II – AUDIT OF RECEIVABLES

PROBLEM NO. 1 – Composition of trade and other receivables

SOLUTION:

Items included:
9
Trade accounts receivable (see computation below) 1,500
1
Advance payments to creditors on purchase orders 0,000
1
Interest receivable on bonds 0,000
5
Subscriptions receivable due in 30 days 5,000
166,
Trade and other receivables 500

Composition of trade accounts receivable:

5
Other trade accounts receivable – unassigned 0,000

Trade accounts receivable - assigned 15,000

Trade installment receivable due 1 – 18 months,

net of unearned finance charges of P2,000 20,000

Trade receivables from officers due currently 1,500

Trade accounts on which post-dated checks are held

(no entries were made on receipts of checks) 5,000

Trade accounts receivable 91,500

Items not included:

Accounts known to be worthless 2,500 Write off
Advances to affiliated companies 25,000 Noncurrent investment
Customers' account with credit balance (15,000) Trade and other payables

PROBLEM NO. 2 – Computation of adjusted accounts receivable

SOLUTION:

1
Requirement No. 1
1
) Love M. Do
Sales returns 92,000
Accounts receivable

2
) Strawberry Fields
None

3
) This Boy Company
None, this is misposting only in the SL. However, the customers' ledger should be
adjusted.

4
) Girl Corporation
Sales 40,000
Accounts receivable

5
) Ticket To Ride Corp.
Accounts receivable-Nontrade 160,000
Accounts receivable

6
) Let It Be Corp
Cash 124,000
Accounts receivable

7
) Hey Jude
None, this is misposting only in the SL. However, the customers' ledger should be
adjusted.

8
) Get Back Company
None, this is misposting only in the SL. However, the customers' ledger should be

2
 adjusted.

9
) Yesterday Corp
None, this is misposting only in the SL. However, the customers' ledger should be
adjusted.

Requirement No. 2

Unadjusted balance 2,020,000

Add (Deduct) adjustments:
No. 1 (92,000)
No. 4 (40,000)
No. 5 (160,000)
No. 6 (124,000)

Adjusted balance 1,604,000

PROBLEM NO. 3 – Audit of accounts receivable and related accounts

SOLUTION:
Per Adjustmen
Books ts Per Audit
442,5 (16,4 387,4
Accounts receivable 00 1 00) 00
15,0
2 00
(21,0
3 00)
(12,0
4 00)
(1,2
5 00)
(18,0
6 00)
(1,5
7 00)

3
 238,5 (12,0 205,8
60 days old and below   00 4 00) 00
(1,2
  5 00)  
(18,0
  6 00)  
(1,5
  7 00)  
117,2 117,2
61 to 90 days 00 00
85,4 (21,0 64,4
Over 90 days   00 3 00) 00

15,0 15,0 7,6

Allowance for doubtful accounts 00 2 00 22
(21,0
3 00)
(1,3
8 78)
Adjusting Journal Entries
16,4
1 Advances to officers and employees 00
16,4
Accounts receivable 00

15,0
2 Accounts receivable 00
15,0
Allowance for doubtful accounts 00
Erroneous recording of recovery from written off
account

21,0
3 Allowance for doubtful accounts 00
21,0
Accounts receivable (>90 days) 00
Accounts that should be written off

12,0
4 Net sales 00
12,0
Accounts receivable (<60 days) 00
Unrecorded credit memo

4
 1,2
5 Net sales 00
1,2
Accounts receivable (<60 days) 00
Unrecorded employee discount

18,0
6 Net sales 00
18,0
Accounts receivable (<60 days) 00
13,0
Inventory 00
13,0
Cost of sales 00
Goods out on consignment erroneously
billed

1,5
7 Freight out 00
1,5
Accounts receivable (<60 days) 00
Unrecorded freight-out

1,3
8 Allowance for doubtful accounts 78
1,3
Doubtful accounts expense 78

205,8 1 2,0
60 days old and below 00 % 58
117,2 2 2,3
61 to 90 days 00 % 44
64,4 5 3,2
Over 90 days 00 % 20
7,6
Required allowance 22
Balance per books before this adjustment (15,000+15,000- 9,0
21,000) 00
1,3
Adjustment 78

PROBLEM NO. 4 – Audit of allowance for doubtful accounts

SOLUTION:
5
 Requirement
No.1
Allowanc
Category Aging ratio AR Balance Rate e
1 – 10 days
64% 960,000 1.00% 9,600
11 – 30 days
18% 270,000 2.50% 6,750
31 – 60 days
8% 120,000 5.00% 6,000
61 – 120 days 20.00
5% 75,000 % 15,000
121 – 180 35.00
days 3% 45,000 % 15,750
over 180 days 80.00
2% 30,000 % 24,000

100% 1,500,000 77,100

Requirement
No.2
Doubtful accounts expense 22,300 *
Allowance for doubtful accounts 22,300

Allowance for doubtful accounts, 1/1 27,300

Add provisions (P8,000,000 x 4%) 320,000

Total 347,300
Less accounts written-off 292,500

Balance before adjustment 54,800

Required allowance (see no.
1) 77,100

Additional required allowance for doubtful accounts 22,300

PROBLEM NO. 5 – Analysis of accounts receivable and related accounts

SOLUTION:

Requirement No. 1

6
 209,0
Accounts receivable, 1/1/12 00
1,500,0
Credit sales for 2012 00
(1,380,2
Collections during 2012 00)
(31,0
Accounts written off - 2012 00)
Accounts receivable, 297,8
12/31/12 00

Requirement No. 2
7,60
Allowance for doubtful accounts, 1/1/12 0
30,00
Doubtful accounts expense - 2012 (see computation below) 0
(31,0
Accounts written off - 2012 00)
4,20
Recovery of accounts written off – 2012 0
10,80
Allowance for doubtful accounts, 12/31/12 0

Computation of doubtful accounts expense - 2012:

30,00
Doubtful accounts expense for 2012 (P1,500,000 x 2%) 0

Computation of bad debt

rate:
Year Credit sales AR writen-off Recoveries Net
23,85
2009 1,110,000 26,000 2,150 0
3, 25,75
2010 1,225,000 29,500 750 0
3, 26,40
2011 1,465,000 30,000 600 0
9, 76,00
3,800,000 85,500 500 0

76,00
Net accounts written off (2009 to 2011) 0
3,800,0
Divide by credit sales (2009 to 2011) 00

Percentage of uncollectible accounts to charge sales 2.00%

7
PROBLEM NO. 6 – Audit of accounts receivable and related accounts
SOLUTION:

Requirement No. 1.a

GL/SL 60 61 to 90 91 to 120 over
120
Unadjusted balances 837,9
00 387,800 307,100 89,800 53,200
Add (deduct) adjustments:
AJE No. 1 (9,0 (9,00
00) 0)
AJE No. 2 (6,1 (6,1
00) 00)
AJE No. 3 11,00 11,00
0 0
Adjusted balances 833,800 387,800 318,100 83,700 44,200

Requirement No. 1.b

Age of accounts balance Rate Allowanc
e
60 387,800 1% 3,878
61 to 90 318,100 2% 6,362
91 to 120 83,700 5% 4,185
over 120 44,200 25% 11,050

833,800 25,475

Requirement No. 1.c

Unadjusted allowance for doubtful accounts 55,49
5
Add (deduct) adjustments:
AJE no. 1 (9,0
00)
AJE no. 4 (squeeze) (21,0 (30,02
20) 0)

8
 Required allowance (see no. 1.b) 25,47
5
Balance per books (P41,895 - P6,100) 35,79
5
Add (deduct) adjustments:
AJE no. 2 6,10
0
AJE no. 4 (21,0 (14,92
20) 0)
Doubtful accounts expense per audit 20,87
5

Requirement No. 2
Adjusting journal entries:

1) Allowance for doubtful 9,00

accounts 0
Accounts receivable - over 120 days 9,00
0
To write off definitely uncollectible
accounts
2) Doubtful account expense 6,10
0
Accounts receivable - 91 to 120 6,10
days 0
To correct entry made in recording accounts written
off
3) Accounts receivable - 61 to 90 days 11,00
0
Advances from 11,00
customers 0
To reclassify advances from customers

4) Allowance for doubtful 21,02

accounts 0
Doubtful account 21,02
expense 0
To adjust allowance to required balance

PROBLEM NO. 7 – Analysis of notes receivable and related accounts

SOLUTION:

9
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000) 4,000,00
0
Less installment due on April 1, 2013 2,000,00 2,000,00
0 0
Note receivable from officer, due 12/31/14 1,600,00
0
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797) 637,60
0
Discount amortization-2012 (P637,600 x 12% x 9/12) 57,38 694,98
4 4
Note receivable from sale of
land
Balance, 12/31/12 2,800,00
0
Less principal installment due on 7/1/13
Total amount to be received 902,50
0
Less interest (P2,800,000 x 11%) 308,00 594,50 2,205,50
0 0 0

10
 Total noncurrent receivables, 12/31/12 6,500,48
4

Requirement No. 2
Note receivable from sale of plant due on 2,000,00
4/1/13 0
Note receivable from sale of land (see no. 1) 594,50
0
Current portion of long-term receivables 2,594,50
0

Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12) 360,00
0
Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,00
0
Accrued interest receivable, 12/31/12 514,00
0

Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12 180,00
0
P4,000,000 x 12% x 9/12 360,00 540,00
0 0
Note receivable from officer (P1,600,000 x 160,00
10%) 0
Note receivable from sale of equipment (P637,600 x 12% x 57,38
9/12) 4
Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,00
0
Total interest income for 2012 911,38
4

PROBLEM NO. 8 – Audit of notes receivable and related accounts

SOLUTION:

Requirement No. 1.a

PV of consideration receivable (see computation 503,10
below) 5
Carrying amount of (400,00
land 0)
Correct gain on sale of 103,10
land 5

11
 Present value of cash flows to determine initial CA:
Date Principal Interest Total PVF (14%) PV, 1/1/12 PV,
(4%) 12/31/12
12/31/1 200,000 24,00 224,00 0.8772 196,493
2 0 0
12/31/1 200,000 16,00 216,00 0.7695 166,212 189,475
3 0 0
12/31/1 200,000 8,00 208,00 0.6750 140,400 160,056
4 0 0
600,000 503,105 349,531

Requirement No. 1.b

Amortization schedule using effective interest
method:
Date EI (14%) NI (4%) Disc. Repayment AC
Amort.
1/1/12 503,1
05
12/31/1 70,435 24,00 46,43 200,00 349,5
2 0 5 0 40
12/31/1 48,936 16,00 32,93 200,00 182,4
3 0 6 0 76
12/31/1 25,524 8,00 17,52 200,00
4 0 4 0 -
23
Interest income - 2012 (P503,105 x . 70,43
14) 5

Requirement No. 1.c

Gain on sale of land - overstated (P200,000 - 96,89
P103,105) 5
Interest income for 2012 - understated (P70,435 - (46,4
P24,000) 35)
Net overstatement of 2012 profit 50,46
0

Requirement No. 1.d

Carrying amount, 12/31/12 (see 349,54
schedule) 0

Requirement No. 1.e

Amount reported as notes receivable 400,00
0

12
 Correct current portion of NR (P349,540 - 167,06
P182,476) 4
Overstatement of CA/working capital 232,93
6

Requirement No. 2
Adjusting journal
entries:
To corect the entrymade to record the sale of land on 1/1/12:
Gain on sale of land 96,89
5
Discount on notes receivable (FV-PV) 96,89
5

To record amortization of discount on 12/31/12:

Discount on notes receivable 46,43
5
Interest income 46,43
5

PROBLEM NO. 9 – Audit of notes receivable and related accounts

SOLUTION:

Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180) 3.5172
Ordinary annuity factor at 13% for 5 periods 3.5172

Requirement No. 2 Profit

over (under)
Sales - over
Reported 2,005,900
Should be 1,500,000 505,900
Interest income - under
Reported 0
Should be (refer to amortization schedule) 156,000 (156,000)
Net misstatement 349,900

Requirement No. 3 RE, 12/31/12

over (under)
2011 profit overstated (see no. 2) 349,900
2012 profit understated (interest income under)
Reported 0

13
 Should be (refer to amortization schedule) 131,927 (131,927)
Net misstatement 217,973

Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
Should be (refer to amortization schedule) 236,456
Net misstatement of WC, 12/31/12 - over (under) 787,084

Amortization schedule:
Date Payment Interest (13%) Principal CA
1,200,000
12/31/11 341,180 156,000 185,180 1,014,820
12/31/12 341,180 131,927 209,253 805,567
12/31/13 341,180 104,724 236,456 569,111
12/31/14 341,180 73,984 267,196 301,915
12/31/15 341,180 39,265 301,915 -
1,705,900

PROBLEM NO. 10 – Analysis of notes receivable and related accounts

SOLUTION:.
Requirement No. 2
1/1 Notes receivable 25,000
Accounts receivable 25,000

2/28 Notes receivable 24,960

Loss on discounting (P25,250 - P24,960) 290
Notes receivable - discounted 25,000
Interest income (P25,000 x .06 x 2/12) 250

3/29 Notes receivable - Officers 6,200

Notes receivable 6,200

8/30 Notes receivable 4,200

Interest receivable 1,400
Interest income 2,800

9/4 Notes receivable dishonored 500

Notes receivable 500

Notes receivable dishonored 40,000

Notes receivable 40,000

14
11/1 Notes receivable 8,120
Cash 8,120

11/4 Notes receivable dishonored 26,031

Notes receivable 26,031

Notes receivable discounted 25,000

Notes receivable 25,000

12/27 Notes receivable 24,000

Loss on settlement of NR 2,031
Notes receivable dishonored 26,031

12/31 Notes receivable 6,200

Petty cash fund 6,200

12/31 Notes receivable 42,437

Notes receivable dishonored 40,500
Interest income 1,937

12/31 Interest receivable (P40,000 x 6% x 4/12) 800

Interest income 400
Notes receivable 1,200

12/31 Interest receivable (P8,000 x 6% x 2/12) 80

Interest income 80

12/31 Unearned interest income 400

Interest income 400

Requirement No. 1.a

Unadjusted trade NR 12,014
Add (Deduct) adjustments:
1/1 25,000
2/28 24,960
3/29 (6,200)
8/30 4,200
9/4 (40,500)
11/1 8,120
11/4 (26,031)
(25,000)
12/27 24,000
12/31 6,200
12/31 42,437
12/31 (1,200)
Adjusted trade NR, 12/31/12 48,000

15
 Composition:
Robinson (P70,000 - P30,000) 40,000
Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 48,000

Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12
3) NR from Julia - non-trade

Requirement No. 1.b

Robinson:
Jan. to Aug. (P70,000 x .06 x 8/12) 2,800
Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600
Tripper (P8,000 x .06 x 12/12) 480
Pepper (P42,437 - P40,500) 1,937
Anna (P25,000 x .06 x 2/12) 250
Julia (non-interest bearing) -
Total interest income - 2012 6,267

PROBLEM NO. 11 – Loan impairment

SOLUTION:
Requirement No.s 1 & 2
Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900

Amortization schedule
Date EI (11%) NI (10%) Disc. Amort. C.A.
1/1/11 9,630,900
12/31/11 1,059,39 1,000,000 59,399 9,690,299
9
12/31/12 1,065,93 1,000,000 65,933 9,756,232
3
12/31/13 1,073,18 1,000,000 73,186 9,829,418
6
12/31/14 1,081,23 1,000,000 81,236 9,910,654
6
12/31/15 1,089,34 1,000,000 89,346 10,000,000
6
826

16
 Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032

PROBLEM NO. 12 – Theory

Select the best answer for each of the following:

1. In the audit of which of the following general ledger accounts will tests of controls be
particularly appropriate?
a. Equipment
b. Bank charges
c. Bonds payable
d. Sales

2. The purpose of tests of controls over shipping is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit approved before goods are shipped.

3. The purpose of tests of controls over billing is to determine whether

a. Billed goods have been shipped
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.

4. An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial
statement assertion of
a. Existence or occurrence
b. Rights and obligations
c. Valuation
d. Completeness

5. Which of the following might be detected by an auditor’s review of client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts

17
 c. Lapping of year-end accounts receivable
d. Inflated sales for the year

6. An auditor who has confirmed accounts receivable may discover that the sales journal
was held open past year-end if
a. Positive confirmation sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.

7. The auditor finds situation in which one person has the ability to collect receivables,
make deposits, issue credit memos and record receipt of payments. The auditor suspects
the individual may be stealing from cash receipts. Which of the following audit
procedures would be most effective in discovering fraud in this scenario?
a. Send positive confirmations to 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.
8. All of the following are examples of substantive tests to verify valuation of net accounts
receivable except the
a. Re-computation of the allowance for bad debts
b. Inspection of accounts for current versus non-current status in the statement of
financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.

9. Confirmation, which is a specific type of inquiry, is the process of obtaining a

presentation 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 obligation
d. Existence and completeness

10. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Number of Consideration by
18
 Level of Inherent Small Business the Recipient is
and Control Risk is
a. Low Many Likely
b. Low Few Unlikely
c. High Few Likely
d. High Many Likely

11. 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 existences assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.

ANSWERS:

1. D 5. D 9. B
2. B 6. D 10. A
3. A 7. C 11. D
4. D 8. B 12. B

19