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Since 1977
AUDITING PROBLEMS
AP.3205-Audit of Receivables
OCAMPO/OCAMPO
MAY 2022
INTERNAL CONTROL MEASURES
1. Proper internal control over receivables should observe
the following:
a. Sales must be separated from the accounting for
them.
b. Accounting for sales must be separated from the
receipt of cash arising from the receivables.
c. Returns, allowances, discounts, and uncollectible
charge-offs must be properly approved and
separated from the cash receipts function.
d. Periodically, receivables should be aged in order to
determine the actions and efficiency of the credit
department.
2. Notes receivable custodian should not have access to
cash or to the accounting record.
3. A responsible official who does not have access to the
notes should approve note renewals as well as chargeoffs of defaulted notes in writing.
4. Proper procedures should be adopted for the follow-up
of defaulted notes.
SUBSTANTIVE AUDIT OF RECEIVABLES
Sales and Accounts Receivable Balances
Sales Transactions
Existence or occurrence: Sales and accounts receivable
are for shipments made to customers
Completeness:
recorded
1. Confirm accounts receivable and perform procedures
for confirmations not returned.
2. Perform analytical procedures to test sales and
accounts receivable.
For a sample of shipping documents, trace sales invoice
and entry into sales journal and accounts receivable
subsidiary ledger. Perform cutoff tests.
Completeness:
Sales transactions that occurred and
existing receivables are recorded
Sales transactions that occurred are
Occurrence: Recorded sales are for shipments actually
made to customers
3. Perform a test of sales cutoff.
For a sample of entries in the sales journal, compare sales
invoice copy, customer order, and sales invoice.
Rights and obligations: Accounts receivable are owned by
the client
Classification: Sales and accounts receivable transactions
have been recorded in the proper accounts
4. Review minutes of the board of directors’ meetings,
inquire of the client personnel, read contracts and
agreements, and confirm with lenders any indications
that accounts have been assigned, sold, or pledged.
For a sample of entries in the sales journal, verify the
accuracy of account coding.
Valuation and allocation: Accounts receivable are properly
valued
5. Verify mathematical accuracy of the accounts
receivable aging schedule and trace it to the accounts
receivable subsidiary ledger.
6. Test the adequacy of the allowance for uncollectible
accounts.
Accuracy (Valuation):
recorded
Sales are correctly billed and
For a sample of entries in the sales journal, (a) examine
sales invoice, shipping document, and customer for
consistency of descriptions and quantities; (b) examine
sales orders for credit approval; and (c) check prices and
extensions. Foot sales journal and general ledger account.
Presentation and disclosure:
Sales and accounts
receivable are properly presented and disclosed in
accordance with GAAP.
7. Review financial statements and perform analytical
procedures to determine whether accounts are
classified and disclosed in accordance with GAAP.
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Page 1 of 5
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AP.3205
EXCEL PROFESSIONAL SERVICES, INC.
PROBLEM NO. 1
The December 31, 2019 statement of financial position of
Help Company included the following information:
Notes receivable
Less: NR discounted
P 598,000
(380,000)
Accounts receivable
Less: Allow. for D.A.
Total receivables
P2,240,000
( 141,000)
P
218,000
2,099,000
P2,317,000
The following transactions occurred during 2020:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Sales on account
Collections on accounts
Accounts receivable written off as
uncollectible
Notes receivable collected
Customer notes received in payment
of accounts receivable
Notes receivable discounted paid at
maturity
Notes receivable discounted
defaulted, including interest of
P200 and a P100 fee. This
amount is expected to be collected
in 2021
Proceeds from customer notes
discounted (face value P450,000,
accrued interest income, P2,000)
Collections on accounts previously
written off
Sales returns and allowances
Required allowance for doubtful
accounts based on impairment
assessment at year end
From the schedule of accounts receivable as of December
31, 2020, you determined that this account includes the
following:
Accounts with debit balances
Advances to officers
Accounts with credit balance
Accounts receivable per GL
The credit balance in customer’s account represents
collection from a customer whose account had been
written-off as uncollectible in 2019.
P8,812,000
8,410,000
Accounts receivable for more than a year totaling P21,000
should be written off.
138,000
290,000
Confirmation replies received directly from customers
disclosed the following exceptions:
740,000
360,000
Customer
Jessie
Customer’s
Comments
The goods sold on
December 1 were
returned
on
December 16, 2020.
20,300
448,500
We do not owe this
amount *%#@ (bad
word). We did not
receive
any
merchandise
from
your company.
Investigation
revealed that goods
sold
for
P16,000
were
shipped
to
Robert on December
29, 2020, terms FOB
shipping point. The
goods were lost in
transit
and
the
shipping
company
has acknowledged its
responsibility for the
loss
of
the
merchandise.
Anne
I am entitled to a
10%
employee
discount.
Your bill
should be reduced
by P1,200.
Anne is an employee
of Praktis. Starting
November 2020, all
company employees
were entitled to a
special discount.
Jay-ar
We have not yet sold
the goods. We will
remit the proceeds
as soon as the goods
are sold.
Merchandise
billed
for P18,000 were
consigned to Jay-ar
on December 30,
2020.
The goods
cost P13,000.
Roy
We do not owe you
P20,000.
We
already
paid
our
accounts
as
evidenced by OR #
1234.
The
sale
of
merchandise
on
December 18, 2020
was paid by Roy on
January 6, 2021.
Roldan
Reduce your bill by
P1,500
This
amount
represents
freight
paid by the customer
for the merchandise
shipped
on
December 17, 2020,
terms,
FOB
destination-collect.
5,000
20,000
12,000
Based on the above and the result of your audit, answer
the following:
1. The loss from discounting of notes receivable is
a. P3,500
c. P1,500
b. P2,000
d. P
0
2. The adjusted balance of Accounts Receivable as of
December 31, 2020 is
a. P2,479,000
c. P1,729,000
b. P1,739,000
d. P1,744,000
3. The adjusted balance of Notes Receivable as of
December 31, 2020 is
a. P238,000
c. P668,000
b. P688,300
d. P688,000
4. The amount to be reported as trade and other
receivables in the entity’s statement of financial
position as of December 31, 2020 is
a. P1,970,300
c. P1,965,300
b. P1,950,000
d. P1,945,000
5. When designing audit procedures, tracing of source
documents to the customers subsidiary ledger and
subsequently to the general ledger is done to satisfy
what assertion?
a. Valuation
c. Completeness
b. Cutoff
d. Classification
Audit Findings
The client failed to
record credit memo
no. 23 for P12,000.
The
merchandise
was included in the
ending inventory at
cost.
Robert
QUESTIONS:
PROBLEM NO. 2
In connection with the audit of the financial statements of
Praktis Corporation, your audit senior instructed you to
examine the company’s accounts receivable.
Page 2 of 5
P 441,100
16,400
(15,000)
P 442,500
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AP.3205
EXCEL PROFESSIONAL SERVICES, INC.
REQUIRED:
•
1. Adjusting entries as of December 31, 2020.
2. Adjusted balance of Accounts Receivable
December 31, 2020.
as
of
Age
60 days &
under
61 to 90
days
91 to 120
days
Over 120
days
3. Confirmation, which is a specific type of inquiry, is the
process of obtaining a representation of information or
of an existing condition directly from a third party.
Two assertions for which confirmation of accounts
receivable balances provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
c. Valuation and rights and obligations
d. Existence and completeness
4. The negative request form of accounts receivable
confirmation may be used when the
Combined
Assessed Level
Of Inherent
Number of
Consideration
and Control
Small
by the
Risk Is
Balances is
Recipient is
a.
Low
Many
Likely
b.
Low
Few
Unlikely
c.
High
Few
Likely
d.
High
Many
Likely
5. Which of the following procedures would an auditor
most likely perform for year-end accounts receivable
confirmations when the auditor did not receive replies
to second requests?
a. Review the cash receipts journal for the month
prior to year-end.
b. Intensify the study of internal control concerning
the revenue cycle.
c. Increase the assessed level of detection risk for the
existence assertion
d. Inspect the shipping records documenting the
merchandise sold to the debtors.
6. If management refuses to allow the auditor to send a
confirmation request, the auditor shall:
a. Inquire as to management’s reasons for the
refusal, and seek audit evidence as to their validity
and reasonableness.
b. Evaluate the implications of management’s refusal
on the auditor’s assessment of the relevant risks of
material misstatement, including the risk of fraud,
and on the nature, timing and extent of other audit
procedures.
c. Perform alternative audit procedures designed to
obtain relevant and reliable audit evidence.
d. All of these.
PROBLEM NO. 3
In connection with your examination of the financial
statements of Ringo, Inc. for the year ended December
31, 2020, you were able to obtain certain information
during your audit of the accounts receivable and related
accounts.
•
The December 31, 2020 balance in the Accounts
Receivable control account is P837,900.
Page 3 of 5
An aging schedule of the accounts receivable as of
December 31, 2020 is presented below:
Net debit
balance
Percentage to be applied
after corrections have
been made
P387,800
1 percent
307,100
2 percent
89,800
53,200
P837,900
•
5 percent
Definitely uncollectible,
P9,000; the remainder is
estimated to be 25%
uncollectible.
The Allowance for Doubtful Accounts schedule is
presented below:
January 1, 2020
November 30, 2020
December 31, 2020
(P837,900 x 5%)
Debit
Credit
Balance
P19,700
13,600
P41,895
P55,495
P6,100
•
Entries made in the Doubtful Accounts Expense
account were:
1. A debit on December 31 for the amount of the
credit to the Allowance for Doubtful Accounts.
2. A credit for P6,100 on November 30, 2020, and a
debit to Allowance for Doubtful Accounts because
of a bankruptcy. The related sales took place on
October 1, 2020.
•
There is a credit balance in one account receivable (61
to 90 days) of P11,000; it represents an advance on a
sales contract.
QUESTIONS:
Based on the above and the result of your audit, answer
the following:
1. How much is the adjusted balance of Accounts
Receivable as of December 31, 2020?
a. P837,900
c. P833,800
b. P839,900
d. P822,800
2. How much is the adjusted balance of the Allowance for
Doubtful Accounts as of December 31, 2020?
a. P25,475
c. P25,255
b. P25,780
d. P41,895
3. How much is the Doubtful Accounts expense for the
year 2020?
a. P21,180
c. P41,985
b. P20,655
d. P20,875
4. How much is the net adjustment to the Doubtful
Accounts expense account?
a. P14,920 credit
c. P20,875 credit
b. P14,615 credit
d. P15,140 debit
5. All of the following are examples of substantive tests
to verify valuation of net accounts receivable except
the
a. Re-computation of the allowance for bad debts.
b. Inspection of the aging schedule and credit records
of past due accounts.
c. Comparison of the allowance for bad debts with
past records.
d. Inspection of accounts for current versus noncurrent status in the statement of financial
position.
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AP.3205
EXCEL PROFESSIONAL SERVICES, INC.
SOLUTION GUIDE #2:
Category
SOLUTION GUIDE:
Balance
Rate
60 days and under
1%
61 - 90 days
2%
91 - 120 days
5%
Over 120 days
25%
Allowance
2018
Sales – Cash
Sales - Credit
Total
Less COS
Gross profit
104,000
2018
PROBLEM NO. 4
The following information is based on the first audit of
Paul 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
profit 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, 2018.
As a result of your examination, the correct data shown
below are available:
12/31/17
12/31/20
Accounts receivable balances:
Less than one year old
P61,600
P112,800
One to two years old
4,800
7,200
Two to three years old
3,200
Over three years old
8,800
P66,400
P132,000
Inventories
146,400
124,160
20,000
44,000
2018
2019
2020
P595,200
P647,200
P835,200
53,600
60,000
67,200
2,400
P651,200
1,600
P708,800
8,000
P910,400
Cash sales
68,000
104,000
124,800
Cash disbursements
for inventory
purchased
750,000
728,400
Accounts payable for inventory
purchased
2020
124,800
Total
296,800
Computation of Credit Sales
Total
Cash received on
AR in:
Applied to:
Current year
sales
Accounts of the
prior year
Accounts of two
year prior
Total
2019
68,000
581,600
2019
2020
Balance, 12/31/20
Add collections:
2018
2019
2020
Total
PROBLEM NO. 5
The balance sheet of Yoko Corporation reported the
following long-term receivables as of December 31, 2019:
Note receivable from sale of plant
Note receivable from officer
P6,000,000
1,600,000
In connection with your audit, you were able to gather the
following transactions during 2020 and other information
pertaining to the company’s long-term receivables:
a.
The note receivable from sale of plant bears interest at
12% per annum. The note is payable in 3 annual
installments of P2,000,000 plus interest on the unpaid
balance every April 1. The initial principal and interest
payment was made on April 1, 2020.
b. The note receivable from officer is dated December 31,
2019, earns interest at 10% per annum, and is due on
December 31, 2022. The 2020 interest was received
on December 31, 2020.
c.
The corporation sold a piece of equipment to Yes, Inc.
on April 1, 2020, in exchange for an P800,000 noninterest bearing note due on April 1, 2022. The note
had no ready market, and there was no established
exchange price for the equipment. The prevailing
interest rate for a note of this type at April 1, 2020,
was 12%. The present value factor of 1 for two
periods at 12% is 0.797.
d. A tract of land was sold by the corporation to No Co.
on July 1, 2020, for P4,000,000 under an installment
sale contract. No Co. signed a 4-year 11% note for
P2,800,000 on July 1, 2020, in addition to the down
payment of P1,200,000. The equal annual payments
of principal and interest on the note will be P902,500
payable on July 1, 2021, 2022, 2023, and 2024. The
land had an established cash price of P4,000,000, and
its cost to the corporation was P3,000,000.
The
collection of the installments on this note is reasonably
assured.
QUESTIONS:
REQUIRED:
Based on the above and the result of your audit, determine
the following:
Based on the above and the result of your audit, compute
for the gross profit for the years ended December 31,
2018, 2019 and 2020.
1. Noncurrent receivables as of December 31, 2020
a. P9,037,600
c. P6,500,484
b. P7,037,600
d. P6,443,100
2. Current portion of
December 31, 2020
a. P2,000,000
b. P2,902,500
Page 4 of 5
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long-term
receivables
as
of
c. P2,594,500
d. P
0
AP.3205
EXCEL PROFESSIONAL SERVICES, INC.
3. Interest income for the year 2020
a. P 854,000
c. P 911,384
b. P1,091,384
d. P1,008,000
4. Accrued interest receivable as of December 31, 2020
a. P360,000
c. P514,000
b. P571,384
d. P674,000
5. Which of the following pairs of accounts would an
auditor most likely analyze on the same working
paper?
a. Notes receivable and interest income.
b. Accrued interest receivable and accrued interest
payable.
c. Notes payable and notes receivable.
d. Interest income and interest expense.
SOLUTION GUIDE #1&2:
Noncurrent
NR-sale of plant:
CA, 12/31/20
Less principal inst. due, 4/1/21
Pedro made the following journal entries in relation to the
sale of land and the related note receivable:
January 1, 2020
Notes receivable
Land
Gain on sale of land
P600,000
P400,000
200,000
December 31, 2020
Cash
Notes receivable
Interest income
P224,000
P200,000
24,000
Pedro reported the notes receivable in its statement of
financial position at December 31, 2020 as part of trade
and other receivables.
QUESTIONS:
Based on the above and the result of your audit, answer
the following:
1. The correct gain on sale of land is
a. P103,105
c. P120,061
b. P 94,868
d. P200,000
NR-officer
2. The correct interest income for 2020 is
a. P74,230
c. P70,435
b. P72,809
d. P24,000
NR-sale of equipment:
CA, 4/1/20
Discount amort.
3. Profit for 2020 is overstated by
a. P50,460
b. P31,130
NR-sale of land:
CA, 12/31/20
Less principal inst. due, 7/1/21
Total
Interest
c. P54,902
d. P
0
4. The correct carrying amount of the notes receivable at
December 31, 2020 is
a. P400,000
c. P368,870
b. P345,098
d. P349,540
5. The entity’s working capital at December 31, 2020 is
overstated by
a. P235,765
c. P182,476
b. P232,936
d. P
0
Total
PROBLEM NO. 6
On January 1, 2020, Pedro Company sold land that
originally cost P400,000 to Buyer Company. As payment,
Buyer gave Pedro Company a P600,000 note. The note
bears an interest rate of 4% and is to be repaid in three
annual installments of P200,000 (plus interest on the
outstanding balance).
The first payment is due on
December 31, 2020. The market price of the land is not
reliably determinable. The prevailing rate of interest for
notes of this type is 14% on January 1, 2020 and 15% on
December 31, 2020.
SOLUTION GUIDE #1:
Date
P
I (4%)
Total
PVF @
14%
PV,
1/1/20
12/31/20
200T
24T
224T
0.8772
196,493
12/31/21
200T
16T
216T
0.7695
166,212
12/31/22
200T
8T
208T
0.6750
140,400
600T
503,105
J - end of AP.3205 - J
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AP.3205