AP 200-6 AUDIT OF INVESTMENTS

ALDIN L. PANTALEON

INTRODUCTION

Investments accounting can vary depending on whether cost, fair value, equity method or consolidation methods are
used. Accounting of which is dependent on the entity’s business model and management intentions, which are
assessed through inquiry and knowledge of the client’s business and industry.

Auditor/s to be assigned in this particular account is deemed knowledgeable regarding the business of the client and
have the ability to determine the economic substance of an acquisition and whether it make sense from industry
perspective and the business strategic plan. The audit of investment should consider the related income statement
accounts such as investment income, holding gains (losses), impairment loss, derecognition loss and other items.

AUDIT OBJECTIVES

ASSERTION AUDIT OBJECTIVE

EXISTENCE All recoded investments on the statement of financial position exist.
OCCCURENCE All recorded income/loss from investments has occurred to the entity at the
reporting date
COMPLETENES All investments owned by the entity at the reporting date are included on the
statement of financial position. All income/loss accruing from the investments
at the reporting date has been recorded
VALLAUTION AND ALLOCATION Investments are included on the statement of financial position at the
appropriate amounts
ACCURACY Investments income/loss is included on the statement of comprehensive
income at appropriate amount.
CLASSIFICATION Income statement related items are appropriately recorded in the proper
accounts in the statement of comprehensive income.
RIGHTS AND OBLIGATIONS The entity owns, or has a legal right to the investments are reported on the
statement of financial position at the reporting date
PRESENTATION & DISCLOSURE Investments and related investment income or loss accounts are properly
classified, described and disclosed in the financial statements including notes in
accordance with the applicable PFRS.

All investment pledged or other security interests are adequately and properly
disclosed.

PRIMARY SUBSTANTIVE TEST/AUDIT PROCEDURES FOR INVESTMENTS

A. Verifying the existence and ownership of securities.
B. Performing valuation procedure in accordance with the accounting policies
C. Investigating current potential impairments
D. Reviewing the Board of Director’s minutes of meetings, shareholders; and
E. Reviewing the appropriateness of the presentation and adequacy of disclosure.
VERIFICATION
 Primarily addresses the following assertion: Existence & rights
 To verify the existence/ownership, procedures will depend whether the securities or evidence of ownership
are:
1. Held by the client
2. Held by third party
VERIFICATION OF EXISTENCE AND OWNERSHIP
Stock certificates (evidence of ownership) are held by the client
  Count the securities or instruments on hand and examine evidence of ownership.
 Do the accounting at the reporting date; and simultaneous with the surprise with the surprise cash count to
prevent substitution.
Procedures of inspecting the securities the auditor shall verify
1. The name(s) of the indicated owner(s) of the securities
2. The names of the issuer of the securities
3. Whether the security is debt or equity
4. The certificate numbers on the documents
5. Any evidence of pledging or restrictions on disposal shown on the certificate.
6. The number of shares of stock or the face value of debt securities.
Stock certificates (evidence of ownership) are held by third party (brokerage firm or bank for safekeeping)
 Sending confirmation letter to the brokerage firm/custodian
 Same procedure in confirming cash in bank and receivables

EVALUATION OF ACCOUNTING METHODS USED AND TEST OF VALUATION

 Primarily addresses the following assertion: Occurrence, accuracy, valuation and allocation.
 Always remember that the method of valuation depends on the investment classification. It can be
1. Investment in associate and joint venture (PAS 28/PFRS 11)
2. Investment in subsidiary (PAS 27)
3. Financial Asset at Amortized Cost (PFRS 9)
4. Financial asset at fair value (PFRS 9)
Investment in Associate and Joint Venture
Should be accounted under equity method
 Initially at cost
 Subsequently, cost plus (minus0 any share of investees income/(loos) plus (less) any change in investees OCI
and less any dividends received.
What to do?
1. Share in in net income(loss) can be verified by examining the FS of the investee and independent calculation
2. For dividends received, the auditor can examine published dividend record of the investee.
Investment in Subsidiary
 Should be measured at
 Cost initially
 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
working papers)
2. Examine ay addition or disposal by looking at the supporting documentation.
Financial Asst at Amortized Cost (FA-AC)
 Should be measured at
 Fair value initially
 Subsequently, any amortized cost using the effective interest method
What to do?
To verify the carrying amount obtain evidence regarding the original issuance price an amortization table using
appropriate rate compare with the amount reported by the client.
Financial Asset Measured at Fair Value
 Should be measured at
Fair value initially
Subsequently, fair value
What to do?
1. Examine the quoted market price if the quoted market price if there is an active market.
2. Determine the quoted price then multiply by its number of shares.
TEST OF IMPAIRMENT OF INVESTMENTS
 Primarily addresses the following assertions: Valuation and Allocation
 Accounting for impairment depends on the type of investment. Ex.
1. Investment in Affiliates (Associate, joint venture, subsidiary)-PAS 36. Impairment of assets.
2. Impairment of financial asset (at amortized cost PFRS 9)
How to do it?
1. Inquire with the management their approach in identifying any 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 assumption used
b. Assess the reasonable ness of management’s estimates; and
c. Evaluate the accuracy, completeness, and the relevance of the important data on which the estimates or
measurements are based.
INDICATORS OF IMPAIRMENT PAS 36
EXTERNAL SORCES INTERNAL SOURCES
Market value declines Obsolescence or physical damage
Negative changes in technology Asset is idle, part of a restructuring or held for disposal
Increase in market interest rates Worse economic performance than expected
Net asset of the company higher than market For investment in subsidiaries, joint ventures or
capitalization associates, the carrying amount is higher than the
carrying amount of the investee’s assets, or a dividend
exceeds the total comprehensive income of the
investee

REVIEW OF MINUTES OF MEETING

 Primarily addresses the following assertions: Completeness, presentation and disclosure
How to do it?
1. Obtain and review minutes (shareholders, Board, Executive Committee, etc.) and agreements
2. Review confirmation replies for evidence of existence, liens pledges or other security interests’ investments;
and
3. Review commitments to acquire or disposal of investments

REVIEW OF FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE OF INVESTMENTS INCLUDING RELATED

ACCOUNT
 Primarily addresses the following assertions: classification, presentation and disclosure
How to do it?
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 non-current portion
 3. Determine the related income statement accounts should be reported appropriately in P/L as a component
of OCI (other comprehensive income)
REPORTED IN: ITEMS
Profit or Loss (P/L) Dividend income
Interest income
Share in net income/loss of an associate or joint venture
Unrealized holding gain or loss on FA @FVPL
Disposal gain or loss on all types of investments
Impairment loss
Other comprehensive Unrealized gain or loss on available for sale (ASF) or FA @FVOCI investments
income (OCI) Share in change of OCI component of associate or joint venture

Classification of asset is determined by the purpose of holding the asset

PURPOSE CLASSIFICATION
Held for rentals purposes or for capital appreciation or Investment property
both
Owner-occupied purpose Property, plant and equipment
Held for sale in the owner course of business Inventory
Held for sale in accordance with PFRS 5 Non-current asset held for sale

Property held for undetermined use

A property of an entity held for undetermined use whether owner-occupied property or for short-term sale in the
ordinary course of business, such property is regarded held for capital appreciation. Therefor, such property is
considered as investment property.

Property occupied by employees paying rent at market rates

A property occupied by an entity-employees whether or not employees are paying rent at market rates is considered
as PPE.

Property held for mixed purpose

A property with a portion that could be sold or leased separately, the entity should account that portion separately.
Therefore, the portion that is held for rental or for capital appreciation is investment in property and the portion as
owner occupied should be regarded as PPE.

Problem 1
Patindogan Incorporated reported the following properties in its consolidated statements of financial position

A commercial land acquired during the year but until the reporting date the board has yet to
decide of their disposition of the said property. P65,000.000
Land and building use in the production of supply of goods, 5,000,000
Building Leased out under finance leased 12,000,000
Building leased out under operating lease 7,000,000
Property in the process of construction and development for sale 20,000,000
Land acquired during the year for future plant site 9,000,000
A building in in Cebu being leased out under operating lease of which 30% of the space is
Occupied for the administration of the company’s operation in the place 15,000,000
Land and building owned by the entity being leased out to Don-Don Company a subsidiary
Of Patindogan Inc. 8,000,000
An investment property under the name of a subsidiary of which the subsidiary is providing
Janitorial services for the entity 3,000,000

Determine the amount of investment property in the consolidated financial position of Patindogan, Inc.