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INVESTING CYCLE
Learning Objectives:
At the end of the learning activities, the student should be able to:
1. Describe the functions and related activities involved in investing cycle.
2. Discuss the procedures in an auditor’s consideration of an entity’s internal control system related
to the investing.
3. Describe the nature of the substantive audit procedures involved in the audit of investments.
T
OVERVIEW OF THE INVESTING CYCLE
he inventory cycle transactions involving cash outflows to acquire financial instruments (debt or
equity) like trading and available for sale securities or held-to-maturity securities and cash
inflows derived from disposal of securities and realization of periodic earnings (interest or
dividends).
A
AUTHORIZATION
ll investment acquisitions and sales should require specific authorization by the board of directors
or its investment's committee because it requires substantial amounts. Investment made
without regard to management's policies could expose the company's high-risk venture that may
result to significant losses.
T
CUSTODY
he company should have a designated custodian who has physical control over its investment
securities. To reduce the risk of losses, theft, or damage, the securities should be kept in a
reproof sale or vault and access to them should be restricted to the custodian. The absence of
physical control over investment securities is an invitation to fraud because any can take and sell
them. If the loss cannot be recovered, both investment and income are overstated.
If investment securities are to be kept externally, an independent party (banks, brokerage firm or
trust company) may be designated as company's custodian. Since custodian does not have direct
access/contact with company personnel who maintain investment records, possibility of concealing fraud
is minimized.
Any withdrawals of securities in the hands of an outside custodian should be made by at least
two designated high-ranking company officials.
I
RECORDKEEPING
nvestment subsidiary records may not be maintained if there is only a small number of investment
transactions. In these instances, investments can be properly accounted for and controlled through
GL account. The need to maintain detailed records of investments arises when the company has a
large number of investments. Each investment will have a subsidiary record that shows its specific
description (common or preferred), certificate serial number, the name in which it is registered and its
cost.
To ensure accuracy, the investment subsidiary records should be reconciled to related GL control
account on a periodic basis. Differences should be promptly and adequately investigated and
adjustments if any, should be made. An individual other than the subsidiary record clerk, person who
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maintains control account, the custodian of securities or one who is involved in cash activities, should
perform the reconciliation.
Periodic securities count and reconciliation with investments records to verify existence and check the
accuracy of investment records. An individual that does not perform tasks, which are enumerated above,
odes this on a surprise basis. Differences should be promptly and adequately investigated and
adjustments, if any, should be made.
O
n a surprise basis by individual other than the securities custodian, the person that maintains the
control accounts, the subsidiary records clerk, and those involved in the activities should perform
a physical count of securities on hand periodically.
During the count, a count sheet (list of securities on hand) should be prepared. It includes details like
specific description, name of the entity represented by the certificate, name of which is registered,
interest or dividend rate, due date (bonds), certificate serial number, face or par value, and number of
shares.
The details above should be compared to the investment subsidiary records and to the related general
ledger control account. Differences should be promptly and adequately investigated.
Securities that are entrusted to third parties for custodianship or as collateral, evidence of its existence
can be obtained through confirmation procedures.
T
he audit of investment securities typically involves analytical review procedures and one or more
tests of details. The following table presents the specific audit objectives and the appropriate audit
procedures for management assertions:
The analysis should include columns for purchases, sales, and other dispositions of securities during the
year, as well as the balances of investments at the end of the current year. In addition, 1) unrealized
holding loss of available for sale securities beginning balance and changes of which should be included in
the information; 2) analysis of income; proceeds from sales and other dispositions including gains and
losses; market values at the end of the period are part of the information.
Beginning balances can be traced to prior year’s working paper while the ending balance, are verified
through: 1) reconcile to the related GL accounts; 2) physical count; 3) confirmation to other parties; and
4) comparison of market values of securities with published sources.
Purchases, sales, and other dispositions of securities during the audit period should be vouched to
supporting documentation like brokers’ advices. Traced amounts received from sales to the cash receipts
books or bank statements. Prices paid or received can be compared with quoted market prices at
transaction dates.
Interest earned, received and accrued can be verified thru independent calculations using information
provided from the ledger or indicated in the certificates or confirmations.
PROBELM 1
During 2017, MAYE Company purchased marketable securities as a trading investment. For the year
ended December 31,2017, the company recognized an unrealized loss of P230,000. There were no
security transactions during 2018. Pertinent information at December 31,2018 is as follows:
P 4,250,000 P 4,120,000
PROBLEM 2
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During 2017, MAHAL Company purchased trading securities. The cost and market value at December
31,2017 were as follows:
The client company sold 10,000 shares of RACHEL stock on January 15,2018, for P150 per share,
incurring P150,000 in brokerage commission and taxes. The client recorded this transaction by crediting
the investment account at the amount of proceeds net of incidental costs.
REQUIRED: Compute the Investment balance and prepare audit adjusting journal entries on December
31,2018.
PROBLEM 3
The following account appears on the books of ELOHIM Company. Prepare any necessary correcting
entries, assuming that the debt investment is held – to – maturity securities.
PROBLEM 4
The following transactions for the investments of GOD’SGLORYUNFOLD Company (your client) took place
in 2015, these are classified as Available for sale securities:
Date Transactions
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02/10 The client company acquired 1,000 shares of Glory Co. common stock at P88 per
share.
06/30 Glory issued rights to common stockholders for the acquisition of one additional
share at P90 for every shares held. The common stock was trading ex – rights at
P114 a share and rights had a market value of P6 per right.
07/20 The remaining 100 rights were sold for P5.50 each.
10/12 The client sold 400 shares of Glory common stock for P30,000. The shares sold
were specifically identified as being from those acquired on February 10.
PROBLEM 5
You are engaged to audit the marketable securities of BATCH215 Company. In your inquiries, the
accountant presented to you the account of investments.
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Additional information that were found helpful to your analysis are as follows:
1) Beginning balance (agrees with your working papers last year)
a. BARTOLMS CO., COMMON – 5,000 shares P 11,000
b. RICH, INC., COMMON – 900 shares 19,000
c. YLEVOL Corp., COMMON – 15,000 shares 45,000
2) Commission were recorded as expense
3) Details of BERTOLDS Bonds:
a. Face value P 1,000 per bond
b. Interest rate 12%
c. Interest dates May 1 and November 1
Required:
Prepare the following:
1) Adjusting entries – December 31,2015
2) Working papers
Problem No. 6
ANYANG CORP., invested its excess cash in marketable equity securities during 2012. The securities do
not qualify as financial asset held for trading. Anyang Corp. has made an irrevocable election to present
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in other comprehensive income subsequent changes in fair value of its Investment securities. As of
December 31, 2012, the company’s securities portfolio consisted of the following.
During the year 2013, Anyang Corp. sold 60,000 shares of Egoy Corp. for P4,800,000 and purchased
60,000 additional shares of Kandong, Inc. and 30,000 shares of Kongga Company.
On December 31, 2013, Anyang Copr.’s portfolio of securities comprised the following:
During the year 2014, Anyang Corp sold all the Kandong, Inc. shares. Also 15,000 shares of Kongga
Company were sold at a loss of P270,000. The net realized gain on sale securities in 2014 amounted to
P1,440,000. On December 31, 2014, Anyang Corp.’s portfolio of securities consisted of the following:
1. For the year ended December 31, 2013, Anyang’s Statement of Comprehensive Income should
report unrealized loss of
2. What amount of unrealized loss should be reported in Anyang’s December 31, 2013 Statement of
Changes in Equity?
3. How much was received by Anyang from the sale of its Investment in Kandong securities in
2014?
4. Anyang’s Statement of Financial Position should report investment in equity securities of
Dec.31, 2014 Dec.31, 2013 Dec.31, 2012
5. What amount should be reported as unrealized gain in Anyang’s Statement of Changes in Equity
for 2014?
Specific Learning Objectives: At the end of the lesson, the students will be able to:
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Investments
Investments are assets held by enterprise for the accretion of wealth through distribution such as interest,
royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise
such as those obtained through trading operations. These investments are classified as long-term or
short-term depending on their maturity dates.
Financial instruments are contract that gives rise to both financial asset and financial liability of another
enterprise.
Trading securities are generally purchased and sold in the exchange market to generate short-term gains
or profits. These are: (1) inventories of stock securities for sale held by brokers (2) active and frequent
for buying and selling securities held by banks in order to generate profits.
Securirities - OCI are purchased and held indefinitely and available to be sold when the need for liquid
funds arises during the operating cycle. Securities at amortized cost are debt securities with fixed or
determinable payments and fixed maturities that enterprise has the positive intent and ability to hold to
maturity. IFRS 9 Provides that financial assets are initially recorded at cost, however, subsequent to the
acquisition, these assets are recorded as follows:
Trading securities are reported at fair value;
Securities at fair value – OCI are reported at fair value;
Securities at amortized cost (net of discount, premium and impairment);
Loans and receivable originated by the enterprise and not held for trading are reported at amortized
cost less impairment; and
Financial assets of which fair value cannot be reliably measured are also reported at amortized cost
less any impairment in value.
1. Receipt of Dividend
1.1 Cash Part of Income D/S(# of S) Face value
1.2 Property Part of Income CV or Cost CV/Cost
1.3 Stock MEMO Increases # of S Cost is unchanged
2. Receipt of Rights MEMO MV Allocated Cost
3. Stock Split MEMO Increases # of S Cost is unchanged
1. Hilton, Inc. has trading securities purchased during 2013. At the end of 2013, the securities had total
market value of P525,000. As of December 31, 2014, the records show cost and market values as
follows:
Investment Cost Market Value
1 P100,000 P 90,000
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2 190,000 210,000
3 250,000 235,000
The gain or loss that would be reported in profit or loss as a result of the valuation of the securities at the
end of 2014 is
a. P 5,000 b. P10,000 c. P20,000 d. P25,000
2. On January 1, 2013, the Pacita Corporation purchased marketable equity securities to be held as
trading for P2,000,000. The company also paid commission, taxes and other transaction costs
amounting to P50,000. The securities had the following market values at December 31, 2013 and
2014, respectively: P1,750,000 and P2,100,000. No securities were sold during 2013. What amount
of unrealized gain or loss should be reported in the 2013 profit or loss section of the statement of
comprehensive income?
a. P200,000 loss b. P250,000 loss c. P50,000 gain d. P100,000 gain
3. On January 1, 2013, the Pacita Corporation purchased marketable equity securities for P2,000,000.
The company also paid commission, taxes and other transaction costs amounting to P50,000.
Because the securities were acquired not for immediate trading, Pacita exercised its option to
measure the change in fair value through other comprehensive income. The securities had the
following market values at December 31, 2013 and 2014 respectively: P1,750,000 and P2,100,000.
No securities were sold during 2013 or 2014. What amount of unrealized gain or loss should be
reported in the December 31, 2014 statement of financial position as a component of shareholders’
equity?
a. P200,000 unrealized loss b. P250,000 unrealized loss
c. P50,000 unrealized gain d. P100,000 unrealized gain
4. Silahis Trading made investments in non- trading equity ecurities. The cumulative “Holding Gain or
Loss” account has a debit balance of P12,900 at December 31, Year 1. An analysis of the
investments on December 31, Year 1 showed the following
No. of Shares or Face Value Cost Fair Value
Asia Textile ordinary 600 shares P307,500 P270,000
S- Mart, Inc. ordinary 225 shares 76,500 90,000
RJ Company ordinary 2,000 shares 269,500 280,600
P653,500 P640,600
On July 1, Year 2, the shares of S- Mart were sold for P70,000. The balance of the equity pertaining
to these shares was transferred to the retained earnings account. On December 31, Year 2, Asia
Textile shares were quoted at P440 per share; RJ shares were quoted at P138 per share. How much
is the required debit to other comprehensive income account at the end of Year 2?
a. P43,500 b. P37,000 c. P30,600 d. P10,600
5. Bayview Company bought 1,000 shares of PLDT shares as equity investments at fair value on
January 10, Year 2 at P150 per share and paid P2,250 as brokerage fee. On December 5, Year 1, a
P10 dividend per share of PLDT had been declared to be paid on April 30, Year 2 to shareholders of
January 31, Year 2. There were no other transactions in Year 2 affecting the investment in PLDT.
At what amount should the investment in equity securities be initially recognized on January 10, Year
2?
a. P142,250 b. P150,000 c. P152,250 d. P162,250
6. On December 30, 2012, Aloha Company purchased 10,000 ordinary shares of Sun Valley
Corporation at P150 per share. At the time of the purchase, Sun Valley has an outstanding 50,000
shares with a total shareholders’ equity of P7,500,000. For the year 2013, Sun Valley reported profit
of P3,000,000. On December 30, Aloha received a cash dividend of P50 per share. Aloha uses
the equity method. What is the investment carrying value at December 31, 2013?
a. P2,600,000 b. 2,100,000 c. P1,600,000 d. P1,500,000
7. During Year 1, Peninsula Corporation acquired, financial asset at fair value through profit or loss,
ordinary shares of RPP Company as follows:
Lot Date No. of Shares Cost Per Share Total Cost
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