05 AUDIT OF INVESTMENTS

Investments are assets not directly identified with the main revenue-production activities of the enterprise and acquired them for any
of the following purposes:
1. To earn a return on idle cash balance;
2. To establish long-term relationships with suppliers and customers;
3. To exercise significant influence or control over another entity;
4. To accumulate funds for future use;
5. For capital appreciation; or
6. For future protection.
Types of Investments:
1. Investment in securities – an ownership share in another entity or a loan granted to another entity, embodied in a financial
instrument dealt with in capital markets.
a. Equity Securities
i. Classification of Equity Securities
• Fair value through profit or loss
• Fair value through OCI
• Investment in Associate
• Investment in Subsidiary
ii. Accounting for Equity Securities
• Fair value through profit or loss
• Fair value through OCI
• Investment in associate – an entity over which the investor has significant influence.
b. Debt Securities
i. IFRS 9 provides the classification of debt securities shall be made base on both:
• The business model for managing the financial asset ; and
• The contractual cash flow characteristics of the financial asset.
ii. Classification of investments in debt securities:
• Debt investments at amortized cost
• Debt investment at fair value through profit or loss; or
• Debt investments at fair value through other comprehensive income.
iii. Accounting for debt investment
• Amortized Cost
• Fair Value Through Profit or loss
• Debt investment at fair value through OCI
2. Funds for long- term use
a. Plant expansion fund
b. Equipment acquisition fund
c. Stock redemption fund
3. Investment property
4. Cash surrender value of life insurance policies

Business model is determined at a level that reflects how financial asset groups are managed to achieve a particular objective, it is
not an assertion but is observable through the activities undertaken for its financial assets. An entity’s business model for
management financial asset may be any of the following:
a. Collecting cash flows that are solely payments for principal and interest
b. Selling financial assets when an opportunity from profit taking arises because of fluctuations in fair values and
interest rates; or
c. Both collecting cash flows that are payments for principal and interest and selling the asset when an opportunity
arises.

Audit of Investment - involves evaluating an entity’s investment activities to ensure they are properly recorded, valued, and
managed in compliance with applicable financial reporting standards and internal policies. Investments may include stocks, bonds,
mutual funds, government securities, real estate, and other financial instruments.
Objectives of the Audit of Investments

1. Verify Existence and Ownership

o Confirm that the investments recorded in the financial statements actually exist and are owned by the entity.
2. Ensure Proper Valuation
o Verify that investments are recorded at fair value, historical cost, or amortized cost, depending on the applicable
accounting framework (e.g., IFRS, GAAP, or local standards).
3. Check Classification and Disclosure
o Ensure investments are correctly classified as short-term or long-term and properly disclosed in the financial
statements.
 4. Assess Compliance with Policies and Regulations
o Verify that investment transactions comply with corporate policies, industry regulations, and legal requirements.
5. Evaluate Investment Performance
o Analyze whether investments align with the organization's financial goals and risk appetite.
6. Detect Fraud or Mismanagement
o Identify potential fraud, unauthorized transactions, or mismanagement of funds.

Key Audit Procedures for Investments

1. Understanding the Investment Policy

• Review the company’s investment policy and objectives.

• Identify authorized investment types, limits, and risk management strategies.

2. Testing Existence and Ownership

• Obtain direct confirmations from banks, brokers, or investment custodians.

• Physically inspect investment certificates or documentation.

3. Verification of Transactions

• Examine purchase and sale agreements, brokerage statements, and transaction records.
• Match investment transactions to supporting documents.

4. Valuation Testing

• Check whether investments are recorded at the appropriate valuation method:

o Marketable securities: Fair value based on stock exchange prices.
o Bonds: Amortized cost or fair value.
o Private equity or real estate: Third-party appraisals or valuation models.
• Recalculate fair value using independent market data.

5. Reviewing Impairment or Write-downs

• Assess whether investments have suffered a decline in value and if impairment losses should be recognized.

6. Assessing Income Recognition

• Verify dividend income, interest income, and capital gains are recorded in the correct period.

7. Compliance and Internal Controls

• Evaluate whether internal controls over investment activities are effective.

• Ensure compliance with accounting standards (e.g., IFRS 9 for financial instruments).

8. Analytical Procedures

• Compare current-year investment performance to prior years.

• Assess return on investments versus market benchmarks.

Notes in answering problems on Investments

FOR INVESTMENT IN EQUITY SECURITIES (SHARES):

a) Control Exists (>50% equity in voting shares, that is ordinary shares) – Investment in Subsidiary
b) Significant Influence exists (20% - 50% in voting shares, that is ordinary shares)
– Investment in Associate (Equity Method)
c) No Ctrl nor Sign. Infl. - Financial Asset at Fair Value
c.1) FA at Fair value through profit or loss (PFRS 9) (aka Trading Securities)
c.2) FA at Fair value through OCI/L (PFRS 9) (aka Available for Sale Security)
Investment in Associate/Equity Method

•
Excess of Acquisition cost over Fair value of identifiable asset (Goodwill) shall not be included in the
computation of share in net income/loss, except if there is an impairment.
• Excess of fair value over book value of non-depreciable asset (e.g. land) shall not be included in the
computation of share in net income/loss, except if there is an impairment.
• If the acquisition cost is lower than the FMV of identifiable asset, the negative excess shall be included
(added) in the share in the net income in the year of acquisition.

CESSATION (Disposal of shares to the extent that the company loses significant influence)

*Prorated based on the portion sold **Prorated based on the portion retained and reclassified

DEEMED SALE/DILUTION (Happens when the company’s interest in associate decreases because of the issuance of the
associate of additional shares to other parties, with the company not participating on such new issuance)

STEP-ACQUISITION OF INVESTMENT IN ASSOCIATE

If as a result of acquiring additional shares of stocks, the entity acquired significant influence in the investee
company, the transition from investment in financial asset at fair market value (no significant influence) to investment in
associate (with significant influence) shall be accounted for under the FAIR MARKET VALUE APPROACH (PFRS 3-
BASED APPROACH):

- The initial cost of the investment shall be the sum of the current fair value of the original investment (original
investment shall be measured at its current fair value) and the cost of the new investment.

Financial Asset at Fair Value (Through P/L or OCI/L)

Investment at Fair Value through Profit Investment at Fair Value through other
or Losses (Trading security) Comprehensive income (Available for sale)
a) Initial recognition At Fair value (fair value of At Fair value (fair value of consideration
consideration given up), given up) plus any transaction costs incurred.
- Transactions costs shall be expensed - Exclude accrued dividends (Note 1)
as incurred
- Exclude accrued dividends(Note 1)
b) Balance sheet Fair Value Balance Sheet Date Fair Value Balance Sheet Date
valuation (temporary Less: Carrying Value Less: Original Cost
changes in value) Unrealized gain/loss – I/S Unrealized gain/loss – SHE of SFP

Fair Value Balance Sheet Date

Less: Carrying Value
Unrealized gain/loss – OCI in SCI
 c) Disposal Proceeds, net of Trans. Cost Upon disposal:
Less: Carrying Value a) Difference between proceeds (gross of
Realized gain/loss – I/S transaction cost) against the CV of the
investment is UHG/L-OCI(SCI/SHE).
b) Transaction cost is recognized as
outright loss (expense)
c) Any Cumulative unrealized holding gain
or loss in the SHE may be transferred to RE
d) Impairment loss Decreases in FMV whether temporary Decreases in FMV whether temporary or
(permanent decline) or permanent are recognized in the permanent are recognized in the OCL/SHE
profit or loss
e) Reclassification At initial recognition, an entity may make an irrevocable election to present in other
comprehensive income. (PFRS 9, par 5.4.4) Thus, transfer into and out of Investment
at FMV through P&L (out of and into Investment at FMV through OCI) is
not allowed.
NOTES
1. If shares are acquired Div.-on (Between Declaration and Record date of Dividends), the purchase price shall be
debited to dividend receivable first before debiting the investment acct. for the bal. (Initial Cost = Purchase Price
– Dividend Receivable)
2. Cash dividends shall be credited to dividend income upon declaration at face value.
3. Property dividends shall be credited to dividend income at fair value on declaration date.
4. Stock dividend shall be recorded only through memo (update carrying value per share)
5. Stock in lieu of Cash shall be recorded as div. income at the FV of shares received.
6. Cash in lieu of Stock shall be accounted for under the “as if” approach, that is, as if shares were received and sold at the
cash received. Gain or loss shall be recorded accordingly. (see disposal of FA at FMV)
7. Share assessment shall be debited to the investment account and credited to cash

FOR INVESTMENT IN DEBT SECURITIES (BONDS)

a) The business model of the company has an objective of holding debt security investments primarily to collect
contract cash flows; cash flows are in the form of principal and interest with fixed maturity date; does not
apply fair value option to eliminate accounting mismatch – Investment at Amortized Cost.
b) The business model of the company has an objective of holding the debt security investment primarily to
collect contractual cash flows but also has an objective of holding the debt security available for sale to take
advantage of business opportunities; does not apply fair value option to eliminate accounting mismatch – at
Fair Market Value through OCI/L
c) The business model has an objective of holding the securities for short-term profits or the entity uses fair value
option to eliminate accounting mismatch – at Fair Market Value through Profit or Loss.

Financial Asset at Fair Value Through P/L and at Amortized Cost: PFRS 9 where recycling IS ALLOWED for debt
security investments categorized as FA@FMV through OCI/L:
At FMV Through Profit or Loss At FMV Through OCI/L Investment at Amortized Cost
(Trading security) (Available for sale security) (Held to maturity security)
a) Initial At Fair value (fair value of At Fair value (fair value of At fair value which is assumed to
recognition consideration given up), consideration given up) plus any be equal to the fair value of
- Transactions costs shall be transaction costs incurred, bonds plus any transaction cost,
expensed as incurred excluding any accrued interest. (a) excluding any accrued interest.
- Exclude accrued interest(a) (a)
b) Balance Fair Value Balance Sheet Date Fair Value @ Balance Sheet Date At Amortized Cost(b)
sheet Less: Carrying Value Less: Amortized Cost(b)
measurement Unrealized gain/loss – I/S Cum. Unrealized gain/loss – SHE
in SFP

Fair Value @ Balance Sheet Date

Less: Carrying Value
Unrealized gain/loss – OCI in SCI
c) Disposal Proceeds, net of transactions Proceeds, net of transactions Proceeds, net of transactions
costs, net of accrued interest (a) costs, net of accrued interest (a) costs, net of accrued interest(a)
Less: Carrying Value Less: Amortized Cost Less: Amortized Cost
Accrued Interest Realized gain/loss – IS* Gain/loss on sale
Realized gain/loss – I/S *including recycling of OCI/L
d) Impairment N/A (as any decline in the PV of New future cash flows at PV of New future cash flows at
Loss value of the investment is original effective rate original effective rate
recognized as UHL-P&L) Less: Amortized Cost Less: Amortized Cost
Impairment loss -IS* Impairment loss -IS*
*including recycling of OCI/L
 e) Reclass. -Reclassification from one category to another is allowed as a result of a change in business model.
-The transfer shall be made at the beginning of the following reporting period from the date business
model has been changed (see following table)

RECLASSIFICATION DUE TO CHANGE IN BUSINESS MODEL

FROM/TO FMV FMVOCI P&L AMORTIZED COST
P&L
- No gain/loss on the reclass date - No gain/loss on the reclass date
FMVP&L - Future amortization based - Amortization based on
on effective rate on reclass prevailing effective rate on
date reclass date
- Subsequent - No more future remeasurement
remeasurement gain/loss to
OCI/L
- Cumm OCI/L is recycled to - Cum. OCI/L is derecognized against
P&L on the reclass date the initial valuation of the investment,
FMVOCI&L - No more future amortization
as a result, the investment is
- Subsequent
transferred at amortized cost, as if it
remeasurement gain/loss to has been originally designated at
profit or loss amortized cost
- Subsequent amortization is based
on the original effective interest rate
-Gain/loss on reclassification -Gain/Loss on reclassification date
date is recognized in the P&L is recognized in the OCI/L
AMORTIZE - No more future amortization -Subsequent amortization shall
D COST - Subsequent be based on the original effective
remeasurement gain/loss to interest
profit or loss - Subsequent gain/loss to OCI/L
Notes –
(a) If bonds were acquired or sold in between interest payment dates.
• If bonds were acquired at a premium (acquisition price > face value), the premium is a loss to be allocated
over the remaining term of the bonds by deducting the same to the related interest income.
• If bonds were acquired at a discount (acquisition price < face value), the discount is a gain to be allocated
over the remaining term of bonds by adding the same to the related interest income. In summary:
Amortization of premium, decreases carrying value of investment and interest income.
Amortization of discount, increase carrying value of investment and interest income.
(b) Impairment loss on investment at amortized cost is the same with impairment of loans and receivables.

PROBLEM 1
During 2021, Lav Company purchased trading securities with the following cost and market value on December 31, 2021:
Security Cost Market Value
A- 1,000 shares 200,000 300,000
B- 10,000 shares 1,700,000 1,600,000
C- 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000
The entity sold 10,000 shares of Security B on January 15, 2022 for P150 per share.
1. What amount of unrealized gain or loss should be reported in the income statement for 2021?
a. 200,000 loss b. 200,000 gain c. 300,000 loss d. 300,000 gain
2. What amount should be reported as loss on sale of trading investment in 2022?
a. 200,000 gain b. 200,000 loss c. 100,000 gain d. 100,000 loss

PROBLEM 2

On December 31, 2021, Fat Company appropriately reported a P100,000 unrealized loss.

There was no change during 2022 in the composition of the portfolio of nontrading equity securities held at fair value through other
comprehensive income.

Security Cost Market Value

12/31/22
A- 1,200,000 1,300,000
B- 900,000 500,000
C- 1,600,000 1,500,000
3,700,000 3,300,000
1. What is the market value of the investment on December 31, 2021?
a. 3,600,000 b. 3,700,000 c. 3,500,000 d. 3,800,000
2. What amount of loss on these securities should be included in the statement of comprehensive income for the year ended
December 31, 2022 as component of other comprehensive income?
a. 400,000 b. 300,000 c. 100,000 d. 0
3. What cumulative amount of loss on these securities should be reported in the statement of changes in equity for the year ended
December 31, 2022 as component of other comprehensive income?
a. 100,000 b. 200,000 c. 400,000 d. 0

PROBLEM 3

At the beginning of current year, Far Company acquired 20% of the outstanding ordinary shares of Dave Corporation for P8,000,000.
This investment gave Far the ability to exercise significant influence over Dave. The carrying amount of the acquired shares was
P6,000,000. The excess of cost over carrying amount was attributed to a depreciable asset which was undervalued on Dave’s
statement of financial position and which had a remaining useful life of ten years.

The investee reported net income of P1,800,000 and paid cash dividends of P400,000 and thereafter issued 5% share dividend during
the current year.
1. What amount should be reported as investment income for the current year?
a. 360,000 b. 160,000 c. 240,000 d. 340,000
2. What is the carrying amount of the investment in associate at year-end?
a. 7,720,000 b. 7,800,000 c. 8,000,000 d. 8,080,000

PROBLEM 4

On January 1, 2021, Pure Company purchased as a long-term investment P5,000,000 face amount of Shin Company’s 8% bonds for
P4,562,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2026 and pay interest annually on
December 31. The interest method of amortization is used.

1. What amount should be reported as interest income for 2022?

a. 456,200 b. 461,820 c. 400,000 d. 369,456
2. What is the carrying amount of the bond investment on December 31, 2022?
a. 4,680,020 b. 4,662,000 c. 4,618,200 d. 4,562,000

PROBLEM 5

On January 1, 2021, King purchased bonds with face amount of P5,000,000 for P4,760,000 including transaction cost of P160,000.
The business model is to collect contractual cash flows and to sell the financial asset. The bonds mature on December 31, 2023 and
pay 10% interest annually on December 31 with 12% effective yield. The bonds are quoted at 102 on December 31, 2021 and 105
on December 31, 2022. The bonds are sold at 110 on June 30, 2023 plus accrued interest.

1. What amount of unrealized gain should be reported as component of other comprehensive income for 2021?
a. 268,800 b. 100,000 c. 340,000 d. 0
2. What amount of unrealized gain should be reported as component of other comprehensive income for 2022?
a. 339,056 b. 221,200 c. 70,256 d. 0
3. What amount should be recognized as gain on sale of the bond investment on June 30, 2023?
a. 544,528 b. 794,528 c. 250,000 d. 589,056

PROBLEM 6
On January 1, 2021, Gon Company purchased 12% bonds with face amount of P5,000,000 for P5,500,000 including transaction cost
of P100,000. The bonds provide an effective yield of 10%. The bonds provide an effective yield of 10%. The bonds are dated January
1, 2021 and pay interest annually on December 31 of each year. The bonds are quoted at 115 on December 31. 2021. The entity has
irrevocably elected the fair value option.
1. What amount of gain from change in fair value should be reported for 2021?
a. 750,000 b. 250,000 c. 350,000 d. 0
2. What amount of interest income should be reported for 2021?
a. 600,000 b. 550,000 c. 660,000 d. 540,000
3. What is the carrying amount of bond investment on December 31, 2021?
a. 5,750,000 b. 5,400,000 c. 5,500,000 d. 5,450,000
4. What total amount of income from the investment should be reported in the income statement for 2021?
a. 540,000 b. 950,000 c. 890,000 d. 900,000

PROBLEM 7
Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2021. All the financial asset were acquired
in 2021:
Financial asset Acquisition Cost
Aye Corp. Stocks, 20,000 shares P590,000
Bee Inc. Stocks, 40,000 shares 1,100,000
See Co. 10%, P2M bonds 1,973,000
 Dee Corp. Stocks, 50,000 shares 2,400,000

Audit notes:
a. Aye Corp. shares were acquired with an intention of generating short-term profits from the share price’s
fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker’s fees and
commissions. The shares were acquired on February 20, 2021. A P2 per share cash dividends were received on
March 30. These dividends were declared by Aye Corp. on January 20, 2021 to stockholders as of record date
March 1, 2021.

b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition of Bee Inc. on
March 1, 2021. These shares were acquired for trading purposes. A P3 per share dividends were received from
the said shares on May 3, 2021. These dividends were declared on April 1 to stockholders as of record date April
20.

c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired on October 1, 2021
at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%. The bonds shall mature
on December 31, 2023. The company has a business model of holding debt securities for short-term profits.

d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and commissions on June
30, 2021. Dee Corp. had a total of 200,000 shares outstanding on the same date. The company received P5
dividends per share form Dee on December 20, 2021.

e. The following information were deemed relevant at year-end and no entries had been made yet by the company
to reflect any of the following information:
Aye Corp. Bee Inc. See Co. Dee Corp.
Net income in 2021 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh

Requirements:
1. What is the unrealized holding gain/loss to be reported in the 2021 statement of comprehensive income?
a. 51,948 c. 1,948
b. 121,948 d. 122,750
2. What is the correct carrying value of investments that should be presented as current asset?
a. 3,664,948 c. 3,665,750
b. 3,543,000 d. 3,765,250
3. What is the correct carrying value of investment in Dee Corp. shares that should be presented in the 2021 Statement
of Financial Position?
a. 2,430,000 c. 2,280,000
b. 2,150,000 d. 2,550,000
4. Assuming that the company’s business model regarding debt securities has an objective of collecting contractual cash
flows, what is the correct carrying value of investment in See Co. Bonds that should be presented in the 2021 Statement
of Financial Position?
a. 1,960,960 c. 1,965,750
b. 1,932,690 d. 1,930,690

PROBLEM 8

On January 1, 2021 Iffy Corp. acquired 30,000 shares of ABC Corp’s 100,000 shares outstanding for P5,000,000. The book
value of ABC’s identifiable net assets on this date was at P14M. All its assets carrying value approximated their fair values
except for a depreciable assets with a remaining life of 5 years, which was undervalued on this date by P1.6M.

ABC reported total comprehensive income in 2021 at P4,000,000 which was net of a foreign exchange loss reported in as
other comprehensive loss at P800,000. ABC also paid dividends at P1.5M at the end of the year, P500,000 of which is from
pre- acquisition Retained Earnings. The fair market value of shares on this date was at P210 per share.

Requirements:
1. What is the correct carrying value of Iffy’s investment in ABC shares as of Dec. 31, 2021?
a. 5,654,000 c. 5,990,000
b. 5,750,000 d. 5,894,000
2. Assuming that Iffy Corp. sold 18,000 shares of its ABC shares investment on December 31, 2021 at its prevailing
fair value, how much in total should be recognized in the profit or loss as a result of the transaction?
a. 387,600 c. 406,000
b. 646,000 d. 243,600
3. Based on the previous item, how much shall be the CV of any remaining investments as of December 31, 2021?
a. 2,357,600 c. 2,300,000
b. 2,520,000 d. 2,261,600
4. Assuming that ABC issued 25,000 shares to other stockholders on Dec. 31, 2021 at prevailing FV without Iffy Corp’s
participation, how much should be recognized in the profit or loss as a result of the transaction/event?
a. 81,200 c. 129,200
b. 196,200 d. None
1. In order to guard against the misappropriation of company-owned marketable securities, which of the
following is the best course of action that can be taken by a company with a large portfolio of securities?
a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping are
where securities are kept
b. Requirement that employees who enter and leave the safekeeping are sign and record in a log the
exact reason for their access
c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger
for securities on a current basis
d. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as
a custodial agent.
2. Squid Company had large amounts of funds to invest on a temporary basis. The board of directors decided to
purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible
financial executive. The best person or persons to make periodic reviews of the investment activity would be:
a. An investment committee of the board of directors
b. The chief operating officer
c. The corporate controller
d. The treasurer
3. The auditors who physically examine securities should insist that a client representative be present in order to:
a. Detect fraudulent securities
b. Lend authority to the auditors’ directives.
c. Acknowledge the receipt of securities returned
d. Examination of cash disbursements records
4. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation
b. Verification by reference to dividend record books
c. Confirmation with dividend paying companies
d. Examination of cash disbursement records.
5. When an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the
bank where the securities are held in a safe deposit box should be asked to
a. verify differences between the contents of the box and the balances in the client’s subsidiary ledger.
b. provide a list of securities added and removed from the box between the balance-sheet date and the
security count date.
c. confirm that there has been no access to the box between the balance sheet date and the security-count
date.
d. count the securities in the box so the auditor will have an independent direct verification.
6. what is the primary objective of auditing investments?
a. to verify the financial stability of the company
b. to ensure that investments are properly recorded, valued, and disclosed
c. to maximize the return on investments
d. to assess the efficiency of management decisions
7. which of the following is not a common classification of investments?
a. trading securities
b. available-for-sale securities
c. investment in cash equivalents
d. held-to-maturity securities
8. which audit procedure is most effective in verifying the existence of investments?
a. inspecting investment certificates and brokerage statements
b. reviewing the company's investment policy
c. comparing investment values with industry benchmarks
d. checking prior year financial statements
9. how should marketable securities be valued on the financial statements under fair value accounting?
a. at historical cost
b. at fair value based on market prices
c. at face value
d. at net realizable value
10. which of the following is a red flag for fraud in investment transactions?
a. investments are diversified across multiple asset classes
b. investment income is consistent with prior years
c. lack of supporting documents for an investment purchase
d. investments are held in a reputable financial institution
11. which financial statement assertion is most at risk if an investment is improperly classified as short-term instead of
long-term?
a. completeness
b. existence
 c. classification and presentation
d. accuracy
12. what document is most commonly used to confirm investment balances with external parties?
a. bank reconciliation statement
b. stock certificate
c. confirmation letter from the investment custodian
d. purchase order
13. how should an auditor verify the valuation of publicly traded stocks owned by a company?
a. by recalculating the dividend payments received
b. by obtaining market prices from a reliable stock exchange
c. by confirming with company management
d. by reviewing past financial statements
14. what is the best audit procedure to detect unrecorded investments?
a. inspecting stock certificates
b. reviewing cash disbursements and tracing them to investment purchases
c. analyzing investment income reported in prior years
d. verifying dividend payments from companies
15. if an investment is classified as "held-to-maturity," how should it generally be valued?
a. at fair value
b. at historical cost
c. at amortized cost
d. at net realizable value
16. what is the primary risk associated with investment derivatives?
a. high transaction costs
b. market volatility and fair value fluctuations
c. lack of liquidity
d. the requirement for long-term holding
17. which type of investment is most likely to require an impairment loss assessment?
a. cash equivalents
b. government bonds
c. available-for-sale securities
d. held-to-maturity securities
18. in the audit of investments, why is it important to review the entity’s investment policy?
a. to confirm that investments are earning a high return
b. to ensure compliance with internal policies and risk tolerance
c. to verify the investment portfolio's age
d. to ensure the company only invests in government bonds
19. when an auditor finds that an investment has significantly declined in value, what should they do next?
a. immediately recommend disposal of the investment
b. assess whether the decline is temporary or permanent
c. ignore the decline unless it is a total loss
d. recalculate the dividend income to compensate for the loss
20. what is a key control that management should implement over investments?
a. allow only senior management to make investment decisions without oversight
b. require dual authorization for investment transactions
c. ensure all investments are in high-risk securities for maximum returns
d. avoid recording unrealized losses on financial statements