M-1403
Audit of Receivables
4. Which of the following might be detected by an auditor's review of the client's sales cut-off?
A.Excessive goods returned for credit
B.Unrecorded sales discount
C.Lapping of year-ends accounts receivable
D.Inflated sales for the year
5. An auditor most likely would review an entity's periodic accounting for numerical sequence of
shipping documents and invoices to support management's financial statement assertion of
A.Existence or occurrence
B.Valuation
C.Right and obligation
D.Completeness
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 debtor are not returned
B.Negative confirmations sent to debtors are not returned
l C.Most of the returned negative confirmations indicate that the debtor owes larger balance that
the amount being confirmed
D.Most of the returned positve confirmations indicate that the debtor owes a smaller balance
that the amount being confirmed.
10. The auditor finds situation in which one person has the ability to collect receivables,make
deposits,issue credit memos and record receipt if 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 all 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
D.Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in
the cash receipta journal
11. The positive request form of accounts receivable confirmation may be used when the
Combined Assessed Level of Inherent and Control Risk is Individual Account Receivable Balance are
A. L o w L a r g e
B. L o w S m a l l
C. H i g h S m a l l
D. H i g h L a r g e
12. The negative request form of accounts receivable confirmation may be used whan the
Combined Assessed Level of Inherent and Control Risks Number of Small Balances Is Consideration by the Recipient
A . L o w M a n y L i k e l y
B . L o w F e w U n l i k e l y
C . H i g h F e w L i k e l y
D . H i g h M a n y L i k e l y
13. Which of the following is the greatest drawback of uaing the subsequent collections
evidenced only by a deposit slip as an alternative procedure when responces to positive accounts
receivable confirmation are not received?
A.Checking of subsequent collections can never be used as an alternative auditing procedure
B. By examininy a deposit slip only,the auditor does not know whther the payment is for the
receivable at the balance sheet date or subsequent transaction
C.A depositor slip is not received directly by the auditor
D.A customer may not have made a payment in a timely basis.
15.Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive repkies ti second request?
A.Review the cash receipts journal for the month prior to year-end
B.Intensify the study of internal control concerning revenue cycle
C.Increased the assessed level of detection risk for existence assertion
D.Inspect the shipping records documenting the merchandise sold to the debtors
16.An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
A.No reply to a positive confirmation request is received
B.No reply to a negative confirmation request is received
C.Collectibility of the receivables is in doubt
D.Pledging of the receivables is probable
17.An auditor's purpose in reviewing credit ratings of customers with deliquent accounts
receivable most likely is to obtain evidence concerning management's assertion about
A.Valuation or allocation
B.Presentation and disclosure
C.Existence and occurence
D.Rights and obligations
18. An aged trial balance of accounts receivable is usually used by the auditor to
A.Verify the validity of recorded receivables
B.Ensure that all accounts are promptly credited
C.Evaluate the results of compliance test
D.Evaluate type of provision for bad debt expense
19. In verifying a November 30, 2011 sales cut off date , an auditor would be most cincerned
wuth comparing records of
A.November 2011 cash receipts with December 2011 bank deposits
B.November 2011 purchases with December 2011 shipments
C.November 2011 accounts receivable with November2011 sales
D.November 2011 sales with November 2011 shipping documents
20. To conceal defalcation involving receivables, the auditor would expect an experienced
bookkeeper to charge which of the following accounts
A.Miscellaneous income
B.Petty cash
C.Miscellaneous expense
D.Sales returns
Straight Problems
Problem 1
Your audit disclosed that on December 31,2014, the accounts receivable control account of
Bayot Co. had a balance of P1,432,500. An analysis of the accounts receivable account showed
the following:
Required:
a. Trade accounts receivable balance as of December 31,2014. P761,250
b. Net current trade and other receivables balance as if December 31,2014. P323,750
c. How much will be presented under noncurrent assets as of December 31,2014?
P187,500
Problem 2
You were engaged to perform an audit of the accounts of Heidy Corporation for the year ended
December 31,2014 and have observed the taking of the physical inventory count of the company
on December 30,2014. Only merchandise shipped the Heidy Corporation to customers up to end
including December 30,2014 has been eliminated from inventory. The inventory as determined
by physical inventory count has been recorded on the books by the company's controller. No
perpetual records are maintained. All sales are made on FOB shipping point basis. You are to
assume that all purchase invoice have been correctly recorded.
The following list of sales invoices are entered in the sales books for months of December 2014
and January 2015 respectively.
DECEMBER 2014
Sales invoice amount Sales invoice date COGS Date shipped
a) P30, 000 December 21 P20,000 December 31, 2014
b) 22, 000 December 31 18,000 December 30, 2014
c) 10, 000 December 29 6, 000 December 30, 2014
d) 40, 000 December 31 24, 000 January 03, 2015
e) 100, 000 December 30 56, 000 December 29, 2014
(shipped to consignee)*
f) 120, 000 December 30 80, 000 January 2, 2015
JANUARY 2015
g) 60, 000 December 31 40, 000 December 30,2014
h) 40, 000 January 02 23, 000 January 2, 2015
i) 80, 000 January 3 55, 000 December 31, 2014
j) 90, 000 January 4 64, 000 December 29, 2014
*Verification from consignee indicates that 60% of the merchandise is still unsold at December
31, 2014.
Required: Prepare the necessary adjusting entries at December 31, 2014 in connection with the
foregoing data:
a. Cost of sales 20, 000
Merchandise Inventory 20, 000
c. No adjusting entries
In the audit of Coca-cola Company, the auditor had an appreciation of the following schedule
and noted some comments for possible adjustments:
Coca-cola Company
Accounts receivable schedule
December 31, 2014
Customer Balance Current Past due
Jollibee P 184, 000 P - P184, 000
Purgold 840, 000 496, 000 344, 000
SM 700, 000 184, 000 516, 000
Mercury 748, 000 424, 000 324, 000
FeedEx 320, 000 - 320, 000
Mini stop 248, 000 120, 000 128, 000
Davao inconvenience store(DIS) 8, 000 8, 000 -
Mcdonalds 512, 000 160, 000 352, 000
Mandarin 480, 000 480, 000 -
The accounts receivable control account balance was determined to be P4, 040, 000.
The external auditor submitted the following audit comments for possible adjustments:
Jollibee Merchandise found defective returned by customers on October
for credit, but the credit memo was issued by Coca-cola only on
January 9, 2015.
Mercury Customer billed twice in error for P80, 000. Balance is collectible.
Mini Stop Paid in full on December 30, 2014 but not recorded. Collections
were deposited on January 2, 2015.
REQUIRED:
a. Adjusting entries as of December 31, 2014.
1. Sales return 184, 000
Accounts receivable 184, 000
2. No adjusting entries
3. Receivable from carrier 320, 000
Accounts receivable 320, 000
4. Sales 80, 000
Accounts receivable 80, 000
5. No adjusting entries
6. Cash 248, 000
Accounts receivable 248, 000
7. AR-DIS 80, 000
AR-McDonald 80, 000
8. Accounts receivable 320, 000
Sales Return 320, 000
b. Adjusted balance of Accounts receivable- Trade as of December 31, 2014. P3, 528, 000
PROBLEM 4
The following information is based on the first audit Tommy Pogi Comapany.
Your new client has not prepared financial statements for three years since December 31,
2014. The company used accrual basis of accounting and reported income on a calendar year
basis prior to 2015. During the three years since December 31, 2014 his cash receipts and
cash disbursements records were maintained and sales on account were entered, when made,
directly into an accounts receivable subsidiary ledger. However, no general ledger postings
have been made since the December 31, 2014. Your examination has disclosed balances at
the beginning and the end of three-year period.
You have satisfied yourself as to the accuracy of the balances shown above. Other
information available to is as follows:
No account balances have been written off as uncollectible during the three-year period
and the ratio of gross profit to sales remains constant from year to year.
Required
1. Compute the total sales for each year 2015 to 2017. P6,574,000
2. What is the average gross profit rate? 25%
3. Compute the gross profit for each year 2015 to 2017.
2015 - 451, 000 ; 2016 516, 000 ; 2017 670, 500
PROBLEM 5
You sent out positive confirmation request to customers of Ernelly Corporation on December 31,
2014. Replies disputing amounts shown on the statements are summarized below.
Confirmation
No. Customers Comments Audit findings
17 Check for P1, 200 was mailed Check received 1/4/15 and
on December 30, 2014 credited on that date
40 Goods should have been billed Pricing policy confirmed by
at 80% of P5, 000 retail price sales manager. The cost of
since we received them on consigned goods amounts to
consignment. P3, 500.
63 We returned the goods on Examined receiving report for
12/03/14 returned goods. Credit memo
for P5, 000 dated 12/07/2014
in advertently not recorded.
78 We do not owe the amount of Received sales documentation
P2, 000 confirmed a posting error.
112 Per our telephone Credit manager agreed; credit
conversation, you agreed to memo for P2, 500 will be
reduce the price by 50% since issued in January 2015.
some of the goods were
damaged.
113 The balance of P2, 500 was Amount was erroneously
paid on December 23, 2014 credited to subsidiary ledger
per your official receipt No. account of Nelly instead of
9876. Ernel.
122 Returned merchandise Merchandise was included in
amounting to P12, 000 on the inventory, P7, 200. Credit
December 26, 2014. memo was issued on January
3, 2015.
138 Reduce your bill by P2, 000. I Special discount of 20%
am entitled to a special
confirmed by sales manager.
discount of 20%.
E. nelly is an employee of
Ernelly Corporation. Sale was
made in the ordinary course of
business and granting of credit
passed through the routine
process.
156 The goods worth P5, 000 were Goods shipped FOB shipping
received in January 2015. point on December 28, 2014.
GPR is 30%.
Required: Prepare adjusting entries
78 Sales 2, 000
Accounts receivable 2, 000
112 SR 2, 500
AR 2, 500
138 SD 2, 000
AR 2, 000
PROBLEM 6
The Lou Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an
allowance for bad debts are maintained separately for each division. On January 1, 2014 the
balance of retail accounts receivable was P 209, 000 while the bad debts with respect to retail
customers was a credit of P 7, 600.
Bad debts are provided for as percentage of credit sales. The accountant calculates the percentage
annually by using the experience of the three years prior to the current year. The formula is bad
debts written off less recoveries expressed as percentage of the credit sales for the same period. A
cash receipt in 2014 from credit sales to retail customers was P1, 380, 200.
Based on the above and the result of you audit, answer the following:
1. The percentage to be used to compute the allowance for bad debts on December 31,
2014. 2%
2. For 2014, the provision for bad debts with respect to credit sales. 30, 000
3. The ledger balance of the accounts receivable after necessary adjustments on December
31, 2014. 297, 800
4. The ledger balance of the allowance for bad debts after necessary adjustments on
December 31, 2014. 10, 800
PROBLEM 7
Efemela Company produces paints and related products for sale to the construction industry
throughout Davao City. While sale have remained relatively stable despite a decline in the
amount of new construction, there has been a noticeable change in the timeliness with which the
companys customers are paying their bills.
The company sells its products on payment terms of 2/10,n/30. In the past, over 75 percent of the
credit customers have taken advantage of the discount by paying within 10 days of the invoice
date. During the year ended December 31, 2013, the number of customers taking the full 30 days
to pay has increased. Current indications are that less than 60% of the customers are now taking
the discount. Uncollectible accounts as a percentage of total credit sales have risen from the
1.5% provided in the past years to 4% in the current year.
In response to your request for more information on the deterioration of accounts receivable
collections the companys controller has prepared the following report:
Efemela Company
Accounts receivable Collections
December 31, 2013
The fact that some credit accounts will prove uncollectible is normal. And annual bad debt wite
offs had been 1.5% of total credit sales for many years. However, during the year 2013, this
percentage increased to 4%. The accounts receivable balance is P1, 500, 000, and the condition
of this balance in terms of age of collection is shown below:
Required:
1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2013? P77, 100
2. The necessary adjusting entry to adjust the allowance for doubtful accounts as of
December 31, 2013?
Doubtful accounts expense 22, 300
Allowance for doubtful accounts 22, 300
3. An aging analysis of accounts receivable would provide an indication as to the
a. Validity of the accounts
b. Integrity of the credit grantors
c. Collectability of the accounts
d. Solvency of the customers
4. Which account balance is most likely to be misstated if an aging of accounts receivable is
not performed?
a. Allowance for bad debts
b. Accounts receivable
c. Sales returns and allowances
d. Sales revenue
5. An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is performed to satisfy the audit objective of
a. Accuracy
b. Control
c. Completeness
d. Existence
PROBLEM 8
In connection with your examination of the financial statements of Ruth Tambok, Inc. for the
year ended December 31, 2013, you were able to obtain certain information during your audit of
the accounts receivable and related accounts.
The December 31, 2013 balance in the Accounts receivable control accounts is P837,
900.
An aging schedule of the accounts receivable as of December 31, 2013 is presented
bleow:
Age Net debit balance Percentage to be applied
after corrections have been
made
Required:
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, 2013?
P533, 800
2. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2013? P25,475
3. How much is the doubtful accounts expense for the year 2013? P 20, 875
4. How much is the net adjustment to the doubtful accounts expense account? Increase by
P14, 920
PROBLEM 9
In connection with the audit of the financial statements of Charm Corporation, your audit
senior instructed you to examine the companys accounts receivable.
Prior to any adjustments you were able to extract the following balances from Charms trial
balance as of December 31, 2013:
From the schedule of accounts receivable as of December 31, 2013, you determined that this
account includes the following:
Accounts receivable for more than a year totaling P63, 000 should be written off.
Confirmation replies received directly from customers disclosed the following exceptions:
Customer Customers comment Audit findings
Swernette The good sold on December The client failed to record
1 were returned on December credit memo no. 23 for P36,
16, 2013 000. The merchandise was
included in the ending
inventory at cost.
Ramil We do not owe this amount Investigation revealed that
*%#@ (bad word).we did not goods sold for P48, 000 were
receive any merchandise shipped to Ramil on
from your company December 29, 2013, terms
FOB shipping point. The
goods were lost in transit and
the shipping company has
acknowledged its
responsibility for the lost
merchandise.
Jojo I am entitled to a 10% Anne is an employee of
employee discount. Your bill Charm.starting November
should be reduced by P3, 600 2013, all company employees
were entitled to a special
discount.
Efem We have not yet sold the Merchandise billed for P54,
goods. We will remit the 000 were consigned to Efem
proceeds as soon as the on December 30, 2013. The
goods are sold. goods cost P39, 000.
Dodong We do not owe you P60, 000. The sale of merchandise on
We already paid our accounts December 18, 2013 was paid
as evidenced by OR # 1234 by Dodong on January 6,
2014.
Francis Reduce your bill by P4, 500 This amount represents
freight paid by the customer
for the merchandise shipped
on December 17, 2013,
terms, FOB destination-
collect.
Based on your discussion with Charms credit manager, you both agreed that an allowance for
doubtful accounts should be maintained using the following rates:
60 days old and below 1%
61 to 90 days 2%
Over 90 days 5%
Required:
Based on the above end the result of your audit, answer the following:
1. The adjusted balance of accounts receivable in the 60 days and below category as of
December 31, 2013. P617, 400
2. The adjusted balance of accounts receivable as of December 31, 2013. P 1, 162, 200
3. The adjusted allowance for doubtful accounts as of December 31, 2013. P22, 866
4. The entry to adjust the allowance for doubtful accounts.
Allowance for doubtful accounts 4, 134
Doubtful accounts expense 4, 134
5. To gather audit evidence about the proper credit approval of sales, the auditor would
selects a sample of documents from the population represented by the
a. Bill of lading
b. Customer order file
c. Sales invoice file
d. Subsidiary customers account ledger
PROBLEM 10
During the course of the audit of the financial statements of Novelynsky, Inc. for the year ended
December 31, 2013, you examined the Trade Notes receivable account represented by the
following items:
a. A four-month note dated November 30, 2013 from the Ruth Co., P100, 000; interest
rate, 10% discounted without recourse on November 30, 2013 at 8%. Novelynsky
recorded the proceeds received as a credit to Liability on Discounted Notes.
b. A 90-day note dated November 1, 2013 from Ernel, P250, 000; interest rate 8%; the
note is for subscriptions to P2, 500 shared of the preference share capital of Novelynsky,
Inc. at P100 per share.
c. A 60 day note dated May 3, 2013 from Heidy Company P30, 000: interest rate, 6%;
dishonoured at maturity; judgement obtained on October 10, 2013, collection doubtful.
d. A one-year noted dated January 31, 2013 from the president of Novelynsky, Inc. P800,
000; no interest; president confirmed. Market rate of the note on January 31, 2012 was
9%.
e. A 120-day note dated September 14, 2013, from Dragon Company, P60, 000; interest
rate, 9%, note is held by bank as collateral.
f. A two year non-interest bearing note from Beth Company for P200, 000 received ab=nd
dated August 31, 2013. The note was received in exchange for an agreement sold. The
equipment had a original cost of P400, 000 and had an accumulated depreciation on
January 1, 2013 of P160, 000. Such equipment is being depreciated at rate of 10% a
year, rounded to the nearest month. The prevailing interest rate for a note of this type is
12%. Novelensky recorded the sale by debiting notes receivable and crediting
equipment of the face value of the note. No depreciation has yet been provided on this
equipment for the year 2013.
REQUIRED:
1. Correct balance of Trade Notes Receivables and Accrued Interest.
2. Audit adjustments entries at December 31, 2013.