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AACA2 - QUIZ 1 Audit of Investments - 2nd Semester AY2023 2024
AACA2 - QUIZ 1 Audit of Investments - 2nd Semester AY2023 2024
1. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections should probably be delegated to the:
a. Cashier.
b. Treasurer.
c. Internal auditor.
d. Chief accountant.
2. Which of the following is not a control that is designed to protect investments?
a. Investments should be properly controlled physically to prevent unauthorized usage.
b. Investments should be registered in the name of the owner.
c. Custody over investments should be limited to individuals who have recordkeeping responsibility
over the securities.
d. Access to investments should be vested in more than one individual.
3. Which of the following controls would a company most likely use to safeguard investments when an
independent trust agent is not employed?
a. Two company officials have joint control of investments, which are kept in a bank safe deposit
box.
b. The internal auditor and the controller independently trace all purchases and sales of
investments from the subsidiary ledgers to the general ledger.
c. The chairman of the board verifies the investments, which are kept in a bank safe deposit box,
each year on the balance sheet date.
d. The investment committee of the board of directors periodically reviews the investment decisions
delegated to the treasurer.
4. Which of the following is the most efficient audit procedure for testing accrued interest earned on bond
investments?
a. Tracing interest declarations to an independent record book.
b. Vouching the receipt and deposit of interest checks.
c. Confirming interest rate with the issuer of the bonds.
d. Recomputing interest earned.
5. During the audit of publicly held company, the auditor could obtain written confirmation regarding long-term
bond transactions from the:
a. Bond holders
b. Client’s attorney
c. Internal auditors
d. Trustee
6. The auditor’s program for examining long-term investments should include:
a. Verification of existence of the bondholders.
b. Examination of any bond trust agreements.
c. Inspection of the accounts receivable subsidiary ledger.
d. Investigation of credits to bond interest income account.
7. Which of the following controls would an entity most likely use to assist in satisfying the completeness
assertion related to long-term investments?
a. The controller compares the current market prices of recorded investments with the brokers’
advice on file.
b. Senior management verifies that investments in the bank safe deposit box are registered in the
entity’s name.
c. The internal auditor compares the investments in the bank safe deposit box with recorded
investments.
d. The treasurer vouches the acquisition of investments by comparing brokers’ advice with
canceled checks.
8. Which of the following controls would an entity most likely use in safeguarding against the loss of
investments?
a. A designated member of the board of directors controls the investments in a bank safe deposit
box.
b. An independent trust company that has no direct contact with the employees who have record-
keeping responsibilities has possession of investments.
c. The internal auditor verifies the investments in the entity’s safe each year on the balance sheet
date.
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d. The independent auditor traces all purchases and sales of investments through the subsidiary
ledgers to the general ledger.
9. When negotiable investments are of considerable volume, planning by the auditor is necessary to guard
against
a. Substitution of investments already counted for other investments 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 investments after they are counted.
10. In auditing investments for proper valuation, the auditor should do all but the following:
a. Vouch purchases and sales of securities by tracing to brokers' advice and canceled checks.
b. Compare cost and market by reference to year end market values for selected securities.
c. Confirm investments held in safekeeping off the client's premises.
d. Recalculate gain or loss on disposals.
11. An audit procedure that provides evidence about proper valuation of equity investments measured at fair
value through profit or loss arising from a short-term investment of excess cash is
a. Recalculation of investment carrying value by applying the equity method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of investments held by broker.
d. Calculation of premium or discount amortization.
12. The auditee has acquired another company by purchase. Which of the following would be the best audit
procedure to test the appropriateness of the allocation of cost to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for purchased assets.
b. Determine whether assets have been recorded at their book value at the date of purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.
13. The auditee has just acquired another company by purchasing all its assets. As a result of the purchase,
"goodwill" has been recorded on the auditee's books. Which of the following comparisons would be the most
appropriate audit test for the amount of recorded goodwill?
a. The purchase price and the fair market value of assets purchased.
b. The purchase price and the book value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 15% of net assets for the past five years.
14. In testing the reasonableness of interest income, an auditor could most effectively use analytical tests
involving
a. The beginning balance in the investments account for fixed income securities.
b. The average monthly balance in the investments account for fixed income securities.
c. The ending balance in the investment accounts for fixed income securities.
d. Documentary support of specific entries in the account.
15. Which of the following would provide the best form of evidential matter pertaining to the annual valuation of
long-term investment in which the independent auditor's client owns a 30% voting interest?
a. Market quotations of the investee company's stock.
b. Current fair value of the investee company's assets.
c. Historical cost of the investee company's assets.
d. Audited financial statements of the investee company.
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e. It was noted that the shares have fair value of P60 and P58 per share on December 31, 2023, and
December 31, 2024, respectively.
f. The following are the journal entries noted related to the investments in North Co. shares:
g. There were no other entries made by the company related to the investment in North Co. shares
account.
East Co. shares
a. 75,000 shares were acquired on June 30, 2023, and were designated as financial asset at fair value
through other comprehensive income. It was acquired at P30 per share which included a P3 per share
transaction cost.
b. On November 15, 2023, Queen Co, received P2 per share dividends from East Co. These dividends
were properly recorded as dividend income.
c. On May 15, 2024, and November 15, 2024, Queen Co. received P3 per share, and P2 per share
dividends, respectively from East Co. These were properly recorded as dividend income.
d. Due to the change in business model, Queen Co. decided to reclassify the investments to financial
asset at fair value through profit or loss on June 30, 2024. These were recorded in the books.
e. It was noted that the shares have fair value of P40 and P45 per share on December 31, 2023, and
December 31, 2024, respectively.
f. The following are the journal entries noted related to the investments in East Co. shares:
February 15, 2024 Equity investments at fair value through profit or loss 2,250,000
Equity investments at fair value through other comprehensive income 2,250,000
To record reclassification of investments
g. There were no other entries made by the company related to the investment in East Co. shares
account.
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b. On June 15, 2023, received an equipment as property dividend. The equipment had a cost of
P300,000, carrying value of P120,000, and fair value of P170,000. The receipt of equipment was
recorded as dividend income at P120,000.
c. On July 31, 2023, acquired additional 30,000 shares of 200,000 outstanding shares of Larius Company
at P110 per share. The fair value of the net assets of Larius Company is equal to their book value at the
time of purchase.
d. On December 15, 2023, received cash dividends of P10 per share. These were recorded as a credit to
dividend income.
e. On June 15, 2024, and December 15, 2024, Bellecourt Inc. received P5 per share, and P10 per share
dividends, respectively from Larius Company. These were recorded as dividend income.
f. On December 31, 2023, and December 31, 2024, the fair value per share was at P115 and P120 per
share, respectively.
g. The following are the journal entries noted related to the investments in East Co. shares:
July 31, 2023 Equity investments at fair value through other comprehensive income 3,300,000
Cash 3,300,000
To record additional acquisition of investments
December 31, 2023 Equity investments at fair value through other comprehensive income 450,000
Unrealized gain or loss-OCI 450,000
To record change in fair value
December 31, 2024 Equity investments at fair value through other comprehensive income 250,000
Unrealized gain or loss-OCI 250,000
To record change in fair value
There were no other entries related to investments were made by the company.
h. Further investigation revealed that Larius Company has reported profit of P5,000,000, and P6,500,000,
for the year ended December 31, 2023, and 2024, respectively.
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cash at face value of the bonds. The annual interest collected was recognized as interest income. No other
entries were made that affect the balance of investments.
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