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Practice Problems-Audit of Receivables
Business and Marketing (Union University of California)
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AP-8707
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
CPA Review
AUDITING PROBLEMS
AUDIT OF RECEIVABLES
PROBLEM NO. 1
To substantiate the existence of the accounts receivable balances as at December 31, 2020, of
LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross
profit on sales is 20%. The company is under the perpetual inventory method.
Name of
Customer
Concordia
Balance
Per Books
P150,000
Falcon
P30,000
Lazaro
P144,000
Silang
P112,500
Yakal
P135,000
Comments
From Customers
P90,000 was returned on December 30,
2020. Correct balance is P60,000.
Your CM representing price adjustment
dated December 28, 2020, cancels this.
You have overpriced us by P150. Correct
price should be P300.
We received the goods only on January 6,
2021.
Balance was offset by our December
shipment of your raw materials.
Audit Findings
Returned
goods
were
received December 31, 2020.
The CM was taken up by
Lukas Company in 2021.
The complaint is valid.
Term is shipping point.
Shipped in 2020.
Lukas
Company
credited
accounts
payable
for
P135,000
to
record
purchases.
Yakal is a
supplier.
1. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000.
C. Increase by P18,000.
B. Decrease by P90,000.
D. Increase by P90,000.
2. The effect on 2020 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over.
C. P6,000 over.
B. P30,000 under.
D. P6,000 under.
3. The overstatement of receivable from Lazaro is
A. P96,000
B. P24,000
C. P72,000
D. P48,000
4. The accounts receivable from Silang is
A. Correctly stated.
C. P112,500 under.
B. P112,500 over.
D. P225,000 under.
5. The adjusting entry to correct the receivable from Yakal is
A. Purchases
Accounts receivable
B. Accounts payable
Purchases
C. Accounts receivable
Accounts payable
D. Accounts payable
Accounts receivable
135,000
135,000
135,000
135,000
135,000
135,000
135,000
PROBLEM NO. 2
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135,000
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CPAR - MANILA
AP8707 – AUDIT OF RECEIVABLES
The following information is based on a first audit of SABILA COMPANY. The client has not
prepared financial statements for 2018, 2019, or 2020. During these years, no accounts have
been written off as uncollectible, and the rate of gross income on sales has remained constant
for each of the three years.
Prior to January 1, 2018, the client used the accrual method of accounting. From January 1,
2018, to December 31, 2020, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2017.
As a result of your examination, the correct data shown in the table below are available:
Accounts receivable balances:
Less than one year old
One to two years old
Two to three years old
Over three years old
Total accounts receivable
Inventories
Accounts payable for inventory purchased
12/31/17
12/31/20
P15,400
1,200
P16,600
P28,200
1,800
800
2,200
P33,000
P11,600
P 5,000
P18,800
P11,000
Cash received on accounts receivable in:
Applied to:
Current year collections
Accounts of the prior year
Accounts of two years prior
Total
Cash sales
Cash disbursements for
inventory purchased
2018
2019
2020
P148,800
13,400
600
P162,800
P161,800
15,000
400
P177,200
P208,800
16,800
2,000
P227,600
P17,000
P26,000
P31,200
P125,000
P141,200
P173,800
1. The company’s sales revenue for the three-year period amounted to
A. P658,200
B. P74,200
C. P625,400
D. P415,300
2. What is the company’s total sales revenue for 2019?
A. P206,400
B. P183,600
C. P268,200
D. P180,400
3. The aggregate amount of purchases for the three-year period is
A. P131,000
B. P440,000
C. P434,000
D. P446,000
4. What is the company’s gross profit ratio in each of the three-year period?
A. 33.33%
B. 28.35%
C. 35.16%
D. 31.15%
5. What is the company’s gross profit for each of the three-year period?
2018
2019
2020
A.
P 60,933
P 68,200
P 80,000
B.
55,533
60,133
79,000
C.
122,400
137,600
178,800
D.
61,200
68,800
89,400
PROBLEM NO. 3
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CPAR - MANILA
AP8707 – AUDIT OF RECEIVABLES
You are examining the financial statements of SALUYOT COMPANY for the year ended
December 31, 2020. Your audit of the accounts receivable and other related accounts disclosed
the following information:
1. The December 31, 2020, balance in the Accounts Receivable control account is P788,000.
2. The only entries in the Bad Debts Expense account were:
a. A credit for P1,296 on December 1, 2020, because customer A remitted in full for the
account charged off October 31, 2020.
b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts.
3. The Allowance for Bad Debts account is presented below:
Date
Particulars
Jan. 1 Balance
Oct. 31 Uncollectible:
Customer A P1,296
B 3,280
C 2,256
Dec. 31 3% of P788,000
Debit
Credit
Balance
P15,250
P6,032
P23,640
9,218
32,858
4. An aging schedule of the accounts receivable as of December 31, 2020, and the decisions
are as shown below:
Net Debit
Balance
AGE
0-1 month
P372,960
1-3 months
307,280
3-6 months
88,720
Over 6 months
24,000
Amount to which the allowance
is to be adjusted after adjustments
and corrections have been made
1%
2%
3%
Definitely uncollectible, P4,000;
P8,000 is considered to be 50%
uncollectible; the remainder is
estimated to be 80% collectible
P792,960
5. There is a credit balance in one account receivable (0-1 month) of P8,000; it represents an
advance on a sales contract; also there is a credit balance in one of the 1-3 months
accounts receivable of P2,000 for which merchandise will be accepted by the customer.
6. The Accounts Receivable control account is not in agreement with the subsidiary ledger.
The differences cannot be located, and the company’s accountant decides to adjust the
control to the sum of the subsidiaries after corrections are made.
1. The adjustment to correct the entry made on December 1, 2020, is
A. Bad debts expense
1,296
Accounts receivable
1,296
B. Bad debts expense
1,296
Allowance for bad debts
1,296
C. Accounts receivable
1,296
Allowance for bad debts
1,296
D. No adjusting entry is necessary.
2. The required allowance balance (per aging) on December 31, 2020, is
A. P29,354
C. P19,858
B. P19,058
D. P32,858
3. The net realizable value of Saluyot’s accounts receivable on December 31, 2020, amounts to
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CPAR - MANILA
AP8707 – AUDIT OF RECEIVABLES
A. P779,902
B. P774,142
C. P793,200
D. P788,664
4. Saluyot should report bad debt expense for 2020 of
A. P13,344
C. P10,296
B. P22,344
D. P33,936
5. What entry is necessary to adjust the allowance account at December 31, 2020?
A. Bad debts expense
10,296
Allowance for bad debts
10,296
B. Bad debts expense
13,800
Allowance for bad debts
13,800
C. Allowance for bad debts
10,296
Bad debts expense
10,296
D. Allowance for bad debts
13,800
Bad debts expense
13,800
PROBLEM NO. 4
DOK, Inc. had the following long-term receivable account balances at December 31, 2019.
Note receivable from sale of division
Note receivable from officer
P1,500,000
400,000
Transactions during 2020 and other information relating to Dok’s long-term receivables were as
follows.
1.
The P1,500,000 note receivable is dated May 1, 2019, bears interest at 9%, and
represents the balance of the consideration received from the sale of Dok’s electronics
division to York Company. Principal payments of P500,000 plus appropriate interest are
due on May 1, 2020, 2021, and 2022. The first principal and interest payment was made
on May 1, 2020. Collection of the note installments is reasonably assured.
2.
The P400,000 note receivable is dated December 31, 2019, bears interest at 8%, and is
due on December 31, 2022. The note is due from May Rox, president of Dok Inc. and is
collateralized by 10,000 shares of Dok’s ordinary shares. Interest is payable annually on
December 31, and all interest payments were paid on their due dates through December
31, 2020. The quoted market price of Dok’s ordinary shares was P45 per share on
December 31, 2020.
3.
On April 1, 2020, Dok sold a patent to Pen Company in exchange for a P100,000 zerointerest-bearing note due on April 1, 2022. There was no established exchange price for
the patent, and the note had no ready market. The prevailing rate of interest for a note of
this type at April 1, 2020, was 12%. The present value of P1 for two periods at 12% is
0.797 (use this factor). The patent had a carrying value of P40,000 at January 1, 2020,
and the amortization for the year ended December 31, 2020, would have been P8,000.
The collection of the note receivable from Pen is reasonably assured.
4.
On July 1, 2020, Dok sold a parcel of land to Sprinter Company for P200,000 under an
installment sale contract. Sprinter made a P60,000 cash down payment on July 1, 2020,
and signed a 4-year 11% note for the P140,000 balance. The equal annual payments of
principal and interest on the note will be P45,125 payable on July 1, 2021, through July 1,
2024. The land could have been sold at an established cash price of P200,000. The cost of
the land to Dok was P150,000. Circumstances are such that the collection of the
installments on the note is reasonably assured.
Based on the preceding information, calculate the following:
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CPAR - MANILA
AP8707 – AUDIT OF RECEIVABLES
1. Accrued interest receivable on December 31, 2020
A. P75,400
B. P99,700
C. P67,700
D. P97,700
2. Carrying value on December 31, 2020, of the zero-interest-bearing note from sale of
patent
A. P79,700
B. P72,527
C. P92,827
D. P86,873
3. Interest income for the year ended December 31, 2020
A. P151,873
B. P137,527
C. P154,264
D. P159,573
4. Current portion of long-term receivables on December 31, 2020
A. P537,425
B. P529,725
C. P545,125
D. P640,000
5. Total long-term receivables on December 31, 2020
A. P1,103,102
B. P1,097,148
C. P1,081,748
D. P1,087,702
PROBLEM NO. 5
1. The auditor finds a situation in which one person has the ability collect receivables, make
deposits, issue credit memos, and record receipt of payments. The auditor suspects the
individual may be stealing from cash receipts. Which of the following audit procedures
would be most effective in discovering fraud in this scenario?
A. Send positive confirmations to a random selection of customers.
B. Send negative confirmations to all outstanding accounts receivable customers.
C. Perform a detailed review of debits to customer discounts, sales returns, or other debit
accounts, excluding cash posted to the cash receipts journal.
D. Take a sample of bank deposits and trace the detail in each bank deposit back to the
entry in the cash receipts journal.
2. In confirming accounts receivable, an auditor decided to confirm customers’ account
balances rather than individual invoices. Which of the following most likely would be
included with the client’s confirmation letter?
A. An auditor-prepared letter explaining that a non-response may cause inference that
the account balance is correct.
B. A client-prepared letter reminding the customer that a non-response will cause a
second request to be sent.
C. An auditor-prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor.
D. A client-prepared statement of account showing the details of the customer’s account
balance.
3. Which of the following statements would an auditor most likely add to the negative form
of confirmations of accounts receivable to encourage timely consideration by the
recipients?
A. “This is not a request for payment; remittances should not be sent to our auditors in
the enclosed envelope.”
B. “Report any differences on the enclosed statement directly to our auditors; no reply is
necessary if this amount agrees with your records.”
C. “If you do not report any differences within fifteen days, it will be assumed that this
statement is correct.”
D. “The following invoices have been selected for confirmation and represent amounts
that are overdue.”
4. Auditors may use positive or negative forms of confirmation requests for accounts
receivable. An auditor most likely will use
A. The positive form to confirm all balances regardless of size.
B. A combination of the two forms, with the positive form used for large balances and
the negative form for the small balances.
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CPAR - MANILA
AP8707 – AUDIT OF RECEIVABLES
C. A combination of the two forms, with the positive form used for trade receivables and
the negative form for other receivables.
D. The positive form when the combined assessed level of inherent and control risk for
assertions related to receivables is acceptably low, and the negative form when it is
unacceptably high.
5. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Level Of
Number of Small
Consideration By
Inherent and Control Risk Is
Balances Is
The Recipient Is
A.
Low
Many
Likely
B.
Low
Few
Unlikely
C.
High
Few
Likely
D.
High
Many
Likely
6. In the confirmation of accounts receivable, the auditor would most likely
A. Request confirmation of a sample of the inactive accounts.
B. Seek to obtain positive confirmations for at least 50% of the total peso amount of the
receivables.
C. Require confirmation of all receivables from agencies of the government.
D. Require that confirmation requests be sent within 1 month of the fiscal year-end.
7. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
A. A majority of recipients usually lack the willingness to respond objectively.
B. Some recipients may report incorrect balances that require extensive follow-up.
C. The auditor cannot infer that all nonrespondents have verified their account
information.
D. Negative confirmations do not produce evidence that is statistically quantifiable.
8. To reduce the risks associated with accepting fax responses to requests for confirmations
of accounts receivable, an auditor most likely would
A. Examine the shipping documents that provide evidence for the existence assertion.
B. Verify the sources and contents of the faxes in telephone calls to the senders.
C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences.
D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if
none are noted.
9. An auditor who has confirmed accounts receivable may discover that the sales journal was
held open past year-end if
A. Positive confirmations sent to debtors are not returned.
B. Negative confirmations sent to debtors are not returned.
C. Most of the returned negative confirmations indicate that the debtor owes a larger
balance than the amount being confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a smaller
balance than the amount being confirmed.
10. Which of the following is the greatest drawback of using subsequent collections evidenced
only by a deposit slip as an alternative procedure when responses to positive accounts
receivable confirmations are not received?
A. Checking subsequent collections can never be used as an alternative auditing
procedure.
B. By examining a deposit slip only, the auditor does not know whether the payment is
for the receivable at the balance sheet date or a subsequent transaction.
C. A deposit slip is not received directly by the auditor.
D. A customer may not have made a payment on a timely basis.
11. All of the following are examples of substantive tests to verify the valuation of net
accounts receivable except the
A. Recomputation of the allowance for bad debts.
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CPAR - MANILA
AP8707 – AUDIT OF RECEIVABLES
B. Inspection of accounts for current versus noncurrent status in the statement of
financial position.
C. Inspection of the aging schedule and credit records of past due accounts.
D. Comparison of the allowance for bad debts with past records.
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