AUDITING AND ASSURANCE:
CONCEPTS AND APPLICATIONS 1
Ishmael Y. Reyes, CPA
Table of Contents
Module 1: Audit of Cash and Cash Equivalent 1
Introduction
Learning Outcomes
Lesson 1. Audit Objectives
Lesson 2. Audit Procedures
Lesson 3. Sample Problem 1-1: Santiago Company
Lesson 4. Sample Problem 1-2: Onor Company
Lesson 5. Sample Problem 1-3:Benjamin Corporation
Lesson 6. Sample Problem 1-4: Ursula Company
Lesson 7. Sample Problem 1-5: Samantha, Inc.
Lesson 8. Sample Problem 1-6: Tanya Company
Assessment Task
Summary
References
Module 2. Audit of Cash and Cash Equivalent 2
Introduction
Learning Outcomes
Lesson 1. Sample Problem 2-1: ABX, Inc.
Lesson 2. Sample Problem 2-2: NARCISA Company
Lesson 3. Sample Problem 2-3: Fermin Company
Lesson 4. Sample Problem 2-4: Ian Company
Assessment Task
Summary
References
Module 3. Audit of Receivables
Introduction
Learning Outcomes
Lesson 1. Audit of Receivables Objectives
Lesson 2. Audit of Receivables Procedures
Lesson 3. Sample Problem 3-1: Upat Company
Lesson 4. Sample Problem 3-2: Inuyasha Company
Lesson 5. Sample Problem 3-3: Rovers, Inc.
Lesson 6. Sample Problem 3-4: IYR Company
Lesson 7. Sample Problem 3-5: The Mexican Company
Lesson 8. Sample Problem 3-6: Ikebana Company
Assessment Task
Summary
References
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Module 4. Audit of Receivables 2
Introduction
Learning Outcomes
Lesson 1. Sample Problem 4-1 : Forever Company
Lesson 2. Sample Problem 4-2 : Bunsoy Company
Lesson 3. Sample Problem 4-3 : Visage Corporation
Lesson 4. Sample Problem 4-4 : YZA, Inc
Lesson 5. Sample Problem 4-5: Isaiah Corporation
Assessment Task
Summary
References
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Course Code:
AUDIT 2
Course Description: This course tests the students’ proficiency in
applying audit standards, techniques, and procedures to a typical
independent audit of a medium-sized service, trading or manufacturing
concern.
Course Intended Learning Outcomes (CILO):
At the end of the course, students should be able to:
1. Plan and perform an audit
2. Analyze data for possible errors and irregularities
3. Formulate adjusting entries, resolve audit issues
4. Prepare working papers and complete the audit including the
preparation of the audit report.
Course Requirements:


Assessment Tasks - 60%
Major Exams
- 40%
Periodic Grade
100%
PRELIM GRADE
MIDTERM GRADE
FINAL GRADE
: 60% (Activity 1-4) + 40% (Prelim exam)
: 30% (Prelim Grade) + 70 % [60% (Activity 5-7)
+ 40% (Midterm exam)]
: 30% (Midterm Grade) + 70 % [60% (Activity 8-10)
+ 40% (Final exam)]
MODULE 1
Audit of Cash and Cash Equivalents 1
Introduction
Auditing cash tends to be straightforward. We usually just obtain the bank
reconciliations and test them. We send confirmations and vouch the outstanding reconciling
items to the subsequent month’s bank statement. But are such procedures always adequate?
Hardly. in this section, we will look at the audit objectives and procedures involved in the audit
of cash and cash equivalents and we will solve CPA board exam-type problems.
Learning Outcomes
After completing the module, the student should be able to:
1. Determine the audit objectives and procedures involved in the audit of cash and cash
equivalents
2. Solve cash balances audit problems
3. Construct a working paper for solving problems involving cash balances
Lesson 1. Audit Objectives (Roque , 2018)
The objectives of audit of cash and cash equivalents are to:
1. express cash balances at the end of the reporting period represent cash and cash items on
hand, in transit to, or in depository banks.
2. show that cash transactions have been properly recorded.
1
3. prove that cash balances are properly described and classified, and adequate disclosures
with respect to amounts restricted as to withdrawal are made in the financial statements
(Roque, 2018).
Lesson 2. Audit Procedures (Roque, 2018)
1. Conduct a cash count of undeposited collections, petty cash, and other funds.
a) Obtain custodian's signature to acknowledge return of items counted.
b) Reconcile items counted with general ledger balances.
c)
Trace undeposited collections counted to bank reconciliation
d) Follow up dispositions of items in cash counted:
i.
Undeposited collections should be traced to bank deposits.
ii.
Checks accommodated in petty cash should be deposited after the count to
establish their validity.
iii. IOUs in the petty cash should be confirmed and traced to collections in the next
payroll period.
iv. Expense vouchers should be traced to the succeeding replenishment voucher.
e) Coordinate cash count with count of marketable securities and other negotiable
assets of the client.
f)
Obtain confirmation of year-end fund balances of cash not counted in branches or
other offices.
2. Confirm bank balance by direct correspondence with all banks in which the client has had
deposits and loans during the year.
3. Obtain bank reconciliation.
a) Check arithmetical accuracy of reconciliation.
b) Trace balance per book to the general ledger balance of cash account.
c)
Trace balance per bank to bank statement and compare with amount confirmed by
bank.
d) Establish authenticity of reconciling items by reference to their respective sources,
like:
i.
Bank debit or credit advices.
ii.
Duly approved journal vouchers.
2
e) Investigate checks outstanding for a long period of time.
i.
Consider adjustment, especially if the check is already stale.
ii.
Consider the possibility of an erroneous preparation of the check.
iii. Investigate any unusual reconciling items.
iv. Where internal control over cash is weak, consider preparing a proof of cash
reconciliation.
4. Obtain cut off bank statement showing the client's transactions with the bank at least one
week after the reporting date, and:
a) Trace year-end reconciling items, like:
i.
Deposit of the year-end undeposited collections.
ii.
Completeness of year-end outstanding checks.
iii. Corrections of bank errors.
b) Examine supporting documents of year-end outstanding checks that did not clear in
the cut off bank statement.
5. Obtain a list of interbank transfers of funds a few days before and after the reporting date.
i.
Vouch supporting documents.
ii.
Ascertain that the related receipts and disbursements were booked by the client
within the same day or at least within the same month.
6. Test reasonableness of cut off by.
a) Comparing dates of checks returned with cut off bank statement to dates of recording
in the cash disbursements register.
b) Tracing receipts recorded a few days before the reporting date to bank deposits.
7. Inspect savings account passbook and certificates of deposits.
a) Reconcile with book balances.
b) Update interest earned posting on passbooks, if necessary.
c)
Compare balances with bank confirmation reply.
8. Determine any restrictions on availability of cash.
3
9. Determine propriety of financial statement presentation and adequacy of disclosures
(Roque, 2018).
Lesson 3. Sample Problem 1-1 : Santiago Company (Cabrera, 2018)
The accountant of Santiago Company is in the process of preparing the company’s financial
statements for the year ended December 31, 2018. He is trying to determine the correct
balance of cash and cash equivalents to be reported as a current asset in the statement of
financial position. The following items are being considered:


Balances in the company’s accounts at the Metropolitan Bank:
Current account
P81,000
Savings account
132,600
Undeposited customer checks of P22,200 (including a customer check dated January 2,
2019, for P3,000).

Currency and coins on hand
P3,480.

Savings account at the Northern Philippines Bank with a balance of P2,400,000. this
account is being used to accumulate cash fro future plant expansion (in 2019).

P120,000 in a current account at the Northern Philippines Bank. This represents a 20%
compensating balance for P600,000 loan with the bank. Santiago Company is legally
restricted to withdraw funds until the loan is due in 2021.


Treasury Bills:
Two-month maturity bills
P90,000
Seven-month bills
120,000
Time deposit (placement term is 2 months),
P100,000.
What total amount of cash and cash equivalents should be reported under current assets?
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Answer: P427,480
Solution:
Savings and current accounts - Metropolitan Bank (P132,600 + P81,000)
P213,600
Undeposited customer checks (P22,200 - P3,000)
19,200
Currency and coins on hand
3,480
Petty cash
1,200
Two-month treasury bills
90,000
Time deposit
100,000
Total cash and cash equivalents
P427,480
Lesson 3: Sample Problem 1-2: Onor Company (Roque, 2018)
1. In connection with your audit of the financial statements of Onor Company for the year
ended December 31, 2018, you gathered the following information.
The company maintains its current account with Tsunami Bank. The bank statement on
December 31, 2018, showed a balance P638,340.
Your audit of the company’s account with Tsunami Bank disclosed the following:

A check for P22,500 received from a customer whose account is current had been
deposited and then returned by the bank on December 28, 2018. No entry was made for
the return of this check. The customer replaced the check on January 15, 2019.

A check for P5,720 was cleared by the bank as P7,520. the bank made the correction on
January 2, 2019.

A check for P3,500 representing payment of an employee advance was received and
deposited on December 27, 2018, but was not recorded until January 3, 2019.
5

Postdated checks totaling P67,300 were included in the deposit in transit. These
represent collections of current accounts receivable from customers. The checks were
actually deposited on January 5, 2019.

Various debit memos for drafts purchased for payment of importation of equipment
totaling P230,000 were not yet recorded. These purchases were set up as accounts
payable. Said equipment arrived in December 2018.

Interest earned on the bank balance for the 4th quarter of 2018, amounting to P1,950 was
not recorded.

Bank service charges totaling P1,260 were not recorded.

Deposit in transit and outstanding checks at December 31, 2018 totaled P136,250 and
P276,380 respectively.
2. Various expenses from the company’s imprest petty cash fund dated December 2018,
totaled P16,250, while those dated January 2019, amounted to P5,903. Another disbursement
from the fund dated December 2018 was a cash advance to an employee amounting to
P3,500. a replenishment if the petty cash fund was made on January 8, 2019.
3. The company’s trial balance on December 31, 2018, includes the following accounts:
Cash in bank - Tsunami Bank
P748,320
Cash in bank - Earthquake bank restricted account for
plant expansion, expected to be disbursed in 2019)
Petty cash fund
700,000
30,000
Time deposit, placed December 20, 2018, and due
March 20, 2019
Money market placement - Prudential Bank
1,000,000
4,000,000
1. What is the adjusted petty cash fund balance on December 31, 2018?
2. The petty cash shortage on December 31, 2018 is
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3. What is the adjusted Cash in Bank - Tsunami Bank balance on December 31, 2018?
4. The entry to adjust the Cash in Bank - Tsunami Bank account should include a debit to AR
5. The December 31, 2018, statement of financial position should show “Cash and cash
equivalents” at Answers:
1. P10,250
2. P0
3. P432,710
4. P89,800
5. P5,442,960
Solutions:
1. Petty cash fund per trial balance
P30,000
Various expenses dates December 2018
(16,250)
Employee cash advance
(3,500)
Adjusted petty cash fund balance
10,250
2. Insufficient information
Book
Bank
Unadjusted balances
P748,320
P638,340
NSF Check
(22,500)
Bank error (7,520 - 5,720)
1,800
Unrecorded cash receipt
3,500
Postdated checks
(67,300)
Bank debit memos
(230,000)
Interest earned
1,950
Bank service charges
(1,260)
Outstanding checks
(276,380)
Adjusted balances
P432,710
3. Accounts receivable (22,500 + 67,300)
89,800
P432,710
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Accounts payable
230,000
Bank service charges
1,260
Cash in bank
315,610
Advances to employees
3,500
Interest income
1,950
4. Cash in Bank - Tsunami Bank
P432,710
Petty cash fund
10,250
Time deposit
1,000,000
Money market placement
4,000,000
Cash and cash equivalent
P5,442,960
Lesson 5: Sample Problem 1- 3: Benjamin Corp. (Roque, 2018)
In connection with your audit of the financial statements of Benjamin Corp for the year ended
December 31, 2018, you conducted a surprise count of the company’s petty cash fund and
undeposited collections at 8:20a.m. on January 3, 2019. Your count disclosed the following:
Bills and coins
Bills
Coins
P100.00
5 pieces
5.00
18 pieces
P50.00
40 pieces
1.00
206 pieces
P20.00
48 pieces
0.25
32 pieces
Checks
Date
Payee
Maker
Amount
Dec 30
Cash
Custodian
P1,200
Dec 30
Benjamin Corp
SLV Inc
14,000
Dec 31
Benjamin Corp
Mario Lansang, sales manager
1,680
Dec 31
Benjamin Corp
MSU Corp
17,800
Dec 31
Benjamin Corp
Ateneo Inc
8,300
Dec 31
Taiwan Corp
Benjamin Corp
27,000
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Unreimbursed vouchers
Date
Payee
Desciption
Amount
Dec 23
Mario Lansang, sales manager
Advance for trip to Tagaytay P20,000
Dec 28
Central Post Office
Postage Stamps
1,620
Dec 29
Messengers
Transportation
150
Dec 29
Byte Inc
Computer repair
800
Other items found inside the cash box:
1. Unclaimed pay envelope of Juan MacDonut. Indicated on the pay slip is his net salary of
P7,500. your inquiry revealed that Juan’s salary is mingled with the petty cash fund.
2. The sales manager’s liquidation report for his Tagaytay City trip.
Cash advance received on Dec 23
P20,000
Less: Hotel accommodation, meals, etc.
P16,000
Bus fare for two
1,200
Cash given to Pablo, salesman
1,000
Balance
18,200
P1,800
Accounted for as follows:
Cash returned by Pablo to the sales manager
P120
Personal check of the sales manager
1,680
Total
P1,800
Additional information:
1. The custodian is not authorized to cash checks.
2. The last official receipt included in the deposit on December 30 is No. 4351 and the last
official receipt issued for the current year is No. 4355. the following official receipts are all
dated December 31, 2018.
OR No
Amount
Form of Payment
4352
P13,600
Cash
4353
17,800
Check
4354
3,600
Cash
9
4355
8,300
Check
The petty cash balance per general ledger is P25,000. the last replenishment of the fund was
made on December 22, 2018.
1. What is the amount of shortage due from the sales manager?
2. What is the amount of undeposited collections on December 31, 2018?
3. The adjusting entries on December 31, 2018, should include a net debit to Travel Expenses
of 4. The cash count should include total checks of 5. What is the total cash shortage?
Answers:
1. P240
2. P57,300
3. P18,080
4. P42,980
5. P22,166
Solutions:
1. Cash advance
P20,000
Less: Actual cash disbursed P16,000
Hotel, meals, etc
1,300
Pablo (P1,000 - P120)
880
18,080
Cash that should be returned
1,920
Cash actually returned
1,680
Shortage due from sales manager
P240
2. Collections per OR nos. 4352 - 4355
P43,300
Unreceipted collections
14,000
Total undeposited collections
P57,300
3. Travel expenses (P16,000 + P1,200 + P880)
P18,080
4. Total checks
P42,980
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5. Total cash shortage
P22,166
Benjamin Corp
Cash Count Sheet
January 3, 2019
Bills and coins:
Denomination
Quantity
Amount
P100
5
P500
50
40
2,000
20
48
960
5
18
90
1
206
206
.25
32
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Date
Maker
Amount
Dec 30
Custodian
P1,200
Dec 30
SLV Inc
14,000
Dec 31
Mario Lansang
1,680
Dec 31
MSU Corp
17,800
Dec 31
Ateneo Inc
8,300
Date
Account
Amount
Dec 23
Advances
P20,000
Dec 28
Postage
1,620
Dec 29
Transportation
150
Dec 29
Repairs
800
Total
P3,764
Checks:
42,980
Unreimbursed vouchers
Total cash accounted
22,570
P69,314
Less: Accountabilities
Petty cash
P25,000
Collections (per official receipts)
43,300
Unclaimed salary
7,500
Excess travel advance
1,680
Unreceipt4ed collection from SLV Inc
14,000
91,480
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Cash shortage
(22,166)
Benjamin Corp
Adjusting Journal Entries
December 31, 2018
1. Cash
P14,000
Accounts Receivable
P14,000
2. Advances to officers and employees
20,000
Postage Expense
1,620
Transportation Expense
150
Repairs Expense
800
Petty cash fund
3. Unused postage
22,570
365
Postage expense
4. Cash
365
27,000
Accounts Payable
5. Cash
27,000
7,500
Salaries Payable
6. Receivable from custodian
7,500
22,166
Cash
22,166
7. Travel expenses (P16,000 + P1,200 + P880)
18,080
Petty cash fund
1,680
Advances to officers and suppliers
19,760
Lesson 6. Sample Problem 1-4: Ursula Company ( Empleo, 2018)
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The following information has been extracted from the accounting records of Ursula Company
at December 31, 2018:
a)
Cash on hand (see note below)
P230,000
b)
Impukan Bank savings account (the required minimum Monthly
Average Daily Balance is P10,000)
9,500
c)
364-day Treasury Bills purchased March 1, 2018
400,000
d)
Petty cash fund (see note below)
20,000
e)
Tipid Bank current account (see notes below)
160,000
f)
Time deposit placements:
Date
Term
Dec 15, 2018
30 days
30,000
Oct 31, 2018
90 days
40,000
Nov 30, 2018
180 days
25,000
g)
Employee travel advances
7,000
h)
Cash in bond sinking fund
500,000
i)
Customer’s note receivable
45,000
j)
Postage stamps
2,400
The following are included in cash on hand:

A customer check for P43,000 returned by the bank on December 28, 2018. it was
redeposited and cleared the bank on January 2, 20109.

A customer check for P75,000 dated January 3, 2019, received December 27, 2018.

PHILPost money orders received from customers, P30,000.
The petty cash fund consists of the following:
Currency and coins
P13,500
IOUs from officers and employees
3,000
Unreplenished petty cash disbursements
1,500
Currency in envelope with the notation:
“We were Bang Quay’s coworkers. Words may
not be adequate to express how sorry we feel.
Please accept our heartfelt sympathies on the
loss of your loved one.”
1,500
20,000
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The following information pertains to Tipid Bank current account:

A check for P13,000 was dated and recorded on December 29, 2018, but was delivered
to payee on January 5, 2019.

A check for P5,000 dated January 10, 2019, payable to a supplier was recorded and
released to payee on December 19, 2018. Tipid Bank requires the current account
depositors to maintain a monthly average of daily balance of P50,000.
What total amount should be recorded as cash and cash equivalents on December 31, 2018?
Lesson 7 . Sample Problem 1-5: Samantha Inc. (Empleo, 2018)
The auditor for Samantha Inc. examined the petty cash fund immediately after the close
of business, July 31, 2018, the end of the company’s natural business year. The petty cash
custodian presented the following during the count:
Currency
P1,650
Petty cash vouchers:
Postage
420
Office supplies expense
900
Transportation expense
340
Computer repairs
800
Advances to office staff
1,500
A check drawn by Samantha Inc,
payable to the petty cash custodian
Postage stamps
7,200
300
An employee’s check, returned by the bank,
marked NSF
1,000
An envelope containing currency of P1,890
for a gift for a retiring employee
1,890
16,000
The general ledger shows an imprest petty cash fund balance of P16,000.
1. How much is the petty cash shortage or overage?
2. What is the adjusted balance of the petty cash fund at July 31, 2018?
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Lesson 6. Sample Problem 1-6: (Espenilla, 2017)
On January 1, Tanya Co establishes a petty cash account and designates Orly Reyes as
petty cash custodian. The original amount included in the petty cash fund is P10,000. The
following disbursements are made from the fund:
Office supplies
P3,460
Postage
2,240
Entertainment
840
The balance in the petty cash box is P3,200.
1. The person responsible, at all times for the petty cash fund is the
a) Chairman of the board of directors
b) President of the company
c)
Petty cash custodian
d) General cashier
2. The following are appropriate procedures for controlling the petty cash fund, except
a) To monitor variations in different types of expenditures, the petty cash custodian files
petty cash vouchers by category of expenditure after replenishing the fund.
b) To replenish the fund, the general cashier issues a company check to the petty cash
custodian, rather than cash.
c)
To determine that the fund is being accounted for satisfactorily, surprise counts of
the fund are made from time to time by the internal auditor or other responsible
official.
d) Each individual to whom petty cash is paid is required to present signed receipts to
the petty cash custodian.
3. The entry to replenish the fund is 4. The objective of establishing a petty cash fund is to
a) Cash checks for employees
b) Account for all cash receipts and disbursements
c)
Account for cash sales
d) Facilitate payment of small, miscellaneous items
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5. What is the effect of not replenishing the petty cash at year-end and not making the
appropriate adjusting entry?
a) A detailed audit is essential
b) The petty cash custodian should turn over the petty cash to the general cashier
c)
Cash will be overstated and expenses understated
d) Expenses will be overstated and cash will be understated
Assessment Task 1
The cash account of the BEA Corporation as of December 31, 2018, was composed of the
following: (Roque, 2018)
On deposit in current account account with the Bank of PI
P900,000
Cash collection not yet deposited to the bank
350,000
A customer’s check returned by the bank for insufficient fund
150,000
A check drawn by the Vice-President of the company dated January 15, 2019
70,000
A check drawn by a supplier dated December 28, 2018, for goods
returned by the company
60,000
A check dated May 31, 2018, drawn by the company against the
Bank of Manila in payment of customs duties.
Since the importation did not materialize, the check
was returned by the customs broker. This check was an
outstanding check in the reconciliation of the Bank of Manila
410,000
Petty cash fund of which P10,000 is in currency; P7,200 in form of
employees’ IOUs; and P2,800 is supported by approved petty
cash vouchers for expenses all dated prior to closing of the books
on December 31, 2018
Total
20,000
P1,960,000
Less: Overdraft with the Bank of Manila secured by a chattel mortgage
on the inventories
Cash balance per ledger
300,000
P1,660,000
16
What is the amount of cash to be reported on the December 31, 2018, statement of financial
position of Bea Company?
Summary
For cash count problems:
1. Identify the accountability
a) If Petty Cash Fund, the accountability is the Imprest Balance per General Ledger.
b) If Undeposited Collections, the accountability is total undeposited collections per
books/records adjusted further for any unrecorded collections (based on additional
information of the problem) If there is no direct information about collections per
records, accountability is collections per Official Receipts, Cash receipt vouchers or
other documents evidencing collections.
c)
Other collections (e.g. return of expense advance, collection for charities or any other
purposes not in tact and assumed to have been included among currencies on hand.
If the said collections for any other purpose is in tact, the same shall be ignored in
the cash count.
2. Identify valid supports to the accountability as presented in the problem
a) For Petty Cash Fund, acceptable valid support shall include:

Bills and Coins, Replenishment Check, encashable Accommodated Checks (Valid
cash items)

Unreplenished Petty Cash Expense Vouchers (Adjusted to various expense
accounts)

Employee IOUS (Adjusted to receivables)

Post dated/NSF Checks (Assumed to be previously accommodated checks which
shall be adjusted to receivable)

unused postage is not a valid support where the accountability is the Petty Cash
Fund

return of an expense advances (eg. excess from travel advance) is added to the
accountability to get the total accountability and not added to valid supports
b) For Undeposited Collections
17

Bills and Coins

Depositable Customer Collection Checks as of the count date (Post dated, stale and
NSF collection checks as of the count date are not included as valid collection, thus
should not be included as valid support)

Copies of expense vouchers evidencing the use of the collection to pay certain
expenses

Unused postage stamps (valid support where accountability is Undeposited
Collections.).
References
Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.
MODULE 2
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Audit of Cash and Cash Equivalents 2:
Sample Problems
Introduction
This section is a continuation of the previous section on the audit of cash and cash
equivalents. We will now focus on problems involving the petty cash fund, bank reconciliation
and the proof of cash. This module focuses solely on problem solving using accounting
procedures on cash audit and cash equivalents,
The emphasis of this portion are all hands-on exercises, the very fact that all the
theories and principles were tackled in the course- Audit 1.
Learning Outcomes
After completing the module, the student should be able to:
1. Solve cash balances audit problems (petty cash fund, bank reconciliation, proof of
cash)
2. Construct a working paper for solving problems involving cash balances
3. Explain the relationship existing between cash and cash equivalents
4. Perform operational procedures involving cash balances.
Lesson 1 . Sample Problem 2-1: ABX, Inc. (Espinilla, 2017)
Anying Velsaco is reviewing the cash accounting for ABX, Inc. Anying’s review will focus
on the petty cash fund account and the bank reconciliation for the month ended May 31, 2018.
She has collected the following information from ABX’s bookkeeper for this task.
Petty Cash Fund
1. The petty cash fund was established on May 2, 2018, in the amount of P10,000.
19
2. Expenditure from the fund by the custodian as of May 31, 2018, were evidenced by
approved petty cash vouchers for the following:
Various office supplies
P3,920
IOU from employees
1,200
Shipping charges
2,298
Miscellaneous Expense
1,526
On May 31, 2018, the petty cash fund was replenished and increased to P12,000; currency
and coins in the fund at that time totaled P756.
Bank Reconciliation
Shore Bank
Bank Statement
Disbursements
Receipts
Balance, May 1, 2018
Balance
P350,760
Deposits
P1,120,000
Note payment direct from customer
(interest of P1,200)
37,200
Checks cleared during may
P1,246,000
Bank service charges
1,080
Balance, May 31, 2018
260,880
ABX, Inc’s Cash Account
P354,000
Deposits during May 2018
1,240,000
Checks written during May 2018
1,273,400
Deposits in transit are determined to be P120,000 and checks outstanding at May 31 total
P34,000. Cash on hand (besides petty cash fund) at May 31, 2018, is P9,840.
1. What is the amount of petty cash shortage?
2. The journal entry to record the replenishment of, and increase in the petty cash fund
includes a credit to Cash -
20
3. What amount of cash should be reported in the May 31, 2018, statement of financial
position?
Answers:
1. P300
2. P11,244
3. P368,720
Solutions:
1. Coins and currency
P756
Fund disbursements (P3,920 + P1,200 + P2,298 + P1,526)
8,944
Petty cash accounted
9,700
Custodian’s accountability
10,000
Petty cash shortage
P300
2. Petty cash fund
P2,000
Office supplies
3,920
Accounts receivable-employees
1,200
Shipping expense
2,298
Miscellaneous expense
1,526
Cash short/over
300
Cash
P11,244
3.
Book
Bank
Unadjusted balances
P320,600
P260,880
Deposit in transit
120,000
Cash on hand
9,840
Outstanding checks
(34,000)
Note collected by bank
37,200
Bank service charges
(1,080)
Adjusted balances
356,720
Adjusted cash balance (P356,720 + P12,000)
356,720
P368,720
21
Lesson 2. Sample Problem 2-2: NARCISA Co. (Roque, 2018)
Presented below are a series of unrelated situations. Answer the question at the end of each
situation.
1. The accountant of NARCISA Co. Provided the following data in reconciling the April 30
cash in bank balance:
Balance per bank, April 30
P130,350
Balance per books, April 30
85,000
Bank service charge
2,000
Deposit in transit
49,000
Outstanding checks
17,650
Note collected by bank including P11,200 interest (Narcisa Co.
not yet informed)
136,000
Check drawn by XYZ Co erroneously charged by bank to Narcissa’s
account
54,600
A transposition error was made in recording a sale and deposit in the sales journal and cash
receipts journal in April.
Correct Amount
P13,658
Recorded as
16,358
What is the adjusted cash balance on April 30?
2. The following information is included in EMIL Corporation’s bank statement for the month
of March:
A customer’s check has been marked “NSF” by the bank and returned
P13,000
Bank service charge for March
1,200
In comparing the bank statement to the company’s cash records, you found:
Outstanding checks on March 31
P184,000
Deposits made but are not yet shown in the April bank statement
14,000
22
The deposits in transit and outstanding checks have been correctly taken up in the company’
s books. You also found a customer’s check for P17,400 that had not yet been deposited and
had not been recorded in Emil’s books. Your client’s books show a cash balance of P36,420.
What is Emil Corporation’s correct cash balance at March 31?
3. The following information pertains to a checking account of a company at June 30, 2018.
Balance per bank statement
P200,000
Interest earned for the second quarter
500
Outstanding checks
15,000
Customer’s checks returned for insufficient funds
5,000
Deposit in transit
25,000
What is the cash balance per books at June 30, 2018?
4. A company is reconciling its bank statement with internal records. The cash balance per
the company’s books is P45,000. there are P5,000 of bank charges not yet recorded, P7,500
of outstanding checks, P12,500 of deposits in transit and P15,000 of bank credits and
collections not yet taken up in the company’s books.
What is the cash balance per bank?
5. A company shows a cash balance of P175,000 on its bank statement dated June 30. As of
June 30, there are P55,000 of outstanding checks and P37,500 of deposits in transit.
What is the adjusted cash balance on June 30?
6. The cash account shows a balance of P225,000 before reconciliation. The bank statement
does not include a deposit of P11,500 made on the last day of the month. The bank statement
shows a collection by the bank of P4,700 and a customer’s check for P1,600 was returned
because it was NSF. A customer’s for P2,250 was recorded on the books as P2,700 and a
check written for P395 was recorded as P485.
23
What should be the correct cash balance?
7. On July 5, 2018, Emilia Corp received its bank statement for the month ending June 30.
the statement showed a P209,500 balance while the cash account balance on June 30 was
P35,000. in reconciling the balances, the auditor discovered that:
1. The June 30 collection of P176,000 were recorded on the books but were not
deposited until July.
2. The bank service charges for the month of June totaled P3,000.
3. A paid check for P24,300 was entered incorrectly in the cash payments journal as
P34,200.
What is the total outstanding checks at June 30, 2018?
Answers:
1. P216,300
2. P39,620
3. P214,500
4. P50,000
5. P157,500
6. P227,740
7. P343,600
Solutions:
1.
Book
Bank
Unadjusted balances
P85,000
P130,350
Bank service charge
(2,000)
Deposit in transit
49,000
Outstanding checks
(17,650)
Collection of note
136,000
Erroneous bank debit
54,600
Transposition error (P16,358 - P13,658)
(2,700)
Adjusted balances
P216,300
P216,300
24
2. Balance per books
P36,420
Unrecorded and undeposited customer’s check
17,400
Bank service charge
(1,200)
NSF check
(13,000)
Adjusted cash balance
P39,620
3. Balance per bank statement
P200,000
Outstanding checks
(15,000)
Deposit in transit
25,000
Interest earned
(500)
NSF checks
5,000
Balance per books at June 30, 2018
P214,500
4. Balance per books
P45,000
Bank charges
(5,000)
Outstanding checks
7,500
Deposits in transit
(12,500)
Bank credits and collections
15,000
Adjusted cash balance
P50,000
5. Balance per bank statement
P175,000
Outstanding checks
(55,000)
Deposits in transit
37,500
Adjusted cash balance
P137,500
6. Balance per books
P225,000
Bank collection
4,700
Customer’s NSF check
(1,600)
Overstatement of cash receipt (P2,700 - P2,250)
(450)
Overstatement of cash disbursement (P485 - P395) 90
Adjusted cash balance
P227,740
25
7. Balance per books, June 30, 2018
P35,000
Bank service charges
(3,000)
Overstatement of disbursement (P34,200 - P24,300)
9,900
Adjusted cash balance
P41,900
Balance per bank, June 30, 2018
P2019,500
Add: Undeposited collections
176,000
Total
385,500
Less: Adjusted cash balance
41,900
Outstanding checks, June 30, 2018
P343,600
Lesson 3. Sample Problem 2-3: Fermin Company (Espinilla, 2017)
Fermin Company’s check register shows the following entries for the month of December:
Date
Checks
Deposits
Balance
Dec 2018
1
Beginning balance
P89,300
5
Deposit
7
Check 14344
P32,500
120,800
11
Check 14345
14,000
106,800
26
Deposit
29
Check 14346
P65,000
49,000
154,300
155,800
8,600
147,200
Fermin ’ s bank reconciliation fro November revealed one outstanding check (14343) for
P12,000 (written on November 28), and one deposit in transit for P5,550 (made on November
29).
The following is from Fermin’s bank statement for December 2018:
Date
Checks
Deposits
Balance
Dec 2018
1
Beginning balance
P95,750
26
1
Deposit
P5,550
4
Check 14344
5
Deposit
14
Check 14345
15
Loan proceeds
20
NSF Check
7,600
603,200
29
Service charge
1,000
602,200
31
Interest
P32,500
101,300
68,800
56,000
14,000
124,800
110,800
500,000
3,600
610,800
605,800
Assume that all errors were committed by Fermin Company, not the bank.
Based on the preceding information, determine the following:
1. Adjusted cash balance on November 30
2. Outstanding checks on December 31
3. Deposit in transit on December 31
4. Total bank receipts in December
5. Adjusted cash balance on December 30
Lesson 4. Sample Problem 2-4: IAN Company ( Espenilla, 2016)
The bank statement for the current account of IAN Co showed a December 31, 2018,
balance of P585,284. information that might be useful in preparing a bank reconciliation is as
follows:
a)
Outstanding checks were P52,810.
b)
The December 31, 2018, cash receipts of P23,000 were not deposited in the bank until
January 2, 2019.
c)
Our check written in payment of rent P8,940 was correctly recorded by the bank but was
recorded by Ian Con as a P9,840 disbursement.
d)
In accordance with prior authorization, the bank withdrew P18,000 directly from the
current account as payment on a mortgage note payable. The interest portion of that
payment was P14,000. Ian Co has made no entry to record the automatic payment.
e)
Bank service charges of P740 were listed on the bank statement.
27
f)
A deposit of P35,000 was recorded by the bank on December 12, but it did nto belong to
Ian Co.
g)
The bank statement included a charge of P3,400 for a not-sufficient-fund check. The
company will seek payment from the customer.
h)
Ian Co maintains an P8,000 petty cash fund that was appropriately reimbursed at the end
of December.
i)
According to instructions from Ian Co on December 31, the bank withdrew P40,000 from
the account and purchased treasury bills for Ian Co. The company recorded the
transactions in its books on December 31 when it received notice from the bank. Half of
the treasury bills mature in three months and the other half in six months.
1. What is the cash in bank balance per books on December 31, 2018?
2. What is the adjusted cash in bank balance on December 31, 2018?
3. What amount of cash and cash equivalents should be shown under current assets on
December 31, 2018?
Lesson 5. Sample Problem 2-5: Edgardo Company (Espinilla, 2016)
Edgardo Co was organized on January 2, 2018. the following items are from the company’s
trial balance on December 31, 2018.
Ordinary share capital
P1,500,000
Share Premium
150,000
Merchandise Inventory
69,000
Land
1,000,000
Building
1,400,000
Furniture and fixtures
367,000
Accounts receivables
165,400
Accounts payable
389,650
Notes payable - bank
500,000
Sales
6,235,200
Operating expenses (including depreciation of P400,000)
1,005,150
Additional information is as follows:
28
Deposits in transit, December 31
P384,660
Service charge for December
2,000
Outstanding checks, December 31
475,000
Bank balance, December 31
892,000
Edgardo Co’s mark up on sales is 30%
1. What is the total collections from sales?
2. What is the total payments for merchandise purchases?
3. What is the total cash receipts per books?
4. What is the total cash disbursements per books?
5. What is the cash balance per books on December 31?
6. What is the adjusted cash balance on December 31?
Lesson 5. Sample Problem 2-5: Annie Corp. (Roque, 2018)
In connection with your audit of the cash account of Annie Corp, you gathered the following
information.
Balance per bank, December 1, 2018
P145,000
Total bank receipts (credits) in December
346,000
Balance per bank, December 31, 2018
114,500
Outstanding checks, Nov 30, 2018 (including P12,000 paid by
bank in December)
67,000
Outstanding checks, December 31, 2018 (including checks issued
in November)
Deposit in transit, Nov 30, 2018
94,162
39,458
A customer’s check received on December 4, 2018, was returned by bank
on December 7 marked NSF. It was redeposited on
December 8, 2018.The only entry made was to take up the
collection on December 4, 2018
11,143
1. What is the total book receipts in December?
2. What is the total bank disbursements in December?
3. What is the total book disbursements in December?
29
Assessment Task 2
Your audit of the cash account of Junie Corp, disclosed the following information:
1. Cash in bank balance per books, Dec 31, 2018
P35,000
2. Bank statement balance, Dec 31, 2018
60,000
3. Note collected by bank in December (principal plus interest of P800, less
collection fee of P200)
27,600
4. Debit memo for a checkbook
?
5. Deposits in transit, Dec 31, 2018
15,200
6. Transposition error made by bank in recording deposit of
December 28:
Correct amount
P45,000
Recorded as
54,000
7. Erroneous bank debit
9,000
26,700
8. Included in the Cash in bank account is petty cash fund of P10,000, Your count on
December 31, 2018, revealed the following fund items:
Currency and coins
P3,000
Supplies
2,400
Transportation
100
IOUs
4,000
9500
9. Erroneous bank credit
11,000
10. Outstanding checks (including a certified check of P10,000)
39,400
1. What is the principal amount of the note collected by bank in December?
2. What is the adjusted cash in bank balance at December 31, 2018?
3. The cost of checkbook is 4. What is the amount of petty cash shortage at December 31, 2018?
5. What is the adjusted petty cash balance?
30
Summary
In a nutshell, bank reconciliation problems is expressed in the following:
BANK
Unadjusted balance
xx
Deposit in Transit / Unrecorded collections
xx
Outstanding checks (excluding certified checks)
(xx)
Bank errors
xx (xx)
Adjusted balance
xx*
Unadjusted balance
xx
Unrecorded bank credits (note collection, customer
payments to the bank, loan proceeds)
xx
Unrecorded bank debits (BSC, NSF, note/loan
payments directly thru bank)
(xx)
Book errors
xx (xx)
Adjusted balance
xx
References
Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.
31
MODULE 3
Audit of Receivables 1
Introduction
Auditing receivables is important because it sheds light upon the status of a business
’ incoming cash. In addition to validating financial records, the outcomes presented on the
auditing reports allows checking of unsent invoices, and whether customers pay their invoices
on time. In this section, we will look at the audit objectives and procedures involved in the
audit of receivables and we will solve CPA board exam-type problems.
Learning Outcomes
After completing the module, the student should be able to:
1. Determine the audit objectives and procedures involved in the audit of receivables.
2. Solve audit problems on receivables and related accounts.
3. Construct a working paper for solving problems involving receivables and related
accounts.
Lesson 1. Audit Objectives
(Roque, 2018)
The objectives of audit of recievables are to :
1. prove that receivables represent valid claims against customers and other parties and have
been properly recorded.
32
2. determine the related allowance for doubtful accounts, returns and allowances, and
discounts are reasonably adequate.
3. attest that receivables are properly described.
4. verify that disclosures with respect to the accounts are adequate .
Lesson 2. Audit Procedures
(Roque, 2018)
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:
i.
Reviewing collections after year-end.
ii.
Checking supporting documents.
iii. Discussing the account with appropriate officer.
d) Discuss with appropriate officer, confirmation requests returned by the post office
and perform
e) Prepare a summary of confirmation results. extended procedures.
4. Review correspondence with customers for possible adjustments.
5. Test propriety of cutoff:
33
a) Examine sales recorded and shipments made a week before and after the end of the
reporting period and ascertain whether the sales were recorded in the proper period.
b) Investigate large amounts of sales returned shortly after the end of the reporting
period.
6. Perform analytical procedures, like:
a) Gross profit ratio
b) Accounts receivable turnover
c)
Ratio of accounts written off to sales or balance of accounts receivable
d) Compare with prior year and industry averages
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. Obtain analyses of significant other receivables.
9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.
10. Determine propriety of financial statement presentation and adequacy of disclosures.
11. Obtain receivable representation letter from client
Lesson 3. Sample Problem 3-1: Upat Company (Roque, 2018).
The December 31, 2019, statement of financial position of the Upat Company included the
following information:
Accounts Receivable
P672,000
Less: Allowance for Credit Loss
42,300
P629,700
Notes Receivable*
65,400
Total Receivables
P695,100
34
*The company is contingently liable for discounted notes receivable of P114,000.
During the year ending December 31, 2020, the following transactions occurred:
Sales on credit
P2,623,800
Collections of accounts receivable
2,523,000
Accounts receivable written off as uncollectible
41,400
Notes receivable collected
87,000
Customer notes received in payment of accounts receivable
216,000
Notes receivable discounted that were paid at maturity
108,000
Notes receivable discounted that were defaulted, including
interest of P60 and a P15 fee. This amount is expected
to be collected during 2021
6,075
Proceeds from customer notes discounted with recourse
(principal P135,000, accrued interest, P600)
135,225
Collections on accounts previously written off
1,500
Sales returns and allowances (on credit sales)
6,000
Increase in allowance for credit loss
39,357
Based on the preceding information, determine the balances of the accounts at December 31,
2020.
1. Accounts receivable
2. Allowance for credit loss
3. Notes receivable
4. Notes receivable discounted
Answers:
1. P515,475
2. P41757
3. P194,400
4. P135,000
Solutions:
35
Journal entries
1. Accounts Receivable
2,623,800
Sales
2. Cash
2,623,800
2,523,000
Accounts Receivable
3. Allowance for credit loss
2,523,000
41,400
Accounts receivable
4. Cash
41,400
87,000
Notes Receivable
5. Notes Receivable
87,000
216,000
Accounts Receivable
6. Notes Receivable discounted
216,000
108,000
Notes Receivable
7. Accounts receivable
108,000
6,075
Cash
Notes Receivable discounted
6,075
6,000
Notes receivable
6,000
8. Cash
135,225
Loss on discounting of NR
375
Notes Receivable discounted
135,000
Interest income
600
Proceeds
P135,225
CV of note (P135,000 + P600)
135,600
Loss on discounting
P375
9. Accounts receivable
1,500
Allowance for credit loss
Cash
1,500
1,500
Accounts receivable
10. Sales returns and allowances
1,500
6,000
Accounts receivable
11. Expected credit loss (BDE)
Allowance for credit loss
6,000
39,357
39,357
36
AR
Allow. For Credit Loss
NR
NR discounted
Jan 1
P672,000
(P42,300)
P179,400
(P114,000)
1
2,623,800
2
(2,523,000)
3
(41,400)
41,400
4
(87,000)
5
(216,000)
216,000
6
7
6,075
(108,000)
108,000
(6,000)
6,000
8
(135,000)
9
1,500
(1,500)
(1,500)
10
(6,000)
11
(39,357)
Dec31
515,475
(41,757)
194,400
(135,000)
Lesson 4. Sample Problem 3-2: Inuyasha Inc. (Roque, 2018).
In relation to your audit of Inuyasha Inc’s accounts receivable you ascertained the
following information:
The general ledger balances of the client’s receivable and related accounts were:
Accounts receivables
3,225,300
Allowance for bad debts
(169,000)
Amortized cost
3,056,300
Inuyasha Inc estimates its bad debt losses by aging its accounts receivable, the aging
schedule of accounts receivable at December 31, 2014 is presented below:
Age
Amount
Current
1,686,400
1 to 30 days past due
922,000
31 to 60
384,800
37
61 to 90
153,300
Over 90
78,800
The company normally sells n/30
Furthermore, the company’s uncollectible accounts experience for the past 5 years are
summarized in the schedule that follows:
Year
Current
1-30
31-60
61-90
over 90
2013
1%
6%
9%
23%
55%
2012
2%
8%
10%
18%
60%
2011
1%
4%
11%
16%
45%
2010
3%
5%
12%
22%
45%
2009
3%
2%
8%
21%
45%
1. What are the corresponding percentages to be used per age category in computing for
the client’s required allowance for bad debts?
2. The required allowance for bad debts is 3. The net realizable value of the company’s accounts receivable on December 31, 2014
should be Answers:
1. 2%; 5%; 10%; 20%; 50%
2. P188,368
3. P3,036,932
Solutions:
Current
1-30 days
31-60 days
1-90 days
More than 90
1%
6%
9%
23%
55%
2%
8%
10%
18%
60%
1%
4%
11%
16%
45%
3%
5%
12%
22%
45%
3%
2%
8%
21%
45%
2%
5%
10%
20%
50%
38
P1,686,400
922,000
384,800
153,300
78,800
P3,225,300
P33,728
46,100
38,480
30,660
39,400
P188,368
Gross Accounts Receivable
P3,225,300
Allowance for uncollectible accounts 188,368
Net realizable value
3,036,932
Lesson 5. Sample Problem 3- 3: Rovers Inc. (Roque, 2018)
You are auditing the accounts receivable of Rovers Inc as of December 31, 2014. You
found the following information in the general journal:
Accounts receivable
1,466,720
Less: Allowance for doubtful accounts
(46,720)
Accounts receivable net
1,420,000
The accounts receivable subsidiary ledger had the following details:
Customer
Invoice date
Amount
Balance
Gudang
9/12/2014
139,200
139,200
Tisoy
12/12/2014
153,600
12/02/2014
99,200
11/17/2014
185,120
10/08/2014
176,000
12/08/2014
160,000
10/25/2014
44,800
8/20/2014
40,000
244,800
Nanong
9/27/2014
96,000
96,000
Balong
8/20/2014
71,360
71,360
Peejong
12/06/2014
112,000
11/29/2014
169,440
Gusoy
Naning
Total
252,800
361,120
281,440
1,446,720
Additional information:
39
You discovered based on your review of subsequent events that Balong recently went
bankrupt, thus you suggested that the amount receivable from the same shall be written off.
You also discovered that the invoice dated 12/02/2014 has already been settled by Tisoy per
OR number 34675. this amount has been erroneously posted against Gusoy’s subsidiary
ledger as a settlement for an invoice dated 11/05/2014 for the same amount.
The estimated bad debt rates below are based on the company ’ s receivable collection
experience:
Age
% of collectibility
0-30 days
98%
31-60
95%
61-90
90%
91-120
80%
Over 120
50%
1. Assuming that there were no other entries to the allowance for doubtful accounts, what is
the correct bad debt expense for the year?
2. What is the correct allowance for bad debt expense for the year ended December 31, 2014?
3. What is the net adjustment to the accounts receivable in general ledger?
4. What is the carrying value of the company’s accounts receivable as of December 31, 2014?
5. What is the necessary adjusting entry to adjust any unlocated difference between the SL
and GL?
Answers:
1. P144,960
2. P120,320
3. P91,360
4. P1,255,040
5. Dr. Sales 20,000 Cr. Accounts Receivable 20,000
Solutions:
Customer
Invoice date
Amount
Dec
Nov
Oct
Sept
Aug and prior
Gudang
9-12
139,200
139,200
40
Tisoy 12-12
153,600
12-2
153,600
99,200 99,200
Gusoy 11-17
185,120
10-8
176,000
Naning 12-8
160,000
10-25
44,800
8-20
40,000
96,000
Balong
8-20
71,360
12-6
Total
235,200
160,000
40,000
9-27
11-29
176,000
44,800
Nanong
Peejong
185,120
96,000
71,360
112,000
112,000
169,440
169,440
1,446,720
524,800
354,560
Nov
Sept
220,800
111,360
Reconciliation between GL and SL
Per GL
Unadjusted bal
Per SL
1,466,720
235,200
111,360
Write-off Balong
(71,360)
Dec
1,446,720
Oct
524,800
Aug and prior
354,560
220,800
453,760
220,800
(71,360)
(71,360)
Posting error
Adjusted
235,200
(99,200)
1,395,360
1,375,360
99,200
425,600
40,000
Lesson 6. Sample Problem 3-4: IYR Company (Roque, 2018)
In the course of your audit of IYR Company’s “Receivables” account as of December 31,
2020, you found out that the account comprised the following items:
Trade accounts receivable
P1,550,000
Trade accounts receivable, assigned (proceeds from assignment
amounted to P650,000)
750,000
41
Trade accounts receivable, factored (proceeds from factoring done
on a without-recourse basis amounted to P250,000)
12% trade notes receivable
300,000
200,000
20% trade notes receivable, discounted at 40% upon receipt of the
day note on a without recourse basis
300,000
Trade receivables rendered worthless
50,000
Installments, receivable, normally due 1 year to 2 years
600,000
Customers’ accounts reporting credit balances arising from sales returns 60,000
Advance payments for purchase of merchandise
300,000
Customers’ accounts reporting credit balances arising from
advance payments
40,000
Cash advances to subsidiary
800,000
Claim from insurance company
30,000
Subscription receivable due in 60 days
600,000
Accrued interest receivable
20,000
Deposit on contract bids
500,000
Advances to stockholders (collectible in 2023)
2,000,000
1. How much is the total trade receivables
2. How much is the amount to be presented as “trade and other receivables” under current
assets?
3. How much loss from receivable financing should be recognized in the income statements?
Lesson 7. Sample Problem 3-5: The Mexican Corp. (Roque, 2018)
The Mexican Corp grants its customers 30 days credit. The company uses the allowance
method for its uncollectible accounts receivable. During the year, a monthly debt accrual is
made by multiplying 2% by the amount of credit sales for the month. At the fiscal year-end of
December 31, an aging of accounts receivable schedule is prepared and the allowance for
uncollectible accounts is adjusted accordingly.
42
At the end of 2014 before any audit adjustments, the general ledger accounts showed
balances of account receivable at P1,230,000 and the allowance for bad debt at P106,000.
Account receivable activity for 2014 included the following:
Credit sales
P12,800,000
Write offs
82,000
The company ’ s controller prepared the followed aging summary of year-end accounts
receivable:
Age
Amount
Percent collectible
0-60 days
825,000
98%
61-90
220,000
90%
91-120
50,000
70%
Over 120
128,000
60%
It was ascertained that P40,000 from the over 120 days accounts are absolutely worthless.
1. How much is the unreconciled difference between the general ledger and the subsidiary
ledger balance of accounts receivable and how should it be accounted for?
2. How much is the total bad debt expense?
3. How much is the net realizable value of accounts receivable at December 31, 2014?
Lesson 8. Sample Problem 3-6: Ikebana Company (Roque, 2018)
You are auditing the Accounts Receivable and the related Allowance for credit loss
account of Ikebana Company.
The following data are available:
General Ledger
Accounts Receivable
2018
Dec 31 P424,000
Allowance for Credit Loss
2018
2018
Jul 31 GJ - Write-off P8,000
Jan 1 Bal P10,000
Dec 31 GJ - Provision 24,000
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Summary of Aging Schedule
The summary of the subsidiary ledger balances as of December 31, 2018, is shown below:
Debit balances:
Under 1 month
P180,000
One to six months
184,000
Over six months
76,000
440,000
Credit balances
AA Co
P4,000 - OK; additional billing in January 2019
BB Co
7,000 - Should have been credited to DD Co.*
CC Co
9,000 - Advance on a sales contract
20,000
*Account is in “one to six months” classification.
The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require an allowance of 2%. Accounts over six months are analyzed
as follows:
Definitely bad
P24,000
Doubtful (estimated to be 50% collectible)
12,000
Apparently good, but slow (estimated to be 90% collectible)
40,000
76,000
1. The adjusted balance of Ikebana’s “1 to 6 months” accounts receivable is 2. The adjusted balance of Ikebana’s “over 6 months” accounts receivable is 3. The adjusted accounts receivable balance on December 31, 2018, should be 4. The required balance of the allowance for credit loss account on December 31, 2018, is 5. The entry to adjust the allowance for credit loss account is -
44
Assessment task 3
You are auditing the accounts receivable and the related allowance for bad debts account
of Sayote Inc. The control account of the aforementioned accounts had the following balances:
Accounts receivable
P1,270,000
Less: Allowance for bad debt
(78,000)
Net book value
1,192,000
Upon your investigation, you found out the following information:

The company’s normal sales term is n/30.

The allowance for bad debt account had the following details in the general ledger:
Allowance for Bad Debts
July 31 Write off
24,000
Jan 1 Balance 30,000
Dec 31 Provision 72,000
The subsidiary ledger balances of the company’s accounts receivables as of December 31,
2014 contained the following information:
Debit balances
Credit balances
Under one month
540,000
Kamote Co.
12,000
One to six months
52,000
Kutchay Corp
21,000
Over six months
228,000
Kalachuchi Inc
27,000
Additional info:

The credit balance with Kamote Co. Was for an overpayment from the customer. The
company delivered additional merchandise to Kamote Co. On January 3, 2015 to cover
such overstatement.
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
The credit balance of Kutchay Corp was due to a posting error, the amount should have
been credited to Kuchara Corp for a 60 day outstanding receivable.

The credit balance from Kalachuchi Inc was a cash advance for a delivery to be made on
January 15, 2015.
It was estimated that 1 percent of accounts under one month is doubtful of collection while 2
percent of accounts one to six months are expected to require an allowance for doubtful of
collection. The accounts over six months are analyzed as follows:
Definitely uncollectible
72,000
Doubtful (estimated to be 50% collectible)
36,000
Apparently good but slow ( estimated to be 90% collectible)
120,000
Total
228,000
1. What is the entry to adjust any unlocated difference between the control account and the
subsidiary ledger?
2. The adjusted accounts receivable balance on December 31, 2014 should be 3. The required balance of the allowance for bad debts account on December 31, 2014 is 4. The entry to adjust the allowance for bad debts account is -
Summary
For aging of accounts receivable problems:

The aging schedule should be based on and should agree with the subsidiary ledger

The aging schedule should be adjusted first with all possible adjustments before a
required allowance is computed. Possible adjustments include:

Adjustment to both the GL and SL (thus to Aging) additional write off of accounts
unrecorded sale/over recorded sale, unrecorded collections credit balance in
accounts receivable (adjusted to advances from customers)

Adjustment to SL only (no adjusting entry required, but Aging schedule may be
adjusted) sales/collections already recorded in the GL but not yet in the SL posting
errors
46

Adjustments to GL only - will not affect the aging schedule anymore (eg
sales/collections not yet recorded by the GL but already posted to the SL)

The adjusted balance of the subsidiary ledger shall ultimately be the correct/adjusted
balance of the accounts receivable gross of the required allowance.

If the general ledger ultimately does not coincide or equal to the subsidiary ledger, an
additional adjustment should be in place to correct the general ledger to equal the
Adjusted Balance of the subsidiary ledger. The adjustment is either debited or credited to
SALES account

To compute for the Bad Debt Expense for the period, the adjusted balance per
computation is compared to the unadjusted balance (Do not forget to consider write-off
of accounts receivable recoveries of previously written-off accounts and interim bad debt
provisions, if there are any)
References
Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.
MODULE 4
AUDIT OF RECEIVABLES 2
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Introduction
This section is a continuation of the previous section on the audit of cash and cash
equivalents. We will now focus on problems involving notes receivables, loans receivables
and financing transactions. The succeeding lessons are solely problem sets that show
auditing procedures on audit of receivables 2.
Learning Outcomes
After completing the module, the student should be able to:
1. Solve audit problems on receivables and related accounts (notes receivables, loans
receivables and receivable financing).
2. Construct a working paper for solving problems involving receivables and related
accounts.
3. Show the step-by-step procedures in audit of receivable computations.
Lesson 1. Sample Problem 4-1: Forever Company (Roque, 2018)
During your audit of Forever Company for the year ended December 31, 2018, you find the
following account.
Notes Receivable
Sept 1 Cornea, 20% due in 3 months
Dr. P80,000
Oct 1 Hunk Co, 24%, due in 2 months
Dr. 300,000
Oct 1 Discounted Cornea note at 25%
Cr. 80,000
Nov 1 Valerie, 24%, due in 13 months
Dr. 600,000
Nov 30 Cellular Co, no interest, due in one year
Dr. 500,000
Nov 30 Discounted cellular note at 18%
Cr. 500,000
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Dec 1 Tictic, 18%, due in 5 months
Dr. 900,000
Dec1 O. Reyes, President, 12%, due in 3 months
(for cash loan given to O. Reyes)
Dr. 1,200,000
All notes are trade notes unless otherwise specified. The Cornea note was paid on December
1 as per notification received from the bank. The Hunk Co note was dishonored on the due
date but the legal department has assured management of its full collectibility.
The company, with your concurrence, will treat the discounting as a conditional sale of note
receivable.
1. At what amount on the current assets section of the December 31, 2018, statement of
financial position will the notes receivable - trade be carried?
2. What amount of loss on notes receivable discounting should be reported in the 2018 income
statement of the company?
3. Based on the ledger account presented, what amount of interest income should be accrued
at December 31, 2018?
Answers:
1. P1,500,000
2. P90,833
3. P67,500
Solutions:
1. Valerie
P600,000
Tictic
900,000
Total notes receivable -trade, Dec 31, 2018
P1,500,000
2. Net proceeds:
Principal
P80,000
Interest
4,000
Maturity value
P84,000
Discount (80,000 x 20% x 3/12)
(3,500)
P80,500
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Book value:
Principal
P80,000
Accrued interest rec. (80,000 x 20% x 1/12) 1,333
81,333
Loss on discounting of Cornea note
P833
Principal/ Maturity value
P500,000
Discount (500,000 x 18% x 1 year)
(90,000)
Net proceeds
410,000
Book value
500,000
Loss on discounting of Cellular note
P90,000
Total loss on discounting (P833 + P90,000)
P90,833
3. Hunk
(P300,000 x 24% x 3/12)
P18,000
Valerie
(P600,000 x 24% x 2/12)
24,000
Tictic
(P900,000 x 18% x 1/12)
13,500
O. Reyes
(1,200,000 x 12% x 1/12)
12,000
Total accrued interest receivable
67,500
Lesson 2. Sample Problem 2 : Bunsoy Company (Roque, 2018)
The Notes Receivable account of BUNSOY CO. has a debit balance of P239,200 on
December 31, 2018. There was no balance at the beginning of the year. Your analysis of the
account reveals the following:
1. Notes amounting to P845,000 were received from customers during the year.
2. Notes of P416,000 were collected on due dates and notes amounting to P221,000 were
discounted at the Aggressive Bank The Notes Receivable account was credited for the notes
discounted.
3. Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note for
P31,200 was dishonored and was charged back to Notes Receivable account.
4. Cash of P33,000 was received as partial payment on notes not yet due. The amount
received was credited to Liability on Partial Payments account.
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5. A note for P50,000 was pledged as collateral for a bank loan.
6. Included in the company's cash account balance is a three-month note from an officer
amounting to P8,000 which is over a month past due.
Assuming that Bunsoy Co. will use a Notes Receivable Discounted account, the adjusted
balance of the Notes Receivable account on December 31, 2018, is Answer: P260,800
Solution:
Unadjusted balance (P845,000 - P416,000 - P221,000 + P31,200)
P239,200
Partial collection recorded as a liability
(33,000)
Notes receivable discounted still outstanding
(P221,000 - P104,000 - P31,200)
85,800
Dishonored note
(31,200)
Adjusted balance
P260,800
Lesson 3. Sample Problem 4-3: Visage Corp. (Roque, 2018)
Visage Corp had the following receivable financing transactions during the year:
On March 1, 2020, Visage Corp factored P500,000 of its accounts receivables to BPI. As
of the date of factoring, it was ascertained that P20,000 of the accounts receivable is doubtful
of collection. BPI advanced P350,000 cash to Visage Corp and withheld P50,000 as factors
holdback (to cover future sales discount and sales returns and allowances). the company
incurred P10,000 direct transaction costs (legal fees and other professional fees) related to
the factoring. The factoring was done on a without-recourse basis, thus transferring all
significant risks and rewards associated to the receivable to BPI.
On May 1, 2020, Visage Corp assigned P800,000 of its outstanding accounts receivable
to BPI in consideration of aP500,000, 24% loan. BPI charged the company 2% of the
accounts assigned as service charge. By the end of May. Visage Corp collected P200,000
cash from the assigned accounts net of a P5,000 sales discount. By the end of June. Visage
51
Corp collected another P150,000 from the assigned accounts after P4,000 sales discount.
The company accepted merchandise originally invoiced at P30,000 as sales returns and
wrote-off P20,000 of the assigned accounts as worthless. It was agreed between parties that
monthly collections shall be remitted to the bank as partial payment of the loan and interest.
On July 1, 2020, Visage Corp accepted from a customer a 6-month P600,0000, 12% notes
receivable for the sale of merchandise. On October 31, 2020, Visage Corp discounted the
note to BPI at a discount rate of 10%. the discounting was done on a without recourse bases,
thus transferring all significant risks and rewards associated to the receivable to BPI.
1. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the factoring of receivable on March 1?
2. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the assignment of receivable on May 1?
3. What is the carrying value of the accounts receivable-assigned as of June 30?
4. What is the carrying value of the loans payable related to the accounts receivable assigned
as of June 30?
5. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the discounting of the note receivable on July 1?
Answers:
1. P90,000
2. Assignment is only a loan transaction, thus there is no transfer of receivables.
3. P391,000
4. P166,200
5. P1,400
Solutions:
1. Net cash proceeds from factoring (P350,000 - P10,000)
P340,000
Factor’s holdback
50,000
Net sales price of AR factored
390,000
Carrying value of AR
(480,000)
Loss from factoring
(90,000)
52
3 .Accounts Receivable assigned
P800,000
May collection with sales discount (P200,000 + P5,000)
(205,000)
June collection with sales discount (150,000 + P4,000)
(154,000)
Sales returns
(30,000)
Accounts written-of as worthless
(20,000)
Accounts receivable - assigned - June 30
391,000
4.
Payment
Loans payable, May 1
Interest
Principal
(Bal x 24% x 1/12)
Balance
500,000
May 31 remittance
200,000
10,000
190,000
310,000
June 31 remittance
150,000
6,200
143,800
166,200
5 .Proceeds from discounting**
P625,400
Less: Carrying value of Notes
(600,000)
Interest rec. up to Oct 31 (600,000 x 12% x 4/12)
Gain on discounting
(24,000)
1,400
Maturity value
Principal amount
600,000
Interest (600,000 x 12% x 6/12)
36,000
636,000
Discount (P636,000 x 10% x 2/12)
(10,000)
Proceeds from discounting
625,000**
Lesson 4. Sample Problem 4- 4: Yza Inc. (Roque, 2018)
On January 1, 2014, YZA Inc gave a loan to ABC Corp amounting to P1,000,000 and received
a three-year 6% note. The note calls for annual interest to be paid each December 31. the
company incurred origination costs amounting to ___. The company charged P80,000 to ABC
as origination fees. As a result, the yield on the loan was at 8%.
At December 31, 2015, based on ABC’s financial crisis YZA was not able to collect the 2015
interest and that only 600,000 of the principal due December 31, 2016 will be collected. The
53
P600,000 principal is expected to be collected in two equal installments on December 31,
2016 and December 31, 2018.
1. What is the origination cost incurred by YZA on January 1, 2014 in relation to the loans
receivable?
2. What is the impairment loss to be recognized in 2015?
3. What is the correct carrying value of the loans receivable from ABC on December 31, 2015?
Lesson 5. Special Problem 4-5: Isaiah Company (Roque, 2018)
On December 31, 2013, ISAIAH Company, a financing institution lent P4,000,000 to PSALMS
Corp due 3 years after. The loan is supported by an 8% note receivable. Transaction costs
incurred to originate the loan amounted to P248,000. P374,000 was chargeable to PSALMS
as origination fees. Interest on the loan are collectible at the end of each year. The yield rate
on the loan is 9.25%
ISAIAH was able to collect interest as it became due at the end of 2014. During 2015,
however, due to PSALMS Corporation’s business deterioration and due to political instability
and faltering global economy, the company was not able to collect amounts due at the end of
2015. after reviewing all available evidence at December 31, 2015, ISAIAH Company
determined that it was probable that PSALMS would pay back only P3,400,000 collectible as
follows:
December 31, 2017
1,400,000
December 31, 2018
1,000,000
December 31, 2019
600,000
December 31, 2020
400,000
As of December 31, 2015, the prevailing rate of interest for all debt instruments is 14%
1. What is the carrying value of the loans receivables as of December 31, 2014?
2. What is the impairment loss to be recognized in the 2015 statement of comprehensive
income?
54
3. What is the interest income to be recognized in the 2017 statement of comprehensive
income?
4. What is the correct carrying value of the loans receivable as of December 31, 2017?
Assessment Task 4
Presented below are unrelated situations. Answer the questions relating to each situation.
1. On January 1, 2018, Waling-waling Co sells its equipment with a carrying value of
P160,000. the company receives a non-interest-beaing note due in 3 years with a face amount
of P200,000. there is no established market value for the equipment. The prevailing interest
rate for a note of this type is 12%.
The following are the present value factors of 1 at 12%:
Present value of 1 for 3 periods
0.71178
Present value of an ordinary annuity of 1 for 3 periods
2.40183
1. What is the gain or loss to be recognized on the sale of the equipment?
2. What is the discount on note receivable on January 1, 2018?
3. What is the discount amortization at the end of the third year? (using effective interest
method)?
2. On January 2, 2018, a tract of land that originally cost P800,000 was sold by Vietnam Rose
Company. The Company received a P1,200,000 note as payment. It bears interest rate of 4%
and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance.
The prevailing rate on interest for a note of this type is 10%.
The present value table shows the following present value factors of 1at 10%:
Present value factor of 1 for 3 periods
0.75132
Present value factor of 1 for 2 periods
0.82645
Present value factor of 1 for 1 period
0.90909
Present value of an ordinary annuity of 1 for 3 periods
2.48685
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1. What amount of gain on sales should be recognized on January 2, 2018?
2. How much interest income should be reported for 2018?
3 .The notes receivable account of Caimito Inc consisted of the following:

60-day note of P10,000 dated may 15 with a 9% interest rate discounted at the bank on
June 8 at 12%.

120-day note of P100,000 (face amount) dated October 1 with no stated interest rate and
a market rate of 9% interest, discounted at the bank on November 30 at 12%. This note
was received from the sale of equipment,
Determine the proceeds from discounting of notes receivable.
Summary
For loans receivable problems:
Initial measurement

Initial measurement of loans receivable shall be at fair market value, which shall be the
net initial investment or the net cash given up on the loan transaction. More specifically,
the net initial investment shall be

Principal amount of the loan
x
Add Origination costs
x
Less Origination fees
x
FMV of the loan/Initial investment
x
Origination costs are costs that are directly attributed to the loan transaction such as
brokers fees and commissions, professional fees (eg to lawyers for drafting debt
agreements or to accountants for assessment of any asset collateral on the loan)

Origination fees are origination costs chargeable to the debtor as per the debt agreement
It can be an amount higher or lower than the actual origination cost incurred
Balance sheet measurement
56

Loans receivable shall be measured at the balance sheet date at amortized cost, which
shall be
Initial amount recognized/FMV at initial recognition x
Less: Principal collections
(x)
Less Amortization of premium on loan or
x
Add Amortization of discount on loan
Less: Impairment loss* if any
Amortized cost
(x)
(x)
x
*Impairment loss of loans receivable
Carrying value of the Loans and Receivable (include accrued interest as a general
rule)
x
Less: Present value of expected cash to be recovered using the ORIGINAL
EFFECTIVE INTEREST RATE
Impairment Loss/Bad Debt Expense
(x)
x
References
Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.
57