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AUDITING PROBS
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750 views7 pagesAudit of Receivables
AUDITING PROBS
Uploaded by
kellyshaye08Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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/ 7
a ee TT
AUDITING PROBLEMS
AP.2105-Audit of Receivables
SCANPO/CABARLES
OCTOBER 2016
INTERNAL CONTROL MEASURES:
1, Proper internal control over receivables should observe
the following:
a. Sales must be separated from the accounting for
them.
b. Accounting for sales must be separated from the
receipt of cash arising from the receivables.
¢. Returns, allowances, discounts, and uncollectible
charge-offs must be properly approved and
‘separated from the cash receipts function.
4d. Periodically, receivables should be aged in order to
determine the actions and efficiency of the credit
department.
2. Notes receivable custodian should not have access to
‘ash or to the accounting record.
3. Aresponsible official who does not have access to the
notes should approve note renewals as well as charge-
offs of defaulted notes in writing.
4, Proper procedures should be adopted for the follow-up
of defaulted notes.
SUBSTANTIVE AUDIT OF RECEIVABLES
Sales and Accounts Receivable Balances
Existence or occurrence: Sales and accounts receivable
are for shipments made to customers
1. Confirm accounts receivable and perform procedures
for confirmations not returned
2. Perform analytical procedures to test sales and
accounts receivable.
Completeness: Sales transactions that occurred and
‘existing receivables are recorded
3. Perform a test of sales cutoff.
Rights and obiigations: Accounts recelvable are owned by
the client
4, Review minutes of the board of directors’ meetings,
inquire of the client personnel, read contracts and
agreements, and confirm with lenders any indications
that accounts have been assigned, sold, or pledged.
Valuation and allocation: Accounts receivable are properly
valued
5. Verify mathematical accuracy of the accounts
receivable aging schedule and trace it to the accounts
receivable subsidiary ledger.
6. Test the adequacy of the allowance for uncollectible
accounts.
Presentation and disclosure: Sales and accounts
receivable are properly presented and disclosed in
‘accordance with GAAP,
7. Review financial statements and perform analytical
procedures to determine whether accounts are
classified and disclosed in accordance with GAAP.
Sales Transactions
Completeness: Sales transactions that occurred are
recorded
For a sample of shipping documents, trace sales Invoice
and entry into sales journal and accounts receivable
Subsidiary ledger. Perform cutoff tests.
Occurrence: Recorded sales are for shipments actually
made to customers
For a sample of entries in the sales journal, compare sales
Invoice copy, customer order, and sales invoice.
Classification: Sales and accounts receivable transactions
have been recorded in the proper accounts
For a sample of entries in the sales journal, verify the
accuracy of account coding,
Accuracy (Valuation)
recorded
Sales are correctly billed and
For a sample of entries in the sales journal, (a) examine
sales invoice, shipping document, and customer for
consistency of descriptions and quantities; (b) examine
sales orders for credit approval; and (c) check prices and
‘extensions. Foot sales journal and general ledger account.
end -
Page 1 of 7
AP.2105 PROBLEM NO. 1
‘The December 31, 2015 statement of financial position of
Help Company included the following information:
Notes recelvable P 598,000
Less: NR discounted (380,000) P 218,000
Accounts receivable 2,240,000
Less: Allow. for D.A.
141,000) 2,099,000
Total receivables 2,317,000
‘The following transactions occurred during 2016:
1. Sales on account 8,812,000
2. Collections on accounts 8,410,000
3, Accounts receivable written off as
uncollectible 138,000
4, Notes receivable collected 290,000
5. Customer notes received in payment
of aécounts receivable 740,000
6. Notes receivable discounted paid at
‘maturity 360,000
7. Notes receivable discounted
defaulted, including interest of
P200 and a P100 fee. This
‘amount is expected to be collected
in 2017 20,300
8. Proceeds from customer notes
discounted (Face value 450,000,
accrued interest income, P2,000) 448,500
9. Collections on accounts previously
written off 5,000
10. Sales returns and allowances 20,000
11. Required allowance for doubtful
‘accounts based on impairment
assessment at year end
QUESTIONS:
Based on the above and the result of your audit, answer
the following:
1, The loss from discounting of notes receivable is,
a. P3,500 cc. P4,500
b. 2,000 bo
2. The adjusted balance of Accounts Receivable as of
December 31, 2016 is
a. 2,479,000 ¢. P1,729,000
b. P1,739,000 4. P1,744,000
3. The adjusted balance of Notes Receivable as of
December 31, 2016 is
‘a. P238,000 c. P668,000
b. P688,300 4. P688,000
4, The amount to be reported as trade and other
receivables in the entity's statement of financial
position as of December 31, 2016 is
a, P1,970,300 c. P1,965,300
b. 1,950,000 dd. P1,945,000
PROBLEM NO. 2
In connection with the audit of the financial statements of
Praktis Corporation, your audit senior instructed you to
examine the company’s accounts receivable.
From the schedule of accounts receivable as of December
31, 2016, you determined that this account includes the
followin
Accounts with debit balances P 441,100
Advances to officers ~ rer ‘rade 16,400
‘Accounts with credit balance (45.000),
‘Accounts receivable per GL B.ag2.500
‘The credit balance in customer's account represents
collection from a customer whose account had been
written-off as uncollectible in 2015.
Accounts receivable for more than a year totaling P21,000
should be written off.
Confirmation replies received directly from customers
disclosed the following exceptions:
Customer's
Customer Comments Audit Findings
Jessie The goods sold on The client failed to
December 1 were record credit memo
returned ‘on no. 23 for P12,000.
December 16,2016. The merchandise
was included in the
ending inventory at
cost.
Robert We do not owe this Investigation
amount *%#@ (bad revealed that goods
. word). We did not sold for P16,000
receive any were shipped to
merchandise from Robert on December
your company. 28, 2016, terms FOB
shipping point. The
We Re daatnogc goods —were “Tost in
wee bee transit and the
shipping company
has acknowledged its
responsibility for the
lost ofthe
merchandise,
Anne 1 am entitled to a Anne is an employee
10% employee of Praktis. Starting
discount. Your bill November 2016, all
should be reduced company employees
by P1,200, were entitled to a
special discount.
Jay-ar We have not yet sold Merchandise billed
the goods. We will
remit the proceeds
for P18,000 were
consigned to Jay-ar
as soon asthe goods on December 30,
are sold, 2016. The goods
cost P13,000.
We do not owe you The sale of
20,000. We merchandise on
‘i already paid our December 18, 2016
% accounts ‘as was paid by Roy on
evidenced by OR # January 6, 2017.
1234.
Pedro Reduce your bill by This amount
4,500 represents freight
paid by the customer
for the merchandise
shipped on
December 17, 2016,
terms, FOB
destination-collect.
REQUIRED:
a. Adjusting entries as of December 31, 2016.
b. Adjusted balance of Accounts Receivable as of
December 31, 2016. PROBLEM NO. 3
In connection with your examination of the financial
statements of Ringo, Inc. for the year ended December
31, 2016, you were able to obtain certain information
during your audit of the accounts receivable and related
accounts.
© The December 31, 2016 balance in the Accounts
Receivable control accounts is P837,900.
+ An aging schedule of the accounts receivable as of
December 31, 2016 is presented below:
Percentage to be applied
Net debit after corrections have
Age —balance been made
60 days &
under —_P387,800 1 percent
61t0 90,
days 307,100 2 percent
91 to 120
days: 89,800 5 percent
Over 120 Definitely uncollectible,
days 53,200 P9,000; the remainder is
‘estimated to be 25%
837,900 uncollectible,
heise dcepasey Sa pretet
+ The Allowance for
presented below:
Doubtful Accounts schedule is
Debit Credit Balance
January 1, 2016 19,700
November 30,2016 P6,100 13,600
December 31, 2016
(P837,900 x 5%) P41,895 P55,495
+ Entries made in the Doubtful Accounts Expense
account were:
1. A debit on December 31 for the amount of the
credit to the Allowance for Doubtful Accounts.
2. A credit for P6,100 on November 30, 2016, and a
debit to Allowance for Doubtful Accounts because
of @ bankruptcy. The related sales took place on
October 1, 2016. -
+ There is a credit balance in one account receivable (61
to 90 days) of P11,000; it represents an advance on a
sales contract.
(Quesrions:
Based on the above and the result of your audit, answer
the following:
1. How much is the adjusted balance of Accounts
Receivable as of December 31, 20167
3. P837,900 2 P833,800
b. PB39,900 J. P822,800
2. How much Is the adjusted balance of the Allowance for
Doubtful Accounts as of December 31, 20167
A PISATS .” 725,255
. P28,780 4. Pa1,395
3. How much fs the Doubtful Accounts expense for the
year 2016?
2. P21,180 c. P41,985
B. P20,658 4. 20,875
4, How much is the net adjustment to the Doubtful
Accounts expense account?
a. P14,920 credit c. P20,875 credit,
b. P14,615 credit d. P15,140 debit
ee ee aaa.
SOLUTION GUIDE #2:
Satesor | Balance | Rate | Allowance
60 days and under 1%
61 - 90 days De
91 - 120 days 3%
Over 120 days 25%
Totat_ 2
PROBLEM NO. 4
‘The following information Is based on the first audit of
Paul Company.
The client has not prepared financial statements for 2014,
2015, or 2016. During these years, no accounts have
been written off as uncollectible, and the rate of gross
profit on sales has remained constant for each of the three
years.
Prior to January 1, 2014, the client used the accrual
‘method of accounting. From January 1, 2014 to December
31, 2036, only cash receipts and disbursements records
were maintained. When sales on account were made, they
Were entered in the subsidiary accounts receivable ledger.
No general ledger postings have been made since
December 31, 2014,
‘As a result of your examination, the correct data shown
below are available:
123143 12/31/16
Accounts receivable balances:
Less than one year old, 61,600 112,800
‘One to two years old 4,800 7,200
Two to three years old - 3,200
Over three years old = 8.800
56.400 £132,000
Inventories 146,400 124,160
Accounts payable for inventory
purchased 20,000 44,000
Cash received on
AR in: 2014 2018 2016
Applied to:
Current year
sales 595,200 *P647,200 ' PB35,200
Accounts of the
prior year 53,600 60,000 “s 67,200
‘Accounts of two
yearprior 4 _2400 1,600 ‘+ _g,009
Total P651.200 708,800 210.400
Cash sales 68,000 104,000 124,800
Cash disbursements
for inventory
purchased 750,000 728,400 581,600
REQUIRED:
Based on the above and the result of your audit, compute
for the gross profit for the years ended December 31,
2014, 2015 and 2016. ea Rn nether aan nnn Toon Eee nnee ers
ba " ’ BAA,
EXCEL PROFESSIONAL SERVICES, INC.
SOLUTION GUIDE: 3. Interest income for the year 2016 ~ *
a 854,000 cP 911,384
en | B. P1oa1,384 4. P1,008,000
Seles=Credt_[ 4. Accrued interest receivable as of December 31, 2016
[Total = = a. P 360,000 . P514,000,
ese i b. P57ii3e4 674,000
(Gross prof i i
is —J sowuriow cuioe #182:
Computation of Credit Sales ; —
- a Non
| Batonee, 13750776 we ~
mee sie _ surcent
f TR-sale of plant:
[ada calla fe | aera
—— 2014 ~ Legs principal inst. due, 4/1/37
2016. a “| -oncer
Toe = Ee _
PROBLEM NO. 5
‘The balance sheet of Yoko Corporation reported the
following long-term receivables as of December 31, 2015:
6,000,000
4,600,000
Note receivable from sale of plant
Note receivable from officer
In connection with your audit, you were able to gather the
following transactions during 2016 and other information
pertaining to the company's long-term receivables:
‘a. The note receivable from sale of plant bears interest at
12% per annum. The note 's payable in 3 annual
installments of P2,000,000 plus interest on the unpald
balance every April 1. The initial principal and interest
payment was made on April 1, 2016.
b. The note receivable from officer Is dated December 31,
2015, ears interest at 10% per annum, and is due on
December 31, 2018. The 2016 interest was received
on December 31, 2016.
c. The corporation sold a piece of equipment to Yes, Inc.
on April 1, 2016, in exchange for an P800,000 non-
interest bearing note due on April 1, 2018, The note
had no ready market, and there was no established
exchange price for the equipment. The prevailing
interest rate for a note of this type at April 1, 2016,
was 12%. The present value factor of 1 for two
periods at 12% is 0.797,
d. A tract of land was sold by the corporation to No Co.
‘on July 1, 2046, for P4,000,000 under an installment
ssale contract. No Co. signed 2 4-year 11% note for
2,800,000 on July 1, 2046, in addition to the down
payment of P1,200,000. The equal annual payments
of principal and interest on the note will be P902,500
payable on July 1, 2017, 2018, 2019, and 2020. ‘The
land had an established cash price of P4,000,000, and
its cost to the corporation was 3,000,000. ' The
collection of the installments on this note is reasonably
assured.
QUESTIONS:
Based on the above and the result of your audit, determine
the following:
1. Noncurrent receivables as of December 31, 2016
a. P9,037,600 c. P6,500,484
b. P7,037,600 d, P6,443,100
2. Current portion “of long-term receivables as of
December 31, 2016
a. P2,000,000 c. P2,594,500
». p2902.500 dP 0
NR-sale of equipment:
CA, 4/1/16
Discount amort.
‘NR-sale of land:
A, 12/31/16
Less principal inst. due, 7/1/17
Total |
Interest
Total
PROBLEM NO. 6
(On January 1, 2016, Pedro Company sold land that
originally cost P400,000 to Buyer Company. As payment,
Buyer gave Pedro Company @ P600,000 note. The note
bears an interest rate of 4% and is to be repaid in three
annual installments of P200,000 (plus interest on the
‘outstanding balance). The first payment Is due on
December 31, 2016. The market price of the land is not
reliably determinable, The prevailing rate of interest for
notes of this type Is 14% on January 1, 2016 and 15% on
December 31, 2016. v
fete
Pedro made the following journal entries in relation to the
sale of land and the related note receivable:
January 1, 2016
Notes receivable 600,000
Land 400,000
Gain on sale of land 200,000
December 31, 2016
cash 224,000
Notes receivable 200,000
Interest income 24,000
Pedro reported the notes receivable in its statement of
financial position at December 31, 2016 as part of trade
and other receivables.
QUESTIONS:
Based on the above and the result of your audit, answer
the following:
1, The correct gain on sale of land is
a. P103,105 & P120,061
b. P 94,868 4. P200,000
2, The correct interest income for 2016 is
a. P74,230 c. P70,435
b. 72,809 d. 24,000 3. Profit for 2016 is overstated by
a. P50,460 cc. P54,902
b. P31,130 dP 0
4, The correct carrying amount of the notes receivable at
December 31, 2016 is
2. P400,000 c. P368,870
b. P345,098 d. 349,540
5. The entity's working capital at December 31, 2016 is
overstated by
a. P235,765, cc. P182,476
b. 232,936 a)
SOLUTION GUIDE #:
pate | P| 164%) | Totat | pvE@ Py,
14% | a6
s2/aii6 | 2oot [_24t | 22ar | 0.8772 [196,493
azsut7 | 200 | _ ter | 2iet | 0.7695 | 166,212
azyaij1s | 200r | _st | 20st | 0.6750 | 140,400
‘600T 303,205
PROBLEM NO. 7
Select the best answer for each of the following:
1. In the audit of which of the following general ledger
accounts will tests of controls be particularly
appropriate?
3. Equipment c. Bonds payable
b. Bank charges d. Sales
2. ‘The purpose of tests of controls over shipping is to
determine whether
a. Billed goods have been shipped.
b. Shipments are billed,
. Shipping department personnel are competent.
4d. Credit is approved before goods are shipped.
3. The purpose of tests of controls over billing Is to
determine whether
a. Billed goods have been shipped.
b. Shipments are billed.
c._ Billing department personnel are competent.
4.” Credit is approved before goods are billed.
4, An auditor most likely would review an entity's perlodic
‘accounting for the numerical sequence of shipping
documents and invoices to support management's
financial statement assertion of
‘a. Existence or occurrence Valuation
b. Rights and obligations: 4. Completeness
5. Which of the following might be detected by an
auditor's review of the client’s sales cut-off?
a. Excessive goods returned for credit
b.. Unrecorded sales discounts
‘c. Lapping of year-end accounts receivable
dd. Inflated sales for the year
6. An auditor who has confirmed accounts receivable may
discover that the sales journal was held open past
year-end if
a. Positive confirmations sent to debtors are not
returned
b. Negative confirmations sent to debtors are not
returned
c Most of the returned negative confirmations
indicate that the debtor owes a larger balance that
the amount being confirmed.
7
10.
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d. Most of the returned positive confirmations indicate
that the debtor owes a smaller balance than the
amount being confirmed.
The auditor finds situation in which one person has the
ability to collect receivables, make deposits, issue
‘credit memos and record receipt of payments, The
‘auditor suspects the individual may be stealing from
cash receipts. Which of the following audit procedures
would be most effective in discovering fraud in this
scenario?
a. Send positive confirmations to @ random selection
of customers.
b. Send negative confirmations to all outstanding
accounts receivable customers.
c. Perform a detailed review of debits to customer
discounts, sales returns, or other debit accounts,
excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the
detail in each bank deposit back to the entry in the
cash receipts journal.
All of the following are examples of substantive tests
to verify valuation of net accounts receivable except
the
a. Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-
current status in the statement of financial
position, — sssusipica ten
c._Inspection of the aging schedule and credit records
of past due accounts.
d. Comparison of the allowance for bad debts with
past records.
Confirmation, which is a specific type of inquiry, is the
process of obtaining a representation of information or
of an existing condition directly from a third party.
Two assertions for which confirmation of accounts
receivable balances provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
Valuation and rights and obligations
d. Existence and completeness
The negative request form of accounts receivable
confirmation may be used when the
Combined
Assessed Level
Of Inherent’ Number of Consideration
and Control Small by the
RiskIs Balancesis Recipient is
Low Many Likely
Low Few Unlikely
High Few Likely
High Many kely
Which of the following procedures would an auditor
most likely perform for year-end accounts receivable
confirmations when the auditor did not receive replies
to second requests?
a. Review the cash receipts journal for the month
prior to year-end.
b. Intensify the study of internal control concerning
the revenue cycle.
c. Increase the assessed level of detection risk for the
‘existence assertion
4. Inspect the shipping records documenting the
merchandise sold to the debtors.
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DO-IT-YOURSELF (DIY) DRILL
PROBLEM NO. 1
Professional Company produces paints and related
products for sale to the construction industry throughout
Metro Manila. While sales have remained reiatively stable
Gespite a decline in the amount of new construction, there
has been a noticeable change in the timeliness with which
the company’s customers are paying their bills.
‘The company sells its products on payment terms of 2/10,
1n/30._In the past, over 75 percent of the credit customers
have taken advantage of the discount by paying within 10
days of the invoice date. During the year ended December
31, 2016, the number of customers taking the full 30 days
to pay has increased. Current indications are that less
than 60% of the customers are now taking the discount.
Uncollectible accounts as a percentage of total credit sales
have risen from the 1.5% provided in the past years to 4%
in the current year.
In response to your request for more information on the