AUDIT OF INVESTMENTS

Accounting for investments can vary depending on whether cost, fair value, or equity or
consolidation methods are used.
Much depends on the entity's business model and management's intentions, which are assessed
through inquiry and knowledge of the client's business and industry.

Only auditors knowledgable about the business can determine the economic substance of an
acquisition and whether it makes sense from an industry perspective and the business
strategic plan.

In the audit of investments, the auditor consider the related income statement accounts such
as investment income, holding gains (loss), derecognition loss and other items.

Before performing the substantive testing in any account, always reconcile first the amount
in the trial balance/unaudited FS versus the amount in the general ledger (if applicable).

SUMMARY OF AUDIT OBJECTIVES AND SUBSTANTIVE AUDIT PROCEDURES:

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES

Existence or All recorded investments on the - inspection of securities held

Occurrence statement of financial position by the client
exists.
- confirmation of securities held
All recorded income from by third parties
investments has accrued to the
entity at the reporting date. - evaluating the accounting
methods used and test the
valuation

Completeness All investments owned by the - Detailed minutes of the meeting

entity at the reporting date are review
included on the statement of
financial position. All income
accruing from investments at the
reporting date has been
recorded.

Rights and The entity owns, or has a legal - inspection of securities held
Obligations right to the investments by the client
reported on the statement of
financial position at the - confirmation of securities held
reporting date. by third parties

Valuation and Investments are included on the - evaluating the accounting

Allocation statement of financial position methods used and test the
at the appropriate amounts. valuation

- impairment testing
Presentation and Investments and related - Review financial statement
Disclosure investment income accounts are presentation and disclosure of
properly classified, described investments including related
and disclosed in the financial accounts.
statements, including notes, in
accordance with the applicable
PFRS.

All investment pledged or other

security interests are
adequately and properly
disclosed.

AUDIT PROCEDURES FOR PROPERTY, PLANT AND EQUIPMENT:

VERIFICATION OF EXISTENCE AND OWNERSHIP

To verify the existence/ownership, procedures will depende whether the securities or evidence
of ownership are:
- held by the client
- held by the third party

STOCK CERTIFICATES (EVIDENCE OF OWNERSHIP) ARE HELD BY THE CLIENT

a. Count the securities or instruments on hand and examine the evidence of ownership.
b. Ideally, do the counting at the reporting date; and
c. Simultaneous with the surprise cash count to prevent substitution.
When inspecting the secutiries, the auditor should note the following:
a. The name(s) of the indicated owner(s) of the securities.
b. The name(s) of the issuers of securities.
c. Whether the security is debt or equity.
d. The certificate numbers on the documents.
e. Any evidence of pledging or restriction on disposal shown on the certificates.
f. The number of shares of stock or the face value of debt securities.

STOCK CERTIFICATES (EVIDENCE OF OWNERSHIP) ARE HELD BY A THIRD PARTY (BROKERAGE FIRM OR BANKS
FOR SAFEKEEPING)
a. Sending of confirmation letter to the brokerage firm/custodian.
b. Same procedure in confirmation of cash in bank and receivables.

EVALUATE THE ACCOUNTING METHODS USED AND TEST OF VALUATION

Always remember that the method of valuation depends on the investment classification. It can
be:

a. Investment in Associates and Joint Venture (PAS 28)

b. Investment in Subsidiary (PAS 27)
c. Financial assets at Amortized Cost (PFRS 9)
d. Financial assets at Fair Value (PFRS 9)
BRIEF REVIEW OF FINANCIAL ASSETS CLASSIFICATION

DEBT INSTRUMENTS EQUITY INSTRUMENTS DERIVATIVES

1. Business Model Test NO Trading Intention? YES

NO
Held to collect Held to collect
contractual cash contractual cash
flows? flows and sell? Fair value through NO
nonrecyclable OCI?

YES
2. SPPI Test NO

Fair Value Option? YES

NO NO

AMORTIZED COST FAIR VALUE FAIR VALUE FAIR VALUE THROUGH PROFIT OR LOSS
THROUGH THROUGH NON- (Default Classification)
RECYCLABLE OCI RECYCLABLE OCI

INVESTMENT IN ASSOCIATE AND JOINT VENTURE

Should be accounted using Equity Method
- initially at cost
- subsequently, cost plus(minus) share in investment income(loss); plus(minus) any change
in OCI and less any dividends received.
What to do?
1. Share in net income(loss) can be verified by examining the FS of the investee and make
independent calculation.
2. For dividends received, the auditor can examine published dividends record of the
investee.

INVESTMENT IN SUBSIDIARY
Should be measured at
- initially at cost
- subsequently, cost adjusted for impairment, if there is any.
What to do?
1. Verify the beginning balance of the investment for the current year (auditor will refer to its prior year workin
2. Examine any + or - by looking at the supporting documentation.

FINANCIAL ASSETS AT AMORTIZED COST

Should be measured at
- initially at fair value
- subsequently, amortized cost, using the effective interest method
What to do?
To verify the CA, obtain evidence regarding the original issuance price and amortozation
table using appropriate rate and compare with the amount reported by the client.
FINANCIAL ASSETS AT FAIR VALUE
Should be measured at
- initially at fair value
- subsequently, at fair value
What to do?
1. Examine the quoted market price if there is an active market. For example, share of stock
quoted in the Philippine Stock Exchange (PSE)
2. Determine the quoted price then multiply by the number of shares.

TEST OF IMPAIRMENTS OF INVESTMENTS

Accounting for impairment depends on the type of investment:
- for investment in affiliates (associate, joint venture and subsidiary)
PAS 36, Impairment of Assets
- for financial assets (at amortized cost) - PFRS 9, Financial Instruments
How to do?
1. Inquire with the management their approach in identifying indicators of impairment.
2. How they deal with the actions taken as a result of any potential impairment noted.
3. If there is a noted impairment or the auditor consider the recognition, the auditor should:
a. evaluate the appropriateness of the valuation model and assumptions used;
b. assess the reasonableness of management's estimates; and
c. evaluate the accuracy, completeness, and the relevance of the important data which the
estimates or measurements are based.
Indicators of impairment (PAS 36)
External sources:
- market value declines
- negative changes in technology, markets, economy or laws
- increases in market interest rates
- net assets of the company higher than market capitalization
Internal sources:
- obsolesence or physical damage
- asset is idle, part of a restructuring or held for disposal
- worse economic performance than expected
- for investments in subsidiaries, joint ventures or associates, the carrying amount is
higher than the carrying amount of the investee's assets, or a dividend exceedsthe total
total comprehensive income of the investee

REVIEW OF MINUTES OF THE MEETING

How to do?
1. Obtain and review minutes (shareholders, board of directors, executive committee, etc) and
agreements.
2. Review confirmation replies for evidence of existence, liens, pledges or other security
interest in investments; and
3. Review commitments to acquire or dispose investments.

REVIEW FS PRESENTATION AND DISCLOSURE OF INVESTMENTS INCLUDING RELATED ACCOUNTS

How to do?
1. Determine the proper presentation and classification of investments in the statement of
financial position
2. Short-term investments are included in the current asset section while long-term
investments are presented in the noncurrent section
3. Determine that the related income statement accounts should be reported appropriately in
the P/L or as a component of Other comprehensive income.
Reported in Profit or Loss:
- dividend income
- interest income
- share in net income(loss) of an associate or joint venture
- unrealized holding gains(loss) on Finacial assets at FVPL (trading securities)
- disposal gains(loss) on all types of investments
- impairment loss on investments
Reported in Other Comprehensive Income:
- unrealized gains(loss) on Financial assets at FVOCI (available for sale securities)
- share in change in OCI component of an associate of joint venture