Applied Auditing

Audit of Investment
PROBLEM NO. 1
The following transactions of the Angat Company were completed during the year 2016:

Jan. 2 Purchased 20,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of P4,500. These shares were
classified as trading securities.

Feb. 1 Purchased 20,000 shares of Malolos Company common stock at P125 per share plus brokerage fees of P19,000. Angat
classifies this stock as and available-for-sale security.

Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of P35,000. In addition, the
company paid brokerage fees of P18,000. Angat classified these bonds as a trading security.

Jul. 1 Received semiannual interest on the RP Treasury Bonds.

Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest.

Oct. 1 Sold 3,000 shares of Malolos at P132 per share.

The market values of the stocks and bonds on December 31, 2016, are as follows:
Bulacan Auto Co. P45 per share
Malolos Company P130 per share
RP Treasury 7% bonds 102
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2016
2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2016
3. What amount of unrealized gain should be shown as component of income in 2016?
4. What amount of unrealized gain should be shown as component of equity as of December 31, 2016?

PROBLEM NO. 2
You were able to obtain the following ledger details of Trading Securities in connection with your audit of the Bocaue Corporation for
the year ended December 31, 2006:
Particulars Date Ref. DR CR
Purchase of GOOD Co. 4,000 shares 1-14 CV P 960,000

Purchase of LUCK Co. 4,800 shares 2-20 CV 1,200,000

Sale of LUCK Co. 1,600 shares 3-01 CR 360,000

Receipt of GOOD Stock Dividend Offsetting Credit to retained
earnings 5-31 JV 88,000

Sale of GOOD Stocks 3,200 shares 8-15 CR 784,000

Sale of GOOD Stocks 800 shares 10-1 CR 184,000

From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows:
Kind Declared Record Payment Rate
Cash 01-02 01-15 01-31 P20/share
Stock 05-02 05-15 05-31 10%
Cash 08-01 08-30 09-15 P30/share

At December 31, 2006, GOOD and LUCK shares were selling at P210 and P240 per share, respectively
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2006
2. Gain on sale of 3,200 GOOD shares on August 15, 2006
3. Gain or loss on sale of 800 GOOD shares on October 1, 2006
4. Dividend income for the year 2006
5. Carrying value of Trading Securities as of December 31, 2006

PROBLEM NO. 3

In connection with your audit of Hogonoy Companys financial statements, you were able to gather the following subsidiary account
which reflect the marketable securities of the company for the year 2006:
Hugo Corp..
Date Transactions Shares Debit Credit
9/01 Purchase 40,000 P2,000,000
9/30 Cash dividends to stockholders of record 9/15, declared 8/15 P 100,000
10/01 Purchase 100,000 5,000,000
10/15 Sale at P65 40,000 2,000,000
Cash collected for sale made on 11/10, after a 11/1 declaration of P5
11/30 cash dividend per share to stockholders on record as of 12/1 40,000 6,600,000
12/15 Cash dividend received . 300,000
Totals P7,000,000 P9,000,000

Hogonoy, Inc. acquired 30% of Pugo Corporations voting stock on January 1, 2005 for P5,000,000. During 2005, Pugo earned
P2,000,000 and paid dividends of P1,250,000. Hogonoys 30% interest in Pugo gives Hogonoy the ability to exercise significant
influence over Pugos operating and financial policies. During 2006, Pugo earned P2,500,000 and paid dividends of P750,000 on April
1 and P750,000 on October 1. On July 1, 2006, Hogonoy sold half of its investment in Pugo for P3,300,000 cash.
Applied Auditing
Audit of Investment
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The gain on sale of 40,000 shares of Hugo Corp. on October 15 is
2. The gain on sale of 40,000 shares of Hugo Corp. on November 10 is
3. The carrying value of the Companys investment in Hugo Corp. on December 31, 2006 is
4. The gain on sale of investment in Pugo Corp. is
5. The carrying value of the Companys investment in Pugo Corp. on December 31, 2006 is

PROBLEM NO. 4
Meycauayan Inc. acquired 50,000 shares of AAA stock for P5 per share and 125,000 shares of BBB stock for P10 per share on
January 2, 2005. Both AAA Inc. and BBB Corp. have 500,000 shares of no-par common stock outstanding. Both securities are being
held as long term investments. Changes in retained earnings for AAA and BBB for 2005 and 2006 are as follows:
AAA, Inc. BBB Corp.
Retained earnings (deficit), 1/1/05 P1,000,000 (P175,000)
Cash dividends, 2005 (125,000) -
Net income, 2005 200,000 325,000
Retained earnings, December 31, 2005 1,075,000 150,000
Cash dividends, 2006 (150,000) (50,000)
Net income, 2006 300,000 125,000
Retained earnings, December 31, 2006 P1,225,000 P 225,000

Market value of stock: 12/31/05 P7.00 P12.00

12/31/06 6.50 15.00

QUESTIONS:
1. The income from investment in AAA, Inc. in 2006 is
2. The income from investment in BBB, Inc. in 2005 is
3. The carrying value of Investment in AAA, Inc. as December 31, 2006 is
4. The carrying value of Investment in BBB, Inc. as December 31, 2006 is
5. How much is the unrealized gain or loss that will be included as component of equity as of December 31, 2006?

PROBLEM NO. 5
Select the best answer for each of the following:
1. 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.

2. 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.
d. The internal auditor and the controller independently trace all purchases and sales of investment securities from the
subsidiary ledgers to the general ledger.

3. 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 entitys 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.

4. 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 entitys 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.

5. 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.

6. In auditing investments for proper valuation, the auditor should do all but the following:
a. Vouch purchases and sales of securities by tracing to brokers' advices and canceled checks.
b. Compare cost and market by reference to year end market values for selected securities.
c. Confirm securities held in safekeeping off the client's premises.
d. Recalculate gain or loss on disposals.

7. An audit procedure that provides evidence about proper valuation of trading securities arising from a short-term investment of
excess cash is
a. Recalculation of investment carrying value by applying the equity method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of securities held by broker.
d. Calculation of premium or discount amortization.
Applied Auditing
Audit of Investment
8. The auditee has acquired another company by purchase. Which of the following would be the best audit procedure to test the
appropriateness of the allocation of cost to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for purchased assets.
b. Determine whether assets have been recorded at their book value at the date of purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.

9. The auditee has just acquired another company by purchasing all its assets. As a result of the purchase, "goodwill" has been
recorded on the auditee's books. Which of the following comparisons would be the most appropriate audit test for the amount of
recorded goodwill?
a. The purchase price and the fair market value of assets purchased.
b. The purchase price and the book value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 15% of net assets for the past five years.

10. Of the following, which is the most efficient audit procedure for testing accrued interest earned on bond investments?
a. Vouching the receipt and deposit of interest checks.
b. Tracing interest declarations to an independent record book.
c. Recomputing interest earned.
d. Confirming interest rate with the issuer of the bonds.