MODULE 4
Audit of Receivables and Revenues
TOPICS (Based on Syllabus):
1. Audit Objectives
2. Consideration of internal controls
3. Risk of material misstatements arising from fraud on Receivables and Revenue (Significant Risk)
4. Test of Controls and Substantive Audit Procedures on receivables and revenue
a) Accounts and classes of transactions in the sales and collection cycle including business functions and
related documents and records
b) Test of controls and substantive tests of transaction for sales
c) Sales returns and allowances
d) Test of controls and substantive tests of transaction for cash receipts
e) Audit tests for uncollectible accounts
f) Test of details of balances for accounts receivable
5. Audit Working Papers and Other Documentation
REFERENCES:
• Basic Auditing Practice Volume 2 by Petronilo Santos
• Textbook in Auditing Practice by Solita A. Frias
• Practical Auditing 2021 Edition by Patricia M. Empleo
• Practical Auditing 2001 Edition by Zenaida S. Bijasa-Sangcal
• Applied Auditing by Baldres, De Leon, Magadia and Sarmiento
• Comprehensive Manual of Auditing by Ma. Elenita Balatbat Cabrera
DISCUSSION
AUDIT OBJECTIVES:
•
SOURCE: Textbook in Auditing Practice by Solita A. Frias
A. Compliance audit objective
To ascertain the following:
1. existence of internal control
2. client's compliance with internal controls
3. effectiveness of internal control
B. Substantive audit objective
To ascertain the following:
1. that the receivables represent valid claim of the client against third parties.
2. that the receivables are collectible.
3. that there is an adequate allowance for doubtful accounts.
4. that there is a proper cut-off in the recording of receivable transactions.
5. that the receivables are recorded in accordance with generally accepted accounting principles.
6. that the generally accepted accounting principles applied to receivables are consistently applied.
7. that interest earned on notes receivable has been received, that cash receipt is properly recorded, or if not
yet received that it is properly accrued, or if the interest is received in advance that the entry for the deferral
of income is correct.
•
SOURCE: Basic Auditing Practice Volume 2 by Petronilo Santos
Accounting Control Objectives
A. Sales
1. Customers' orders are committed only, if:
a) The terms are acceptable to the company
b) Goods ordered are available in stock, and
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2.
3.
c) Credit was appraised and authorized.
Shipments are:
a) Made only for authorized sales
b) Independently reconciled with Sales Invoice.
c) Acknowledged by the customer by signing the delivery receipts
d) Billed or covered by a Sales Invoice
Sales invoice are:
a) Promptly prepared and recorded
b) Reconciled with Customers' Orders
c) Independently rechecked as to merchandise specifications, quantity, pricing and accuracy of arithmetical
computations.
d) Used and blank forms for Sales Invoices and Delivery Receipts are controlled and accounted for.
B. Account Receivable
1. Accounts receivable are properly authorized and fully documented.
2. Adjustments to accounts receivable are:
a) Authorized
b) Documented
c) Promptly recorded
3. A Subsidiary Ledger is maintained and periodically reconciled with the controlling general ledger account.
4. Monthly statements are mailed to customers.
5. Customers' accounts are regularly evaluated as to collectability.
6. Potential bad accounts are identified and correlated with balance of the allowance for doubtful accounts.
C. Sales Returns and Allowances
1. Merchandise being returned are properly inspected before acceptance.
2. Merchandise returned are acknowledged by a Receiving Report and placed back in inventory.
3. Credit Memoranda for sales returns are approved and issued to customers only when evidenced by a
Receiving Report.
4. Used and blank Credit Memoranda are controlled and accounted for.
Audit Objectives
A. Sales
To determine that:
1. All significant sales are recorded.
2. Recorded sales are all earned.
3. Shipments to customers are billed or invoiced.
4. Proper cut-off is observed in recording transactions.
5. Only operating revenues are classified as sales.
6. Financial statement presentation is appropriate and disclosures are adequate.
B. Accounts Receivable
To determine that:
1. Accounts receivables are:
a) actually existing
b) valid claims against trade customers
c) collectible
2. Allowance for doubtful accounts is adequate
3. Proper cut-off is observed in recording transactions.
4. Only trade receivables are classified as accounts receivable.
5. Financial statement presentation is appropriate and disclosures are adequate.
C. Sales Returns and Allowances
To determine that:
1. Sales returns and allowances are:
a) Properly authorized
b) Evidenced by actual return of merchandise.
2. Proper cut-off is observed in recording transactions.
3. Financial statement presentation is appropriate and disclosures are adequate
2
•
SOURCE: Practical Auditing 2019 Edition by Patricia M. Empleo
The auditor's principal objectives in the audit of accounts receivable and sales are to:
1.
2.
3.
4.
5.
•
SOURCE: Practical Auditing 2001 Edition by Zenaida S. Bijasa-Sangcal
1.
2.
3.
4.
5.
•
consider internal control over receivable and revenue transactions.
determine the existence of receivables, that the client has the rights to these assets, and the occurrence of
revenue transactions.
establish the completeness of recorded receivables and revenue transactions.
determine that the receivables are measured at appropriate amortized cost, and
establish that the presentation and disclosure of receivables and revenues are appropriate.
Adequate control structured policies and procedures exist.
All sales and receivables that should be recorded are properly recorded. (completeness)
Only sales and receivables that should be recorded are recorded (existence).
Receivables records and supporting schedules are mathematically correct and agree with general ledger
accounts (clerical accuracy).
The presentation and disclosure of receivables is adequate; including the separation of receivables into
appropriate categories and adequate reporting of any receivables pledged as collateral and related party
receivables.
SOURCE: CPA Review Manual in Auditing Problems BY Ma. Elenita Balatbat Cabrera
A. ACCOUNT RECEIVABLE
1. To ascertain that the receivables represent valid and legal claims against third parties in the amounts
indicated in the accounting records.
2. To ascertain whether the receivables are collectible.
3. To determine the adequacy of the allowance for doubtful accounts.
4. To determine whether receivables have been properly classified and described on the statement of financial
position.
B. NOTE RECEIVABLE
1. To establish the existence and validity of the notes.
2. To ascertain ownership of the notes.
3. To determine their collectability.
4. To determine propriety of statement of financial position presentation.
5. To determine that interest collections have been received and that interest earned and accrued has been
correctly recorded.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
1. To ascertain the adequacy of the allowance for doubtful accounts.
2. To verify if proper procedures have been followed in writing off doubtful accounts.
3
CONSIDERATION OF INTERNAL CONTROLS:
•
SOURCE: CPA Review Manual in Auditing Problems BY Ma. Elenita Balatbat Cabrera
1. Segregation of shipping, receiving, accounting, billing and collecting functions.
2. Credit department should be independent of shipping, billing and accounting.
3. Delivery receipts, bills of lading, and sales invoices should be pre-numbered and the numerical sequence
accounted for.
4. Sales invoices should be correlated with shipping orders, delivery receipts, or bill of lading.
5. COD sales, deliveries on consignments should be safeguarded.
6. Miscellaneous receivables should be recognized immediately.
7. Employees advances should be authorized by appropriate official.
8. Posting in accounts receivable subsidiary ledgers should come from authorized sources only.
9. Mathematical accuracy of accounts receivable subsidiary ledgers should be checked and balances reconciled
with general ledger control account.
10. Periodic aging of accounts receivable
11. Monthly statements should be sent to customers.
12. Notes receivables should be authorized and properly accounted for.
•
SOURCE: Textbook in Auditing Practice by Solita A. Frias
1. Segregation o shipping, receiving, accounting, billing and collecting functions
▪ No one person should be incomplete charge of a transaction.
▪ The employee in charge of shipping goods to customers should not be responsible for receiving goods
from the suppliers.
▪ Receiving and billing employees should not keep the books of accounts because they will find it very easy
to manipulate the books of accounts to conceal fraud on sales and inventories.
▪ The billing and collecting functions should be assigned to different persons.
✓ Billing is the process of filling up sales invoice and delivering the same to customer.
✓ The sales invoice may or may not accompany the products delivered (usually accompanied by delivery
receipt.)
✓ The collections of cash from buyers are made by the cashiers in the treasury department.
✓ The segregation of these duties will prevent the understatement of sales for a planned cash
abstraction from collections.
2.
Credit department should be independent of shipping, billing and accounting.
▪ The credit department reviews the sales orders received from customers for credit limit and credit
standing before order is approved.
▪ The credit department should be independent of the shipping, billing and accounting.
▪ With the approved customers’ sales order the shipping department delivers the products.
✓ Every product withdrawn from the warehouse, store or shelf should be an assurance the delivery is
billed against the customer and that credit sales are billed against customers who good at credit-risk.
✓ Approved sales order should show the evidence of authorization like the initials of the employee who
compared customer’s orders with credit file and the officer who authorized the credit.
✓ The warehouse or the store delivers the products and copies of the approved customers.
✓ The billing departments prepares the sales invoice which is given to the customers.
a) A copy of the sales invoice is routed to the accounts receivable bookkeeping section for posting in
the AR subsidiary ledgers.
b) Another copy of the sales invoice is forwarded to the GL accountant for journal entries in the sales
book.
Notes:
The postings in the ARSL should not come from the sales book since the SLs serve as check on the
entries in the journals and the GL.
✓
Another employee preferably an internal auditor should examine the sales documents to prove that the
customers are billed for the correct amount and on the date the goods are delivered.
a) A sales invoice may not be prepared for goods delivered.
b) Quantities may not be overstated to conceal inventory shortages.
c) Invoice amounts may be understated to cover future abstractions.
d) Sales invoices may be post-dated to allow discounts on collections after the discount period.
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3.
Delivery receipts, bills of lading, and sales invoices should be pre-numbered and the numerical sequence
accounted for.
▪ Pre-numbered delivery receipts, bills of lading and sales invoices facilitate tracing, comparisons and
detection of missing documents.
▪ The pre-numbered sales invoices provide assurance of recording all sales invoices used and that all used
sales invoices are properly posted in the ARSL.
▪ The numerical sequence of these accountable forms should be done preferably by an auditor.
4.
Sales invoices should be correlated with shipping orders, delivery receipts, or bill of lading.
▪ This control provides assurance that goods leaving the client are billed against customers.
▪ The prices should be checked against price list, the quantities against issue reports or postings in the stock
cards and the extension by independent calculation.
5.
COD sales, deliveries on consignments should be safeguarded.
▪ Controls should include the independent recording of COD sales and deliveries on consignments to set up
accountabilities.
▪ These deliveries are settled by collections for COD sales and account sales or consignees reports.
6.
Control on sales returns, allowances and discounts.
▪ Credit memoranda for returned goods should be supported by receiving reports.
▪ Sales returns and allowances should be approved by an officer independent of the cash department.
▪ Every entry other than for sales or collection should be supported by approved debit and credit
memoranda.
✓ These are entries for sales returns, sales allowances, bad debts write-off and special cash discount.
✓ Collection efforts should be continued even after receivables are written off.
7.
Miscellaneous receivables should be recognized immediately.
▪ Pending claims for damages, freight and insurance should be booked.
▪ Receivables from sales of scrap, rentals and royalties should be recorded.
▪ When the income does not come from the main line of the company it is likely to overlooked.
▪ Recurring income like rentals and royalty still uncollected should be accrued.
8.
Employee advances should be authorized by appropriate official.
▪ The company should be strict on granting and collecting of employee advances. When employees know
the company is liberal with loans, they may abuse it and later delay the payments or even initiating off of
the accounts.
▪ Any writing off should be made only after exhausting all means for collection like salary deductions and
only on authorization of clients official.
9.
Posting in accounts receivable subsidiary ledgers should com from authorized sources only.
▪ The postings in the subsidiary records should come from sales invoices, official receipts and debit and
credit memoranda.
✓ This serves as a check on the entries in the books of original entry.
✓ It is not proper to post in subsidiary ledgers from general journal, sales book and receipts book.
5
10. Mathematical accuracy of accounts receivable subsidiary ledgers should be checked and balances reconciled
with general ledger control account.
▪ Monthly, the balances of account receivable subsidiary ledgers should be proven, listed and the total
reconciled with the GL control account.
✓ Any discrepancy should be immediately investigated.
✓ These review should be done by other than the accounts receivable clerk and other than those
responsible over cash receipts and payments.
https://accounting12atdt.wordpress.com/category/chapter-11-modifying-accounting-systems/
11. Periodic aging of accounts receivable.
▪ The aging of accounts receivable will keep management informed on the status of the asset.
▪ It also serves as a control on credit granting, collections, and accounting.
▪ It should be reviewed by an officer of the company independent of the cash functions.
12. Monthly statements should be sent to customers.
▪ The procedure should prevent alteration or interception of statements before they are mailed by employees
who have no access to cash.
✓ The statements will enable customers to bring to client’s attention any discrepancy and serve as a
psychological deterrent in the commission of fraud.
✓ Differences reported by customers should be investigated.
▪ In addition, the accounts receivable should be confirmed at least once a year by internal auditors.
13. Notes receivables should be authorized and properly accounted for
▪ Acceptances and renewals of notes should be approved by an appropriate official.
▪ A register of notes should be maintained.
▪ There should be periodic count of promissory notes, comparison with the note register and reconciliation
with the general ledger.
▪ Notes receivable discounted should be recorded.
6
https://slideplayer.com/slide/15766313/
Risk of material misstatements arising
from fraud on Receivables and Revenue (Significant Risk)
•
SOURCE: CPA Review Manual in Auditing Problems by Ma. Elenita Balatbat Cabrera
1. Sales on account are understated.
2. Sales on account are not recorded.
3. Unauthorized writing off of accounts receivable.
4. Sales discount, returns and allowances are over-footed.
5. Lapping of accounts receivable.
6. Sales discounts are granted for payments after the discount period.
7. Sales discount computations are overstated.
8. Collections on accounts receivable written off are not recorded.
9. Credit memoranda are issued for fictitious sales returns and allowances.
•
SOURCE: Forensic Accounting 4th Edition by Zimbelman and Albrecht
COMMON REVENUE RELATED FRAUD SCHEMES
Common Fraud Schemes and
Transactions
Record Fictitious Sales
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Common Audit Procedures
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Review the AR ledger, cash receipts journal, and sales journal for
large or unusual items.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping documents.
Review the sales returns after year-end to determine the effect on
the AR balance.
Test cut-off sales, sales returns, and cash receipts at year-end by
looking at supporting documents before and after year-end.
Review the reconciliations of the sub-ledger to the general ledger
and investigate unusual items.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Ensure proper treatment of all related party sales and AR
Conduct interview of client personnel.
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Common Fraud Schemes and
Transactions
Recognize revenues too early
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Understate allowance for doubtful
accounts/ don't write-off uncollectibles
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No record returned goods/discounts
from customer
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Record returned goods / write-off
receivables after the end of the period
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Manipulation of cash received
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Common Audit Procedures
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of accounts receivable.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Review the sales returns after year-end to determine the effect on
the AR balance.
Test cut-off sales, sales returns, and cash receipts at year-end by
looking at supporting documents before and after year-end.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of accounts receivable.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of accounts receivable.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Review the sales returns after year-end to determine the effect on
the AR balance.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of accounts receivable.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Review the sales returns after year-end to determine the effect on
the AR balance.
Test cut-off sales, sales returns, and cash receipts at year-end by
looking at supporting documents before and after year-end.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Review the AR ledger, cash receipts journal, and sales journal for
large or unusual items.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping documents.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Conduct interview of client personnel.
8
Common Fraud Schemes and
Transactions
Related Party Transactions
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Sham Sales
(A phrase used for various types of
fictitious sales)
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Bill-and-hold sales
These are orders for goods that are
stored by the seller, often because
the buyer is not ready or able to
receive the goods at the time of the
order. Fraud occurs when these sales
are recognized even though the many
requirements for their recognition
(e.g. risk of loss must transfer to the
buyer) are not.
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Common Audit Procedures
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Ensure proper treatment of all related party sales and AR
Conduct interview of client personnel.
Compare prices and terms on sales invoices with that of the
company's authorized list and terms.
Inquire of management and other client personnel about related
party receivables.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Review the AR ledger, cash receipts journal, and sales journal for
large or unusual items.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping document.
Review the sales returns after year-end to determine the effect on
the AR balance.
Test cut-off sales, sales returns, and cash receipts at year-end by
looking at supporting documents before and after year-end.
Review the reconciliations of the sub-ledger to the general ledger
and investigate unusual items.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Ensure proper treatment of all related party sales and AR
Conduct interview of client personnel.
Inquire of management and other client personnel about related
party receivables.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping documents.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Conduct interview of client personnel.
9
Common Fraud Schemes and
Transactions
Side agreements
These are sales terms and
agreements (e.g. a liberal return
policy) that are made outside the
normal reporting channels. These
agreements lead to fraud when they
involve amending the terms and
conditions of existing sales contracts
so that they violate revenue
recognition requirements.
Consignment Sales
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Channel surfing
Sometimes called channel stuffing.
This is a practice that suppliers use to
encourage customers to buy extra
inventory so as to increase currentyear sales. This practice can inflate
sales when stated or implied side
agreements (e.g. allowing customers
to return the goods) are not properly
disclosed or accounted for. Also,
channel stuffing can be deemed
fraudulent when sufficient reserves
are not established (e.g. for sales
expected to be returned).
Lapping/kiting
A practice where cash receipts are
misapplied to hide fictitious receivables.
For example, if a fictitious receivable is
recorded for Customer X, a payment
received from Customer A will be used
to show that the receivable was valid. A
later payment received from another
customer may be used to write-off the
receivable recorded by Customer A,
etc.
Redating
Also called refreshing transactions.
This involves changing sale date to
more current time periods to prevent
them from being deemed
uncollectible or bad debts.
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Common Audit Procedures
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Ensure proper treatment of all related party sales and AR
Conduct interview of client personnel.
Compare prices and terms on sales invoices with that of the
company's authorized list and terms.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Select AR balances to confirm and send positive and negative
confirmation requests.
Review the sales returns after year-end to determine the effect on
the AR balance.
Test cut-off sales, sales returns, and cash receipts at year-end by
looking at supporting documents before and after year-end.
Conduct interview of client personnel.
Compare prices and terms on sales invoices with that of the
company's authorized list and terms.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Review the sales returns after year-end to determine the effect on
the AR balance.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Review the AR ledger, cash receipts journal, and sales journal for
large or unusual items.
Select AR balances to confirm and send positive and negative
confirmation requests.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping documents.
Test occurrence of sales by tracing details from the sales journal to
supporting documents.
Conduct interview of client personnel.
10
Common Fraud Schemes and
Transactions
Liberal return policy
This policy allows customers to return
products and cancel sales in future
periods. These policies make it
difficult to estimate the amount of
revenue that should be recorded in
the current period.
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Partial shipments
This scheme involves recording the
full amount of a sale when only part
of the sale was shipped.
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Improper cut-off
This occurs when transactions are
recorded in the wrong period. This
occurs when a company keeps the
accounting books open for a
particular period and records future
period transactions as if they
occurred in the current period. (also
referred to as improperly holding the
books open).
Roundtripping
This involves selling unused assets
for a promise to buy or similar assets
back at roughly the same price. In the
end, no economic benefit exists for
either company.
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Common Audit Procedures
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Select AR balances to confirm and send positive and negative
confirmation requests.
Examine evidence of subsequent cash collections from the
customer for the following any positive confirmations not returned,
negative confirmations returned with significant exceptions, and
other account balances deemed appropriate.
Review the sales returns after year-end to determine the effect on
the AR balance.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Review the AR ledger, cash receipts journal, and sales journal for
large or unusual items.
Select AR balances to confirm and send positive and negative
confirmation requests.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping documents.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Select AR balances to confirm and send positive and negative
confirmation requests.
For positive confirmations not returned and for negative
confirmations returned with significant exceptions, examine
supporting documentation such as billing and shipping documents.
Test cut-off sales, sales returns, and cash receipts at year-end by
looking at supporting documents before and after year-end.
Conduct interview of client personnel.
Perform analytical procedures on sales, sales returns, allowance for
doubtful accounts, bad debts and the aging of receivables.
Review the AR ledger, cash receipts journal, and sales journal for
large or unusual items.
Ensure proper treatment of all related party sales and AR
Conduct interview of client personnel.
Compare prices and terms on sales invoices with that of the
company's authorized list and terms.
11
Test of Controls and Substantive Audit Procedures on receivables and revenue
https://www.studocu.com/ph/document/university-of-san-jose-recoletos/intermediate-accounting2/compliance-test-of-controls-and-substantive-test-of-transactions-sales-and-receivables/16664004
Audit objectives
The objectives relate to obtaining sufficient competent evidence about each significant financial statement assertion that
pertains to the revenue cycle and related transactions and balances.
Assertions
Existence/
Occurrence
Completeness
Obligations/
Rights
Valuation
Presentation
and Disclosures
Transactions Level
Recorded sales are valid and represent goods
actually shipped or services actually rendered
2. Recorded cash receipts represent cash
collected during the period
3. Recorded sales adjustments represent
authorized discounts, returns or uncollectible
amounts.
All sales, cash collections, and sales adjustments
are recorded.
The entity has the right to collect recorded
receivables.
Sales revenues, receivables, cash collections, and
adjustments are correctly journalized, summarized,
posted, and properly valued.
1.
Sales, cash receipts, and sales adjustments are
properly presented, classified, and disclosed in the
financial statements
Balances Level
Recorded accounts receivable exist at the
balance sheet date
Accounts receivable include all amounts
due from customers
Accounts receivable represent legal
enforceable claims.
1. Accounts receivable are properly
valued as recorded in the customer
ledger.
2. The allowance for doubtful accounts
represents a reasonable estimate of
uncollectible accounts.
1. Accounts receivable are properly
classified in the balance sheet.
2. Accounts receivable assigned or
pledged have been properly disclosed
in the financial statements.
12
Audit Procedures
Testing Controls: Sales and Receivables
Department
Sales and credit
Warehouse and
Shipping
1.
2.
3.
4.
5.
1.
2.
3.
4.
Billing/
Receivables
1.
2.
3.
4.
5.
6.
7.
8.
9.
Control Procedures
Prepare prenumbered sales order
Perform credit check (authorization)
Approve credit for returns
Initiate write-off accounts, which should be
approved by the treasurer
Follow-up on old or past due accounts.
Received approved sales order from credit
department (must have approved sales order
before release of goods from the warehouse)
Pull out inventory from warehouse and release
to shipping
Perform independent check of goods received
from warehouse and approved sales orders in
shipping department
Prepare prenumbered bill of lading.
Match shipping documents and sales orders
before preparing sales invoice.
Periodically account for all prenumbered
shipping documents.
Perform independent check of sales order
pricing.
Prepare prenumbered sales invoice.
Batch and total invoices.
Update A/R Masterfile
Print sales journal.
Print sales summary. Agree to invoice batch
totals (independent check).
Mail customer statements
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
Accounting
1.
2.
3.
4.
5.
Receive sales summary
Perform independent check of invoice batch
totals and sales summary
Review sales account classifications
Post to GL
Follow-up customer exceptions (independent
check)
▪
▪
Sample Test of Control Procedures
Inquire about credit procedures for
new customers (valuation)
From a population of approved sales
order (and returns), select a sample
and examine documents for evidence
of credit check (valuation)
Observe warehouse personnel filing
sales orders (existence)
Observe physical controls over
inventory
Observe evidence of independent
checks (existence)
Inspect a sample of prenumbered
shipping documents and:
✓ Agree to sales order (existence)
✓ Account for prenumbering
(completeness)
Vouch a sample of sales invoices
(select approved sales order from the
sales journal) to shipping documents
and approved sales orders (existence)
Trace a sample of shipping documents
to sales invoice and sales journal and
A/R Masterfile (completeness)
Observe a procedure. Test a sample
period (reperformance)
(completeness).
Reperform pricing check: From a
sample of sales invoices check pricing
with the master price list (valuation).
Observe procedure and reperform
(valuation).
Observe mailing (existence,
completeness, valuation).
Observe and reperform (valuation,
existence, completeness, report
presentation)
Inspect customer exception file and
disposition (existence, completeness,
valuation)
Segregation of duties:
Authorization - Sales and Credit, Treasurer
Recordkeeping – Billing, Accounting
Custody – Warehouse, Shipping
13
Substantive Test of Transactions: Sales and Receivables
In deciding on substantive test of transactions, some procedures are commonly used on every audit regardless of the
circumstances whereas others are dependent on the adequacy of the controls and results of tests of controls. The
following table shows the substantive audit procedures for sales transactions, the related audit objectives and assertion:
Assertions
Occurrence and
Validity
Audit Objectives
A. To determine that recorded sales are
authorized and shipments are actually
made to non-fictitious customers
Rights and
Obligations
1.
2.
3.
4.
Completeness
B. To determine that existing sales
transactions are recorded on a timely
basis.
5.
6.
Valuation or
Allocation
C. To determine that recorded sales are for
the amount of goods shipped and are
correctly billed and recorded
7.
8.
9.
Presentation
D. To determine that sales transactions are
properly classified
The audit procedures that may be used for substantive tests of
controls for sales returns and allowances transactions include
10.
11.
12.
13.
Audit Procedures
Review the sales journal, general ledger and
accounts receivable subsidiary file for large
or unusual items
Trace sales journal entries to copies of sales
orders, sales invoices and shipping
documents
Trace shipping documents to entry of
shipments perpetual inventory records
Compare prices on sales invoices with
authorized price lists or contracts.
Trace shipping documents to resultant sales
invoices and entry into sales journal and
accounts receivable master file.
Compare dates of recorded sales
transactions with dates of shipping records or
perform sales cut-off.
Recompute information on sales invoice
Trace entries in sales journal to sales
invoices
Trace details on sales invoices to shipping
documents, price tests and customers’
orders
Examine document supporting sales
transactions for proper classification
Review the use and authorization of credit
memoranda (all allowances to customers for
returned or defective merchandise should be
supported by serially numbered CM signed
by an officer or responsible employee having
no duties relating to handling cash or
recording to customers’ ledger).
Review credits for returned merchandise if
supported by receiving report on the return
shipment.
Verify prices, extension and footings and
trace postings from the general journal or
other accounting records to the customer’s
accounts in the subsidiary ledger.
14
Substantive Test of Balances: Receivables
The following table shows the substantive audit procedures for accounts and notes receivable for year-end:
Assertions
Occurrence and
Validity
Audit Objectives
A. To determine that receivables exist and
represent bonafide obligations owed to
the company as at year-end
Rights and
Obligations
Completeness
Valuation and
Allocation
Presentation
1.
2.
3.
4.
B. To determine that all transactions
relative to receivables have been
recorded in the proper accounting
period.
C. To determine that receivables are
recorded and presented at proper
amounts in accordance with applicable
reporting standards
D. To determine that receivables are
properly presented and classified
5.
6.
7.
8.
9.
Audit Procedures
Obtain aged schedule of accounts and notes
receivable and reconcile to ledgers (general
and subsidiary)
Confirm receivables
Inspect notes on hand
Perform analytical procedures to determine
reasonableness of balances in relation to
recorded sales.
Perform cutoff test of sales and sales returns
Review collectability of receivables and
adequacy of allowance for doubtful accounts
Recalculate interest income on notes
Evaluate financial statement presentation
and disclosures
Obtain written client representation regarding
pledge, assignment, etc.
Source: Basic Auditing Practice Volume 2 by Petronilo Santos
INTERIM TESTS OF COMPLIANCE
The interim tests of compliance for the revenue-receipt cycle are as follows:
A. SALES
1. Obtain specimen signatures of officers who approve transactions like:
a) Credit Manager
b) Sales Manager
c) Storekeeper
d) Shipping or Delivery Department Manager
e) Cashier
2.
Obtain specimen initials of persons who double-check the:
a) Sales Invoices
b) Delivery Receipts or Bills of Lading
3.
Check the file copies for the completeness of the numerical sequence of:
a) Charge Sales Invoices
b) Cash Sales Invoices
c) Delivery Receipts or Bills of Lading
d) Credit Memoranda
4.
Select a sample of recorded sales invoices and:
a) Check arithmetical accuracy
b) Trace to corresponding shipping documents
c) Test pricing by reference to official price list
d) Check approval for: (1) credit, (2) terms
e) Compare details with customer orders, like merchandise specifications, price, quantity, credit period,
discounts, etc.
f) Trace postings to customers' subsidiary ledger.
g) Check entries for promptness and accuracy.
5.
Select a sample of sales invoices and:
a) Trace to sales register
15
b)
c)
Trace postings to customers' subsidiary ledger.
Look for initials of person double-checking the accuracy of invoices.
6.
Select a sample of delivery receipts or Bills of Lading and:
a) Trace to corresponding sales invoices
b) Compare with customers' orders
c) Trace postings to stock card or inventory records
d) Look for initials of person double-checking the accuracy of delivery receipts.
7.
Select a sample of entries in the subsidiary ledger and trace to:
a) Corresponding sales invoices
b) Entries in the sales register
8.
9.
Check footings and cross-footings of sales register and trace footings to the general ledger.
Observe proper segregation of duties.
B. ACCOUNT RECEIVABLES
1. Select a sample of postings in the subsidiary ledger and:
a) Trace to cash receipts register
b) Trace to debit/credit memo register
2. Reverse the procedure in Number 1.
3. Check for evidence showing monthly reconciliation of the subsidiary ledger balances with the control account in
the general ledger.
4. Scan and investigate any unusual entries.
5. Determine if write-offs and other adjustments are properly documented and authorized.
6. Observe proper segregation of duties.
C. SALES RETURNS AND ALLOWANCES
1. Select a sample of credit memoranda and trace to:
a) Entries in the debit/credit memo register
b) Corresponding receiving reports
2. Reverse the procedures in No. 1
3. Select a sample of credit memoranda and:
a) Review for proper approval
b) Check pricing and arithmetical accuracy
4. Check footings and cross-footings of debit/credit memo register and trace postings to the general ledger.
5. Observe proper segregation of duties.
YEAR-END SUBSTANTIVE TEST OF BALANCES AUDIT PROGRAM
The interim tests of compliance for the revenue-receipt cycle are as follows:
A. ACCOUNT RECEIVABLES
1. Obtain a list of aged accounts receivable balances from the subsidiary ledger and:
a) Foot and cross-foot the list
b) Check if the list reconciles with the general ledger control account.
c) Trace individual balances to the subsidiary ledger.
d) Test the accuracy of the aging.
e) Adjust non-trade accounts erroneously included in customers' accounts.
f) Investigate and reclassify significant credit balances.
2. Test accuracy of balances appearing in the subsidiary ledger.
3. Confirm accuracy of individual balances by direct communication with customers.
a) Investigate exceptions reported by customers and discuss with appropriate officer for proper disposal.
b) Send a second request for positive confirmation requests without any replies from customers.
c) If the second request does not produce a reply from the customer, perform extended procedures, like:
1) Reviewing collections after year-end
2) Checking supporting documents
3) Discussing the account with appropriate officer
d) Discuss with appropriate officer, confirmation requests returned by the posy office and perform extended
procedures.
e) Prepare a summary of confirmation results.
16
4.
5.
Review correspondence with customers for possible adjustments.
Test propriety of cut-off:
a) Examine Sales recorded and shipments made a week before and after the statement of financial position
date and ascertain whether the sales were recorded in the proper period.
b) Investigate large amounts of sales returned shortly after the statement of financial position date.
6. Perform analytical review procedures, like:
a) Gross Profit ratio
b) Accounts Receivable turnover
c) Ratio of accounts written off to sales or balance of accounts receivable.
✓ Compare with prior year and industry averages.
✓ Any significant unexplained variation should be investigated.
7. Review individual balances and age of accounts with appropriate officer and:
a) Determine accounts that should be written off
b) Determine adequacy of allowance for doubtful accounts.
8. Ascertain whether some receivables are pledged.
9. Determine propriety of financial statement presentation and adequacy of disclosures.
10. Obtain accounts receivable representation letter from management.
Source: CPA Review Manual in Auditing Problems BY Ma. Elenita Balatbat Cabrera
TRADE ACCOUNTS AND NOTES RECEIVABLE
A. Review general ledger activity for trade accounts receivable
1. Note and investigate unusual entries.
2. Trade opening balances to the prior period work papers
B. Compare the accounts receivable turnover to the prior periods.
C. Obtain or prepare an aged trial balance of trade receivables as of the confirmation date.
1. Foot and cross-foot the schedule.
2. Trace individual confirmation requests to subsidiary accounts.
3. Mail confirmations with auditor's return address.
4. Prepare confirmation statistics.
5. If the client request exemption from confirmation for any accounts, obtain and document satisfactory
explanation, and perform appropriate alternative procedures.
6. Trace confirmation replies to the trial balance and investigate variances.
7. Obtain new addresses for confirmation returned, and remail.
8. Send second request for positive confirmations.
9. Perform alternative auditing procedures for unanswered positive requests.
10. Summarize the results of confirmation procedures.
D. For positive confirmation without response, and accounts exempted from confirmation at the client's request:
1. Test subsequent paid items against specifically identified invoices.
2. Examine customer purchase orders and other evidence supporting the existence of the liability.
3. Establish the existence of the customer by references to credit bureaus or directors.
E. For accounts receivable confirmed on a date other than the statement of financial position date:
1. Prepare or obtain an analysis of transactions between the confirmation date and the statement of financial
position date.
2. Trace amounts from the analysis to the ledgers.
F.
Prepare or obtain an analysis of trade notes receivable including the following details:
1. Maker
2. Date issued and due
3. Original terms of repayment
4. Collateral, if any
5. Interest rate
6. Balance at the end of the prior period
7. Principal - additions and repayments
8. Balance at the end of the current period
17
9.
Interest income - balance from the prior period, receipts, accruals, and the balance at the end of the current
period.
G. Perform the following tests on the trade notes receivable analysis:
1. Foot the schedule
2. Trace totals to the general ledger
3. Physically inspect notes.
4. Request positive confirmations
5. Confirm notes out for collection and/or discounted with note holder.
6. Inspect any collateral for the notes.
7. Recompute interest income.
8. Trace interest collections to the cash receipts journal.
H. Determine whether any accounts or notes have been pledged, assigned, or discounted.
I.
Determine whether any accounts or notes are owed to employees or related parties. For notes owed to such
parties:
1. Determined the nature and purpose of the transactions(s) that resulted in the balance.
2. Determine whether transactions were properly executed.
3. Obtain positive confirmation of balances.
J.
Prepare or obtain an analysis of the allowance for doubtful accounts.
1. Review accounts written off during the period.
2. Determined if write-offs have been properly authorized.
3. Examine supporting documentations for write-offs.
K. Review the adequacy of the allowance for doubtful accounts by
1. Reviewing an aged trial balance of accounts.
2. Examining credit reports for large and delinquent accounts.
3. Performing and reviewing ratio analysis for:
a) accounts receivable to credit sales
b) allowance for doubtful accounts to accounts receivable
c) Sales to returns and analysis
d) Doubtful accounts expense to credit sales
e) Doubtful accounts expense to write-offs
4. Review post statement of financial position transactions related to receivables.
Source: Textbook in Auditing Practice by Solita A. Frias
ACCOUNTS RECEIVABLE
1. Examine sales invoices
2. Trace sales invoices to entries in the sales journal.
3. Trace sales invoices to postings in the accounts receivable subsidiary ledger.
4. Tie up examination of accounts receivable and audit procedures on cash.
5. Examine general journal entries affecting accounts receivable.
6. Prove mathematical accuracy of sales journals, cash receipts journals and subsidiary ledgers.
7. Obtain from client a schedule of accounts receivable.
8. Verify accounts receivable trial balance
9. Test aging.
10. Confirm accounts receivable.
11. Select a confirmation date.
12. Select form of confirmation and accounts to be circularized.
13. Summarize results of confirmation.
14. Follow up results of confirmation.
15. Analyze doubtful accounts and allowance for doubtful accounts.
16. Test proper cut-off.
17. Examine sales returns, allowances, discounts and returned collection checks after the statement of financial
position date.
18. Obtain an accounts receivable certificate.
19. Determine proper financial statement presentation and disclosures.
18
ACCOUNTS RECEIVABLE
1. Examine notes receivable.
2. Count promissory notes.
3. Verify interest.
4. Obtain confirmation of notes receivable.
5. Examine doubtful accounts and allowance for doubtful accounts.
6. Ascertain financial statement presentation and disclosures.
Source: Practical Auditing 2001 Edition by Zenaida S. Bijasa-Sangcal
ACCOUNTS RECEIVABLE AND SALES
A. Presentation and Disclosure
1. Review loan agreements
2. Review of the accounts receivable trial balance
B. Existence and Occurrence
3. Examine all aspects if a sample of sales transactions
a) Compare the sales invoice with the customer's purchase order.
b) Checking for proper credit approval.
c) Comparing prices on sales invoices with those on price list. Ascertaining the propriety of discounts granted
to sales
d) Proving the correctness of the extensions and footings in each invoice in the sample.
e) Checking the recording in the sales journal and the posting of the sale in the AR subsidiary ledger.
f) Proving the footings of the sales journal and tracing the total to the general ledger accounts for sales.
4. Confirm accounts receivable on a test basis.
C. Rights and Obligations
5. Review sales discount procedures and documentation
6. Vouch debit in Individual AR accounts to Sales Invoices.
7. Review the year end cut-off sales and cash receipts transactions. The sales cut-off test involves the following:
a) Examining shipping documents for several days before and after the cut-off sate to determine the date and
terms of shipment.
b) Tracing shipping documents to the sales and inventory records to establish that the entries were made in
the correct accounting period.
c) Inspecting invoices for a period of time before and after the cut-off date to ascertain the validity and
propriety of the shipments and corresponding entries.
d) Inquiring from management about any direct shipments by outside suppliers to customers and determining
the appropriateness of related entries.
D. Completeness
8. Compare a sample of shipping documents to the related sales invoices for the purpose of discovering orders
which have been shipped but not billed.
9. Reconcile a sample of cash register tapes and sales tickets with the sales journals so that evidence is gathered
that shows that all sales have been recorded and recorded accurately.
10. Perform analytical procedures for accounts receivable and sales.
a) the gross profit rate
b) accounts receivable turnover
c) the ratio of accounts receivable to the year's net credit sales.
d) the ratio of accounts written off during the year to the ending balance of accounts receivable.
e) the ratio of valuation allowance to accounts receivable.
These ratios should be compared with corresponding date for the preceding years and with comparable
industry averages and any unexpected fluctuations should be investigated.
E. Valuation
11. Test foot the sales journal and reconcile with postings to the general ledger - to find out if sales figures were
brought forward accurately.
12. Voucher debit entries in the Allowance for Doubtful Accounts to the Individual Accounts and Original Write-off
Authorizations. - So that it can be determined that such write-offs were properly reflected in the accounts and
were authorized.
13. Prepare or obtain ab aged accounts receivable schedule a) To help identify accounts that should be written off
19
b) To determine reasonableness of the doubtful accounts expense and the allowance for doubtful accounts
c) To aid the confirmation of accounts receivable.
14. Investigate any unusual items, transactions and amounts - To determine the substance behind and treatment
of, such items, transactions and amounts.
15. Recalculate and review doubtful accounts expense and allowance - For reasonableness of expense and
adequacy of the allowance.
16. Examine cash receipts after the statement of financial position date - To provide evidence of collectibility at the
statement of financial position date.
ACCOUNTS RECEIVABLE AND SALES
1. Prepare or obtain a schedule of the Notes Receivable as of the close of the fiscal period. The list should show
the
a) name of the makers
b) the name of endorsers
c) date of notes
d) term of notes
e) due dates
f) the amount of the notes
g) interest rates
h) discount rates (if discounted)
i) interest collected in the period
j) interest accrued or prepaid
k) payments made on the principal
l) the balance due
m) any collateral held.
2.
Reconcile controlling and subsidiary account balances.
3.
Inspect items on hand. Notes receivable will either be
a) on hand
b) out for collection
c) discounted
d) pledged as collateral
e) returned to maker if paid after the statement of financial position date and prior to the audit.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Confirm notes receivable.
Determine the disposition of past-due notes.
Verify notes genuineness
Investigate renewed notes
Determine collectibility
Trace receipts from discounted notes.
Obtain approval of notes charged off as uncollectible,
Review allowance provided for notes,
Verify interest: income, accrued, and prepaid.
Separate Other-Than-Customer Note
Source: Applied Auditing 2017 Edition by Asuncion, Ngina and Escala
1.
2.
3.
4.
Reconciliation of Subsidiary Ledger with General Ledger
Confirming receivables and reviewing subsequent cash receipts
Analyzing notes receivable and related interest
Evaluating adequacy of the allowance for doubtful accounts, including the appropriateness of the methodology
used to calculate the allowance.
5. Performing accounts receivable and sales cut-off
6. Checking the appropriate valuation of accounts receivables denominated in foreign currencies.
7. Investigating any transactions with or related party receivables.
8. Analyzing credit balances and unusual items
9. Ascertaining whether any receivables have been pledged or assigned
10. Performing analytical procedures.
20
Audit Working Papers and Other Documentation
Source: Applied Auditing by Baldres, De Leon, Magadia and Sarmiento
The following documentation for receivables includes, but is not limited to, identification of the following:
1. The procedures performed (generally the audit program or reference to it) and conclusions reached with respect to
the procedures performed, together with a statement of overall conclusions with respect to receivables.
2. The relationship of the nature, timing, and extent of procedures performed to the evaluation of the accounting
estimation, routine data, and non-routine data processes, or reference to the documentation of such relationship
elsewhere in the audit working papers
3. The problems encountered and bases of resolution.
4. To the extent appropriate, the following:
a) Summary of Accounts Receivable
b) Aged composition of accounts receivable at the statement of financial position date and if significantly different,
at the interim date as well.
c) Rationale for various dates selected for confirming or otherwise verifying accounts receivable (interim or yearend), methods used (e.g. positive and negative confirmations), and sample size (percent of total accounts and
amount)
d) Accounts that were selected for confirmation or other verification.
e) Confirmation replies, including appropriate documentation of oral confirmations.
f) Analysis of the results of the confirmation and other verification procedures.
g) Reconciliations between detailed listings and control accounts,
h) The roll-forward of activity in the control accounts from the interim date to the statement of financial position
date.
i) The results of investigations of unusual items appearing in control accounts or journal entries.
j) The results of review of the receivables, sales, and inventory cut-offs.
k) Summary of notes receivable and activity during the period.
l) Details of any collateral and guarantees.
m) Summary of interest income accrued and received on notes receivable during the period.
n) Analysis of activity in the allowance for uncollectible accounts.
o) Details regarding collection experience (including the period subsequent to the statement of financial position
date), bad debt history, and the collectibility of significant individual accounts.
p) Analysis of activity in the allowance for discounts, returns of merchandise, warranties and similar items, and
summaries of historical experience.
q) Bases for concluding whether the allowances are appropriate.
r) Details of receivables from related parties.
s) List of receivables transferred with recourse and details of related loss contingencies.
t) Details of liens, pledges, and other security interests in receivables.
u) Alternative procedures used when confirmation requests are not sent, and the rationale for non-confirming
accounts.
v) Results of analytical review procedures performed.
Source: Practical Auditing 2001 Edition by Zenaida S. Bijasa-Sangcal
Besides preparing LEAD SCHEDULES for receivables and net sales, the auditors obtain or prepare the following
working papers, among others:
1.
2.
3.
4.
5.
6.
Aged trial balance of trade accounts receivable.
Analyses of other receivables
Analysis of notes receivable and related interest
Summary of results of confirmation of accounts receivable
Analysis of allowance for doubtful accounts and notes.
Comparative analyses of sales transactions by month, by product or territory, or relating actual sales to forecasted
sales.
21
SAMPLE INTERNAL CONTROL QUESTIONNAIRE
ACCOUNTS RECEIVABLE AND SALES TRANSACTIONS
No.
QUESTIONS
1. Are the following functions performed by employees other than the
accounts receivable bookkepers:
A.
Handling cash and maintaining cash records?
B.
Opening incoming mail?
C.
Credit and collection?
D.
Review and mailing of statements to customers?
E.
Approval of adjustment credits, and write-up of uncollectible
accounts?
2. Are the accounts receivable ledgers unavailable to the cashier?
3. Are the subsidiary ledgers regularly balanced with the control accounts?
4. Are the subsidiary ledgers occasionally balanced with the control
accounts by someone other than the accounts receivable bookkepers?
5. Are aged trial balances of accounts receivable regularly prepared and
submitted for executive approval?
6. Are statements sent at regular intervals to all customers?
7. Are sales invoices serially numbered, and all such numbers accounted for
by accounts receivable bookkeepers?
8. Are entries in control accounts based on totals compiled in other
departments?
9. Is executive approval required to pay accounts receivable credit balances?
10. Are write-offs of uncollectible accounts authorized in writing by appropriate
officials?
11. Are accounts receivable, after being written off as uncollectible, carried in
a separate ledger, and collection efforts thereone regularly reviewed by an
executive?
12. Are credit memoranda pre-numbered and all numbers accounted for?
13. Do credit memoranda include the approval signature of an appropriate
official?
14. Do credit memoranda for returned goods carry the number of related
receiving report?
15. Are accounts receivable bookkepers rotated from one ledger to another at
reasonable intervals?
16. Do internal auditors or other staff personnel periodically confirm
receivables by direct communication with debtors?
17. Are receivables from officers and employees carried in a separate ledger
and control account?
18. Are goods shipped on consignment recorded in a special inventory
account rather than as accounts receivable?
Reviewed by
Date
YES
NO
ANSWERS
NA
REMARKS
Prepared by
Date
22
SAMPLE ACCOUNTS RECEIVABLE REPRESENTATION LETTER
March 31, 2021
Bonifacio, Rizal and Company, CPAs
5/F Mataas na Gusali, Ayala Avenue
Makati City
Dear Sir:
With respect to you examination of our financial statements, we hereby make the following representations concerning
accounts and notes receivable shown in the statement of financial position at December 31, 2020 in the aggregate amount
of P xxx,xxx.
1. Trade accounts and trade notes receivable represent valid claims againts customers of the company.
2. Non-trade receivables from officers, directors, sharehodlers, and controlled companies are correctly and properly
set forth in the statement of financial position.
3. Consignments are excluded from the receivables.
4. The accounts receivable balance contains no charges for merchandise shipped after the statement of financial
position date.
5. All assigned receivables are proper;y inidcated in the records.
6. All notes receivable discounted are properly indicated in the statement of financial position.
7. The balance of the accountsand notes receivable is not subject to discounts in excess of customary cash
discount.
8. All known uncollectible notes and accounts receivable have been charged off at the statement of financial
position date.
9. The allowance for doubtful accounts of P xxx,xxx in our opinion, is adequate to provide for all losses in the
receivables at the statement of financial position date which may result from uncollectibility of the receivables.
Yours truly,
EARTHLINGS COMPANY
President
23
SAMPLE AUDIT WORKING PAPERS
Source: "MANUAL ON AUDIT WORKING PAPERS" by Gloria Mangoba and Ofelia Urrutia
LEAD SCHEDULE OR LEAD SHEET
Millenium Link Manufacturing, Inc.
Workingpaper for Accounts Receivable
12.31.2020
Balance per books, 11.30.2020
Add: Sales on account during December 2020
Total
1,213,000
∏
988,800
√
2,201,800 ₼
Less: Collections in December 2020
897,050 
Sales returns and allowances
4,750 Փ
Balance per books, 12.31.2020
901,800 ₼
1,300,000
∏
AJE No. 3: To reclassifiy customers' credit balances
for statement purposes
10,000
As adjusted, 12.31.2020
1,310,000 ₼
To WBS
∏ Reviewed transactions from 11.30.2020 (confirmation date) to 12.31.2020 and found no unuaual transactions or variations.
√ Checked total against sales books; test checked underlying sales invoices during December 2020 and found that the charges
representing sales actually arose from sales.
 Checked total against cash receipts books; test-checked official receipts issued during December 2020 and found them in order.
Փ Test-checked credit memos issued during the month and found them in order.
₼ Footings/computations verified.
PREPARED BY
Initial
GA Date 2.16.2021 Initial
REVIEWED BY
JD Date
2.18.2021
B
24
AGING SCHEDULE OF ACCOUNTS RECEIVABLE
Millenium Link Manufacturing, Inc.
Workingpaper for Accounts Receivable
12.31.2020
Conf.
Balance 12/31/2020
No.
Customers
Brought forward
Debit
Credit
898,500
5,000
Month Billed
December
November
540,200
189,300
AR - 4
Golden Gate Enterprise
53,000
∏
53,000
√
AR - 5
Guacods Trading
45,000
∏
45,000
√
Guanzon Merchandising
30,000
∏
Hilario-Aguilar Trading
36,000
∏
Long Beach Emporium, Inc.
20,000
∏
AR - 6
Mabuhay Enterprises, Inc, (deposits)
15,000
√
20,000
√
√
5,000
Subs. Coll.
October
120,000
√
30,000
√
10,000
√
47,000
∏
19,000
Santiago Austria Sales, Inc.
21,200
∏
10,000
Sison Bros. Co., Inc. (deposits)
15,000
√
11,200
√
10,000
√
49,000
548,600
Remarks
P 29,000 old accounts, doubtful (To B4)
19,000

10,000

26,000

10,000

23,000

21,200

23,000

20,000

15,000

16,200

mo loss anticipated as current profits are good.
6,000
√
3,000
√
2,600
Tamesis Commercial Co.
33,000 ∏
5,000
√
5,000
√
13,000
√
Tamesis Bros. and Co. Trading
42,000 ∏
20,000
√
12,000
√
10,000
√
Washington Trading
34,000 ∏
19,000
√
15,000
√
Young's Dry Goods Store
16,200 ∏
16,200
F.E. Zapanta, Inc.
34,100 ∏
1,310,000 ₼
Balance per books, 12.31.2020
Up to 2.16.21
2,400
Metropolitan Enterprises
Customer's credit balances
Sept./Earlier
-10,000
1,300,000
10,000
√
Bankrupt, collection of full amount os doubtful (To B4)
10,000 ₼
762,400 ₼
252,500
₼
193,000
₼
68,000 ₼
AJE 3
732,000
∏
₼ Represents 56% of outstanding accounts receivable at 12.31.2020
To B
√ Aging distribution checked
Based on the sample accountes selected for confirmation and on the accounts selected for verification as outlined in the
 Official Receipts inspected.
audit program, the company's accounts receivable are, in our opinion, fairly stated and represent valid claims against the
Reviewed and compared balances at 12.31.2020 with 11.30.2020 balances (confirmation date).
debtors indicated. We have not come across any lien or contingent liability arising from discount on sale of accounts
In addition to confirmation at 11.30.2020, six new large accounts were confirmed (see "Conf. No." column);
receivable.
replies are in separate file.
₼ Footings/computations verified
Fidel Alano, 2.16.2021
∏ Checked agains general or subsidiary ledger
DWC, 2.18.2021
P.C., 1.15.2021
PR, 2.16.2021
dwc, 2.18.2021
B1
25
SUMMARY OF POSITIVE CONFIRMATION RESULTS
Company:
SUMMARY RESULTS OF POSITIVE
CONFIRMATION
Millenium Link Manufacturing, Inc.
SFP Date:
12.31.2020
Name of Account:
Account Balance as at:
Accounts Receivable - Debit Balance
11.30.2020
Dates confirmation sent out:
First request - 12.15.2020
Second request - 1.15.2021
No. of
Accounts
Confirming balances
26
Reporting differences (see reply below)
1
Amount
Portion confirmed
B5
Portion excepted to
6
Returned by Post-Office
No replies
7
TOTAL CONFIRMATIONS SENT
40
TOTAL OF ACCOUNT
44
152,200
64
60
39,300
3
5
15,200
1
2
164,500
14
13
204,100
1,175,300
B3
Percent of Total
This Year Last Year
18
20
100%
100%
96%
95%
1,224,400
PERCENT OF CONFIRMATIONS SENT TO TOTAL OF ACCOUNT
Have all reported material differences been adjusted or satisfactorily cleared? Yes (see B5)
Note below details of difference not adjusted or satisfactorily cleared: Not Applicable
THE FOLLOWING BALANCE DUE FROM ME (US) IS CORRECT:
Due To:
As of:
Millenium Link Manufacturing, Inc.
November 30, 2020
Amount:
P 54,500.00
F. Espino
Signature: F. ESPINO
CONF. NO. 37
Position : ACCOUNTANT
Balance should be P 39,300 only
TAMESIS COMMERCIAL CO.
Karuhatan, Valenzuela City
PREPARED BY:
Initial:
FC
REVIEWED BY:
Date:
Initial:
Date:
2.10.2021
DMC
2.12.2021
26
LEAD SCHEDULE OR LEAD SHEET
MILLENIUM LINK MANUFACTURING, INC.
Accounts Receivable
November 30, 2020
Conf. No.
Customer
30
31
32
33
+
Address
Brought forward
Golden Gate Enterprises
Guanzon Merchandising
Henares Trading
Hilario and Sons Trading
Izon Merchandising Co.
Liwag General Merchandising
Metropolitan Enterprises
102 Calamba, Laguna
61 San Fernando, Pampanga
210 A. Mabini St., Manila
501 Juan Luna, Manila
118 Dasmarinas, Manila
120 San Marcelino, Manila
712 Melecio St., Cabanatuan City
Results
Amount
850,300
36,000
30,000
19,600
36,500
-3,400
16,500
61,000
∏
∏
∏
∏
∏
34
35
+
36
37
+
Santiago Austria Sales, Inc.
Tamesis Commercial Co.
Mandaluyong City
Karuhatan, Valenzuela City
11,200 ∏
54,500 ∏
38
39
+
Tamesis Bros. and Co. Trading
Washington Trading
890 Ylaya St., Manila
410 Rizal Avenue, Manila
26,100 ∏
40,600 ∏
40
+
F.E. Zapanta, Inc.
EDSA, Quezon City
Total Accounts Receivable, 11/30/2020
∏
∏
34,100 ∏
1,213,000
₼
Credit balances
Gross debits
11,400 *
1,224,400 ₼
To B2
Confirmation results mailed on 12.15.2020
+
*
Credit balances were not confirmed at the request of the client. Our examination disclosed that these credits represent deposits on unfilled
orders to be offset when shipments are made and that they arose in the ordinary course of business.
∏
Checked agains general or subsidiary ledger
₼
Footings/computations verified
Work done on accounts wehere no replies were received or where requests were returned by Post Office:
1. Examined original invoices and customers' acknowledgements of the merchandise shipments composing the balance of the account.
2. Compared invoices with customers' purchase orders and with shipping records, and verified that the correct items and amount of
goods ordered were those shipped and billed to customers
3. Traced subsequent collections on the accounts and examined official receipts suporting remittances. Verified that customers'
payments were applied to proper account balances.
Confirmation replies are in a separate file.
PC, 12.11.2020
FT, 2.1.2021
DMC, 2.12.2021
B3
27
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Millenium Link Manufacturing, Inc.
Workingpaper for Allowance for Doubtful Accounts
12.31.2020
Balance per working papers, 12.31.2020
49,000
802, 12.31.2020 - To increase allowance for doubtful accounts
to approximately 5% of outstanding receivables at 12.31.72
To PL8
16,000
Per books, 12.31.2020
65,000 ∏
To WBS
∏
Checked agains general or subsidiary ledger
Received individual customers' accounts as at 12.31.2020 with the Credit and Collection Manager
on 2.16.2021, giving particular attention to accounts which have been overdue for 90 days or more.
Also received subsequent collections and aging distribution of outstanding balance. At 12.31.2020,
accounts which are overdue for 90 days or more amounted to P 102,100 - (See B1). Collections received
on these accounts up to 2.15.2020 amounted to P 35,138. Possible bad debt losses were determined from
those accounts from which no subsequent collections were received, as follows:
Old accounts, doubtful of collection
B1
29,000
Bankrupt, collection of full amount - doubtful
B1
34,100
Total
63,100
Based on the foregoing review and on client's experience in collecting its receivables, in my opinion,
the amount of P 65,000 which is 5% of outstanding receivable at 12.31.2020 is adequate to meet
possible losses arising from bad debts.
David M Marino, 2.17.2021
B4
28
SUPPORTING WORKING PAPER - CONFIRMATION OF AR
Millenium Link Manufacturing, Inc.
Pasig City
December 17, 2020
Tamesis Commercial Co.
Karuhatan, Valenzuela City
Gentlemen:
This is in connection with the confirmation request sent to you by our auditors,
Jose, Villacorta and Company, wherein you reported difference in your balance
outstanding of P 54,000 as at November 30, 2020.
In checking our posting to customers' subsidiary ledgers, we noted that Invoice
No. 3201 dated October 30, 2020 for P 15,200 was erroneously charged to your account.
We wish to inform you that necessary corrections have already been made in our records
to reduce your balance to P 39,300 as at November 30, 2020.
Please accept our apologies for this oversight.
Very truly yours,
Millenium Link Manufacturing, Inc.
Arturo Reyes
ARTURO REYES
Chief Accountant
DMC, 2.20.2021
B5
29
ACCOUNTS RECEIVABLE CERTIFICATE
Millenium Link Manufacturing, Inc.
Pasig City
ACCOUNTS RECEIVABLE CERTIFICATE
February 22, 2021
Jose, Villacorta and Company,
PO Box 14344
Makati City
Gentlemen:
In connection with your examination of our account as at December 31, 2020, we
hereby make the following statements concerning the accounts receivable as at that date
amounting to P 1,310,000.
1.
All accounts receivable recorded on the books at the abovementioned date
represented valid claims against customers.
2.
None of our company's accounts receivable was pledged or otherwise
hypothecated.
3.
All sales to and including the above date have been recorded on the books
as sales of the year then ended and the memrchandise sold has been
excluded from the inventories of that date. The accounts receivable shown in
the booksdo not include charges with respect to materials or merchandise
shipped subsequent to the statement of financial position date.
4.
The amount of P 65,000 provided as an allowance for possible doubtful accounts
is adequate to provide for any loss that may be sustained in collecting the
accounts receivable from customers as at the above date.
Very truly yours,
(to be signed by company officer who has
responsibility over accounts receivable)
DMC, 2.22.2021
B6
30
SAMPLE WORKING PAPER FOR ACCOUNTS RECEIVABLE CONFIRMATION
Source: Textbook in Auditing Practice by Solita A. Frias
RAYMAR CORPORATION
Working Paper for Accounts Receivable Confirmation
December 31, 2020
Per
Subsidiary
Ledger
12.31.2020
Audit
Adjustment
12.31.2020
DR. (CR.)
Adjusted
Balance
12.31.2020
Juan dela Cruz
Castaneda Electrical Company
Livingston Manufacturing Company
Manalo Florendo
Sta. Ana Trading Company
Gregorio Lapuz
Evangelista Machines, Inc.
Santos and Sons Bed Shops, Inc.
9,000.00
29,605.15
13,200.00
(5,000.00)
8,625.30
3,050.00
34,022.19
12,023.96
T
T
T
T
T
T
T
T
Joselito Consengco
Fernando Dimasalang
Grande Real Taal Company
Manuel dela Pena
995.00
2,100.00
22,129.26
11,120.00
T
T
T
T
995.00
2,100.00
22,129.26
11,120.00
Asuncion Ltd Company
Ricardo Limjaco
Vicente Gatmaitan (employee)
Mamnila Trading
21,401.11
3,332.00
2,000.00
16,702.36
T
T
T
T
21,401.11
3,332.00
16,702.36
184,306.33
u
u
T

∏
√
5,000.00
(3,050.00)
(2,000.00)
(50.00)
u
9,000.00
29,605.15
13,200.00
8,625.30
34,022.19
12,023.96
Confirming
Balance
9,000.00 
29,605.15 

CONFIRMATION RESULTS
Reporting
Returned by
Difference
Post Office
No Reply
13,200.00

1458
2451
Jan. 16
Jan. 18
29,200.00
8,215.90
8,625.30

3001
Feb. 6
4,625.30
3350
4025
4315
4260
1113
2034
2221
2560
4000
1235
Jan. 10
Feb. 15
Mar. 2
Mar. 3
Feb. 2
Jan. 12
Mar. 15
Mar. 26
Feb. 10
Jan. 11
34,022.19
2,992.19
5,033.41
381.30
2,100.00
20,000.00
9,435.20
1,684.80
12,222.00
3,332.00
4421
4530
Mar. 12
Mar. 22
10,301.26
3,345.96
146,891.51
u
34,022.19 
12,023.96 
995.00
2,100.00

22,129.26 
11,120.00 
21,401.11
3,332.00
16,702.36
184,256.33
u
117,900.56
u
100%
64%
SUBSEQUENT COLLECTION
TO MARCH 30, 2021
OR
Number
Date
Amount
38,527.66
u
21%

2,100.00
u
1%
25,728.11
u
14%
80%
Footings checked
Traced to and from accounts receivable ledger
Posting from replies of customers and returns by post offices
Reconciled with general ledger balance
Examined collections after December 31, 2020
31
SAMPLE WORKING PAPER FOR NOTES RECEIVABLE
Source: Textbook in Auditing Practice by Solita A. Frias
RAYMAR CORPORATION
Analysis of Notes Receivable
December 31, 2020
Maker
Date of Note
Abner, Arnel
Aladin, Roel
Bautista, Leah
Bernas, Nieves
Carlos, Henry
Donato and Company
Gibson, Ronald
Jayco, Jeanine
Madison, Inc.
March 1, 2020
April 30, 2020
May 31, 2020
August 1, 2020
July 1, 2020
October 1, 2020
October 15, 2020
November 1, 2020
December 15, 2020
Term
18 months
12 months
18 months
24 months
36 months
4 months
Demand
12 months
90 days
Maturity Date
September 1, 2021
April 30, 2021
November 30, 2021
August 1, 2022
July 1, 2023
February 1, 2021
Demand
November 1, 2021
March 14, 2021
Interest
Rate
14.40%
18.00%
18.00%
18.00%
18.00%
15.00%
18.00%
15.00%
18.00%
AJE 11
AJE 12
Face of
Note
10,500
11,000
22,000
3,000
5,000
10,000
24,500
8,000
26,000
120,000
-5,000
-11,000
104,000
u
Interest
Income
INS
INS
INS
INS
INS
INS
INS
INS
INS
1,260
1,320
2,310
225
450
375
919
200
208
7,267
u
Interest
Receivable
C
C
C
C
C
C
C
C
C
Unearned
Interest
1,260 C
1,320 C
3,630 C
855 C
450
375
919
200
208
4,732
u
AJE 13
C
C
C
C
C
Allowance
for BD
Remarks
5,500 D doubtful of collecion
interest paid in advance
interest paid in advance
maker bankrupt
4,000 D doubtful of collection
4,485
u
AJE 14
9,500
u
AJE 15
*Computed on 360 days a year
u
C
INS
D
Footings checked
Computed
Inspected promissory notes
Discussed with cluent bad debts provisions and write-off
32
PROBLEMS
PROBLEM 1
(Source: Practical Auditing 2022 Edition by Empleo)
Identify by letter the assertions addressed in each of the following substantive procedures relating to audit of the
cash balances.
Assertions:
A. Existence and Occurrence
B. Rights and Obligations
C. Completeness
D. Valuation and Allocation
E. Presentation and Disclosure
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Obtain confirmation of receivables.
Compare disclosures made in the financial statements with the requirements of the IFRS.
Obtain confirmation of receivables pledged under loan agreements.
Vouch recorded sales transactions back to customer order and shipping document.
Perform cut-off test for sales and sales returns.
Perform cut-off test for cash collections.
Compare current year's cash sales with the general ledger records for accounts receivable.
Reconcile subsidiary records with the general ledger records for accounts receivable.
Review credit collection policies and procedures and analyze the age of the receivables.
Examine credit files for large accounts.
Perform analytical review procedures to evaluate appropriateness of the balance of the
allowance for uncollectible accounts.
Inspect notes receivable.
Recompute interest revenue.
Identify related party transactions.
Inquire from management. Examine bank confirmations and review minutes of meetings
to identify receivables pledged or collateralized.
Trace cash sales with cash receipts from cash such sales.
33
PROBLEM 2
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
Items 1 through 8 are selected questions of the type generally found in internal control questionnaires used by auditors
to obtain an under-standing of internal control in the sales and collection cycle. In using the questionnaire for a client, a
“yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential deficiency.
1.
2.
3.
4.
5.
6.
7.
8.
Does the computer system automatically approve a credit sale based on preapproved credit limits maintained in a
customer master file?
Are shipping documents controlled and sequentially numbered? Is the sequence of the shipping documents properly
accounted for to identify any missing documents?
Is there a mechanism for proper cancellation of shipping documents?
Is the accounts receivable master file reconciled to the general ledger on a monthly basis?
Does the accountant independently reconcile the bank account balance?
Are batch totals of cash receipts compared with a computer summary report of the cash receipts journal by the data
control clerk?
Is there a mechanism to internally verify if cash and credit sales transactions are charged to the correct general ledger
account?
Are cash receipts recorded on a daily basis?
Required:
a) For each of the preceding questions, state the transaction-related audit objectives being fulfilled if the control is in
effect.
b) For each control, list a test of control to test its effectiveness.
c) For each of the preceding questions, identify the nature of the potential financial misstatements.
d) For each of the potential misstatements in part c., list a substantive audit procedure to determine whether a material
misstatement exists.
34
SOLUTION GUIDE:
No.
1.
2.
3.
4.
5.
6.
7.
8.
Selected Questions in ICQ
Does the computer system
automatically approve a
credit
sale
based
on
preapproved credit limits
maintained in a customer
master file?
Are shipping documents
controlled and sequentially
numbered?
Transaction – Related
Audit Objectives
Test of Controls to Test
Effectiveness
Nature of Potential
Financial Misstatements
Substantive Audit
Procedures to determine a
material Misstatement Exists
Is the sequence of the
shipping documents properly
accounted for to identify any
missing documents?
Is there a mechanism for
proper
cancellation
of
shipping documents?
Is the accounts receivable
master file reconciled to the
general ledger on a monthly
basis?
Does
the
accountant
independently reconcile the
bank account balance?
Are batch totals of cash
receipts compared with a
computer summary report of
the cash receipts journal by
the data control clerk?
Is there a mechanism to
internally verify if cash and
credit sales transactions are
charged to the correct
general ledger account?
Are cash receipts recorded
on a daily basis?
35
PROBLEM 3
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the
sales and collection cycle:
1.
2.
3.
4.
5.
6.
7.
Compare the dates of recording sales in the sales journal with the invoices and ship-ping documents to see if there
is any discrepancy.
Examine evidence, such as the accountant’s initials, to ensure that the accounts receivable master file is reconciled
to the general ledger.
Compute prices and extensions on sales invoices and trace the prices on invoices to the approved price list or the
price master file.
Find out whether statements detailing outstanding amounts were sent to customers on a monthly basis.
Examine sales returns for receiving reports that have been signed by an authorized employee.
Obtain a prelisting of cash receipts and trace their amounts to the cash receipts journal, testing for names, amounts,
and dates.
Trace cash receipts entries recorded in the cash receipts journal to the bank statement for a month.
Required:
a. Identify whether each audit procedure is a test of control or a substantive test of transactions.
b. State which of the seven transaction-related audit objectives each of the audit procedures fulfills.
c. Identify the type of evidence used for each audit procedure, such as inspection and observation.
SOLUTION GUIDE:
Commonly Performed
No. TOC and STs of Transactions
1.
Compare the dates of recording
sales in the sales journal with
the invoices and ship-ping
documents to see if there is any
discrepancy.
2.
Examine evidence, such as the
accountant’s initials, to ensure
that the accounts receivable
master file is reconciled to the
general ledger.
3.
Compute prices and extensions
on sales invoices and trace the
prices on invoices to the
approved price list or the price
master file.
4.
Find out whether statements
detailing outstanding amounts
were sent to customers on a
monthly basis.
5.
Examine sales returns for
receiving reports that have been
signed by an authorized
employee.
6.
Obtain a prelisting of cash
receipts and trace their amounts
to the cash receipts journal,
testing for names, amounts, and
dates.
7.
Trace cash receipts entries
recorded in the cash receipts
journal to the bank statement for
a month.
Test of Control or
Substantive Test
Transaction Related Audit
Objectives
Type of Evidence
Used
36
PROBLEM 4
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
The following is a list of possible errors or fraud (1 through 8) involving sales and controls (a. through k.) that may prevent
or detect the errors or fraud:
Possible Errors or Fraud
1. Invoices are sent for shipped goods, and are recorded in the sales journal, but are not posted to any customer
accounts.
2. Invoices for goods sold are posted to incorrect customer accounts.
3. Invalid transactions granting credit for sales returns are recorded.
4. Goods are removed from inventory for unauthorized orders.
5. Credit sales are made to customers with unsatisfactory credit ratings.
6. Invoices are sent to co-participants in a fraudulent scheme, and sales are recorded for fictitious transactions.
7. Goods shipped to customers do not agree with goods ordered by customers.
8. Invoices are sent for shipped goods, but are not recorded in the sales journal.
Internal Controls
a. Customer orders are compared with an approved customer list.
b. Sales orders are prepared for each customer order.
c. Shipping clerks compare goods received from warehouse with details on shipping documents.
d. Prenumbered credit memos are used for granting credit for goods returned.
e. Goods returned for credit are approved by the supervisor of the sales department.
f. Approved sales orders are required for goods to be released from the warehouse.
g. Monthly statements are mailed to customers with outstanding balances.
h. Shipping clerks compare goods received from warehouse with approved sales orders.
i. Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed.
j. Control amounts posted to the accounts receivable ledger are compared with the control totals of invoices.
k. Daily sales summaries are compared with control total of invoices.
Required:
For each error or fraud, select one internal control that, if properly designed and implemented, most likely would be
effective in preventing or detecting the errors and fraud. Each response in the list of controls may be used once, more
than once, or not at all.*
*Based on AICPA question paper, American Institute of Certified Public Accountants
SOLUTION GUIDE:
No.
1.
2.
3.
4.
5.
6.
7.
8.
Possible Errors or Fraud
Invoices are sent for shipped goods, and are recorded
in the sales journal, but are not posted to any customer
accounts.
Invoices for goods sold are posted to incorrect
customer accounts.
Invalid transactions granting credit for sales returns are
recorded.
Goods are removed from inventory for unauthorized
orders.
Credit sales are made to customers with unsatisfactory
credit ratings
Invoices are sent to co-participants in a fraudulent
scheme, and sales are recorded for fictitious
transactions.
Goods shipped to customers do not agree with goods
ordered by customers.
Invoices are sent for shipped goods, but are not
recorded in the sales journal.
Internal Control
.
37
PROBLEM 5
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
The following sales procedures were encountered during the annual audit of Griezmann Wholesale Distributing Company:
Customer orders are received by the sales order department. A clerk computes the ap-proximate dollar amount of the
order and sends it to the credit department for approval.
Credit approval is stamped on the order and sent to the accounting department. A computer is then used to generate two
copies of a sales invoice. The order is filed in the customer order file.
The customer copy of the sales invoice is held in a pending file awaiting notification that the order was shipped. The
shipping copy of the sales invoice is routed through the warehouse, and the shipping department has authority for the
respective departments to release and ship the merchandise. Shipping department personnel pack the order and
manually prepare a three-copy bill of lading: The original copy is sent to the customer, the second copy is sent with the
shipment, and the other is filed in sequence in the bill of lading file. The sales invoice shipping copy is sent to the
accounting department with any changes resulting from lack of available merchandise.
A clerk in accounting matches the received sales invoice shipping copy with the sales invoice customer copy from the
pending file. Quantities on the two invoices are compared and prices are compared to an approved price list. The customer
copy is then mailed to the customer, and the shipping copy is sent to the data processing department.
The data processing clerk in accounting enters the sales invoice data into the computer, which is used to prepare the
sales journal and update the accounts receivable master file. She files the shipping copy in the sales invoice file in
numerical sequence.
Required:
a. To determine whether the internal controls operated effectively to minimize instances of failure to invoice a shipment,
the auditor would select a sample of transactions from the population represented by the
(1) customer order file.
(2) bill of lading file.
(3) customers’ accounts receivable master file.
(4) sales invoice file.
b.
To gather audit evidence that uncollected items in customers’ accounts represented existing trade receivables, the
auditor would select a sample of items from the population represented by the
(1) customer order file.
(2) bill of lading file.
(3) customers’ accounts receivable master file.
(4) sales invoice file.
c.
To determine whether the internal controls operated effectively to minimize in-stances of failure to post invoices to
customers’ accounts receivable master file, the
auditor would select a sample of transactions from the population represented by the
(1) customer order file.
(2) bill of lading file.
(3) customers’ accounts receivable master file.
(4) sales invoice file.*
*Based on AICPA question paper, American Institute of Certified Public Accountants
38
PROBLEM 6
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
The following are common tests of details of balances or substantive analytical procedures for the audit of accounts
receivable:
1.
2.
3.
4.
5.
6.
7.
Select 20 customer accounts from the accounts receivable master file and trace to the aged accounts receivable
listing to verify name and amount.
Select 20 customer accounts from the aged accounts receivable listing and trace to the accounts receivable master
file for name, amount, and aging category.
Prepare a bar chart showing amounts and percentages of accounts receivable in each aging category for the current
and prior year and evaluate trends.
Obtain a list of aged accounts receivable, foot and cross-foot the list using audit software, and trace the total to the
general ledger.
Compute accounts receivable turnover for the current year and compare to the prior year and the industry average.
Perform alternative procedures on accounts not responding to second requests by examining subsequent cash
receipts documentation and shipping reports or sales invoices.
Request 50 positive confirmations of accounts receivable
Required:
a. For each audit procedure, identify the balance-related audit objective or objectives it partially or fully satisfies. (Detail
tie-in, existence, completeness, accuracy, cut-off, realizable value, classification, rights, presentation)
b. In which order would the auditor perform the seven procedures? Briefly justify your answer.
SOLUTION:
Requirement 1:
Test of Details or Substantive Analytical Procedures
No.
for Accounts Receivable Audit
1. Select 20 customer accounts from the accounts receivable master
file and trace to the aged accounts receivable listing to verify name
and amount.
2. Select 20 customer accounts from the aged accounts receivable
listing and trace to the accounts receivable master file for name,
amount, and aging category..
3. Prepare a bar chart showing amounts and percentages of accounts
receivable in each aging category for the current and prior year and
evaluate trends.
4. Obtain a list of aged accounts receivable, foot and cross-foot the list
using audit software, and trace the total to the general ledger.
5. Compute accounts receivable turnover for the current year and
compare to the prior year and the industry average.
6. Perform alternative procedures on accounts not responding to
second requests by examining subsequent cash receipts
documentation and shipping reports or sales invoices.
7. Request 50 positive confirmations of accounts receivable.
Balance-related Audit Objective(s)
Requirement 2:
39
PROBLEM 7
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
The following misstatements are sometimes found in the sales and collection cycle’s account balances:
1.
2.
3.
Several cash receipts were posted to the incorrect customer accounts.
A shipment made in the subsequent period is recorded as a current period sale.
The allowance for uncollectible accounts is inadequate because of the client’s failure to reflect depressed economic
conditions in the allowance.
Several accounts receivable are in dispute as a result of claims of defective merchandise.
The pledging of accounts receivable to the bank for a loan is not disclosed in the financial statements.
Goods were returned for credit on the last day of the fiscal year but the sales return was not recorded until the following
fiscal year.
Several accounts receivable in the accounts receivable master file are not included in the aged trial balance.
One account receivable in the accounts receivable master file is included on the aged trial balance twice.
Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.
4.
5.
6.
7.
8.
9.
Required:
a. For each misstatement, identify the balance-related audit objective to which it pertains. (Detail tie-in, existence,
completeness, accuracy, cut-off, realizable value, classification, rights, presentation)
b. For each misstatement, list an internal control that should prevent it.
c. For each misstatement, list one test of details of balances audit procedure that the auditor can use to detect it.
SOLUTION GUIDE:
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Misstatement Found
Several cash receipts were
posted to the incorrect customer
accounts.
A shipment made in the
subsequent period is recorded
as a current period sale.
The allowance for uncollectible
accounts is inadequate because
of the client’s failure to reflect
depressed economic conditions
in the allowance.
Several accounts receivable are
in dispute as a result of claims
of defective merchandise.
The pledging of accounts
receivable to the bank for a loan
is not disclosed in the financial
statements.
Goods were returned for credit
on the last day of the fiscal year
but the sales return was not
recorded until the following
fiscal year.
Several accounts receivable in
the accounts receivable master
file are not included in the aged
trial balance.
One account receivable in the
accounts receivable master file
is included on the aged trial
balance twice.
Long-term interest-bearing
notes receivable from affiliated
companies are included in
accounts receivable.
Balance-Related Audit
Objective
Internal Control That
Should Prevent It
One Test of Details of
Balances Audit Procedure
40
PROBLEM 8
(Source: Auditing and Assurance Services 17th Edition by Arens, Elder and Beasley)
The following are the nine balance-related audit objectives, seven tests of details of balances for accounts receivable, and six
tests of controls or substantive tests of transactions for the sales and collection cycle:
Balance-Related Audit Objective:
Detail tie-in
Cut-off
Existence
Realizable Value
Completeness
Classification
Accuracy
Presentation
Test of Details of Balances, Test of Control, or Substantive Test of Transactions Audit Procedure
1. Confirm accounts receivable ending balances and sales terms, such as right of return and consignment arrangements.
2. Review sales returns after the balance sheet date to determine whether any are applicable to the current year.
3. Compare dates on shipping documents with the sales journal throughout the year.
4. Perform alternative procedures for nonresponses to confirmations.
5. Examine sales transactions for related-party or employee sales recorded as regular sales.
6. Examine sales invoices for consignment sales and other shipments for which control has not been transferred.
7. Trace a sample of accounts from the accounts receivable master file to the aged trial balance.
8. Trace recorded sales transactions to shipping documents to determine whether a document exists.
9. Trace the balance of accounts receivable from related parties to proper disclosure in the footnotes to the financial
statements.
10. Trace a sample of shipping documents to related sales invoice entries in the sales journal.
11. Compare amounts and dates on the aged trial balance with the accounts receivable master file.
12. Trace from the sales journal to the accounts receivable master file to make sure the information is the same.
13. Inquire of management whether there are notes from related parties included with trade receivables.
Required:
a. Identify which procedures are tests of details of balances, which are tests of controls, and which are substantive tests of
transactions.
b. For each balance-related audit objective, identify which test of details of balances and test of controls or substantive test of
transactions partially satisfy the balance-related objective.
SOLUTION GUIDE:
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
Test of Details of Balances, Test of Control, or Substantive Test
of Transactions Audit Procedure
Confirm accounts receivable ending balances and sales terms, such as
right of return and consignment arrangements.
Review sales returns after the balance sheet date to determine whether
any are applicable to the current year.
Compare dates on shipping documents with the sales journal throughout
the year.
Perform alternative procedures for nonresponses to confirmations.
Examine sales transactions for related-party or employee sales recorded
as regular sales.
Examine sales invoices for consignment sales and other shipments for
which control has not been transferred.
Trace a sample of accounts from the accounts receivable master file to the
aged trial balance.
Trace recorded sales transactions to shipping documents to determine
whether a document exists.
Trace the balance of accounts receivable from related parties to proper
disclosure in the footnotes to the financial statements.
Trace a sample of shipping documents to related sales invoice entries in
the sales journal.
Compare amounts and dates on the aged trial balance with the accounts
receivable master file.
Trace from the sales journal to the accounts receivable master file to make
sure the information is the same.
Inquire of management whether there are notes from related parties
included with trade receivables.
Type of Test
Balance-Related
Audit Procedure
* may also include realizable value if cash receipts examined are for older accounts
41
PROBLEM 9 – Financial Statement Presentation
(Adapted from Auditing and Assurance Part 1- 2022 Edition, by Asuncion, Ngina and Escala)
On December 31, 2022, Miami Company’s Accounts Receivable balance per ledger of P 1,250,000 includes:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
MasterCard or VISA Credit Card sale of merchandise to customer
Overpayment to supplier for inventory purchased on account
Insurance claim on automobile accident
Advance to sales manager due in one year
Five year note receivable due from company president (This was issued by the
president for the loan granted to him.)
Interest due on 5-year note from company presid, interest payable manually
Acceptance of 6-month note for past due account arising from sale of inventory
Accrued interest receivable on the note above
Overpayment by customer of an account receivable
Accounts receivable to customer definitely uncollectible
Other trade accounts receivable - unassigned
Trade accounts receivable - assigned
Note receivable customer (this note is for a cash loan made to this customer
collectible in 3 years.
Claim for a tax refund from last year
Prepaid insurance - 4 months remaining in the policy period
Advances to or receivables from shareholders (P 100,000 is collectible currently)
Advances to affiliates
Subscription receivables
Special deposits on contract bids
Dividends receivables
Notes receivable dishonored
Accrued rent receivable
Claims against common carriers
Acceptance of 8-month note from employees arising from sale of inventory
Trade installment receivable due within 16 months, gross of unearned interest
income of P 20,000
TOTAL
10,000
20,000
2,000
4,000
300,000
6,000
5,000
100
(5,000)
4,000
50,000
10,000
30,000
3,000
4,000
250,000
125,000
150,000
30,000
10,000
5,000
6,000
4,900
6,000
220,000
1,250,000
REQUIRED:
Based on the above date, compute for the following:
1. Trade accounts receivable as of December 31, 2022
2. Trade notes receivable as of December 31, 2022
3. Trade and other receivables to be presented in the current section of the statement of financial position as of
December 31, 2922.
4. Noncurrent receivables as of December 31, 2022
5. Non-trade receivables as of December 31, 2022
42
SOLUTION GUIDE:
Trade
NO.
ITEMS
1. MasterCard or VISA Credit Card sale of merchandise to customer
2. Overpayment to supplier for inventory purchased on account
3. Insurance claim on automobile accident
4. Advance to sales manager due in one year
5. Five year note receivable due from company president (This was issued by the
president for the loan granted to him.)
6. Interest due on 5-year note from company president, interest payable manually
7. Acceptance of 6-month note for past due account arising from sale of inventory
8. Accrued interest receivable on the note above
9. Overpayment by customer of an account receivable
10. Accounts receivable to customer definitely uncollectible
11. Other trade accounts receivable - unassigned
12. Trade accounts receivable - assigned
13. Note receivable customer (this note is for a cash loan made to this customer
collectible in 3 years.
14. Claim for a tax refund from last year
15. Prepaid insurance - 4 months remaining in the policy period
16. Advances to or receivables from shareholders (P 100,000 is collectible currently)
17. Advances to affiliates
18. Subscription receivables
19. Special deposits on contract bids
20. Dividends receivables
21. Notes receivable dishonored
22. Accrued rent receivable
23. Claims against common carriers
24. Acceptance of 8-month note from employees arising from sale of inventory
25. Trade installment receivable due within 16 months, gross of unearned interest
income of P 20,000
TOTAL
Trade
Amount Accts. Rec. Notes Rec.
10,000
10,000
20,000
2,000
4,000
300,000
6,000
5,000
100
(5,000)
4,000
50,000
10,000
30,000
3,000
4,000
250,000
125,000
150,000
30,000
10,000
5,000
6,000
4,900
6,000
220,000
1,250,000
Other Current
Receivables
20,000
2,000
4,000
TAOR
Noncurrent
Non-trade
Receivables
Receivables
10,000
20,000
2,000
4,000
20,000
2,000
4,000
300,000
6,000
5,000
100
REMARKS
6,000
5,000
100
300,000
6,000
100
Current Liability
50,000
10,000
50,000
10,000
3,000
3,000
100,000
100,000
30,000
30,000
3,000
150,000
125,000
250,000
125,000
Prepaid Insurance
Deduction from Subscribed SC
30,000
10,000
6,000
10,000
5,000
6,000
4,900
6,000
11,000
200,000
442,000
5,000
6,000
4,900
200,000
275,000
156,000
30,000
10,000
6,000
4,900
635,000
791,000
43
PROBLEM 10 – Financial Statement Presentation
(Source: Practical Auditing 2022 Edition by Empleo)
You were engaged to perform an audit of the accounts of the FONTANA BLUE CORPORATION for the year ended
December 31, 2021, and have observed the taking of the physical inventory of the company on December 29, 2021. Only
merchandise shipped by the Fontana Blue Corporation to customers up to and including December 29, 2021 have been
eliminated from inventory. The inventory as determined by physical inventory count has been recorded in the books by
the company's controller. No perpetual inventory records are maintained. All sales are made on an FOB shipping point
basis. You are to assume that all purchase invoices have been correctly recorded.
The following list of sales invoices are entered in the sales books for the months of December 2021 and January 2022,
respectively.
Cost of Goods
Sold
20,000
18,000
6,000
24,000
56,000
f.
120,000
Dec. 30
Date Shipped
December 31, 2021
December 31, 2021
December 30, 2021
January 3, 2022
December 29, 2021
(Shipped to consignee)*
80,000 January 2, 2022
2022 g.
h.
i.
j.
60,000
40,000
80,000
90,000
Dec. 31
Jan. 2
Jan. 3
Jan. 4
40,000
23,000
55,000
64,000
December 2021
January
Sales Invoice
Amount
Date
30,000
Dec. 21
22,000
Dec. 31
10,000
Dec. 29
40,000
Dec. 31
100,000
Dec. 30
a.
b.
c.
d.
e.
December 30, 2021
January 2, 2022
December 31, 2021
December 29, 2021
*Verification from consignee indicates that 60% of the merchandise is still unsold at December 31, 2021.
Required:
Prepare the necessary adjusting journal entries at December 31, 2021 in connection with the foregoing information.
44
PROBLEM 11
(Source: Practical Auditing 2022 Edition by Empleo)
You are assigned to audit the Magnolia Company for the year ending June 30, 2021. The accounts receivable were
circularized as at June 30, 2021 and the following exceptions have not been disposed of:
Customer
A
B
C
D
E
F
G
H
I
J
Balance
Comments from Customer
30,000 Balance was paid on June 29, 2021
74,000 Balance was offset by our June 10
shipment of tires.
16,200 The above balance has been paid.
15,000 Our records show a balance of P
5,000, after payment of P 10,000 on
June 22, 2021.
24,000 We do not owe Magnolia anythng on
June 30 as goods were received in
July 2021, FOB destination.
15,000 Our deposit of P 60,000 should cover
this balance.
85,000 We never received these goods.
Audit Findings
Magnolia received mailed check on July 2, 2021.
Magnolia credited accounts payable for P 74,000
to record purchase of tires.
The balance was credited to Customer L.
The P 10,000 collection was verified to have been
deposited, but was recorded as a cash sale.
The shipment costing P 16,500 was made on June
29, 2021 and the goods were not included in
recording the June 30, 2021 inventory.
Magnolia had previously credited the deposit to
sales.
The shipment was erroneously made to another
customer, and the goods costing P 59,000 are
now on its way to G. The shipment was made
FOB destination.
10,000 We are rejecting the price, which is Magnolia's clerk erroneusly computed the unit
too much.
price at P 200. The corret pricing should have
been at P 150 per unit.
180,000 Amount is okey. Since this is on
Goods cost P 120,000 and were excluded in
consignment, we will remit payment Magnolia's inventory.
upon selling the goods.
5,000 CM No. 3256 cancels this balance.
The CM dated May 31, 2021 was recorded by
Magnolia in July 2021.
Required: Audit Adjusting Entries.
45
PROBLEM 12 (Problem 8 in Lecture Video Presentation)
“Results of Receivable Confirmation”
(Adapted from CPA Reviewer in Auditing Problems by Solita A. Frias)
You obtained from your client, SLC Corporation, the following schedule of accounts receivable as of October 31, 2021:
Act. No.
2018-20
2018-35
2018-45
2018-80
2018-85
2019-05
2019-20
2019-25
2020-33
2020-40
2020-42
2021-12
2021-25
2021-38
2021-50
Conf. No.
001
002
003
004
005
006
007
008
009
010
011
012
013
014
015
Name of Customers
Melba dela Cruz
Ronald Magno
Ana Marie Querol
Aiko Villavicencio
Cleofe Santiago
Aezelle Villavicencio
Jesse Caling
Arthur Galicio
Remuel Bernardo
Benjamin Cabudbod
Rhoda Marano
Shirley Layug
Jenielyn Mariano
Anjelo Cruz
Gieron Adriano
Balance
18,000
12,000
10,000
10,000
10,000
16,000
24,000
8,000
14,000
30,000
2,000
22,000
4,000
8,000
12,000
200,000
You traced the items in this schedule to individual account balances in the subsidiary ledger, checked the footing and
ascertained that addresses were complete and adequate. You also reconciled the schedule balance with the controlling
account in the general ledger ad found them to be in agreement.
On November 8, 2021, you mailed out confirmation request to all customers above with the exception of Rhoda Maraño
which you verified personally since she is working with the company as secretary.
By
1.
2.
3.
4.
November 30, 2021, the following replies had been arrived:
Aiko Villavicencio, received November 15, confirms balance of P 10,000.
Ana Marie Querol, returned by Post Office “Addressee Unknown.”
Jesse Caling, received November 20, remarks “Balance is now paid.”
Benjamin Cabudbud, received November 25, confirms P 20,000, remarks “We returned P 10,000 worth of
merchandise on November 12”.
5. Gieron Adriano, returned by post office, “No such person”.
6. Anjelo Cruz received November 26, confirms only P 6,000 remarks “You overcharged us P 2,000, we did not order
lipstick.”
You verified that P 10,000 of merchandise was actually returned by Benjamin Cabudbud on November 12. This was
covered by the company credit memo number 1615. You also verified an error in billing Anjelo Cruz for P 2,000. This
error was corrected by the company on November 10.
In
1.
2.
3.
4.
5.
accordance with instructions from your senior, you verified that the following were paid in November:
Aiko Villavicencio, paid November 15, OR No. 4567.
Jesse Caling, paid November 18, OR No. 5125.
Ana Marie Querol, paid November 26, OR No. 5978.
Aezelle Villavicencio, paid November 24, OR No. 5467.
Rhoda Maraño, paid November 16, OR No. 4789
On December 2 you mailed the second requests for confirmations to all those who did not reply to the first requests, and
by December 15 you received the following replies:
1. Cleofe Santiago, received December 7, P 10,000 OK
2. Arthur Galicio, received December 8, remarks “This is not yet due, you allowed me 90 days credit.”
3. Shirley Layug, December 10, Balance of P 22,000 confirmed.
46
Required:
Working papers compiling results of confirmation using the following column headings:
Account Number
Name of Customers
Confirmation Number
Address
Per Client, October 31, Dr. Cr.
Confirmation Results
(1) Confirming balance
(2) Reporting differences
(3) Returned by Post Office
(4) No Reply
Subsequent collection to Nov. 30
(1) Date
(2) OR number
(3) Amount
Remarks
47
SOLUTION:
SLC CORPORATION
Working Paper for Accounts Receivable Confirmation
October 31, 2021
Act. No.
2018-20
2018-35
2018-45
2018-80
2018-85
2019-05
2019-20
2019-25
2020-33
2020-40
2020-42
2021-12
2021-25
2021-38
2021-50
Name of Customers
Melba dela Cruz
Ronald Magno
Ana Marie Querol
Aiko Villavicencio
Cleofe Santiago
Aezelle Villavicencio
Jesse Caling
Arthur Galicio
Remuel Bernardo
Benjamin Cabudbud
Rhoda Marano
Shirley Layug
Jenielyn Mariano
Anjelo Cruz
Gieron Adriano
Conf. No
001
002
003
004
005
006
007
008
009
010
011
012
013
014
015
Address
PER CLIENT
As of October 31, 2021
Debit
Credit
18,000
12,000
10,000
10,000
10,000
16,000
24,000
8,000
14,000
30,000
2,000
22,000
4,000
8,000
12,000
200,000
100%
CONFIRMATION RESULTS
SUBSEQUENT COLLECTIONS
Confirming Reporting Returned by
Up to November 30, 2021
Balance Differences Post Off. NO REPLY
Date
OR No.
Amount
REMARKS
18,000
12,000
10,000
11/26/2021
5978
10,000
10,000
11/15/2021
4567
10,000
10,000
16,000 11/24/2021
5467
16,000
24,000
11/18/2021
5125
24,000
8,000
14,000
20,000
10,000
P 10,000 returned on 11/12 - CM 1615
2,000
11/16/2021
4789
2,000
22,000
4,000
6,000
2,000
Overbilling confirmed; corrected on 11/10.
12,000
78,000
36,000
22,000
64,000
62,000
39%
18%
11%
32%
31%
48
PROBLEM 13
(Source: Practical Auditing 2022 Edition by Empleo)
Presented below and overleaf is information related to the Accounts Receivable accounts of Balimbing, Inc. during the
current year 2021:
a.
The Accounts Receivable control account has a debit balance of P 321,000 on December 31, 2021.
b.
An aging schedule of the accounts receivable as of December 31, 2021 is as follows:
% to be applied after
correction made
1%
3%
6%
P 4,000 definitiely uncollectible
remainder estimated at
25% uncollectible
Two entries were made in the Uncollectible accounts expense account during the year:
1) a debit on December 31 for the amount credited to Allowance for Uncollectible Accounts.
2) a credit for P 2,740 on November 3, 2021, and a debit to Allowance for Uncollectible Accounts because of a
bankruptcy. The P 2,740 write-off of receivables is related to the 91-120 day category.
Age
Under 60 days
6- - 90 days
91- 120 days
Over 120 days
c.
d.
The Allowance for Uncollectible Accounts is as follows for 2021:
Date
Jan. 01
Nov. 03
Dec. 31
e.
Net Debit
Balance
175,000
80,000
42,000
24,000
Particulars
Beginning balance
Write-off
Provision (5% x P 321,000)
Debit
Credit
2,740
16,050
Balance
8,750
6,010
22,060
A credit balance exists in the Accounts Receivable (61 - 90 days) of P 4,800, which represents an advance on a
sales contract.
REQUIRED:
1) Audit adjusting entries at December 31, 2021.
2) Compute the correct balances of Accounts Receivable and Allowance for Uncollectible Accounts at December 31,
2021.
3) Compute the correct amount of Uncollectible Accounts Expense for the year 2021.
49
PROBLEM 14 ((Problem 10 in Lecture Video Presentation)
Various Recorded Transactions Affecting Accounts Receivable and Related Accounts
During your audit of Hawk Company for the year 2021, the following accounting records are presented to you by the
accounting department manager:
SALES JOURNAL
Date
2021
Dec. 02
05
10
13
18
21
23
27
31
Sold To
Inv. No.
Alpha Company
Beta Supplies Corporation
Charlie Manufacturing Company
Delta Services, Inc.
Echo Corporation
Foxtrot Link, Inc.
Golf Leisure Park, Inc.
Hotel Magnifico Corporation
Total per record
Acct. Rec.
Debit
DR No.
5551
5552
5554
5555
5556
5557
5558
5559
6053
6058
6063
6070
6085
6091
6101
6115
200,000
250,000
300,000
150,000
420,000
370,000
235,000
360,000
2,285,000
Sales Rev.
Credit
200,000
250,000
300,000
150,000
420,000
370,000
235,000
360,000
2,285,000
CASH RECEIPTS JOURNAL
Date
2021
Dec. 01
03
07
12
16
19
22
26
29
Received From
Yankee Trading Company
Zulu Corporation
Romeo Services Company
Alpha Company
Beta Supplies Corporation
Oscar Dining Place, Inc.
Delta Services, Inc.
Lima Trading Company
Whiskey Beverages Company
Total per record
OR No.
6101
6102
6103
6104
6105
6106
6107
6108
6109
Cash
Debit
Inv. No.
5545
5540
5553
5551
5552
3705
5555
5320
5250
240,000
98,000
120,000
174,600
250,000
50,000
50,000
80,000
350,000
1,172,600
Sales Disc.
Debit
2,000
5,400
Acct. Rec.
Credit
Sales Rev.
Credit
240,000
100,000
120,000
180,000
250,000
50,000
50,000
80,000
7,400
350,000
1,100,000
80,000
Further audit revealed the following:
1. Collection from Yankee Trading Company on December 1, 2021 was paid by a check but returned by the bank due
to insufficiency of fund. As of December 31, 2021, the account is still outstanding.
2. Collection from Zulu Corporation on December 3, 2021 was paid within the discount period. Based on Invoice No.
5540, the cash discount should be 3%. Zulu agreed to offset the difference to future purchase transactions.
3. Credit sales on December 10, 2021 to Charlie Manufacturing Company is for 320,000 based on Invoice No. 5554
but the P 20,000 worth of goods were returned on the same date due to inferior quality. A credit memo was also
issued on December 10 regarding this return.
4. The collection from Alpha Company on December 12, 2021 is net of sales returns of P 20,000 on December 13 due
to inferior quality. The term of the sales is 3/10, n/30.
5. The collection from Beta Supplies Corporation on December 16, 2021 has a credit term of 3/10, n/30.
6. The collection from Oscar Dining Place, Inc. on December 19, 2021 was a collection of accounts written off in year
2020 but recovered in 2021. This is the only entry made upon recovery of such account.
7. The cash receipt from Delta Services, Inc. on December 22, 2021 is a partial collection of account with a credit term
of 3/10, n/30.
8. Credit sales to Golf Leisure Park, Inc. with Invoice No. 5558 is erroneously extended resulting to understatement of
sales by P 5,000.
9. The collection from Lima Trading Company was not recorded in sales journal. Its related Delivery Receipt was
dated September 11, 2021.
The account balances of the following accounts are as follows:
A. Accounts Receivable at November 30, 2021 - P 750,000
B. Sales Discount from January 1 to November 30, 2021 - P 23,600.
C. Sales Revenue from January 1 to November 30, 2021 - P 21,120,000
50
Required:
1. Compute the unadjusted balances at December 31, 2021 of the following accounts:
A. Accounts Receivable
B. Sales Discount
C. Sales Revenue
2. Prepare the necessary adjusting journal entries at December 31, 2021.
3. Compute the adjusted balances at December 31, 2021 of the following accounts:
A. Accounts Receivable
B. Sales Discount
C. Sales Revenue
SOLUTION:
SOLUTION:
1. Computation
of unadjusted
unadjusted balances
December 1, 2021
1. Computation
of the
AT, SalesatDiscounts
Balances at November 30, 2021 (beginning balances)
Balances per Sales Journal, December 31, 2021 (credit sales)
Balances per Cash Receipts Journal, December 31, 2021
Total
Balances, December 31, 2021, unadjusted (ending balances)
2.
Accounts Receivable
Deb it
Credit
750,000
2,285,000
1,100,000
3,035,000
1,100,000
1,935,000
Adjusting Journal Entries:
Date
Account Names
2021
(AJE NO.1)
Dec. 31 Accounts Receivable - Yankee Trading Company
Cash
NSF Check.
(AJE NO.2)
31 Sales Discount [(3% - 2%) x P 100,000]
Customer's Credit Balances - Zulu Corporation
Understatement of sales discount to customers.
(AJE NO.3)
31 Accounts Receivable - Charlie Manufacturing Company
Sales Revenue
Understatement of sales - Sales Invoice NO. 5554
(AJE NO.4)
31 Accounts Receivable - Oscar Dining Place, Inc.
Allowance for Doubtful Accounts
Re-establishment of accounts previously written off.
(AJE NO.5)
31 Accounts Receivable - Golf Leisure Park, Inc.
Sales Revenue
Understatement of sales - Sales Invoice NO. 5558
(AJE NO.6)
31 Accounts Receivable - Lima Trading Company
Accounts Receivable - Lima Trading Company
Understatement of sales in September 11, 2021
(AJE NO.7)
31 Accounts Receivable -Romeo Services Company
Sales Revenue
Unrecorded Sales in December, 2021 with SI No. 5553
Debit
Credit
240,000
240000
1,000
1,000
20,000
20,000
50,000
50,000
5,000
5,000
80,000
80,000
120,000
120,000
51
3.
Adjusted balances at December 31, 2021
Balances at December 31, 2021, unadjusted
Adjustments:
1. Yankee Trading Company
2. Zulu Corporation
3. Charlie Manufacturing Company
4. Oscar Dining Place, Inc.
5. Golf Leisure Park, Inc.
6. Lima Trading Company
7. Romeo Services Company
8. Understated footing of cash receipts journal
Accounts Receivable
Debit
Credit
1,935,000
Sales Revenue
Debit
Credit
23,405,000
240,000
1,000
20,000
50,000
5,000
80,000
120,000
2,450,000
Balances, December 31, 2021, unadjusted
Sales Discount
Debit
Credit
31,000
2,210,000
20,000
5,000
80,000
120,000
240,000
240,000
32,000
23,550,000
52
PROBLEM 15
Working Paper for Notes Receivable
During the course of the audit of the financial statements of Cyprus Corporation (C-Corp.) for the year ended December
31, 2021, you examined the notes receivable represented by the following:
PN
1
2
3
4
5
Maker
Alaska Company
Hakuna Matata
Norway Investment Corp.
R. Julio, C-Corp. president
Sweden Company
Rate
16%
16%
16%
16%
Principal
100,000
250,000
300,000
80,000
60,000
Term
4-months
90 days
60 days
90 days
120 days
Discounting of Notes
Date of PN
Date
Rate
11/30/2021 11/30/2021 16%
11/01/2021
05/03/2021
01/04/2021
09/14/2021
-
Nature of Transaction and Other Remarks
2,500 preference shares subscription at P 100 each
Dishonored at maturity; Collection doubtful
Note not renewed; president confirmed
Note is held by bank as collateral
In addition to the above, a draft payable 30 days after date for P 450,000 by the Brazil Company on the Denmark Company
in favor of the Greece Company, endorsed to Cyprus Company, on December 2, 2021 and accepted on December 4,
2021.
Required:
From the information presented, prepare the following:
1.
Working papers for the Notes Receivable as of December 31, 2021 using the following columns: (All answers must
be rounded off to the nearest peso)
CYPRUS CORPORATION
Notes Receivable
December 31, 2021
Maker
2.
3.
NOTES RECEIVABLE - TRADE
DATE
of Note
Due/Maturity Date
Interest Rate
Amount
INTEREST - 12/31/2021
Received Accrued
Earned
REMARKS
Prepare all the necessary audit adjustments, including entries for interest accrued and prepaid
How will you present Notes Receivable to statement of financial position at December 31, 2021?
53
Reclassifying Journal Entries
2. The necessary audit adjustments, including entries for interest accrued and prepaid
Critical
part of
the
problem
Date
Account Names
2021
(AJE 1)
Dec 31 Subscription Receivable - Hakuna Matata
Notes Receivable
(AJE 2)
31 Accounts Receivable - Norway Investment Corporation
Notes Receivable
Interest Income
(AJE 3)
31 Advances to Officers - R. Julio
Notes Receivable
(AJE 4)
31 Prepaid Interest - Alaska Co. (P 105,333 MV x 16% x 3/12)
Interest Expense
To record prepaid interest for January to March, 2021
Debit
Credit
250,000
Hakuna Matata
250,000
308,000
Norway Investment Corporation
300,000
8,000
80,000
R. Julio, Company President
80,000
4,213
Alaska Company - From 12/31/2021 to 3/30/2022 (3 months)
4,213 Per policy, expense method is used when notes is discounted
(AJE 5)
31 Interest Income (P 100,000 x 16% x 3/12)
Unearned Interest Income - Alaska Company
4,000
Alaska Company - From 12/31/2021 to 3/30/2022 (3 months)
4,000 Income method is used upon discounting
(AJE 6)
31 Interest Receivable - Sweden Company
Interest Income
2,880
(AJE 7)
31 Interest Receivable - Hakuna Matata
Interest Income
6,667
Sweden Company - From 12/31/2021 to 3/30/2022 (3 months)
2,880
Hakuna Matata - From 12/31/2021 to 3/30/2022 (3 months)
6,667
54