AUDTG 421 – Applied Auditing

Examination No. 1
Topic: Audit of Revenue, Receivables and Cash Transactions

Practical Problems. Instruction: Provide the requirements for the following cases/problems. For present
value factors, round off to four (4) decimal places.

1. You were engaged as the external auditor of an entity for the year 2019. In your audit of cash
transactions, you were given a bank reconciliation by the client’s bookkeeper. However, you
decided to reperform the reconciliation process. The entity has only one bank account and
follows the imprest fund system. There was no cash on hand balance on December 31, 2019.
The petty cash fund, which was replenished on December 28, amounted to P20,000. No unpaid
PCF vouchers were found and the PCF cash balance was properly accounted during your surprise
cash count on January 2, 2020. You gathered the following data for your reconciliation:
a. Balance per bank on November 30 is P14,040 and P19,630 on December 31.
b. Balance per books on November 30 is P11,190 and P18,945 on December 31.
c. Deposits in transit amounted to P2,740 on November 31 and P3,110 on December 31.
d. Outstanding checks amounted to P4,260 on November 31 and P3,870 on December 31.
e. The bank collected P1,200 on November and P1,600 on December. These collections were
not recorded in the entity’s books.
f. The bank charged the entity P950 on November and P640 on December. These charges
were not reflected in the entity’s books.
g. Deposits made on December amounted to P281,070 per bank statement. Disbursements
made, per cash journal, amounted to P273,885 for the month of December.
h. Of the checks outstanding as of December 31, one check for P700 was certified at the
request of the payee.
i. NSF check from customer amounting to P800 was charged by the bank in December 23. This
has not been redeposited. NSF check returned in November and recorded in December
amounted to P1,050. NSF check returned and recorded in December amounted to P900.
j. The bank erroneously credited another entity’s deposit amounting to P2,010.

In addition to the above data, the following were revealed during your substantive audit of
transactions:
a. A payment for travel expenses amounting to P750 was paid out of receipts on December 14.
b. Voucher No. 5643 dated December 20 contains an amount of P3,250. The same amount was
also reflected in the cash disbursements journal on the same date. Check No. 934560
related to the said voucher amounted to P325. It was ascertained that the amount in the
check was the same with the supplier’s billing and official receipt.
c. Official Receipt No. 56247 dated December 16 contains an amount of P165. The same
amount was also reflected in the cash receipts journal on the same date. Customer’s check
no. 198006 (DBP) related to this OR has an amount of P465. Billing statement and related
invoices amount was the same with the customer’s check.

Requirements: (a) prepare a reconciliation schedule that will show the cash balance that will be
presented in the statement of financial position; (b) present recommended audit adjusting
journal entries; (c) provide a brief explanation to your schedule and entries (support this with
relevant accounting standards and/or accounting principles/assumptions)
2. You were assigned as associate auditor in an audit engagement. During your study of the
entity’s internal control, as part of your risk assessment, you were impressed by their
established policies and procedures related to cash and cash equivalents – as declared by the
management and those charged with governance. With this, your senior auditor assigned you to
conduct a test of control related to cash and cash equivalents. To your dismay, you found out
that majority of established internal control policies and procedures were not followed. Your
team concluded that there is a high risk of material misstatement – whether due to fraud or
error. Your senior auditor assigned you to conduct a bank reconciliation for the month of
December 2019. The entity’s bookkeeper gave you his bank reconciliation for the month of
November 2019. After studying this reconciliation, you found it to be correct. Other information
were as follows:

Cash Receipts Summary - December

Date Particulars Amount
12/8/2019 Receipts from collection of accounts 25,774.80
12/15/2019 Receipts from collection of accounts 27,447.56
12/22/2019 Receipts from collection of accounts 4,659.82
12/29/2019 Receipts from collection of accounts 5,886.85

Cash Payments Summary – December

Date Particulars Amount
12/1/2019 November service charge 9.00
12/3/2019 Check issuance 5,236.50
12/5/2019 Check issuance 3,645.21
12/8/2019 Check issuance 16,394.89
12/10/2019 Check issuance 15,873.42
12/12/2019 Check issuance 4,848.89
12/19/2019 Check issuance 3,622.83
12/22/2019 Check issuance 3,692.09
12/31/2019 Check issuance 7,657.7

Bank reconciliation – November 30, 2019 (Prepared by Client)

Cash per general ledger 2,631.74

Less: Cash on Hand (210.89)
Total 2,420.85
Less: Bank service charge – November ( 9.00)
Add: Outstanding checks – November 991.00
Balance per bank 3,402.85

Cash on hand on December 31 amounted to P100. The transactions per December bank
statement, which were correctly recorded by the bank, show that deposits amounted to
P62,870.92; checks paid amounted to P57,952.03; service charge for the month were P10; and a
charge of P100 was made against the account because of the return unpaid of a customer’s
check. The service charge and the returned check were not recorded in the client’s books. The
total of outstanding checks as of December 31 was found to be P4,110.50.
 Requirements: (a) prepare a reconciliation schedule that will show the cash balance that will be
presented in the statement of financial position; (b) present recommended audit adjusting
journal entries; (c) provide a brief explanation to your schedule and entries (support this with
relevant accounting standards and/or accounting principles/assumptions)

3. You were assigned as a member of an audit team. In particular, you were assigned to audit sales
and revenue accounts of your client. You were satisfied in the physical count of inventories and
decided to test the sales cut-off assertion of the client. The following were selected accounts in
the client’s financial statements:

Accounts receivable 12,200,000

Merchandise Inventory 6,500,000
Sales 75,000,000
Cost of sales 54,000,000

The client uses the periodic inventory system, and the merchandise inventory balance above is
the result of the physical count conducted on December 30, 2019 at the close of business hours.
All merchandise received up to December 30, 2019 have been included in the count and all
merchandise shipped to customers up to December 30, 2019 have been eliminated from the
count. It takes at least three days to reach destination.

Your sales cut-off test revealed the following information:

December 2019 recorded sales

Selling price Cost Shipping Terms Shipment Date
26,000 20,000 FOB Shipping point 12/26/2019
85,000 70,000 FOB Destination 12/28/2019
120,000 92,000 FOB Shipping point 12/30/2019
90,000 67,000 FOB Destination 12/30/2019
64,000 50,000 FOB Shipping point 12/31/2019

January 2020 recorded sales

Selling price Cost Shipping Terms Shipment Date
155,000 121,000 FOB Shipping point 12/31/2019
200,000 150,000 FOB Destination 12/30/2019
220,000 168,000 FOB Destination 12/28/2019
43,000 32,000 FOB Shipping point 1/3/2020
55,000 42,000 ---- *** 1/3/2020

*** The goods were made to customer’s specifications, were completed on December 30, 2019
but were requested by the customer to be delivered in January, 2020.

Good out on consignment costing P80,000 and with sales price of P120,000 were not included in
the physical count. These goods have been recognized as sales when they were shipped out to
consignees. Verification with the consignees indicated that only 60% of these goods had been
 sold as of December 31, 2019. The company has already set-up Cost of Sales account in its books
after conducting physical inventory.

Requirements: (a) Prepare a schedule that will show adjusted balances of above accounts that
will be presented in the 2019 financial statements, after above-related adjustments; (b) present
your recommended audit adjusting entries; (c) provide a brief explanation to your schedule and
entries (support this with relevant accounting standards and/or accounting
principles/assumptions)

4. On December 31, 2019, your audit client holds Notes Receivable from a customer with a total
amount of P1,000,000 and bear interest at 6% collectible every December 31. The note had a
face amount of P1,500,000 and P250,000 is due annually every December 31. The first two
principal and accrued interest were collected appropriately on December 31, 2018 and 2019.
The client did not recognize any impairment allowance on the receivable upon initial
recognition, considering the credit rating of the customer and the client’s experience on similar
notes. However, on December 31, 2018, because credit risk increase significantly on the
particular industry in which the customer is engaged on, the client recognized an allowance of
P30,000 on these notes. During 2019, the customer suffered a series of financial difficulties and
negotiated for modification of terms, as follows:
a. Reduction of principal by P100,000.
b. Interest rate is reduced to 4% on the unpaid principal.
c. Remaining principal is collectible in installments of P225,000, starting December 31,
2020.

Requirements: (a) prepare a schedule that will show the adjusted balance of notes to be
presented in the financial statements for the year ended December 31, 2019; (b) present
recommended audit adjusting entries related to the above modification; (c) provide a brief
explanation to your schedule and entries (support this with relevant accounting standards
and/or accounting principles/assumptions)