Ateneo De Zamboanga University

School of Management and Accountancy

S.Y. 2019-2020

AUDITING PROBLEM
Auditing 320 A and B
LONG QUIZ 1- AUDIT OF INVESTMENT

Name:
I.D. No.:
Date:

1. 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.

2. Anna Lee, 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 fraud 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 made 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.

3. In testing long-term investments, an auditor would use analytical procedures to ascertain the reasonableness of the
classification between current and noncurrent portfolios.

In testing long-term investments, an auditor would use analytical procedures to ascertain the reasonableness of the valuation of
marketable equity securities.

In testing long-term investments, an auditor would use analytical procedures to ascertain the reasonableness of the existence of
unrealized gains or losses in the portfolio

a. b. c. d.
First statement False True False False
Second statement True True False False
Third statement True True True False

4. 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.

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.

I- 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, 2018. 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 2018 and 2019 are as follows:
 AAA, Inc. BBB Corp.
Retained earnings (deficit), 1/1/18 P1,000,000 (P175,000)
Cash dividends, 2018 (125,000) -
Net income, 2018 200,000 325,000
Retained earnings, December 31, 2018 1,075,000 150,000
Cash dividends, 2019 (150,000) (50,000)
Net income, 2019 300,000 125,000
Retained earnings, December 31, 2019 P1,225,000 P 225,000

Market value of stock: 12/31/18 P7.00 P12.00

12/31/19 6.50 15.00

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

1. The income from investment in AAA, Inc. in 2018 is

a. P15,000 c. P12,500
b. P 1,000 d. P 0

2. The income from investment in BBB, Inc. in 2018 is

a. P31,250 c. P2,500
b. P81,250 d. P 0

3. The carrying value of Investment in AAA, Inc. as December 31, 2019 is

a. P250,000 c. P325,000
b. P350,000 d. P252,500

4. The carrying value of Investment in BBB, Inc. as December 31, 2019 is

a. P1,250,000 c. P1,875,000
b. P1,268,750 d. P1,350,000

5. How much is the unrealized gain or loss that will be included as component of equity as of December 31,
2019?
a. P75,000 gain c. P25,000 gain
b. P25,000 loss d. P 0

II- Paombong Corporation purchased P200,000 8% bonds for P184,557 on January 1, 2017. Paombong
classified the bonds as available for sale. The bonds were purchased to yield 10% interest. Interest is
payable semiannually on July 1 and January 1. The bonds mature on January 1, 2022. Paombong
uses the effective interest method to amortize premium or discount. On January 2, 2019, Paombong
sold the bonds for P185,000 after receiving interest to meet its liquidity needs.

The market values of the bonds are as follows:

December 31, 2017 P190,449
December 31, 2018 186,363
Based on the above and the result of your audit, determine the following:

1. Interest income for the year 2017

a. P14,869 c. P18,517
b. P16,000 d. P18,456

2. Unrealized gain on AFS as of December 31, 2017

a. P3,436 c. P5,892
b. P3,375 d. P 0

3. Interest income for the year 2018

a. P18,775 c. P16,000
b. P15,272 d. P18,701

4. Unrealized gain or loss on AFS as of December 31, 2018

a. P8,053 gain c. P3,351 gain
b. P3,486 loss d. P1,806 loss

5. Realized gain or loss on sale of AFS on January 2, 2019

a. P6,861 loss c. P4,849 loss
b. P4,714 loss d. P9,416 gain

III- The following two subsidiary accounts reflect the trading securities of What is it Company for the
year 2017:

KHAIRY COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 16 Purchase 20,000 CD P1,900,000
31 Raised to market value,
offset credit to retained
earnings GJ 100,000

Mar. 30 Sale at P150 10,000 CR P1,500,000

June 10 Stock dividend at par 10,000 GJ 1,000,000
July 29 Sale at P110 10,000 CR . 1,100,000
Totals P3,000,000 P 2,600,000
AHYAN CORP.
Date Transactions Shares Ref. Debit Credit
Sep. 05 Purchase 20,000 CD P1,000,000
28 Cash dividends to
stockholders of record
Sept. 15, declared Aug. 15 CR P 50,000
Oct. 01 Purchase 50,000 CD 2,500,000
05 Sale at P65 20,000 CR 1,000,000
Nov.30 Cash collected for sale
made on Nov. 10, after a
Nov. 1 declaration of P5
cash dividend per share to
stockholders on record as
of December 1 20,000 CR 3,300,000
Dec.15 Cash dividend received CR . 150,000
Totals P3,500,000 P4,500,000

On January 2, 2017, What it is Company purchased 39,000 shares of Alayna Co.’s 200,000 shares of outstanding
common stock for P1,170,000. On that date, the carrying amount of the acquired shares on Alayna Co.’s books was
P810,000. What is it attributed the excess of cost over carrying amount to goodwill. During 2017, What is it’s
president gained a seat on Alayna’s board of directors. Alayna Co. reported earnings of P800,000 for the year ended
December 31, 2017, and declared and paid cash dividends of P200,000 during 2017. On December 31, 2017,
Alayna’s common stock was trading at P30 per share.

1. The gain on sale of 10,000 shares of Khairy Company on March 30 is

a. P500,000 b. P1,500,000 c. P550,000 d. None

2. The gain on sale of 10,000 shares of Khairy Company on July 29 is

a. P625,000 b. P337,500 c. P525,000 d. P150,000

3. The correct acquisition cost of 20,000 shares of Ahyan Corp. acquired on September 5 is
a. P3,500,000 b. P950,000 c. P1,000,000 d. P3,450,000

4. The gain on sale of 20,000 shares of Ahyan Corp. October 5 is

a. P350,000 b. P300,000 c. P1,028,500 d. P314,300

5. The gain on sale of 20,000 shares of Ahyan Corp. on November 10 is

a. P1,000,000 b. P2,400,000 c. P2,300,000 d. P2,200,000

6. The balance of the Company’s investment in Khairy Company before mark-to-market on December 31, 2017 is
a. P475,000 b. P500,000 c. P1,475,000 d. P525,000

7. The adjusted balance of the Company’s investment in Ahyan Corp. before mark-to- market on December 31,
2017 is
a. P1,500,000 b. P1,350,000 c. P1,200,000 d. P1,000,000

8. The income from investment in common stock of Alayna Company to be reported on the income statement for
the year ended December 31, 2017 is
a. P156,000 b. P159,000 c. P120,000 d. P39,000

9. The adjusted balance of investment in Trustworthy Company at December 31, 2017 is

a. P1,326,000 b. P1,170,000 c. P1,287,000 d. P1,251,000