FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

AUDITING PROBLEMS
First Semester AY 2017-2018
QUIZ 12 – AUDIT OF INVESTMENT (SUBSTANTIVE TEST THEORY)
Name Date
(Family Name) (First Name) (Middle Name) Section
Professo Day/Tim
r e
Stud. No. Score /56 items
Room Rating

ANSWER SHEET

No. ANSWER No. ANSWER

1. 11.
2. 12.
3. 13.
4. 14.
5. 15.
6. 16.
7. 17.
8. 18.
9. 19.
10. 20.

Instructions:
Choose the correct answer among the given choices. Your final answer must be written on the ANSWER
SHEET provided. Use CAPITAL LETTERS.

1. During the physical examination of securities, the auditor should insist for the presence of a duly authorized
representative of the client in order to
a. Lend authority to the auditor’s directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt of securities returned.

2. If the auditor discovers that the carrying amount of a client’s trading securities is overstated because of a
loss in value which is other than a temporary decline in market value, the auditor should insist that
a. The appropriate initial fair value of the investments be shown on the face of the statement of financial
position with disclosure of the current fair value.
b. The investment be classified as long-term for the statement of financial position with full disclosure in
the footnotes.
c. The loss in value be recognized in the statement of income of the client.
d. The equity section of the statement of financial position separately show a charge equal to the amount
of the loss.

3. The auditor can best verify a client’s bond sinking fund transactions and year-end by
a. Re-computation of interest expense, interest payable, and amortization of bond discount or premium.
b. Confirmation with individual holders of retired bonds.
c. Confirmation with the bond trustees.
d. Examination and count of the bonds retired during the year.

4. Which of the following is the most effective audit procedure for verification of dividends earned on
investments in trading securities?
a. Tracing deposit of dividend checks to the cash receipts book.
b. Reconciling amounts received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Re-computing selected extensions and footings of dividend schedules and comparing totals to the
general ledger.

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5. Which of the following is the customary audit procedure for the verification of the legal ownership of real
property?
a. Examination of correspondence with the corporate counsel concerning acquisition matters.
b. Examination of ownership documents registered and on file at a public hall of records.
c. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant
and equipment.
d. Examination of deeds and title guaranty policies on hand.

6. Which of the following explanations might satisfy the auditor who discovers significant debits to
accumulated depreciation account?
a. Extraordinary repairs have lengthened the life of an asset.
b. Prior years’ depreciation charges were erroneously understated.
c. A reserve for possible loss on retirement has been recorded.
d. An asset has been recorded at its fair value.

7. In connection with a review of the prepaid insurance account, which of the following procedures would
generally not be performed by the auditor?
a. Re-compute the portion of the premium that expired during the year.
b. Prepare excerpts of insurance policies for audit working papers.
c. Confirm premium rates with an independent insurance broker.
d. Examine support for premium payments.

8. The dividend and interest accounts will normally have already been audited in whole or in part through
which balance sheet accounts?
a. Payables and investments
b. Receivables and intangibles
c. Payable
d. Receivables and investments

Answer is (d)
Dividends and interest are profit and loss accounts that normally would have been audited through the
receivables and investment related balance sheet accounts.

9. Which of the following controls would most effectively ensure that the proper custody of assets in the
investing process is maintained?
a. Direct access to securities in the safe-deposit box is limited to one corporate officer.
b. Personnel who post investment transactions to the general ledger are not  permitted to update the
investment subsidiary ledger.
c. Purchase and sale of investments are executed on the specific authorization of the board of directors.
d. The recorded balances in the investment subsidiary ledger are periodically compared with the contents
of the safe-deposit box by independent personnel.

10. Key segregations of duties for investments include all of the following except
a. Whoever is responsible for investment activities should not also ensure that all dividend and interest
income was received.
b. Whoever initiates the purchase of investments should not also grant final approval.
c. Whoever oversees security valuation should not also acquire securities.
d. Whoever maintains custody of the securities should not also account for the securities.

11. To establish the existence and ownership of an investment in common stock of a public company, an
auditor ordinarily performs a security count or
a. Determines the market share at the balance sheet date using published quotations.
b. Corresponds with the investee regarding the number of shares owned.
c. Relies on the internal control structure if the auditor has tested the controls and has reasonable
assurance they are operating as prescribed.
d. Confirms the number of shares owned with an independent registrar.

12. An auditor testing long-term investments would ordinarily use substantive analytical procedures to
ascertain the reasonableness of the
a. Existence of unrealized gains or losses in the portfolio.
b. Completeness of recorded investment income.
c. Classification between current and non-current portfolios.
d. Valuation of marketable equity securities.

13. To establish the existence and rights of a long-term investment in the common stock of a publicly traded
company, an auditor ordinarily performs a security count or
a. Relies on the entity’s internal controls if the auditor has reasonable assurance that the control activities
are being applied as prescribed.
b. Confirms the number of shares owned that are held by an independent custodian.
c. Determines the market price per share at the balance sheet date from published quotations.
d. Confirms the number of shares owned with the issuing company.

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14. Which of the following is likely to be the most effective audit procedure for verifying dividends earned on
investments in publicly traded equity securities?
a. Trace deposits of dividend payments to the cash receipts book.
b. Reconcile recorded earnings with the dividend earnings reported in the investment broker statement.
c. Compare the amounts received with prior-year dividends received.
d. Re-compute selected extensions and footings of dividend schedules and compare totals to the general
ledger.

15. An auditor would most likely verify the interest earned on bond investments by
a. Vouching the receipt and deposit of interest payments.
b. Confirming the bond interest rate with the issuer of the bonds.
c. Re-computing the interest earned on the basis of face amount, interest rate, and period held.
d. Testing the controls over cash receipts.

16. The audit firm’s valuation expert would likely be brought in to assist in the audit of fair value measurements
at an entity when the following is present:
a. The entity is a new audit client.
b. Significant uncertainty exists in key inputs to the entity’s valuation models.
c. The entity has a financial instrument with a Level 2 input.
d. The entity owns a large and diverse portfolio of publicly traded stock.

17. The typical assertions related to investments and related accounts would not include the assertion that
a. Capitalized intangible costs relate to intangibles acquired in exchange transactions.
b. Amortization is properly calculated.
c. Research and development costs are properly classified.
d. Goodwill is valued at market value.

18. Investment should be vouched with the help of

a. Commission book
b. Brokers book
c. Sales deeds
d. Minutes book

19. Receipt from sale of investment should be vouched with the help of
a. Brokers Budget Notes
b. Brokers Sold Notes
c. Minute Book
d. Inventory of investment

20. Investments in hand should be verified with the help of

a. Schedule of investments
b. Statement of Financial Position
c. Inspection of securities
d. Certificate from the bank