AUDIT OF RECEIVABLES AND RELATED ACCOUNTS

SUBSTANTIVE PROCEDURES FOR RECEIVABLES

SUBSTANTIVE PROCEDURES FOR RECEIVABLES (Including Sales on account) Account balance

Existence: Accounts receivables are for shipments made to customers.
• Confirm accounts receivables and perform procedures for confirmations not returned.
• Perform analytical procedures to test accounts receivables (including sales on account)

Completeness: Existing receivables are properly recorded for credit sales transactions occurred.
• Cut-off test

Rights and Obligations: Accounts receivables are owned by the client.

• Review minutes of the board meetings for receivables that has been assigned or pledged.
• Inquiry with client personnel, read related contracts and agreements.
• Confirmation with third parties (lenders) any indicators that receivables have been assigned, sold, and pledged.

Valuation and Allocation: Receivables are properly valued.

• Verify mathematical accuracy of the accounts receivable aging schedule and trace it to the accounts receivable
subsidiary ledger.
• Test the accuracy of the allowance for uncollectible accounts.
• Re-calculation of allowance for uncollectible accounts.

Presentation and Disclosure: Receivables (including credit sales) are properly presented and disclosed in accordance with
practicable reporting standard.
• Review financial statements and perform analytical procedures to determine whether accounts are properly
classified and disclosed in accordance with practicable reporting standard.

Classes of transactions
Completeness: Sales (credit) transactions that occurred are recorded.
• For sample of shipping documents, trace sales invoice and entry into sales journal and accounts receivable
subsidiary ledger.
• Perform cut-off test.

Occurrence: Recorded sales are for shipments actually made to customers.

• For sample of entries in the sales journal, compare sales invoice copy, customer order, and sales invoice.
• Analytical procedures and inquiry.

Classification: Sales and accounts receivable transactions have been recorded in the proper accounts.
• For sample of entries in the sales journal, verify the accuracy of the accounts coding used.

Valuation (Accuracy): Sales are correctly billed and recorded.

• For sample of entries in the sales journal, (a) examine sales invoice, shipping document, and customer order for
consistency of descriptions and quantities; (b) examine sales orders for credit approval; and (c) check prices and
extensions.
• Foot sales journal.
• Foot general ledger account.
CASE 1
The following information were obtained from your audit client Premier Co. in connection with your audit for the year
ended December 31, 2020. The ledger balance of the trade accounts receivable of Premier Co. includes the following
items:

Trade installment receivable due in 16 months P950,000

Trade receivables from the officers 120,000
Past due trade accounts receivables 620,000
Advances to employees 80,000
Receivable from customer arising from sale of goods 810,000
Interest receivable on bonds 30,000
Interest receivable on notes 18,000
Other trade accounts receivable – unassigned 420,000
Trade accounts receivable – assigned 355,000
Trade accounts on which post – dated check is held 425,000
Trade accounts known to be worthless 5,000
Accounts receivable from a long-lost customer 3,000
Trade accounts receivable in which P5,000 is definitely uncollectible 815,000
Total P4,651,000

Your inquiries and investigation revealed the following information:

i. The trade receivable control account is not in agreement with subsidiary ledger. The general ledger balance is
P4,631,000.

ii. The account from long lost customer was recovered during the year. The accountant forgot to record the
collection of the account.
iii. The allowance for bad debts account had the following
details:
January 1, balance P45,500
June 30, write off (3,500)
August 31, write off (7,000)
October 31, write off (8,500)
Recovery 3,000
December 31, Provision 40,300
December 31, balance P69,800

iv. The company’s policy estimates that 3.5% of the outstanding balance of trade receivables are uncollectible.

Determine the following as of December 31, 2020:

1. The adjusted balance of trade receivable is:
2. The allowance for bad debts is:
3. The bad debt expense is:
4. How much is the total amount of receivables in the statement of financial position is:
5. The proposed entry to adjust bad debt expense would include a debit of:
CASE 2
Pacioli Cafe Incorporated general ledger showed the following information:
Accounts receivable (Note 1) P1,247,840
Allowance for uncollectible accounts – beginning (27,000)

Note 1 – Agreement of Subsidiary ledger

Dream Land Cafe’s accounts receivable subsidiary ledger on the other hand shows the following composition:

Results of confirmation

As an auditor you perform confirmation of accounts with the respective customers, based on your professional judgment
all customers account balances must be confirmed. The auditors working paper is presented below:
Customer Per book Per reply Remarks
Invoice dated 12/10 was erroneously priced at P48 per unit. Agreed price per
approved customer order was P40. There were 3,935 units delivered per
Stir Bucks Co. P317,440 P285,960 inspection of related P.O. and shipping report.
Invoice dated 9/20 was already settled as evidence by OR #19201-001.
Investigation revealed that payment was posted Krispi Krim's account for an
UC See Inc. 126,900 80,000 invoice dated 12/20 for the same amount.
The difference was due to invoice dated 12/27. Goods was still in transit and
Cibitel Co., 187,600 143,600 have not been received by Cibitel yet as of December 31, FOB shipping point.
Credit memo for customer returns for damaged goods worth P10,000 in
relation to invoice dated 10/9 was recorded in January of the following year.
Krispi Krim The comment section of the confirmation letter states "Amount per our record
Corp. 289,000 325,900 is higher, please reconcile and check"
Dankin A check for P18,000 dated January 4, 2021 was received from Dankin Dunats
Dunats Inc. 218,600 200,600 on 12/28.
J Co. 108,300 – Company is in financial difficulty, half of this amount is definitely uncollectible.

Results of inquiry
An inquiry was made from the client and revealed the following:
a. During the year, the company wrote off P60,000 receivables and recovered P34,000 from the previously written off
accounts. A total of P180,300 was provided as bad debts before year end.

b. The company’s policy with regard to uncollectible accounts are summarized below:
Age % uncollectible

0-30 days 3%
31-60 days 7%
61-90 days 11%
91-120 days 30%
over 120 days 55%

Determine the following as a result of your audit:

1. How much is the adjusted balance of accounts receivable?
2. How much is the correct balance of allowance for bad debts as of December 31, 2020?
3. How much is the bad debts expense during the period?
4. How much is the net realizable value of the accounts receivable?
5. Your proposed adjusting journal entries (PAJE) would include a net debit or credit to accounts receivable of?
 6. Your proposed adjusting journal entries (PAJE) would include a net debit or credit to allowance for uncollectible
accounts of?
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