Applied Auditing

1
Substantive Tests of Receivables and Sales

Module 003 – Substantive Tests of Receivables

and Sales

At the end of this module you are expected to:

1. Describe the auditor’s objectives for the substantive tests of trade
accounts and notes receivable and sales transactions
2. Explain the nature of the appropriate audit procedures to accomplish the
objective for the audit of trade accounts and notes
3. Understand and prepare audit working papers to document audit
procedures for receivables and sales

Audit of Trade Receivables and Balances

Sales transactions are always material to an entity’s financial statements and financial
statements failures as well as manipulations involve the overstatement/understatement of
revenues. Therefore, the revenue account must be examined thoroughly during the audit.
Since the sales account is closely related to accounts receivable, the two can be considered
jointly in a discussion of audit objectives and audit procedures. An example would be to
determine that an account receivable is valid, it must be supported by the validity of the sales
in the form of a sales invoice or billing statement.
Some of the common misstatements or errors that occurred in the receivable account and
sales account that an auditor would try to detect during the course of the audit are as follows:
a) Reported sales and receivables amount are incorrect in order to manipulate the
income to be reported for the period.
b) Improperly writing off the receivable as bad debt in order to steal cash and theft be
hidden.
c) Lapping is being carried out. Cash from one receivable is stolen and covered with cash
received from a second customer during the following day or two.
d) Incorrect year-end cut off of transactions.
e) Incorrect billing to customers (in terms of quantity invoiced and delivered, price
error and error in mathematical formula) and error in collections.

Audit Objectives and Procedures

The overall objective of the audit of receivables and sales is to determine if they are fairly
presented in the context of financial statement as a whole. Specific audit objectives relative
to the assertions applicable to audit of receivables and revenues as well as the corresponding
audit procedures to be performed are presented below:

Course Module
Assertions:
I. Existence and occurrence
Audit Objectives:
A. To determine that receivables exist and represent bona fide obligations owed to the
company as of the statement of financial position date.
Audit Procedures:
1. Perform a receivable confirmation on a sample year-end trade receivables.
2. Obtain a schedule of aged trade accounts receivable and notes receivable schedule
and reconcile to ledgers.
3. Examine the underlying documentation such as purchase order, dispatch
documentation, duplicate sales invoice, etc.
4. Inspect notes on hand.
5. Examine the customer’s account and customer correspondence to assess whether the
balance outstanding represents specific invoices and confirm their validity.

Assertions:
II. Completeness
Audit Objectives:
B. To determine that all transactions relative to receivables have been recorded in the
proper accounting period.
Audit Procedures:
6. Test cutoff of sales and sales returns to determine whether receivables are recorded
in the proper accounting period.
7. Trace a sample of shipping documentation to sales invoices and into the sale and
receivables’ ledger.
8. Review material subsequent year invoices, credit notes and adjustment and ensure
that they are recorded correctly in the line relevant financial period.

Assertions:
III. Rights and obligations
Audit Objectives:
C. To determine that the company has a legal right to all accounts receivables at the
balance sheet date.
Audit Procedures:
9. Review bank confirmation for any liens on receivables.
10. Make inquiries of management, review loan agreement and review board minutes for
any evidence of receivables being sold or factor.

Assertions:
IV. Valuation and Allocation
Audit Objectives:
 Applied Auditing
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Substantive Tests of Receivables and Sales

D. To determine that receivables are recorded and presented at proper amount in

accordance with PAS/PFRS.
Audit Procedures:
11. Review collectability of receivables and determine the adequacy of allowance for
doubtful accounts.
12. Compare receivables’ turnover and receivables’ days to the previous year and/or to
industry data.
13. Compare the bad debt expense as a percentage to sales to the previous year and/or
to industry data.
14. Examine credit notes issued after year-end for allowances that should be made
against current period balances.
15. Examine large customer accounts individually and compare to previous year’s
balances.
16. Recalculate the interest income from the notes receivable.

Assertions:
V. Presentation and Disclosure
Audit Objectives:
E. To determine that receivables are properly presented and classifies in the statement
of financial position.
Audit Procedures:
17. Read the disclosure notes relevant to receivables in the draft financial statements and
review for understandability.
18. Obtain written client representations regarding pledge, discount or assignment of
receivable, and about related-party receivables (officers, directors and other related
parties).

Discussion of Substantive Audit Procedures

1. Obtain a schedule of aged accounts receivable and notes receivable schedule and
reconcile to ledgers.
An Aging for Accounts Receivable is prepared by the company to present the
following:
a) Aging of customers’ accounts
b) Estimating of probable credit losses
c) Controlling and monitoring of confirmation requests

Course Module
 The auditor should test footings, cross footings and aging especially those
accounts classifies as current and those shown as past due. These accounts
should be traced to the subsidiary ledgers.
Figure 3.1 illustrates the working papers for accounts receivable while figure
3.2 shows the working paper for notes receivable.
Figure 3.1 Accounts Receivable Aging Schedule
South Grand Incorporated
Accounts Receivable - Aging Schedule
December 31, 2018

Aging Distribution Subsequent

Balance
Past due collections
Name of Customer
1- 61 - Over up to
Dr Cr Current
60 90 90 1/31/19
Alpha Corp. P xx   P xx ˆ P xx /
Beta Trading (xx)  
Charlie Inc. xx   xx ˆ xx /
Delta Company xx   xx ˆ
P xx P xx P xx P xx P xx P xx

Add (Deduct) Adjustments

(1) To reclassify account with
credit balance - Beta Trading xx
(2) To write-off definitely
uncollectible account - Delta
Company (xx)
Net xx xx xx xx xx
Adjusted balance P xx P xx P xx P xx P xx

 Traced to the general ledger

ˆ Aging distribution checked
/ Official receipts inspected
 Traced to subsidiary ledger

Prepared by: Reviewed by:

Initial Date Initial Date

Source: Cabrera, M.E. (2017) Applied Auditing. Manila: GIC Enterprises & Company, Incorporated
(Chapter 10 – Substantive Tests of Receivables and Sales)

Figure 3.2 Working Papers for Notes Receivable

South Grand Incorporated
Notes Receivable
December 31, 2018

Note Date Interest Amount Interest

number Maker of Note Due rate Accrued Earned
052 A Corp. 11/30/2018 2/15/2019 xx% P xx CI P xx ˆ P xx
058 B Corp. 12/10/2018 2/10/2019 xx% xx CI xx ˆ xx
060 C Corp. 12/20/2018 2/20/2019 xx% xx CI xx ˆ xx
071 D Corp. 12/30/2015 3/30/2019 xx% xx CI xx ˆ xx
Balance per ledger P xx  P xx P xx
Add (Deduct) Adjustment
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Substantive Tests of Receivables and Sales

(1) To reclassify past due note - A Corp. (xx)

Balance per audit P xx

C Confirmed by maker
Confirmation replies on separate file
Traced to the general ledger
I Inspected promissory note
ˆ Computations verified

Prepared by: Reviewed by:

Initial Date Initial Date

Source: Cabrera, M.E. (2017) Applied Auditing. Manila: GIC Enterprises & Company, Incorporated
(Chapter 10 – Substantive Tests of Receivables and Sales)

2. Confirm receivables with debtors.

A primary technique for verifying the existence of accounts receivable is to confirm
them with the company's customers. Since the information obtained through
confirmations is obtained directly from a third party, it is considered to be of higher
quality than any information that an auditor could have obtained from the client
company's internal records.
Accounts receivable may be confirmed by either the positive confirmation, the
negative confirmation or by a combination of the two methods.
In a positive confirmation, correct or incorrect, the recipient is requested to reply/
confirm with the stated amount/ information. Auditor should perform follow up
procedures if the debtor does not reply. Positive confirmation can be used in the
following situations:
a) Individual account balances are relatively large.
b) There is a reason to believe that there may be a substantial number of
accounts in dispute or with inaccuracies or irregularities.
c) Internal substantiating evidences are not adequate.
d) Internal control system is weak.
If customers do not return confirmations to the auditor, the auditor may go to
considerable lengths to obtain the confirmations, given the high quality of this form
of evidence. If there is no way to obtain a confirmation, then the auditor's next step
is to investigate subsequent cash receipts, to see if customers have paid for those
invoices that were not confirmed. This is a strong secondary form of evidence that
the accounts receivable outstanding at the end of the reporting period being audited
were in existence at that time.
Figure 3.3 shows an example of a positive confirmation request sent to a customer.

Course Module
Figure 3.3 Positive Form of Accounts Receivable Confirmation Request
South Grand Incorporated
178B V. Luna Avenue
Manila City

January 18, 2019

Jackson Trading
17-C Building Paseo Ave
Makati City, Metro Manila

Dear Sirs:

Please confirm directly to our auditors

J.G. Samson and Associates
#5 Quezon Avenue
Quezon City

The correctness of the balance of your account payable to us as shown below and
on the enclosed statement at December 31, 2018. If the amount is not in agreement
with your records at that date, please provide any information which will aid our
auditors in reconciling the difference.

Your prompt return of this form in the enclosed stamped envelope is essential to
the completion of the auditors’ examination of our financial statements and will be
appreciated.

South Grand Incorporated

By: Juan Miguel De Vera

(Controller)

THIS IS NOT A REQUEST FOR PAYMENT, BUT MERELY FOR CONFIRMATION OF YOUR ACCOUNT

The statement of out account showing a balance of P50,000 due to South Grand
Incorporated at December 31, 2018 is correct except as noted below:

Jackson Trading

Date: January 25, 2019 By: Ariane Perez

(Controller)

Exceptions: None________________________________________________________________________________________
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________

On the other hand, in a negative confirmation, the recipient is requested to reply only
when the recipient disagrees with the stated amount. In the event that the customer
fails to reply, the account balance indicated in the confirmation request is regarded
as a correct response even though the debtor may have ignored it.
Negative Confirmation is less expensive than positive confirmation, because there
will be no second confirmation request and no follow-up procedures. This method is
used when:
a) The auditor has assessed the risk of material misstatement as low and has
obtained sufficient evidence regarding the design and operating
effectiveness of controls.
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Substantive Tests of Receivables and Sales

b) The population of items is made up of a large number of small, homogenous

account balances, transactions, or other items.
c) The auditor expects a low exception rate.
d) The auditor reasonably believes that recipients will give the requests
adequate consideration. Adequate consideration exist when there are high
response rates on audits in previous year or of similar clients.
The timing of confirmation can be either at year-end or at an interim date near year-
end. If the procedure is performed during the latter, it is necessary for the auditor to
review the intervening transactions in the receivables control accounts between the
date of confirmation and the balance sheet date.

3. Inspect notes on hand

The auditor should generally inspect all of the actual notes and any collateral for the
notes, preferably simultaneous with the counting of cash and examination of
securities. However, if there are a great number of notes receivable, the auditor might
consider examining only a sample of the notes. Also, if some of the notes are held by
some other party, the auditor should sent a confirmation to the holder of the note.

4. Perform analytical procedures to determine whether the receivables, sales and interest
revenue balances appear reasonable.
Performance of analytical procedures can indicate problems with the financial
records of the client, which can be investigated more thoroughly. Analytical
procedure involves the following:
a) Compare accounts receivable turnover and days outstanding in accounts
receivable with previous years’ and industry data.
b) Compare bad debt expense as a percentage of sales revenue to previous
years and industry data.
c) Compare percentage of allowance for doubtful debts to accounts receivable
to previous years and industry data.
d) Aging analysis of outstanding balances. Compare with previous year and
note any drastic changes.
e) Compare the total balance of trade receivables with that of last year.

5. Test sales and sales returns cutoff to determine whether receivables are recorded in the
proper accounting period.
The auditor usually tests the sales cutoff by examining invoices and shipping
documents for several days both before and after the year-end by tracing such
documents to the sales and account receivable records for the appropriate period.
This test of sales cutoff may occasionally be made at an interim date to check the
frequency of the company’s procedures. All substantial sales returns after the
statement of financial position date should also be reviewed carefully as they may
represent fictitious sales recorded at year-end.

Course Module
 6. Review collectability of receivables and determine the adequacy of allowance for
doubtful accounts.
The auditors reviews the process that you follow to derive an allowance for doubtful
accounts. This includes a consistency comparison with the method used in the last
year, and a determination of whether the method is appropriate for client’s business
environment.
The auditor may also verify the past due accounts receivable listed in the aging
schedule that have not been paid subsequent to the statement of financial position.
Credit ratings for delinquent and unusually large accounts are determined.

7. Recalculate the interest income from notes receivable

The most effective verification of the interest earned account is an independent
computation by the auditors of the interest earned and accrued by basing on the notes
receivable on hand and/or agreement. The auditor compares the computation by the
client and his own and prepares working paper which is compose of the following:
a) Accrued interest receivable at the beginning of the year
b) Interest collected during the year
c) Accrued interest receivable at the end of the year
d) Interest earned during the year

8. Evaluate financial statement and disclosure of receivables. Obtain written client

representations regarding pledge, discount or assignment of receivables and about
receivables from related parties.
In addition to the foregoing audit procedures mentioned, the auditor should also
review the minutes of director’s meeting and confirm with banks of any selling or
assigning of accounts receivable.

Illustrative Audit Case 3.1

During the annual audit of Chandler Corporation, you encountered the following account, entitled
receivables and payables:
Items Debit Credit
Due from customers P 312,000
Payables to creditors for merchandise P 124,000
Note receivable, long-term 160,000
Expected cumulative losses on bad debts 80,000
Due from employees, current 4,400
Cash dividends payable 48,000
Special receivable, dishonored note* 44,000
Accrued wages 4,800
Deferred rent revenue 3,200
Insurance premiums paid in advance 2,400
Mortgage payable, long term 80,000

*Collection probable in two years

REQUIRED:
1. Given the journal entry to eliminate the above account and to set up the appropriate accounts to
replace it.
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Substantive Tests of Receivables and Sales

2. Show how the various items should be reported on a current statement of financial position.

Solution: Illustrative Audit Case 3.1

(Requirement 1)
Accounts receivable P 312,000
Notes receivable - long term 160,000
Special receivable - loans to employees 4,400
Special receivable - dishonored note 44,000
Prepaid insurance 2,400
Accounts payable - trade P 124,000
Allowance for doubtful accounts 80,000
Cash dividends payable 48,000
Wages payable 4,800
Rent revenue collected in advance 3,200
Mortgage payable - long term 80,000
Receivables and payables 182,800

(Requirement 2)
Current assets:
Accounts receivable - trade P 312,000
Less: Allowance for doubtful accounts 80,000 P 232,000
Receivables from employees 4,400
Prepaid insurance 2,400
Investment and funds:
Notes receivable - long term 160,000
Other assets:
Special receivable - dishonored note 44,000
Current liabilities:
Accounts payable - trade 124,000
Cash dividends payable 48,000
Wages payable 4,800
Rent revenue collected in advance 3,200
Long-term liabilities:
Mortgage payable - long term 80,000

Illustrative Audit Case 3.2

You have been asked to audit the records of Joey Manufacturing Company, a small manufacturer
of precision tools and machines, for the year-ended December 31, 2018. Your examination of
sales transactions revealed among others the following:

Course Module
 1) Some machines have been shipped on consignment to Joey’s regular dealers. These
transactions have been recorded as ordinary sales and billed as such. As of December 31,
2018, the machines have billed and in the hands of consignees amounted to P600,000. Sales
price was determined by adding 20% to cost.
2) On December 30, 2017, two machines were shipped to a customer FOB shipping point basis.
The sale was entered in the records on January 7, 2019 when cash was received in the amount
of P19,000.
3) The inventory as of December 31, 2018 included goods sold during November 2018 for
P13,000 but returned on December 18, 2018. O entry has been made to adjust the customer’s
account for the goods returned. The goods were included at selling price which was 130% of
cost.
As auditor of Joey Manufacturing Company, what adjusting journal entries would you
recommend relative to the above findings?

Solution: Illustrative Audit Case 3.2

The following are the recommended adjusting entries to correct the accounts of Joey
Manufacturing Company as of December 31, 2018.
AJE (1) Sales P 60,000
Accounts receivable P 60,000
To reverse the entry made to record deliveries to
consignees which are still unsold as of 12/31/2018

(2) Inventories, 12/31/2018 50,000

Cost of sales - Inventories, 12/31/2018 50,000
To include goods in the hands of consignees

(3) Accounts receivable 19,000

Sales 19,000
To record the sale of machines shipped on 12/31/2018,
FOB shipping point

(4) Sales returns and allowances 13,000

Accounts receivable 13,000
To record goods returned by customer

(5) Cost of sales - Inventories, 12/31/2018 3,000

Inventories, 12/31/2018 3,000
To correct overstatement of inventories

Illustrative Audit Case 3.3

You have been appointed as external auditor of Rachel Green Corporation. Rachel Green
Corporation operates in an industry that has a high rate of bad debts. On December 31, 2018,
before any year-end adjustments, Rachel’s Accounts Receivable balance was P300,000 and its
Allowance for Doubtful Accounts balance was P12,500. The year-end balance reported in the
statement of financial position for the Allowance for Doubtful Accounts will be based on the aging
schedule shown as follows:
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Substantive Tests of Receivables and Sales

Required:
As an auditor, you have to determine:
a) The appropriate balance for the Allowance Doubtful Account on December 31, 2018.
b) How Accounts Receivable would be presented on the statement of financial position on
December 31, 2018.
c) The peso effect of the year-end bad debt adjustment on the pre-tax income for 2018.

Solution: Illustrative Audit Case 3.3

a) The Allowance for Doubtful Accounts should have a balance of P24,250 on December 31,
2018. The supporting calculation are shown below:
Days account Expected percentage Estimated
Amount
outstanding uncollectible Uncollectible
0-15 P 150,000 0.02 P 3,000
16-30 100,000 0.10 10,000
31-45 25,000 0.20 5,000
46-60 15,000 0.30 4,500
61-75 5,000 0.35 1,750
Balance for Allowance for Doubtful Accounts P24,250
The accounts which have been outstanding over 75 days (P5,000) and have zero probability
of collection would be written off immediately and not be considered when determining the
proper amount for the Allowance for Doubtful Accounts.

b)
Accounts receivable P 295,000
Less: Allowance for doubtful accounts (24,250)
Net accounts receivable P 270,750

c) The year-end bad debt adjustment would decrease pre-tax income P16,750 for 2018 as
shown below:
Estimated amount required in the Allowance for doubtful accounts P 24,250
Balance in the account after write-off of bad accounts but before
adjustment (P12,500 - P5,000) (7,500)
Required charge to expense P 16,750

Illustrative Audit Case 3.4

During the course of the audit of the financial statements of Crome Inc. for the year ended
December 31, 2018, you examined the notes receivable represented by the following items:

Course Module
 1) A four-month note dated November 30, 2018, from the Aeon Company, P10,000; interest
rate 16%; discounted on November 30, 2018, at 16%.
2) A draft drawn payable 30 days after date for P45,000 by the Benton Company on the
Dodge Company in favor of the Gerrand Company, endorsed to Crome Inc., on December
2, 2018 and accepted on December 4, 2018.
3) A 90-day noted dated November 1, 2018 from J.C. Cruz of P25,000, interest at 16%; the
note is for subscriptions to 250 preference shares of Crome Inc., at P100 per share.
4) A 60-day note dated May 3, 2018, from the National Investment Company, P30,000;
interest rate, 16%; dishonored at maturity; judgment obtained on October 10, 2018.
Collection doubtful. (No interest after maturity.)
5) A 90-day noted dated January 4, 2018, from Romeo Paz, president of Crome, P8,000 no
interest, not renewed, president confirmed.
6) A 120-day note dated September 14, 2018, from the Samson Company, P6,0000; interest
rate, 16%; note is held by bank as collateral.
When the company discounted a noted, Interest expense was debited for the discount cost
and Interest income was credited for the revenue.
Required:
a) Working papers for the Notes Receivable as of December 31, 2018.
b) All necessary audit adjustments, including entries for interest accrued and prepaid.
c) Statement of financial position presented of the notes as of December 31, 2018.

Solution: Illustrative Audit Case 3.4

(Requirement a)

Crome Inc.
Notes Receivable
December 31, 2018
Date Interest Interest
Maker Amount REMARKS
of Note Due rate Received Accrued Earned
Aeon Discounted on
Company 11/30/18 3/20/19 16% 10,000 C 533 r 133 11/30/2018 at 16%
Benton Accepted by Dodge
Company 12/2/18 1/2/19 45,000 C Co. on 12/14/2018
Subscription
Receivable on
J.C. Cruz 11/1/18 1/20/18 16% 25,000 C 667 ˆ 667 preference shares
National Dishonored at
Investment maturity; collection
Co. 5/3/18 7/2/18 16% 30,000 C 800 ˆ 800 doubtful
Maker is President of
Crome; not paid at
maturity not
Romeo Paz 1/4/19 4/4/19 8,000 C renewed; confirmed
Samson Note held by bank as
Company 9/14/15 1/12/16 16% 6,000 C 280 ˆ 280 collateral
Balance per ledger 124,00 
Add (Deduct) Adjustment

(1) To reclassify subscription receivable (25,000)

(2) To reclassify past due (30,000)
(3) To reclassify note due from president of client (8,000)
Net adjustment (63,000)
Balance as adjusted 61,000 533 1,747 1,880

C Confirmed by maker
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Substantive Tests of Receivables and Sales

Traced to the general

ledger
Traced to official
r receipt
ˆ Computations verified

Reviewed
Prepared by: by:
Initial Date Initial Date

(Requirement b)

Adjusting Journal Entries

(1) Subscription receivable 25,000
Notes receivable 25,000

(2) Accounts receivable 30,800

Notes receivable 30,000
Interest income 800

(3) Advances to officers 8,000

Notes receivable 8,000

(4) Prepaid interest 421

Interest income 400
Interest expense 421
Unearned interest 400

(5) Interest receivable 947

Interest income (P1,747 - P800) 947

(Requirement c)

Statement of Financial Position Presentation

Current assets
Note receivable - trade (net of note discounted amounting to
P10,000; Note for 6,000 is held by bank as collateral for a loan) 51,000
Subscription receivable 25,000
Advances to officers 8,000

Course Module
Illustrative Audit Case 3.5
The following information are available from the records of Stardust Corporation:
ABC Corporation DEF Company
9/3 378 10/8 378 7/29 398 9/16 300
10/20 345 11/18 345 8/6 280
11/1 271 12/1 271
11/25 846
GHI Incorporated JKL Trading
8/1 898 9/2 898 9/16 413 10/15 200
9/14 714 12/15 500 9/20 216 10/30 200
10/18 1,206 10/29 1,105 11/30 200
11/30 904
MNO Supply PQR Dealers
7/5 660 8/7 660 8/2 247 9/16 100
8/15 1,020 10/15 1,020 9/17 22

STU Corp. (Subsidiary Co.) XYZ Co.

12/31 5,000 12/10 500 12/12 500
12/15 Allowance 100
Date from the allowance account of the company as it appeared on December 31, 2018 are
presented below:
Allowance for doubtful accounts
5/6 125 1/1 566
8/11 401
12/20 80

Required:
a) Prepare an aging working paper as of December 31, 2018 making use of the following
categories: not due; past due, less than 2 months; past due, more than 2 months. Accounts
are considered past due 60 days after date of sale.
The company establishes an allowance account for uncollectible receivables equal to:
 10% of accounts less than 2 months past due
 30% of accounts more than 2 months past due
The rates are based on historical bad debts adjusted for current observable data on
collectiblity of Accounts receivable.
b) Determine the adjusted balance of Accounts receivable and Allowance for doubtful
accounts as of December 31, 2018.
c) Prepare the adjusting journal entries.

Solution: Illustrative Audit Case 3.5

(Requirement a) Accounts Receivable Aging Schedule

Stardust Corporation
Accounts Receivable - Aging Schedule
December 31, 2018

Name of Customer Balance Aging Distribution

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Substantive Tests of Receivables and Sales

Past due
Date of Accounts Less than More than
Dr Cr
invoice not due 2 months 2 months
ABC Corporation 11/25 846 846 ˆ
DEF Company 7/29 98 98 ˆ
8/6 280 280 ˆ
378
GHI Incorporated 9/14 214 214 ˆ
10/18 1,206 1,206 ˆ
1,420
JKL Trading 9/20 29 29 ˆ
10/29 1,105 1,105 ˆ
11/30 904 904 ˆ
2,038
MNO Supply
PQR Dealers 8/2 147 147 ˆ
9/17 22 22 ˆ
169
STU Corp. (Subsidiary Co.) 12/31 5,000
XYZ Co. 12/15 (100)

Balance per ledger 9,751 

Add (Deduct) Adjustments

(1) To reclassify amount due from a

subsidiary (5,000)

(2) To reclassify account with credit

balance (100)

Net adjustment (5,100)

Adjusted balance 4,651 1,750 2,576 525

 Traced to the general ledger

ˆ Aging distribution checked
Prepared by: Reviewed by:
Initial Date Initial Date

Note: Accounts with credit balances as well as non-trade receivables are not aged. Reclassifying entries are
prepared to segregate them from the trade receivables.

(Requirement b) Analysis of Allowance for Doubtful Accounts

Stardust Corporation
Allowance for Doubtful Accounts
December 31, 2018

Course Module
 Balance per ledger (40.00)
Add: Provision for the year (AJE 3) 455.10
Balance as adjusted 415.10

Computation of required allowance:

Required allowance
Account classification Amount % Amount
Accounts not due 1,750 0 -
Accounts less than 2 months past due 2,576 10 257.60
Accounts more than 2 months past due 525 30 157.50
4,851 415.10

(Requirement c)
Adjusting Journal Entries - 12/31/2018

AJE
(1) Advances to subsidiary 5,000
Accounts receivable 5,000

(2) Accounts receivable

Customers' accounts with credit balances 100
100

(3) Doubtful accounts expense 455.10

A:llowance for doubtful accounts 455.10
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Substantive Tests of Receivables and Sales

References and Supplementary Materials

Books and Journals
1. Cabrera, M.E. (2017) Applied Auditing. Manila: GIC Enterprises & Company,
Incorporated

Online Supplementary Reading Materials

1. ACCA F-8, CH # 14, Receivables; https://www.slideshare.net/ArsalanKhan47/acca-f8-
ch-14-receivables; December 2, 2018
2. AUDIT PROCEDURES – RECEIVABLE AND SALES;
http://www.rebe.rau.ro/RePEc/rau/journl/FA13S/REBE-FA13S-A21.pdf; December
2, 2018
3. Substantive Tests of Accounts Receivable – Cengage;
http://www.cengage.com/accounting/book_content/0324375581_rittenberg/Final_P
Pts/6thRittenbergCh11a.ppt; December 2, 2018

Online Instructional Videos

1. Auditing Account Receivable - Intro. to Substantive Testing | Auditing and Attestation
| CPA Exam; https://www.youtube.com/watch?v=BE0Li8EuYdo; December 2, 2018
2. Assertions & Substantive Procedures in the Revenue & Collection Cycle;
https://www.youtube.com/watch?v=BAQb9dLEH1k; December 2, 2018
3. Chapter 11 Accounts Receivable, Notes Receivable and Revenue;
https://www.youtube.com/watch?v=bEp0oQQkYMg; December 2, 2018

Course Module