Choice "C" is correct. Under equity method accounting, the amortization of the excess of the investor's cost over the investment's underlying book value reduces the investor's income from the equity method investment. If amortization is calculated incorrectly (i.e., the amortization is too high), this could lower the return on the investment.
Choice "a" is incorrect. Under equity method accounting, dividends are recorded as a reduction of the investor's investment in the balance sheet, not as income on the income statement. Therefore, the lower dividend should not reduce the calculated return on the equity method investment.
Choice "d" is incorrect. Equity method investments are accounted for separate from investments classified as trading or available-for-sale. Therefore, an error in the accounting for trading and available-for-sale securities should have no impact on the calculated return on an equity method investment.
Choice "b" is incorrect. Equity method investments are not reported at fair value. Therefore, a substantial fluctuation in the price of the investee's common stock would have no impact on the investor's return on the equity method investment. NOTE to students: The answer to this question (and your ability to perform a successful audit) depends on your knowledge of financial accounting concepts. If you are unfamiliar with equity method accounting, please consult the Financial 3 lecture in the Becker Financial materials.