
securities from the subsidiary ledgers to the general ledger.

8. Which of the following controls would an entity most likely use to assist in satisfying the completeness
assertion related to long-term investments?
a. The controller compares the current market prices of recorded investments with the brokers’ advices on
file.
b. Senior management verifies that securities in the bank safe deposit box are registered in the entity’s
name.
c. The internal auditor compares the securities in the bank safe deposit box with recorded investments.
d. The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled
checks.

9. Which of the following controls would an entity most likely use in safeguarding against the loss of
investment securities?
a. A designated member of the board of directors controls the securities in a bank safe deposit box.
b. An independent trust company that has no direct contact with the employees who have record-keeping
responsibilities has possession of securities.
c. The internal auditor verifies the investment securities in the entity’s safe each year on the balance
sheet date.
d. The independent auditor traces all purchases and sales of investment securities through the subsidiary
ledgers to the general ledger.

10. When negotiable securities are of considerable volume, planning by the auditor is necessary to guard
against
a. Substitution of securities already counted for other securities which should be on hand but are not.
b. Substitution of authentic securities with counterfeit securities.
c. Unauthorized negotiation of the securities before they are counted.
d. Unrecorded sales of securities after they are counted.

PART II – PROBLEMS

PROBLEM NO.1
On June 1, 2018, Present Corporation purchased as a long term investment 4,000 of theP1,000 face value,
8% bonds of Absent Corporation. Present Corporation has the positive intention and ability to hold these bonds
to collect contractual cash flow only. 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, 2024. On November 1, 2019, Present
Corporation sold the bonds for a total consideration of P3,925,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following:

1. The purchase price of the bonds on June 1, 2018 is

2. The interest income for the year 2018 is

3. The amount to be reported of the investment in bonds in statement of financial position as of December 31,
2018 is

4. The interest income for the year 2019 is

5. The gain on sale of investment in bonds on November 1, 2019 is

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QUIZ4 – Audit of Investments SET A 2nd Semester AY 2017-2018

PROBLEM NO.2
On April 30, 2016, INSTINCT Corporation purchased 5-year P 10,000,000 10% bonds dated January 1, 2016.
The bonds were purchased to yield 12%. Interest is payable annually every December 31. INSTINCT
Corporation has the positive intention and ability to hold these bonds to maturity. The issuer paid the interest
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 becomes probable that the issuer will be put into
administration by a receiver. On December 31, 2018 INSTINCT estimated that none of the interest will be
collected and only P 9,000,000 of the principal will be collected on maturity date. No cash flows are received
during 2019. At the end of 2019, the issuer is released from administration and INSTINCT receives a letter
from the receiver stating that the issuer will be able to meet its remaining, obligations, including interest and
repayment of principal.

QUESTIONS:
Based on the above and result of your audit, determine the following: (Round off present value factors to four
decimal places and final answers to nearest hundreds)

6. How much was the total amount paid to acquire the investment in bonds on April 30, 2016

7. How much is the carrying amount of the investment in bonds on December 31, 2016

8. How much should be recognized as impairment loss in 2018

9. How much is the interest income to be recognized in 2019

10. How much should be recognized as reversal of impairment loss in 2019

PROBLEM NO.3
On January 2, 2018, Sta. Rita Company acquired 20% of the 400,000 ordinary shares of San Martin
Corporation for P60 per share . The purchase price was equal to San Martin’s underlying book value. Sta. Rita
plans to hold this stock to influence the activities of San Martin.

The following data are applicable for 2018 and 2019

2018 2019
San Martin dividends (paid October 31) P 80,000 P 96,000
San Martin profit 280,000 320,000
San Martin share market price at year-end 64 62

On January 2, 2020, Sta. Rita Company sold 20,000 shares of San Martin at their quoted price of P62 per
share. During 2020, San Martin reported profit of P240,000, and on October 31, 2020, San Martin paid
dividends P40,000. At December 31, 2020, after significant stock decline, which is expected to be temporary,
San Martin’s stock was selling for P44 per share . After selling the 20,000 shares, Sta. Rita does not expect to
exercise significant influence over San Martin, and the share will be held by Sta. Rita indefinitely.

QUESTIONS:
Based on the above and result of your audit, determine the following:

11. Carrying amount of Investment in San Martin as of December 31, 2018

12. Carrying amount of Investment in San Martin as of December 31, 2019

13. Total amount to be recognized in profit or loss on January 2, 2020

14. The income from investment in San Marin in 2020 is

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QUIZ4 – Audit of Investments SET A 2nd Semester AY 2017-2018

15. The amount to be recognized in other comprehensive income as of December 31, 2020

PROBLEM NO.4
You were engage by Jenny Company to audit it financial statements for the year 2019. During the course of
your audit, you noted that the following financial assets which held for trading were properly reported as current
assets at December 31, 2018:

Cost Fair Value

Taguro Corporation, 5,000 shares, convertible preference P 900,000 P 975,000
shares
Raisen, Inc., 30,000 ordinary shares 1,350,000 1,485,000
Mokoru Co., 10,000 ordinary shares 1,237,500 900,000
P3,847,500 P1,360,000

The following shares and conversion transactions transpired during 2019:

March 1 Sold 12,500 shares of Raisen for P67.50 per share

April 1 Sold 2,500 shares of Mokoru for P90 per share
September 21 Converted 2,500 shares of Taguro’s preference shares into 7,500 ordinary shares of Taguro,
when the market price was P160.50 per share for the preference shares and P81 per share
for the ordinary shares

The following 2019 dividend information pertains to shares own by Jenny:

January 2 Moroku issued a 10% share dividend when the market price of Moroku’s ordinary share was
P99 per share
February 14 Raisen declared a P4.50 per share dividends on its ordinary shares
March 31 and Taguro paid dividends of P5 per share on its preference shares, to shareholders of record on
September 30 March 15 and September 15, respectively. Taguro did not pay dividends on its ordinary
shares during 2019
April 15 Raisen paid a P4.50 per share dividend on its ordinary shares, to shareholders of record on
March 15.

Market prices per share of the securities were as follows:

12/31/2019 12/31/2018
Taguro Corp., preference 184.50 195.00
Taguro Corp., ordinary 85.50 76.50
Raisen, Inc. ordinary 45.00 49.50
Mokoru Co., ordinary 81.00 90.00

All of the foregoing shares are listed in the Philippine Stock Exchange. Decline in the market value from cost
would not be considered permanent.

QUESTIONS:
Based on the above and result of your audit, you are to provide the answer to the following:

16. How much is the gain on sale of 12,500 Raisen shares

17. How much is the gain or loss on sale of 2,500 Mokoru shares

18. How much is the gain or loss on conversion of 2,500 Taguro preference shares into 7,500 ordinary shares

19. How much is the total dividend income for the year 2019
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QUIZ4 – Audit of Investments SET A 2nd Semester AY 2017-2018

20. How much should be reported as loss on fair value adjustment on financial assets held for trading in the
company’s profit or loss for the year 2019

 GOOD LUCK 

“Tomorrow you will wish you had started today”

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QUIZ4 – Audit of Investments SET A 2nd Semester AY 2017-2018

ANSWER SHEET

NAME:_______________________________________________ DATE:____________________

PART - I PART - II
THEORIES PROBLEMS

1 1 11
2 2 12
3 3 13
4 4 14
5 5 15
6 6 16
7 7 17
8 8 18
9 9 19
10 10 20

 GOD BLESS 

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